Or ‘What’s that got to do with the price of milk?’
In our ever-increasing list of guest writers, we have great pleasure in welcoming Dee Margetts to GreensBlog. Dee served in the Senate from 1993 to 1999 as a member of the WA Greens, and is currently completing a PhD at UWA Business School.
Whilst National Competition Policy (NCP) is arguably the biggest policy change ever adopted within Australia, public debate has been limited to the margins. But despite the enormous implications, mention of the term “National Competition Policy” is likely to be met with a blank stare from most Australians. There has, however, been a level of public debate around the social impacts of NCP-driven deregulation of the Australian dairy industry. One element of that debate has been whether the way dairy farmgate deregulation took place in Australia was ‘inevitable’, and whether, by extension, that means it does not need to be reassessed.
One reason for the level of public interest controversy over dairy market deregulation is that, milk and dairy products are considered a dietary staple, which makes demand for market milk quite inelastic. Almost half of Australia’s milk and dairy produce is still consumed domestically. Whilst there are other options such as long life milk or powdered milk, Australian consumers generally continue to prefer the fresh product. The origins of dairy industry deregulation began when Australia experienced a shift in economic policy with the coming to power of the Hawke Labor Government in March 1983. The signing of the Australia-NZ (CER), an agreement which had been negotiated by former Liberal Prime Minister Malcolm Frazer, one of the Hawke Government’s first official acts, put extra pressure on the Australian dairy export sector to find ways to reduce costs in order to compete more effectively with New Zealand. Economic policy began shifting even further with the introduction of financial deregulation and preparations for further trade and free-market reforms. Prior to the implementation of NCP, deregulation of the Australian dairy industry had occurred in stages. Before 1986, pooling arrangements existed for both domestic and export milk produced in Australia. In 1986, during the time of the Hawke Labor Government, the Minister for Primary Industry, John Kerin, introduced a new market support scheme with the intention of making the dairy industry more market oriented. Between 1986 and 1992, export support was wound down from 44.2% to 22% above world parity prices. This was followed by the Crean plan, (prompted by findings from Industry Commission inquiries into rural marketing arrangements and the dairy industry in particular in 1991) which saw the extension, but gradual reduction in export assistance from July 1992. This reduction in export assistance coincided with a range of export tariff reduction schemes in Australia associated with the April 1994 signing of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). Australia’s commitments to the World Trade Organization (WTO) under this agreement required the termination of export subsidies (domestic industry assistance was still permitted but it was required to be totally unconnected to export sales).
The Crean Plan for market assistance for dairy exports was subsequently stopped on 30 June 1995 to be replaced by a Domestic Market Support Scheme (DMSS) which supported the domestic manufactured milk sector. The DMSS was designed to wind down and to be abolished by 2000. Its planned abolition is recognised by the industry as the first stage in the Federal Government’s implementation of the NCP reforms into the Australian dairy industry. It should be noted that the DMSS was industry funded. Levies were charged per litre to milk manufacturers and to market milk producers to assist the producers of milk for use in Australia’s domestic value-adding sector. The 1992 submission to the Hilmer Inquiry by the Australian Dairy Industry Council, which included the United Dairy Farmers of Victoria, had opposed dairy deregulation on public interest grounds. However Victorian dairy farmers had been by far the greatest beneficiaries of the DMSS, and therefore the greatest losers from its abolition and Dairy Australia identifies the winding down of the support for producers of domestic manufacturing milk and the pressures to implement the next stages of NCP change as the major reasons why commercial dairy interests and manufacturing milk producers in states like Victoria, began to push for farmgate deregulation. Just prior to deregulation, Victorian dairy farmers were receiving farmgate prices even lower than that paid to New Zealand dairy producers.
With the removal of the DMSS looming, dairy producers in the large Victorian dairy cooperatives saw an option to use further NCP–driven changes to secure, or regain, a market advantage over the other states by the removal of the market milk premium. Prior to farmgate deregulation in mid 2000, each state had regulatory arrangements for market milk quota or pooling arrangements and the setting of farmgate prices for market milk to help ensure year-round, reliable and adequate supplies of fresh milk. Market milk pooling provided an equitable sharing of the higher farmgate prices which market milk attracted compared to milk used in manufacturing. In non-pooling states, such as Western Australia, the dairy industry operated under a tradeable quota and market regulatory system administered by the Dairy Industry Authority of Western Australia. The DMSS, as it applied only to domestic value-added production, was designed to comply with Australia’s WTO obligations, but the Industry Commission had not just pushed for the removal of export assistance, they also argued for domestic market deregulation arguing that domestic market milk prices would fall as a result. Cocklin and Dibden identify three main components of dairy deregulation; the removal of the DMSS, the removal of state based price and supply management systems and the offer to pay compensation packages to farmers. The changes leading to dairy market deregulation were pushed by the Industry Commission, as part of the Government’s free trade agenda, but the arguments supporting National Competition Policy were that it would bring about domestic benefits which are greater than any associated social costs.
The targeted or measurable ‘public benefits’ of National Competition Policy, are unclear although terms such as ‘greater efficiency’ ‘improved productivity’ and ‘improved international competitiveness’ have been used alongside terms such as ‘increased community welfare’. This paper will argue that predictions of the outcomes in relation to dairy industry deregulation were largely based on untested assumptions. This paper will also argue that the assumptions of the benefits of the implementation of National Competition Policy, including the dairy industry, were not tested by systematic monitoring or assessment, nor were there systematic assessments of the social impacts of deregulation in the targeted sector, or the impacts on regional development. The abstract goals of NCP do not include regional social impacts. This paper will assess the strength of their original argued case for NCP-driven deregulation against currently available data on outcomes in the dairy sector.
This case study will critique a number of official reports and reviews prior to and after Australia-wide farmgate deregulation was implemented in mid 2000, and in the process, seek to find answers to the following questions:
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Who are the main beneficiaries of NCP- driven deregulation of the Australian Dairy industry?
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Has dairy market deregulation resulted in a more efficient resource use in the Australian dairy industry?
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What are the outcomes for Australian dairy consumers?
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Is there more or less competition in the Australian dairy market after NCP – based deregulation?
Along with these specific questions are the inevitable value judgements of whether the basis for policy making in this area has been sound and if not, what remedies should be sought?
This paper argues that NCP-driven dairy market deregulation was enabled by the ideological preferences in some parts of Government for the “free”-trade and “free” market agenda and driven by the potential “winners”, not the public interest. It has contributed to reduced dairy farmer bargaining power and increased regional social (and environmental) costs. The market power shift has also enabled economic cost and risk shifting from the ever more concentrated retail and dairy manufacturing sector onto dairy farmers, contributing, by 2006, to a reduction in average dairy farm total factor productivity growth, a loss of Australian dairy manufacturing capacity to overseas interests, a growing shortage of domestic fresh milk supplies and higher average domestic retail milk prices.
To read Dee Margett’s full paper, please download the pdf here - Competition Policy - Dairy
