20/10/2014 - 16:51

Dairy monopoly 'won't work'

20/10/2014 - 16:51

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The Australian dairy industry would not benefit from adoption of a Fonterra-style ‘national champion’, as in New Zealand, and suggestions otherwise are not consistent with market realities, according to a recent Productivity Commission report.

Dairy monopoly  'won't work'
GOT MILK? Western Australia’s dairy industry is Australia’s smallest.

The Australian dairy industry would not benefit from adoption of a Fonterra-style ‘national champion’, as in New Zealand, and suggestions otherwise are not consistent with market realities, according to a recent Productivity Commission report.

The ‘Relative costs of doing business in Australia: dairy product manufacturing’ report found that an Australian dairy monopoly would be a price taker in the global market.

It commission’s report follows a recent Mckinsey Australia finding that government intervention to increase scale would contribute to unlocking export potential, leading to calls for a similar set up here.

However the commission found that Victoria, where the majority of Australia’s dairy exports are produced, had lower costs of raw milk production than nearby competitor NZ, and that since its deregulation, the industry had bucked a wider trend of falling productivity in the food production sector.

Western Australia, which is a relatively low producer by volume at around 300 million litres annually, faced higher costs but only accounted for about $50 million of Australia’s $3.2 billion of dairy exports.

The report said the Australian industry was less likely to benefit from scale, with greater distances, higher transport costs and limited variations from seasonal production potentially outweighing potential gains.

The door was left open for market-driven increases in scale, with the report noting that there were options for industry participants to use milk swap and other arrangements as a method of cost reduction.

Monopoly production had significant risks, as reputational damage to one company could potentially ground the entire industry, whereas in the Australian model, lower levels of concentration ensured that any incident could be contained to one section of the industry.

Since deregulation and removal of price controls in the milk market in the early 2000s, the industry had undergone strong productivity growth and the exit of less viable producers, the report said.

This is contrasted to the previous arrangement, which the commission said had possibly encouraged overproduction in the industry with subsidised exports, resulting in an overall cost to the economy.

 

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