Cheap milk, no guilt

31 Comments

Milk pourOne morning last week, ABC Sydney presenter Deborah Cameron was encouraging listeners to support dairy farmers by forgoing large savings offered by $1 per litre home brand milk at the major supermarkets. Opinion leaders across the country shared the sentiment and did likewise.

Independent Senator Nick Xenophon told the Senate inquiry into milk prices that the 'unsustainable' $1 per litre price will force farmers off the land and ruin Australia's dairy industry. 

It's true that farmers suffer inordinately from droughts and floods. It's tempting to think we're doing them a favour if we forgo discounts and pay higher prices for branded milk. But a better way to help struggling farmers is to give to the relief appeals organised by Vinnies and other charities, enjoy cheap milk, and drink more of it, guilt free. 

Low milk prices are the market god's gift to consumers. Like milk itself, market mechanisms that reward viable, well-planned businesses are healthy.

Economists argue that consumers and dairy farmers alike stand to benefit from $1 per litre milk prices. Price reductions create new markets, which is what happened with discount air fares. If milk is cheaper than Coke, people will drink more milk and less Coke. In this instance, it's not the farmers who lose, it's the Coca Cola Company.

In his economics.com.au blog last week, Dean of Business and Economics at Monash University Stephen King ridiculed the opinion leaders who predict ruin for dairy farmers. He suggests the following mock headlines:

Coles threatens farmers. 'We'll sell more milk'

Farmers plead: 'Don't sell more of our product'

Increasing milk sales to hurt dairy farmers

King's logic is that low prices and increased retail sales help producers who supply what economists call the 'inputs'. For milk, the main producers are the dairy farmers. More milk will be sold and retailers will need to persuade farmers to supply more milk. You cannot do that by harming the farmers.

To drive home the message, he uses the analogy of China. Australia provides inputs such as iron ore that enable China to sell low priced manufactured goods. Australia is the beneficiary of China's low prices in the way that the dairy farmers gain from supermarket milk discounts.

The broader message is that replacing fear with informed thinking can produce an outcome that is more pleasing than that dictated by popular sentiment. This applies not only to milk prices, but also to much larger issues such as carbon reduction.


Michael MullinsMichael Mullins is editor of Eureka Street.

Topic tags: michael mullins, cheap milk, $1 per litre, nick xenophon, Senate inquiry into milk prices

 

 

submit a comment

Existing comments

Here in Argentina, the Kirchner maintained milk prices low for several years in succession. The result was the closure of large numbers of dairy farms, and the slaughter of the cattle for meat. People didn't transfer from Coca Cola to milk. The motivation behind these two drinks is quite different in marketing terms, and people do not change from one to another just because one is cheaper. If this were true, we would all drink water!
Joss Heywood | 14 March 2011


Are the dairy farmer organisations arguing against milk price reductions not "informed"? Or are the only "experts" those who pour "ridicule" from high ivory towers? If choosing between ideologue economists and the balance sheet of small farmers I would regard the latter as more credible. Its easy to pay lip service to a mere 14 years of drought, but is Michael also "informed" that industry deregulation over that period has greatly impacted the viability of the family farm?

I gather our professor friend would be happy if more local farms closed so that we could import milk from China (or New Zealand, a real prospect). The farmers could head off to Vinnies of course.

We city folk won’t have any milk bars left either, but would still enjoy whatever price the supermarkets deem good for us.

All for the good of the consumer "economy", or certainly those who make a living from interpreting its past, and (with less than a pass rate I would suggest) prognosticating on its future. Eureka Street is advocating Thatcherite "market mechanisms", complete with its moralisms of "reward" for "well-planned" farms (read highly capitalised businesses who supply export markets). Has anyone heard about Catholic social principles?
David Moloney | 14 March 2011


An interesting piece and based in more truth than the recent IPA arguments about Coles being consumer focused.

Unfortunately, it presumes the market cannot plan and strategise for the future. Rather than the market rewarding sound business practice, the recent milk pricing is an act of desperation by a failing business - Coles.

Wesfarmers will not maintain such heavy discounting in the longer term and the medium term pain for some milk producers may very well reduce competition in the longer term meaning we all actually pay more for milk. It would be interesting to read the rationale by Wesfarmers directors in this decision!

How we all became such concerned agrarian socialists surprises me. National security concerns may play a role but it is still surprising in the context of socialism being a dirty word in the big smoke.
Josh Cullinan | 14 March 2011


You might be right, Mr Mullins, but Stephen King is from my recollection a serious neo-con for whom the market is always right regardless of other considerations. People with these views led us into the GFC. I look forward to seeing the opinions of other, more socially concerned economists.
Chris Ansted | 14 March 2011


Well said! Popular sentiment very rarely gets it right! Carbon reduction is a must. Popular opinion seeking pollies like Abbott have to go, bring back Turnbull, a moderate - for all his past errors.
Jack Kennedy | 14 March 2011


Ah! Economics! Well commented, Joss Heywood. Milk in Australia is not a scarce resource. In fact to make a decent living dairy farmers have to produce a lot of it - the distributors and processors of milk pay them so little for it.

In fact the big supermarket chains pay them so little chains like Coles & Woolies can afford to use a cheaper price for milk as a hook to pull customers into their giant stores.

What they lose in a price war among themselves they win with consumers deserting smaller stores and/or doing all their grocery shopping in their emporia.Theirs is not a health campaign to consume more milk. It's a competitive gimmick.

It is the small stores Nick Xenophon should be concerned for.

True the big chains, having lulled dairy farmers into producing more milk because of their demand, can change their tactics and use some other commodity in their internecine price war. That is what I fear and I believe it is a fear based on informed thinking about how the food market operates in practice in Australia.
Uncle Pat | 14 March 2011


I find it very difficult to believe that people who wish they could afford more milk are substituting it with Coke.

There may be people who wish they could afford more milk, and they may drink coke, but I think the link between the two is weak.

If they wish they could have more milk for its health benefits, they are unlikely to replace with coke.

I'm really surprised to read this article here. There is a comparison to be made with goods from China and our dairy industry, but its about paying a fair price for people's labour.

These wonderful 'market forces' might give us cheap goods from China, and Australia might benefit, but we all know the workers producing those goods are not paid a fair price. Dairy farmers deserve to be paid a fair price for their labour too.

I don't want to buy milk, (or any other produce) if the farmer wasn't paid a fair price for it. For me, this is a valid fairtrade issue. And I'm surprised that the editor of this magazine would advocate making use of charities, instead of promoting fair trade.
I understand that people on low incomes deserve to drink as much milk as they need, but I don't see that this should be achieved by turning small farmers into virtual slaves.
I feel like I've landed at the wrong magazine site; is this really a place where 'market forces' are hailed as the solution to everything. How about a social justice viewpoint?
sue | 14 March 2011


It's not the first time that I'm tempted to think that economists can be irrational.

Does Professor King really believe that all that is necessary for a business is to sell "product"?

Whatever else, the market price has to be greater than all reasonable costs in the chain of production and distribution.

To many economists, the production can be
"anywhere" and the markets can be as diverse as possible.

Australia has followed that notion with much of our manufacturing industry, with the result that it's now largely done overseas. Whether that is a "good thing" for the society as a whole [the "economy" is something rather different] is not a matter for economists to determine.

But the simple fact is that, whereas clothing or cars can be made elsewhere and transported vast distances [notwithstanding the considerable costs in pollution and the like which might be incurred but never costed] something like fresh milk and cream are in a different category entirely.

So it is socially significant if dairy farming were to disappear, even if that is something which economists seem to neither to recognise nor care about.

John Carmody, Sydney.
John Carmody | 14 March 2011


What the esteemed Professor of economics failed to address was that the market for milk is characterised by oligopolies at the point of milk processing and then at the retail end. A model of pure market competition might not be accurate in assessing the outcome of this exercise.

Analysis of the likely outcomes will need to take account of those elements of bargaining power and strategic aims. There is no guarantee that the farmers will benefit or that in the long term there will be an expansion of the market. Informed thinking is certainly necessary but needs to take account of the complexities of markets - those who fear for the long term outcome may well have good reason to do so.
Doug | 14 March 2011


My worries are three: What mix of fresh milk and other products separated out by them will the processors resort to in order to keep their profits up?

What guarantee is there that milk from other regions than South Western Victoria can continue to be sold to smaller outlets at a price that will keep them viable? And if they go what prices will the supermarkets charge then?
Joe Castley | 14 March 2011


Commenters Sue and John Carmody captured my feelings. Michael Mullins should know that the dollars and cents price doesn't always capture the true, broader cost to the environment and the community.

I want fresh, locally produced milk that comes from cows living as natural a life as possible. I want a diversity of occupations and lifetyles in the community. One of the first steps to not respecting people and the environment is to reduce matters to simple dollars and cents equations.
Russell | 14 March 2011


Commenters Sue and John Carmody captured my feelings. Michael Mullins should know that the dollars and cents price doesn't always capture the true, broader cost to the environment and the community.

I want fresh, locally produced milk that comes from cows living as natural a life as possible. I want a diversity of occupations and lifestyles in the community. One of the first steps to not respecting people and the environment is to reduce matters to simple dollars and cents equations.
Russell | 14 March 2011


Tactics, such as Coles employs, are lethal to farmers, a deterrent to our economy and thus to our wellbeing.

Without a healthy dairy industry in Australia we'll become more and more dependent on other countries. When dependence on other countries for our primary products becomes a way of life here, how could Australians have a life?

Farmers have appealled to shareholders of Coles and its related companies, Wesfarmers, I think, to veto this planned assault on Australian farmers. Where are the forms to do so? Why not put it online somewhere?

I'm not a farmer, nor do I personally know any farmers, I am though a believer in fair trade.
Joyce | 14 March 2011


Professor Stephen King maintains that the winners will be Coles, Woolworths, most dairy farmers, and consumers. He says the losers will be the milk processors - the middlemen - and uneconomic farmers.

All the major processors are foreign owned (Parmalat [Pauls] - Italy; National Foods [Pura, Dairy Farmers] - Japan; Fonterra [Bega and other smaller brands] - NZ; and Nestle. Uneconomic dairy farming businesses will be forced to adapt, and are likely to do better in other industries.

My own family was forced out of dairying in the 1970s. Our dairy farm had became uneconomic due to greater compliance costs that accompanied stricter health regulations. We did better out of beef.

The point of this editorial was that our fears are often based on simplistic notions that don’t stand up to scrutiny. Australian manufacturing is all but dead, yet the economy is healthier than it has been for many decades. There will be displacement when a price is put on carbon, but we will adapt. Newcastle did not die when BHP left. It renewed itself.
Michael Mullins | 14 March 2011


I found this article infuriating. There is something wrong with the logic that says by driving retail prices below the cost of production consumers will benefit and production increase.

As others have pointed out, Coke and milk are not interchangeable; nor is Coke cheaper than milk.

Many people are prepared to pay more for bottled water than for milk, despite the obvious costs involved in producing milk.

Coles and Woolworths already squeeze many primary producers so that they, the retailers, can attract customers with prices that cannot be sustained if the farmers are to make reasonable incomes.

We have already sacrificed many small, local producers and retailers; cheaper goods may be attractive but entail long term damage to our environment, food security, and more - including the dignity and well-being of farmers and others.

Comments here by Russell, Sue et al. make a lot more sense than Stephen King's.
Myrna | 14 March 2011


Why all the handwringing about the farmers? I bet they are getting the same price now as they were before the price war.
Phil Smith | 14 March 2011


I agree with you, Mr Mullins.

There are a variety of pricing strategies businesses can use. By selling a staple food such as milk cheaply, it becomes a 'loss leader' - they lose money on the milk, but gain it back and then some when you also decide to buy some bread, fruit, cereal and what not when you stop in for the milk.

It seems to me that the only way dairy farmers can go under is if they act selfishly to undercut their fellow dairy farmers and accept an unsustainably low price. The simple solution is for all dairy farmers to price themselves as competitively as possible while ensuring they cover their costs.
MBG | 14 March 2011


An interesting piece and based in more truth than the recent IPA arguments about Coles being consumer focused.

Unfortunately, it presumes the market cannot plan and strategise for the future.

Rather than the market rewarding sound business practice, the recent milk pricing is an act of desperation by a failing business - Coles.

Wesfarmers will not maintain such heavy discounting in the longer term and the medium term pain for some milk producers may very well reduce competition in the longer term meaning we all actually pay more for milk.

It would be interesting to read the rationale by Wesfarmers directors in this decision!

How we all became such concerned agrarian socialists surprises me. National security concerns may play a role but it is still surprising in the context of socialism being a dirty word in the big smoke.
Josh Cullinan | 14 March 2011


Yes, what a shame Stephen King did not first consider the fact that demand for milk does not increase greatly when prices go down. All that happens is that there is less money to go around and the farmers miss out because they have the least market power. So, yes, you should feel guilty drinking the $1 stuff.
Marian Macdonald | 14 March 2011


I think the marketing moves by Coles were just brilliant. Some politicians were bound to jump on some bandwagon to gain publicity. What actually sticks in everyone minds is that fact that milk is now available for $1.00 a litre at Coles. Senator Nick Xenophon provides actually much free publicity for Coles.

A well-published loss leader is good for business and it will help people to go through the door to do the buying. Most Australians own directly or indirectly shares in Coles or Woolworth and there can be little harm if these businesses make a little bit more profit.
Beat Odermatt | 14 March 2011


I for one will not be buying the cheap home brand milk. I also think it is stupid to say that people will buy more milk if it is cheaper. Milk is a basic food item. Most people would be buying the amount of milk they require and are not going to increase their consumption because it is cheaper. You can only drink so much of the stuff!
pat | 14 March 2011


Since writing headlines seems like so much fun, I thought I'd try my hand at a few: Milk market soars: 'Make more milk', farmers tell cows Milk market skyrockets: farmers buy more cows Cow factories on overtime as demand goes ballistic Cow numbers skyrocket: 'Grow more grass', farmers tell paddocks Will Coke go broke? May diversify into dairy Milk market plateaus: cow factories slow down Milk market tanks Cows on breadline: 'Make more Coke', say Coles The market for milk will expand only so much whatever the price, and producers can't respond quickly. Cheap milk is as likely to create competition with other brands as with other commodities. China is a manufacturing success in part because of the wages paid to its workers. That raises serious (and complex) questions of justice. In any case, China's wage structure won't last forever, as we have seen in the case of Japan.
David B | 14 March 2011


I am reminded of living in a large country town. Coles and Safeway undercut every delicatessen and butcher. When all the delis had closed the supermarkets stopped selling good quality products the same happened with butchers. I am very skeptical of this move. Supermarkets have many products they can mark up to cover their losses, the same doesn't apply to the small shops that supply both every day and quality specialty goods.
Margaret McDonald | 14 March 2011


Yes, what a shame Stephen King did not first consider the fact that demand for milk does not increase greatly when prices go down. All that happens is that there is less money to go around and the farmers miss out because they have the least market power. So, yes, you should feel guilty drinking the $1 stuff.
Marian Macdonald | 15 March 2011


I am not sure for whom the politicians are actually fighting for. It seems that somebody is more interested in making Australia’s retail market a ripe and ready for the arrival of German and USA retailers. Keen competition between the 3 major retail marketers in Australia would be bad for the newcomers. What appears to be a fight by selfless politicians for the “poor farmers” could be regarded more as the laying out of a “welcome mat” for foreign companies.
Beat Odermatt | 15 March 2011


Like Sue, I was stunned to read this article from Michael Mullins and printed in Eureka Street. Your family may sadly have been forced to move out of dairying in the 1970s, but my family run a most efficient dairy farm with great consciousness of sustainable farming practices and conservation of water -- and all for a pittance!

We do not wish to receive handouts. We wish to receive justice and a fair price for what we produce. We wish to remain on our property for reasons of lifestyle and values -- not just because we run a most efficient and sustainable farm!
Barbara | 15 March 2011


Oh the ecstasy of the "market"! The solution to all of mankind's problems.Perhaps we should have applied the free market principles to our labour market. After all employees/workers are just human capital aren't they? Just read Rerum Novarum or any of the subsequent encyclicals vide Benedict XVI Caritas in Veritate Ch.3 in particular where he says "...Then, the conviction that the economy must be autonomous, that it must be shielded from "influences" of a moral character, has led man to abuse the economic process in a thoroughly destructive way!"

Why do most economists support some form of price/tax on pollution? Because the market cannot & does not provide a mechanism to enable/require the polluting company to include removing/reducing these harmful side effects on society/the economy in the final price of its product. We, society pay by way of higher medical/health system costs through taxation as well as the uncosted/uncostable effects on the quality & length of our lives. In short the polluters make greater profits than they ought because the community/society pays the taxes necessary to mitigate the damage their pollution causes!

Similarly the oligopolists in the dairy product industry can 'heavy' the individual producer with a take it or leave it offer. Likewise the duopolists Coles & Woolworths heavy all of their suppliers on price etc. Have you noticed the marked reduction in brand lines for many products. If you are the usual supermarket shopper you must have noticed the ever increasing shelf space taken over by home brand products. The Consumer is not King(pun intended) rather a beggar with little to choose from, unless of course you can afford Leo's et al!
Graham Holmes | 15 March 2011


Has anyone who reads these articles left West End and lived in a community of dairy farmers?
graham patison | 15 March 2011


So by this 'logic' we shouldn't bother buying Fair Trade coffee, chocolate, tea, rice, etc. simply because the lower prices help the farmers in globally Southern countries?

I don't think so. What companies like Nestle and Starbucks do is substitute not to a completely different product (Coke is a completely different product to milk by the way) but to a different producing country. Is this to increase the quantity of production? Of course not. It monopolises the production power into the hands of fewer farmers.

I was shocked to read this socially ignorant article on this site. I support market forces as much as the next guy, but unfortunately there comes a time when the intersection of private marginal benefit and private marginal cost just does not equal the intersection of social marginal benefit and social marginal cost. In this situation, the government needs to step in.

Rather than quoting an economist, it might have been more revealing to interview the farmers. Trying to suggest that they are too stupid to realise a benefit is quite unfair. These farmers know their business, and are complaining.
James | 18 March 2011


This theory is great if the demand for milk is elastic, but what if it's not? The amount of milk sold remains the same, but he money received by farmers is reduced. I'm sorry, but coke drinkers are never, under any circumstances, gong to substitute milk for coke. The dairy farmers are gong to sell about the same amount of milk for less money. I accept that farmers (and most other producers) need to sell a reasonable quantity at a reasonable price to maintain their families, and will not buy the headlined artificially low priced product.
chris stephens | 19 March 2011


I can't believe it's not butter. I know it's not milk! Will cheese be next?
Greig Williams | 16 May 2011


Similar Articles

Multiculturalism just works

  • John Stuyfbergen
  • 24 March 2011

In a park for a Sunday barbecue, suddenly a few men from our group separated from the rest of us. I asked the woman next to me what they were doing. They were Muslims, and they were praying. Suddenly the men were back. They switched on the radio, and we all listened to and argued about the cricket scores.

READ MORE

Embracing Good Friday football

  • Luke Walladge
  • 17 March 2011

The NRL and national soccer competition already play matches on Good Friday, a move which they made without input from church groups. Now is the time for churches to collaborate with the AFL on a Good Friday match, or else it will be left behind again.

READ MORE

We've updated our privacy policy.

Click to review