Demand and Supply of Milk in Australia

Question: Discuss about the Demand and Supply of Milk in Australia. Answer: Introduction According to The Conversation. (2016), the production of milk in Australia has increased rapidly in the last few quarters. The total production of milk has been doubled in some of the places in the country. According to Agriculture (2016), this high supply has caused great inventory accumulation, resulting in fall in price. The reasons behind this phenomenal supply quantity are improved technologies, cow nutrition, focus on animal health and welfare, economies of scale and many more. The interested parties in this article will be the farmers, the milk producers, the milk traders, and those business owners who used milk as a factor of production. The stakeholders in this industry are the milk producers, suppliers, sellers, and the operators of related industries. The government being the one who will have to address the problems regarding the situation exogenously, is also considered as stakeholder. Economic theories The microeconomic theories can be used here are demand and supply and economies of scale. These economic concepts will help one to understand the reasons behind the splurge in the supply of milk and its consequences in the economic activities in Australia. The concept of demand and supply shows how the increased supply can be good as well as bad for some of the agents in the economy. The economies of scale shows which producers will survive in the industry and which producers will quit operating in the same. Analysis of the situation As stated by zkan, Hill and Cullen (2015), the splurge in supply was caused by improved technologies, cow nutrition, focus on animal health and welfare, economies of scale and many more. These reasons externally affected the supply by shifting the supply curve outwards as shown in the figure below: As the figure above shows, the supply of milk has shifted the supply curve rightwards. At price level P the output increased from A to B. According to Rios, McConnell and Brue (2013), this means, at the same price more milk is available now. But the demand for milk has not changed in the economy; this will result in a fall in the price of milk. The situation is depicted in the figure below: The figure above shows due to the unchanged demand, the rise in supply will reduce the price level of milk from P to P. If the demand for milk keeps on being at the same level, the price will not rise further from here. This will reduce the profitability in the industry for small producers. The business holders who use milk as an input will also reduce their prices to meet the competition in the market which will be created by the large supply of milk. According to Canto, Joines and Laffer (2014), this will be favourable for the consumers of milk and to those businesses which use milk as input in their production process. On the other hand, the suppliers and producers of milk will earn less due to the fall in price. This situation will push out some milk producers out of the market. As stated by Baumol and Blinder (2015), only those will remain who have an efficient production system and incurs less cost of production. One of the reasons behind this rise is economies of scale. Those who produce milk in a large quantity and thus have a less cost of production will benefit from this situation. It can be presented in a figure as given below: In the figure 3, the due to economies of scale, producing more quantity of milk reduces the average cost from producing more milk (A to B). The small producers in the market will leave due to inefficient production process. According to Hoag (2013), the rise in supply is not a sudden change but a sustaining one as the outside shocks which caused this are also sustaining in nature. Recommendation for the stakeholders The situation offers some positive scope for the Australian milk industry as given below: The country can increase the amount of exports, and start exporting to those countries where the country has not exported before. The country can also start producing new products which are related to milk and which will be well accepted by the consumers. This will bring in the scope of research and development in the industry. The country can donate the extra amount of milk for good cause and use it for food security bills in various countries. A better storage process can be introduced to increase the inventory in the country. The government has to think about policies which will absorb the milk producers who will leave the industry due to the rising supply. Conclusion From the above milk supply scenario in Australia it can be concluded that this rise is will sustain. This reduces the cost of production and increase the efficiency level in the industry. Multiple options come out from this scenario. As the figure 3 shows, the economies of scale can make Australia a major supplier of milk in the international market. It brings in the opportunity of creating new products which requires milk as a factor of production. Industries which will be affected by this price fall of milk are ice cream companies, yogurt producers and others. This will reduce their cost of production. The government of Australia can focus on trade of milk with this huge supply. The government also has to make policies which will help the employment process to absorb those who will be pushed out of the industry due to low level of price. References Agriculture, (2016). Innovation doubles milk production | Dairy mega evaluation | Dairy research | Dairy | Agriculture | Agriculture Victoria. [online] Agriculture.vic.gov.au. Available at: https://agriculture.vic.gov.au/agriculture/dairy/dairy-science-and-research/dairy-mega-evaluation/innovation-doubles-milk-production [Accessed 6 Dec. 2016]. Australia, D., 2014. Australian Dairy Industry. Dairy Australia. Available online: www. dairyaustralia. com. au/Industry-information/About-the-industry. aspx. Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning. Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics: Theory and evidence. Academic Press. Hoag, J.H., 2013. Review of Supply and Demand. In Intermediate Microeconomics (pp. 27-40). zkan, ?., Hill, J. and Cullen, B., 2015. Effect of climate variability on pasture-based dairy feeding systems in south-east Australia. Animal Production Science, 55(9), pp.1106-1116. Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill. The Conversation. (2016). Milk price cuts reflect the reality of sweeping changes in global dairy market. [online] Available at: https://theconversation.com/milk-price-cuts-reflect-the-reality-of-sweeping-changes-in-global-dairy-market-59251 [Accessed 6 Dec. 2016].