Market Power
The primary determinant of milk prices is the global market, which incorporates the interplay of demand and supply forces. Australia’s dairy industry relies on the farmers’ optimal land use, capital investments, and herd size. However, farmers find it difficult dealing with isolation and volatile prices (Holden, 2019). A sufficient supply chain requires determination of lower milk prices that meet the customer’s sales contracts. The failure of the major supermarkets to have matching milk prices affects the supply chain. Xenophon’s charge is valid because the supermarkets’ action lowers the domestic supply volumes. It implies that Australia faces an increased demand for milk with much pressure placed on milk prices (Deloitte, 2019). A reduction in the costs drains the farmers’ investments and efforts. Eventually, the herd sizes can reduce significantly affecting milk productivity across Australia.
Also, the milk industry can realize increased domestic competition due to a lower milk pool environment. Unsustainable competition triggers industry players to influence the distribution of the available profits (Keogh, 2019). The fact that supermarkets have a more substantial bargaining power creates an imbalance between farmers and processors—average farmers lose confidence with the dairy industry in responding to the low prices. The supermarkets’ unexpected price change transfers risks to farmers hence altering their production patterns.
References
Deloitte. (2019). What’s driving the opening milk price? (Agribusiness Bulletin, June 2019) URL: https://www2.deloitte.com/au/en/pages/consumer-industrial-products/articles/whats-driving-the-opening-milk-price.html
Keogh, M. (2019). “The ACCC view – dairy from a competition perspective” (Trans-Tasman Dairy Leaders Forum 6 May 2019) URL: https://www.accc.gov.au/speech/the-accc-view-dairy-from-a-competition-perspective
Holden, R. (2019). “Vital Signs: why more expensive milk won’t help farmers much” (The Conversation Feb 22 2019) URL: https://theconversation.com/vital-signs-why-more-expensive-milk-wont-help-farmers-much-112145