The Australian dairy industry
The dairy industry is Australia's third largest rural industry. It
consists of about 8,000 dairy farms and directly employs approximately 40,000
It has a farmgate value of $4 billion.
A reduction in dairy farm numbers since deregulation of the industry has been more
than offset by an increase in average herd size and productivity, the effect
being that the volume of milk produced by the 8,000 farms in 2009 is over 70
per cent above the volume produced by the 22,000 farms in 1980.
Australia's main dairying areas are identified on the map below.
Chart 2.1: Australian
Over two-thirds of the 9.4 billion litres of milk produced in 2008-09 was
produced in Victoria, 10 per cent in New South Wales and 7 per cent in
Dairying occupies a relatively large proportion of the agricultural sector in
Australia's milk production sector is dominated by owner-operated farms
(approximately 80 per cent).
Although these farmers operate efficiently they remain vulnerable to unstable
climatic conditions which in turn affect their ability to successfully manage
the costs of production. Milk production is highly seasonal, peaking in October
and tapering off in the cooler months from April (Chart 2.3 below).
Just over half the milk produced in Australia during 2008-09 was consumed
by the domestic market; the remainder being exported as either drinking milk or
In 2008, Dairy Australia reported that the Australian dairy industry was
'enjoying the best world market conditions in decades...international dairy
commodity prices rose to record levels through 2007', due to consistent strong
demand and tight supplies, as well as the effects of exchange rates and cuts in
This led to higher farmgate milk prices for Australian dairy farmers – prices
increasing by more than 50 per cent in southern regions during 2007-08 (see
Dairy Australia did note that despite the optimism, the industry 'remain[ed]
constrained by the high cost and limited availability of production inputs,
uncertain climatic conditions and reducing dairy herd numbers'.
Higher farmgate prices continued into the 2008-09 season until,
following the global financial crisis, milk processors reduced the price paid
to farmers sharply.
The reduction in price per litre paid to farmers was initiated by Murray
Goulburn who announced a 'step-down' in response to the weakening international
commodity market. Following Murray Goulburn's announcement, the remaining major
milk processors also announced reductions in the price they would pay.
The economic effect on the dairy industry of these announced reductions
in prices paid to farmers has been a focus of this inquiry, evidence gathered
by the Committee indicating that the impact on dairy farmers and their
communities has been severe:
In July, August, September and October, suppliers have lost
substantial income. I myself am losing in excess of $100,000 a month... There
are individual examples of farmers having to sell furniture in order to put
food on the table for their family and, in some circumstances, offering to hand
their farms back to the bank. The first forced sale of a farm which supplies
National Foods is taking place on 19 November.
Whilst we have had downturns of this nature to cope with
practically ever since we have been involved in farming, this is by far the
worst that we have ever had to deal with. I guess the main reason that it is
the worst is that we were faced with a 40 per cent drop in milk price in
January of last season. In terms of our operation, we are relatively big
farmers, with 550 or 600 cows. That cut $380,000 worth of income out of the
last half of our business last season.
On my calculations, losing 6c a litre equates to a combined
loss of $7.8 million across 90 suppliers in Tasmania. If you add a
conservative multiplier of 2.5 to that loss, that translates into a regional
economic impact of minus $20 million. That is just a conservative estimate of
economic loss. The social cost is almost impossible to quantify and the
qualitative impact is real. It is not just employment loss; it is family
breakdowns, bankruptcy and loss of life, sometimes in the most tragic
The economic effect on the dairy industry of reductions in
prices to be paid to producers will be devastating to the industry and may see
further farmer numbers being reduced as farmers are unable to receive a
reasonable return (cost plus margin) to survive. ...farmers are being forced to
supply the total Australian market at a price that relates to the conditions
relative to commodity markets around the world...
The step down in farmgate prices in 2008–09, the first such occurrence
since 1973, led to a downturn in confidence within the industry from its 2008
optimism, albeit only back to somewhere around the longer-term average (Chart
Chart 2.2: Farmers'
attitude to the future of the dairy industry
Source: Dairy Australia, Australian
Dairy Industry in Focus 2009, p. 5.
This has in turn been followed by a reduction in milk production.
This year's production levels are tracking lower (Chart 2.3) and annual
production is expected to return to the level of 2007-08 due to the lower
prices, reduced demand and the effects of both drought and flood.
Chart 2.3: Monthly
Source: Dairy Australia, www.dairyaustralia.com.au.
Although the international market has shown signs of stabilising in
the continuing appreciation of the Australian dollar (Chart 2.4) represents an
additional challenge for the Australian dairy industry putting downward
pressure on export returns.
Chart 2.4: Exchange rates
Source: Reserve Bank of Australia, www.rba.gov.au.
Dairy Australia predicts that global dairy demand 'based on continued
economic recovery is likely to continue to improve over the course of 2010 in
most key markets; albeit at a slower pace.'
Caution remains however as any number of factors could negatively affect demand
and cause a reduction in commodity prices.
The Committee recognises that the impact of the global financial crisis
on the Australian dairy industry was severe. The Committee acknowledges that it
will take some time for the industry, particularly dairy farmers, to recover
and suggests that the Government consider its role in the industry's recovery particularly
in terms of facilitating its long term sustainability.
The Committee has further considered these matters in Chapter 6 of this
Dairy industry deregulation
Until 2000, the Australian dairy industry was regulated. The price paid
for manufacturing milk was determined by factors including world prices of
manufactured dairy products, although support was provided through the use of
national export pools that ensured farmers received an average pool price for
their product regardless of its quality, use and destination.
State authorities set the farmgate price for fresh drinking milk to ensure the
additional costs of year round supply were covered. Today, however, Australia's
dairy farmers operate in a deregulated and open market; the determination of
prices is described in Chapter 3.
Steps towards market deregulation commenced in the mid 1980s and
continued throughout the 1990s. Deregulation was largely driven by the dairy
industry itself as participants sought opportunities for growth. On 28
September 1999 a government support package was announced to support all states
in deregulating their dairy industries from 1 July 2000.
At the time deregulation was being considered, the Senate Rural and
Regional Affairs and Transport References Committee investigated the domestic
dairy industry with particular reference to market conditions, competitiveness,
regulatory arrangements and measures that the government could take to
facilitate a transition to a less regulated environment.
Their comprehensive report, Deregulation of the Australian Dairy Industry,
concluded that 'sooner rather than later the market [would] force deregulation
and that a managed outcome with a soft landing [was] preferable to a
commercially driven crash.'
In their findings however, they also noted that of serious concern was the
suggestion that the control regulation provided would 'shift to processors and
large retailers who would then be able to dictate terms to the industry and
Following deregulation, the reduction in dairy farm numbers was coupled
with an increase in herd sizes and milk yields per cow as farmers sought to
benefit from the efficiencies of larger operating systems.
Similarly, there has been considerable consolidation within the processing
sector as processors have experienced sustained pressure to reduce costs.
Increased concentration of processors
The manufacturing sector of the Australian dairy industry has become
more concentrated since the first stages of deregulation in the late 1980s; the
outcome being increased foreign ownership and a reduction in the market share
of farmer owned cooperatives. The five major companies have increased their
milk processing capacity from 50 per cent to 75 per cent of the market.
In 1999, the five largest milk manufacturers in Australia were Murray
Goulburn, Bonlac, Dairy Farmers Group (all three entities were cooperatives),
National Foods Ltd and Pauls/Parmalat.
Pauls/Parmalat, National Foods and Dairy Farmers Group dominated the market for
drinking milk sales (cumulatively they held an 80 per cent share of this
market) while the cooperatives of Murray Goulburn and Bonlac dominated the
manufacturing milk market, the two entities responsible for processing 55 per
cent of all Australia's manufacturing milk.
Today, Bonlac is owned by Fonterra, and the Dairy Farmers Group has been
acquired by National Foods. Fonterra (20 per cent),together with Murray
Goulburn (the largest remaining farmer owned cooperative, supplying 37 per cent
of Australia's milk) are the prominent market players in the manufacturing milk
market (Chart 2.5).
Chart 2.5: Market
share of milk volume (2008-09)
Source: Fonterra, Submission
10, Attachment 1, p. 2.
The remaining milk produced in Australia is sold into the domestic
drinking milk market which, like the manufacturing milk market, is dominated by
two players – National Foods and Parmalat (Chart 2.6).
Source: Figures from AMVA, Submission
32, p. 3.
Milk sold into the drinking milk market is marketed through various
channels including fast food outlets, supermarkets, independent grocers, corner
stores, and service stations. However, the sale of milk through the supermarket
channel has slowly been increasing; Dairy Australia noting a recent change in
the behaviour of the two large chains – they have embarked on a marketing
campaign encouraging consumers to make comparisons between their own generic
branded milk with that of branded products.
Dairy Australia comment that although this behaviour is 'unlikely to affect the
volume of dairy products consumed there may be an impact on the channel and
value of dairy sales as consumers seek greater value in their purchases' and move
to generic labelled and price discounted branded products.
The Committee notes with concern the increasing market share of the
major retailers in the drinking milk market through their sale of generic milk.
The Committee wishes to bring this situation to the attention of the Government,
particularly as the processors dominating the fresh milk market are directly
competing with their own products as they also supply Woolworths and Coles with
their generic branded milk. This situation suggests to this Committee that the
'serious concern' of the Senate Select Committee which undertook the 1999
inquiry into deregulation of the industry that the control regulation provided
would 'shift to processors and large retailers who would then be able to
dictate terms to the industry and marketplace'
has been realised to the detriment of the industry as a whole and the consumer.
The Committee has further explored these issues with a view to addressing the concerns
in Chapters 3, 4 and 5.
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