Forget dolphins and farmers, serve your customers

ADAM CREIGHTON
FEBRUARY 26, 2019
The Australian
First getting rid of plastic bags, now upping the price of milk: What is wrong with our supermarket giants? Making life less convenient and more expensive in a futile bid to help dolphins and those who own cows.
It might make some people feel virtuous, to be sure, but as the Productivity Commission and the competition regulator have found, respectively, it will do little to help marine life or dairy farmers.
“When we looked at this plastic bags issue we found that a lot of studies just cite each other; in fact we sourced it all back to some guy in Canada in the 1970s who’d done a study on the effect of fishing ropes on marine life,” said Phillip Weickhardt, lead ­author of a 2006 Productivity Commission inquiry into waste management, speaking to The Australian last June.
The sudden push to boycott ­supermarkets that don’t charge us more than a dollar a litre for milk is even odder. Dollar milk should be celebrated. Grocery prices in Sydney are 15 per cent higher than in London, according to Numbeo, a crowdsourced global database of consumer prices.
Milk is cheaper, though, by a whisker. Potatoes, eggs, bread — you name it — are all much more expensive here. At least we’ve got milk under control.
Coles kicked off dollar milk in 2011, prompting Woolworths and Aldi to follow suit. Woolworths stopped doing so last week, increasing the price to $1.10 with a promise to “deliver higher milk prices to more than 450 Australian dairy farmers supplying into Woolworths-branded fresh milk”.
Coles joined Woolworths in removing “single-use” plastic bags from its stores last year. Let’s hope they don’t cave in this time. The idea that slightly more expensive milk will help dairy farming in Australia is ridiculous. Even if it did, why should one sector be singled out for special support through artificially higher prices?
“Total farm numbers, output and profitability trends have not changed since the introduction of one dollar per litre milk,” the Australian Competition & Consumer Commission concluded last year, in a 240-page assessment of the dairy industry. It found $1 a litre milk was “unlikely to have a direct impact on farm gate prices”. Even in “higher cost regions” there’d be “no response”.
And why should there be a response? For a start, supermarkets don’t even buy milk from farmers. They source it from big processors such as Murray Goulburn, Fonterra or Parmalat, which negotiate milk prices with farmers. All the big processors buy 500 million ­litres of milk a year, far more than the average dairy farm produces — about 1.5 million litres.
“Any increases in margins flowing from an increase in the retail price would likely be captured by the major supermarkets, or at best shared between the supermarkets and processors,” the ACCC said. The analysis did find that dairy farmers don’t have much bargaining power. Well, join the club — try getting a pay rise these days.
There’s also a global price of milk, beyond the control of the ­supermarkets. If the global price were high enough, farmers would export it instead. Indeed, they do export more than a third of their production, largely to China.
It’s true dairy farming isn’t investment banking or funds management; in the 16 years since deregulation of the sector, rates of return have averaged barely more than 2 per cent. That’s less than a sixth of the return investors in the big four banks enjoy, even without franking credits.
Things are looking up, though: “Farm cash income for dairy farms is projected to increase by 53 per cent nationally to an average of $137,000 per farm in 2017-18, reflecting higher milk prices and increased milk production,” says the Department of Agriculture in its latest farm survey, suggesting the case for dollar-plus milk is waning.
Weak returns could be a sign we have too many dairy farmers. No one is forcing farmers to keep farming. If some producers have to leave the industry, that’s sad perhaps, but natural. Indeed, the proportion of people employed in agriculture has dwindled over time as technology and productivity has improved. That will probably continue.
No one denies particular cases of heartache owing to drought, a slump in global prices or rough bargaining from processors; the question is why some businesses or workers deserve special help. Labor has proposed a “floor price” for milk. Why not for beef, too?
“Many farmers consider that this pricing devalues the work they, their families and staff do to produce high quality milk,” the ACCC said. Who doesn’t think they are undervalued?
Dairy farmers already received $65 million in budgetary assistance in 2017, according to the Productivity Commission latest industry subsidy catalogue. If more were required, charity should start at home. I can count at least three lobby groups for farmers: the National Farmers Federation, the Australian Dairy Farmers Association and even NSW Dairy Connect. That doesn’t include their very own political party, the Nationals. If you can afford to support at least three lobby groups, you probably don’t need an extra helping hand.
Economist Adam Smith once observed that the wealth of a nation was reflected in the cheapness with which its economy can provide goods and services for its people. Deliberately making milk more expensive is economic vandalism. Indeed, for health reasons milk is surely something we want people to consume. If basic milk becomes more expensive, some lower income consumers might shift into less healthy alternatives.
“We believe the long-term sustainability of our dairy industry — and the regional communities they help support — is incredibly important for Australia,” Woolworths chief executive Brad Banducci says. So do we all, but charging $1.10 instead of $1 won’t make any difference. Agriculture Minister David Littleproud has urged shoppers to boycott Coles and Aldi until they follow Woolworths and increase the price of milk. I can assure the Minister I won’t be walking the 50 additional metres to buy more expensive milk at Woolies.
ADAM CREIGHTON