Milk

Coles recently announced it will sell milk for $1 a litre and now a bunch of politicians are sooking that it’s going to destroy the dairy industry.  Nick Xenophon announced a parliamentary inquiry today:

“I understand that consumers want cheap milk. But if cheap milk in the short term means the destruction of our dairy industry in the long term, ultimately consumers will suffer.”

I don’t think Xeno has thought this one out. The retail price of milk has no direct impact on farm gate prices. I don’t see why dairy farmers would care if Coles decided to sell the milk at 20 cents, or give it away for free, or pour it down the drain.

It’s not just Xenophon who doesn’t have his thinking cap on. Opposition agriculture spokesman John Cobb got quite emotional, accusing Coles executives of being “quite happy to get their bonuses over the dead bodies of farmers”. Greens Senate leader Christine Milne reckons “It’s time Australia’s dairy farmers saw something being done to protect their livelihoods.”

Possibly their reasoning is that if Coles cuts its retail price it will need to extract a better price when they negotiate with farmers. But that doesn’t make sense either. Price is determined by prevailing market conditions: demand and supply. Coles doesn’t improve its bargaining position by dropping its retail price.

Maybe they’re confused and they actually want to protect small retailers from the competition. But that doesn’t make much sense either. Small retailers don’t make that much money on milk. They provide it as service to customers who they hope will fill up their trolley with more expensive items. I doubt 7/11 owners will mind too much if Coles sells cheap milk because they’re not really competing in that market. They provide convenience and long trading hours and nobody’s going to stop going to the 7/ll because their milk is a few cents dearer than Coles.

So maybe it’s about protecting Woolies. Woolies stand to lose the most if shoppers switch to Coles instead because they get cheaper milk. So maybe the whole thing is a ruse to prevent our two major retailers from having a little price competition. Or maybe everyone involved with this is just a complete moron.

26 thoughts on “Milk

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  2. Yes, their complaints make no sense. Why do they think Coles are out to make their suppliers broke? It’s just absurd – this would push their prices up!

    Or maybe everyone involved with this is just a complete moron.

    I believe you’ve hit the nail on the head here.

  3. Maybe if we got rid of the taxpayer funded supermarket protection racket that is the ACCC, then farmers would be able to band together and demand a higher price for their produce.

  4. “Whenever the private sector introduces an innovation that makes the poor better off than they would have been without it, or that offers benefits or terms that no one else is prepared to offer them, someone—in the name of helping the poor—will call for curbing or abolishing it.”

    ‘Woods’s Law’ (Thomas Woods)

  5. This is really strange. If Coles tries to offer the farmers a price that would be too low for them to survive on won’t they just be forced to sell to Woolworths instead, sending Coles out of business? Only an idiot tries to make it impossible for their suppliers to continue to make a profit.

    I think the reason for the confusion is that a large number of people have trouble thinking of anyone who isn’t a large company choosing prices for things. They believe that all prices are decided by large companies and that no one else has any influence on them. For example if Coles rises the price of food they believe it is “forcing” everyone to pay more and if it decreases the prices it pays to it’s suppliers it’s “forcing” them to take less money, which argueably would be the case in a monopoly, but it’s definitely not a monopoly; I live in an area that’s officially categorized as “Rural” and within 15 K’s I have super-markets from at least four different companies. (Woolworths, Coles, ALDI, IGA, and several small corner stores)

  6. TimP – that suggests that people think we live in a command economy. And a command economy in which some fool put private corporations in charge of giving the commands. If that was how the world worked then I’d be annoyed also.

  7. This is udderly ridiculous! Xeno is just milking this for all it is worth! I’m cheesed off! Can anyone else think of any more teatilating cow jokes?

  8. ““I understand that consumers want cheap milk. But if cheap milk in the short term means the destruction of our dairy industry in the long term, ultimately consumers will suffer.””

    Imbecile. To produce milk that cheaply require massive capital outlays and inventory management systems.

  9. This post misses a few important points.
    The other supermarkets have matched Coles’ price for milk. So far it only applies to house brands, but the others will struggle to maintain volume. The whole market will be affected.
    That means dairy farmers will have little or no option but to sell to someone who is selling the product below the cost of production. Processors are often monopolies within their regions anyway.
    Next, demand for milk is not price sensitive. Even if Coles was the only one discounting, it would only take share off the others. Consumption would not increase.
    Third, anyone who has ever dealt with Coles knows what arseholes they are with suppliers. They leverage their control over access to customers to apply enormous pressure on suppliers, often to the point of unprofitability. The claim that they will absorb the price cut is laughable.
    Fourth, dairy farmers have limited flexibility regarding their production or costs. Cows must be milked and fed. Assuming the price they receive falls (which is inevitable), it will take time to adjust and some will get out of dairy farming.
    In the long run, Coles’ margins will be temporarily reduced along with those of processors and producers. The market will return to normal based on rational behaviour (ie making a profit rather than a loss) although it might take a while as it’s easier to reduce prices than increase them.
    What will have changed? In business terms it is known as a loss of confidence in the future. Investment will be discouraged.
    It’s not simply a matter of Coles wanting to catch Woolworths. For short term competitive gain, they are causing long term damage to Australian agriculture.
    I’m not proposing the government step in, but I am suggesting we stop buying stuff from Coles until they get over this spate of idiocy. There are plenty of other ways to compete.
    I have explained more about their impact on agriculture here: http://www.businessspectator.com.au/bs.nsf/Article/WES-Wesfarmers-WOW-Woolworths-Coles-pd20101214-C5464?OpenDocument&src=is&cat=agribusiness-al

  10. David:

    “Assuming the price they receive falls (which is inevitable)”

    I’d have to disagree with you with this statement.

    Let us for argument sake, take this to the extreme. Lets say that the major supermarkets started giving away milk for free.

    That means more people would purchase milk (for nothing).

    This would increase the demand for milk.

    Since over the short term, the supply of milk is relatively fixed, and expensive to increase, this would actually increase the price of milk for suppliers.

    On the contrary, if the supermarkets started charging $10 a litre, no-one would buy milk and supermarkets would need very little, and then the suppliers would have no bargaining power.

    This would lead to prices for suppliers to decrease.

    Indeed, if we use the logic you’ve suggested, serviette manufacturers would be out of business because McDonalds gives them away from free.

    The reality is that prices are set by bargaining power. And this price drop has not increased the bargaining power of supermarkets. It’s either reduced it (if people are buying more milk so they need more) or left it unchanged (if people are buying the same amount of milk).

    People can boycott Coles if they like, but I think it’s largely counterproductive, unless they actually start reducing prices to farmers (which I believe would be for unrelated reasons anyway).

    Indeed, lowering supermarket milk prices and the attention that comes with it, will encourage more people to buy milk (free advertising) and will help dairy farmers.

    In fact (conspiracy theory warning) I think the dairy farmers and supermarkets are in cahoots. All this talk about milk is free advertising, as saves them running another “don’t forget to drink milk” campaign. I’m not sure what’s in it for the supermarkets, as they seem like the bad guys here, but maybe they’re going to raise the price of milk later (once everyone is hooked on it again) and then say no-one can complain because everyone was whinging when the price was low.

    You heard it here first!

  11. Clinton,

    Milk is a normal good. You do not purchase more of it if it becomes cheaper. This is also why it is not particularly price sensitive.

    Milk producers receive marginal revenue product. If the original revenue falls, so will milk prices.

    The issue is if the action taken by coles this will or not actually impact consumer demand or preferences in any meaningful way.

    ” The reality is that prices are set by bargaining power.”

    No, by marginal products. The most monopsonistic industry for labour is mining, but it’s workers are some of the best paid.

  12. I think the problem with that argument is that it requires you to assume three things:

    1. Coles is evil (or at least unethical) and will screw-over their suppliers to accomplish their goals.
    2. It is somehow possible (via aggressive negotiation or something similar) for Coles to decrease the price it pays to it’s milk suppliers; thereby increasing it’s profit on the sale of milk.
    3. Coles chooses not to do this for some reason.

    The combination of these three beliefs must mean that Coles’ overall goal is not profit (perhaps a strong fondness for home-made cheese?). The Alternative explanation is that Coles is going to treat this as a loss-leader to attempt to gain more market share from either Woolworths or the normal intermediataries that operate between farmers and retailers.

  13. I suspect the high wages in mining is actually the result of negotiating power. Not many people want a job in that industry because normally they work a long way away from their homes. Most people prefer to be able to go home every night rather than only one week out of four. The limited number of people who will take such jobs gives those that are willing to take them more negotiating power allowing them to insist on higher pay. Of course maximum negotiating power is limited by how much the other party values what you’re offering, but negotiating power still decides the price. The most obvious form of negotiating power is of course the (often unstated) threat of going to the other party’s competitors instead.

  14. Tim – part of the theory is that mining should also have a lot of industrial disputes as it is a bilateral monopoly.

    It has some of the lowest rates of disputes.

    You need a lot of excess capacity to bandy around your market power. The mining industry is too practical and deadline driven for that kind of stuffing around.

  15. .,

    Coles is selling a product. Part of that product is milk.

    MacDonalds doesn’t set the price of its serviettes based on their input costs, it gives them away for free because it improves their other sales.

    It’s quite clear this is what the supermarkets are doing.

    Any retail outlet doesn’t plan to make exactly the same profit on all its goods. Petrol stations make little margin on petrol and much more at the convenience store. Budget movie cinemas make their money at the candy bar.

    Supermarkets are no different. Some items are high profit items, some are low profit (or a loss). Supermarkets get their produce as cheap as they can and put it together and try to make the most profit.

    Do you seriously think supermarkets would pay more for milk because they’re making higher profits? If you do, you obviously have more faith in them than I do.

    The supermarkets have been squeezing the farmers for everything they can before the price drop, and they’ll do exactly the same now.

    Any other argument suggests that before the supermarkets were being nice to farmers, and that I can not believe.

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  17. “The supermarkets have been squeezing the farmers for everything they can before the price drop, and they’ll do exactly the same now.”

    It’s called doing business. Every business aims to buy their product as cheaply as possible, and to sell it for as much as the market can bear. Government getting involved never helps.

  18. Why are people supporting Japanese owned Dairy Farmers against Coles which is Australian owned. If Muslims owned Dairy Famers and I wish they would buy them out I would love to see the outcry them. We only have to see politicans stopping their schools. Coles milk is a million times better thqn Dairy Farmers so is their cream.

  19. Fonterra (Riverina Fresh) supply Woolworths some but they water it down a little more.

    Clinton – has it struck you that consumers seem to have an awful lot of bargaining power?

    The serviettes are part of the cost of a hamburger etc.

    With more and more ALDI setting up shop, Woolworth’s business model of Roger Corbett – charge as much as we can for ordinary crap – seems to be coming to an end.

    If you reckon they don’t have a markup pricing system well then the derived demand for milk doesn’t necessarily apply and farmers won’t get any less compared to what they are getting now.

    But then again you’re saying the supermarkets are trying to more or less maximise the “wage bill” for milk.

  20. David,

    Isn’t this a good time for this to happen though for remaining dairy farmers?

    1. Good rains.

    2. Exit of some QLD farmers due to cyclones etc.

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