A report issued today by the Australian Competition and Consumer Commission has found that Australian consumers were paying an average of 22 cents per litre less for plain milk sold in supermarkets following the first six months of a deregulated dairy market.
In issuing the ACCC report into price monitoring of the milk industry, ACCC Chairman, Professor Allan Fels, noted that across all categories of milk stocked in Australian supermarkets, including plain, UHT, modified, flavoured and specialty milk, the average price reduction was 12 cents per litre.
"Lower average milk prices have been strongly influenced by a switch to generic-labelled milk products and increased sales of 3-litre packs of milk, both of which are generally cheaper on a per litre basis", Professor Fels said. "If prices remain at current levels, savings to Australian milk consumers from dairy deregulation would exceed $118 million on a full-year basis from supermarket sales of milk alone".
Prices paid to dairy farmers for drinking milk fell by 19 cents per litre to around 34 cents, bringing prices more into line with raw milk purchased for use in manufactured dairy products. At the same time, dairy farm incomes have been supplemented by the proceeds of an 11 cents per litre retail milk levy.
The ACCC also found that supermarket margins on milk sales decreased by an average of 19 per cent on a per litre basis in the first six months of deregulation while processor margins contracted by an average of 18.5 per cent in the same period#.
Supermarket chains introduced lower prices for generic-labelled milk products in August 2000 and have indicated that these prices will apply indefinitely. Sales of supermarket milk increased to just over half of total milk sales in the three months to December 2000. However, there was little change in the overall volume of milk purchased by Australian consumers across all food stores.
"Milk sold in non-supermarket outlets also decreased in price, although there appears to have been some modest price increases in the early months of this year", Professor Fels said. "When savings estimates for milk sold in convenience stores, petrol stations, traditional corner stores, milk bars, delicatessens and take-away food outlets are taken into account, total consumer savings since dairy deregulation would far exceed the savings made by supermarket shoppers. However, given the absence of longer term pricing trends for milk products sold in the vast number of small independent businesses that sell milk across Australia, it is difficult to put a figure on these additional savings.
"The importance of milk as a driver of store traffic in food and grocery outlets prompted many retailers to lower milk prices following deregulation. Australian milk consumers now have access to an increasing array of milk products sold through many different retail outlets. Accordingly, consumers have the opportunity to weigh-up a range of price and convenience factors when deciding the type of milk they purchase and the retail outlet from which milk products are bought. Importantly, standard prices for generic-labelled milk now apply in major supermarket chains giving most Australians access to low-priced milk.
"However, with the introduction of the 11 cents per litre retail milk levy on 8 July 2000, some milk products have increased in price since deregulation. These included UHT milk, some milk sold in the Australian Capital Territory and milk products retailing in the Northern Territory. Farmgate milk prices were not previously regulated in the Australian Capital Territory and Northern Territory while raw milk used for UHT milk products was previously regulated at lower prices than for other drinking milk products. This meant that the retail milk levy could not be fully offset by lower purchase costs for milk at the farmgate in these particular instances".
Across Australia, less than 18 per cent of milk is used for drinking products with the remainder used to produce cheese, butter, milk powders and other manufactured dairy goods. Estimates derived from previous figures released by the Australian Bureau of Agricultural and Resource Economics suggest that Australian farmgate prices for milk will fall by an average of around 3.4 cents per litre in 2000-01 when measured across both manufacturing and drinking milk.
Farmgate price reductions are expected to have a considerably greater impact on farm incomes in New South Wales, Queensland and Western Australia which have traditionally directed a higher proportion of state production into the drinking milk sector.
The ACCC recently issued a draft determination proposing to grant authorisation* for Premium Milk Supply Pty Ltd to collectively bargain farmgate prices and milk standards with Pauls Limited on behalf of participating South East Queensland dairyfarmers. The ACCC is currently awaiting further information from the Australian Dairy Farmers Federation in relation to its recent application for authorisation to enable individual groups of dairyfarmers within any particular region in Australia to engage in collective bargaining arrangements with the processor to whom they supply.
Farmgate price controls for drinking milk were removed in all states of Australia from 1 July 2000 with an 11 cents per litre Dairy Industry Adjustment Levy introduced on 8 July 2000 to fund a structural adjustment package for Australian dairy farmers. As part of the process of dairy industry deregulation, the Commonwealth Government directed the ACCC to monitor prices, costs and profits across the drinking milk supply chain for the nine-month period ending 8 January 2001.
Price changes
Australian supermarket prices for plain, reduced fat and low-fat milk decreased by an average of 22 cents, 6 cents and 9 cents per litre respectively across all pack sizes and brands from the June quarter to the December 2000 quarter. These products make up 81 per cent of total milk sold in supermarkets. However, prices for UHT, flavoured and specialty milk increased in price by averages of 10 cents, 14 cents and 3 cents per litre respectively over this same period. Across all categories of milk stocked by Australian supermarkets, the average price decrease in the six months to December 2000 was 12 cents per litre.
In convenience and corner stores, prices of 2-litre packs of plain milk decreased in response to lower supermarket prices. However, price reductions for 1-litre packs of plain milk and other milk categories were generally less pronounced.
Price reductions for milk were greatest in Victoria where plain milk fell by an average of 32 cents per litre in supermarkets. Price decreases in States such as New South Wales, which previously had low retail prices for milk, declined to a lesser extent. Overall, there is now less variability between milk prices in different States.
Impact on margins and sales revenues
From the June quarter to December 2000 quarter the gross margin on aggregate milk sales in supermarkets declined by 19 per cent with retail prices falling at a greater rate than wholesale prices. Despite sales volumes increasing by around six per cent, substantial reductions in per litre revenue led to an overall decrease in aggregate revenue derived from supermarket milk sales during this period.
The average net profit margins of Australian milk processors decreased by around 12 and 18 per cent respectively on a per litre basis for the September and December 2000 quarters relative to the June 2000 quarter. As the total volume of milk sold in Australia was relatively constant over this period, the overall profitability of milk processors decreased following deregulation. Although price discounting of branded milk products fell away in the December 2000 quarter, net profit margins remain considerably lower than for periods before deregulation.
#Supermarket margins were based on the difference between wholesale and retail prices (gross margin) due to the difficulty in accurately apportioning store overheads to specific product categories. Processor margins were calculated by deducting expenses incurred in the processing of milk, including the costs of purchasing raw milk, from wholesale milk prices.
*The ACCC has the function, through the authorisation process, of adjudicating on certain anti-competitive practices that would otherwise breach the Trade Practices Act 1974. Authorisation provides immunity from court action, and is granted where the ACCC is satisfied that the practice delivers offsetting public benefits. Applications for authorisation are considered on a case by case basis. The onus is on the applicant to demonstrate that there is public benefit arising from the conduct and that the public benefit outweighs any public detriment. Authorisation, once granted, does not compel parties to participate in the proposed arrangements.