Supermarket giant Woolworths has raised concerns in the dairy industry with a plan to deal directly with a group of farmers to secure milk supplies.
Woolworths is trialling a direct relationship with a group of farmers on the NSW mid-north coast.
The supermarket said the deal would benefit farmers and consumers, and acknowledged the dairy industry had been affected by the $1-a-litre milk wars between Woolworths and Coles, and other factors such as the high Australian dollar.
"This trial will not be the silver bullet to fix all the problems but we think it could herald a new way of delivering better returns to farmers and a more efficient supply chain," Woolworths general manager of fresh food, Pat McEntee said.
Mr McEntee said the initiative was a response to customers, who had expressed concern about pressure put on dairy farmers, and to the industry, which had objected to the devaluing of milk and the threat to industry sustainability resulting from the price cuts.
However the dairy industry's peak national body, Australian Dairy Farmers (ADF), said the plan failed to address the biggest problem facing dairy farmers.
"Unfortunately, direct farmer contracting does not address the key issue; milk priced at $1 per litre is simply unsustainable and does not give a fair return for dairy farmers across Australia and others in the supply chain," ADF president Noel Campbell said.
ADF said direct contracting had been tried in the UK and delivered mixed results, with only a minority benefiting.
An ADF spokesman said one concern was that only farmers who could deliver large volumes of milk and were close to distribution centres, to save on transport costs, would secure contracts.
Woolworths will market milk produced in the contracts under a new brand developed with the farmers involved.
Manning Valley dairy farmer Tim Bale, quoted in Woolworths' press release, said the farmers wanted long-term contracts to give them confidence to invest in their businesses.
"There's no doubt that consumers like $1 milk, but we think they also recognise that farmers deserve a fair price for what we produce," Mr Bale said.
A dairy industry participant, who asked not to be named, said the arrangement could squeeze milk processors, who sit between farmers and retailers in the distribution chain.
Pressuring processors could force them to reduce the distribution of branded milk to corner stores and regional towns, the participant said.
Woolworths and the farmers' group have sought immunity from the competition regulator to proceed with collective bargaining.
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