War: What is it good for? Milk & produce wars in Australia

Coles announced on Monday 30 January 2012 that it would cut certain fresh produce prices by 50% on a rotational basis, each week.  On Australia Day in 2011 Coles announced that it would sell its home brand milk for $1 a litre.


At first glance this may seem like a win for Australian consumers.  Who wouldn't want their fresh produce half price?  Milk at $1 a litre? But like most issues, especially economic ones, it's just not that simple.


Coles argues that it will simply be cutting the price of fruit & vegetables that are in surplus (the “bumper crop due to ideal growing conditions around the country”), so that farmers can sell it, rather than ploughing it back into the ground. However Coles has also admitted that it will be slashing prices of a range of vegetables, not just those that are abundant.


Many farmers are saying that these lower prices may force them out of business.  The rationale is that for farmers who don't supply Coles (many small farmers) they will be forced to offer the same or similarly low prices without the benefit of a supply contract with Coles.  And if they don't cut their prices consumers will shop at Coles and they will lose their customers. Lose-lose for growers.


Part of the problem with Coles' cutting prices, is that Coles and Woollies between them hold massive market share: more than 80% of the grocery market between them.  That's a huge market share which means that they control a lot of what is sold and produced in Australia.  

For years farmers, other industry participants and commentators have complained that the large supermarkets are putting pressure on growers to supply larger and larger volumes whilst pushing down prices for food.

The Supermarkets dominate many areas of retail: food, liquor, fuel & they're moving into hardware and want to get into pharmacies (don't get us started on them selling health when they're the largest sellers of tobacco products). Their dominance is such that they are now looking at other areas of the food industry to dominate, such as the supply and processing chain, and home branded products.


One way they can increase their home brand market share is to allocate valuable shelf space to their own products and price them lower, thus taking market share away from the branded products. In the most extreme scenario, the home branded product gains more market share than its branded cousins and the manufacturer of the branded products goes out of business, leaving the consumer with less choice.  And the supermarket with more power over pricing.  The supermarkets get bigger and its competitors gradually disappear.


This all sounds like pie in the sky stuff, but it is exactly what happened in the UK dairy industry.


In relation to milk however, it's part of the story.  The processors also play a part in the merry dance.  Processors are paid less money for processing home branded milk.  So as the home brand market share increases, the processors get less for the milk.  They in turn must recoup the losses somehow so naturally would turn to farmers and pay them less for their milk.  Margins are slashed for a grocery item that is already priced lower than water or soft drink.


When Coles and Woolworths started the "milk wars" on Australia Day in 2011, home brand milk was dropped to $1 a litre.  Farmers need to raise, feed and milk cows.  And make a profit. And keep up with inflation.  $1 a litre is currently less than a bottle of water.  Water. Which doesn't come from an animal and you would think, costs a lot less to put into a bottle and sell than milk.

The supermarkets say that they are working with industries to help them become more efficient.  However this doesn't seem to apply to many other industries.  Prices for everything are rising, but farmers are expected to take price cuts for milk because they're not efficient.


It's just not fair. 


This kind of price cutting also encourages farmers to pump their cows full of hormones to keep them milking all year round in conditions that are less than favourable to the animals.  An industry that actively encourages intensive farming seems to be an anomaly when consumers are becoming more concerned about the environment and animal welfare.  Conversely, it also discourages smaller enterprises (organics or those that are kinder to animals and the environment) that charge more for milk & dairy products.  


The milk wars may have claimed their first well-known casualty: Lion processing (who own Pura and Dairy Farmers milk) announced in November 2011 that it made a loss on its plain milk processing. You've got to wonder what it will do to the farmers further down the line over time.


Back to fruit & veggies.

So what happens to the money that is paid to farmers when the price drops 50%? Presumably most supply contracts to the supermarkets have prices for farmers locked in, but what happens when those contracts are up for renewal and the supermarkets start insisting that their revenue/profit from produce has dropped? 

The other concern is that with many other retail businesses, the supermarkets can raise the price of one (say, fuel) to ensure they don't suffer losses.  The result being we pay more for fuel and destroy agriculture in Australia.

Cutting prices of vegetables by 50% is very unlikely to benefit the dwindling number of small growers who do not supply Coles.  They are already having a difficult time surviving and each year, more and more disappear.  We need to do something about it before the 2 supermarkets control 100% of all vegetables bought in Australia. Before it's too late.