D-Day for Dairy farmers
BY SUE BOLAND
July 1 is D-day for dairy farmers around Australia â not only is that the start-date for the GST but it's also the date scheduled for the final deregulation of the dairy industry.
Overnight, milk quotas will be abolished, without compensation. A dairy farmer who bought a milk quota for $140,000 only five years ago will lose that $140,000. Annual dairy farm incomes are also expected to fall, on average, by $28,350.
Once dairy deregulation comes into effect on July 1, there will be no rural industries left which receive price support.
Dairy deregulation has been occurring since the mid-1980s when the federal Labor government abolished control over the pricing of key dairy products. Price support became more commercially based and was progressively reduced.
Then, in 1992, the federal government announced that the Domestic Market Support Scheme for manufacturing milk (for making cheese, yoghurt and powdered milk) would be progressively whittled down; it has now been abolished and manufacturing milk prices fully deregulated.
The current Coalition federal government is continuing this policy to its completion: the full deregulation of the drinking milk market.
Retail prices for milk have already been deregulated. Queensland was the last state to deregulate retail prices in January 1999. New South Wales deregulated retail prices in July 1998.
Farm gates prices
The July 1 measures will result in the end of state laws that provide a guaranteed minimum price for drinking milk bought from the farmer at the farm gate.The difference between the farm gate prices for manufacturing milk and drinking milk is substantial. NSW dairy farmers get approximately 52 cents per litre for market milk, whereas they only get approximately 27 cents per litre for manufactured milk.
Currently, the farm gate price for drinking milk is regulated through milk quotas, with farmers who produce more than their quota able to sell the surplus as manufacturing milk. Once the farm gate price of drinking milk is deregulated, it is likely to drop to that for manufacturing milk.
Deregulation will hit many dairy farmers hard. There are varying estimates that between a quarter and two-thirds of Australia's 13,500 dairy farmers will be forced out of the industry because they won't be able to cover costs.
Most of the soldier-settlement dairy farms which haven't expanded beyond 100 hectares and a milking herd of 100 cows are unlikely to stay afloat unless they are debt-free. It is estimated that a dairy farmer will need to milk 400-500 cows in order to survive the deregulated environment.
A Bega Valley Water Management Committee study concluded that less than 20% of the dairy farms in the Bega area would remain viable as a result of the proposed deregulation of the industry. The study found that 47% of Bega dairy farmers would become unviable if prices fell by 10 cents a litre and 81% would be unviable if prices fell by 15 cents a litre.
In the Sydney basin, milk processing companies are offering dairy farmers as little as 28 cents a litre for their milk after deregulation. One Sydney basin dairy farmer, Peter Williams, told the June 3 Daily Telegraph You cannot survive on even 31 cents a litre. My cost to produce is 28 cents a litre.
Assistance package
Despite the extreme hardship that will be experienced by most dairy farmers after deregulation, the federal government has been determined to drive deregulation through. It has attempted to bribe dairy farmers into supporting deregulation, by offering a $1.8 billion assistance package to help farmers cope with the changes.The assistance package will be funded by an 11 cent a litre levy on drinking milk which is likely to be passed on to the consumer. The $1.8 billion will be used to provide support for struggling farmers over the next eight years and will provide a $45,000 tax-free grant for farmers leaving the industry. Victorian dairy farmers voted to support the assistance package and dairy deregulation last December.
The catch in the federal government's package is that all states have to agree to deregulate drinking milk prices or no state will be able to access the $1.8 billion.
It is widely believed that once Victorian dairy farmers accepted deregulation, no other state would be able to hold out against deregulation, as 62% of Australia's total milk production comes from Victoria. Once the Victorian industry is deregulated, the national supermarket chains in other states would pressure suppliers to match the cheap Victorian prices.
The three dominant national supermarket chains â Woolworths, Coles and Franklins â prefer to source milk for most of their eastern seaboard stores from just one supplier. This has fuelled the fierce rivalry between the large milk processing companies as each one strives for national dominance.
Despite the impending hardship for most dairy farmers, all of the state-based dairy farmer organisations, and the national Australian Dairy Industry Council, supported deregulation. The United Dairy Farmers of Victoria didn't just acquiesce to deregulation, but actively lobbied for it. Like other rural producer bodies, dairy farmer organisations are run by, and champion the interests of, rich farmers.
The outlook of these producer organisations is reflected politically in bipartisan support for the deregulation of agriculture. The National Party can't hide behind the coat-tails of the Liberal Party on this issue â it has been just as vigorous in pushing for deregulation.
Companies gain
The other advocates of deregulation are the milk processing companies and the supermarket chains.These companies have enormous control. Three companies process 90% of Australia's fresh milk output: Dairy Farmers (35%), National Foods (32%), and Pauls (23%). The manufactured milk sector is dominated by two major Victorian co-operatives, Murray-Goulburn and Bonlac, which process more than 50% of the manufactured milk in Australia.
While most of these milk processing companies are still called co-operatives, they operate as capitalist firms and are being progressively privatised in preparation for listing on the stock exchange.
At the moment, these five companies are engaged in a merger frenzy as each one scrambles for national dominance. The CEOs of several of these companies have unashamedly argued that a duopoly of milk processing companies, similar to the airline industry, is the preferred outcome of dairy deregulation.
The government and the milk processing companies argue that deregulation will result in cheaper milk. But that is not true. In the 15 months after the NSW government deregulated retail prices in 1998, the price of milk increased by 16%, despite the Consumer Price Index only rising by 3%. Farmers didn't receive any benefit from the price increase.
A NSW Dairy Corporation study found that consumers paid an extra $67 million in 1999 for milk but farmers got $14 million less. The milk processing companies and supermarket chains pocket the difference.
The advocates of deregulation claim that deregulation will save the industry, even if a large number of farmers are forced out. But, except for the wealthy minority, the remaining dairy farmers will still face problems.
Conflicting interests
With Australian milk production continuing to grow and static domestic market consumption, the industry's dependence on the international market will increase. At the same time, dairy companies face increased competition in the domestic market from New Zealand's dairy industry.Milk production in Australia has doubled since 1981-82 to a record of 10.5 million litres, according to a 1999 report by the Australian Dairy Farmers Federation. The domestic liquid milk market is now less than 20% of the total market and declining. The report predicts that exports will increase to account for 65% of production in five years time, compared with 50% now.
The problem with this is that, according to Senate report into the deregulation of the dairy industry released in December, there is currently an oversupply of milk on the world market which has resulted in depressed prices.
In this situation, with farm gate prices deregulated, it is quite possible that the farm gate price will be pushed even lower than it already is for manufacturing milk. The pressure will then be on dairy farmers to increase milk production in order to maximise returns. This in turn will exacerbate the problem of oversupply on both the Australian and world markets.
Only the minority of wealthy dairy farm owners, agribusinesses and the banks will do well out of such a situation.
Small dairy farmers do need a re-regulation of the industry in order to guarantee them a minimum income. But they need more than this.
They need to sell their milk to a publicly owned, publicly controlled milk processing entity which isn't constantly trying to rip them off. They need to deal with a publicly owned, publicly controlled bank which can give them cheap loans. And they need dairy farmer organisations to be democratised to ensure that wealthy farmers are not able to dominate them.
Such measures would be a start to addressing the needs of small dairy farmers.