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Will ending $1 milk boost the Woolworths share price?

Woolworths Group Ltd (ASX: WOW) has decided to end $1 per litre milk, will that boost the share price?

Today at least, yes – the Woolworths share price is up 1% at the time of writing.

The supermarket giant has decided to increase the price by 10% to $1.10 per litre from tomorrow, where the extra money will go straight to farmers. The supermarket company will sell two and three litre varieties of Woolworths branded fresh milk for $2.20 and $3.30 respectively.

Woolworths Group CEO Brad Banducci said “We believe the long term sustainability of our dairy industry – and the regional communities they help support – is incredibly important for Australia.

“In our consultation with industry bodies, including the Australian Dairy Farmers Association, its state members and NSW Dairy Connect, we’ve heard the outlook will continue to be extremely tough for dairy farmers right across the country.

“This is affecting milk production and farm viability, which is devastating for farmers and the regional communities in which they live. It’s clear something needs to change and we want to play a constructive role in making this happen.”

For those readers wondering whether the full 10 cents will actually go to farmers, Australian Dairy Farmers CEO David Inall said “It is reassuring that Woolworths has committed to deliver the full 10 cent increase back to those farmers who supplied the milk into that product category.

“Removing $1 milk is not just intended to restore farmers’ financial confidence, but it will also boost confidence in regional communities and small businesses that rely on the industry.”

However, Mr Banducci did say this decision wasn’t taken lightly, with customer budget pressures a consideration for Woolworths.

Is the Woolworths share price a buy?

Price deflation has been a key point for Woolworths to win back customers over the last two years. However, price deflation isn’t sustainable for long periods of time – for suppliers like Australian dairy farmers or for Woolworths’ profit growth.

A small amount of price inflation could be good for everyone involved. Woolworths is currently trading at 23x FY19’s estimated earnings. This seems fairly expensive, so I don’t think it’s a buy today.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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