Figure 3. Uses of milk produced within Australia
(Source Australian Dairy Corporation)

Since December 1999 and July 2000, a period of deregulation of milk marketing in Australia, milk prices received by dairy producers have declined by approximately 15 cents per litre in NSW and Queensland and by approximately 3 cents a litre in Victoria.

Simultaneously, prices for milk in the supermarket have increased by 12-14 cents per litre. The loss of internal market regulation for this industry has resulted in the transfer of most of these funds to the retail sector. This loss of income to the farm sector, estimated at $262 million (ABARE 2000) will markedly accelerate trends towards very much larger farms and markedly change the farm production systems used. Similar trends are evident world-wide and this process raises serious questions in regard to societal change and farming systems.

Comparative analysis
(Source Australian Dairy Corporation)

Figure 4 provides current information from Australia, New Zealand, Argentina, UK and the USA, on the costs and values of dairy inputs and outputs in $US. These data provide ample evidence of the global nature of the dairy market.

Given that there is a widespread adoption of efficient farming methods in countries with similar education levels in the grain producing and dairy-farming communities, it appears logical that this situation should result. At present, value of milk at marginal values is 12, 11, 13, 15 and 18 cents per litre in Australia, New Zealand, Argentina, UK and the USA, respectively.

Competitive advantage for industries competing for the global market will depend on

• The application of efficient technologies for an industry, that in turn reflects level of education and availability of appropriate technologies
• A competitive business environment – that is costs of key inputs
• Climate and benefits conferred through a favourable physical environment (rainfall, sunlight etc).
• Value of internal markets.
• Costs of labour inputs.

Farm Models

The following data represent results obtained from a large industry survey in Victoria and closely follow economic modelling of farms in Victoria and New South Wales (Lean and Porter, 2000). These data show that smaller farms are not profitable.

Smaller units will either withdraw from the industry or improve efficiency by greater adoption of efficiencies achieved in controlling costs, increasing current inputs (seed, grain & feed) or by adopting new technologies. The larger, more professional units make more use of technology and there will be an increased valuing of management skills.

Further evidence of these as long term trends is provided from studies in the USA (Fersen, 1992) In 1971 14 dairy cows were sufficient to supply the financial needs of a family; by 1991 the number of cows required for the equivalent income was 127. This process has rapidly accelerated over recent years and herd sizes in northern USA have grown markedly.

Economic measures of farm performance

The implications for these trends, set to now rapidly accelerate with the loss of internal market value in 2000, will be for the development of large-feedlot dairies. The factors that determine whether capital will be invested in large pasture-based dairies or in feedlot dairies will be

• Capital investment on a per cow basis – costs of land being higher for pasture based dairies and need for building structures (lot fed).
• Costs of pasture production – vs value of purchased forage – and value of grain in the relative areas
• Distances walked/ costs of internal infrastructure (laneways for farms) & benefit of more structured diets (lot fed).

Implications for international competitiveness

Much of Australasia’s previously competitive position was a function of low-cost seasonal production of milk from seasonal pasture growth. It is now apparent that only extremely low cost farms with higher levels of production will survive and that the majority of growth will be in hybrid-farms with higher levels of feeding or in larger, lot fed dairies.

The lot-fed dairies will have higher costs of feed per litre of milk, but lower capital per cow, more potential for total production due to more cows with higher per cow production, and better returns on capital. The pressure to markedly intensify animal production is evident in other industries such as poultry and pig production.

This marked change in practice for Australasia also alters the international competitive position of the industry. There is little difference in the costs of production of lucerne, corn silage or of grains and protein meals between countries (Figure 4). These feeds are the most important cost inputs for large dairy production.

The implication of this convergence in costs of inputs is that a major input cost, labour, will become a prime determinant of international competitiveness. Compared to the labour market of the USA and that of resource rich Argentina, Australia is uncompetitive.

Australia, also does not have access to production enhancing methodologies such as bovine growth hormone. The weakness in the labour market raises the probability of downward pressure on rural incomes for employed labour and diminished returns to capital.

In the long term, pressure could be exerted on rural communities internationally to lower the value of labour. Lower returns to capital place increased pressure on discretionary spending on farm activities including land and water care and stewardship of stock.

Conclusions

While the trends towards lower returns in the dairy industry are well recognised, the implications for management systems in Australia are not. In general, the smaller herd size appropriate for pasture-based enterprises and lower milk production for traditional pasture dairies are not consistent with long term profit or survival of enterprises.

While Australia is well placed to develop large lot-fed dairies, some competitive advantage is lost to countries with cheaper labour. The lower returns will place pressure on stewardship of farms.

Dr Ian J. Lean BVSc (Syd), Ph.D (Calif), MACVSc

A graduate of the University of Sydney (1979), Ian spent 6 years in veterinary practice establishing cattle health and production services to farmers in the Hunter valley of NSW. He is a past president of the Australian Association of Cattle Veterinarians and the Cattle Chapter of the Australian College of Veterinary Scientists.

Dr Lean was a temporary resident at Universities of California and Minnesota. In 1986-1990 was a lecturer with University of California teaching clinical nutrition and medicine of cattle. Ian completed his Ph.D in 1990 at University of California on bovine somatotropin and ketosis. He is one is one the very few registered specialists in Medicine of dairy cattle in Australia and spent 6 years with the University of Sydney Department of Animal Science.

He has over 200 scientific articles, many published in journals of high international repute. He has been chief examiner in Cattle Medicine and in Ruminant Nutrition for the Australian College of Veterinary Scientists. Dr Lean declined the Chair in Food Animal Production and Medicine at the Royal Veterinary College, London and was recently appointed as Adjunct Professor in Veterinary Clinical Studies with the University of Sydney. He has been appointed to the scientific boards of two international companies.

His general interests are in improving the profitability of dairy production and his research interests are the interactions between nutrition, health and reproduction in the dairy cow. Ian has consulted to dairy producers and corporations in Australia, United States and New Zealand and been an invited speaker at major conferences in these countries, the UK, Canada, Argentina and the Republic of South Africa. Ian has had extensive experience in the medicine, nutrition and management of dairy cattle in Australia, the USA and New Zealand. He is director of Strategic Bovine Services, a company that consults to dairy and beef producers, veterinarians, corporations and conducts research. Clients include large and small herds in Australia through to very large herds in the USA.