Coles extends direct-buy milk scheme to SA, WA

JARED LYNCH

MAY 14, 2020

The Australian

Supermarket giant Coles is bypassing dairy processors to buy milk directly from farmers in South Australia and Western Australia, after a successful rollout in Victoria and New South Wales.

Under the new sourcing model for its private label range Coles will set the farmgate price, which it says will be guaranteed, rather than the average price processors signal at the start of each dairy season.

The big supermarket chains have had a notoriously prickly relationship with farmers, which erupted on Australia Day in 2011 when Coles slashed the price of its private label milk to $1 a litre, with its competitors quickly following.

Coles and its rivals have since stopped the deep discounting that farmers said devalued their hard-earned product and are quickly moving to make amends – more than nine years on – amid an exodus of farmers from the industry, while those who have stayed on have battled drought and bushfires.

Under the new sourcing model, Coles offers a farmgate price directly to farmers, and pays dairy processors to process and bottle the milk under a toll processing agreement. Coles has toll processing arrangements for milk sourced directly from farmers in South Australia and Western Australia with Lion Dairy and Drinks, Brownes Dairy and Lactalis Australia.

It launched the new model last July in Victoria and southern and central NSW, offering farmers one or two year contracts, at set prices, which the supermarket chain said providing them income certainty and confidence to invest in farm operations.

Prices paid by milk processors are subject to global dairy markets and can bounce around in a particular season. The most dramatic change in prices came in 2016 when Murray Goulburn, which Saputo has since acquired, and Fonterra clawed back “overpayments” to farmers, resulting in some farmers being paid nothing for the milk they produced towards the end of the season.

In May 2017, Murray Goulburn, which previously supplied Coles with its private label milk in Victoria, scrapped its attempted clawback of $183m in milk price “overpayments” from farmers.

The disastrous 2015/16 season has also opened up the market, which processors had previously dominated, to milk brokers, resulting in higher farmgate prices with securing milk supply becoming increasingly competitive.

Coles did not say how much it was offering farmers but says it has been competitive with big processors in NSW and Victoria and is actively recruiting farmers in South Australia and Western Australia.

Coles chief executive commercial and express Greg Davis said the new sourcing model was an important part of addressing the long-term structural issues facing the dairy industry, and the company was pleased to be able to collaborate directly with more Australian dairy farmers.

“We’re proud of the relationships we have built with our directly-contracted farmers in Victoria and Southern and Central NSW to buy their high-quality milk, and we’re thrilled to be able to extend that model to work with farmers in SA and WA,” he said.

“By offering farmers the opportunity to lock in a price and giving them choice on the length of contract, Coles is investing in the long-term sustainability of our suppliers and the Australian dairy sector.”

JARED LYNCHREPORTER