Woolies' milk levy for private label lines extends until June 2021

Woolworths is extending its "drought levy" retail price on fresh two and three litre house brand milk lines for another year, expecting to generate about $30 million in extra payments to its milk producer suppliers.

The supermarket will also establish a separate $5m fund to provide infrastructure and technology grants to help farmers lift efficiency and profitability in the next three years.

The 10 cents a litre retail levy was introduced Australia-wide in February last year, ending the supermarket's eight-year commitment to controversial "dollar milk".

It has raised about $50m for dairy farmers since Woolworths the initiative started at a local level in September 2018.

Peak dairy body Australian Dairy Farmers applauded the supermarket's public commitment to continue its discount milk price at $1.10/l, distributing the extra 10c back to farmers, while also urging Coles, Aldi and other retailers to follow Woolworths' lead.

However, ADF also called for the consumer levy to be built into the farm gate milk price in the long term.

Originally Woolworths' 10c retail price levy applied only to a specific line of drought relief milk bottled for Queensland and NSW stores.

The higher retail price acknowledged soaring farm input costs for drought-caned east coast dairy farms and saw the retailer funnelling payments back to all NSW and Queensland dairy farmers supplying its private labels.

The response from sympathetic consumers was so strong, Woolworths extended the 10c levy across its housebrand range five months later, phasing out its drought milk line.

Although autumn rain has relieved dry conditions in many parts of eastern Australia, drought conditions linger, especially in southern Queensland.

Woolies has opted to maintain its levy commitment, although broadening the levy term so the funds can help farmers lift on-farm efficiency and profitability.

Based on current volumes, these support payments are expected to contribute an extra $30m to its 450-plus farmer suppliers by June 2021.

The company said extending the support would help provide certainty on farms supplying its Woolworths brands.

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The move coincides with the dairy industry's mandatory code of conduct taking a new step this week as processors reveal their prices and contract arrangements for the year ahead.

"Our levy has already provided much-needed relief to dairy farmers and we're grateful for our customers' support of the program," said Woolworths fresh food director Paul Harker.

"While conditions have improved and farmgate prices have gone up since we started the levy in 2018, we're extending payments to provide certainty while dairy farmers and processors find their feet under the new mandatory dairy code.

"This is set to return tens of millions to dairy farmers over the next 12 months, above and beyond the farmgate price they're paid by their processors.

"To build on our existing support, we're also working to establish a dairy fund to offer financial grants for dairy farmers to invest in new infrastructure or technology to improve profitability."

The $5m fund would be paid for independently by the retailer in addition to the money collected from the consumer levy.

Woolworths was engaging with dairy industry stakeholders on the design of the program and expects to open for applications later this year.

ADF said it looked forward to working with Woolworths on future initiatives to maintain a sustainable dairy industry, including its new $5m fund.

However, chief executive David Inall noted the farmer body believed sustainability would be greatly improved if generic milk prices increased to $1.50/litre, at least until changes were made to the Food and Grocery Code to establish appropriate value distribution up the supply chain to farmers.

"If we are to stop farm exits and hardship, then all retailers need to increase the price of their store brand retail fresh milk to $1.50 with the increase going back to farmers via their processors," he said.

Woolworths also purchases milk directly from around 20 dairy farmers for its Farmers' Own range and will publish its pricing agreements in line with the requirements of the dairy code code of conduct.

The federal government's mandatory dairy code was introduced to address what the Australian Competition and Consumer Commission determined was an imbalance in bargaining power between dairy processors and farmers.

From June 1 processors must publish their standard form milk supply agreements to cover all the circumstances in which they intend to purchase milk in the coming financial year.