Milk Wars: price, farmers and the spread of undercuts

Milk is seriously cheap at the supermarkets right now. The cheapest it has been in 20 years, in fact, at $1 a litre for home brand milk. That’s good for consumers who are feeding themselves and their families, but not so good for the dairy farmers and milk processors who say it will just ruin the industry.

Let’s break it down. MM News Editor Rick Morton writes:

Whose idea was this?

The supermarket Coles launched its permanent price reduction on milk to bring people through the doors. In economics this is known as ‘loss leader’ tactics.

You reduce the price of a common item (and most people love their milk) to get people to go shopping there and, before you know it, they’ve spent half of a week’s wage on spices and garbage bags. Coles is effectively saying to milk ‘hey, mate, take one for the team’.

So it’s just Coles?

Woolworths were never going to wait long after its major rival milked loss leading economics for all it was worth, so they jumped on the milk-wagon too, matching the price guarantee. The Independents had to follow suit, too, because if you lose the milk audience the competition is basically over. Milk and bread are the mama and papa of the grocery family. The story would end here if it wasn’t for the fact that we can’t have our cheap milk and drink it too. There’s a loser in the war.

Wait, what’s wrong with cheap milk? Everybody wins!

Not quite. If everything was this easy we’d all be sitting around eating $2 a kilo cherries and bathing in milk. For our skin, of course. As with anything, milk comes at a price. The cows produce it (they get paid in grass), the dairy farmers sell it to milk processors for a price and the big supermarkets buy the milk from the milk processors. The less the supermarkets pay for milk from the middle men, the less they’re going to pay for it in turn from the dairy farmer. At the bottom of the chain the poor old cow will probably still only get some grass. The Dairy industry reckons this will turn into a self-defeating payment cycle that will force farmers out of their own jobs and off the farms. And, as logic demands, the cows won’t milk themselves. The discounting is now the subject of a Senate inquiry. Coles has claimed that they are absorbing the costs of the 33 per cent reduction in home brand milk and not forcing the middlemen and dairy farmers to bear the brunt.

Why on earth do we need a Senate inquiry?

Coles and Woolies are the dominant market players. They write the rules, more or less, when it comes to the industry. The word ‘monopoly’ get bandied around a lot…maybe not technically accurate, but the parallels are similar. Remember playing monopoly and the more and more property your friend owned the harder it became for you to compete? In board game world this usually ends with an upturned game board, but in real life it creates an unfair playing ground and super profits. Some senators are worried that this ‘monopoly’ is hurting not only producers, but independent supermarkets as well. Hence, the senate inquiry. Independent Senator Nick Xenophon said:

”Why is it that in the United States the law does not permit any player to have more than 20 per cent of the marketplace [and] we’ve got two here that control 80 per cent?” he asked. ”I think that needs to be something on the long-term agenda in this country – is it desirable to have just two players controlling 80 per cent of the grocery market?”

Coles has come prepared to the inquiry, informing them that since the reduction in the price of milk, milk sales have increased by two per cent nationally and that this is good for the dairy industry. Logically, this makes sense.

Is it just milk?

No. Coles has also slashed the price on bread, butter and eggs to similar outcries. Chicken products are next with prices reduced by some 16 per cent already. Carlton and United Breweries (the Fosters division) recently stopped delivery of thousands of cartons of beer brans to the Coles and Woolies owned liquor stores for a few days to teach them a lesson. This came after Coles threatened to sell its own beer at below market prices. Another loss leader type situation.

The quesiton remains, do you care? Would you rather pay more for milk and try and prop up the industry or take your cut and run now? The option is still there – buying branded milk in the supermarkets – but the dairy industry say with the much cheaper choice, not many are going to opt to pay more. Are they right?