Australian Dairy Market Competition

This assignment examines the competitive structure of Australia's dairy market. It explores the impact of numerous international competitors, open trade policies, and global price fluctuations on Australian butter production and sales. The analysis concludes that Australia operates within a perfectly competitive dairy market due to factors such as numerous participants, free entry/exit, and lack of market control.

Price
S
Quantity
D
P*
Q*
S1
Q1
P1
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NAME:
ID NO:
Tutor’s name:
BUS102 Introduction to Economics–ATMC 2017
Assessment task 2 – Responses to articles - Article 2, Week 8
DUE via SafeAssign9pm Thursday25th January 2018 (Week 8)
“What is behind the rising price of butter”by Brigit Busicchia, The Conversation
available at:
https://theconversation.com/what-is-behind-the-rising-price-of-butter-85968
Access the article at the URL given above and answer the questions in the spaces below. Use full
sentences and show all necessary working but do not use more space than is given here.Other
references are not necessary but, if you do use any (for example,online economics glossaries)
please list at least the URL of your source.
Marks are shown and total [15].
1) According to the article as “some of Australia’s favourite baked goods, such as croissants and
buttery biscuits, have been creeping up in price…”. Within the context of the article, use the simple
demand and supply diagram below to explain what might happen to the price of croissants in
Australia (explain why prices will most likely increase/decrease/remain the same). In answering this
question, assume the demand curve is constant and discuss the two main supply side issues
affecting the Australian market for butter. Identify and discuss what happens to the supply curve,
prices and the potential impact on the end consumer. [5 marks]
The butter production in Australia has been decreased by 18% from 2016 to 2017. There
are chiefly two reasons behind this falling production of butter. The first reason behind this is
that milk fat is using more to produce cheese and cream due to their higher level of demand in
Asian and U.S market (The Conversation. 2018). Moreover, due to some lower level of genetic
and nutritional factors, the amount of milk fat percentage has been decreasing in this country. In

Price
Quantity
D
S0
S1
P0
P1
Q0 Q1
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Australia, cattle industry was facing poor grazing season since 2016. This further has reduced the
nutrition level of those animals. Therefore, the amount of milk-fat contents and its quality has
become low. As a result, total production of butter in Australia has been affected since 2016
(The Conversation. 2018). Hence, higher butter prices influence Australian bakeries to increase
their product prices. Therefore, the price of croissant has increased.
To answering this situation more accurately, the above diagram will used to explain. In
the above diagram, the demand curve (D) for croissant of Autralian citizens has been shown. The
initial supply curve of croissant was S. After decreasing the production of butter, the price of this
milk produced goods has increased. As a result, supply of croissant will be increased, that is, S1.
Due to fixed demand curve but decreasing supply of croissant, the domestic price of this food
item will be increased. Hence, final consumers of Australia will buy this food item with higher
prices, that is, P1. As a consequence, the consumer will decrease their amount of croissant
consumption from Q* to Q1.
2) When discussing the impacts of the EU dairy quotas, the article states, “The liberalisation of the EU
dairy market drove farm-gate prices down and led farmers, across Europe, to scale back on
production”.
a) Use the simple demand and supply diagram below to explain why prices were artificially high
when the EU set a price floor prior to market liberalisation: in your answer also discuss the
impact on the famer, the purchasers/consumers, and the government. [5 marks]
Marks: 1.5 marks for correct graphical depiction with 0.5 marks for each element of explanation
Milk quota or dairy produce quota of the European Union (EU) had the purpose to control
the rising milk production of this union. This milk quota restricted the amount of milk selling for
a farmer for every year. Hence, before the market liberalisation, the prices of milk products were
artificially high due to earn standard market revenue (Rosa, Weaver and Vasciaveo 2016).
Moreover, a price floor was set to avoid price volatility in the world market. Hence, small scale
milk producers were benefitted by this system.
This dairy quota has a direct impact on government expenditures as it subsidies export of
those dairy products to maintain an unchanged domestic price. For a particular level of quota,
policy makers can decrease the domestic prices. For this reduction, the government expenditure
would not be affected for any subsidised export (Groeneveld, Peerlings, Bakker and Heijman
2016). Due to this lower price, consumers can purchase more products. On the other side,

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whether the farmers will gain or lose will completely depend on empirical question and the
surplus share.
In the above diagram, the demand curve represents the international demand for dairy
products. However, due to dairy quotas, the initial supply curve of EU dairy products will be S0.
In this situation, the supply of milk would be restricted by the government. Moreover, the price
level will be stable and high. Here, the dairy price level before liberalisation was P0. The price
flooring can be seen to maintain the price volatility in the international market. In this situation,
the entire dairy markets of the European Union will produce Q0 amount of milk. However, after
liberalisation, the supply curve will be changed. Though, the world demand curve for milk
products will remain same.
b) Referring to the graph in 2a) explain why dairy prices have been driven down with market
liberalisation in the EU. [0.5 marks]
After liberalisation, dairy prices have faced volatility. Moreover, due to international
business, dairy producers will face a competition with the world market (Beghin and Fuller
2015). On the other side, after liberalisation, large producers will produce can produce huge
amount of productions. Hence, to export their dairy products in the world market, dairy prices
will be decreased after liberalisation. This will be helpful for the large milk industries. However,
small industries will face difficulties after liberalisation. In this situation, the government has
provided subsidies. The government has helped these small industries so that they can produce
large amount milks with good quality and can export them.
To illustrate this situation the above diagram of 2a can be used. In the above diagram, the
supply curve will be shifted to the right, that is, S1 after liberalisation. As a result, the new dairy
price will be P1, which is less than P0.
c) Referring to the graph in 2a) explain why farmers across the EU have scaled back production
since the removal of the price floor and market liberalisation. [0.5 marks]
Diary quota restricted the amount of dairy production in EU. Hence, farmers could not
produce milk beyond a certain amount to avoid levy. After removal of liberalisation, those
farmers can enjoy free amount of productions (Vőneki, Mándi-Nagy and Stark 2015). They can
produce according to the global demand for their dairy products. Hence, they have scaled back
their production level.
In the above figure, the supply curve of dairy products has been increased after liberalisation.
In figure 2a, the initial amount of diary production was Q0. However, after liberalisation, the
new amount f diary production becomes Q1. This implies that overall production will be
increased in future. Moreover, by increasing their amount of milk production, producers can
export more and there is no need to pay extra charges to produce more, as before.
3) Can the Australia’sbutter market be considered perfectly competitive? Why or why not? [4 marks]
The Australian market of butter can be considered as perfectly competitive after analysing
the international scenario. The demand for butter is completely depend upon the international
market. Moreover, the price of butter is determined by the international as well as domestic
demand for butter and total butter produced within this country. The country cannot influence the
price level of butter in world market. There are huge numbers of customers, worldwide.
The Australian dairy industry has faced strong competition in international market with other
dairy producing countries. These are New Zealand, the U.S.A and the EU. Moreover, there are
also some small countries who are well-known supplier of this product

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(Australiandairyfarmers.com.au, 2018). These countries are Ukraine, Argentina and Uruguay.
Hence, due to large number of other dairy products producing countries, Australian products face
a limited share in the global market.
On the other side, the Australian government does not restrict their dairy markets by
imposing any trade barriers. The country has offered an open market for their dairy products
(Australiandairyfarmers.com.au, 2018). On the other side, there are some countries, which have
imposed trade barriers, like tariffs to protect their market of this product.
Recently, international price for dairy products has been increased due to its lower
production and higher demand. As a result, butter price of Australia has also affected. This
higher demand further influences the price of butter in Australia to increase. However, the
country cannot influence solely the dairy price in the world market.
Hence, after analysing these whole affects, it can be concluded that the country is facing a
perfectly competitive market for their dairy products in the world market. This market has almost
all characteristics of a perfectly competitive market. There are large numbers of other
competitors, who are selling same time of products (De Loecker and Van Biesebroeck 2016).
Moreover, there are large numbers of customers who buy dairy products from Australia, like,
butter, cheese and so on. As the county does not impose any trade barriers, there can be free
entry and exit of other foreign industries. On the other hand, as the country does not possess any
monopoly power in the world market, it cannot influence the world price of butter solely. Hence,
these all arguments support the conclusion that the dairy market of Australia is perfectly
competitive by nature.

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References:
Australiandairyfarmers.com.au. (2018). Cite a Website - Cite This For Me. [online] Available at:
http://www.australiandairyfarmers.com.au/_literature_155105/Trade_and_the_Australian_Dairy
_Industry.
Beghin, J.C. and Fuller, F.H., 2015. Dairy policies around the world: What would we gain from
getting rid of them?. Iowa Ag Review, 6(1), p.5.
De Loecker, J. and Van Biesebroeck, J., 2016. Effect of international competition on firm
productivity and market power (No. w21994). National Bureau of Economic Research.
Groeneveld, A., Peerlings, J., Bakker, M. and Heijman, W., 2016. The effect of milk quota
abolishment on farm intensity: shifts and stability. NJAS-Wageningen Journal of Life
Sciences, 77, pp.25-37.
Rosa, F., Weaver, R. and Vasciaveo, M., 2016. Dairy Price commodity in Italy: volatility and
forecast after milk quotas. Proceedings in Food System Dynamics, pp.112-115.
The Conversation., 2018. What is behind the rising price of butter?. [online] Available at:
https://theconversation.com/what-is-behind-the-rising-price-of-butter-85968.
Vőneki, É., Mándi-Nagy, D. and Stark, A., 2015. Prospects for the European Union and
Hungarian dairy sectors after the abolition of the milk quota system. Studies in Agricultural
Economics, 117(1), pp.1-9.