Coles is profiting from the collapse in global milk prices

The fresh cut to MG farmgate prices means that Coles is now making more on a litre of milk than dairy farmers.

The cut in milk prices this week from Murray Goulburn will translate into higher profits for Coles because its house brand milk is acquired on a farmgate price basis.

In effect, at present prices, Coles is making 27 cents a litre on its house brand milk while the farmer will be earning 37 cents for that same milk.

In rough terms, there are 13 litres of milk in every kilogram of milk solid, so, with farmgate prices set at $4.80 a litre, it works out at 37 cents a litre for so-called drinking milk.

This compares to the price paid in 2014 which was 52 cents a litre.

Coles pays farmgate prices plus a margin which is around 36 cents a litre which means the actual price paid by Coles in Victoria today is 73 cents for a litre of milk that sells for $1.

Coles pays around 20 cents a litre to get the milk from the distribution cente to the retail store, which brings this cost up to 93c a litre before the cost of refrigeration and electirity and the light.

Coles is certainly better off than it was in 2014 when the farmgate price was $6.80 a litre, which works out at a processer charge of 86 cents before other retailer costs.

Coles’ average margin across its stores works out at 4.5c for each dollar of goods sold and its milk profits are no better than its average.

The figures are approximations based on the Coles’ Victorian contract which is estimated at 90 million litres a year against the NSW contract which is for 120 million litres per annum.

The 10 year contracts which were signed in 2013 included a rise and fall clause in the contracts which meant the Coles paid more for the milk when the farmgate price was higher and less when it fell.

Coles windfall is due entirely to the collapse of the global milk price from $5,000 a tonne in 2014 to $2,900 at present.