Late last year one of our US correspondents sent a link to an article by Randal Stoker of Woodbridge, Virginia: "Why Our Domestic Dairy Commodity Prices Are So Low" 3 December 2010. Agweb.com. My comments on Randal's reading of the Australian dairy industry were short and sharp. A couple of weeks later the article got a second run in the Cheese Reporter and I promised to set the record straight. Christmas and New Year came and went, there were stock and hay and weeds to attend to on the farm, and a living to be earned. The moment was lost.

Our correspondent wrote again recently and asked us to comment on claims by the Senior VP of Strategy & International Development for a leading US cooperative. To whit: "the average milk price over the last five years for Australia and New Zealand converted to US standards was about $14.50 US per hundredweight". This really is becoming too much to bear.

Let me start with Randal's comments. He writes:

It did not take the Australians as long to discover and correct their milk marketing dilemma. The Australian dairy industry, until deregulation, had a milk pricing system very similar to ours. They came to the realization that their artificially supported Class I revenues were:

1)    being diluted and spread over larger and larger supplies of manufacture milk, and
2)    were driving down their domestic dairy commodity prices that they needed to market globally.

For this reason, in Victoria, where the largest proportion of pooled milk consisted of non-Class I/manufacture milk, an overwhelming majority of dairymen convinced the State of Victoria to adopt complete deregulation. Victoria?s decision to deregulate then spurred the remaining Australian States to adopt nationwide deregulation. Australian Class I sales and manufacture prices increased immediately following deregulation.

Australia and other deregulated countries are now seizing their growing international dairy export markets at our expense.

It's a good story but unfortunately it is not true.

It is true that deregulation was led by Victoria where regulation of the fluid milk market generated a relatively marginal gain to farmers. I am less convinced that farmers led the campaign. The Victorian farmer response was closer to indifference and there was vehement opposition in the other domestically focused states. Processors and the government were the drivers of deregulation. All of this came at a time when there was strong suggestion that the regulatory environment was unconstitutional and the Australian government was generally unburdening itself of involvement in the agricultural sector.

The underlying rationale for deregulation probably had some alignment with Randal's general thesis - a deregulated dairy industry will make it more competitive and responsive to domestic and international market forces. There is no doubt that objective has been achieved, and perhaps it has been in the public interest. It is however debatable that this exposure to market forces has been good for dairy farmer profitability. It is also a complete untruth that Australia has subsequently been "growing international dairy markets". Actually, what has happened is the complete opposite.

Source: Abare / Xcheque

The chart above shows Australian milk production from 1992/93 to 2009/10. Also shown is an estimate of the volume of milk allocated to export and the corresponding balance directed towards domestic consumption. Also shown is an estimate of the milk associated with cheese imports. Cheese imports were at a minimum of about 20,000 tonnes in 1999/2000 (the year of deregulation) and they have more than doubled since.

Is deregulation the cause of this decline? In the case of NSW, Qld and Western Australia the answer is an emphatic yes. In those states the regulated domestic milk price and restrictions on interstate transport were propping up very inefficient ingredient processing operations (eg. cheese, butter, powder). They quickly went the way of the gods and ingredient production contracted back to the southeast of Australia.

The situation in southeast Australia is more complex. Australia is famous for its droughts, and fires and, as we have been reminded just recently, flooding rains. These have taken a toll on Victorian milk production and provide a plausible excuse for the production (and export) decline.

My personal view is that these environmental problems detract from the underlying issue - which is basically economics - the returns from dairy farming have been too low and unreliable to justify investment and growth. 3 separate price / cost shocks in the past decade have shaken the industry to its core. All 3 shocks have been driven by international rather than domestic market effects. Add to that the unpredictable weather and you have a recipe for industry decline. Farmers have been retiring to find an easier life (see also "The changing nature of Australian milk supply - Part 1" Xcheque.com, 17 September 2010). The previous regulated environment would have done little to protect farmers from these problems. They are an artefact of the world we live in - the vagaries of climate and international supply and demand.

Which brings me back to the claims of Oceania milk price average of $US 14.90 / cwt ... yeah right ... we wish.

The table below shows Xcheque's estimate of US Class III and IV milk prices and the corresponding milk price in southeast Australia and New Zealand. These conversions, or something close to them, are also shown in our chart library and can be derived using Xcheque's global milk price calculator.

Estimated US and Oceania milk prices ($US / cwt)

There is not one year where Australian and New Zealand farmers were paid more for their milk. In recent years the gap has closed, thanks to reductions in EU and US export subsidies, but there is still some way to go.

The error in the illustrious Senior VP's estimates is most likely because he has quoted farmgate pricing without adjustment to the milk solids content. For Australia that is typically 4.1% butterfat and 3.3% protein. New Zealand milk is even higher at about 4.7% fat and 3.5% (true) protein. This compares with the US standard of 3.5% butterfat and 3.0% protein.

What has all this got to do with the deregulation debate in the US? Well nothing really, and that's the point. In the southeast of Australia, where exports are a large part of the dairy industry operations, the deregulation process has done very little to increase export volume and competiveness. If anything it has created the opportunity to increase domestic supply as NSW, Qld, and WA have wound back their milk production (and exited the very small export volumes that they were supplying). I'm sorry Randal but your obsevations on the Australian dairy industry are misinformed.

Likewise, are Australia and New Zealand making an absolute fortune in these wonderful export markets? No they are not. These markets are volatile and befuddled with international trade restrictions, tariffs and subsidies. It is a cold hard world out there America and you need to be careful what you wish for.

Editor's Note: Readers may also find the following articles on the international dairy industry and milk price history of interest:

"Dairy Free Trade - A hard row to hoe" Dr Jon Hauser   Xcheque.com   21st November 2009

 "On the causes of milk price volatility" Dr Jon Hauser   Xcheque.com   22nd August 2010   

"Charting global milk price volatility" Dr Jon Hauser,   Xcheque.com,   July 25th 2010

"The global dairy industry's paradigm shift" Dr Jon Hauser   Xcheque.com   12th November 2010  

... and one of Dave's earlier toons from "Dairy Free Trade - A hard row to hoe"