Dairy policy not quite right

The Productivity Commission has called for a series of reforms to improve the competitiveness of the dairy industry, and warned that the federal government’s drought assistance measures would have costly unintended consequences.

The Relative Cost of Doing Business in Australia: Dairy Product Manufacturing report found that the majority of costs in the sector were driven by market factors and commercial decisions, and offered a handful of reforms that could be undertaken to promote the success of the sector.

Suggestions included efforts to reduce labour shortages through changes to workplace relations, reform of road pricing, improving the scope of water markets, and increasing scrutiny of the electricity market.

Western Australia exports nearly $50 million worth of milk products annually, with total production of around 400 million litres.

The report said that, like NSW and Queensland, WA-produced milk was largely for local consumption. Yet while WA production was the smallest of any state, it faces high costs similar to those states.

The report also highlighted that certain forms of drought assistance constrained competitiveness in productivity in the agriculture sector, by “discouraging unviable farms from exiting the industry and preventing land and other inputs moving to higher value uses”.

The federal government’s $320 million drought assistance program, which has a strong focus on concessional loans, was one such example, with the Commission saying the loans were not justified by a market failure rationale, and risked efficiency improvements and adjustment in the sector.

The commission noted that a 2009 report had suggested that the exit of unsuccessful farmers in the industry would lead to a small net increase in agricultural production.

Conversely, the report said the WA government had taken steps in the right direction, with the abolition of interest rate subsidies in June 2012.