Farmers believe supermarkets are getting increasingly nervous about Australia's fast shrinking milk pool and are ramping up strategies to lock in more direct supply deals with producers.
National milk production fell 3.2 per cent to 6.2 billion litres in March, or down almost 6pc for year's first quarter.
In a move which has won applause, Coles has offered what appears to be market leading contract price incentives of up to $9.65 a kilogram of milk solids for the 2022-23 season.
A year ago Coles' average price was around $7.70/kg.
Even producers who already have a year or two to run on contracts at lower farmgate prices have been urged to re-sign on better terms.
The retailer also wants to expand its direct sourcing footprint, adding another 50 million litres to the 406m litres it contracted directly from dairy farmers in NSW, Victoria, Tasmania, South Australia and Western Australia in 2021-22.
In WA, where it has just nine suppliers, it needs an extra 12m litres to take its direct sourced total to 42m.
Coles now has more than 100 farmers on direct contracts Australia-wide.
It pays dairy factories to bottle its discount priced private label milk under a toll processing agreement which began in 2019.
That move followed a similar initiative trialled by Woolworths back in 2013 in NSW's Manning Valley, which now involves farms in Tasmania, Victoria and Queensland supplying its semi-premium priced Farmers' Own label.
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Indicative of Coles' thirst for more milk are the direct contracts on offer in the NSW Riverina, Victoria and south eastern SA.
Suppliers agreeing to exclusively supply all their production will receive $8.20/kg of milk solids between September 1 and December 31, and $9.65/kg in the off-peak milk January to August period.
If they opt for a non-exclusive arrangement so they can also supply another buyer suppliers get $7.34/kg for spring milk from Coles and $9.17/kg in the off-peak months.
On NSW's South Coast, where Coles wants to grow its contracted supply by 10m litres to 70m, contracts are in the $9.40/kg to $10/kg equivalent range.
Having direct connections with farmers has made them realise it's a complex situation
- Andrew Tyler, Murray Dairy
"I think supermarkets have started to see a bit more reality in the milk market since they've become more directly involved," said northern Victorian farmer and Murray Dairy chairman, Andrew Tyler.
"Having direct connections with farmers has made them realise it's a complex situation."
Apart from welcoming the extra competition retailers generated, Mr Tyler believed more maturity was emerging as supermarkets developed greater appreciation of farmers' production and cost challenges.
Retailers were responding accordingly to ensure they had reliable milk supplies for their dairy cabinets all year round.
Happy suppliers
He did not supply Coles, but some neighbouring Tongala farmers did, and "they seem quite happy".
"Having another player in the market is good for us all."
Writing to existing direct suppliers, Coles home brand sourcing general manager, Charlotte Rhodes, noted dairy farmers were facing multiple input cost shocks.
Coles was subsequently pleased to advise it would boost earlier prices flagged for 2023-23.
NSW Farmers dairy committee chairman Colin Thompson, said although the supermarket had "form" as the retailer which led the contentious retail milk price collapse with its "Down, Down" $1 a litre milk campaign, Coles' new direct suppliers spoke highly of their relationship.
"I understand some farmers are reluctant to trust them, but they're doing a pretty good job - not just on prices, but with good service and farm extension assistance," Mr Thompson said.
"It does appear they've started looking at our industry differently, although plenty of people remain unsure what they're planning in the longer term."
Supply insecurity
He said retailers were always keen to portray their intentions as good for the industry, but clearly supply security was becoming a real concern.
Queensland dairy farms produced just half the milk consumed in that state last year, with the rest sourced from NSW and Victoria.
NSW's ability to meet domestic demand was also sliding fast as high input costs and natural disasters undermined production capabilities and more farmers switched to other pursuits.
Given the sector's skyrocketing costs, Mr Thompson said it was insulting and unrealistic to see supermarkets devaluing retail prices with discounted house brand milk selling at $1.30/litre.
"It's important the whole supply chain makes a dollar out of milk," he said.
"If you've got a loss leading supermarket line making it very hard for branded products to sell at a better margin, then processors have less capacity to pay farmers prices which encourage them to produce more milk, or even stay in the industry."
Not confident
EastAusMilk chief executive officer, Shaughn Morgan, was alarmed that despite improved farmgate payments in 2022, farmers in every state were still not confident enough to lift production.
National production fell 3.4pc for the year to April and the month's volumes were 6.6pc below April 2021 figures.
He said although milk price bargaining and contract arrangements were far improved on five years ago, tighter scrutiny of how the dairy industry was treated by retailers under the food and grocery code of conduct was still required.
"We're very pleased the new federal government intends to review the dairy supply chain."