JOHN KERIN. Dairy markets and regulation?.

Nov 4, 2019

 The dairy industry has been subject to plenty of government enquiries and more are in train,but is anything going to come of them?

The former President of the Victorian Farmers Federation, Peter Tuohey has been appointed as the new Victorian Rural Assistance Commissioner (the Victorian Government has allocated $31 million for assistance for farmers). John Brumby is conducting a wider general enquiry into the industry and its arrangements and now Senator Hanson has persuaded the Coalition to have another enquiry by a Senate Committee. John Brumby was in the Commonwealth Parliament when the so-called ‘Kerin Plan’ was introduced and understands more than just the basics of the industry. The industry is now far different to what it was in the late 1980s. 

The latest twist has been that the current Agricultural Minister, Bridget McKenzie, has done a deal with One Nation to have another enquiry and the mandatory Code of Conduct, promised by next year, has been suddenly brought forward so that Senator Hanson and her climate change denying colleague, Senator Roberts, don’t remain on strike in the Senate, frustrating government policy. Some in the industry wonder what kind of (Trumpian?) deals are being struck without industry consultation. I have little faith that the P.M’s. ‘one man’ drought campaign will bring many lasting results on drought or other pressing agricultural issues. It isn’t clear who in the Coalition has responsibility for drought policy.

It is increasingly being shown that Minister Joyce was a policy free zone and the Department of Agriculture has been stripped of a lot of its former expertise on commodity marketing and agricultural science issues. The industry remains in two parts (market milk and milk for manufacture and export), split over seven jurisdictions, including the Commonwealth with regards to the export sector. There has been plenty of evidence that deregulation did not mean all the industry’s problems were resolved by letting market forces prevail.

It is the Nationals’ deregulation that has had the biggest impact on dairy farmers and their struggle to make a living. There have been unintended consequences of deregulation, no matter how much validity there was in the advocacy by economists. Deregulation led to dairy marketing co-operatives scrambling to get market share, the processing sector amalgamated and was sold off in some cases and multinationals have moved in to secure supplies for manufacturing and export. Farmers have less bargaining power than ever to negotiate price. 

No matter how much farmers try to scale up and take on debt to lower costs of production, they now face an impossible task. The situation goes beyond trying to plug holes in the current situation. The cost and availability of water in irrigated dairying areas (six times higher than the average if bought on the spot market), the cost of feed and the price dairy farmers are receiving are leading to the industry shrinking, farmers going bankrupt and giving up production and exports falling. 

Production has been dropping since 2003-2004 and the estimated production for this year at 8.5 billion litres is the lowest in a quarter of a century. Breeding herds are being sold off and large numbers of heifers are being exported to China. The manufacturing and export sectors of the industry are directly affected by the variable, international market price and the domestic industry is affected by the power of the major supermarket chains when prices are being negotiated.

The price to consumers of supermarket milk defies my understanding of basic economics. If a proportion of milk is sold at a price half that of the many other types of market milk on the shelves, then unless the supermarket chains are absorbing the lower cost so that market milk is a ‘loss leader’ or unless milk processors are absorbing the lower price by cross-subsidisation within processing for various milk products, the lower price to producers must be borne by them. Although the price for manufacturing milk has recently risen, it is clear that the industry overall needs a higher price to survive. Fruit and vegetable prices fluctuate depending on weather and other conditions and I cannot see why the same should not apply to milk, unless it can be imported at a lower cost.

The cost of water is a particular problem for irrigation dairy farmers in the Murray Valley and Mr Tuohey has reported that 50 dairy farms in the Cohuna area alone are on the market. He is concerned at the plight of many other farmers in the Murray Valley as well as in the Gippsland and Milawa areas.

There is another element in all this, given the water supply situation. The use of water for pasture production by dairy farmers represents a higher cost than for other primary products. For example, almond farmers can have more bargaining power in buying water and large, private dams have been built in the Riverina. Property brokers see that there are prospects for overseas and other corporate interests in buying out larger dairy as a long term investment-“excellent capital growth”? The market at work?

Considering that about 50% of all water in the Murray Darling Basin comes from N.E. Victoria, another dam in one of the higher valleys could make sense (supply of stockfeed could become a major problem). However, would this do anything for family run dairy farms, if the trend to less water due to increasing droughts does occur, or will it necessarily be of more help if the current market forces prevail, or are there answers in more regulation?

John Kerin was Primary Industry Minister, 1983-91 in the Hawke Government.

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