MILK PRICING

Adjourned debate on motion of Hon. R.L. Brokenshire:

That this council:

1. Notes with concern the impact on the dairy industry of the Coles milk pricing strategy and that—

(a) dairy farmers around the country are today seriously questioning their future having suffered through one of the worst decades in memory, including droughts, floods, price cuts and rising costs of input such as energy and feed; and

(b) unsustainable retail milk prices will, over time, compel processors to renegotiate contracts with dairy farmers and the prospect that these contracts will be below the cost of production may force many to leave the industry; and

(c) the fact that supermarkets are now selling milk cheaper than many varieties of bottled water will be the straw that finally breaks the camel’s back for many dairy farmers; and

(d) the risk of other potential impacts include—

i. decreased competition as name brands are forced from the shelves; and

ii. the possible loss of fresh milk supplies to some parts of the country as local fresh milk industries become unviable.

2. Calls upon the federal government to—

(a) ask the ACCC to immediately undertake an investigation into the big supermarkets and milk wholesalers after recent price cuts to ensure they do not have too much market power and are not uncompetitive in their behaviour; and

(b) support the new Senate inquiry into the ongoing milk price war between the country’s major supermarket chains.

(Continued from 9 March 2011.)

The Hon. M. PARNELL (17:47): The Greens support this motion, and I will very briefly set out what I think most members in this place appreciate. It is quite simple: the duopoly of ownership of the bulk of our grocery market in the hands of two major players is bad for consumers, growers and producers (in relation to this motion, we are talking about milk producers) and it needs to be addressed, not just at a South Australian level—there is only so much we can do—but certainly at a federal level.

I note that this motion refers to the ACCC, which is the appropriate authority for looking at anti-competitive behaviour, and it also refers to the new Senate inquiry into the ongoing milk price war between the country's major supermarket chains. My information is that that inquiry is now well advanced, and so at one level, whilst we are voting on this today—whilst it might seem redundant to be supporting something that is already well advanced—I still think that it is important that the Legislative Council, representing all the people of South Australia, puts on the record its support for a vibrant economy, which includes support for farmers, growers and, also in the long run, consumers as well. The Greens will be supporting the motion.

The Hon. J.S.L. DAWKINS (17:49): I rise on behalf of the Liberal members to indicate that we will be supporting this motion. While the general public might be enjoying some temporary benefit from cheap milk, industry commentators repeatedly warn that excessive price discounting will lead to higher prices, less choice and quality and, ultimately, harm the Australian primary production industry. The battle between the two major retailers, with anxious farmers Australia-wide also weighing in to the argument, has had a constant place in the media since late January and is likely to remain a hot topic until it is resolved.

I would like to refer particularly to the clauses in the honourable member's motion. In respect of 1(a), (b) and (c), I make the following comments. Dairy farmers are reconsidering their vocational futures. The rise in home-brand milk sales has been offset by a fall in branded milk lines. We have seen, I think, an impact on the dairy industry and the outlets in South Australia and also in south-western Victoria and Tasmania very recently.

I note the story in the media the other day about the Fleurieu milk company, where some dairy farmers who were unhappy with the price they were getting have gone into producing their own brand. Not every dairy farmer has the opportunity to do what those in the Fleurieu milk company have done, and many do not have that capacity, but I commend those producers for doing so and for providing the choice in the community.

The rise in supermarket sales that followed on from the $1 a litre move has been offset by an across-the-board fall in convenience store sales. The major milk processors have no choice but to compete, and they can only do so by dropping prices. With dairy contracts due for renewal in July, dairy farmers face an inevitable and potentially unwinnable battle to retain profitability. This has already happened in Queensland, where Parmalat has reduced the bulk price paid to farmers by 14¢ per litre on 20 per cent of the milk supplied, which it says reflects its share of different market segments. This equates to an almost 5 per cent cut. Farmers' margins could never be described as being excessive, so that really does hurt.

Many farmers will opt out and sell their herds to bigger producers, who can better manage price cuts through economies of scale. While this does mean overall volumes may remains static, it also means that smaller family-owned dairy herds will be sold and relocated and with that goes a lot of the expertise those family operations have developed, including their knowledge of the land on which they operate and their stewardship of the environment in which they farm.

The farmer, in many cases, will be left a choice of going into a different agricultural or horticultural field or subdividing, if that is possible, and sell. The latter obviously will be more attractive to many, and that could see more prime productive land dropping out of production, as hobby farmers and lifestylers move into that area. I think we have already seen that in a number of prominent dairying areas of South Australia.

In response to 1(d) of the Hon. Mr Brokenshire's motion, the loss of choice of name brands inevitably leads to a lack of true competition and a subsequent increase in price. International demand for milk will stay high and grow, but it is a very volatile marketplace, with many players. The domestic premium market, while smaller, is much more stable and forms a firm base for milk producers. Damaging that domestic premium market will increase the volatility and risk of dairy farming in South Australia.

In conclusion, I would like to make some comments in relation to part 2 of the honourable member's motion. Firstly, in relation to 2(a), the market share war between Coles and Woolworths and its potential effect on producers became very public last year with the sow stalls issue. The attempt by Coles to gain market advantage threatened pork producers Australia wide. Public and political pressure forced them to back down. The war has since spread from the milk price battle dominating the daily news. Eggs, meat and bread are to receive the same treatment, with Coles claiming that it is doing it all for the customer's benefit. An investigation into the competitiveness of the market in relation to the extraordinary domination of two major retailers will undoubtedly save other producer groups from repeat performances of the same costly dilemma.

In relation to 2(b), I make these comments. A Senate inquiry into the milk price war can only improve the general understanding of the causes and effects of price discounting on producers large and small, long-term prices, product choice and, less obviously, the viability of thousands of smaller retailers that form part of the social fabric of Australian life. With those words, the Liberal Party supports the motion.

The Hon. R.P. WORTLEY (17:56): Firstly, I would like to congratulate the honourable member for putting this motion before the council. His continued passion for an industry he knows very well is to be applauded. Let me begin by giving members a brief overview of the dairy industry in this state. The South Australian dairy industry contributed 800—

The Hon. D.W. Ridgway: This is too much.

The Hon. R.P. WORTLEY: Is there something funny?

The Hon. D.W. Ridgway: Too much.

Members interjecting:

The Hon. R.P. WORTLEY: Is this the sort of contempt—

The Hon. D.W. Ridgway interjecting:

The Hon. R.P. WORTLEY: It is not giving him a lecture; I am sure he knows more than most of us put together. I think it is typical of the arrogance of the opposition members. There is an important motion here, the government is supporting it, and all we get is mocked by the opposition bench. You are a joke, you are a rabble, and may you spend many, many decades right where you are.

The South Australian dairy industry contributed $821 million in gross food revenue in 2009-10. Currently, there are approximately 300 dairy businesses milking more than 90,000 cows and producing about 600 million litres of milk. It is estimated that the industry directly employs 2,000 people, the majority of whom are involved in family businesses. Dairy farmers supply their milk to a number of major dairy processors including National Foods, Murray Goulburn, Warrnambool Cheese and Butter, Bega Cheese Limited, B.-d. Farm Paris Creek and Fonterra. South Australia is also home to more than 40 accredited manufacturers. Again, estimates suggest that up to 800 people are employed in this sector, and I would imagine that many members of this council have indulged in some of South Australia's finest product.

The SA Food ScoreCard estimates that just under half of this production is processed in South Australia for the fresh milk market or manufactured into dairy products. The remainder of the milk is processed interstate, primarily for either the domestic manufacturing markets or exports. As the member has noted, the South Australian dairy farmers and processors have experienced a number of difficult years, including drought, access and availability of water, and a reduction in global demand and subsequently farmgate price.

Another more recent issue that may have had a medium term impact on the industry in South Australia is the announcement by National Foods, which currently contracts around 40 to 50 per cent of South Australia's milk production, that it is negotiating the sale of its Murray Bridge and Jervois facilities and the closure of two plants in Victoria, which farmers in the Limestone Coast region are likely to supply.

In summary, farmers and processors alike are doing it tough. On 26 January 2011, as part of its Down Under campaign, Coles announced it was cutting the price of Coles brand fresh milk to $2 for two litres for both full cream and reduced fat milk, which usually commands a premium on full cream milk. In South Australia this represents a reduction of about 20 per cent. Soon after, other supermarkets also reduced their generic milk prices. Coles also reduced the price of its Coles brand butter and cream. In its press releases, Coles suggested that it is absorbing the cost and the move would not impact on milk processors or dairy farmers.

The milk price discount is yet another concern amongst dairy farmers, as well as processors in South Australia, particularly as both sectors enter into the next round of price negotiations. Dairy farmer sentiment is aligned with that of the national body; that is, they are concerned about the longer term impact on the milk price, the devaluing of their product and the impact on the farm gate price. Manufacturers of milk products have also noticed a marked reduction in sales of their branded products, indicating that consumers are price sensitive and are shifting their purchasing behaviour towards cheaper product.

In relation to the motion put forward, I offer the following. It is true that a significant number of dairy farmers in South Australia will be considering their long-term future in the industry. Many have suffered from the impacts of drought, including rising costs of production that, in many cases, are higher than the price being received. The 2010 Dairy Situation and Outlook report suggests that 30 to 40 per cent of farmers surveyed were generally negative about the future of their industry. The recent announcement by National Foods may also cause significant concerns for some farmers.

Sustained low retail prices and the associated flow-on impacts to the non-grocery sector will place increasing pressures on domestic processing margins and may well flow back to the farmer. This is particularly true of those processors who have only a limited export capability. We must remember, though, that the Australian industry, including parts of South Australia, is a major contributor to world trade and international prices and will also have a significant influence on prices.

It is true that in some cases the current cost of home brand milk is less than many other drink categories. As previously described, if this low price translates to a low on-farm price for those supplying the domestic processors it may lead to dairy farmers leaving the industry, as they may not be able to cover the cost of production.

Industry has already recorded a decrease in the sales of their branded milk products, in some cases up to 20 to 30 per cent. This is hurting not only the majors but also our smaller local processors. Further pressure is being applied to processors from the non-grocery sector—for instance, food services—to match the prices of the retail home brand category. It is therefore possible that as brands become less profitable companies will reassess their value.

Industry data suggests that consumers prefer fresh milk and that UHT long-life milk is not a preferred substitute. Given the perishable nature of milk, it is likely that importing fresh milk is not cost-effective. Therefore, as long as consumers are demanding fresh milk and recognise its value at the point of sale, it is likely that the supply chain would adjust, thus ensuring access to fresh milk. It is possible that the current supply networks will not be the same in the future as they are now as a result of price discounts. The government supports this motion.

The Hon. R.L. BROKENSHIRE (18:03): I thank all honourable members for their contribution. This is an important matter, and I trust it will assist the federal government to assess the ACCC aspects of predatory pricing and the like, and I trust that it will encourage the Senate to come up with good deliberations and recommendations for the commonwealth parliament to consider in the near future. I thank members for their contribution.

Motion carried.

[Sitting suspended from 18:03 to 19:45]