The weird history of Australian milk in the 2010s

In the history of Australian capitalism, few recent incidents are as revealing as the dispute over A$1 per litre milk.

When Coles started discounting milk, I thought: "Good news. For those doing it tough, paying A$1 a litre for milk could conceivably make a real difference."

To my surprise, that was a minority view. All sorts of people viewed Coles’ behaviour with deep suspicion, arguing that it could damage those good-hearted dairy farmers and leave consumers eventually paying higher prices.

People were unswayed by these two simple facts: dairy farmers sell their milk not to retailers, but to milk processors, the biggest of them large multinationals like Parmalat (French) and Saputo (Canadian); and Coles and Woolies had been selling three litres of milk for between A$3.09 and A$3.17, so that A$1 per litre – actually, A$2 for two litres – was not such a huge price cut.

Lesson Most consumers will choose to trust anyone else before they trust the big retailers.

The popular view also seemed to be the dominant one in the mass media, especially after Woolworths and ALDI followed Coles. That view was aided by consumer group Choice, which claimed that regulators should investigate whether Coles was engaged in predatory pricing. Says Choice: "It is difficult to see why any retailer would sustain such losses if it were not seeking to eliminate or damage its competitors".

This claim of predatory pricing was bizarre. Eight years later, Coles is still selling A$1/litre milk, and Woolworths and ALDI have not disappeared as a result. The accusation of predatory pricing is usually – to use a technical dairy farming term – bullshit, and it was certainly bullshit here.

Coles sells well under 10% of Australian milk production. (Rivals sell plenty, a lot of milk gets turned into other dairy products, and more than a third goes overseas.) Coles never had a hope of successful predation, even before Woolworths matched it.

Lesson Predatory pricing is almost impossible to do.

Bonus lesson In 2011, Choice didn’t understand very much about producers, retailers or pricing.

The Senate had already held a 2009 inquiry into dairy industry pricing and competition. In 2011, it held another, specifically on the supermarkets’ pricing decisions.

At this point, it’s worth noting that 2009 and 2015–16 were years of particularly low world prices, and it’s probably no coincidence that political pressure led to inquiries in 2009 and 2016, with follow-ons in 2011 and 2018. On Dairy Australia’s one estimate, 90% of the annual movement in farm gate prices comes from changes in international prices, including exchange rates.

Lesson When a farm industry complains particularly loudly, it’s worth checking world prices and the $A.

The 2011 Senate inquiry was smart enough to feel slightly odd about a supposed public uproar over price cuts:

(T)he committee has been troubled that the benefits gained by consumers have not received sufficient attention in the debate about milk prices. In general, price discounting is likely to be pro-competitive and of benefit to consumers. Provided it does not constitute predatory pricing, a retail price cut should not be discouraged. The January 2011 price cut in a staple product is undoubtedly good news for consumers in the short term.

The Senate committee found that:

(M)ost dairy farmers will not be significantly worse off because of the price cuts. This is because the vast majority of milk production occurs in states such as Victoria where a number of processors operate and drinking milk represents a relatively small share of production, compared to the production of manufactured dairy goods.

They did find a group of Queensland dairy farmers who contracted with milk processor (and multinational food giant) Parmalat under terms that saw Coles’ price cut passed straight on to them. Why were dairy farmers bearing the price risk here? The committee didn’t know, but it recommended milk processors not write this sort of contract with farmers.

Lesson Milk processors were the big players making the biggest mistakes in 2011, but the public mostly weren’t going to get angry at them.

Fast forward to 2016, and then-treasurer Scott Morrison ordered the Australian Competition and Consumer Commission to begin another dairy industry inquiry.

While the ACCC was inquiring, the Senate held yet another inquiry of its own, which found, again, that the milk processors were at the heart of the problem. Some of them had made things worse for everyone else by mismanaging their business (Murray-Goulburn, the biggest Australian milk processor until it was sold to Saputo), or cutting farm gate prices to expand profit margins (New Zealand’s Fonterra).

Lesson Milk processors were the big players making the biggest mistakes in 2017, but the public mostly still weren’t going to get angry at them.

When the ACCC reported in 2018, its key findings included most of the same points made by previous inquiries. In particular, the ACCC found three things:

First, there was no evidence that supermarket pricing, including A$1 per litre milk, had a direct impact on farm gate prices. The ACCC "acknowledged and respected" dairy farmers’ concerns, which was a nice way of saying the farmers were barking up the wrong tree.

Second, the real problem was that – you guessed it – milk processors paid the minimum they needed to pay to get the raw milk, just as you’d expect. The milk market, in other words, worked like most markets anywhere.

Third, supermarkets’ contracts with milk processors had pass-through clauses. These would allow milk processors to adjust payments to farmers when farm production costs increased.

Yet the milk processors kept pretending these clauses didn’t exist. So angry was the ACCC about the milk processors’ misrepresentation of their own contracts that it threatened them with legal action if they persisted in blaming supermarkets for the farmers’ problems.

The ACCC also recommended a mandatory code to govern the relationship between farmers and processors.

This made barely any difference to public or even media perception of the problem.

Lesson Just like in 2011 and 2017, milk processors were the big players making the biggest mistakes in 2018, but the public mostly still weren’t going to get angry at them.

Meanwhile, the big supermarkets kept taking damage on the issue. When Coles tried some damage repair, it just made matters worse by appearing to lie: the ACCC says it claimed the farm gate price for milk had gone up when it had gone down.

Finally, last week, Woolworths, no doubt feeling that the milk debacle was damaging their brand name, attempted to break the cycle by announcing it would charge two dollars and twenty cents for two litres. It says "every cent" of the rise will go to Australian dairy farmers.

David Littleproud, the federal Agriculture Minister, is now calling for Coles and Aldi to follow Woolworths and raise prices, despite years of evidence that the dairy processors are mostly at fault. Meanwhile, politicians continue to blame oil companies and banks for not cutting prices. Most consumers seem to think this is fine. That’s kind of odd.

Lesson People think differently about food than about anything else.

The media, meanwhile, has been distracted by a sideshow: Littleproud made these statements when he had a whole A$700 of Woolworths shares. He sold the shares by the end of the week, presumably leaving him free to bash Coles and ALDI unmolested – despite years of inquiries saying it’s mostly the milk processors’ fault.

Lesson It’s a weird, mixed-up world.