Part A

Dairy in Australia

Dairy is one of Australia's most important rural industries, producing about 9.4 billion litres of milk annually and directly employing approximately 43,000 people. The majority of milk production occurs on the south-east seaboard in Victoria, New South Wales, and Tasmania.

Australia exports approximately 38 per cent of its milk production which was valued at $2.2billion in 2014/15. A large proportion of exports are in the form of value-added products such as cheese, butter, ultra-heat treated milk and milk powders. Australian dairy is exported around the world.

The industry has struggled to perform over the past five years. Adverse climatic conditions, fluctuating operating costs, volatile global demand and shifting global prices have presented challenges for the industry. Changing consumer preferences in the domestic market have also influenced industry operators, which have been forced to alter their product ranges in response. Industry revenue is expected to decrease at an annualised 2.7% over the five years through 2015-16, to total $6.1 billion. Export revenue is also anticipated to decrease over the period, as plummeting prices from the past two years take their toll. Despite these challenges, the past five years have not been all bad for the industry

Typical factory paid prices

http://www.dairyaustralia.com.au/Markets-and-statistics/Prices/Farmgate-Prices.aspx

             2008/09          2009/10         2010/11   2011/12                2012/13   2013/14         2014/15 (p)

Dairy farmers' incomes to crash

Mark Billing wants salaried city workers to imagine walking in the shoes - or muddied boots

- of Australia's dairy farmers. Last week, about 3800 dairy farmers in Victoria, Tasmania and South Australia - two thirds of the industry - were told their incomes were about to crash.

First, major dairy processor Murray Goulburn and, then, Fonterra, announced the price they paid their farmer-suppliers would immediately drop from between $6 and $5.60 for every kilogram of milk solids to just $4.75-$5 a kilogram, equivalent to as little as 35c a litre of milk.

But the sting was yet to come.

Not only would prices be slashed immediately, but they would be backdated or imposed retrospectively to the beginning of the 2015-16 financial year or milk season.

It meant that for every litre of milk sold to Murray Goulburn and Fonterra during the past 10 months - for which farmers had been paid 42c-45c a litre - they would now have to pay back or "owe" their milk companies 10c a litre, because of "overpayment".

The average "debt" that its farmers now supposedly must return to Murray Goulburn - a giant farmer-owned co-operative - is about $120,000.

Murray Goulburn and Fonterra offered to help dairy farmers pay back these so-called overpayment debts by converting them into low interest loans, repayable after three years.

The only alternative, explained Colac dairy farmer and Fonterra supplier Mr Billing, was to erase this 10-month accrued "debt" by him accepting 14c a litre for the next two months, until July.

With 500 cows calving and coming into milk, hay and grain still being fed out to cows until it rains and grass grows again, one fulltime and two part-time employees to pay, and paddocks having to be re-sown and fertilised after a record dry 18 months, a devastated Mr Billing said no farmer should be forced into such a position. The average cost of production for a dairy farmer like Mr Billing, not reliant on irrigation to grow crops and grass, is normally about 36c for every litre of milk his 500 cows produce.

But in the past year, with little rain and no grass, feeding costs have turned that break-even figure into about 42c a litre, equivalent to the milk price Fonterra and Murray Goulburn had been paying all year until the massive "adjustment" or "step down".

"No one could survive on 14c a litre; it's a ridiculous proposition - we would be losing 22c to 30c for every litre of milk we produced on the farm," Mr Billing said.

"Can you imagine what would happen if any employer in the city said to his workers that he had just decided he had been paying them too much since last July, and that now they had to give the money back?"

The massive price drop affects the major dairy producing states of Victoria, Tasmania, southern NSW and southeast South Australia hardest, since more of their milk is exported rather than consumed locally. Farmers have also been warned the price could fall even lower in July for the 2016-17 year, and may artificially be held lower for another two years as Murray Goulburn tries to recoup the $40 million of profits it had "lost".

Murray Goulburn processes more than one-third of Australia's 9.6 billion milk pool and is the benchmark milk price setter.

Ostensibly, the two major companies have slashed prices because of profits downgrades or profit miscalculations caused by global dairy commodity prices that had plummeted in the past year.

But farmers like Mr Billing question why the profit crash wasn't called earlier; why supposed falling demand from China hadn't been flagged sooner; why the milk price adjustment was made retrospective and if, in NZ-owned Fonterra's case, Australian farmers are penalised because so much of the company's dominant NZ output is low-valued bulk milk powder for export.

Raising further questions about the two companies' harsh actions are that three other major dairy processors, Bega Cheese, Warrnambool Cheese and Butter and Burra Foods, who all export as well as supply domestic markets, have held the milk price they pay their farmers at the previous $5.60/kg MS, or 42c a litre, high.
Farmers also ask what happens to the GST they paid on their milk income over the past 10 months, and how the taxman would treat the average $120,000 of income they had supposedly been overpaid, spent and now had to reimburse.

The Billing family have decided that after four generations they will not stop being dairy farmers or sell their 240ha fertile farm. But neither can cows suddenly stop being milked, nor feeding costs pruned to nothing overnight.

"It's a reset for us. We have to get through this next difficult period because I think the Asian appetite for dairy will continue to grow and we must benefit in the end," Mr Billing said.

Questions

- Assume that when the price paid to farmer-suppliers dropped from $6 every kilogram of milk solids to just $4.75 a kilogram, equivalent to as little as 35c a litre of milk, supplies from the farmers reduced by 1%. Calculate the price elasticity of supply for dairy. Draw relevant Graphs. If the current trend with prices was to continue over a longer term what changes would you expect? Explain using economic theory and include relevant graphs.

- Assume that the industry has now received a substantially large export order to Taiwan to supply clients in that country from 2017 through to 2020. How will this affect the supply and price paid to the dairy farmers? Clearly indicate any assumptions you may make, refer to economic theory and draw relevant graphs to support your answer.

- What alternative strategies could Fonterra and Murray Goulburn undertake in regards to pricing? Show evidence of your research and understanding of Economic Theory

- What type of market structure is the market for dairy in which farmers supply the supermarkets through an intermediary? Explain why with reference to relevant economic theory. What are characteristics of this market structure?

Part B

By conducting preliminary research that ensures you have access to relevant country- specific economic data, select a country to study the nation's economic health. Ideally you may select your country of origin if market and economic data is available for you to conduct the necessary research online.

Write an essay, not exceeding 750 words that analyses the health of the nation's economy. Your analysis should be based on GDP changes and shifts in economy through the period 2008 to now, relevant key economic indicators including population and employment, the relationship between key indicators, and relevant global, regional and in- country events and influences on the nation's economy.

Part C

Do not forget to include a reference list for any sources apart from lectures or tutorials. You also need to include in-text references.

A referencing guide is available on the portal under assessments.