tag:theconversation.com,2011:/us/topics/milk-prices-27434/articlesMilk prices – The Conversation2019-11-11T19:02:10Ztag:theconversation.com,2011:article/1242902019-11-11T19:02:10Z2019-11-11T19:02:10ZThe milk, the whole milk and nothing but the milk: the story behind our dairy woes<figure><img src="https://images.theconversation.com/files/301045/original/file-20191111-194675-156dl7t.jpg?ixlib=rb-1.1.0&rect=604%2C7%2C4315%2C3268&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A dairy cow grazes on the lawns in front of Parliament House in Canberra in 2015, as part of an industry event.</span> <span class="attribution"><span class="source">Dean Lewins/AAP</span></span></figcaption></figure><p>The plight of Australia’s dairy farmers is on the political agenda this week, after One Nation leader Pauline Hanson <a href="https://www.theaustralian.com.au/nation/politics/nationals-no-longer-party-of-the-bush-pauline-hanson-lashes-out-after-milk-price-floor-push-fails/news-story/22a49ee1caefef5e504f8c306254700f">narrowly failed in her Senate bid</a> for a minimum milk price. But getting fair payment for their goods is far from the only challenge dairy farmers face.</p>
<p>Pressure has been mounting on the industry for the past decade. Existing milk alternatives are growing their market share, helped by a rise in veganism and public concern around animal welfare. The agriculture sector is under pressure to reduce its contribution to climate change, and technology advances mean milk may one day be produced without cows at all. </p>
<p>All this has been compounded by devastating and prolonged drought. So here’s the full story of the hurdles farmers face, now and in the future, to get milk into your fridge.</p>
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<span class="caption">Dairy cattle at milking time at a farm in Rochester, Victoria.</span>
<span class="attribution"><span class="source">AAP/Tracey Nearmy</span></span>
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<h2>Fluctuating farm gate price</h2>
<p>The rate at which processors pay farmers for milk is known as the <a href="https://www.dairyaustralia.com.au/industry/prices/farmgate-milk-price">farm gate price</a>. The prices are not regulated and are set by market forces.</p>
<p>In 2016 <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2016/June/Dairy_industry_developments">the milk price crashed</a> when Australia’s two largest dairy processors, Murray Goulburn and Fonterra, lowered the price they would pay from about 48 cents a litre to as low as 40 cents.</p>
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Read more:
<a href="https://theconversation.com/un-climate-change-report-land-clearing-and-farming-contribute-a-third-of-the-worlds-greenhouse-gases-121551">UN climate change report: land clearing and farming contribute a third of the world's greenhouse gases</a>
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<p>This dramatically cut the incomes of milk suppliers. The number of dairy farmers in Australia fell by 600, or 9% <a href="https://www.dairyaustralia.com.au/industry/farm-facts/cows-and-farms">over four years</a>. This exit has been <a href="https://www.theguardian.com/food/2019/feb/24/drought-and-low-milk-prices-push-dairy-farmers-to-the-brink">exacerbated by drought</a>.</p>
<p>Since then, the farm gate milk price has increased and in 2019–20 is <a href="http://www.agriculture.gov.au/abares/research-topics/agricultural-commodities/sep-2019/dairy">expected to be 51 cents per litre</a>, due to a weaker Australian dollar and demand from export markets. But forecast global prices for butter, cheese and whole milk powder this financial year remain below that of previous years.</p>
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<h2>Methane, and milk alternatives</h2>
<p>Methane and other livestock emissions <a href="http://www.agriculture.gov.au/ag-farm-food/climatechange/australias-farming-future/livestock-emissions">comprise about 10%</a> of Australia’s greenhouse gas emissions. </p>
<p>As the Intergovernmental Panel on Climate Change made clear in its <a href="https://www.ipcc.ch/srccl-report-download-page/">land use report in August</a>, changes must be made across the food production chain if the world is to keep global warming below the critical 1.5°C threshold. For beef and dairy livestock, this means changes such as land and manure management, higher-quality feed and genetic improvements. Meeting this challenge cost-effectively, while improving productivity, is no small task.</p>
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Read more:
<a href="https://theconversation.com/crying-over-plant-based-milk-neither-science-nor-history-favours-a-dairy-monopoly-123852">Crying over plant-based milk: neither science nor history favours a dairy monopoly</a>
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<p>Technology may help in curbing greenhouse gas emissions from cows, but it also threatens to replace the dairy industry altogether. Advances in biotech may enable liquid analogous to milk to be <a href="https://theconversation.com/lab-grown-dairy-the-next-food-frontier-117963">produced through bioculture systems</a>, <a href="https://www.nationalgeographic.com/news/2014/10/141022-lab-grown-milk-biotechnology-gmo-food-climate/">without a cow in sight</a>. </p>
<p>Elsewhere, the rise of plant-based alternatives derived from soybeans, almonds, oats and other sources threatens traditional milk products. This can partly be attributed to increasing numbers of people adopting a vegan diet. </p>
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<span class="caption">Farmers must overcome a host of challenges to deliver milk to consumers.</span>
<span class="attribution"><span class="source">Paul Miller/AAP</span></span>
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<h2>Taking calves away from cows</h2>
<p>For a mammal to produce milk, it must usually become pregnant and produce offspring. Female calves generally go into a farm’s pool of replacement animals, while male dairy calves are sold.</p>
<p>Pure-breed male dairy calves do not naturally lay down a lot of muscle and so do not generally make good beef livestock. Many are sent to the abattoir for slaughter, typically between 5 and 30 days of age. This practice has prompted welfare concerns and means the industry must carefully manage the handling and transport of vulnerable young calves.</p>
<p>Potential solutions include artificial insemination of cows using only semen that will produce female calves. The use of this technology is limited because it reduces conception rates.</p>
<p>There is also growing public concern about the separation of cows and calves not sent to the abbatoir. The calves are typically taken within the first 12-24 hours and reared together in a shed, where they are fed milk or milk replacer. This is thought to maximise the amount of saleable milk and minimise disease transfer from cow to calf, <a href="https://www.animalhealthaustralia.com.au/what-we-do/endemic-disease/johnes-disease/jd-and-dairy-cattle/three-step-calf-rearing-plan/">particularly Johne’s Disease</a>. However, <a href="https://www.sciencedirect.com/science/article/pii/S0022030219304175">recent research</a> has found <a href="https://www.sciencedirect.com/science/article/pii/S0022030219304369">little evidence</a> to support these practices. </p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S0022030219304369">Research has shown</a> that calf-cow separation in the first day of life causes lower distress than abrupt separation at a few weeks of age or older, when the bond is stronger. This is not to say that early separation is not a concern. Rather, in the face of consumer demands for certain ethical standards, simple fixes may be hard to implement. </p>
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<span class="caption">Topless animal welfare activists protest in Melbourne in February 2019 to raise awareness of what they claim is cruelty within the dairy industry.</span>
<span class="attribution"><span class="source">Ellen Smith/AAP</span></span>
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<h2>The message for consumers</h2>
<p>Challenges to the dairy industry will take time and effort to address. Some, such as drought, are out of farmers’ control. Dry conditions and high cost of water, fodder and electricity have <a href="http://www.agriculture.gov.au/abares/research-topics/agricultural-commodities/jun-2019/dairy">forced farmers to cull less productive dairy cows</a>, leading to a decline in production. </p>
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Read more:
<a href="https://theconversation.com/supermarkets-are-not-milking-dairy-farmers-dry-the-myth-that-obscures-the-real-problem-105300">Supermarkets are not milking dairy farmers dry: the myth that obscures the real problem</a>
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<p>The pressures, and associated debt, create intense stress for farmers, increase family tensions, and have negative flow-on effects throughout rural communities.</p>
<p>Putting aside the political push for a regulated milk price, the key message for dairy consumers is clear. If we want our milk produced in a certain way, we must pay a fair market-based price to cover the costs to farmers of fulfilling our wants.</p><img src="https://counter.theconversation.com/content/124290/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Fisher has received funding from Dairy Australia, Meat and Livestock Australia and Parmalat for research into animal welfare issues in dairy production and calf transport. </span></em></p>Pressure is mounting on Australia’s dairy farmers, from farm gate prices to animal welfare concerns, and technology that could produce milk without cows.Andrew Fisher, Professor of Cattle & Sheep Production Medicine, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1121452019-02-21T19:05:11Z2019-02-21T19:05:11ZVital Signs: why more expensive milk won’t help farmers much<figure><img src="https://images.theconversation.com/files/260115/original/file-20190221-195864-1gsbtks.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Woolworths is pushing up the price of milk. It's normally no way to help farmers.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The supermarket giant Woolworths this week broke ranks and announced it was going to stop selling A$1 per litre milk. It will now charge A$1.10, or <a href="https://www.woolworthsgroup.com.au/page/media/Press_Releases/woolworths-to-transition-out-of-1-per-litre-fresh-milk-in-support-of-a-more-sustainable-australian-dairy-industry/">A$2.20 for two litres</a>.</p>
<p>Chief executive Brad Banducci made it clear that there was <a href="https://www.abc.net.au/news/rural/2019-02-18/woolworths-will-stop-selling-$1-per-litre-milk/10820954">more to the decision</a> than straightforward economics:</p>
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<p>We’ve heard the outlook will continue to be extremely tough for dairy farmers… This is affecting milk production and farm viability, which is devastating for farmers and the regional communities in which they live.</p>
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<p>The Labor Party has been threatening to impose <a href="https://www.abc.net.au/news/rural/2019-02-20/labor-to-set-milk-floor-price-if-elected-in-2019/10827322">a minimum farm-gate price</a>.</p>
<p>Will what Woolworths is doing help farmers? Only a bit.</p>
<h2>Milk prices are internationally set</h2>
<p>The so-called “milk wars” began on Australia Day 2011 when Coles announced it was <a href="https://theconversation.com/milk-wars-pointing-the-finger-at-coles-and-woolworths-529">cutting milk prices to A$1 a litre</a>.</p>
<p>Woolworths and Aldi followed suit.</p>
<p>The milk market does not just consist of dairy farmers, supermarkets and customers. There are also the processors – companies such as the ASX-listed Murray Goulburn, Parmalat, Lion and Fonterra – that stand between farmers and supermarkets. Then there is the international market for dairy products like butter, cheese and milk powder.</p>
<p>The biggest determinant of farm gate prices in Australia is not what the major supermarkets do, but world dairy prices. </p>
<p>The <a href="http://www.agriculture.gov.au/ag-farm-food/meat-wool-dairy/dairy#the-dairy-levy">Department of Agriculture</a> says 37% of Australian milk production is exported. </p>
<p>Add to that the roughly 35% that goes into locally consumed butter, cheese and milk powder that is subject to competition from imports. You can quickly see the prices of nearly three-quarters of the milk produced in Australia are set globally.</p>
<p><a href="https://www.businessinsider.com.au/milk-price-debate-australia-2016-5">Dairy Australia</a> has a higher estimate. Because even fresh milk is subject to foreign competition, it believes 90% of the annual movement in farm-gate prices comes from changes in international prices.</p>
<p>Those changes are beyond the effective control of Australian farmers and regulators. </p>
<p>Many of them are the result of changes in the exchange rate. </p>
<p>International prices are generally set in US dollars. That means a rising Australian dollar can cut the return to Australian farmers, while a falling Australian dollar can enhance it.</p>
<h2>Processors get the cream</h2>
<p>It is tempting to think an increase in retail prices, like the Woolworths 10 cents, would help farmers. But it normally wouldn’t, much.</p>
<p>Someone between the cow and the customer would get the 10 cents, but not necessarily the farmer.</p>
<p>When the <a href="https://www.accc.gov.au/system/files/1395_Dairy%20inquiry%20final%20report.pdf">Australian Competition and Consumer Commission</a> examined the dairy industry last year it:</p>
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<p>did not obtain any evidence that supermarket pricing, including $1 per litre milk, has a direct impact on farm-gate prices</p>
<p>Further, farmers’ lack of bargaining power means they are unlikely to benefit from an increase in the retail (or wholesale) prices of private label milk or other dairy products</p>
<p>Even if processors were to receive higher wholesale prices from sales to supermarkets, this does not mean the processors will pay farmers any more than they have to.</p>
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<p>This time it will be different. Woolworths says “every cent of the increase will end up with Australian dairy farmers”. The processors <a href="https://www.woolworthsgroup.com.au/page/media/Press_Releases/woolworths-to-transition-out-of-1-per-litre-fresh-milk-in-support-of-a-more-sustainable-australian-dairy-industry/">have guaranteed it</a>.</p>
<p>Normally there would be no guarantee that an increase in the wholesale price would flow through to farmers. The processors could pocket it, and the inefficient ones could use it to stay in business, to the long-term detriment of customers.</p>
<h2>Consumers are at one end of the line…</h2>
<p>Banducci said Woolworths was “acutely aware of the budgetary pressures facing many of our customers and have not taken this decision lightly”.</p>
<p>He is right to recognise it will hurt customers. </p>
<p>It won’t, mind you, hurt customers who buy branded milk like a2 – <a href="https://a2milk.com.au/our-farms/?gclid=CjwKCAiAkrTjBRAoEiwAXpf9CcIT_IidGCd1H_yQd3TGWwoUIFISo770LtzmvP_EZ7Nw_NN0APGSMRoCzbsQAvD_BwE">whose marketing success under chief executive Jayne Hrdlicka</a> has pushed the value of the company to <a href="https://www.afr.com/business/retail/fmcg/a2-milk-posts-record-firsthalf-results-upgrades-guidance-20190219-h1bh1g">A$10 billion</a>, making it bigger than Lendlease, Medibank Private, the AMP and Coca-Cola Amatil. Not bad for a company that didn’t exist at the turn of the century.</p>
<p>Instead it will hurt customers who can afford it the least. For a typical family of four with <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/4364.0.55.012%7E2011-12%7EMain%20Features%7EMilk,%20yoghurt,%20cheese%20and%20alternatives%7E17">average milk consumption</a>, the extra 10 cents a litre works out at about A$40 a year. </p>
<h2>…and farmers at the other</h2>
<p>Dairy farming is difficult, and much of Australia is less than ideally suited to it. Farmers have to contend with volatile prices, drought and isolation. </p>
<p>They are the least powerful players in the “value chain” that runs from cows to customers via importers, processors and supermarkets. </p>
<p>Neither government intervention nor higher retail prices can do much to help them.</p>
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Read more:
<a href="https://theconversation.com/low-milk-prices-unearth-the-supply-chains-dirty-secrets-45205">Low milk prices unearth the supply chain's dirty secrets</a>
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<img src="https://counter.theconversation.com/content/112145/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Dairy farmers’ incomes are dependent on so much more than the retail price of fresh milk.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1053002018-10-23T19:15:36Z2018-10-23T19:15:36ZSupermarkets are not milking dairy farmers dry: the myth that obscures the real problem<p>Australia’s federal agriculture minister, David Littleproud, has called for a boycott of supermarket-branded milk. He is angry about lack of support for a <a href="https://www.abc.net.au/news/2018-10-15/coles-aldi-blasted-over-10c-milk-levy-to-help-farmers-in-drought/10376416">“milk levy” of 10 cents a litre</a> wanted by the dairy industry to support drought-stricken farmers. </p>
<p>Fellow National Party colleagues have <a href="https://insidefmcg.com.au/2018/10/18/deputy-pm-open-to-royal-commission-into-supermarkets/">called for</a> nothing less than a royal commission into the supermarkets’ support for farmers. Nationals leader, and deputy prime minister, Michael McCormack, has said he is open to the idea.</p>
<p>Amid intense <a href="https://www.abc.net.au/news/2017-10-25/wesfarmers-results-cost-cutting-slows-coles-sales-growth/9083406">price competition</a> across many supermarket categories, the price of milk stirs passions like nothing else. </p>
<p>But calls to boycott supermarket-branded milk are misguided; and a royal commission would not be money well-spent.</p>
<p>The widely held belief that supermarkets are hurting dairy farmers by driving down the price of milk is incorrect. </p>
<p>It overlooks basic supply chain dynamics and the findings of the 18-month-long inquiry by the Australian Competition and Consumer Commission, which was ordered by then federal treasurer Scott Morrison to investigate the low milk prices paid to dairy farmers.</p>
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Read more:
<a href="https://theconversation.com/helping-farmers-in-drought-distress-doesnt-help-them-be-the-best-105281">Helping farmers in drought distress doesn't help them be the best</a>
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<h2>Indirect relations</h2>
<p>Looking at the supply chain for fresh milk helps show why the retail price of supermarket-branded milk does not determine the price paid to farmers as some claim. </p>
<p>There are many players within a <a href="http://www.agriculture.gov.au/SiteCollectionDocuments/ag-food/food/national-food-plan/submissions-received/foodmap-an-analysis-of-the-australian-food-supply-chain-30-july.pdf">food supply chain</a>: producers, processors, wholesalers, retailers and consumers. </p>
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<a href="https://images.theconversation.com/files/241784/original/file-20181023-169816-xw6s3p.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/241784/original/file-20181023-169816-xw6s3p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/241784/original/file-20181023-169816-xw6s3p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=328&fit=crop&dpr=1 600w, https://images.theconversation.com/files/241784/original/file-20181023-169816-xw6s3p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=328&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/241784/original/file-20181023-169816-xw6s3p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=328&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/241784/original/file-20181023-169816-xw6s3p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=412&fit=crop&dpr=1 754w, https://images.theconversation.com/files/241784/original/file-20181023-169816-xw6s3p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=412&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/241784/original/file-20181023-169816-xw6s3p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=412&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Fresh dairy supply chain volume map:</span>
<span class="attribution"><a class="source" href="http://www.agriculture.gov.au/SiteCollectionDocuments/ag-food/food/national-food-plan/submissions-received/foodmap-an-analysis-of-the-australian-food-supply-chain-30-july.pdf">Department of Agriculture, Fisheries and Forestry</a></span>
</figcaption>
</figure>
<hr>
<p>Dairy farmers typically sell their milk to processors, who then sell to supermarkets. There is a relationship between the supermarket and processor, not supermarket and farmer. Whether the supermarket sells a litre of milk at $2, $3 or $4 has no direct relationship on the price the processor pays to the farmer.</p>
<p>In the words of <a href="https://www.accc.gov.au/publications/dairy-inquiry-final-report">the final report</a> of the competition watchdog’s Dairy Inquiry, “the farm-gate price paid to farmers for milk used to fulfil private label milk contracts is not directly correlated with private-label milk retail prices”.</p>
<h2>Blame dairy processors</h2>
<p>The ACCC’s report does identify a range of market failures due to bargaining power imbalances and information asymmetry, but these are crucially between dairy farmers and processors. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/murray-goulburn-and-fonterra-are-playing-chicken-with-dairy-farmers-59595">Murray Goulburn and Fonterra are playing chicken with dairy farmers</a>
</strong>
</em>
</p>
<hr>
<p>Dairy farmers’ weak bargaining power means any higher price paid by supermarkets to processors would not necessarily result in higher farm-gate prices. The ACCC report notes that farmers get no more money for the milk that is sold at higher retail prices (such as branded milk). </p>
<p>Processors, not supermarkets, set farm-gate prices in response to market conditions (global and domestic demand), at the minimum level required to secure necessary volumes. Farmers are not paid according to the type or value of the end product their milk is used in. They are paid the same price for their raw milk regardless of what brand goes on the container. </p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/241787/original/file-20181023-169831-1kibwcv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/241787/original/file-20181023-169831-1kibwcv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/241787/original/file-20181023-169831-1kibwcv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=354&fit=crop&dpr=1 600w, https://images.theconversation.com/files/241787/original/file-20181023-169831-1kibwcv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=354&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/241787/original/file-20181023-169831-1kibwcv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=354&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/241787/original/file-20181023-169831-1kibwcv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=445&fit=crop&dpr=1 754w, https://images.theconversation.com/files/241787/original/file-20181023-169831-1kibwcv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=445&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/241787/original/file-20181023-169831-1kibwcv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=445&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Distribution of revenue from sale of private label vs branded fresh drinking milk:</span>
<span class="attribution"><a class="source" href="https://www.accc.gov.au/system/files/1395_Dairy%20inquiry%20final%20report.pdf">ACCC Dairy Inquiry</a></span>
</figcaption>
</figure>
<hr>
<h2>Also blame consumers</h2>
<p>Supermarkets are under pressure to keep food prices low, particularly on staples such as bread, milk and eggs. This is evident from the fact that campaigns to get shoppers to exercise their power as ethical consumers quickly run out of steam. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/we-are-what-we-eat-the-demise-of-the-ethical-grocery-shopper-3698">We are what we eat: the demise of the ethical grocery shopper</a>
</strong>
</em>
</p>
<hr>
<p>In April 2016, for example, national attention on the plight of dairy farmers led to a campaign encouraging shoppers <a href="https://www.abc.net.au/news/2016-05-19/consumers-respond-to-fb-plea-to-stop-buying-discount-milk/7429390">to leave “supermarket branded milk”</a> on the shelves. In a single month the supermarket brands’ share of milk sales dropped from 66% to 51%. Then it began to rise again. Within a year it was <a href="https://www.abc.net.au/news/2017-04-27/why-we-have-started-buying-cheap-milk-again/8475424">back to nearly 60%</a>.</p>
<hr>
<p><iframe id="NyTIZ" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/NyTIZ/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<h2>Adding to confusion</h2>
<p>While a milk levy to directly help farmers during the drought <a href="https://www.abc.net.au/news/2018-09-03/would-you-pay-a-10-cents-a-litre-drought-levy-on-milk/10194612">has many supporters</a>, the disconnect within the supply chain means it is near impossible for retailers to pass the money directly to the intended beneficiaries. That, again, depends on those who buys the milk from the farmers – the processors.</p>
<p>Despite this, and because the ACCC inquiry’s findings have so far done little to dispel myths about the price of milk, retailers such as Woolworths have seen it as prudent to embrace the levy idea and publicly demonstrate support for dairy farmers. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/time-to-get-regulation-back-into-australian-dairy-59920">Time to get regulation back into Australian dairy?</a>
</strong>
</em>
</p>
<hr>
<p>All the additional proceeds from its <a href="https://www.woolworthsgroup.com.au/page/media/Latest_News/woolworths-drought-relief-milk-range-to-hit-the-shelves-this-week/">“Drought Relief” milk</a> go back to processor Parmalat, who is responsible for distributing the money to suppliers in drought-affected areas. Coles, meanwhile, has slapped a 30 cent levy on its three-litre milk containers, with the funds going to the <a href="https://www.coles.com.au/corporate-responsibility/supporting-aussie-farmers/drought">Coles Drought Relief Fund</a>.</p>
<p>These measures arguably add to continuing confusion about how the milk market works and the relationship between farm-gate and retail prices.</p>
<p>In the court of public opinion the supermarkets probably had no option but to go along with the charade. </p>
<p>A minister for agriculture, however, should know better.</p><img src="https://counter.theconversation.com/content/105300/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Mortimer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Calls to boycott supermarket-branded milk are misguided; and a royal commission into treatment of dairy farmers would be money wasted.Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/929962018-03-07T05:25:15Z2018-03-07T05:25:15Z‘Down down’ and ‘cheap cheap’ are gone gone: why supermarkets are moving away from price<figure><img src="https://images.theconversation.com/files/209274/original/file-20180307-146691-1t7au5j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coles was once the market leader thanks to its 'down down' low pricing marketing. </span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>On January 26, 2011, Coles fired the first shot in what would soon be dubbed the <a href="http://localejournal.org/issues/n2/Locale%20n2%20-%2007%20-%20Keith.pdf">“supermarket price wars”</a> by reducing the price of its own-brand milk to A$1 per litre. Woolworths fired back, triggering seven years of intense price competition. </p>
<p>But now Coles has waved the white flag, indicating a move away <a href="http://www.afr.com/business/retail/coles-shows-its-softer-side-as-living-costs-bite-20180306-h0x2gc">from price-based marketing</a>, to a focus on other attributes, such as sustainability, local produce and community. </p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/ybo2S0R0XEk?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Coles’ new ad campaign.</span></figcaption>
</figure>
<p>Research shows if price is the main selling point, <a href="https://www.canstarblue.com.au/food-drink/stores/supermarkets/">shopper loyalty decreases</a> and customers become more conscious of price. Price wars are also <a href="https://theconversation.com/predicting-the-last-brand-standing-in-the-supermarket-price-wars-32556">costly for retailers</a>.</p>
<p>While operational costs (wages, rent, bills) remain fixed or go up, prices can’t keep coming down. You eventually run out of margin.</p>
<p>Coles recent <a href="http://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-half-year-results-announcement.pdf?sfvrsn=0">half yearly results</a> reflect this, with a drop in earnings of 14.1% from A$920 million to A$790 million. </p>
<p>In contrast, Woolworths announced an 11.1% increase in earnings for <a href="https://www.woolworthsgroup.com.au/icms_docs/189600_2018-half-year-results-presentation.pdf">their supermarket business</a>. But Woolworths dropped their “cheap, cheap” price cutting campaign <a href="https://mumbrella.com.au/woolworths-ditches-cheap-cheap-in-favour-of-new-always-at-woolworths-tagline-325378">nearly two years ago</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/down-down-but-not-different-australias-supermarkets-in-a-race-to-the-bottom-48151">Down, down but not different: Australia's supermarkets in a race to the bottom</a>
</strong>
</em>
</p>
<hr>
<p>Other retailers also get caught in the cross fire of price cutting. Case in point is Aussie Farmers Direct, which fell into administration this week <a href="https://www.aussiefarmers.com.au/">saying they were</a>:</p>
<blockquote>
<p>…no longer able to compete against the domination of the major two supermarkets.</p>
</blockquote>
<p>While it may be overly simplistic to blame the two big supermarkets for the downfall of Aussie Farmers Direct, price conscious consumers and thin grocery margins certainly contributed. </p>
<h2>How this strategy came about</h2>
<p>Supermarkets are now looking beyond price to stand out. </p>
<p>Both Coles and Woolworths are very similar in the brands they offer, prices, layouts, weekly specials and online channels. The move away from price gets shoppers thinking about what is unique to each chain. </p>
<p>So, rather than price, the focus has shifted to <a href="https://www.woolworthsgroup.com.au/page/media/Press_Releases/Free_Fruit_for_Kids_at_Woolworths/">service quality, social programs</a> and <a href="https://www.coles.com.au/sfs/assets">connecting with the community</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/unit-pricing-saves-money-but-is-the-forgotten-shopping-tool-61379">Unit pricing saves money but is the forgotten shopping tool</a>
</strong>
</em>
</p>
<hr>
<p>Shoppers who are continually exposed to loyalty program logos, may eventually stop noticing these logos, or “switch off”. This is because of a behavioural tendency called <a href="https://www.verywellmind.com/what-is-habituation-2795233">“habituation”</a>. </p>
<h2>What these new strategies are trying to sell</h2>
<p>So, if Coles are no longer selling themselves on price, what are they selling?</p>
<p>Coles’ new approach is more subtle, selling themselves through aspirational stories and employing <a href="https://www.designsociety.org/publication/34585/a_theory_of_affective_experience">classic advertising techniques</a> to do it. </p>
<p>These techniques are used in advertising to convey positive feelings and emotions associated with a particular experience. A simple way to achieve this in advertising is to feature people telling their own stories – as seen in the new Coles advert launched this week. </p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/M3bbQGSw1kg?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Woolworths ad campaign.</span></figcaption>
</figure>
<p>With the Commonwealth Games near, both supermarkets are also featuring sports stars in their marketing. Woolworths <a href="https://mumbrella.com.au/woolworths-features-apple-hungry-wheelchair-athlete-in-first-commonwealth-games-ads-500319">new campaign features</a> athletes and their connection with fresh food, positions the company, once again, as “Australia’s Fresh Food People”.</p>
<p>Meanwhile, Coles have partnered with Uncle Toby’s for their <a href="https://www.coles.com.au/sfs/assets">Sports for Schools</a> campaign. Their advertisements feature an array of young, fit, attractive and successful athletes linking the athletic success with the purchase of products from Coles.</p>
<p>By moving away from price and focusing on a story telling strategy, both supermarkets can engage consumers with a process called <a href="https://books.google.com.au/books?id=gWfVlJAp31wC&pg=PA292&lpg=PA292&dq=Internalization+endorser%E2%80%99s+position+on+an+issue+as+their+own&source=bl&ots=etMsCJ8v2H&sig=SSVql3GEe9bYINgh1T0TDjOYjA8&hl=en&sa=X&ved=0ahUKEwiG86fNmNnZAhWoiVQKHRkmCXsQ6AEIJzAA#v=onepage&q=Internalization%20endorser%E2%80%99s%20position%20on%20an%20issue%20as%20their%20own&f=false">“internalisation”</a>. This is where people accept the endorser’s position on an issue as their own. </p>
<p>Internalisation is a powerful psychological mechanism because even if the source used in the campaign is forgotten, the internalised attitude usually remains. Price doesn’t create this effect. </p>
<p>While food prices won’t necessarily go up any time soon, consumers shouldn’t expect to see any further significant price drops. Instead, Coles and Woolworths will draw attention to other important attributes. </p>
<p>Faced with the expansion of Aldi <a href="https://corporate.aldi.com.au/fileadmin/fm-dam/pdf/Press_Release/2016/ALDI_Media_Release_2016_Business_Update_311016__for_website__11_.pdf">across South Australia and Western Australia</a> and <a href="https://www.smartcompany.com.au/industries/retail/kaufland-australia-hiring-local-staff/">the entry of German supermarket Kaufland</a>, Coles has recognised they can’t keep fighting a battle on price alone.</p><img src="https://counter.theconversation.com/content/92996/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Coles plans to compete with competitors by moving away from low prices to a focus on other attributes, such as sustainability, local produce and community.Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of TechnologyLouise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/599202016-05-26T20:09:06Z2016-05-26T20:09:06ZTime to get regulation back into Australian dairy?<figure><img src="https://images.theconversation.com/files/124062/original/image-20160526-17526-qc8l5v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Australian dairy industry could consider a regulation model like that in Canada.</span> <span class="attribution"><span class="source">Deb Hultgren/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>The Australian government’s <a href="https://theconversation.com/murray-goulburn-and-fonterra-are-playing-chicken-with-dairy-farmers-59595">intervention in the dairy crisis</a> by offering concessional loans to struggling farmers has prompted suggestions that other types of regulation - <a href="http://www.abc.net.au/news/2016-05-25/richard-di-natale-indicates-support-for-milk-floor-price/7446548">such as a dairy floor price</a> - might be needed.</p>
<p>The dairy <a href="https://theconversation.com/murray-goulburn-saga-has-roots-in-deregulation-59607">industry was deregulated</a> more than a decade ago; perhaps it’s time Australia looked to other countries for models to fix the system.</p>
<p>The current situation facing the Australian dairy industry is <a href="https://theconversation.com/milk-price-cuts-reflect-the-reality-of-sweeping-changes-in-global-dairy-market-59251">the same the world over</a>. 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. </p>
<p>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. </p>
<p>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.</p>
<p>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. </p>
<p>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. </p>
<p>What is the <a href="https://www.dairyfarmers.ca/what-we-do/supply-management">supply management model</a>? 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. </p>
<p>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. </p>
<p>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. </p>
<p>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 <a href="http://www.theaustralian.com.au/national-affairs/farmers-taste-coles-milk-deal--and-its-a-little-sour/news-story/a5275d850175d0f78d2de135a5a045a5?memtype=anonymous">infamous A$1.00 per litre</a> – A$4.00 for Canada’s four litre container, and have done so for years.</p>
<p>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. </p>
<p>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.</p>
<p>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.</p>
<p>The situation in Victoria could well <a href="http://www.abc.net.au/news/2016-05-16/selling-the-family-dairy-farm/7412828">come to that of New Zealand’s</a>, 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. </p>
<p>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.</p>
<p>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.</p>
<p>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: </p>
<blockquote>
<p>“We will wait and see and hang on for dear life.” </p>
</blockquote>
<p>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? </p>
<p>As one Queensland interviewee emphatically instructed me about Canada’s model:</p>
<blockquote>
<p>“Don’t give away [the] regulated system!”</p>
</blockquote>
<p>Now is the time for Victoria to consider the advice of this farmer and introduce more regulation.</p><img src="https://counter.theconversation.com/content/59920/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Muirhead receives funding from Egg Farmers of Canada, which is a supply managed sector. This said, I have total academic freedom to use this funding as I see fit. It is held by the University of Waterloo and I must abide by all ethical and academic regulations governing its use.</span></em></p>Government intervention in the crisis facing Australian dairy has opened the gates for suggestions of other types of regulation.Bruce Muirhead, Professor of History and the Associate Vice President, External Research , University of WaterlooLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/596072016-05-24T23:13:49Z2016-05-24T23:13:49ZMurray Goulburn saga has roots in deregulation<p>The history of the dairy cooperative Murray Goulburn and its farmer suppliers shows how a close relationship of trust has developed and been broken with the collapse of the farmgate milk price. Roots of the current crisis can be traced all the way back to the deregulation of the dairy industry at the start of the century.</p>
<p>Murray Goulburn was founded in Victoria in 1950 and grew steadily over the next two decades to become the nation’s largest dairy company by 1973. In its <a href="http://www.mgc.com.au/media/28754/MG-Annual-Report-2015.pdf">2015 annual report</a>
it recorded total assets of over A$1.84 billion and total revenues of A$2.88 billion. It holds a large portion of the dairy market, in 2016 it was estimated by <a href="http://www.ibisworld.com.au/industry/industryreports.aspx?indtid=87&indpid=2086">IBISWorld</a> to have just over 42% of the national market for milk powder and 31% of the national market for milk and cream.</p>
<p>Over half its revenue comes from exports, primarily into Asia. It’s also the nation’s <a href="http://www.ibisworld.com.au/car/default.aspx?entid=1103">largest buyer of raw milk</a>, employing around 2,400 people and with approximately 2,500 members.</p>
<h2>Deregulation and the “keystone” role of cooperatives</h2>
<p>The deregulation of the Australian dairy sector started in 1999 and rolled out over the following year. It saw the repeal of existing state legislation regulating the supply and pricing of milk. </p>
<p>The impact of this deregulation was mixed across Australia but it led to the decline in the total number of dairy farmers, from around 10,000 in 2000 to about 6,061 in 2016. It is likely to fall even more over coming years.</p>
<p>Despite increases in the overall size of dairy farms, most remain small-scale, family owned businesses. Dairy farming requires higher levels of capital investment than most other agricultural sectors, with major expenses being automated milking machines.</p>
<p>Milk is now essentially a global commodity and dairy farmers are price takers. With the need to invest more into capital equipment, fuel and stock feed, profit margins in the sector have been squeezed. </p>
<p>Over the past five years the average profit margin for dairy farms has fallen. Any decline in the farmgate milk price will only put many producers into unsustainable losses unless they can increase economies of scale by having larger herds or lower input costs. </p>
<p>Another consequence of the deregulation of the dairy industry has been the decline in cooperatives. The Dairy Farmers Cooperative was sold to National Foods (now Lion) in 2008, and Bega Cheese demutualised in 2011 and listed on the ASX. Today there are about nine dairy cooperatives active in Australia, the largest of these are Murray Goulburn and Norco Ltd from northern NSW. </p>
<p>Cooperatives like Murray Goulburn are different from other businesses. The cooperative should be focused primarily on its members’ welfare and as such it is unusual for them to be able to satisfy the often competing interests of members as patrons and outside investors from the ASX.</p>
<p>A well-run cooperative can be sustainable and profitable. It can serve as a “keystone” business that helps sustain its members. Keystone businesses are those firms that serve as a major buyer or supplier for many smaller “niche” firms, helping to keep the smaller firms more sustainable for an entire industry. </p>
<p>The approach taken in terms of milk supply and pricing is an example. Since the dereguation of the dairy industry Murray Goulburn has effectively set the farmgate milk price across most of the Australian dairy sector. It also takes all the milk its members wish to supply.</p>
<p>This stabilising and coordinating or “keystone” role within the dairy industry has been a feature of Murray Goulburn since market deregulation. Given the size of the cooperative anything that might affect its long term operations will have significant impact on the Australian dairy industry. </p>
<h2>The issue of trust in a cooperative</h2>
<p>Cooperative enterprises are owned by their members who also have a trading or patronage relationship with them. What differentiates them from other businesses is the democratic governance of the business, with member-owners having a say in major strategic decisions. </p>
<p>Management of a cooperative is therefore more complex and the board and executive leadership team must maintain the trust and loyalty of the members to keep the business strong. They also need to balance the member’s interests as suppliers (patrons) and as investors, while encouraging them to see themselves as owners of the cooperative and members of a <a href="http://www.cemi.com.au/node/541">community of purpose</a>. </p>
<p>The financial strength of the cooperative is only as important as the financial strength of its members. To survive the cooperative must maintain a clear social and economic purpose with the members’ interests first and foremost.</p>
<p>Gary Helou, then CEO, was part of a new management team brought into Murray Goulburn in 2011 to modernise and strengthen the cooperative’s leadership. However, his management style appears to have been more in keeping with that of a regular firm.</p>
<p>Recent <a href="http://www.smh.com.au/business/murray-goulburn-milk-farce-why-werent-the-farmers-told-20160513-gouoqq.html">revelations by Fairfax Media</a> suggest that Helou and the senior management of Murray Goulburn had evidence of declining export sales as early as July last year. However, they continued to promise farmers a “guaranteed” high farmgate milk price and share price.</p>
<p>Although a capital restructure at Murray Goulburn was endorsed by the board it raised some concerns in the financial press and among <a href="http://www.weeklytimesnow.com.au/agribusiness/dairy/former-mg-chairmen-concerned-for-future-of-coop/story-fnkeqg0i-1226924052204">former directors</a>. The financial crisis that the cooperative has found itself in is something of a self-inflicted wound. </p>
<p>It has sought to “<a href="http://www.cemi.com.au/node/553">walk both sides of the street</a>” with its ASX listing and overconfident pronouncements of keeping the farmgate milk price at around $6 per kg/MS. </p>
<p>Dairy farmers who are or once were members and shareholders have lost money. Many retired farmers who had their preference shares converted to the ASX listed ordinary shares have seen the value of their stock collapse. For their younger active counterparts the loss of share value is compounded by the lower milk price with many facing debts of A$100,000 to A$120,000. </p>
<p>Former CEO Gary Helou and former CFO Brad Hingle have departed Murray Goulburn leaving the cooperative’s board and Chairman Philip Tracy to face down angry farmers and shareholders, plus a class action led by legal firm Slater and Gordon. </p>
<p>Murray Goulburn’s members have been essentially turned from owners and members of a democratic community of purpose, into suppliers and investors whose share value is linked to the price of a litre of milk. That’s where the problem lies.</p>
<p>This is not necessarily the end of Murray Goulburn, however, they will need to regain the trust of their members and demonstrate that as a cooperative their primary focus is on the well-being of their farmer members. </p>
<p>As a business it must be frugal and focused on delivering its members the best prices at the lowest costs it can. Any investment and growth should be designed to provide its members with the best long term returns to their businesses as suppliers or buyers, not just to see the value of its share capital appreciate.</p>
<p>Of equal importance is the cooperative’s ability to keep its members loyal not just through the prices or dividends that it offers, but because they feel a sense of ownership and being part of a community of purpose that would be lost if the cooperative disappeared.</p><img src="https://counter.theconversation.com/content/59607/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tim Mazzarol receives funding from the Australian Research Council (ARC), Co-operative Bulk Handling Ltd and the Business Council of Co-operatives and Mutuals (BCCM). He is also the Director of the Co-operative Enterprise Research Unit (CERU) at the University of Western Australia.</span></em></p>The break up of trust between dairy farmers and Murray Goulburn can be tracked back to the degregulation of the dairy industry.Tim Mazzarol, Winthrop Professor, Entrepreneurship, Innovation, Marketing and Strategy, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/597402016-05-24T20:11:15Z2016-05-24T20:11:15ZDairy farmers are being ‘milked dry’, but let’s remember the real cost of milk<figure><img src="https://images.theconversation.com/files/123714/original/image-20160524-20557-2ua3db.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The dairy industry faces a number of welfare and environmental issues. </span> <span class="attribution"><span class="source">Cow image from www.shutterstock.com</span></span></figcaption></figure><p>The Australian dairy farming industry is in a <a href="https://theconversation.com/milk-price-cuts-reflect-the-reality-of-sweeping-changes-in-global-dairy-market-59251">state of crisis</a>. Cheap dairy products and fluctuations in both the domestic and global markets have taken a financial toll on farmers. <a href="http://tenplay.com.au/channel-ten/the-project/extra/season-7/milked-dry">Consumers have rallied</a> to help struggling dairy producers. </p>
<p>But this is only half the problem. The true cost of dairy is also paid by dairy cows and the environment. </p>
<h2>Welfare problems</h2>
<p>Despite the idyllic image of outdoor farming, <a href="http://www.sciencedirect.com/science/article/pii/016815919400538P">several industry practices negatively affect dairy cows</a>. To meet production demands, dairy cows are subject to a continuous cycle of impregnation, induced calving and milking. </p>
<p>Tail-docking and horn removal are routinely performed without pain relief. Lameness is another major animal welfare problem, often the result of environmental pressures, such as tracks, herd size and handling. The average lifespan of a dairy cow is six to seven years, whereas generally cows can live for 20 to 25 years. </p>
<p>One of the most controversial issues is <a href="http://kb.rspca.org.au/what-happens-to-bobby-calves_87.html">young “bobby” calves</a>. A bobby calf is a newborn calf, less than 30 days old, who has been purposely separated from their mother. Immediately after <a href="https://www.researchgate.net/profile/Daniel_Weary/publication/12413844_Effects_of_early_separation_on_the_dairy_cow_and_calf_1._Separation_at_6_h_1_day_and_4_days_after_birth/links/09e4150f727fd0d2e5000000.pdf">separation</a>, cow and calf call out and search for each other. </p>
<p>Most bobby calves are slaughtered within the first week of their life. Handling and transport pose added problems for young calves who have not developed herding behaviours, are vulnerable to stress, and are forced to go without their mother’s milk. Each year, 450,000 bobby calves are slaughtered. </p>
<p>Advocacy groups frequently uncover the routine <a href="http://www.animalsaustralia.org/investigations/dairy-calf-cruelty-investigation/">abuse</a> of bobby calves in Australian abattoirs and <a href="http://www.alv.org.au/cow-truth/">challenge</a> the dairy industry to do something about it. </p>
<p>Yet aside from the wider ethical questions over the use and exploitation of animals, farmers are not legally doing anything wrong. This is because the treatment of animals operates in a legal context where animals are considered absolute property. </p>
<p>What’s more, farm animals are <a href="http://bawp.org.au/wp-content/uploads/2013/07/eBook-FINAL.pdf">exempt from the provisions of anti-cruelty legislation</a>. Codes of practice are practically useless, because they promote low welfare standards and are unenforceable. </p>
<h2>The environmental impact</h2>
<p>As well as systematic welfare problems, livestock farming is, both directly and indirectly, one of the most ecologically harmful human activities. The <a href="http://www.mla.com.au/About-MLA/Cattle-sheep-goat-industries/Industry-overview">Australian livestock sector</a> is worth A$17 billion and dairy cattle farming is a A$4.2 billion industry. </p>
<p>In Australia, livestock farming accounts for <a href="http://www.agriculture.gov.au/ag-farm-food/climatechange/australias-farming-future/livestock-emissions">10% to 16% of greenhouse gas emissions</a>, with dairy farms contributing <a href="http://agriculture.vic.gov.au/agriculture/dairy/emissions-in-dairy">19% of this, or 3% of total emissions</a>. Methane emissions, from digestion and manure, and nitrous oxide from livestock are <a href="http://www.fao.org/agriculture/lead/themes0/climate/en/">significant contributors</a>. Globally, the livestock sector is responsible for more greenhouse gases than the world’s transport. </p>
<p>Livestock production accounts for 70% of all agricultural land, including the land used to grow crops to feed these animals. Animal agriculture is a <a href="http://www.fao.org/docrep/010/a0701e/a0701e00.HTM">key factor</a> in land degradation, deforestation, water stress, pollution, and loss of biodiversity. </p>
<p>Livestock farming will also be affected by climate change, particularly changes in temperature and water. The quantity and quality of pasture and forage crops will also be affected. Diseases may increase due to fluctuating weather and climate.</p>
<h2>Emissions can be reduced</h2>
<p>Just as the energy sector is attempting to transition to low-carbon energy sources to tackle climate change, the agricultural sector needs to transition to an ethical <em>and</em> sustainable alternative. </p>
<p>From the current crisis, there are several opportunities for farmers to seize. <a href="https://www.researchgate.net/profile/Brett_Bryan/publication/284812321_Scenarios_for_Australian_agricultural_production_and_land_use_to_2050/links/566c8fcf08ae1a797e3d97be.pdf">Large transitions</a> are possible in land use, production, output and profitability. </p>
<p>Places such as Gippsland in Victoria, which currently produces 19% of Australia’s dairy, have the <a href="http://rdagippsland.com.au/agriculture-industry-transformation-gippsland/">opportunity for agricultural development</a> based on apples and brassicas, such as broccoli, kale, cauliflower, cabbage, turnip and mustard. Some of these crops are already popular in the region. As a result of climate change and increasing temperatures, some areas will be more suitable than others. </p>
<p>While still in the stages of research, perennial grain crops – which store more carbon, maintain better soil and water quality, and manage nutrients better than annuals – have the potential to contribute to sustainable agriculture. New land uses could also include carbon plantings, <a href="https://theconversation.com/explainer-what-are-biofuels-12907">biofuels and bioenergy crops</a>. Investing into further research for alternatives to livestock farming is needed. </p>
<p>Some have argued that <a href="http://www.abc.net.au/news/2016-03-22/csiro-says-emissions-can-be-cut-with-no-loss-in-livestock/7266640">livestock emissions can be technically mitigated</a> by modifying animal feed, better managing pastures, carbon sequestration and manure storage. </p>
<h2>Welfare issues remain</h2>
<p>But technical mitigation does not address the endemic animal welfare problems in the livestock industry. </p>
<p>Consumer demand is one of the most powerful strategies to combat animal welfare and environmental problems. <a href="http://researchrepository.murdoch.edu.au/16577/1/land_based_greenhouse_gas_mitigation.pdf">Research shows</a> that we must reduce food waste and losses in the supply chain and change our diets toward less resource-intensive diets, such as a plant-based diets. <a href="https://theconversation.com/going-veggie-would-cut-global-food-emissions-by-two-thirds-and-save-millions-of-lives-new-study-56655">Doing so would cut emissions by two-thirds and save lives</a>. It’s possible to eliminate animal suffering and reduce carbon emissions by reducing and replacing livestock production and consumption.</p>
<p>Alternatives to dairy milk include soy and almond milk. Soy milk is <a href="https://theconversation.com/soy-versus-dairy-which-milk-is-better-for-you-9379">nutritionally comparable</a> to dairy milk and has a significantly <a href="https://theconversation.com/soy-versus-dairy-whats-the-footprint-of-milk-8498">smaller environmental footprint</a>. </p>
<p>Policy initiatives also need to address these issues. The Food and Agriculture Organization’s <a href="http://www.fao.org/docrep/010/a0701e/a0701e00.HTM">Livestock’s Long Shadow</a> report recommends a policy approach that correctly prices natural resources to reflect the full environmental costs and to end damaging subsidies. In the interim, <a href="http://www.theguardian.com/environment/2015/nov/24/meat-tax-far-less-unpalatable-than-government-thinks-research-finds">higher taxes on meat</a> and other livestock products will be necessary to improve public health and combat climate change. </p>
<p>Denmark, for instance, is considering proposals raise the tax on meat, after its ethics council concluded that “<a href="http://www.independent.co.uk/news/world/europe/denmark-ethics-council-calls-for-tax-on-red-meat-to-fight-ethical-problem-of-climate-change-a7003061.html">climate change is an ethical problem</a>”.</p>
<p>Governments everywhere need to have a transitional plan for livestock producers and workers – one that helps to cultivate the ethical and sustainable agricultural endeavours of the future.</p><img src="https://counter.theconversation.com/content/59740/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gonzalo N Villanueva does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The dairy industry faces a number of welfare issues, and is a major contributor to greenhouse gases.Gonzalo N Villanueva, PhD Candidate, School of Historical and Philosophical Studies, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/595952016-05-22T20:06:39Z2016-05-22T20:06:39ZMurray Goulburn and Fonterra are playing chicken with dairy farmers<figure><img src="https://images.theconversation.com/files/123124/original/image-20160519-22310-19bce32.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Dairy giants Murray Goulburn and Fonterra competed in a race to the bottom.</span> <span class="attribution"><span class="source">cskk/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>Dairy giants Murray Goulburn and Fonterra <a href="http://www.gametheory.net/dictionary/games/GameofChicken.html">played a dangerous game of chicken</a> by hanging onto high milk prices despite the global dairy market volatility. Even though both cooperatives are shifting responsibility to each other for the fall in milk prices, which is pushing dairy farmers to the brink, they are both at fault for their race to the bottom. Now both will have to work hard to win back the trust of farmers. </p>
<p>The two companies, both cooperatives (although Fonterra has most of its members in New Zealand) compete head-to-head for farmer suppliers in Australia. Fonterra is the world’s largest dairy exporter accounting for about 40% of global dairy trade and is the fourth largest dairy company behind Nestle, Danone and Lactalis with an annual gross revenue of A$17.61 billion, and 1200 suppliers in Victoria, Tasmania and South Australia. By contrast Murray Goulburn has annual sales revenues of A$2.87 billion, 9% of the global trade market and has 2500 suppliers in Victoria and Tasmania. </p>
<p>Since 2005, when Fonterra purchased Bonlac the two companies have fought for suppliers in Australia and grown their respective businesses to meet increasing global demand for dairy product. Their resulting pricing models to farmers were assured while dairy prices continued to rise. Farmers accepted claw back provisions - it was never thought that they would be invoked - and the companies accepted loose contractual obligations to supply. The competitive environment that ensued, from which dairy farmers benefited meant that neither company was able to hold the mantle of market leader for long. </p>
<p>The game of chicken was on as <a href="https://www.fonterra.com/nz/en/Hub+Sites/News+and+Media/Media+Releases/FONTERRA+FORECASTS+TOTAL+PAYOUT+AVAILABLE+TO+FARMERS+FOR+201516+AND+ANNOUNCES+FONTERRA+CO-OP+SUPPORT">early as August, 2015</a> when Fonterra began reducing its advance payments to New Zealand dairy farmers). Throughout the following eight months Murray Goulburn and Fonterra steadfastly sat behind their respective wheels committed to hanging tough. Much was at stake.</p>
<p>For both cooperatives a reduction in advance payments to their suppliers in March, or earlier would have saved them considerable reputational risk, and in many cases reduced the exposure of dairy farmers to financial failure. Instead they chose not to swerve, but to hang tough, failing to ignore the <a href="https://theconversation.com/milk-price-cuts-reflect-the-reality-of-sweeping-changes-in-global-dairy-market-59251">significant decline in global prices</a>, for which they both appeared oblivious. </p>
<p>While Murray Goulburn swerved first by lowering the milk solid price, they did so far too late. Fonterra swerved last, but by then the events in the international market had raced past the game – leaving both companies’ suppliers stranded with the over-payment problem from which they now suffer. Recklessly both cooperatives thought they could run the gauntlet with global dairy. That they actually did so for eight months is testimony to the merits of market competition. </p>
<p>Where to now for the two beleaguered companies and suffering dairy farmers? The benchmark for corporate behaviour and accepting responsibility for ‘bad’ outcomes was <a href="http://iml.jou.ufl.edu/projects/Fall02/Susi/tylenol.htm">set by Johnson & Johnson in 1982</a>. </p>
<p>The handling of the Tylenol crisis, where a series of poisoning deaths resulted from drug tampering, set the standard for corporate ethics against which all other subsequent behaviours can be compared. Johnson & Johnson took responsibility, took action and set about the recovery – despite not being responsible for the tampering of their product on shop shelves in Chicago. </p>
<p>It will be through remedial behaviour by each of the dairy giants over the next months that these cooperatives will re-cement their relationships with suppliers, as they both try to win over farmers and gain disproportionate market share at the others’ expense. The outcome both cooperatives have been seeking since Fonterra’s market entry in 2005. </p>
<p>Fonterra have reiterated the view that they warned farmers that the price paid did not <a href="https://www.fonterra.com/wps/wcm/connect/Fonterra_NewZealand_en/Fonterra/Hub%20Sites/News%20and%20Media/Media%20Releases/FONTERRA%20AUSTRALIA%20REVISES%20MILK%20PRICE%20FOR%20MAY%20AND%20JUNE%202016%20AND%20INTRODUCES%20SUPPORT%20LOAN/FONTERRA%20AUSTRALIA%20REVISES%20MILK%20PRICE%20FOR%20MAY%20AND%20JUNE%202016%20AND%20INTRODUCES%20SUPPORT%20LOAN?pageID=Z6QReDePPO8MIDC3JD2JM4CLHCGJMG6GPO4JM4733DIJM46G1DCJIT65BEC3OK6J1">reflect the collapse in global dairy prices</a> yet appear to have left the responsibility to them to manage. </p>
<p>Worse, Fonterra’s CEO, Theo Speirings, has now <a href="http://www.radionz.co.nz/news/rural/304226/fonterra-'robbing-from-australia-to-help-nz'">defended the price cut</a> on the grounds that their strategy is to repatriate profit for the benefit of their New Zealand shareholders. This overlooks that the majority that of tradeable shares are held by Australian superannuation funds and that Fonterra’s Australian suppliers had to be subsidising their New Zealand counterparts. How else do you explain the 30% increase in farm gate price on this side of the Tasman? </p>
<p>By contrast Murray Goulburn’s behaviour, especially that towards their suppliers, appears far more conciliatory. Murray Goulburn has been transparent about resignations from the board and management; open about reorganisation and appointment of their interim CEO, David Mallinson; and, shared with suppliers the prioritisation of effort. </p>
<p>They have now offered suppliers a Milk Supply Support Package designed to spread the impact of lower milk payments across the next three years. This package sits on the cooperative’s balance sheet - where it should - with no need to take on individual loans at supplier level. </p>
<p>Whether or not either company can emulate the recovery of Johnson & Johnson remains to be seen, but it is reasonable to expect considerable energy, effort and enterprise being expended by them in the months that follow. </p>
<p>Telling evidence will be reflected in market share in 12 months.</p>
<p><em>This piece has been altered since publication to correct Fonterra’s annual gross revenue, which is $A17.61 billion and Murray Goulburn’s annual sales revenue, which is $A2.87 billion.</em></p><img src="https://counter.theconversation.com/content/59595/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Two of the largest dairy cooperatives have been playing with farmers by pursuing a high price for milk when both should have taken into account fluctuations in the global dairy markets.James Lockhart, Senior Lecturer, School of Management, Massey UniversityDanny Donaghy, Professor of Dairy Production Systems, Massey UniversityHamish Gow, Professor of Agribusiness, Massey UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/592512016-05-12T05:38:10Z2016-05-12T05:38:10ZMilk price cuts reflect the reality of sweeping changes in global dairy market<p>A structural change is underway in global dairy markets. A perfect storm has emerged through a coincidence of events, technology, and policy changes across the major dairy producing nations, including Australia, which will result in a long term significant reset of dairy economics across the globe. </p>
<p>Cooperatives Murray Goulburn and Fonterra have both dramatically reduced the prices they offer dairy farmers for milk, <a href="http://www.smh.com.au/business/dairy-farmers-go-to-war-on-murray-goulburn-fonterra-cuts-20160508-gop2lr.html?logout=true">sparking a backlash from farmers</a>, who say they will be pushed into the red and out of dairy. </p>
<p>It is only due to the strength of the two cooperatives in absorbing the costs of high milk prices in a changing market that these reductions did not occur earlier.
The cooperatives have shown an inadequate understanding of global dairy economics by over-paying farmers and by seeking to <a href="http://www.stuff.co.nz/business/farming/dairy/79872452/fonterra-australia-farmers-up-in-arms-over-payment-clawback">claw back over-paid advances</a>.</p>
<p>The low prices have been blamed on a short-term <a href="https://www.fitchratings.com/site/fitch-home/pressrelease?id=1001848">oversupply coinciding with a reduction in demand</a> from China and Russia. Some of this demand is now being met by Chinese investment in both Australia and New Zealand which also contributes to the changes underway. But the debate thus far has focused on problems with demand while ignoring the bigger issue of increasing global over-supply.</p>
<p>The preoccupation with the belief that global demand will solve emerging on-farm production cost difficulties and that a <a href="http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11499035">“substantial improvement in prices was still expected by mid-2016”</a> was naïve and failed to recognise how quickly, and irreversibly global dairy supply can change.</p>
<p>Since the mid-2000s a strong increase in demand for milk products across Asia, largely on the back of rising middle-income wealth led to the complete depletion of surplus dairy stocks in the European Union and the US. This change to the supply-demand equilibrium resulted in a temporary sea-change in dairy markets because growth in <a href="http://theglobaldairy.com/noticias/milk-demand-to-outstrip-supply-in-next-decade-41049/">demand simply outpaced growth</a> in supply by between 50% and 100% in some markets on an annual basis.</p>
<p>To a large extent this imbalance had been driven by regulation of the global supply market in which only a few export nations competed – Australia and New Zealand included. It resulted in higher than historical average dairy prices in global markets, but considerably more short-term volatility due to global GDP shocks and <a href="http://www.thegrocer.co.uk/buying-and-supplying/fmcg-prices-and-promotions/dairy-demand-will-outstrip-supply-by-2018/372289.article">short-term supply-demand imbalances</a>. </p>
<p>Regrettably a critical assumption that appears to have emerged among producers during this period, as evidenced by continued investment and expansion, was that the real price for global dairy commodities was increasing, a trend they expected to continue in the long term.</p>
<p>The current dairy price scenario, which would historically have been short-lived, is in fact masking underlying structural changes to supply-side dynamics that are now underway. Only approximately <a href="http://www.fao.org/docrep/012/i1522e/i1522e02.pdf">7% of globally produced milk is traded</a> (65 billion milk-equivalent litres). Therefore, a small change in supply globally has a profound effect on the global dairy market equilibrium. </p>
<p>The EU is the world’s largest milk producer, <a href="http://www2.fonterra.com/our-financials/the-global-dairy-industry">with approximately 160 billion litres produced annually</a>. The <a href="http://www.fao.org/docrep/012/i1522e/i1522e02.pdf">removal of milk production quotas</a> in March 2015 presented an opportunity for dairy expansion and, even more importantly, one that is no longer confined to the traditional dairy exporters of Ireland, France, Belgium, and the Netherlands. </p>
<p>Under quota, <a href="http://ec.europa.eu/agriculture/eval/reports/dairy/chapter2_en.pdf">EU exports doubled</a> between 2000 and 2013 to 9.5 billion litres and are anticipated to increase again this coming season. Quota removal has freed dairy farmers in central and Eastern Europe to increase in scale considerably, availing themselves of technologies denied during the Cold War years. Coupled with the removal of regulations concerning the transportation of liquid milk across borders, producers and processors now find themselves with opportunities for growth not experienced since the second world war.</p>
<p>Political policies in the world’s third largest dairy producer, the USA, are also likely to influence global dairy supply in the future. Current dairy production is being stimulated by low feed prices, which were <a href="http://usda.mannlib.cornell.edu/usda/current/htrcp/htrcp-04-14-2016.pdf">driven by record yield seasons</a> in 2013 and 2014, similar levels in 2015 and new <a href="http://www.usda.gov/oce/commodity/wasde/latest.pdf">projected highs</a> this year.</p>
<p>Eighty percent of US dairy farm costs are feed. The reduction in feed costs from US$29.26 per 100kg milk in August 2012 to US$18.04 per 100 kg milk in June 2015 has greatly increased the value of marginal production. </p>
<p>The advent of large-scale fracking, which has resulted in a significant reduction in the price of oil, will likely maintain lower corn prices, at least in the short-term. This comes as the reduced value of biofuels re-focus the use of corn back to a feedstuffs for farmed livestock. The net result is that 75% of every new tonne of production across the USA is expected to be sold on the global surplus market.</p>
<p>Farmers have fought for free trade and open access for decades on both sides of the Tasman. Now that it is emerging, profitable returns will be caught first by the lowest cost global producer. </p>
<p>We are fools to think that that will be either Australia or New Zealand. Therefore, possibly with the exception of the US market, a downward reset is in store for global dairy prices.</p><img src="https://counter.theconversation.com/content/59251/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Cooperatives like Murray Goulburn and Fonterra and dairy farmers need to accept that lower milk prices will be the new normal in a more competitive global market.James Lockhart, Senior Lecturer, School of Management, Massey UniversityDanny Donaghy, Professor of Dairy Production Systems, Massey UniversityHamish Gow, Professor of Agribusiness, Massey UniversityLicensed as Creative Commons – attribution, no derivatives.