What’s happening to the Australian Dairy Industry

I just recorded a radio interview for ABC Toowoomba on the dairy farmers’ campaign against supermarkets selling milk for $1. Here are my notes for the discussion

Consumer prices have increased 20 per cent since 2010, when the milk price was $1.30/litre, so to maintain the real price, the current price would have to be around $1.56.

Dairy producers in Australia have been under continuous pressure to increase herd size and reduce costs, with those unable to do so having to leave the industry or accept declining incomes. I first researched this topic in the early 1980s, when farm numbers had already fallen by about 50 per cent.

Since 1979, the number of dairy farms in Australia has fallen from 22 000 t0  5700. In Queensland the number has gone from 3000 to less than 400.

However, because of increased herd size the number of cows hasn’t changed much . Milk output per cow increased rapidly up to about 2000, so total production grew over that period before stabilising

The “cost-price squeeze” affects most agricultural producers but the problems of dairy farmers are exacerbated by the market power of supermarkets and their use of milk as a “loss leader”.  The decision to raise the price charged to consumers represents at least a symbolic step away from that practice.

18 thoughts on “What’s happening to the Australian Dairy Industry

  1. It is my understanding that Fresh Milk only represents 5% of the total market for milk. Even if all of the 10c/litre price increase goes back to farmers, it is going to make very little difference to average farm gate milk price.

    Given that the output of milk has remained stable over the time Prof Q looked at the industry, the reason for the declining farm gate price must be the reduction of other products from the Dairy industry. I presume a large proportion of this output goes into skim milk powder, which has notoriously low value compared to fresh milk.

    I remain unconvinced that milk consumers should be shamed into paying more for fresh milk when the real issue is the inability of the diary industry to right size it’s output, probably reducing the output by about one third.

  2. John, there are big regional differences in the dairy industry. More or less separate industries existed in the states until dairy deregulation circa 2000, when substantial compensation was paid especially to producers in NSW and Q where the dairy industry was concentrated on fresh milk. Modern transport and refrigeration meant that there was no longer justification for the rigid separation of milk for human consumption and manufacturing for the domestic and export markets. Dairy regulation was in any case always vulnerable to ‘maverick’ farmers or processors selling fresh milk interstate under cover of Section 92. In effect, the $1 a litre charged for fresh milk by supermarkets was, and is, a good offer for Victorian dairy farmers whose alternative is export sales of milk powders, butter and cheese. Of more interest at this point in the tortured and tortuous history of the dairy industry in Australia is fundamental questions surrounding the long run competitiveness and comparative advantage of the substantial irrigated dairy industry of northern Victoria following introduction of water trading a decade or so ago. The effects of water trading have been exacerbated by drought and the prospective further water shortages associated with climate change. Irrigated dairying struggles to compete in the water market with perennial crops, where water is lower proportion of costs, and interruptible annual crops. Dairying in northern Victoria was once based on abundant water, subsidised irrigation infrastructure and regulated markets. Only subsidised irrigation infrastructure exists these days as a by-product of the deeply flawed Murray-Darling Basin Plan. It will be a singularly futile expression of the misjudged enthusiasm of local interests for irrigated dairying, and the foolishness of Victorian and Commonwealth politicians, if the upshot of the $3 billion or so now being spent on high tech irrigation in the Goulburn Valley is in effect a stranded asset, because so much water has been traded to other parts of the MDB. Best Al.

  3. The “cost-price squeeze” affects most agricultural producers but the problems of dairy farmers are exacerbated by the market power of supermarkets and their use of milk as a “loss leader”

    This sounds like a contradiction. If the supermarkets used their market power to pay less to the dairy farmers, they could sell milk at $1 a litre to consumers and still make a profit, so it wouldn’t be a “loss leader”. But the whole premise is dubious. The real losers from $1 per litre milk were the dairy processing companies, who for years convinced consumers that they added value to a basic commodity like milk by adding fancy fonts and colouring to milk cartons, and charged accordingly. The winners were consumers who paid less for milk.

  4. I’m not sure how I feel about the milk thing. At first I thought it was great for consumers, but realistically Coles and Woolworths do have a duopoly. Even if they increase the shop price of Milk they still have that duopoly so whats to stop them still squeezing the dairy farmers. Price controls would be even worse of course. Its actually a good example of an issue that looks like it needs government intervention, but any intervention could make the situation worse.

  5. Duncan E. Isn’t the simple answer that in a deregulated market, milk at the farm-gate is priced according to the (milk equivalent) export prices of manufactured products? The Coles Woolworth duopoly then has little to do with farm gate prices. But what has been disrupted is the marketing strategies (and marketing margins) of once powerful milk processing companies, mainly foreign-owned as it happens. I agree with your doubts about government intervention. The plans of shadow minister Fitzgibbon for guaranteed farm-gate prices are bizarre.

  6. I think Joel Fitzgibbon has forgotten the disaster of the wool price reserve scheme. His dubious economic theories will damage to the dairy industry when his minimum pricing regulation means that milk will be left unsold. Not even the Labor Party can repeal the laws of supply and demand.

    Some firms with high production costs will go under if their costs are high and their industry is becoming more efficient. This isn’t supermarkets acting as duopolistic monopsonists – it is just competition and the ruthless way markets promote efficiency.

    https://www.farmonline.com.au/story/5914296/labor-demands-floor-price-to-save-dairy-industry/

  7. Yep, JQ has (very unusually) got this wrong. The crucial point is that fresh milk is only a small part of dairy farmer’s sold output in most of Australia, and therefore supermarket pricing of it is irrelevant to most dairy farmers. The only exceptions being, because of logistic costs, WA and (to a much lesser extent) Queensland. The decline in the Qld herd after deregulation is therefore simply due to competition from better endowed (for export) dairy areas, not monopoly by supermarkets.

  8. The decline in the Qld herd after deregulation is therefore simply due to competition from better endowed (for export) dairy areas

    Yes, it turned out that dairy farming in the tropics isn’t a great idea. Who knew?

  9. DD, I was indeed incorrect in assuming that most milk output is sold as fresh milk. Long ago, the marketing scheme produced an excess that was exported as skim milk powder, but I don’t think that’s significant anymore. Do you know what the main uses are?

  10. The Dairy Australia web site has documents that say what the composition of dairy exports is. Fresh milk is the largest category, but it’s only one quarter of the total (by weight). The rest is a bit of everything – skim milk powder, whole milk powder, cheese, whey and other things.

  11. The issues go deeper than anyone commenting above has covered or even intimated. Now, this might be due to blog-brevity or it might be due to other factors.

    1. The trend to oligopoly and monopoly in global capitalism is continuing and even accelerating. There are plenty of sources where you can get empirical data about this trend. Honestly, don’t even bother coming back and trying to say that “modern capitalism does not lead to increasing oligopoly and monopoly”. Such a claim flies in the face of all the evidence. If people want to commence an evidence based argument on this matter, feel free. I will comply.

    2. Given point 1., the argument that classical or neoclassical free-market, ideal-competition theory has anything to do with what is happening currently in the real economic world, in industries which have already oligopolized, is just a hot air argument. People who still believe that ideal free market (many small firms) competition theory has any relevance to oligopolist capitalism are at best living well in the past. At worst, they have taken up a faith-based position, not an evidence-based position. Hence their economic stance is of a an ideological or even a religious nature. It certainly has nothing to with empirical evidence or objectivity or science.

    3. Complaining about the latest oligopoly-induced phenomena in any industry (in the food retail and dairying industries in this instance) is a complete waste of time. It’s like complaining about the torrential rain and high winds in a cyclonic depression. In each case, the condition(s) of the overall system guarantee the extant empirical outcomes.

    4. I expect the cyclone… erm, I mean.. the capitalist oligopolist system to intensify. Expect more torrents of the very same phenomena. With a cyclone, it’s the heat (energy) and moisture (matter) feeding into the system, when it’s over water, which make it grow. With capitalism it is again (in raw physicalist or thermoeconomic terms) the energy and matter being fed into the system which make it grow. However, an economy is, of course, a human agency determined system too. This presumes that we have choices about our system drivers – meaning choices about the forces which drive our system.

    5, However, the arguments re choices about our “drivers”, and even identifying the real system and formal system drivers in the first place, are not simple in intellectual terms. Then, final determinations (when a choice is made and action is determined) are not easy to carry out. We are locked in by a lot of historical choices. What locks us in, perhaps more than anything, are our choices about the axioms of mainstream economics and of the attendant financial and capitalist accounting, including capitalization.

    6. No doubt, I will be met by the standard incomprehension of mainstream economics practitioners when I assert (yet again) that mainstream economics is an axiomatically determined system, not a system of empirically demonstrable laws. As an axiomatically determined system it;

    (a) is NOT based on an empirical or scientific ontology;
    (b) is prescriptive not descriptive (normative not positive in economic parlance).
    (c) is subject to endogenous axiomatic outcomes contained in its axiomatic and algorithmic formulae;
    (d) suffers from empirical reality as an exogenous nuisance both in theoretical and applied terms.

    7. The conflicts of (c) and (d) above lead and/or will lead to the largest crises it faces. Unless and until we can develop a consequentialist ethics-guided, yet empirically descriptive economics as opposed to deontological-axiomatic economics, expect more of the same until the system collapses from external limits or is reorganized radically through human agency decisions. This current system can only give as more of the same, and intensifications of the same, including oligopolistic outcomes as it approaches its algorithmic asymptotes endogenously and its physical limits exogenously. Not only ecological nature but also human nature (including human agency) are both strictly speaking “nature” as such and both exogenous in relation to the programmed and programmatic “machine-logic” of applied axiomatic-algorithmic (mainstream) capitalist economics.

  12. My understanding of the structural problems in the east coast section of the Australian Dairy industry is different. When the free trade zone was set up with New Zealand these east cast dairy farmers had to compete with some of the most efficient dairy farmers in the world. This made the marginally profitable dairy producers suddenly unprofitable. Some of these producers were helped leave the industry. Much new entrants wre actively encouraged by some politicians who saw them as part of their power base. It is these new entrants that now have become unprofitable at best and may even be creating negative wealth. Now all of this does not even address the social issues that dominate the dairy industry on the east coast of Australia. For this reason I am unable to make any final judgment on this issue.

  13. It is a researchable question whether remaining dairy farmers on the east coast of Australia are ‘new entrants’ or optimists who ignored the implications of dairy deregulation around 2000 and the opening up (before that) of the Australian market to New Zealand manufactured dairy products. I don’t know the precise answer but suggest it is more likely the latter because dairying in coastal NSW and Queensland is conducted in attractive locations where much of the return is capital appreciation of land, the amount of which depends on factors other than the profitability of dairy farming. In any case, the numbers involved are small, a far cry from the distant past when a significant low income problem existed in the dairy industry of the North Coast of NSW and in southern Queensland. The low income problem and the Byzantine regulatory arrangements of the dairy industry were the focus of research of an earlier generation of talented agricultural economists, a couple of whom like Frank Jarrett and Ross Parish hailed from that neck of the woods. One of the key issues in that earlier policy debate was restricted access to the fresh milk market. The astute politician Neville Wran made his run (in part) in the late 1970s by abolishing the rigid milk zone in NSW, and winning seats in areas then excluded from the (fresh) milk zone. Not much changes with respect to electoral competition in rural Australia, with its frequent focus on local and single issues. Joel Fitzgibbon’s unwelcome, and fundamentally silly, suggestions of guaranteed farm gate prices can be explained by his base in the Hunter region of NSW.

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