Milk discounting

A lot of profile is given to the allegations that the milk price war has claimed many casualties since it commenced on Australia Day. Dairy farmer organisations have invested considerable managerial efforts and expense to highlight the risks for their members associated with deep-discounting of mainstream dairy products.

With retailers absorbing the price discount on private label lines, the key reality of any impact on farmers depends on how much volume migrates to private label products. This has varied state to state – in Victoria for instance, branded fresh milk sales volumes are now higher than they were a year ago.

Milk producers in Queensland are at greatest risk from cuts in farmgate prices, where most milk ends up in milk cartons. Processor competition ensures branded milk prices are typically much lower than in Victoria and NSW, while farmgate prices are higher to ensure year-round milk production. Milk producers in Queensland feared the added slug from discounting would result in a slashing of farmgate prices to restore profit to processing in the northern state.

The timing of the discount campaigns heightened protests, as water had barely receded from the January floods which immediately cut milk flows by 20%. Production challenges coupled with fears of farmgate price cuts has deflated regional sentiment in an anxious recovery period.

Discounting has two effects – volume shift and price response. A volume effect has been greatest in Queensland. After 5 months, it seems the annual equivalent of about 14 million litres, or 6% of sales, has moved from processor brands. A seminar in Brisbane last week heard (with some disbelief that it wasn’t worse than this) the annual volume effect adds up to about 1.3 cents a litre when applied to differences in product prices. A price impact appears to have been less than this – retail data suggests branded prices have held ground, and the regional wholesale price index (tracked by Dairy Australia) is also steady. The volume impact in NSW is about the same despite the gaps in milk product prices being larger in that state.

In hindsight, this won’t be industry-threatening by itself. Putting it into perspective, a 2-cent shift in the $A (seen frequently in the past year) is worth about 1.2 cents a litre to a Victorian producer in the current season. A $20/tonne lift in grain prices has a larger impact to costs for most farmers. National Foods suppliers have been hit with far greater adjustments due to the change in private label supply arrangements to Woolworths in the northern states. But demonising grocery chains is a favourite agripolitical pastime.

Such a low impact to date across industry can mean several things. The vocal political and industry protest persuaded consumers to pause before choosing the cheaper product. The entrenched value of milk as a convenience product, accessible from in a vast array of places outside the supermarket, protected brand sales. The result will be a combination of these effects and others.

For the farm sector, there might be bigger fish to fry, but now confidence is the biggest casualty. Where this issue goes from here matters most, as the story may be far from over. If milk processors are forced to sacrifice branded prices to claw back market share in an extended price war, the harm to margins – and the threat to milk suppliers – may grow.