Just a few weeks after rival Woolworths Limited (ASX: WOW) announced that it was bypassing milk processors and sourcing milk directly from producers, competitor Coles has signed a deal with Victoria and New South Wales dairy cooperatives Murray Goulburn/Devondale and NORCO.
Coles – owned by Wesfarmers Limited (ASX: WES) has signed the two dairies to ten and five year deals respectively to supply the supermarket operator with private label milk from July 2014. Devondale will also supply Coles with premium-branded cheeses.
Devondale managing director Gary Helou says the deal includes a premium above the farm gate price, so will be profitable for the company's dairy farmers. Australian DairyFarmers president Noel Campbell said the deal was a much needed commitment to the industry following the decision of major supermarkets to sell milk at $1 a litre. Mr Campbell said Devondale was hopeful of reaching a similar agreement with Woolworths.
Coles says the new contracts were a major win for farmers because we cut out the middle man and farmers get a bigger share of the retail price. Consumers will also benefit because the new agreements mean the retailer can sustain affordable milk prices.
Murray Goulburn is expected to supply Coles with around 200 million litres of milk a year, about 5% of its production volumes.
The daily milk market is dominated by foreign-owned companies, including Japanese owned Lion, which had processed milk for Coles and Parmalat. Lion has been losing market share as milk volumes fell by 14.5% across its branded and private label products, in the year to September 2012.
Coles already has deals with farmer-owned groups around Australia including branded products sourced from Warnambool Cheese & Butter (ASX: WCB) and Bega Cheese Limited (ASX: BGA).
Foolish takeaway
Whether the supermarkets can sustain $1 a litre milk remains to be seen. As costs rise, pressure will come onto the likes of Coles and Woolworths to lift prices, otherwise farmers will face the same situation they were in during the milk wars over the past two years.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Woolworths.
