DAIRY farmers across eastern Australia are signing up as potential direct suppliers to Woolworths' new special private label Farmers' Own.
Farmers' Own is set to be trialled in NSW next month, with the supermarket promising customers a new high quality, un-homogenised and locally produced house brand product selling above the controversial $1 a litre store price widely adopted by retailers in 2011.
Analysis by Macquarie Equities suggests if Woolworths could replace half its private label milk volumes with a new premium product it could generate extra annual sales of $200 million and earnings of $60m.
Many in the dairy industry have high hopes Woolworths' attempt to upgrade private label milk's image may also lead to an end to the category's cheap retail price which has undermined returns and confidence in the processing and farm sectors.
While supermarket rival Coles last week made headlines with its own deal to lock in 10- and five-year supply contracts promising price premiums to farmers supplying its private label milk through the Murray Goulburn and Norco co-operatives, Woolworths says plenty more avenues exist for it to source house brand milk.
Speaking after recently announcing a 5.7 per cent lift in Woolworths third quarter sales results, chief executive Grant O'Brien said all current milk supply options, and more, were open to Woolies.
He hinted even Murray Goulburn was a potential Woolworths supplier.
But he worried the Coles' deal could "turn the industry structure on its head" when it dumps Lion and Parmalat as its $1/L milk bottler next year and starts sourcing from new purpose-built factories run by the farmer co-ops.
He said Coles' plans involved a lot of change being achieved in 14 months and in his view it was "something that needs to be done carefully".
Parmalat, which will lose its contract to supply Coles in southern Queensland in 2014, has also described Coles' deal as potentially a "very divisive, disruptional strategy" that had left many farmers sceptical about where the real benefits would end up.
Macquarie Equities dairy analyst, Greg Dring, said private label processing costs for Coles' rivals, particularly Woolworths, may rise as a flow-on consequence of Lion and Parmalat being sidelined by Coles and having less milk throughput to absorb their costs.
Furthermore Woolies' strategy to upgrade the $1/L price point for house brand milk may not work if Coles' long-term partnerships locked in supplies at prices low enough to keep consumer purchasing behaviour accepting cheap milk as standard for the next decade.
Meanwhile, although Woolworths is reluctant to discuss plans for an interstate expansion of its Farmers' Own pilot scheme currently involving farmers on NSW's Mid North Coast, the milk broker overseeing its direct supply needs has been busy taking details of farmers keen to sign up.
A steady flow of phone calls from farmers dissatisfied with their current farmgate payment arrangements have been directed to Victorian-based Milk2Market which was recently established as a raw milk exchange.
The company buys, sells and manages milk and milk contracts for stakeholders across the dairy market and has worked with Woolworths and the Mid Coast bargaining group in the Manning Valley.
Woolworths' Mr OBrien said while the supermarket giant had a history of buying direct from farmers in other food categories it was approaching any future role in the dairy sector in a "really careful and measured way".
"We have chosen to do a pilot with a group of farmers, but it's only one of the things we've got in train and that we're looking at," he said.
"This is an important industry for the country and we're being really careful in how we're doing it."
The Manning Valley farmer leading the premium house brand direct supply talks with Woolworths, Tim Bale, said farmgate payment negotiations with his group had been delayed for 10 days while talks about processing the milk continued at Parmalat.
Parmalat last week told farmers it had not engaged in "toll processing" in the past and speculation about it agreeing to bottle Farmers' Own was wrong, but commercial development boss Vince Houlihan confirmed this week that "this is not to say that we are not in discussions".
"Our preference has always been to work for long-term industry wide outcomes," he said.
Mr Bale believed processors Parmalat and Lion's enthusiasm for talking about toll processing Woolworths' direct supply milk had increased significantly after learning Coles did not need their private label services in Victoria, NSW or southern Queensland next year.
He agreed with Mr O'Brien's view that many potential processing options existed in the market, particularly given the increasing number of small scale niche operators whose businesses and skills had grown significantly in the past two years.