Coles seeks security and certainty, in buying two milk processing factories

Melbourne-based Fresh Agenda director Steve Spencer said the purchase of the Victorian and NSW factories, from Canadian dairy giant Saputo Dairy Australia for $105 million, was no surprise.

"Milk production has been dropping for a long time, the owner of the asset probably flagged their interest in moving them on, so it's logical," Mr Spencer said.

"It's a very strategic acquisition for the security of that business - they [Coles] used to have milk plants a long time ago.

"They do it for a reason and the reason is security and certainty - in this industry, at the moment, there isn't a lot of that."

The supply chain was already established, but the purchase gave Coles a greater understanding of milk processing assets, he said.

"Their [Coles] contracts are pricing milk out for two years, so this is not a surprise."

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The two plants, at Laverton, and Erskine Park, Sydney, were built by MG a decade ago for $140m.

The factories produce Coles Own Brand 2L and 3L milk.

About 90 farmers currently supply Coles.

Mr Spencer said it gave Coles "a bit more margin on the product and a bit more flexibility.

"They are probably are okay for supply with what they've got at the moment, but there is always attrition going on in the supply base - they will get milk when they need to meet their requirements," he said.

Woolworths had a different model, so was not likely to follow "in the short term."

United Dairyfarmers of Victoria president Mark Billing agreed it was a "risk mitigation strategy" by Coles.

"The milk pool has shrunk, as we all know," he said.

"I would suggest if I was sitting around the Coles board table, I would be looking at what the long term risk is to milk supply.

"By having direct supply and control of processing that gives them a little bit more assurance of putting milk on shelves."

Mr Billing described the move as "interesting.

"Given the two factories they have purchased were supplying all the milk for the shelf in the first place, to me, it seems like a natural step," he said.

Saputo was a global cheesemaker and acquired the factories through the buy-out of Murray Goulburn.

"Divesting those and concentrating on their core business seems to make a bit of sense," he said.

But he said farmers would need to watch that Coles did not manipulate milk prices, in the future.

He said there was still a significant choice in the number of processors farmers could supply.

"In other countries where supermarkets control the whole supply chain it hasn't played out that well - but the advantage we have in Australia is the level of choice we have," he said.

The deal is still subject to Australian Competition and Consumer Commission approval, expected to be completed in the first half of next year.

"We have a couple of advantages, the ACCC is one and the Dairy Code of Conduct is the other - that provides a level of comfort for both processors and farmers," he said.

"We need to keep a close eye on how it progresses and ensure it operates within the confines of the ACCC and the Code."

Meanwhile, eastAUSmilk president Matt Trace said the announcement changed the dynamic in processing fresh milk.

Mr Trace said it must not diminish competition within dairy.

"The farm-gate price paid to dairy farmers must remain fair and transparent and not be negatively impacted by the sale, with Coles now owning the equivalent of the dairy 'paddock to plate'," Mr Trace said.

Co-chief executive Shaughn Morgan said the ACCC must ensure there were no negative impacts on the dairy industry, especially given the declining milk production and farmers exiting the industry over the past years."

"We will closely monitor the ACCC review and the impact that the Coles purchase may have on the dairy industry," Mr Morgan said.

An Australian Dairy Products Federation said the deal indicated Australian dairy was evolving to fit a contracting milk pool.

"For the 2022-23 season raw milk production volumes are projected to contract by a further 4-6 per cent for 2022-23, which will mean Australia's total milk pool will have reduced by more than 25pc since 2000 when it hit a projected 8 billion litres in 2022-23," the spokesman said.

" This is at a time when milk production is growing in competing dairy production markets - particularly New Zealand."

Faced with higher milk costs, as processors competed for less raw milk and faced soaring overheads, many dairy processors were needing to assess their manufacturing footprints.

The spokesman said manufacturing may no longer be in step with the raw materials and costs needed to sustain it and remain competitive in local and international markets.

"The reality of this is that Australia's current milk pool scenario is no longer sustainable and if we cannot increase milk production some factories like those in Laverton and Erskine Park may change ownership," the spokesman said.

"As we have already witnessed in the current financial year, some factories based in rural and regional Australia will likely close and adversely impact local communities."

Rabobank senior dairy analyst Michael Harvey said the acquisition was part of a major transformation of the Australian supply chain, which still had some way to run.

"Changing ownership of assets is part of this and Coles' direct sourcing is also a change," Mr Harvey said.

"More broadly, the supply chain is witnessing a big shift in how much milk is in the system, who processes it, recruitment strategies and what markets are being focussed on.

"In addition, the milk price architecture continues to change."