Aussie Milk Producers Suffer Due to Price War Amid Soaring Global Prices

Australian dairy farmers are crying, not over spilt milk, but over lost income as they continue to be caught in the price war between supermarket giants Woolworths and Coles. Thus, while prices of milk in the international market soar due to the drought that hit neighbor New Zealand, the $1 per litre price tag at groceries continues to hurt their pockets and caused some farms to close.

On Wednesday, Woolies announced that it would roll out a cut-price Farmer's Own milk brand in a bid to correct the impression that the supermarket giant is exploiting dairy farmers, by bypassing the middle men.

Under the Woolies plan, the $1 per litre milk price that consumers love but dairy farmers abhor, would be retained by the grocery giant buying directly the milk from farmers.

"We have always believed that the drop to $1 a litre is not sustainable for the dairy industry and not good for dairy farmers . . . As a result, we are looking at trialling alternatively-sourced milk products, direct from dairy farmers that deliver a higher price at the farm gate," The Australian Financial Review quoted Andrew Hall, director of Woolworths' corporate and public affairs.

In 2011, the ACCC investigated the price war and concluded that it was the supermarkets that carried the cost of lower milk prices in terms of lower profit margins for the basic commodity.

Ironically, milk prices in the international market continue to go up because of the worst drought to hit New Zealand in 10 years. As a result, whole milk powder prices for delivery in May increased by almost 25 per cent to $5,313 a tonne from the previous auction. Reckoned a month earlier, the increase is about 50 per cent higher, according to the Web site of GlobalDairy Trade, an industry monitor.

New Zealand's North Island has been declared a drought area, while conditions are not different in the South Island which could cause a 1 per cent decline in production for the world's biggest milk exporter which ships about 95 per cent of its production.

New Zealand supplies 30 per cent of the global milk requirement. Until the drought eases and milk production in New Zealand improves, international dairy prices are expected to remain high, said Ted Charteris, the Victorian manager of Rabobank.

However, Rabobank senior dairy analyst Michael Harvey said Aussie farmers could not benefit from this development because most of the near-term contracts have already been locked in for most milk produces in Australia.

He added that although Australia exports 50 per cent of its dairy output, farmers who are mostly located in Queensland, New South Wales and Western Australia that supply the domestic market, cannot easily shift to international sales to benefit from the high commodity prices in the global market.