Coles has milked a 10-year deal that should make dairy producers smile

John Beveridge
Herald Sun
April 11, 2013

A FUNNY thing happened during the war between the big supermarkets and dairy farmers.

After a long time butting heads over whether $1-a-litre home-brand milk was a good idea or not, the two sides have suddenly realised they had a lot more in common than what divided them.

The result is a 10-year deal between Coles and Devondale to supply the big supermarket – not only with home-brand milk, but to return Devondale cheeses to Coles shelves after a long absence and to exclusively introduce Devondale-branded milk.

As a result, farmers supplying milk to the Murray Goulburn Co-operative which owns the Devondale brand and the smaller Norco group, will get a guaranteed premium over the normal farm-gate price. The big supermarket chain can justly claim that it is the farmer’s friend, ditching foreign-owned suppliers and running the Australian flag up the pole.

Coles is even getting qualified support for its approach from the Australian Dairy Farmers which has long been a vocal opponent of the $1-a-litre private label milk wars between Coles, Woolworths and Aldi.

Woolworths was already negotiating deals with some farmer groups and this 200 million-litre-a-year deal can only accelerate the trend of the big supermarkets cosying up to farmer groups at the expense of the foreign-owned milk processors.

It is a win-win-lose deal though, as current Coles supplier Lion Nathan National Foods – which is owned by Japanese giant Kirin – loses the massive Coles contract from the middle of next year and possibly adds to the $2.2 billion of writedowns it has suffered since unwisely buying National Foods from San Miguel in 2007.

Lion produces the Pura milk brand, but is reassessing its commitment to fresh milk processing after revealing the division has been losing money.
It has previously lost the Woolworths home-brand contracts in NSW and Queensland.

While Lion’s commitment to fresh milk is under pressure, Murray Goulburn is investing heavily, spending $120 million on efficient new milk processing plants in Sydney and Melbourne, and potentially also pitching for the Woolworths contracts.

As a farmer-owned co-op, Murray Goulburn offers a great each-way bet for the dairy farmers, apart from the main benefit that they will be able to offer a premium price above the normal farm-gate price.

Any profits Murray Golburn makes from processing milk will also belong to its farmers. Such profits are a distinct possibility, given that the current Lion and Parmalat processors run older and less efficient plants.

Whatever the result, Coles can now point to the fact that it is dealing directly with dairy farmers through their largest co-operative and paying a premium for the product, effectively neutralising the argument about $1-a-litre milk slashing returns to farmers.

It won’t satisfy everyone. There are plenty of claims the big supermarkets still hold the whip hand in negotiating with their suppliers, but it should align the interests of many dairy farmers in Victoria and NSW with those of Coles.

The most immediate effect of the deal will be a big restructuring of the milk processing side of Australia’s dairy industry and rationalisation is now almost a certainty.