Coles lifts farmgate milk price to secure supply in tight market

In a bid to lock in supply assurances and longer term price stability for its house brand milk and cheese lines, the supermarket heavyweight is offering contracts out to 2026.

The latest offer to its direct supply producers has promised between eight cents and 22c extra for a kilogram of milk solids as Coles attempts to avoid being caught by further surprise spikes in the local market and consumer backlashes for high food prices.

It is apparently promising a steady rise to $12.05/kg by mid-2025 for long tenure suppliers, many of whom teamed up with Coles when it began direct sourcing milk in 2019.

The supermarket's new offer has landed just as latest milk production figures show Australian milk production continued to slump, despite farmgate payments from milk processors leaping about 25 per cent this financial year to more than $9.50/kg.

National milk output for the first six months of 2022-23 shrank another 7.1 per cent, and as much as 11.9pc in NSW which has the biggest domestic consumer market.

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For the first time in 30 years Australia is on track to produce less than 8 billion litres in 2022-23, unless milk receival trends are reversed in late summer and autumn.

High labour, fuel, electricity and fertiliser costs, and significant east coast flooding during 2022, squeezed many dairy farmers' margins, discouraging herd expansion.

The attraction of switching to other land use and farming enterprise options has also continued to erode dairy farm numbers.

Australian Dairy Farmers president, Rick Gladigau, said the latest Coles three-year deal to its direct suppliers was "a positive indicator for the market", although it was up to farmers to assess if they could make sufficient money from the retailer's one-, two- or three-year contracts.

"Coles is offering price certainty and security, but there are a lot of costs hitting dairying at the moment, particularly labour and energy," he said.

"In reality, farmers also have a lot more bargaining power now ... they're not scared to move to other processors if the money offered isn't worthwhile.

"Coles is probably feeling that pressure first-hand now it deals directly with producers."

A spokesperson for Woolworths said it accepted multiple wholesale cost increases from its processors in the past six months, recognising the record farmgate prices and higher processing costs.

It also annually reviewed pay rates for milk supplied directly from its Farmer's Own producers.

However, Mr Gladigau noted, despite supermarkets raising retail prices to about $1.60 a litre for private label milk in response to last year's $2/kg leap in processor payments, store prices still significantly undervalued the product and its true production cost.

"Private label supermarket milk at $1.60/litre is equivalent to prices before the discounting wars slashed it down to a dollar in 2011," he said.

"If you calculated the CPI since then, it should be selling for well over $2/litre."

Australia's collapsing dairy production figures and our emboldened farmer price expectations contrast noticeably with a 2022 revival in overseas milk volumes which subsequently dragged down international prices.

Global markets for bulk milk powder and cheese commodities fell about 30pc in the past six months as production crept up in Europe, the US and South America and coincided with subdued buying interest from China.

Rabobank's senior dairy and consumer foods analyst, Michael Harvey, said inflation had also put pressure on northern hemisphere food demand, contributing to the significance of more milk in the market.

He said "at some point" China would re-open to bulk ingredient products, but its starting point would likely be slower and lower than past years.

In Britain and mainland Europe farmgate prices have already declined in response to weaker spot milk values and global commodities markets, putting pressure on processors to cut their raw milk spending.

Fortunately for British farmers, last year ended with their farmgate payments almost 50pc higher than the previous December when milk shortages triggered a price surge into 2022 - like Australia.

But now most milk processors, and retailers buying direct, have flagged farmgate price cuts for February or March after a 7pc fall in January's wholesale values.

British milk production has also been tipped to lift about 2pc this year as a consequence of last season's bullish price signals to farmers.

In Europe and Ireland processors are also nervous about how farmers may react to payment cuts, potentially culling herds again and sending milk output tumbling by year's end.

In Australia, however, Mr Harvey expected the milk pool to continue contracting, mostly meaning good news for farmgate prices throughout 2023, regardless of overseas supply surpluses.

"There may be a small correction in the southern production regions, but still, we're at record high prices and they should still be profitable," he said.

Coles said its own longer term contracts would offer farmers greater security of income so they could invest back into their farms and make them more sustainable in a potentially fluctuating price environment.

The latest tenure payments, which were reviewed at least annually, rewarded long term dairy farmer partners.

"Direct sourcing (in NSW, Victoria, Tasmania, South Australia and Western Australia) ensures fair, competitive and guaranteed farmgate prices to dairy farmers and ensures our customers are provided with great quality locally sourced milk for the long term," a spokesperson said.

Woolworths said it remained in close contact with its processors and industry groups to understand changes in the market.

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