Dairy by Numbers

By ROSS MCINNES, QDO Vice-President

During the recent Coles supermarket vs Campbell Arnott’s marketing dispute around the product Tim Tams, Coles Managing Director John Durkan made some interesting comments in relation to companies setting prices for their product. Mr Durkan stated that there was no justification for Campbell Arnott’s to lift the pricing of some of their biscuit line by 10%.

In the free market of Friedman economics, the very same free markets our major political parties espouse to, a company has every right to set the price for their product. Within this economic model it is up to the consumer decide whether or not they will buy that product at that price and competitive markets sort it out without interference. In theory that is how a free competitive market should work. It’s an interesting comparison then considering Mr Durkan’s reservations of the product supply sector’s right to increase prices.

Let’s look at the numbers across some sectors and the increases in prices and income they have seen increase since around say the year 1992. 

0% - No increase in milk prices from the regulated price of 1992 in Brisbane to the price of supermarket brands today.

+20% - Farmgate price of milk for dairy farmers in Southern Queensland going into bottles – this has increased by 20% or about 10cents per litre since 1992. Out of the 9-10 cents extra, apart from the increase in input costs there has been a direct cost of 3-5 cents due to the increased demands by processors and retailers for longer shelf life milk. This has resulted in more cows culled for mastitis and larger replacement numbers needed.

+79% Consumer Price Index (CPI) increase since 1992.

+80-90%- Increase in Murray Goulburn average export milk price in southern Australia mainly Victoria and Tasmania – contrary to claims made by Coles executives that all milk price movements are directly linked to the export price, Murray Goulburn has seen an average increase of about 3.5% pa compared with 0.7% in Qld with domestic andexport prices more often moving inopposite directions.

+153% - Increase in the average full time wage in Australia from $30,432 to $76,960 since 1992

+188%- Increase in pay of Members of House of Representatives and Senators - Our elected pollies in Canberra have fared a little better than the average wage with their base salaries increasing from $67,715 to $195,130 with extra allowances on top of that.

+700%? –ASX 100 CEO’s salaries – this is an estimated increase in executive packages in Australia. This figure however is difficult to quantify give the lack of transparency in executive salary reporting. A Sydney Morning Herald report stated that the average CEO package vs the average wage was 20 times in 1985, peaked at 94 times in 2007 and at 67 times in 2013. The average wage in 1985 was $19,760 so with the multiplier still 67times that works out at 968%. According to media reports, former Coles boss Ian McLeod in 2013 had a base salary of $1.9million, but with bonuses received $19 million at the end of the year, setting a record for Australia.

It is clear the consumer is not the main beneficiary of this market domination. Particularly when you consider in the light that long term contracts to a selected group of dairy co-ops that supply the supermarket branded milk. Where does the long term milk pricing go with the ten year contracts that are currently locking $1 milk in place? I doubt that even the most passionate supplier shareholders of the large southern co-op will be happy for their milk to be sold, as the contract wears on, for 80 cents or less per litre in 2014 value?

It is commonly believed that the original deal was signed to allow their branded cheese back on Coles’ shelves after it had been largely removed several years earlier. But the more recent situation of the supermarkets store brand cheese taking sales by selling for 30-40% less than theirs may have dampened some of the public enthusiasm. One thing for sure it is unlikely to propel farmers’ incomes at all let alone by the national average. One truth remains however and that is that the CEO’s of market power will continue to laugh all the way to the bank.