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Woolworths Group Ltd’s (ASX:WOW) share price tumbles as it jacks up the price of milk

The share prices of our largest supermarkets are taking a hit following media reports that they are jacking up the price of milk by 10%.

I see this as being more of a good news story but that may not be of much comfort to shareholders of Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES) as their stocks dropped around 1.5% each when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is down 0.2% during lunchtime trade.

In contrast, Metcash Limited (ASX: MTS), which hasn’t announced anything, is enjoying a 0.7% uplift in its share price to $3.03.

Woolies first jacked up the price of the staple this morning to support drought-stricken farmers and Coles (owned by Wesfarmers) soon followed despite a report in the Australian Financial Review saying that management had resisted such a move in the past.

Shareholders should see this as a positive, not only because it is aimed at alleviating financial stress from farmers, but because these supermarket giants might finally be able to inject some much-needed food inflation back into the industry.

Falling grocery prices have weighed on sales growth at Woolies and Coles as offshore budget grocery rivals are putting downward pressure on prices. It will be interesting to see if Aldi jumps onto the bandwagon.

While all of the extra 10% increase in Woolies and Coles own-brand milk prices will be given to farmers, I believe the move will pave the way for the supermarkets to lift prices on other products.

Both supermarkets have been attempting to lift prices, but the strategy hasn’t stuck as no one wants to give their rivals an upper hand in winning market share.

The milk price campaign could prove to be the circuit-breaker that will allow the retailers to increase prices on some products to offset the rising cost of power.

This isn’t good news for consumers but it would be music to the ears of shareholders eagerly awaiting the return of respectable same-store sales growth.

The two supermarkets will set up an independent committee to ensure that the 10 cents a litre price rise will be passed on to dairy farmers.

The cooperation should also hearten investors because it shows private companies overcoming politics. The federal government was toying with the idea of a milk levy to help our drought-affected farmers but Prime Minister Morrison is reported to have shot that idea down on worries that it will be seen as a new tax.

That would weaken the government’s ability to attack the opposition Labor party as a high-taxing government-in-waiting.

The 10% increase in milk prices is expected to last until the end of 2018 although there are already calls for the levy to be extended in duration and to cover private-label milk as well.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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