• Australian supermarket giant Woolworths will stop selling $1-a-litre milk, a product of a seven-year dairy price war with rival Coles.
• Dairy farmers have long complained that the cheap milk has put their businesses under enormous pressure.
• “It’s clear something needs to change,” said Woolworths chief executive Brad Banducci.
• Prices for larger bottles of milk will rise by 10% and the company says the price increase will be handed over in full to its suppliers.

Woolworths will stop selling $1-a-litre milk at its supermarkets, in a move it says will help restore Australian dairy farmers’ commercial viability.

Coles cut its home brand milk to $1-a-litre milk in 2011 in the opening shot of a fierce price war and Woolworths quickly followed suit as the two supermarkets battled for market share.

The cheap home brand products have proved controversial, and have been blamed by some in the dairy industry for cutting farm-gate prices and farmers’ profitability.

Woolworths said on Monday it would cease selling $1-a-litre milk from Tuesday, with two- and three-litre bottles of home-brand milk rising by 10 per cent to $2.20 and $3.30 respectively.

The price increase would be handed over in full to the 450 dairy farmers who supply its home-brand milk, Woolworths said.

It follows Woolworths launching a “Drought Relief” range of milk in September 2018, which included a 10 per cent levy that had raised $5.8 million to date.

One-litre cartons of home-brand milk will remain $1.20, without any levy passed onto farmers.

“We believe the long-term sustainability of our dairy industry – and the regional communities they help support – is incredibly important for Australia,” said Woolworths chief executive Brad Banducci.

“It’s clear something needs to change and we want to play a constructive role in making this happen.”

Banducci said that the levy model was the most effective way to ensure price increases ended up with farmers.

“While we’re realistic this won’t solve broader structural issues, we hope it will help inject much needed confidence into the sector and the regional communities dairy farmers do so much to support,” he said.

Many of Australia’s dairy farmers are struggling as the drought hits their operations, increasing costs such as water and feed.

January this year was the warmest on record and rainfall over the past 10 months has been below average across much of the east cost, according to the Bureau of Meteorology.

Australian Dairy Farmers CEO David Inall said the move was “a game changer in the fight against discount dairy that has long frustrated the industry”.

“Removing $1 milk is not just intended to restore farmers’ financial confidence, but it will also boost confidence in regional communities and small businesses that rely on the industry,” he said.

Coles has responded to the drought affecting some diary suppliers with a temporary 10 per cent levy on three-litre bottles of milk, which by January had raised $3.9 million for 640 farmers.

Woolworths’ move to drop $1-a-litre milk entirely will heap pressure on Coles to also act.

Australia’s largest supermarkets have been under pressure over $1-a-litre milk, as farmers faced drought and rising costs, with federal agriculture minister David Littleproud last year throwing his support behind a milk levy that would go directly to farmers.

An Australian Competition and Consumer Commission inquiry in 2017 largely cleared $1-a-litre milk for being to blame for low farm-gate prices, but did identify a power imbalance between farmers and the large milk processors that buy their milk.

Farmers are paid the same amount whether their milk is eventually sold as home-brand or more expensive brand label milk, and increasing retail prices would just increase supermarkets’ profits rather than help farmers, the ACCC concluded.

The levy model Woolworths is using aims to get around that by handing the price increases directly on to farmers.

This article first appeared in Business Day. Read the original article. Follow Business Day on Twitter.

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