Deregulation - Does the Victorian Dairy Industry Need It?

Farmers have been given the opportunity to vote on whether they wish to see a planned dismantling of the regulations for sale of liquid milk throughout Australia or conversely to vote to maintain these regulations indefinitely.

In recent weeks there has been much discussion by industry representatives that has shed light on the issues relating to deregulation. Deregulation is about the share of liquid milk which is biased heavily away from Victorian and Tasmanian dairy farmers. The dismantling of the domestic market support scheme for manufacturing milk is predetermined and is not a consideration in the deregulation vote.

The federal government's proposed deregulation package is dependent on the Victorian Government passing legislation to dismantle the current regulation controlling liquid milk sales. If such legislation is not passed by early next year, the deregulation package will not be available.

There is almost a guarantee that any regulation put in place to control the sale by farmers, processors or retailers of liquid milk, will be ignored. It is unlikely that such regulations will convince the federal government that they are in the public interest. This is apart from jeopardising what would, for the first time, be free trading, in a protected dairy commodity market in Australia.

To have a better understanding of the need to deregulate the dairy industry, it is worthwhile forecasting the likely future structure of the Australian Dairy Industry. In the next 20 years, farm size will continue to increase. It is most unlikely that milk returns on the export market will rise since a sustained price rise will entice entry of other dairy producing countries to capitalise on the profits. The EU and USA have huge potential to expand production in this event.

Farmers will be faced with continuing deterioration in terms of trade. Those who have embraced new technologies and efficiencies will have a competitive advantage. Their business management expertise will also be high.

The processing industry will also have undergone significant change. The traditional cooperatives will have been forced to float their shares to better respond to market forces. Mergers will be likely and small companies will need to secure niche markets to survive. The sale of large quantities of semiprocessed unbranded products typical of the bulk of todays exports will not attract large profits. Multinational companies, which already have a strong presence in Australia, will utilise the low milk prices in Australia to process and export branded products overseas.

Domestic demand for dairy products will not change significantly however due to a continuing increase in total production; the percentage of milk consumed in Australia will decrease. Any regulated domestic market would become less significant. It is possible that a small proportion of entrepreneurial dairy farmers will secure a portion of the liquid milk markets of major population centres at prices which reflect the world commodity price plus a margin to cover the extra cost of non seasonal production. There are moves already between processors and farmers for this to commence after deregulation. Existing processing companies will have to compete with these farmers for this market.

There is also a strong possibility that UHT milk sales will grow at the expense of the short shelf life pasteurised milk. In many countries in Europe, UHT is the only liquid milk available. Modification to treatment which reduces the taste differences, more friendly packaging, competitive pricing and better positioning in supermarkets, will assist this change.

For Australian farmers to be able to stay competitive, it is imperative that they produce milk at a price which allows them a margin for profit. We have the advantage of a very low cost industry with a sound processing system to support it. If the government were prepared to subsidise the value of export milk by imposing a regulated price on liquid milk above that which is reflected in the world market, it would send incorrect price signals back to farmers. This has been demonstrated by the farmers in the north and the west where many have dairy farms operating at much higher costs and lower efficiencies. Although it could be argued that regions in Victoria are more suited to dairying, most of the higher costs on these farms are related to lack of uptake of modern farming technologies. The high milk prices received by these farmers has allowed them to farm with higher costs. To maintain their status quo by supporting the current regulations would perpetuate the inefficient farms. The farms operating efficiently in these regions are achieving high returns subsidised by Victorian farmers who do not have access to their markets.

The future of the Australian dairy industry is bright for those with enthusiasm and dedication to take on the challenges faced not only by dairy farmers but all Australian agriculture. There is no option for government and farmers other than to support a deregulated industry.

It is perhaps incorrect to suggest that the proposed package will remove regulation from the dairy industry. It will, in fact, impose a further eight years of regulation.

 



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