Milk pricing and exports

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If you are in an export industry, life can be harsh and volatile. I work in one – international education. Every Australian dairy farmer works in one – the international dairy industry. However, apparently neither the farmers nor a recent Senate inquiry want to accept this harsh economic reality.

A recent Senate inquiry has called for more intervention in the milk industry due to a lack of competition between domestic retailers and excessive market power of multinationals. A report is here. A Victorian government web page giving some industry background is here. There are two key things to note. First, most Victorian milk goes to the export market – very little ends up as the stuff we put on our Breaky cereal.

[T]he liquid milk market consumes only 8 per cent of Victorian production …

About 45% of national production goes to exports. I understand that Victoria is the most efficient dairy producer in the country (a claim based on my ACCC experience and sure to be roundly disputed!) and :

Victoria supplies around 85 per cent of national dairy exports.

Second, in export industries, the world market tends to set the price. And that looks like the case for the farm gate price of milk.

Farm gate prices increased from around 32 cents per litre in 2006-07 to around 50 cents per litre in 2007-08, on the back of an international price spike. As international prices decreased between July 2008 and March 2009 (around 50 per cent for skim milk powder), the farm gate price returned to around 35 cents per litre (Figure 3). The current farm gate price is around 28-30 cents per litre, but this is expected to reach around 30-33 cents per litre by the end of 2009-2010.

I am not sure of the accuracy of the Victorian government prediction. The Aussie dollar is still around 90 cents US and the Euro is weak. The EU is one of our largest international competitors in the dairy industry. But it looks like farm gate prices reflect international prices.

Now – are there issues in the dairy industry? Yes! Farmers in some areas have limited options for selling their milk to local processors. Collective bargaining rules under the Trade Practices Act help level the playing field a bit here. Farmers have historically been subject to various protections that were removed about a decade ago. The adjustment is still occurring and these adjustments are painful for farmers in low-productivity areas or with farms that are below an optimal size. And we do have a concentrated domestic retail industry – but as already noted, the prices follow exports as this is the ‘fall back’ for domestic farmers. Prices for milk destined for domestic markets can’t fall below the price of ‘export milk’.

Between drought, the GFC, exchange rate variability and changing patterns of international demand and competition, life can be very very hard for a dairy farmer. It is the nature of export industries. It is not a reason to find a local excuse or to have the government beat up the very parties that the farmers need to work with to get their product to both domestic and international customers.

2 Responses to "Milk pricing and exports"
  1. Good topic and observations Stephen.  Murray Goulburn Co Op is one of the biggest movers of product through the Port of Melbourne.  Milk is big business.

    The drought has been a killer for more farmers than just the bad ones or those economists might deem to be below the efficient scale, so a question – are domestic prices reflecting domestic production costs?  Inflation adjusted water and feed costs would surely much higher now than 15 years ago. 

  2. Yes, Fluctuation and competition is the nature of export industries. But the milk processors and exporter in Australia is very limited, which make the milk price farmers receive become even worse.

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