AFTER provoking almost a year of controversy and friction, Australia's $1-a-litre supermarket milk price war can't last for too much longer says Westpac senior commodities specially, Neil Burgess.
The price battle, which began as a Coles initiative on Australia Day has been blamed for a big slump in milk sales from convenience stores and milk vendors as well as indirectly driving down farmgate payments to dairy farmers whose contracts were re-negotiated this year.
It also sparked a Senate inquiry into the impact of the big supermarket duopoly pricing tactics on farmers, other retail competitors and milk processing companies.
Japanese parent company of Australia's biggest milk processor, Kirin Holdings, is blaming the discount war, now involving all supermarket "house brands", as a major contributor to its projected net loss in its milk business this year.
Kirin owns the Lion beverage group, including the former National Foods dairy products stable which became Australia's biggest milk processor after buying the Dairy Farmers co-operative in 2008.
Westpac's Mr Burgess said although processors used high volume supermarket supply contracts for generic milk to keep their bottling plants running at maximum capacity and providing a consistent market for all the milk their suppliers delivered, he believed economic reality had to kick in eventually.
"Supermarket private label milk contracts might be keeping the infrastructure working, but it's also squeezing processors' own valuable brands out of the market - brand names that are meant to be worth a lot of money to these companies," he said.
Milk processing costs were also rising, particularly energy costs.
"With only two main processors operating in eastern Australia (Lion and Parmalat), its not hard to see the point where they turn to Woolworths and Coles and say this situation can't continue.
"And, although I'm not privy to the numbers the supermarkets work with to cover their own costs, I'm sure economic commonsense would suggest they can't afford to carry the $1 a litre price for much longer, either.
"Coles even told the Senate hearing that while it's private label milk discount was commitment for a six months, the price would eventually rise.
"It probably depends on how long the supermarkets have their current contracts locked in with the processors."
Coles argues its decision to slash milk prices as much as 33 per cent in January has actually been good for the dairy industry, lifting consumption in most States in the nine months to September.
Victorian milk sales were up 4.9pc, followed by Western Australia (4.5pc), and Queensland (3.6pc), but NSW and Australian Capital Territory sales were less impressive - up just 0.8pc.
Milk consumption in South Australia and Tasmania and the Northern Territory actually fell 0.2pc in the year to September and UHT also fell 9.3pc nationally, but overall September milk sales in Australia were 198.5 million litres or four per cent up on September 2010 .
A Coles spokesman said while not all milk categories were rising, this year's sales figures rebuffed claims that milk was an inelastic product and price cuts wouldn't lead to any sales growth.
However, Mr Burgess noted that unlike Britain where supermarkets invested a lot of effort and money in developing their private labels as mainstream competitors to food company dairy brands, retailers like Coles did not have their own processing plants or close ties with specific processors.
He said UK giant Tesco even paid a modest premium to farmers contracted to supply its supermarkets.
Although Australia's private supermarket labels growth formula was copying a long tradition of home brands in Britain, Mr Burgess believed major processors here seemed much less likely to stay aligned to specific supermarket contracts in the current uneasy market climate.
Australian Dairy Farmers president Chris Griffin said pricing pressure on processors branded milk lines had definitely flowed through to a downward trend in farmgate prices milk companies were offering farmers.
The price war had created a two speed dairy economy, hitting Queensland, WA and northern NSW farmers hardest and depressing product innovation initiatives by the processors.
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