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Australian dairy market deregulation:
Coping with policy change

by

David Harris, Freelance Economist

D. N. Harris & Associates, Melbourne, Australia

Paper prepared for the 25th Western Canadian Dairy Seminar

6-9 March 2006, Capri Centre, Red Deer, Alberta, Canada

 

Key points
• Deregulation of the Australian dairy market involved the over-night removal of all price support mechanisms. There was a substantial fall in fluid milk returns but the industry has coped with the effects of the policy change.

• Farm level adjustment mostly happened in the first two years of a deregulated market. A number of farmers left the industry – some older farmers retired, some switched into alternative farm products and others found jobs outside of agriculture.

• But the impact on industry output was limited as the remaining farmers adapted to the new market conditions by improving the productive performance of their dairy enterprise. In general the response was to increase farm output – deregulation created growth opportunities for individuals in the fluid milk sector.

• Some reacted by expanding herds and increasing land areas. But most made changes to improve the physical performance of their farms – greater carrying capacity, improved pasture management and increased milk yields.

• The over-night policy change made the full impact transparent. It sharpened the incentive farmers to make decisions about their future. It helped to speed up the gains in per farm performance that typically flow from policy reforms.

• A phased policy change would have provided some implicit transitional assistance through the milk price. But it can dilute the incentive for major decisions to improve long term viability.

• The Australian approach realised the implicit assistance that would have been received from a phased policy change. The experience suggests transitional assistance works better if it’s a transparent, one-off, unconditional grant that allows farmers to make decisions that suit their circumstances.
 

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