What will deregulation do to our farm gate price?
There has been much discussion in recent months in the media about the impact of deregulation on the farm gate price of milk. This has been especially directed at NSW, WA and QLD farms where the impact of deregulation will be greater.Liquid milk sales
In Victoria, prior to deregulation, a continually decreasing percentage (approx. 6%) of our milk has been sold on the liquid milk market, regulated by the VDIA. This has been distributed evenly across all supply factories so that each farm receives an equal percentage share of the liquid milk market.
Deregulation will reduce the price received by factories for this milk purchased by the processors, currently at 46 cents. The processors are then levied 11 cents per litre to fund the package. If the price they pay is 35 cents or less, then there will be no upward rise in the retail milk price attributed to deregulation.
Each milk supply factory, in the deregulated market, will have the opportunity to contract sale of liquid milk to processors. National Foods and Parmelat are the two major liquid milk processing companies in Victoria. The profit from liquid milk sales for each supply company will depend on the price they negotiate with these processors and the volume of sales. If, for example, they double the sales volume, at half the profit margin, then it will not impact on farm gate price.
Given that domestic consumption of liquid milk will not alter significantly post deregulation, then increased market share by a Victorian milk supply company will come at the expense of other supply companies, including interstate. Deregulation will open up state borders and allow supply of domestic milk to northern states from Victoria.
There is a real possibility that the effect on farm gate price could be positive, depending on the marketing ability of your supply company.
The Dairy Market Support Scheme
This legislation was introduced in the mid 1980's by the Commonwealth Government under the Kerin Plan. The DMS levy is on all city milk at 1.9 cents/litre and 3.7 cents/litre on l manufactured milk sold domestically in Australia. It is redistributed to factories on all manufactured milk with the effect of increasing the average milk price by 0.9 cents/litre. In the early days of the scheme, it was at a level which increased the price received for export product by up to 25%.
One of the aims of the scheme was to assist the development of an export component of the dairy industry. This gave the industry the opportunity to expand without the need for quotas. In NSW, QLD and WA, quotas were retained which has lead to the inefficiencies and high cost of production evident in these states today. This is partly contributed to by the high cost of quota and land paid by farmers reflecting the higher farmgate price.
In Victoria, production in excess of liquid milk requirements has not been restrained by a quota system. Instead, supply factories have developed an export industry of world competitive standard. The DMS levy has assisted the development of this market. It has allowed the Australian dairy industry to increase supply by nearly 200% in 15 years predominantly due to growth in the non quota southern states.
The impact of removal of the DMS on Victorian factories after deregulation will depend on the level of export at each factory. Approximately 50% of all Australian milk is currently exported. A company exporting 50% of its milk supply would be in a relatively neutral position since it would receive the same amount of DMS as is levied. Supply factories in NSW and QLD which have a much smaller manufacture component of their milk, have always received less than they have been paid under this scheme.
On July 1st this year when the Commonwealth government removes this legislation, there will be no incentive from Victorian factories to keep out of the city milk market in other states. They will also be able to compete more equitably on the domestic market against importing products from NZ and Europe which have been excluded from the DMS levy.
Other Effects on Price
By far the most significant impact on farm gate price in the next year will be the world market price for milk products. In recent weeks there have been some positive signs for Australia as the Euro has strengthened and supply from Europe has reached quotas.
Provided the $A against the $US remains at relatively low levels, Australian milk companies will have the opportunity to lock into contracts at favourable exchange rates.
Finally, the farm gate price will be influenced by the capability of each company to maximise efficiency of processing. Just as each dairy farm is driven to cost efficiencies, supply factories are faced with similar economic pressures.
The industry does have a positive outlook. For Victorian dairy farmers who have taken on the challenge of efficient production of a quality product, their future in a world competitive industry is optimistic. Murray Goulburn has already set the pace with a strong opening price, up 17 % on last year, reflecting the stronger world prices. This demonstrates the relative insignificance of deregulation on Victorian farm gate prices.
The Other States
To date NSW has still not passed legislation to dismantle state marketing legislation. If, as proposed by the Australian Milk Producers Association, QLD or NSW continue with a quota scheme, even if open to all states, the package under the national Dairy Structural Adjustment Program will not be available to any farmers.
The states have until October to pass this legislation. If they elect to reintroduce quotas, as is being considered by the Queensland premier, it will be in defiance of section 92 of the Australian Constitution. This demands the free trade of all commodities between states. It will potentially invoke a High Court injunction against the state legislation and bring about the same result, that is, full deregulation, but without the package. It would be a brave state government to deny the rest of the Australian Dairy Industry the opportunity to introduce deregulation in an orderly fashion in response to a minority group of farmers attempting who are attempting to retain exclusive access to a domestic market in a society committed to economic rationalism.
Click here to view the rest of the 2000 June newsletter.