Current Structure of the Australian Dairy Industry - Case Study Example

Australia Dairy Industry Author’s Name Institutional Affiliation Date of submission Overview of the current structure of the Australian dairy industry and how this has changed since deregulation in 2000 Introduction The Australian dairy industry dates back to 1788 when Captain Arthur Philip introduced seven cows and two bulls to Australia. The industry has since grown to become what it is today. Today, the Australian dairy industry is worth $13 billion and is one of the largest rural industries. The $13 billion industry consists of farm, manufacturing and export industries with farm gate value alone being valued at $4 billion and has been hailed for enriching regional Australian communities. Since deregulation in the year 2000, the number of Australian dairy farmers has reduced by about 70% to around 6,000 farmers who produce around 9.7 billion liters of milk every year. The industry has also been credited for employing close to 40,000 Australians on dairy farms as well as in factories. In addition, more than 100,000 Australians have also been indirectly employed in other related services industries (Dairy Australia 2016, par.2). The Dairy industry in Australia is also considered one of the leading rural industries in Australia as far as adding value via downstream processing is concerned. It is to be noted that most of the processing occurs close to farming areas and hence generates a lot of economic activities in county regions. In Australia, the dairy industry is well established across temperate as well as in some subtropical areas of the country. It is to be noted that the bulk of milk production takes place in the south east states although all states have dairy industries supplying fresh drinking milk to the nearby towns and cities (Australian Bureau of Statistics 2004, par.4). The industry also produces a range of high quality consumer products that include various varieties of fresh milk, yogurts, custards as well as a wide variety of cheese types which are produced in most of the states in Australia. It is worth noting however that the manufacturing and production of longer shelf life products which include cheese as well as specialized milk powders has become more concentrated in Australia’s South-east region. The dairy industry in Australia today As stated above, the dairy industry is an important rural industry in Australia with on-farm productivity continuing to increase as a result of improved feed and pasture as well as herd management techniques. Though the industry is pasture based predominantly, supplementary feeding with grains has of late become increasingly common. All the Australian states led by Victoria have viable milk productions that supply fresh milk to all nearby towns and cities. The industry has become a major regional employer through adding value through processing of the milk produced thus giving rise to fresh lines including butter, cream, yogurt, as well as cheese. The industry also produces significant quantities of bulk milk as well as specialized powdered milk. Trends in production, exports, prices and other key variables The production trend since deregulation in 2000 can best be described as having been stagnant for the last fifteen years. Historical milk production for Australia indicate that milk production in Australia significantly increased before the market deregulation with annual increases in production being the norm from the mid-1980s and 1990s. After deregulation, production peaked in 2000, 2001 and 2002. However after this, Australia’s milk production has dropped off stagnating at best. Similarly, Australia’s dairy exports have also declined during the period (Leduc 2015, par.4). The graph below compares Australia’s milk production between 2000 and 2013. The table below Shows Australia’s milk production trends before and after deregulation. The table shows that the bulk of milk production in Australia is by Victoria State although other states are also involved in the production. NSW VIC QLD SA WA TAS AUST 1979/80 907 3,151 508 329 222 315 5,432 1989/90 879 3,787 629 356 267 344 6,262 1999/00 1,395 6,870 848 713 412 609 10,847 2005/06 1,197 6,651 597 646 377 622 10,089 2006/07 1,104 6,297 537 655 349 641 9,583 2007/08 1,048 6,102 486 606 319 661 9,223 2008/09 1,064 6,135 513 628 340 709 9,338 2009/10 1,099 5,813 530 605 359 677 9,084 2010/11 1,087 5,936 487 572 372 726 9,180 2011/12 1,135 6,241 487 570 349 792 9,574 2012/13 1,136 6,071 460 536 349 765 9,317 2013/14 1,104 6,166 437 516 340 810 9,372 2014/15 1,159 6,390 411 516 364 891 9,371 As a result of deregulation, it was hoped that prices would fall. Since deregulation, the farm gate prices of milk have been governed by the free market. Thus, the prices have varied from time to time. For instance between 2008 and 2015, the farm gate prices were as shown in the table below; 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 AUST Cents/Liter 42.4 37.3 43.2 42.0 40.2 51.2 48.5 $/kg milk solids 5.66 4.98 5.80 5.69 5.41 6.89 6.49 Australia’s milk production has for a long time been above the requirement for domestic consumption and hence a significant portion of it is exported (Dairy Australia 2015, p.9). The amount of milk products exported has raged between 40 and 60 percent since deregulation. However, over the recent past, Australia has seen its milk exports lower to below 40 percent of its production and this has been the lowest proportion exported since the 1990s owing to the reduced supply of milk arising from shrinking milk production base. This is shown in the chart below. It is however worth noting that Australia is the fourth biggest milk exporter globally despite its total production being 2% of global production. The dairy sector in Australia is a diversified one including farmers owned cooperatives, public and private as well as multinational companies. At the national level is the Australian Dairy Industry Council Inc. (ADIC). The Australian Dairy Farmers’ Ltd (ADF), Dairy Australia Ltd and Australian Dairy Products Federation Inc. (ADPF) are also national bodies involved in industrial regulation with Dairy Australia being a service body while the rest are representation bodies. Then there are state dairy farmer organizations such as NSW Farmers Association, Queensland Dairy farmers’ organization among others. Then there are regional development bodies including Dairy NSW, Subtropical Dairy, Dairy SA among others. At the lowest level is the farmer who is involved directly in milk production in Australia. Since deregulation, the number of farmers in the industry has significantly reduced to just over 6,000 (Productivity Commission 2014, chap. 1, par. 23). It is also worth noting that farmer owned cooperatives no longer dominate the industry and they nowadays account for less than 40 percent of the total milk production in Australia. The largest farmers’ cooperative in Australia is Murray Goulburn and it accounts for almost 37 percent of entire Australian production. The cooperative has plants in Sydney and Melbourne and mainly supplies major supermarkets. Major multinational players in the industry include Fonterra of New Zealand, Kirin of Japan and Lactalis of France. Other major participants that manufacture a variety of products and serve different markets include the publicly listed Bega Cheese Limited, Regal Cream, and Burra foods, Australian Consolidated Milk and Warrnambool Cheese and Butter among others. These manufacturers produce a variety products which include Fresh and UHT long life drinking milk, Skim milk powder (SMP) Buttermilk powder (BMP) butter, Butter/Casein, Cheese, Whole Milk powder (WMP) Yogurts, castards and dairy desserts. Other products include specialized ingredients such as nutraceuticals and Whey proteins (pwc.com 2016, chap. 5). The following table compares the production of different milk products by the industry before and after the deregulation. Australian production of dairy products Butter AMF(CBE) SMP WMP Whey Products 1989/90 78,053 26,105 130,976 56,476 19,895 1999/00 110,325 71,295 236,322 186,653 66,258 2005/06 92,850 52,904 205,495 158,250 98,436 2006/07 101,666 31,434 191,475 135,364 86,198 2007/08 99,202 28,416 164,315 141,974 82,652 2008/09 109,753 38,742 212,030 147,544 81,136 2009/10 100,134 28,245 190,233 126,024 79,094 2010/11 96,326 26,160 222,484 151,269 61,488 2011/12 100,551 19,164 230,286 140,424 64,645 2012/13 99,035 19,193 224,061 108,838 63,440 2013/14 101,705 14,417 210,964 126,322 55,506 2014/15 101,511 17,161 233,835 99,025 53,097 Regarding domestic sales, the supermarket channel has the biggest market share in Australian drinking milk sales with the market share averaging 53-54 percent in the last five years. The supermarket chain is in fact associated with an outbreak of price wars dating 2011 when one of the major supermarket chains reduced its private label milk price to $1 a litre for modified milks and cream milks. All other major supermarkets followed leading to a sales shift of about 1.5% market share from convenience and similar outlets to supermarkets. Milk is majorly packed in plastic bottles which account for 80 percent for all sales with gable top cartons accounting for 6% and UHT cartons accounting for 14%. Effect of regulation of Australian Dairy Industry on Supply of in the industry Since its deregulation, Australia’s dairy industry has undergone considerable structural change. Competition has become unhealthy with Murray Goulburn and Fonterra which are the two major dairy processors in Australia retrospectively cutting the price of raw milk. This has given rise to talks on industry regulation. This has resulted from the fact that even when international demand for milk is on the rise, the price of milk in Australia continues to decline with milk now said to be cheaper than water. Despite the industry having been deregulated, famers did not benefit from increase in prices. The prices have continued to fall. Farmers now through regulation are prevented from selling directly to consumers with penalties being imposed on changing the milk processors they do business with. Levies that farmers have to pay to run the national industry body or Dairy Australia has also been introduced with no option to opt out since it is the processors who deduct the levy from the farmers cheques with farmers raising over $30 million or about $7,000 for the average farmer. Yet such bodies mostly benefit processors despite their making no financial contribution. Furthermore the state representative bodies also impose levies to the farmers. To make the matters worse, these bodies have been accused of acting against farmers’ interests. Despite the arguments above, farms incomes have been declining since deregulation (The guardian 2013, par.2). Many farmers now have to borrow against the equity of their farms but finding it hard to repay. As a result, banks have been tightening the noose which has resulted in many farming families laying off hired helps. Many farms are now operating at losses with the average net farm income projected to be nil in 2017. As a result of these issues, farmers have had to cull their herds with some selling their farms or their farms being auctioned by banks thus resulting in decline in milk production. Processors have experienced declined supply but this has not resulted in farm gate price increases as processors have been locked into long-term contracts of cheap milk. Cheap milk has driven up demand for fresh milk with no supply to satisfy it resulting to even less milk being exported. The result of this has been arguments for the industry going back to regulation in a bid to save the industry. The government has already intervened in the crisis through offering concessional loans to struggling farmers. However, farmers feel that this is not enough and other type of regulation such as farmer support levy for every litre of milk purchased and a dairy floor farm gate price ought to be introduced. Effect of regulation for the industry-introduction of Dairy floor farm gate price One way of helping save the sector is government regulation of farm gate milk prices. At the moment, farm gate prices are too low such that the farm hardly realizes his/her production cost. This is the reason for the decline in production. To counter this and hence increase the supply of milk by farms, the government should introduce a farm gate price floor (Barbour 2016, par. 2). This means that no processor will be allowed to purchase milk at prices that are below certain levels. The effect of this will be an increase in supply of milk by farmers to processors since now firms will be able to meet their production costs and make some income as well. The milk will now cost more than it is costing currently. This means that consumers will demand less of it than they are doing currently. The effect of this is that not all the milk supplied will be bought in Australian local markets. For Australia however, the surplus milk will serve as boost to the export market given that the amount of milk exports for Australia has been declining. The overall effect would be the revival of the dairy industry by boosting farmers’ ability to produce more milk while increasing the amount of milk exported by Australia Dairy Australia 2016, par. 2). It is worth noting that the increased demand for milk locally resulting from low prices has meant that there is not enough milk for Australia to market. Hence, the surplus production arising should go to the export market. The following graph shows the likely effect of farm gate price regulation by government on Australia dairy industry The graph shows that after introducing farm gate price floor, there would a surplus production AB resulting from the supply being more than demand (Economics.fundamentalfinance.com 2016, par.1). This is because the quantity demanded would be Q1 while the quantity supplied would be Q2. However, it should be noted that at the international level, milk prices have not declined and hence Australia can still be able to find demand for the surplus milk given that its exports have declined owing to the increased demand locally that has resulted from reduced retail prices. Price Demand Supply P1 A B C Q1 Q2 Quantity References: Productivity Commission. 2014. Relative cost of doing business in Australia: Dairy product manufacturing. http://www.pc.gov.au/inquiries/completed/dairy- manufacturing/report/dairy-manufacturing.pdf. Dairy Australia. 2016. About the Australian dairy industry. http://www.dairyaustralia.com.au/Industry- information/About-the-industry/About-the-Australian-dairy-industry.aspx. Dairy Australia.2015. Australian dairy industry in focus 2015. http://www.dairyaustralia.com.au/Industry-information/About-Dairy- Australia/~/media/Documents/Stats%20and%20markets/Australian%20Dairy%20Industry%2 0In%20Focus/Australian%20Dairy%20Industry%20In%20Focus%202015.pdf. Leduc, Yves. 2015. What has really happened in Australia since deregulation? Dairy Famers of Canada, 2015. https://www.dairyfarmers.ca/farmers-voice/farm-policy/what-has-really-happened-in- australia-since-deregulation. Australian Bureau of Statistics. 2004. The Australian dairy industry. http://www.abs.gov.au/Ausstats/abs@.nsf/0/B006A83A9127B0F5CA256DEA00053965?Ope n. Pwc.com.au.2016. The Australian dairy industry: The basics. http://www.pwc.com.au/industry/agribusiness/assets/australian-dairy-industry-nov11.pdf The guardian. 2013. Milk is now cheaper than water. Dairy farmers deserve better. https://www.theguardian.com/commentisfree/2013/dec/17/milk-is-now-cheaper-than- water-dairy-farmers-deserve-better. Barbour, Lucy.2016. Election 2016: Richard Di Natale indicates support for milk floor price to tighten industry regulation. Abc, 2016. http://www.abc.net.au/news/2016-05-25/richard-di- Natale-indicates-support-for-milk-floor-price/7446548 Dairy Australia. 2016. Domestic sales summary. http://www.dairyaustralia.com.au/Markets-and- statistics/Production-and-sales/Domestic-Sales-Summary.aspx Economics.fundamentalfinance.com.2016. Price floors. http://economics.fundamentalfinance.com/micro_price-floor.php. Read More