Time to get regulation back into Australian dairy?

The Australian government’s intervention in the dairy crisis by offering concessional loans to struggling farmers has prompted suggestions that other types of regulation - such as a dairy floor price - might be needed.

The dairy industry was deregulated more than a decade ago; perhaps it’s time Australia looked to other countries for models to fix the system.

The current situation facing the Australian dairy industry is the same the world over. The European Union and the United States come to mind, as milk supply outweighs demand. But they provide assistance to their dairy farmers through subsidies or other support that helps to keep them viable.

Canada does not compete internationally in the dairy sector as it maintains a supply management system introduced in the early 1970s. Dairy is not subsidised, as government provides no support, and the price paid to farmers is negotiated among stakeholders.

When I explained this Canadian supply management model to Victoria dairy farmers, as part of my research earlier this year, they rejected the idea. However the current situation may cause some of them to reconsider this position.

While the Canadian model works for Canadian farmers, a supply managed system would be more difficult for those in Australia given that about 40% of Victorian dairy is exported and exports don’t happen with supply management. But Australia’s share of the global market is decreasing over time, despite the best efforts of Australian dairy organisations and farmers, and the number of farms continues to decline. Perhaps Australia will end up with a system resembling a supply managed one through market mechanisms.

I interviewed a total of 45 farmers and dairy stakeholders in Australia during February and March of this year, nearly half in Queensland and the remainder in Victoria and Tasmania. I was interested in how the Australian dairy model works, especially as it is cited by the business press in Canada as one that we should adopt given their dislike of Canada’s regulated system.

What is the supply management model? Briefly, it matches domestic demand with domestic supply and exports are non-existent. The system is based on quotas - for example a kilogram of milk solid costs C$25,000 in the province of Ontario where I live, and it represents about one cow’s worth of production. Producers need at least 50kg of milk solids to run a decently remunerative operation.

Stakeholders representing producers, consumers, processors, the restaurant association and others meet annually to determine price, not government. Included in this is a profit guarantee for farmers that allows them to make long-term decisions and maintain a middle class lifestyle while milking on average about 70 cows. It also means they are immune to this latest global crisis, and to future ones.

And if supermarkets decide to use milk as a loss leader, it is the deep-pocketed supermarket that takes the hit, not the farmer. The price paid to the latter is guaranteed by negotiation, which creates stability.

Clearly, this is not how it operates in Australia where the supermarkets, according to one Queensland dairy producer, “must bruise the farmers to give them a loss leader.” Nor is the price consumers pay for milk in Ontario out of line with that charged by Coles and Woolworths, the real regulators of Australian dairy. Southern Ontarians pay the equivalent of the infamous A$1.00 per litre – A$4.00 for Canada’s four litre container, and have done so for years.

I found in my research that Victoria’s dairy farmers are in favour of privatisation and deregulation. They talked a lot about efficiency and how they are among the world’s more efficient farmers, and Canadians must surely not be, given their system.

Perhaps this is true if efficiency is measured by getting the greatest amount of milk for the least input. But Australian dairy farmers fall behind by other parameters.

Ontario dairy farmers, for example, employ robotic technology at a much greater rate than their Victorian counterparts. New dairy barns are being put up all over the province and a majority of them install robots to do their milking. Ontario now has hundreds of farms using milking robots.

The situation in Victoria could well come to that of New Zealand’s, where cows may be culled and the survivor’s rations severely cut back, as farmers are unable to feed supplements in such an adverse economic climate.

In an interview, as part of my research, one New Zealand dairy farmer told me he was into “starvation mode” for his cows because of cost. He was feeding them with grass only and when that ran out, there was nothing else. He was certainly running an efficient farm, but at a significant cost to his own mental health and to that of his cows’ wellbeing and ability to provide milk.

One Victorian farmer told me that even before the announcement of cuts to the milk solids price, he and his colleagues “farmed at the margins". When prices are robust, so are farmer’s livelihoods, but when they collapse, as they always do in a commodity situation, so do their livelihoods.

This results in another vicious cycle of dairy farmers quitting the industry which leads to further instability. As another interviewee told me, following the cut:

“We will wait and see and hang on for dear life.”

Might the future of Victorian dairy be Queensland, where farmers suffered much of what their Victoria counterparts are now experiencing more than a decade ago after deregulation, and dairy is now a niche industry?

As one Queensland interviewee emphatically instructed me about Canada’s model:

“Don’t give away [the] regulated system!”

Now is the time for Victoria to consider the advice of this farmer and introduce more regulation.