Parmalat concerned over Coles milk deal

17 Apr, 2013 07:35 AM

PARMALAT chief Craig Garvin has joined Woolworths in raising concerns about Coles' $2 billion private label milk supply deal with Murray Goulburn Co-op, saying it threatens to divide and disrupt the dairy industry.

"This is potentially a very divisive and a very disruptional strategy; I think farmers should be nervous," said Mr Garvin, who runs Australia's second largest fresh milk processor.

"There's a lot of scepticism among farmers and they're really now starting to look through this deal and what's really in it," he told The Australian Financial Review.

Mr Garvin said Coles' 10-year milk supply agreement could be good for Victorian farmers, who already supplied Murray Goulburn, and said the deal guaranteed a decade of cheap private label milk for consumers.

However, he said farmers in other states and foreign-owned processors who accounted for most of the drinking milk processed in Australia could be left out in the cold.

He questioned whether Murray Goulburn, which processes 3 billion litres of milk a year, would need new sources of milk in NSW and Queensland to fulfil its 200 million litres a year contract with Coles. "I'm sceptical that any new farmers will win a deal out this at all in NSW and Queensland."

Mr Garvin also queried the "premium" Murray Goulburn has promised to pay farmers, pointing out that Parmalat has paid 12 per cent more on average than Murray Goulburn and 6 per cent more than Norco for milk over the last four years. "They have guaranteed a premium but to what? What they have paid in the past?" he said.

According to Macquarie Equities, Coles will pay Murray Goulburn 10¢ a litre less for private label milk than it currently pays Lion, which will lose contracts in NSW, Victoria and south east Queensland mid next year.

Murray Goulburn is building two new processing plants at a cost of $120 million or 6¢ a litre. Macquarie says Coles is investing less in the milk supply value chain and relying on the new production facilities and a toll processing arrangement with Murray Goulburn to achieve a lower cost of production.

Coles has hailed the agreement as a major step towards the long-term sustainability of the fresh milk industry.

But Mr Garvin remains sceptical. "This is not the silver bullet for the industry people think it is, people should be careful," he said, echoing comments last week from Woolworths chief executive Grant O'Brien.

"This is not about foreign or local processors but long-term industry sustainability," Mr Garvin said. "The future of the industry would be better served through long-term contracts between farmers, processors and retailers."

Parmalat is in negotiations with Woolworths over private label milk contracts in NSW and Queensland, which expire in September 2013 and 2014.

"As the incumbent we'll proactively work with Woolworths on the long-term future of the industry," he said.

Parmalat is also in talks over a toll processing contract with Woolworths, which wants to source milk directly from farmers for a new premium brand.

A trial with seven NSW farmers starts soon. In an email to suppliers last week, Parmalat said it was "first and foremost a buyer and processor of milk" and created long-term value by investing and growing sustainable supply chains from farms to consumers.

"Our purpose is to be a manufacturer and seller of branded dairy products and toll processing is not an activity we have engaged in the past ... our preference has always been to work for long-term industry wide outcomes."

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17/04/2013 1:25:32 PM

So you could summerise this article and the direction of the Dairy Industry as further reducing income and security for milk producers in Australia. And as deregulation gets more momentum it bites deeper into producers pockets and creates deeper divisions for all but the big guys known as Coles and Woolies.
Mabel Peyton Smyth
17/04/2013 7:18:24 PM

Oh yes Parmalat and Woolworths have it all splattered over their collective faces. MG and Coles have shown then a clean pair of heels and have given them little room to turn. Woolworths going direct to farmers was a farce and Parmalat is a multinational with little need for sales of home brand product.
18/04/2013 10:36:37 AM

As a Parmalat supplier in Victoria I find Mr Garvin's claim that we are paid 12% more than MG suppliers hard to believe. Parmalat has the hardest milk quality standards and if these standards are not reached each month we are no better off than if we were supplying MG. Victorian suppliers have been subsidising Queensland suppliers for years. We get less than 40c/l while those up north get over 50c/l. This deal with Coles could prove the best thing for the dairy industry in many years. If we weren't trying to sell our farm we would consider switching to MG.
18/04/2013 12:17:45 PM

Once again Coles and Woolworths are the only winners in these types of deals. The processor has to try to reduce costs and farmers are no better off either. I am sure MG will get half way through this contract and ask the question "what have we done"?
19/04/2013 2:48:04 PM

Read the fine print in the contract. Eventually Coles will become the supplier and then buy up the farms and we will all have to serve Coles or woolworths whoever wins the war http://supermarketwarriors.blogsp
20/04/2013 6:25:36 AM

This looks like a terrible deal. Coles seem to have locked in a cheap price just before dairy prices go up
Cattle Advocate
21/04/2013 6:24:54 AM

QDO's Brian Tessman ''NORCO is a relatively small player in QLD, so it will have to get new suppliers if it is to meet demands from Coles. All farmers in QLD and northern NSW need the farm gate price to improve. We really need to be pumping as much as we can out of these southern states into those export markets not diverting supply up to QLD to make up for short falls that are caused by ridiculous retail games.' NSW's Lynne Strong, supplies both Parmalat and Lion '' We're very happy working with Parmalat I'm confident that Woolworths is too.''
Cattle Advocate
21/04/2013 6:48:34 AM

NSW's Lynne Strong ''Milk processors like Lion who are only able to supply the domestic market are at the whim of the supermarkets, all the power in NSW is with the supermarkets at the top of the supply chain. I would'nt be surpised if they [Lion] announced that's where they're moving, there's incredible potentlial to supply powdered milk, UHT to Asia and certianly if I was Lion this is where I would be going. Infant formula, my goodness you have to actually pre order your Infant formula, so high potential.''
Cattle Advocate
21/04/2013 7:05:59 AM

Greg Dring, Macquarie Equities ''It has to be noted that Lion and Parmalat dont need to be in the private label business or even in the branded business. Coles seems intent on creating a category with little opportunity for nation branded milk to be ranged.'' Has the 'Fresh Opportunities' project that wants to double the size of WA's Dairy Industry to give it export capacity, made it onto the list of ' Things to do ' on the fridge yet?
26/04/2013 6:31:25 PM

Parmalat pays 6 per cent more than Norco? Wonder why so many of their suppliers are looking to jump ship?


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