COVER STORY Deregulation cause of dairy industry crisis
by Peter Westmore
News Weekly, June 18, 2016
It is a sign of the desperation in the dairy industry that thousands of dairy farmers from around the country have taken to the streets of the capital cities to protest against policies that have driven their industry to the brink of bankruptcy.
Milking an entire industry
These protests have not been organised through the official dairy farmers’ organisations. The organisation Australian Dairy Farmers (ADF) even issued a statement dissociating itself from the protests, saying: “ADF is not in any way affiliated with ‘milk rallies’ being held to protest against milk price cuts.
“We appreciate that the protestors are passionate about the dairy industry and finding solutions to help the dairy crisis. However, we do not believe that this action is the best way to support our industry or find solutions to the challenges we face …
“We are concerned that rallies will create confusion and detract from the main issue: the financial and emotional wellbeing of our dairy farmers.”
The statement was an effective repudiation of the actions of the dairy farmers, which led to a $550 million rescue package, announced by Federal Minister for Agriculture Barnaby Joyce.
It also reflects an unwillingness to tackle the fundamental causes of the industry’s problems: the deregulation of the dairy industry, water deregulation, and the failure to restrain the supermarket duopoly, Coles and Woolworths, which have conducted a milk price war to the bottom.
Is there any point in revisiting the history of the industry? In this writer’s view, until the causes of the crisis are recognised, solutions will not be found. The Howard government deregulated the dairy industry in 1999 as part of its wider push to deregulate the Australian economy. The belief was that this was necessary to lower prices to consumers – which it did – and force high-cost producers out of the industry, leaving only low-cost producers to compete domestically and globally.
The problem was that price-support schemes, based on regulated production and set farm-gate prices, had been established for the domestic market because violent commodity price swings undermine the foundations of a local industry, which needs to be efficient to survive on the world stage.
The dairy farmers were given a vote on the Howard package: either accept deregulation with a “structural adjustment package”, or reject it and face deregulation with no package.
Not surprisingly, this Faustian bargain led to a positive vote for deregulation, including the removal of the statutory milk marketing bodies that set milk farm-gate prices. At the time, there was a shortage of milk internationally, so prices stayed reasonably high, but over the past two years, the price of milk has fallen to half its former level.
It is instructive to note that while Australians were told that deregulation was inevitable and necessary, both the European Union and the United States continue to protect and subsidise their agricultural industries, including their local dairy industries.
The second contributor to the crisis was deregulation of water. Devised by Malcolm Turnbull as water minister in the last Howard government and amended and implemented by Labor in 2008, deregulation was imposed in the naïve belief that it would lead to efficiencies in water management, and push down the price of water.
The exact opposite happened. The deregulation of the Murray-Darling Basin was based on the removal of farmers’ rights to irrigation water from the Snowy Mountains Scheme, and a massive buyback of farmers’ water entitlements by the Commonwealth government, to provide environmental flows for the Murray-Darling Basin. The Commonwealth acquired 2.7 million megalitres of irrigation water for environmental flows.
Victoria accounts for 85 per cent of Australia’s dairy exports, worth around $2.3 billion in 2013–14. The export focus means that returns for most dairy farmers are linked to world dairy commodity prices and exchange rates. So, if the Federal Government really wants to help Victorian dairy farmers, it should cut red tape and not unnecessarily add to production costs.
Instead, the price of temporary water, on a market increasingly controlled by governments and private speculators, has increased from $30 a megalitre to almost $300 a megalitre as a direct result of the water buybacks.
Reduced reliability of water supply and a corresponding extraordinary increase in the price of this key input may be the straw that finally breaks the dairy industry’s back; much of it a direct consequence of government intervention, not only drought.
The third factor in the present crisis is the supermarket war between the two giants, Coles and Woolworths, which together control about 80 per cent of fresh milk sales in Australia.
A two-year price war has forced the retail price of milk down to $2 for two litres of “home brand” milk, far below the price of production. Until these issues are dealt with, the dairy industry’s future is problematic.