Retail giants probed as milk wars threaten farms

The cut in the price of unbranded milk has boosted milk sales at Coles by as much as 20 per cent. Photo / Bloomberg

Executives from Australia's largest food retailers are scheduled to appear before Parliament this week to address concerns their decision to cut the price of milk may be hurting the nation's 7500 dairy farms.

Wesfarmers' Coles supermarkets discounted milk to A$1 ($1.37) a litre from as high as A$1.49 on January 26 to gain customers. Woolworths, Aldi Group and Pick n Pay Stores followed the next day.

The discounts are the latest salvo in supermarket efforts to keep customers as Germany-based discount grocery chain Aldi expands in the country. Australian food prices last year had their slowest annual growth in 16 years.

"Australian consumers don't know how good they have it," said Charlie McElhone, manager of economics and trade at the National Farmers Federation, a group that represents Australia's farmers. "When you look at the breakout in global food inflation, this is the place to be at the moment."

Aldi, which opened its first Australian store in 2001, says its products are 25 per cent to 40 per cent cheaper than competitors and plans to add 25 outlets this year to its existing 250. Coles said it has reduced prices on 5000 products - about 20 per cent of its inventory - in the past six weeks.

Australian discounts are in contrast to rising global food prices, which fuelled the unrest that toppled regimes in Egypt and Tunisia and pushed Libya toward civil war.

The World Bank said last month that 44 million people have been pushed into extreme poverty since June as food shortages lifted a United Nations gauge of world prices to a record.

While Australian supermarkets promised to absorb the price cuts on their self-labelled milk, the reductions hurt processors like New Zealand's Fonterra and Kirin Holdings who lose sales of more-expensive branded products. In turn, they're expected to pass on cuts to farmers in negotiations for annual supply contracts starting in July, said Luke Mathews, a commodity strategist at Commonwealth Bank.

Farmer Brian Tessmann said he earned about A56c a litre on branded milk and about A40c on unbranded milk and needed average prices above A50c to break even. Some farms get as little as A20c a litre, he says.

"We will be the collateral damage as supermarkets try to get more people through the door to buy milk cheaper than water," said Tessmann, 53, as he walked through dairy sheds at his property in Coolabunia, where the family has milked cows for 100 years.

"We might have to give dairying away."

Parliament called supermarket executives to an inquiry this week to explain how the price cuts would affect the industry, the Senate economics committee said.

Prime Minister Julia Gillard's Labor Government relies on support from four non-party lawmakers, two of whom represent areas that list dairying as a main industry. Australian dairy farmers are struggling with high feed costs after droughts, then record floods, destroyed crops.

The cut in the price of unbranded milk has boosted milk sales by as much as 20 per cent, Wesfarmers chief executive Richard Goyder has said.

"It is a well-trodden path to pick out a particular product and reduce its price to get foot traffic," said Will Seddon at White Funds Management in Sydney. "They will make up the losses through higher prices on other products."

Woolworths had no option but to match Coles and has also vowed to absorb the cost, company spokesman Simon Berger said.

"I spare a thought for farmers, but I have three children under 4 and we go through about eight litres of milk a week," said Eloise Parry, a stay-at-home mother, as she shopped at Coles in the Canberra suburb of Curtin.

"The cheaper prices are too attractive."

- BLOOMBERG