Coles gets the cream with milk ‘investment’

by admin on April 17, 2013

SUPERMARKET giant Coles has uploaded a cartoon video to YouTube explaining its latest move in the dairy sector — a 10-year supply contract with farmer-owned co-operative Murray Goulburn entitled “Investing in Australian Dairy”.

“We’ve listened to what you said about supporting Australian dairy farmers so that our dairy industry remains strong for future generations,” the video says, while laying out the supposed benefits of the deal, which includes a five-year supply agreement with NSW co-operative Norco.

Not only will farmers be paid a premium for their milk, says Coles, but in owning the factory where it is processed they will also receive dividends.

“The new contracts are a major win for farmers because we cut out the middleman and farmers get a bigger share of the retail price. It is also a win for consumers because we can sustain affordable milk prices,” the company said in announcing the deal last week.

But on the numbers, the Wesfarmers-owned retailer is doing nothing like investing in the dairy sector. In fact, it’s likely it will spend less on Australian milk than ever before.

And while some farmers may do well out of it, others are likely to be worse off.

Coles currently buys its house-brand milk in northern Queensland and Tasmania from Lion, owner of the former Dairy Farmers and National Foods milk processors which control the Pura milk brand and Coon cheese.

That contract runs out in mid-2014, but Coles offered to extend it if Lion could cut its prices by 10c a litre — a move industry sources say could not have been made without losing money.

For Murray Goulburn to have won the Coles contract, it would have needed to beat Lion’s price. And if Lion, a wholly owned subsidiary of Japanese food and beverage giant Kirin, could not make the numbers stack up, it’s doubtful Murray Goulburn could do any better.

MG boss Garry Helou says the difference can be made up by more efficient processing after building two new processing plants at a cost of $120 million.

But this is hardly a move that would not have occurred to Lion, which turned around its New Zealand beer business with a massive reinvestment program dating back almost a decade.

The only way the numbers could work for Murray Goulburn is if the farmer-shareholders are happy to receive a return on their invested capital below that which would be demanded by any other business.

Effectively, they will be running down the value of their jointly owned company in order to sell their milk at a higher price than they would otherwise achieve — moving their money from one pocket to another.

If it works, Murray Goulburn’s farmer-shareholders are funding a move that locks in milk prices at $1 per litre for the next 10 years — a move that would hardly be welcomed by their fellow dairy producers.

If it doesn’t work, the farmers who own Murray Goulburn will have blown at least $120m, and possibly much more, if it harms the company’s plans to become one of the top 20 dairy companies in the world.

And the public is not swallowing what Coles has to sell, plastering the supermarkets’ Facebook page with derisive comments describing the deal as a cynical move by a company that has pushed the dairy industry to the brink of collapse.

“This is a black day for the Australian dairy industry with the signing of this deal,” said one user.

 

Source – The Australian

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