Coles secures milk supply

Supermarket offers farmers big increases

COLES has offered dairy farmers steep price increases under longer-term contracts in an effort to shore up the supply of its private label milk and keep prices steady until 2025.

Food prices are outpacing broader inflation, putting further pressure on manufacturers to lift prices, which threatens to unleash more pain at checkouts.

Coles began sourcing milk directly from farmers four years ago for its private label varieties, giving it more control of its dairy supply chain.

It wrote to farmers this week offering to pay up to 22c more per kilogram of milk solids under “tenure payments” to entice them onto three-year supply contracts in an effort to smooth out price volatility and contain further spikes.

Coles spokesman Brad Gorman said price rises and longer contracts provided farmers with income certainty while securing the supermarket chain’s milk supply.

“Coles introduced a direct sourcing model for our ownbrand milk in 2019 to ensure we could provide fair, competitive and guaranteed farmgate prices to dairy farmers directly. These longer term contracts offer farmers greater security of income so that they can invest back into their farms and make them more sustainable,” Mr Gorman said.

“This tenure payment is to recognise and reward our long term dairy farmer partners who have been working under this model. The direct sourcing model also ensures we can provide our customers with great quality locally sourced milk for the long term.”

Coles will also pay farmers in key dairy regions an extra 8c per kilogram a month, taking the farm gate price to $12.05 a kilogram by June 2025. This compares with average farm gate milk prices across Australia’s southern export regions of between $9.50-$10 per kilogram of milk solids.

Inflation in fresh food and groceries has been running rampant, jumping 9.2 per cent at Coles and Woolworths in the December quarter, while Australia’s headline inflation jumped to 7.8 per cent in the year to December.

Dairy processors, including ASX-listed Bega Cheese, have been successful in securing price rises from the supermarket chains to help recover soaring input costs across the supply chain, with the price of milk and cheese soaring.

The grocery price hikes end a decade-long period of food deflation. The milk wars erupted on Australia Day in 2011, when Coles slashed the price of its private label milk to $1 a litre, with its competitors quickly following.

Coles and its rivals have since stopped the deep discounting.

Coles began sourcing milk directly from farmers for its private label milk in July 2019, initially offering farmers one or two year contracts, at set prices. Coles also pays dairy processors to process and bottle the milk under a toll processing agreement.

Rabobank dairy analyst Michael Harvey said he was not expecting further “major uplifts” in milk prices as the current season draws to a close.

“For Australia’s dairy producers, farm gate margins remain positive and are supported by the record milk prices,” Mr Harvey said.

“The high milk prices have mostly offset major cost headwinds … for dairy farmers. Labour availability remains a major challenge for dairy farming businesses.”