Compare milk to petrol, two staples of our lives where the supermarkets maintain an interest.
The suppliers of petrol are big enough to vary their prices and the supermarkets follow the lead.
There is no doubt supermarkets would become more popular if they changed the price of fuel to $1 per litre and held it there for a decade. But they don’t because they cannot bully BP and Shell.
Nothing prevents a supermarket from offering $1 petrol, but what they cannot do is bludgeon international oil companies into a lower price as they do with processors and farmers.
The dairy industry doesn’t mind if supermarkets make milk cheap. In fact the dairy industry wouldn’t mind if the supermarkets gave the milk away for free if they still paid the processors and farmers a price that reflected the cost of production.
The problem is supermarkets artificially declare prices then expect to be subsidised by both processors and farmers.
To find the genesis of the milk crisis we need to go back to 2001. Then, the milk-pricing mechanisms were changed to allow the markets, not regulation, to set the price.
For a decade things ticked along and the market operated so that the milk price paid by the consumer was reflective of the whole supply chain, the supermarkets, the processors and the farmers.
In the middle of this world sat the farmer co-operative, Murray Goulburn. Everything orbited around MG.
MG represented both processors’ and farmers’ interests because it was a co-operative and a seller of milk. MG’s size and broad representation meant it was mindful of the whole supply chain.
Then several things happened. MG lost its way as it sought to become a company rather than a co-operative. It failed to negotiate the challenges of the commercial world and it failed to balance the needs of farmers and processors.
In 2011, as MG commenced its metamorphosis, the major supermarkets, Coles then Woolworths, began their $1 milk campaign. This campaign didn’t focus on the cost of production, it focused on the retail price. In its quest to be “commercial” MG played along and suddenly the power to set a price shifted. A few years later, MG collapsed.
Since that time there has been no single processor big enough to challenge the supermarkets, leaving the major retailers in charge of prices while demanding their $1 milk continued to be profitable. By 2017 the distorting forces had become so pronounced the Commonwealth Government referred the industry to the ACCC.
The ACCC made many findings but basically laid the blame of farmers suffering at the feet of the processors. All that was needed was that when the cost of production changed, the processors exercise the price variation clauses in their contracts.
There is little evidence any of the major processors have exercised their options under their price variation clauses with the supermarkets. No processor is large enough to challenge the supermarkets with a price variation. To do so would be at the peril of their other products on the shelf.
While welcome, the Woolworths announcement of $1.10 litre milk does nothing to address the artifice which is a milk price totally disconnected from the cost of production.
The South Australian Dairyfarmers’ Association, supports a free market to set a milk price. What is occurring isn’t a free market. The supermarkets are setting a course and shackling farmers and processors to it.
The supermarkets need to be mindful they are placing demands that will break the system. The casualties are already real. Since the introduction of $1 milk the number of dairy farms in SA have fallen from 286 to 228. They continue to walk away.
The supermarkets sell water which reflects the cost of production, which is why bottled water now costs much more than bottled milk. If processors cannot move on price it won’t be long before some of them join Murray Goulburn as a memory and many more farmers go with them.
Source: The Advertiser