Australia to Probe Woolworths, Wesfarmers on Cuts to Milk Prices

A sign advertises 2-liter bottles of milk for A$2 in the dairy section of a Coles supermarket in Melbourne. Photographer: Carla Gottgens/Bloomberg

A banner advertises 2-liter bottles of milk for A$2 at a Coles supermarket in Perth. Photographer: Ron D'Raine/Bloomberg

Shoppers pass a cardboard sign advertising lowered milk prices in the dairy section of a Coles supermarket in Melbourne. Photographer: Carla Gottgens/Bloomberg

Dairy cows wait in a holding pen prior to milking at Caldermeade Farm in southeastern Victoria. Photographer: Carla Gottgens/Bloomberg

Dairy cows are milked on a rotating platform at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

David Algie, farm manager, attaches suction nozzles to dairy cows for milking at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Milk collects in a drum under a milking platform at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Dairy cows walk back to pasture after being milked at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Dairy cows walk back to pasture after being milked at Caldermeade Farm. Photographer: Carla Gottgens/Bloomberg

Executives from Australia’s largest food retailers are scheduled to appear before parliament this week to address concerns their decision to cut the price of milk may be hurting the nation’s 7,500 dairy farms.

Wesfarmers Ltd. (WES)’s Coles supermarkets discounted milk to A$1 ($1.01) a liter from as high as A$1.49 on Jan. 26 to gain customers. Woolworths Ltd. (WOW), Aldi Group and Pick n Pay Stores Ltd. (PIK) followed the next day.

The discounts are the latest salvo in supermarket efforts to keep customers as Essen, Germany-based discount grocery chain Aldi expands in the country. Australian food prices last year had their slowest annual growth in 16 years.

“Australian consumers don’t know how good they have it,” said Charlie McElhone, manager of economics and trade at the National Farmers Federation, a group that represents Australia’s farmers. “When you look at the breakout in global food inflation, this is the place to be at the moment.”

Aldi, which opened its first Australian store in 2001, says its products are 25 percent to 40 percent cheaper than competitors and plans to add 25 outlets this year to its existing 250. Coles said it has reduced prices on 5,000 products -- about 20 percent of its inventory -- in the past six weeks.

Australian discounts are in contrast to rising global food prices, which fueled the unrest that toppled regimes in Egypt and Tunisia and pushed Libya toward civil war. The World Bank said last month that 44 million people have been pushed into extreme poverty since June as food shortages lifted a United Nations gauge of world prices to a record.

Chain Reaction

While Australian supermarkets promised to absorb the price cuts on their self-labeled milk, the reductions hurt processors like Fonterra Co-operative Group Ltd. and Kirin Holdings Co. who lose sales of more-expensive branded products. In turn, they’re expected to pass on cuts to farmers in negotiations for annual supply contracts starting in July, said Luke Mathews, a commodity strategist at Commonwealth Bank of Australia.

“The price pressure flows through the supply chain and will ultimately impact the farm,” said Mathews.

Farmer Brian Tessmann said he currently earns about 56 cents a liter on branded milk and about 40 cents on unbranded milk and needs average prices above 50 cents to break even. Some farms get as little as 20 cents a liter, he said.

“We will be the collateral damage as supermarkets try to get more people through the door to buy milk cheaper than water,” said Tessmann, 53, as he walked through dairy sheds at his property in Coolabunia, where the family has milked cows for 100 years. “We might have to give dairying away.”

Parliamentary Inquiry

Parliament called supermarket executives to an inquiry that started today to explain how the price cuts will affect the industry, the Senate economics committee said in a statement. A Coles representative is due to appear on March 22.

Prime Minister Julia Gillard’s minority Labor government relies on support from four non-party lawmakers, two of whom represent areas that list dairying as a main industry.

Australian dairy farmers are struggling with high feed costs after droughts, then record floods, destroyed crops.

The cut in the price of unbranded milk has boosted milk sales by as much as 20 percent, Wesfarmers Chief Executive Richard Goyder has said.

“It is a well-trodden path to pick out a particular product and reduce its price to get foot traffic,” said Will Seddon, who holds Wesfarmers and Woolworths in the $350 million he manages at White Funds Management Pty in Sydney. “They will make up the losses through higher prices on other products.”

Shares in Woolworths, Australia’s biggest retailer, have risen 0.1 percent this year. Wesfarmers, whose businesses range from retail to mining, has gained 3 percent.

‘No Option’

Woolworths had no option but to match Coles and has also vowed to absorb the cost, company spokesman Simon Berger said.

“Woolworths would not have started this price war with milk and shares some of the concerns of the dairy industry,” Berger said in an e-mailed statement. “A price reduction on one brand puts pressure on all brands, which over time can devalue the whole milk category.”

Australia’s dairy industry produces 9.1 billion liters of milk each year, according to industry group Dairy Australia. Even at the equivalent of $1.01 a liter, Australian milk is more expensive than in the U.S., where it costs about 87 cents, or the U.K. where it sells for around 41 cents.

Coles said it has no plans to end the cheap-milk campaign.

‘Incredibly Positive’

“The reaction we are getting from our customers is incredibly positive,” Wesfarmers’s Goyder told reporters on a Feb. 17 conference call. “Our milk sales are up 15 to 20 percent since we put this in place.”

One winner is the shopper, who saw Australian consumer prices rise last quarter at the slowest pace in almost two years as a stronger currency lowered the cost of imported goods. Consumer spending makes up half the $1.3 trillion economy.

“I spare a thought for farmers, but I have three children under four and we go through about 8 liters of milk a week,” said Eloise Parry, a stay-at-home mother, as she shopped at Coles in the Canberra suburb of Curtin. “The cheaper prices are too attractive.”

To contact the reporter on this story: Gemma Daley in Canberra at gdaley@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net