The Milk Price Outlook
The 10-15% drop in opening prices largely reflects the 10 year low in export market price for skim milk powder. Unfortunately because of our heavy dependence on the export market, we are vulnerable to such events and will continue to be in the long term. The other Western countries produce milk predominantly for domestic consumption.The USA and European community are the major contributors to export markets along with Australia and New Zealand. Their surpluses sold on the export market only represent a small proportion of their total output. Their governments are prepared to subsidise this output. This has two effects on the export market. It sends incorrect market signals back to producers in those countries because they receive an inflated price for their export milk. Secondly, it increases supply of world trade in dairy products which reduces the price received on the export market. Australia and New Zealand must except this price without subsidies since our scale of production for export is too high to expect government subsidies.
Deregulation of the Australian milk market will have no impact on the world export price. For Victorian farmers, the inevitable drop in the price received by factories for whole milk will have a relatively small impact on the price received. If the price dropped to export price there would be a 7% drop. In favour of the milk price is the removal of the domestic market support levy on manufactured milk which is up to 20% of Victoria's milk. This will have the benefit of improving competition of Australian manufactured product sold domestically against imported products that do not pay the levy. Industry commentators suggest that these two deregulation impacts will oppose each other so that the final impact is minimal.
The deregulation package which is designed to keep a margin of 7-10 cents per litre on whole milk before is reaches the processor, has been put to the federal government. All states agree that deregulation is necessary. The states with the large share of liquid milk market will have the most to lose so are keen to see the package accepted. The government has looked favourably upon the proposed package. Given its wide industry support and non-inflationary nature it is predicted that it will be passed by parliament. If so, this will be a welcome relief to farmers who will have some space to breath whilst they decide whether or not to stay in the industry.
Click here to view the rest of the 1999 August newsletter.