Oil and milk are daily use products.
Oil / Fuel is used to drive your car to heat your house to power electrical generators.
Milk is an every day product for western society. Of the total consumed, about 1/3 is drunk and 2/3 is consumed as cheese, butter, yoghurt, ice-cream and powders.
The price of oil or fuel varies from day today at the marketplace in Australia.
Drinking milk and other dairy products remain fairly constant in the market place.
Why is this so?
Oil is essential to the world as we know it. It is mined / collected and transported in bulk by “Strong Sellers” many of whom are countries or groups of countries this gives them “market power”. If something changes in either Supply or the man, they can change the price that it sold on the open market for.
In Australia, dairy farmers are totally at the mercy of the free market. They are given prices once a year by processes who are strong buyers but also a weak sellers.
The processors Sell to a small number of traders, distributors, institutions all of which can exert market power on the processor / sellers. So processors are weak sellers (even though they are strong buyers)
In Australia, this is seen to be good for the final consumer as it gives low costs of food.
The oil supply chain is quite different. Crude oil is produced by nationally owned companies. (Strong sellers)
These companies or organisations, very large compared with the milk companies in Australia. with their large size comes economies of scale, so much so that they can deliver fuel (which is very energy dense) to your area for $1.40 per litre the SAME as a litre of milk.
Included in this $1.40, is something in the order of $.40 of fuel excise tax is paid to the Australian government. This tax is nominally raised to pay for infrastructure in roads and other assets associated with the use of oil, that is driving and moving people around.
If you placed this scenario on top of the dairy industry, one could ask, why does the government not tax milk and then invest in the infrastructure of milk production, Be it dairy farmers, dairy farms, milk processing plant and equipment.
As there are many individual food industries or products, it may be unreasonable to suggest that the dairy industry is the only one that receives this sort of support. But there are lessons to be learned including ways to ensure that the price paid by consumers matches the price it costs the farmers (weak sellers) so that they stay in production.
In the last financial year, Australia’s milk production dropped by an average of 1,400,000 L per day totalling over 500,000,000 L for the year. With the drought and the bushfires and other calamities in Australia, this rate is likely to increase.
Dairy farming is capital intensive, this means that someone, Who wants to be involved in dairy farming needs a large amount of money to purchase the land, the stock, the infrastructure and pay for the training of their staff. These initial costs take many years to repay if you are borrowing from a bank or have other investment opportunities.
The risk is that Australia will lose an industry that provides one of the major food and nutrition items of our diet due to a policy of “lowest cost to the consumer is most important” even when our rural sector is affected by abnormal conditions.
It would be great if our farmers / our food providers could have mechanisms that allowed prices to vary with input costs / or had an unrelated “margin insurance program” as they do in the USA to cover increased costs in times of drought or other “weather /seasonal abnormalities”.
I believe this is a national strategic issue rather than a dry economic argument.
A review of our food industries, including the dairy industry and Australia and our future needs is needed.
This is a link to the interview I participated in last week.