PARMALAT chief Craig Garvin has joined Woolworths in raising concerns about Coles' $2 billion private label milk supply deal with Murray Goulburn Co-op, saying it threatens to divide and disrupt the dairy industry.
"This is potentially a very divisive and a very disruptional strategy; I think farmers should be nervous," said Mr Garvin, who runs Australia's second largest fresh milk processor.
"There's a lot of scepticism among farmers and they're really now starting to look through this deal and what's really in it," he told The Australian Financial Review.
Mr Garvin said Coles' 10-year milk supply agreement could be good for Victorian farmers, who already supplied Murray Goulburn, and said the deal guaranteed a decade of cheap private label milk for consumers.
However, he said farmers in other states and foreign-owned processors who accounted for most of the drinking milk processed in Australia could be left out in the cold.
He questioned whether Murray Goulburn, which processes 3 billion litres of milk a year, would need new sources of milk in NSW and Queensland to fulfil its 200 million litres a year contract with Coles. "I'm sceptical that any new farmers will win a deal out this at all in NSW and Queensland."
Mr Garvin also queried the "premium" Murray Goulburn has promised to pay farmers, pointing out that Parmalat has paid 12 per cent more on average than Murray Goulburn and 6 per cent more than Norco for milk over the last four years. "They have guaranteed a premium but to what? What they have paid in the past?" he said.
According to Macquarie Equities, Coles will pay Murray Goulburn 10¢ a litre less for private label milk than it currently pays Lion, which will lose contracts in NSW, Victoria and south east Queensland mid next year.
Murray Goulburn is building two new processing plants at a cost of $120 million or 6¢ a litre. Macquarie says Coles is investing less in the milk supply value chain and relying on the new production facilities and a toll processing arrangement with Murray Goulburn to achieve a lower cost of production.
Coles has hailed the agreement as a major step towards the long-term sustainability of the fresh milk industry.
But Mr Garvin remains sceptical. "This is not the silver bullet for the industry people think it is, people should be careful," he said, echoing comments last week from Woolworths chief executive Grant O'Brien.
"This is not about foreign or local processors but long-term industry sustainability," Mr Garvin said. "The future of the industry would be better served through long-term contracts between farmers, processors and retailers."
Parmalat is in negotiations with Woolworths over private label milk contracts in NSW and Queensland, which expire in September 2013 and 2014.
"As the incumbent we'll proactively work with Woolworths on the long-term future of the industry," he said.
Parmalat is also in talks over a toll processing contract with Woolworths, which wants to source milk directly from farmers for a new premium brand.
A trial with seven NSW farmers starts soon. In an email to suppliers last week, Parmalat said it was "first and foremost a buyer and processor of milk" and created long-term value by investing and growing sustainable supply chains from farms to consumers.
"Our purpose is to be a manufacturer and seller of branded dairy products and toll processing is not an activity we have engaged in the past ... our preference has always been to work for long-term industry wide outcomes."
