In a series of anonymous interviews, Australian dairy processors have lifted the veil of secrecy about the deals done with supermarkets behind closed doors. Australian Dairyfarmer asked six questions to address the big issues: why processors supply private label milk, how much it hurts Australian dairy and what needs to change.
Their answers to the six questions have been consolidated and summarised.
Question: Why do processors supply private label milk?
Answer: Private label accounts for huge volumes of milk, with equally massive trade-offs in profitability, efficiencies and negotiating power.
Filling these contracts ensures there is a buyer for all the milk produced by farmers. The volume also yields production efficiencies and drives down sourcing costs, such as the price of packaging.
While these savings are easy to quantify, there are other benefits to winning such large supermarket contracts.
"Smart processors seize the opportunity to negotiate up-ranging of branded product across their portfolio," one processor said.
Supermarkets use ranging grades to determine how many stores stock each product. For example, a product with a range grade of A might be in 900 stores while its range grade B competitor would be in just 560 stores.
A private label contract might include lifting the range grade of several products, having more products stocked or even the guaranteed ranging of a future product.
Question: How much has discounting cost the Australian dairy industry?
Answer: The private label milk price cuts affect branded products, too. A 2017 government report estimated annual losses of $227 million across supermarket milk lines.
Most consumers perceive few differences between branded and private label milk, making the higher prices of branded milk difficult to justify.
At the same time, the science of store planograms and layouts make the dominance of private label "a self-fulfilling prophecy", processors said. "The more exposure, the greater the sales," one said.
The impact of supermarket discounting has also put a ceiling on prices for Australia's once-lucrative 600-million-litre food-service market. Processors say a large contract with one of the cafe chains to supply milk at $1 per litre has recently been signed, despite the added cold chain costs of servicing many small volume users.
"Taking the price of food-service milk from $1.30 down to $1 per litre has removed another $180 million from the dairy supply chain," one processor said.
Question: Why have supermarkets resisted pressure to increase the price of milk?
Answer: Milk is a target for discounting because it is in at least 90 per cent of shopping baskets. When consumers pay an extremely low price for a product that is constantly in use, the value message is constantly reinforced.
Question: The Australian Competition and Consumer Commission says that even if the retail price of milk increases, processors will not pass the benefit on to farmers. Does it have a point?
Answer: Equity of value throughout the supply chain is the ultimate goal, according to processors, with one representative pointing to the rapid changes since the dairy crisis erupted.
"Processors are not in a great position. Most are foreign-owned, Murray Goulburn is gone, Lion Dairy & Drinks is selling and many are under pressure," one said.
"Processors want a viable, profitable and healthy relationship with farmers and industry. It doesn't make sense to buy into an industry and bleed the source of our product," another said.
Question: Why don't processors invoke the rise-and-fall clauses in supermarket contracts when costs increase?
Answer: There is a delay of more than a year once a rise or fall is instigated, which processors say is not an effective way of reflecting the true cost of milk.
Instead, they advocate a cost index utilising real data from industry sources, which is reviewed quarterly with cost impacts going to farmers and processors. Such a model already exists for the fuel costs of transport companies.
A formal mechanism based on agreed data would help make the case for price increases, particularly following new purchasing behaviour by supermarkets, processors said.
"In the past, a processor could build a good relationship with the buyer, who had the authority to push price increases through but now that a central department is responsible for reviewing prices, there is less opportunity to create common ground based on a genuine understanding of industry pressures," one processor said.
Question: Why don't retail milk prices rise when supply is under pressure like the cost of bananas does?
Answer: When Cyclone Yasi hit in 2011, the price of bananas went to $14.99 a kilogram but there was a story behind it from the growers and the industry kept talking up the nutritional value.
In April 2016, consumers wanted to help dairy farmers but, unlike the banana industry, processors say the dairy industry confused consumers by arguing about which milk was the most ethical choice.
"The fractured dairy industry put up barriers - saying not to buy milk processed by foreign-owned companies, don't buy milk that returns less to farmers, and so on - for consumers who wanted to make 'good' decisions," a processor said.
"Eventually, consumers with no clear direction simply returned to their previous habit of buying private label milk.
"Farmers and processors missed the opportunity to unite and to tell consumers that simply buying branded milk would allow money to work its way through the supply chain."
This story first appeared on the Australian Dairyfarmer website