Background
2.1
It is estimated that the Australian dairy industry directly employs around 43 500 people across 5055 farms producing 8776 million litres of raw milk per annum. It is Australia's fourth largest rural industry and, based on farm gate value, generated $4.8 billion in 2019–20.
2.2
The Australian dairy industry is dispersed across the country, with eight dairying regions across Victoria, South Australia, New South Wales, Queensland, Tasmania and Western Australia, as depicted in figure 2.1. In addition to providing fresh drinking milk, the industry also supplies a range of processed products, such as cheeses, yoghurts, and custards.
2.3
As of November 2020, the Australian dairy industry consisted of an overall dairy herd of 1.41 million cows, with the typical dairy herd more than tripling in size in the past three decades to 279 cows in 2019. According to Dairy Australia, Holstein is the dominant breed of dairy cattle in Australia, accounting for approximately two thirds of the herd. Other prominent breeds include the Jersey, the Holstein/Jersey cross, Brown Swiss, Ayrshire, Australian Red, and the Illawarra.
2.4
Although Dairy Australia estimated that 43 500 people were directly employed on dairy farms and by dairy companies in 2019–20, it noted that there is significant additional employment associated with the industry in transport, distribution, farm services and research and development.
2.5
The manufacturing of processed dairy products is commonly undertaken close to the respective farming region in which milk is sourced, resulting in significant employment and economic activity in rural and regional areas.
2.6
Dairying is well-established across temperate and some subtropical regions, with each state having an industry providing fresh drinking milk. As shown in figure 2.2, below, however, the uses of Australian milk varies significantly between states.
2.7
Approximately 65 per cent of Australian dairy is sold on the domestic market, with the remaining 35 per cent exported. This equates to $3.4 billion per annum in exports and makes Australia the fourth largest dairy exporter, with five per cent of global trade.
2.8
Approximately 125 Australian companies export dairy products to over 100 countries, with the largest markets being China, Japan, Singapore, Malaysia, and Indonesia.
2.9
According to Dairy Australia, manufacturing of commodity dairy products for exportation has become concentrated in Australia's south-east, and includes products such as cheddar and mozzarella cheese and specialised milk powders and butterfats.
The dairy industry prior to deregulation in 2000
2.10
Prior to 2000, the Australian dairy industry was regulated via support from a number of 'complex interventions at the state and Commonwealth level', which had been in place since the early 1900s. Through legislation, the federal and state governments controlled the production, pricing, and uses of milk, as well as equalising returns to farmers.
2.11
Milk production was also categorised into two categories: market milk to supply the drinking milk market, and manufacturing milk to supply manufacturers. During this period, the price of market milk was set materially higher than milk used in manufacturing to reflect the higher production costs associated with meeting consumer demand for continuous fresh drinking milk throughout the year.
2.12
State-level regulation 'focussed on regulating the fresh milk sector', with state governments setting farm prices for fresh milk within each jurisdiction and, among other things, controlling the level of access farmers had to the market. A number of states operated milk pools where a percentage of each farm's production was allotted to the drinking milk market, while others allocated specific quotas to individual farmers.
2.13
In addition, a Domestic Market Support (DMS) mechanism was run at a Commonwealth level, which provided support to the export of manufactured dairy products 'by creating a mechanism to reduce the price gap between domestic and international markets'. The Department of Agriculture, Water and the Environment (the Department) advised that the DMS imposed a levy on all milk production, which was passed on to domestic consumers and used to subsidise manufactured dairy products, 'allowing them to be sold on international markets at global prices'.
2.14
According to the Department, it was estimated by the Productivity Commission in 2001 that the combined effect of both state and Commonwealth regulation and protection resulted in an annual subsidy to dairy farmers of $463 million in 1999–2000 ($761 million in today's terms). The Department further pointed out that:
At the height of regulatory arrangements, 61% of the income received by dairy farmers came from subsidies … It was also well above the level of assistance provided to other Australian agriculture sectors at that time.
The combination of state and Commonwealth systems created a fragmented domestic milk market, with milk production not occurring where it was most economical. This led to a higher cost industry.
The dairy industry since deregulation in 2000
2.15
On 1 January 2000, the Australian dairy industry was deregulated through the cessation of the DMS and the repeal of state legislation governing the sourcing and pricing of fresh drinking milk.
2.16
To support the industry's transition, the federal government created an eight year $1.7 billion structural adjustment package. This package was funded by a consumer levy on dairy beverages of 11 cents per litre from July 2000 until February 2009.
2.17
Although the industry grew strongly in the 1990s, with milk production and the value of farm production increasing at 5.6 per cent and 2.4 per annum, respectively, since 2000, growth has stalled. Although showing improvement in the last nine years, milk production and the value of farm production decreased over the decade following deregulation at 1.8 per cent and 2.4 per cent per annum, respectively. See figure 2.3 below for Australian milk production since deregulation.
2.18
Dairy Australia notes that total milk production and farm cost structures have not yet returned to levels of the early 2000s. See figure 2.4, below, for further details on long-term trends within the industry.
2.19
There has been ongoing consolidation within the Australian dairy farming industry, with Dairy Australia reporting the number of dairy farms down 3 per cent in 2019–20 compared to the prior year. Dairy Australia notes that this reduction in farms numbers has been offset by the size of farms, with the average farm size increasing and their share of milk production growing. See figure 2.5 below for the changes in registered dairy farms in Australia, per state, since 2006–07.
2.20
The Australian Competition and Consumer Commission (ACCC) stated that deregulation led to a ‘substantial reduction’ in the retail prices of dairy products, leading to reduced wholesale prices and margins for processors, particularly for private label drinking milk. Farmers and their representative groups ‘expressed their concern that Australian farmers would be more profitable but for this retail price behaviour and the reduced margins of processors’.
2.21
In 2017, the Senate Economics References Committee (Economics Committee) also observed that deregulation of the dairy industry resulted in a number of structural changes to the industry, including the 'significant consolidation of dairy farm enterprises and widespread privatisation of processors'. The Economics Committee continued that:
At the same time, retail competition in the dairy product sector has intensified with the aggressive promotion of 'private label' or 'homebrand' products—exemplified by the availability of $1 per litre milk since 2011. While there is no argument that low retail prices have been beneficial to consumers' purchasing power, a significant amount of value has been removed from the dairy value chain which has affected the viability of dairy farmers and processors.
Despite being Australia's third largest agricultural industry, many dairy farmers are finding it increasingly difficult to cover costs and continue in the industry. Over the last decade, the farm gate milk price has been relatively stable while the cost of production has increased significantly.
2.22
Although Australia is the fourth largest dairy exporter in the world, the share of the global dairy market supplied by Australia has fallen from around 16 per cent in the late 1990s, prior to deregulation, to approximately five per cent today.
The evolution of milk pricing and farm profitability since deregulation
2.23
Australia is a major exporter and importer of dairy products and, since 2000, the industry has operated in an open and internationally competitive market. According to Dairy Australia, more than 70 per cent of milk production in Australia is exposed to global dairy prices.
2.24
Historically Australia has been considered a low-cost producer. However, in recent years farm cost structures have increased in response to the need to adapt to drier conditions as a result of drought and climate change. The shift by many farmers from pasture-based to more resource-intensive farming has resulted in the costs of production outstripping increases in milk prices. Feed and labour currently comprise 70 per cent of milk production costs.
2.25
As shown in figure 2.6, below, prices received by farmers around the world have continued to converge, with farm gate prices now more closely reflecting global trends due to the removal of market distorting policies, deregulation, and increased global trade.
2.26
In 2019–20, Australian dairy farmers received an average of close to US$41 per 100 kg of milk, which was above the price of major producing countries in the European Union and New Zealand, but below that of farmers in the United States. Australian farmers receive lower levels of government support compared to their international counterparts. Dairy Australia attributed the 'record high domestic farmgate price' in 2019–20 to 'strong competition for milk between processors'.
2.27
The strength of the Australian dollar impacts farm gate milk prices, with Australian dairy farmers benefiting from a weaker Australian dollar. This is due to the fact that a lower Australian dollar makes exports more competitive and imports less competitive, all other things being equal.
2.28
Domestically, farm gate milk prices are determined by their milkfat and protein content, with different prices for each component. Since deregulation in 2000, prices within the industry have been set by supply and demand. Unlike many countries around the world, the Australian government has no legislative control over the price milk processing companies pay farmers for milk, and individual company returns are affected by various factors such as market and product mix, marketing strategies, utilisation and efficiencies in factory processing capacity, and exchange rate hedging policies.
2.29
In terms of farm profitability and financial return, as shown by figure 2.7 below, the general trend across states has been a decline in return on assets from 2015–16 to 2018–19 followed by a significant upturn in 2019–20. Return on assets measures the efficiency with which farm expenditure has been used to generate profit.
2.30
Profitability varies between states and from year to year due to differences in production systems and input costs including feed and labour, climatic and market conditions, and levels of technical innovation and business management skills. The higher rainfall in the second half of 2019–20 saw lower feed costs in many states as a result of greater pasture utilisation.
2.31
According to the Department:
The strongest performers in terms of average rates of return over the last two decades were Tasmania (3.7%), Western Victoria (3%) and South Australia (2.4%). In comparison, farms in subtropical dairy regions of Queensland and North Eastern New South Wales delivered an average rate of return of less than 1% over the last two decades.
2.32
The lower rate of return in Queensland is seen by the ACCC to reflect 'generally higher farm cash costs and lower milk yields per cow compared to the southern states, which more than offset the effect of typically higher farmgate milk prices'.
2.33
In its analysis of milk prices by region (see figure 2.8 below), the Department noted:
… farmgate milk prices had fallen in 2015–16 and 2016–17, in response to world market conditions. They subsequently rebounded in 2017–18 and 2018–19. Opening prices in the current season are also higher due to competition amongst processors for limited milk supply. This indicates that, rather than milk prices, it has been input costs that have had the most significant bearing on farm profitability in the last two seasons.
2.34
Figures on milk prices by state in 2019–20 show continued growth in all states over the previous 12 months (see figure 2.9 below).
2.35
For the 2021 season, Dr Jared Greenville, First Assistant Secretary in the Department, informed the committee that data indicates that 'cash incomes for dairy farms are going to rise slightly'. He explained that while milk prices had been higher initially due to the poor seasonal conditions, 'prices have fallen, and we're expecting them to fall a little bit into next year, just as milk production increases'. However, the price falls have been offset by 'reduced fodder costs and other costs' brought about by the improved seasonal conditions.
Views on the current state of the dairy industry
2.36
Evidence to the inquiry indicated that the dairy industry has faced very difficult times in recent years, with a number of inquiry participants suggesting that the industry has suffered greatly as a result of deregulation in 2000. A selection of these views is provided below.
2.37
In Dairy Australia's opening statement to the committee, its chair, Mr James Mann, highlighted the myriad issues and adverse events the industry has faced over the last few years and the negative impacts they have had on confidence:
Dairy Australia recognises that the last few years have been extremely challenging for many Australian dairy farmers, with a number of significant events. Widespread drought has particularly added to the cost of feed and fodder and water, putting pressure on businesses. The milk price step-downs of 2016 and the demise of Murray Goulbourn have seen a significant erosion of trust in the Australian industry supply chain. The recent bushfires have had an enormous impact on farmers, particularly on the South Coast of New South Wales, East Gippsland and north-east Victoria. Continuing retail price discounting of dairy has capped returns for many dairy farmers, particularly in the fresh milk states, and have left farmers feeling that their product has been devalued.
These events have collectively smashed farmer margins and depleted farmer confidence, leading many to question their future in the industry.
2.38
Mr Colin Thompson, the chair of the Dairy Committee of NSW Farmers, highlighted in his evidence to the committee that Australian dairy products are highly regarded and trusted globally, and that Australia is known for its efficient production, clean image, and food safety. Notwithstanding this, he argued for a role for government in supporting businesses and investing to bring about growth in the industry. Mr Thompson also echoed the dismay expressed by a number of farmers that retail price discounting had devalued dairy products:
The discounting of white milk is having not only a devastating financial effect on farmers and their families but also a psychological one, as farmers, many of whom are struggling to cope with a crippling drought, exorbitant feed prices and bushfires, see their high-quality product devalued in such a way, used as a loss leader and sold more cheaply than bottled water.
2.39
Mr Graham Forbes, president of the Farmers Group of Dairy Connect, an advocacy body, commented on the additional price pressures arising from competition by importers:
Our industry is coming under considerable pressure from New Zealand imports being sold at prices well below that of the retail price in New Zealand. It's effectively dumping with deceptive labelling, and it's really pulling our industry back.
2.40
Ms Annabelle Johnson, Head of Policy and Advocacy at NSW Farmers, focused further on the issue of competition and stated that there would be no single solution to resolve the challenges facing dairy farmers:
Domestically, there's a competition issue. That's why we keep coming back to—there's not going to be one solution for the dairy industry; there is going to be a range of solutions, and competition reform lies at the core. So many of these issues can come back to: there's a competition imbalance, and the way that our competition framework is framed, it's not focusing on the right things. It's not setting the right tests to be able to recognise the imbalance and the unfairness in the negotiations, in the way that the relationships operate.
2.41
The national policy and advocacy body, Australian Dairy Farmers (ADF), acknowledged that there is no single solution to improve dairy farm profitability and competitiveness. Mr Terry Richardson, the president of ADF, noted the large number of reviews and inquiries into the industry over the past decade and indicated that the government's pursuit of free trade agreements has been welcomed by the industry. He did, however, outline a number of issues and events that have impacted on profitability since deregulation. Specifically he stated that:
… farm profitability and competitiveness have been impacted in a number of ways. We [ADF] do recognise that drought; increasing costs, such as electricity; the introduction of aggressive promotion of private-label or home-brand products by supermarkets; world price volatility; and the international dairy price downturn in the 2015–16 year by the dairy processors have had a deep impact on farm profitability. Additionally, farmgate price growth has not kept up with costs.
2.42
A number of farmers pointed to inadequacies in the structure and responsiveness of dairy industry institutions and expressed a desire for transformational change to place the industry on a 'productive, profitable and sustainable footing'. Mr Thompson stated that:
Some of our institutions have been in place for a long time. Frankly, they have not kept up with the pace of the changing scene of dairy—in particular, the reduction of production and the number of farms that are still operating. And so, through the Australian Dairy Plan, we are proposing a restructure of our industry bodies—in particular, merging RD&E [research, development and extension] with advocacy and forming one organisation that is far more streamlined, efficient and effective.
2.43
Mr Eric Danzi from Queensland Dairyfarmers' Organisation agreed on the need for structural change at both a regional and national level:
Clearly, at the moment, the industry structure really is broken and not acting in the best interests of farmers, and that goes right across to the issues of funding and advocacy and getting bang for the buck, and there are clearly issues in getting good delivery out of Dairy Australia. Transformational change to the structure is really the only option to fix those issues.
2.44
Mr Matthew Trace, a dairy farmer from the Sunshine Coast, vice-president of the Queensland Dairyfarmers' Organisation, and a director of Subtropical Dairy and Norco, spoke about the need for change in the northern dairy industry. He also provided two high-level options for the government to pursue. Specifically, he said:
The northern dairy industry is at a critical stage where a new strategy and direction is required or the industry will largely fade and perish. This has been coming since deregulation, and we require a specific advocacy and RD&E, as in research development and extension, strategy for the northern industry—and by the northern industry I mean Queensland and New South Wales.
Either government needs to take a path to regulation, which we know works for certain, or it needs to support the industry to solve these problems itself by supporting a new industry structure where the farmers' own money currently collected in levies can be used effectively to fix our own problems in our own regions.
2.45
A number of witnesses focused on problems in the Queensland dairy industry following deregulation. Mr John Cochrane from Kenilworth Dairies stated that Queensland has lost 83 per cent of its farmers in the last 20 years. Mr Peter Garratt, the chair of Premium Milk Group, expressed concern for the future of the industry given that many farmers had made the decision to leave as 'the economics of our industry simply didn't add up'. He highlighted for the committee the decline in the number of dairy farms in Queensland over the last two decades:
Back then [before deregulation], Queensland was home to more than 1,500 dairy farms—almost entirely family farms that had supported multiple generations. We now have fewer than 300 farms left in Queensland. … With milk production in Queensland to 30 June 2020 at 310 million litres and packaged milk sales of approximately 570 million litres, there is a deficit of 260 million litres.
2.46
Mr Ken Bryant from the Far North Coast Dairy Industry Group spoke about the failure of deregulation and the reliance of market forces to provide an adequate price for farmers:
Dairy deregulation in 2000 was meant to let market forces operate in the fresh milk market and let supply and demand set the price. In our [Far North Coast Dairy Industry Group] view, this has been a complete failure, as for most of the subsequent years farmers have not received an adequate price, and thus the contraction in the industry in the northern dairy regions.
2.47
Mr John Dahlsen, an advocate for a sustainable dairy industry, supported Mr Bryant's conclusion by stating: 'I think it has been accepted by everyone that the market has failed and there should be intervention'. Mr Dahlsen then highlighted the major issue in the industry as he sees it:
I think the core of the issue is that the retail oligopoly is abusing its position and as a consequence the consumers are subsidising dairy farmers. I think you solve a problem at the core, which is that the retailers are not paying a fair price.
2.48
Mr Ross McInnes, a Queensland farmer who has had a long association with the dairy industry, agreed with this point by stating: 'the supermarket duopoly has created a dysfunctional market for the Queensland dairy industry'. This was further supported by the chair of Premium Milk Group, Mr Peter Garratt, who said:
… the retailers are continuing to use their power within the market to keep pricing at very low levels to fulfil their promise of delivering value to their customers, at the expense of the farming community.
2.49
Mr Andrew Burnett, chair of the Dairy Farmers Milk Cooperative, spoke about the national retail pricing approach used by retailers and how it is used as a marketing tool and loss-leader:
The dairy industry has been impacted materially from this national retail pricing approach. Acknowledging the different farming systems, farm sizes, regional areas, climatic issues et cetera equals a greater production cost. Queensland does have a farmgate price some 15c higher than that in Victoria. When you couple that with a large regional footprint driving distribution costs even higher, the fresh milk supply chain is just not sustainable. The national retail price is actually lower than the cost to supply and process the milk in this state, and in turn farmers are losing millions of dollars annually.
2.50
Summing up, Mr Burnett said:
… the big retailers have developed national pricing strategies where generic milk is priced at the same price regardless of cost to production, inbound or outbound logistics, or regional and metropolitan locations. To ensure a viable dairy industry and sustainable supply chain throughout, something must change, otherwise more farmers will exit, along with processors exiting.
2.51
The idea of paying a fair, or sustainable, price was touched on by Mr Ross Hopper, the owner of processor Melany Dairies. He indicated the importance of paying the right price to ensure the farmers supplying him can sustain their businesses into the future:
With our farmers, we know that, if we pay them the right price, they're going to give us good quality milk, they'll be sustainable and there's a future for them. If we don't look after them, well, we won't have a future and I won't have a business. Therefore, I've got to do the right thing by them and get the price up.
2.52
Ms Vittoria Bon, Government and Industry Relations Manager of Coles Group, while acknowledging the challenges facing the dairy industry, took issue with the perception of the central role of retailers as influencers of farmgate prices:
There is often misinformation that Australia's retailers dictate farmgate milk pricing paid by processors. This does not occur at Coles. The dairy processors we utilise set the farmgate price. Our contract with processors comprise of the farmgate milk price and manufacturing costs. The farmgate milk price is a key determinant of the cost price of milk. This is set by processors independently of Coles. In 2010 we introduced into our contracts a cost movement mechanism whereby, if processors submit an increased farmgate price, Coles will pay the extra cost. Whether this additional cost is ultimately passed on to our customers or whether we absorb the additional cost is a matter for Coles.
2.53
In a research paper submitted to the inquiry, Mr David Beca stated that farmers cannot rely on higher milk prices in the future and must focus on low-cost production systems to return to sustainable levels of profitability:
Regardless of the challenges, it is important that Australian dairy farmers do adopt low cost of production systems as this would appear to be the only avenue for these farmers, and the dairy industry as a whole, to return to sustainable levels of profitability. Significant improvements in milk price in the future are unlikely as Australian milk prices have been consistently competitive with international milk prices over the last 20 years.
2.54
In contrast to the general view provided by other witnesses regarding the state of the industry, Mr Jared Greenville, an assistant secretary from the Department, stated that since deregulation, and the withdrawal of government support, the majority of the industry has remained profitable and has become internationally competitive with farmers around the world, including those from New Zealand. He also noted that, at the height of the regulated system, around 60 per cent of farmer revenue came from government transfers or subsidies.
2.55
Individual farmers were also keen to emphasise to the committee that they were positive for the future of dairy farming, that while it was ‘hard work’, there were rewards and financial returns, regular monthly cash flows, a ‘strong community, healthy lifestyles’, and that through building skills and knowledge they have been able to ‘capitalise on any and every opportunity’ that arose. Ms Karrinjeet Singh-Mahil, a farmer in south-west Victoria, was concerned about ‘the negativity that’s been coming across and that is presenting this industry as an outdated, old-fashioned industry that is not making a positive contribution and needs to be managed to its grave’. She added that while ‘there are lots of things government can do to support agriculture, there was also ‘a huge amount of opportunity and cause for optimism about the role the Australian dairy industry will continue to play into the future’.