SOME Western Australian dairy farmers who supply milk to Lion Dairy & Drinks in Bentley have been advised to "consider their options" by September 30.
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Lion has conceded it will not need milk from all of its current 29 suppliers from October 1, when a new contract to process and package milk for the Coles Group takes effect.

It expects some of its suppliers may transfer to supplying Coles for the new contract, but at this point Lion is unsure from which of its current farmers it will meet requirements for its own Masters brand fresh milks and flavoured milk drinks in the coming season.

Lion indicated on its website on Monday it will offer WA dairy farmers who produce more than 1.5 million litres of milk a year competitive pricing schedules across four basic agreement options with lower prices in the spring flush and higher prices in the summer months – generally with a two cents-a-litre bonus for farmers who sign an exclusive supply agreement with it and a 2.5cpl discount on prices paid to South Coast farmers because of the extra distance their milk has to travel back to Bentley for processing.

As a guide, Lion’s minimum average price across the coming season is 51.05 cents per litre for farmers in what it describes as the Pinjarra-Busselton region, who are prepared to sign an exclusive supply agreement.

It will offer farmers in the Albany region on non-exclusive supply agreements a minimum seasonal average of 46.55cpl.

All of the Lion agreement options are for the period July 1 to August 31 next year and allow for additional incentive payments to farmers who produce milk with higher than its base milk solids requirements.

But the number of suppliers it retains will largely depend on how many sign one, two or three-year contracts with Coles to supply milk directly to the supermarket chain for its own-brand milks.

Coles is already seeking expressions of interest from dairy farmers who might become its milk suppliers in October.

On Monday it indicated it will be seeking up to 38 million litres of milk a year direct from WA dairy farmers in 20 post code areas south from Pinjarra through the Peel and South West dairying areas, including Waroona, Harvey, Benger, Brunswick, Bunbury, Boyanup, Elgin, Capel and the Busselton region through to Yelverton, Metricup and Chapman Hill.

Coles did not list the adjacent Jindong and Margaret River areas, where two dairy farming families directly supply its supermarket rival Woolworths with milk, or the South Coast as dairy areas where it is prepared to collect milk.

The pricing schedule it put up on its website on Monday was relatively simple with higher prices offered for eight months of the season and lower prices for September, October, November and December, but it is based on a per kilogram payment for butterfat and protein.

Converted to a cents per litre price, which is the pricing structure normally used in WA, Coles’ minimum seasonal average price works at at 51.46cpl.

But, as WAFarmers dairy section president Michael Partridge pointed out in Farm Weekly last month when Coles announced the extension of its fresh milk direct sourcing model from the Eastern States into WA, it may only need 10 or fewer dairy farmers to supply it and they might not all be current Lion suppliers.

That could leave some Lion suppliers without a home for their milk from October 1.

A company spokesperson confirmed Lion had initiated “conversations” last week with its suppliers whose supply agreements end on June 30.

“We have advised them it is in their own best interests to consider their options,” the spokesperson said.

The spokesperson declined to nominate how many suppliers had been contacted.

Lion suppliers were on one, three or five-year contracts, most of which align with the July 1-June 30 dairy season but, largely because the existing contract with Coles is based on an October cycle, there are some supply contracts that do not align with the season.

Some of those were extended to also end on June 30 when the mandatory dairy code of conduct was introduced on January 1 and brought with it milk supply agreement publishing and contractual obligations for milk processors which began Monday and are based on the normal dairy season cycle.

Suppliers without a current contract will be free to take up the Coles offer immediately, but those who have to break a contract to do so may face financial or time penalties.

The spokesperson said Lion remained committed to continuing to buy milk in WA for its Masters brand and flavoured milks.

The company recently spent two years and $43 million updating the Bentley plant and its product distribution network.

In a prepared statement Monday, Lion stressed its dairy and drinks division was a “demand-driven business”.

“Lion Dairy & Drinks currently procures milk in Western Australia to manufacture a large volume of Coles own brand white milk,” it said.

“Following the recent decision by Coles to source milk directly from farms in Western Australia for its Coles own-brand white milk volumes, from October 1 we will have a significantly lower demand for milk in the State.

“We are continuing to work through this change, however this decision does mean we will not need to enter as many milk supply contracts with Western Australian dairy suppliers from October 1.

“We have a proud history of good relationships with dairy farmers in Western Australia and as a priority we have been keeping our dairy suppliers in the State updated on these changes.

“Under a proposed new agreement with Coles, from October 1, Lion Dairy & Drinks will continue to process the Coles retailer own brand white milk volume for Western Australia at our Bentley manufacturing site in Western Australia,” Lion said.

Last week’s calls from Lion alerting suppliers it may require less milk from October 1 is understood to have triggered a flurry of enquiry to alternative milk processors Brownes Dairy and Harvey Fresh starting Wednesday.

Brownes is understood to have been contacted by at least six current Lion suppliers asking what the prospects of being picked up as a Brownes’ supplier might be.

After Brownes controversially shed five suppliers five years ago and Lactalis Australia-owned Harvey Fresh subsequently attempted to reduce the number of its suppliers, Lion had became the preferred processor for many WA dairy farmers.

For much of the past five years it has offered the highest average farmgate prices for milk and guaranteed those up to two years in advance.

It also offered the most flexible contract options until other processors began matching it.

But an impending change of ownership to China Mengnui Dairy Company Ltd and the significant change to the Coles contact – understood to be the largest milk contract in WA – followed by last week’s contact calls, has made dairy farmers nervous.

“We’re heading for some interesting times ahead by the looks of it,” one Lions supplier, who asked not to be identified, told Farm Weekly last week.

“But I don’t believe the letters (advising suppliers their milk is no longer required) have gone out yet,” he said.

Farmers say no relief is in sight.

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