milk prices

Crying over cheap milk

A long long time ago I posted about milk prices. I suggested they were too high. Or that people should complain about them, rather than about the price of petrol. Milk, is, afterall, completely renewable.

Pure Milk
Image Credit: Flickr

Now. I know farmers work hard to earn a living. And I hate that their prices are essentially controlled by our retail duopoly. And I know the margins are pretty low in milk farming because they are being, no pardoning of this pun, milked for every drop.

But I don’t share the dairy lobby’s angst when it comes to the price of milk (see another story where they call price drops “un-Australian”) in Coles and Woolworths (Update: Franklins and Aldi have joined the price war).

The supermarkets are having a price war. So what. This happens all the time in retail. But when it comes to milk, and the price of milk, this is a useful pawn in an economic game. Milk prices are determined by a contractual arrangement. And the contracts are up for renegotiation soon. That’s all these calls to boycott Coles and Woolies milk are. And they’re a little dumb.

Using milk as a loss leader to attract customers (and promising that they’ll wear the costs of dropping the price, rather than the farmers). Now, I am all for lobby groups looking to protect their interests. That’s how capitalism works. So I think it’s great that the dairy guys are out their suggesting Coles and Woolworths won’t wear the cost of a price drop for long. But this argument kind of misses the point of loss leading.

I’m sure the big two would love to have the farmers making no profit on their labours at all – but what they wouldn’t like – is for all the milk farmers to go out of business at once. Leaving them with no supply. Loss leading is essentially a marketing tactic, and I’d hope (perhaps naively) that the cost of dropping the price of milk to $1 a litre, is coming from the marketing side of the supermarket budget, rather than the procurement side. Choosing a staple product like milk to fight with a competitor who in just about every sense offers an identical product is a great move.

Unless there are farmers out there who like selling their milk at below cost (and already the lobby groups seem to be making noise about that being unsustainable) – I’d say the big two will wear the costs for so long as it is making them money to do so. There is no benefit to them if the milk industry dries up. There is benefit to them if they steal market share off one another. They’re targeting each other. Not the farmers. Obviously they want to cut down their overheads as much as possible – but it’s not a particularly sustainable business practice to be running your suppliers out of business in a price war. The whole idea of a loss leader is that they lose money there because nobody just goes to the Supermarket to buy milk, but they might pick one supermarket above the other if their milk is cheaper. It’s marketing. The money to do this probably comes out of a marketing budget.

If they figure out how much they’ll lose selling milk at below cost for a year (say 30c a bottle) and how much profit they’ll make per customer gained, across their whole basket or trolley of goods (say $50) then it’s a pretty simple question to answer… the idea that this will be passed on down the chain is a bit odd – especially since it’s only on their branded lines and the prices of the other, no doubt more popular milk (based on observation at the fridge in the supermarket) have not changed (as far as I know). This is just two companies trying to one up each other to get customers through the door. It’s marketing.

How to fight this battle
Calling giving the average Australian a bargain “un-Australian” is not a winsome PR strategy. It looks like whinging and whining. If the milk lobby really wants to fight against these chains, if they really want to hurt the supermarkets, they should team up with butchers and greengrocers and urge people not to boycott Coles and Woolies milk, but rather to embrace this as a chance to hit them in the hip pocket. If you want to punish them for being “Un-Australian” you should be encouraging people to snap up the cheap milk and buy nothing else from them in protest. The milk industry should embrace this as an opportunity for people to rediscover the joy of drinking milk. Start promoting making milkshakes at home. And then encourage people to get their veggies from a fruit market and their meat from a butcher – and see how long this lasts.

Coffee and the environment

Here’s an interesting coffee article with the following environmental and economical message:

“Last year, Britons spent about £750 million on coffee, but only a small fraction of this on espressos. Think of the huge amount of money that would be saved if the majority of coffee-bar patrons switched to espressos from cappuccinos. The country’s milk bill would fall and its carbon footprint would shrink too.”

Not only is coffee an excessive drain on water stocks – milk is bad too. This is all very well – except the same writer also describes the cappuccino experience (amongst others – including the corretto – a shot with alcohol)

“There is no doubt that the most popular variant is the cappuccino (“little hood”), at its best a glorious drink consisting of equal parts espresso, milk and foam. The experience of consuming a perfectly made cappuccino is sensual to the point of decadence.”

Milking the debate

My ongoing investigation into milk prices continues. My research reveals a shocking fact. Milk costs about the same to produce per litre as petrol – and yet we still pay significantly more at the Servo.

To begin my research on the matter I first contacted Ben, my economics consultant, who said the following:

“It probably costs more to produce/transport (I’m no milkologist, so i don’t know about this for sure), at any particular time there is only a certain supply of milk, so it is open to general market forces, you demand less milk than petrol, so the marginal utility you gain at 1 litre of milk is vastly lower than that of petrol.

Really, they are totally different items. People who think that comparing the price of milk to petrol will reveal some holy grail of pricing failure are retards.”

Not content to be left in the retard basket I pursued the issue with expanded economic factors…

If scarcity is a factor though surely the ease in which milk can be created as opposed to fuel should make the supply side of the equation the larger side and lower the price – also the fact that milk has a much shorter shelf life should keep the price low because retailers can’t afford to hang on to it? Shouldn’t it? Milk is expensive – it’s about $2 a litre if you buy it from a servo – and around $1.25 from a Supermarket – it can’t cost that much to produce – all you need is a cow and some grass – I assume too, that a cow, being an appreciating asset (as long as it’s getting fatter) has a net cost of zero to the farmer.

It can’t possibly cost more to squeeze a cow’s nipple than to extract crude oil from the ground and refine it into petrol. Isn’t part of the deal with oil pricing that there’s a central pricing body who make the call based on available supply, future supply and market conditions? Surely milk has an almost infinite future supply and ample current supply, and pretty consistent, steady demand. Unless there’s a sudden spike in demand for milk products like ice cream and milkshakes… There shouldn’t be any inefficiencies in its production created by fluctuations in the market and it shouldn’t cost more than petrol.

Its carbon footprint is an issue because Cows produce methane so I guess emissions trading will also impact on milk pricing.

Ben says I have it all wrong:

“Cows apparently cost a lot to upkeep. Cows also are relatively labour intensive per litre. Milk requires handling up to health and saftety standards, specific packaging, refrigeration. sure, pumping oil out of the ground is expensive, but they can pull out a million litres with only a few personnel and throw it in a ship and take it places. Sure it has to be refined, but i wouldn’t be surprised if fuel refinement is about on par costwise with milk refinement, if not cheaper.”

Not content to let my research die at a secondary source – I decided to pursue details from the primary producers. I found the following:

“Milk prices paid to farmers are determined on the basis of milkfat, protein and volume:

Payment = milk fat ($/kg) + protein ($/kg) – volume charge (c/L)”

According to the current figures Milk farmers receive about 44c per litre of milk – and $5.80 per kilo of Milk solids (milk fat and protein). I’m not sure why the volume charge is subtracted… but that’s a separate issue. Milk it seems costs 44c per transaction in the initial purchasing stage. It must then be processed, bottled, and distributed to the retailer.

Milk prices, assuming you haven’t visited that link above, are set to rise this year due to the following factors:

“The Australian Bureau of Agriculture and Resource Economics (ABARE) expects that milk prices will continue to rise through to 2008-09 (Outlook Conference, 2007):

  • High prices in recent years have been driven by constraints to growth in the three main exporters (EU, NZ & Aust.) at a time of rising global demand
  • The current drought in Australia will limit total production in 2006-07 and 2007-08
  • Poor seasonal conditions have also been evident in New Zealand
  • There has been heat and drought in the EU, and CAP reforms have reduced incentives to produce milk
  • On the other hand increased supplies are expected from emerging exporters such as Argentina and the Ukraine, while China’s dairy production (mainly for domestic consumption) continues to rise”

This UK site estimates average cost per litre of milk at about 13.7 pence per litre – that’s not taking into account the milk solid production.

Costs of production of milk are actually decreasing. And the average Tasmanian cow (which I assume is similar to the average Australian cow) produces 386kg of milk solids – and each cow produces about $1,488 worth of milk and milk solids while costing $1,196 to maintain (on a 250 cow farm).

So, that’s all quite long winded – but basically the farmer is selling the milk at 44c per litre – and being looked after in the process. The extra 80 cents (at least) is being added by the retailers and others. The government currently levies 11c per litre – but that’s all set to change. Good to see the Rudd Government doing something about this issue.

The whole debate (in my mind) centres on whether the production costs of milk and petrol are comparible – I am assuming that the transport/bottling/refining costs are within the ballpark of each other – refrigeration should be cancelled out by the distance fuel is transported etc…

So these guys put the average price of production of a litre of fuel at 25-50c. Another UK site suggests the cost of producing fuel accounts for about 32% of the total cost per litre. The cost of production of a litre of milk accounts for about 35% of the total price based on the regular retail price of $1.25 per litre. So it’s Servos that sell milk for $2 a litre or more that are really jacking up the price – and for this they should be held accountable. The figures don’t lie. Milk is where the Service Stations are guilty of price gouging.

Unfortunately I promised Paul I’d only make interesting posts after he added me to his RSS reader. I lied.

Got milk?

Why is it that milk costs more per litre than petrol? In my understanding it’s completely renewable. It’s not like we’re approaching “peak milk”, with ever dwindling supplies to satiate our growing thirst for our rampant consumer driven lifestyles… It’s a travesty I say.
And something must be done. There’s your cause of inflation right there – especially with fuel prices back down around the $1.10 per litre mark.

Scroll to Top