Supermarket wars: Dairy farmers a dying breed

Daily farmers say they are struggling to survive, with supermarkets offering consumers milk from as low as $1 a litre.

Coles – owned by Wesfarmers Limited (ASX: WES) and Woolworths Limited (ASX: WOW) have been waging a price war for some time now. Coles is aggressively trying to win back customers from Woolworths that it lost through years of neglect under its former management. As part of that strategy, the company introduced $1 milk two years ago and then $2 bread, with Woolies and independent IGA stores, supplied by Metcash Limited (ASX: MTS), forced to follow suit.

The ABC reports that 500 dairy farmers and local business people have met in Tongala, in northern Victoria, to try and work out a way to challenge the two dominant supermarkets. Businessman Dick Smith, famous for promoting Australian businesses, and politicians Barnaby Joyce and Bob Katter were amongst the speakers.

Dairy farmer Nigel Hicks has told the ABC that he receives 25 or 26 cents a litre, but his cost of production is around 43 cents a litre. He has increased his bank borrowings in an attempt to stay afloat, but can’t survive at current milk prices.

Industry group, Australian Dairy Farmers, says it has been lobbying supermarkets to lift retail prices, but Coles has argued that the milk war is not to blame and the company says that it only buys 4% of the total milk produced in Australia. The ABC says that Coles actually buys 20%, so someone appears to have their calculations wrong.

Dairy farmers and milk suppliers may need to take a slice of the Goodman Fielder (ASX: GFF) loaf, and follow the company’s lead. The company says it may not renew its contract to supply Coles with cheap $1 bread, which expires at the end of June, unless it gets an increase in price.

The Australian Competition and Consumer Commission (ACCC) could also provide some relief, with reports out today that the regulator has escalated an investigation in Coles and Woolies over possible anti-competitive behaviour towards suppliers. 50 suppliers are believed to have come forward with complaints against the two giant retailers.

Foolish takeaway

There are now 6,700 dairy farmers in Australia. A decade ago, it was almost 12,000. Who knows how many farmers we’ll have left in another ten years’ time, but the current trend doesn’t suggest it will be pretty.

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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.

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