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An interesting test ahead for the Australian milk market.

- Wednesday, March 27, 2013

There has been considerable debate in Australia over recent years about the 'fairness' of the domestic fresh milk market, with retailers clearly demonstrating their influence in the market by being able to unilaterally decide what price consumers should have to pay for milk. Retailers have claimed there is nothing untoward about this, and it is simply the 'market' working as it should. Developments in global dairy markets over recent weeks should provide a real test of the extent to which this is the case, and if it is consumers should soon be paying more for fresh milk.

New Zealand has experienced a major drought over recent times, and this is having a significant impact on dairy production, as farmers dry off their cows earlier than they normally would, or sell them for slaughter. Fonterra, the major New Zealand dairy processor is the worlds largest dairy exporter, and has been forced to lift the prices it pays to farmers because of the diminishing milk supply. This, in turn, has resulted in increases in global dairy prices and the anticipation that dairy prices will now quickly increase. Even major European milk processors are forecasting price increases due to low levels of milk supply in Europe, coupled with the New Zealand situation.

This will present an interesting test for the Australian fresh milk market. If the Australian market is working properly, this change in global prices should be reflected in increases in the farmgate prices paid for milk in Australia, which in turn should be reflected in changes in the prices paid by consumers. 

This is obviously confounded somewhat by the market orientations of different milk production regions, with northern NSW and Queensland milk producers largely producing for the fresh milk market, while Victorian dairy farmers predominantly rely on export markets. Nevertheless, there is sufficient interaction between the two markets to anticipate that the increases in global prices will have a flow-on impact on domestic milk prices.

The result should be that retailers will soon need to explain to Australian consumers that, due to global dairy market developments, they can no longer offer milk at $1 per litre, and that fresh milk prices will need to increase. 

If that does not occur, then it raises some very interesting questions about the functioning of the Australian milk market, which the Australian Competition and Consumer Commission will no doubt be interested in further investigating!

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