Milking the dairy industry dry leaves us all poorer

Once upon a time, two large milk wholesaling companies faced public backlash about their decision to unexpectedly pay dairy farmers less for milk than it cost to produce and apply it retrospectively.

The good consumers of Australia, frothing with outrage, supported the local farmers by buying the named brands milks at the local supermarkets and took photos of the sold out sections of milk fridges and plastered them all over social media. The supermarket brand milk remained on the shelves and the consumers conveniently ignored the fact they had propped up this unsustainable system by buying $1 a litre milk for the preceding two years.

Meanwhile, in a spectacular display of cynical cause-related marketing, Coles, one of the originators of the $1 a litre milk in 2011, launched a special brand of milk that was more expensive with 20c from every sale going to a fund for the farmers.

This is the same supermarket chain that signed a 10-year milk supply deal with Murray Goulbourn, that according to their public statements at the time it would be ‘a major win for farmers because we cut out the middle man and farmers get a bigger share of the retail price’. Three years in, that doesn’t appear to be working.

The real bottom line in this ethical conundrum that we all need to consider, how much do we value our dairy industry? How important is it for Australian to be able to produce its own milk and dairy products and, if that is important, what is a viable price to pay the farmers who make it?

For the investment managers investing in Woolworths and Wesfarmers (the owner of Coles), an important question is when the stand over tactics of the supermarkets’ on their suppliers actually starts destroying the economic value of an entire industry, is it time to look more broadly than just what creates profit margin for the two powerful distributors?

Beyond the marketing, the real story is, in 2011 the supermarkets, started offering $1 a litre milk, purportedly to make milk ‘affordable’ for more people, even though it has been bought by the majority as a valued staple food for decades. Cheap milk was the enticement to get customers in the door and then get them spend up on other higher margin products. It was part of a vicious price war between the two major supermarket chains in an attempt to defend and grow their market share.

It was never going to be the supermarkets that bore the brunt of the price cut, they can choke the distribution channels, so held the power to pass financial pain onto their suppliers. And the institutional investors who bought shares in Woolworths and Wesfarmers (the owners of Coles) approved of this margin clawback because it delivered on the profit line.

And the customers bought the $1 milk, telling themselves that is what they could afford. Until now.

This week’s debate about the value of the Australian dairy industry, what is reasonable for the farmers to earn and what we are prepared to pay for milk the perfect parable to demonstrate the cause and effect of valuing the profitability of the dominant and powerful groups in a production chain, over the value of the product and industry itself to a society.

Murray Goulbourn and Fonterra are not blameless either. MG were briefing shareholders this month that there was no concern with their financial stability, with a strong balance sheet and a growing business, but in the same breath talking about a Support Package for farmers to spread the impact of the cost cuts over the next three years. So, they won’t absorb any of the price pain, but are happy to pummel the farmers, without whom, they wouldn’t have a product to sell.

We, as members of superannuation funds and other investment vehicles, provide the capital to the likes of Woolworths, Coles and Murray Goulbourn and we can use our collective power to be more thoughtful about the impact of their profit seeking on entire industries. Pushing the pain down to the most powerless group in a supply chain makes us all poorer.

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