Drought heats up chook prices, but supermakets still not moving on milk

Soaring stockfeed costs have added another dollar to the price of pre-cooked chickens at major supermarkets, prompting drought-stressed dairy farmers to ask why cheap milk still sells at a loss?

The drought-driven feed price leap and other input cost rises, including energy, have effectively forced a truce in the barbecue chicken discount war between Coles and Woolworths which saw prices drop to $8 each two years ago.

In March last year prices lifted to $9 for a roasted chicken, with Woolworths then moving up to $10 a month ago, followed by Coles in the past fortnight.

Independent grocery chain IGA sells roasted chooks for $9.99.

The two biggest retailers, which together sell about 90 million cooked chooks a year, confirmed drought had been a major contributor to the price rise.

Dairy farmers say drought has given retailers a perfect incentive to lift milk prices, as they have done for cooked chooks, and pass returns back to cost-burdened farmers.

Dairy farmers say drought has given retailers a perfect incentive to lift milk prices, as they have done for cooked chooks, and pass returns back to cost-burdened farmers.

However, the new price is still cheaper than the $11 per chicken price tag which generally applied prior to the discounting scramble going into top gear in 2017.

Poultry producer processor and feed miller, Inghams, which has a 60-plus years supply history with Woolworths, warned in last August how feed wheat, energy and insurance prices were biting and, if not offset by other savings, would flow through to market price increases.

Inghams had already lifted prices by up to eight per cent in some supply channels last winter.

We just need to get the retailers to expand their generosity to other commodities and dairy is a good place to start

Terry Richardson, Australian Dairy Farmers

“The major chicken processors are clearly putting a fair bit of supply leverage on the retailers,” said NSW farmer and Dairy Connect’s farmer group chairman, Graham Forbes.

“Although, I wonder how much of the latest supermarket price rise really goes back to them and their growers.

Positive development

“It is, however, positive to see supermarkets now acknowledging drought has had a big impact on farm production costs.

“There’s no way dairy farmers can continue feeding cows for a loss.”

Australian Dairy Farmers president, Terry Richardson, was also “encouraged to see Coles and Woolworths acknowledge the drought’s impact on our farmers”.

“We just need to get the retailers to expand their generosity to other commodities, and dairy is a good place to start,” he said.

The milk volume downturn has become really obvious in the fresh milk market states and northern Victoria in the past six weeks

Graham Forbes, Dairy Connect

Mr Forbes, who has cut his milking herd from 800 to 600 cows in the past year, said on current trends national milk output was likely to be down about 30pc by May because feed supplies continued to dry up and irrigation costs had soared.

“It will be a very slow recovery when seasonal conditions do improve,” he warned.

Graham Forbes

Graham Forbes

“Unfortunately it’s cheaper to send cows to the abattoir and sell heifers to China than keep feeding them for the returns we’re getting.”

He noted grain prices had doubled in a year from $200 a tonne to $400/t landed on his Mid North Coast farm, while hay worth $110/t in South Australia a year ago was now $350/t.

“The milk volume downturn has become really obvious in the fresh milk market states (NSW and Queensland) and northern Victoria in the past six weeks and will get worse as more farms cull before winter,” he said.

“If you’ve got a tanker of spare milk available at the moment you’ll probably get trampled in the rush.”

Act now on $1/litre milk

ADF’s Mr Richardson said retailers now had a perfect incentive to lift milk prices and see the added return passed back to the farm gate, so farmers could better manage the rising cost of fodder and water.

The dairy industry had fought a long battle against discounted dairy products and it was only fair it received a fair return for its effort, particularly as other commodity prices were rising because of drought.

Australian Dairy Farmers president, Terry Richardson.

Australian Dairy Farmers president, Terry Richardson.

Dairy Connect’s chief executive officer, Shaughn Morgan, said lifting the base milk price would give the whole industry the chance to move better returns through the supply chain to the farm.

Discounted retail house brand prices have been fixed at $1 a litre since 2011 and are widely considered a supermarket “loss leader” to draw customers into stores.

Last year a Bank of America Merrill Lynch report surmised cooked chooks were a similar loss making drawcard.

At $8 each it estimated no supermarket had made any profit selling barbecued chickens.

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A Woolworths spokesman said the retailer was “acutely aware” drought pressures had a direct relationship with production costs for poultry producers and had responded accordingly.

Consulting with farmers

“We’re always consulting with our various farm sector suppliers,” he said, although could not speculate what may happen in other fresh food categories such as fruit, meat or milk.

Coles declined to comment on pricing because it is about to release half-yearly results to the stock market, but a spokesman highlighted different food categories had different market supply and demand fundamentals.

Supermarkets have long argued they buy from dairy processors, not farmers, and in general Australia has no shortage of fresh milk supply to process.

Indeed, most fresh milk is converted into other dairy products including cheese, powder and butter, much of which is exported into, arguably, more competitively priced markets.

There’s no doubt the NSW parliamentary inquiry recommendation for a dairy commissioner to oversee the dairy industry is a must – and must happen now

Shaughn Morgan, Dairy Connect

However, Dairy Connect’s Mr Morgan said it was absurd to be trucking bulk milk from Victoria to process in Queensland.

Shaughn Morgan

Shaughn Morgan

In fact, the current drought-squeezed markets meant many specialty dairy product makers were paying extreme price increases to access southern volumes they needed while farmers were cutting production because prices they received weren’t covering costs.

“There’s no doubt the NSW parliamentary inquiry recommendation for a dairy commissioner to oversee the dairy industry is a must – and must happen now,” he said.

“The dairy industry faces a dire outlook in this state unless the government steps in."