Discuss about the Australian Dairy Industry for Economic Perspectives
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.
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% 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
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 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:
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.
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 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 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.
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 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.
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.
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.
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.
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.
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