Economic Analysis of the Australian Dairy Industry: A Detailed Report

This report provides a comprehensive economic analysis of the Australian dairy industry. It begins with an overview of the industry's structure, detailing the stages of dairy production from raw milk to consumer distribution, and highlighting significant changes since 1970, including technological adv...Read More

Running head: AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
Name of the Student
Name of the University
Authors Note

1AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
Table of Contents
Introduction......................................................................................................................................3
Structure of Australian Diary Industry and identification of stages of production of dairy
products............................................................................................................................................3
Analyzing the structure of intermediate markets.............................................................................4
Inglenook Diary’s current strategy..................................................................................................6
Opportunities or threats to long run profits of dairy industry..........................................................6
Recommendations to the current strategy of Inglenook Diary........................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

2AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
Introduction
The study highlights on the structure of the Dairy Industry in Australia and the various
stages of production of dairy products from raw milk and its distribution to the customers. Since
1970, the dairy industry in Australia has shown huge improvements in productivity of their farm.
Implementation of advanced technologies as well as structural reforms within the sector has
increased the efficiency in milk production (O’Brien et al., 2012). This industry in Australia has
commissioned ABARES for analyzing the productivity drivers within the industry for supporting
huge information needs that is required to develop funds across the regions. The study also
elucidates on the structure of their intermediate markets and implication of market structure in
this industry. It also reflects on the current strategy of Inglenook dairy and its opportunities and
threats to its long run profits. Furthermore, recommendations regarding this farm’s current
strategy are also discussed in this assignment.
Structure of Australian Diary Industry and identification of stages of production of dairy
products
Over the past 30 years, the structure of the dairy industry in Australia has changed in a
huge way and is driven by various factors that includes removal of regulated prices of milk and
reforms in market of dairy products. However, during this phase , the total number of farms in
this nation has declined by about two-thirds and the processing as well as distribution segments
of this industry have been rationalized (Tauer et al., 2012). Although few resources are being
utilized in producing milk, restructuring has led to efficient industry. This has also led to increase
in growth on production of dairy each farm in real terms. This industry contributes to 0.3 to 0.4%

3AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
to GDP (gross domestic product) of the nation. In addition, the employment rate of Australia
increases as large workers are engaged in this industry.
The process that is involved in producing dairy products from raw materials and then
marketing and distribution to the consumers in Australia involves few steps :
Receiving milk or raw materials – The dairy farms uses antibiotics for controlling infections in
cows. The milk is then obtained from them.
Storing- Milk is stored in clean and hygienic container .
Standardization- It includes filtration as well as separation.
Pasteurization and homogenization- During this process, milk is heated to 72 degree centigrade
and is kept for 15 seconds.
Chilling the product obtained- After that, it is cooled instantly to 4degreecentigrade. This
treatment us required for destroying harmful bacteria present in the milk.
Packaging
Storage- the chemical inputs such as sanitizing agents are used for storage of dairy products.
Distribution to the consumer
Analyzing the structure of intermediate markets
The oligopoly intermediate market structure is involved in the production as well as
distribution of final dairy products. The dairy industry in Australia has few firms and they are
interdependent with each other. However, each farm under Australian dairy industry considers

4AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
MC
D=AR
MRQ1
P1
Price
Quantity
the action of rival farms while setting their price on dairy products. In addition, non-price
competition exist in this intermediate market structure as farms influences the products prices.
Similar or differentiated dairy products are produced by the farms in this Australian industry. In
addition, the farms in this industry adopts new technology that outcomes in the farms to become
capital intensive as well as dependent on labor. As it has been seen that pricing arrangements
had influenced productivity in past, implementation in new technologies helps them to attain
competitive advantage in oligopoly market structure.
As few dairy firms exists in the Australian market, the diary industry faces oligopolistic
competition. In this competitive market structure, the dairy farms are forced to be interdependent
as it aids one farm to monitor other farm’s actions for gaining competitive advantage. In fact, the
behavior of the farms in dairy industry of Australia is explained with the help of kinked demand
curve framework shown below:

5AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
Figure 1: Kinked demand curve framework reflecting behavior of dairy farms in oligopolistic
competition
Source: (As created by author)
At P1 , if the dairy farms raises the price of milk product, then consumers tries to purchase from
other farms. This leads to loss of market share value of that farm and hence demand becomes
elastic. Thus, farms incurs loss from raising the product price and hence farms in this market face
huge competition in terms of product pricing. This model also recommends that price might be
rigid as there firms achieve no incentive for changing their product price.
Implication of market structure for market power distribution in this industry
The oligopolistic market structure in Australian dairy farms has huge implications for the
distribution of market power in the industry mainly over its pricing and accumulation of profits
at different production chain stages. Price leadership occurs in the oligopoly as large farm in this
industry affects the pricing strategy of other farms existing in this market. Therefore, if one farm
raises its price of dairy products, then other farms will not follow it and stick to their set price.
As a result, the quantity demanded for the products of that farm will decline considerably. On the
contrary, if one farm declines the product price, then other farms will follow by reducing the
product price for retaining their customers (Howley et al., 2012). Thus, it will prevent them from
losing their market share and exist in the market.
This market structures has some implications on the accumulation of industry profits at
different stages of the production chain of the industry (Kilelu et al., 2013). The dairy farms in
Australia focus on marketing activities such as advertising the products for attaining higher
profitability. However, this increases the aggregate demand of the dairy products in this

6AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
oligopoly market. Moreover, if one farm adopts new technology in production, then the total cost
of production automatically increases. Now, if another farm sets lower price for the dairy
product, then this farm will lower its price on their product. As a result, the farm attains lower
profit or may face loss in manufacturing dairy products. Overall, it affects the industry profits
leading to lowering of market share value.
Inglenook Diary’s current strategy
Inglenook dairy farm currently strategizes to involve vertical integration while processing
milk and activities for distributing dairy products (Gourley et al., 2012). In addition, the
organization current strategy also includes differentiation of dairy products based on the needs
and preference of the customers. They also strategizes to reduce the products cost and improve
the production process by adopting new technologies. They also plan to develop unified brand in
the market for attracting large number of customers and attain their trust and loyalty. Moreover,
they try to update their product offering technique for improving their financial performance.
They also focuses innovating new products using raw materials, providing proper customer
services and setting lower product prices in order to attain competitive advantage (Ertl et al.,
2015). This current strategy will facilitate in controlling larger share of this market as well as
ensure in attaining sustainable profitability in long term.
Opportunities or threats to long run profits of dairy industry
Inglenook dairy farm in Australia reflects good potential in growth and the factors that
includes advancement of technologies and production as well as supply chains affects the
producers abilities and hence provides huge opportunities to expand in future (Eastwood et al.,
2012). The company also strategizes to set lower prices in comparison with other competitors in

7AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
this industry. Moreover, technological advancement and extending customers channels also
provides opportunities to the farms in the dairy industry as the international demand for the
products grows in greater way. Thus, Inglenook management practices helps in generating
employment opportunities and improving the labor productivity.
The threats of this dairy farm occur from high level of competition in this industry. The
competitors of this dairy farm pose huge threats on them in terms of pricing strategy and quality
of products. However, this aids the farm in focusing on producing high quality products at lower
price. In addition, intervention of the Australian government also affects the growth of Inglenook
within the Australia’s dairy industry (Burton et al., 2012). As a result, this affects on the long run
profit of the farm as this farm’s cost of production becomes higher than the total amount of
revenue obtained during the particular year. Under investment in the infrastructure of dairy chain
and trade liberalization, unsuitable development plans also poses threats to this farm.
Recommendations to the current strategy of Inglenook Diary
In order to be successful, the strategy of Inglenook should rely on the principle of value
creation in each section of the dairy chain. The recommendations given to the current strategy of
Inglenook Dairy will help them to achieve the goal of long run profitability. This includes:
It is suggested that Inglenook farm should consult with their stakeholders for achieving the
objective and goal of the farm and this helps in expanding the business.
Given the rise in milk volatility and feed prices, it is necessary to integrate risk management
system into the strategies of dairy development (Ahmad and Bravo-Ureta, 2012). Thus, it is
suggested that the farm should implement risk management system for attaining higher
profitability in long run.

8AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
Agricultural development has been dynamic in regards to structure of the farm, input prices ,
product prices and perceptions of the consumer. Thus, it is suggested that Inglenook should
monitor, evaluate and improve their strategy in order to avoid risk that comes from other
rivalries.
Before implementing the strategy, the farm should assess dairy programs that explore benefits of
program for creating target beneficiaries. Thus, this will help them in improving investment
returns in development of dairy.
Conclusion
Thus, it is concluded from the above assignment that implementation of proper strategy
helps the dairy farm in attaining higher profitability and expanding the business. The market
structures also influences the dairy farms in the nation. The business strategy of Inglenook also
provides huge opportunities in the market and also helps in facing threats that comes from rival
firms. Thus, it helps in gaining competitive advantage and achieve sustainable profitability in the
long run.

9AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
References
Ahmad, M., & Bravo-Ureta, B. E. (2012). Technical efficiency measures for dairy farms
using panel data: a comparison of alternative model specifications. Journal of
Productivity Analysis, 7(4), 399-415.
Burton, R. J., Peoples, S., & Cooper, M. H. (2012). Building ‘cowshed cultures’: A cultural
perspective on the promotion of stockmanship and animal welfare on dairy
farms. Journal of Rural Studies, 28(2), 174-187.
Eastwood, C. R., Chapman, D. F., & Paine, M. S. (2012). Networks of practice for co-
construction of agricultural decision support systems: case studies of precision dairy
farms in Australia. Agricultural Systems, 108, 10-18.
Ertl, P., Klocker, H., Hörtenhuber, S., Knaus, W., & Zollitsch, W. (2015). The net
contribution of dairy production to human food supply: The case of Austrian dairy
farms. Agricultural Systems, 137, 119-125.
Gourley, C. J., Dougherty, W. J., Weaver, D. M., Aarons, S. R., Awty, I. M., Gibson, D.
M., ... & Peverill, K. I. (2012). Farm-scale nitrogen, phosphorus, potassium and sulfur
balances and use efficiencies on Australian dairy farms. Animal Production
Science, 52(10), 929-944.
Howley, P., Donoghue, C. O., & Heanue, K. (2012). Factors affecting farmers’ adoption of
agricultural innovations: A panel data analysis of the use of artificial insemination
among dairy farmers in Ireland. Journal of Agricultural Science, 4(6), 171.

10AUSTRALIAN DAIRY INDUSTRY: ECONOMIC PERSPECTIVES
Kilelu, C. W., Klerkx, L., & Leeuwis, C. (2013). Unravelling the role of innovation platforms
in supporting co-evolution of innovation: Contributions and tensions in a smallholder
dairy development programme. Agricultural systems, 118, 65-77.
McDowell, R. W., & Nash, D. (2012). A review of the cost-effectiveness and suitability of
mitigation strategies to prevent phosphorus loss from dairy farms in New Zealand and
Australia. Journal of Environmental Quality, 41(3), 680-693.
O’Brien, D., Shalloo, L., Patton, J., Buckley, F., Grainger, C., & Wallace, M. (2012). A life
cycle assessment of seasonal grass-based and confinement dairy farms. Agricultural
Systems, 107, 33-46.
Tauer, L. W., & Mishra, A. K. (2012). Dairy farm cost efficiency. Journal of Dairy
science, 89(12), 4937-4943.