<p>I would like to contradict Kenny LJ explicitly on his claim that "the free market works".</p>

<p>It only works if the market is actually free, i.e. competition exists. Which, you can argue, is not the case in the milk market.</p>

<p><strong>What you are looking at is a <a href="https://en.wikipedia.org/wiki/Cartel" rel="noreferrer">cartel</a></strong>.</p>

<p>(Excuse me for citing numbers for the <em>German</em> market, not Australia, as I am more familiar with that market and have numbers ready that I don't have for Australia. I am quite confident, however, that while the ratios might differ a bit, the overall structure will be the same.)</p>

<hr>

<p>There are about <strong>100.000 milk farmers</strong> in Germany, producing about 28 million tons of milk per year. As Mick pointed out, however, they are in the farming / production business, not in the transportation / processing business, so they have to sell their milk to dairies. There are just over <strong>100 dairies</strong> in Germany.</p>

<p>And most of them have a monopoly on their region, meaning they're the only dairy a farmer <em>could</em> sell to.</p>

<p>Those dairies sell the processed milk to supermarket chains and other retailers / business consumers. About 60% of all the milk produced is sold by <strong>less than a half-dozen major supermarket chains</strong>.</p>

<p>Milk is a highly regulated food product, meaning that one dairy's milk is effectively the same as any other. There is <strong>very little competition in quality</strong>. The dairies don't even have "a product", the milk ends up packaged in the <em>supermarket</em> brand:</p>

<blockquote>
  <p>Woolworths has bumped the cost of its own-brand milk by 10 cents a litre, but Coles has refused to follow suit because it might burden customers.</p>
</blockquote>

<p>So the only competition is in the price. <strong>Whoever <em>sells</em> cheapest.</strong> Customers buy the milk where it's cheapest (supermarket), because they simply do not have any realistic option to go for a "premium" milk product that's provided by middle- or small-sized, or regional, producers at a sustainable price with a transparent premium for the producer as well. It's just not available. There are "bio" brands, but that label is only saying something about how the cattle is kept and fed -- the price dynamics still apply:</p>

<p>The supermarket buys where it's cheapest (dairy), and the dairy tells the milk farmers how much they are willing to pay, take it or leave it.</p>

<p>A farmer that is not willing to sell his milk at the price the dairy dictates (even if it's at a loss), will not get his milk to market <em>at all</em>, but still have running costs to pay. Which means he'll be out of business pretty quick, forced to sell his business, land, and lifestock to some bigger farmer that is able to use scaling effects to produce at a lower price.</p>

<p>You could claim that this is the result of an oversaturated market, that less milk on the market would drive the prices up. That is correct, in a way, but the market <em>is</em> oversaturated <em>because</em> producing large quantities of milk as cheap as possible is the only bargaining chip the producers <em>have</em> in a market where literally no-one is going to a farmer to buy produce. Rising prices would not equate to rising margins for the farmers, as they simply have no control over the supply chain.</p>

<p><em>Concentration of power at the retailer end, a lack of competition in quality, and the inability of the producer to cut out the middle man (dairies) or create a meaningful "premium" market means the retailer is dictating the price, to the point where producer's margins are minimized and the only way to be a profitable producer is by economics of scale -- large combines swallow medium and small-sized producers, and the retailers are able to push the price even lower, repeating the cycle.</em></p>

<p>This is beneficial to the customer insofar as that the product (milk in this case) is available at every supermarket and extremely cheap. But it comes at a high cost, destroying middle- and small-sized milk farms (and dairies!) in a race to the bottom. Which also includes a race for the most milk-efficient cattle, to the exclusion of all other considerations.</p>

<hr>

<p>Refuting Kenny LJ's wholesale dismissal of regulation:</p>

<blockquote>
  <p>Suppose instead that these farmers instead benefited from low grain prices and enjoyed profits of 20 cents per litre of milk sold. Should consumers then have stood outside supermarkets demanding that milk prices be lowered by 10 cents per litre?</p>
</blockquote>

<p>The consumers wouldn't have had to, as the supermarket chain would already, preemptively, have realized the opportunity to lower prices (to stay competitive to the <em>other</em> supermarket chains who would have done the same).</p>

<hr>

<p><strong>Addendum:</strong></p>

<p>In answer to a comment by @horns, <em>this is a matter of official record and investigation</em>.</p>

<p>Rewe was sentenced to 20.8 million Euro antitrust fine in May 2013. Spar was sentenced to 3 million Euro antitrust fine in November 2014. (Just two I was able to duckduckgo ad-hoc.)</p>

<p>Quoting the <a href="https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2017/13_03_2017_Milch.html" rel="noreferrer">German Antitrust Office</a>:</p>

<blockquote>
  <p>Our investigations have shown that the contracts between milk producers and dairies in Germany have long periods of notice and duration. In addition, farmers in Germany are generally obliged to supply the milk they produce exclusively to their respective dairy. There is virtually no possibility for them to switch to another dairy. This is a problem for farmers and hinders possible newcomers on the dairy side or dairies wishing to extend their activities. Another widespread practice is that the price of raw milk is set only after delivery and is based on reference prices and market information systems.</p>
</blockquote>

<p>Also from that article:</p>

<blockquote>
  <p>The Bundeskartellamt questioned 89 private and co-operative dairies, which in 2015 procured approx. 30.9 million tonnes of raw milk. This is equivalent to around 98 % of the total milk supply volume. The authority's investigations have shown that in 2015 97.8% of the volume of raw milk covered by the investigations was sold subject to exclusive supply obligations. In addition, contracts for more than half of the raw milk supply volume can only be terminated with at least two years' notice.</p>
</blockquote>

<p><em>There is no effective competition.</em></p>

CC BY-SA 4.0
2019-03-15T12:41:06.860Z
Comments are not for extended discussion; this conversation has been [moved to chat](https://chat.stackexchange.com/rooms/91066/discussion-on-answer-by-devsolar-why-do-australian-milk-farmers-need-to-protest).
Ubiquitous
CC BY-SA 4.0
2019-03-15T16:47:24.143Z
I don't believe this is correct. I don't think we are seeing cartel behaviour. I think we are seeing monosony - a situation where there are very few buyers (supermarkets) and many sellers (milk producers). Supermarkets are able to exert market power. The situation is that if a producer declines to sell their milk at the low asking price, they risk not selling their milk at all.
Jamzy
CC BY-SA 4.0
2019-03-15T19:58:42.103Z
Note that @Jamzy has a small spelling error in that comment: a situation where a group has a "monopoly power" of purchasing in a region has *monopsony* power, not *monosony* power.
Eric Lippert
CC BY-SA 4.0
2019-03-13T09:58:26.177Z
2019-03-14T18:03:43.810Z
2019-03-14T18:03:43.810Z
DevSolar
<p>Not sure about Australia, but in America it's quite common for a large retailer to simply dictate to the producers the price they will purchase the commodity from them for.  If a farmer's primary customer can simply declare that they will be paying 5% less for a product, the farmer really does not have much recourse.    Or, if for whatever reason the expenses increase, the farmer either eats that cost, or it gets passed on. Unfortunately, they are not a storefront that can make up for it by selling to more customers -- they have their major customers, and they sell it to them.    So if that major customer simply refuses to pay it, the farmer has no recourse. </p>

CC BY-SA 4.0
2019-03-13T20:48:40.227Z
The free market says the farmer should shut down their farm and stop selling milk. If the retailers set the price too low, they'll quickly find themselves unable to buy any milk because all the farms are shut down, and they'll have to raise it back up. Unfortunately, by that point all the farms will be shut down, which isn't a good thing. It would be much better for all parties to work out a sustainable price in advance.
Criticize SE actions means ban
CC BY-SA 4.0
2019-03-13T20:51:47.430Z
Agreed.   And in this case, the farmers are banding together to attempt to prevent that.  That is still free market.      If the government steps in and picks a winner in the market, it ceases to be a free market.
Keith
CC BY-SA 4.0
2019-03-14T00:09:44.903Z
@Keith for one thing free is entirely arbitrary terminology, governments already regulate (almost) all food produce in (almost) all nations and given that 'the market' is as designated by government jurisdiction above and beyond any other marker, it hardly makes any sense to claim 'government action equates with a non-free market.' The wholesale failure of the terminology gets worse when one considers that in a democratic (free market,) theoretically the same people(with the same interests) are the market as are the primary motivator of governance.
Giu Piete
CC BY-SA 4.0
2019-03-14T13:06:52.637Z
@Mazura Nope, subsidies are a pretty much a world-wide phenomenon, especially for things considered "national security", like food, energy etc. Of course, in the end, subsidies are far worse - instead of people buying milk paying for the production of milk, *everyone* pays it in their taxes.
Luaan
CC BY-SA 4.0
2019-03-15T00:57:51.657Z
@Luaan While farm subsidies may be widespread, the level of subsidy varies significantly between governments. Australian farm subsidies are one of the the lowest in the OECD, and farmers receive **" no payments for commodity production"**. [Source](https://farmers.org.au/blog/farm-subsidies-in-australia-the-facts/)
traktor
CC BY-SA 4.0
2019-03-15T12:32:12.010Z
@traktor53 Nice to see that - and indeed, a good showcase of just how inefficient subsidies get. Being able to compete on the international market where plenty of the "competition" gets half (or more) of their income from subsidies is quite awesome, especially when you compare the average salaries ("cost of work") in those countries.
Luaan
CC BY-SA 4.0
2019-03-15T23:47:07.287Z
That's why I felt swearing was appropriate. Get back to me when your government pays farmers to grow stuff that will just be destroyed so as to preserve the market, and the country's ability to produce a surplus if necessary.
Mazura
CC BY-SA 4.0
2019-03-13T12:12:06.170Z
2019-03-13T12:12:06.170Z
Keith
<p>Other answers and comments have outlined the general economic principles at work here. Here are the details unique to Australia:</p>

<ol>
<li>Two companies, Coles and Woolworths, control the majority of the supermarket sales in the country. Critics call them a "duopoly." There are other stores, but the big two dominate. Their control of the market allows them to effectively dictate prices to some of their suppliers.</li>
<li>From 2011 to 2018 they were competing aggressively on the price of basic store-brand milk (presumably at little or no direct profit to themselves or dairy farmers; the major supermarkets may have profited indirectly by attracting customers away from smaller chains, who then buy profitable non-milk items).</li>
<li>Coles is still selling milk cheaper in 2019 than it was in 2010.</li>
<li>Last year Woolworths sold a limited run of "drought relief" milk at an increased price, marketed as helping out struggling dairy farmers. A significant number of customers chose to pay 10% extra (for the same product with a different label). Woolworths have now raised the price of their basic store-brand milk and dairy farmers want Coles to do the same.</li>
<li>Dairy farmers feel that pegging the consumer price of milk to $1/L for 8+ years while the prices of every other consumer product went up at the normal rate is not the kind of market behaviour they want to see.</li>
</ol>

CC BY-SA 4.0
2019-03-14T03:31:41.433Z
2019-03-14T03:31:41.433Z
Robyn
<p>Getting milk from the dairy farm to the retailer is too expensive for individual farms to manage on their own, with transporting, processing and packaging. There are also a host of consumer and health regulations that prevent dairy farms selling direct to consumers without first processing the milk. They are dependent on distribution networks to buy and collect the milk. Thus they have little bargaining power when it comes to negotiating the price, it often comes down to accepting what is offered as a take-it-or-leave-it deal. Some would liken it to paying "protection" to racketeers, except this is legal. </p>

<p>Farmers are also generally not well educated in areas such as economics or marketing, and so the quotes and sound bites are emotive and often a simplistic view of what would solve the problem as they see it. In this case, Coles charging 10 cents per litre more and passing that 10 cents back to the farmers would approximately <strong><em>double</em></strong> what they earn from their milk. </p>

<p>The supermarkets sell their own brand milk for about \$1.00 per litre, other brands are more expensive. But regardless of the brand, farmers typically get \$0.08 - \$0.15 per litre.</p>

<p>Possibly the only alternative solution that would deliver more money back to the farmers is if they were to organise into a collective, which could bring significant bargaining power, and dictate for what price they will sell their milk. The two main obstacles to this, however, are that the farmers are mostly parties to a supply contract which they would either have to break, at the risk of being sued for breach of contract, or wait until it expires, and the risk of falling foul of the various laws designed to protect consumers from anti-competitive practices such as price-fixing.</p>

CC BY-SA 4.0
2019-03-13T12:07:10.193Z
To suggest that farmers are "generally not well educated" is short-sighted at best.   Honestly.   Maybe that's how Australian farmers are, but not in America.    In America it's very common for farmers to have college degrees.   Having said that, they may not be as informed on economic issues as others.
Keith
CC BY-SA 4.0
2019-03-13T12:08:59.667Z
„Farmers are also generally not well educated“. This might be true for farmers in subsistence agriculture in less developed countries. This belief is certainly not true for people running agriculture businesses in the western world, where your local farmer might have an university degree.
lejonet
CC BY-SA 4.0
2019-03-13T18:22:33.027Z
"Might" have a degree - there are countries where *almost entire universities* are focused on agri-/horticulture courses, diplomas and degrees. They might have other subject areas and qualifications of course, but these are far smaller and less broad programmes generally.
Nij
CC BY-SA 4.0
2019-03-14T09:39:23.173Z
'Great' 'Economy'. Source and client get scammed by all the intermediaries.
Overmind
CC BY-SA 4.0
2019-03-14T13:04:26.170Z
@Overmind Without the intermediary, there would be no trade - the consumer wouldn't get the product, and the producer wouldn't get the money. If the conditions are such that this is not true, then it's also true that you *can* avoid the intermediaries - though you'll probably find that on average, those "scamming intermediaries" are actually a net value to both the consumer and producer anyway. Let's stop using Marx's theory of value in serious economic discussions please; it's been outdated long before it was formulated.
Luaan
CC BY-SA 4.0
2019-03-14T14:01:22.020Z
Worked better without them. Manufacturing, transport and distribution actually were planned many ears ago, meaning that if you wanted to produce a basic product you would make your factory near where you find the resources needed (so no transporters) and all derivatives could be manufactured there. Then, the next factory that used what you produced was also near, not needing bloody ages for your product to get there. Now different entities obtain the resources, different ones transport them to you, different ones process them in the end. You'll end up paying more for moving stuff around.
Overmind
CC BY-SA 4.0
2019-03-14T14:02:07.360Z
And at each step you get taxed in various forms.
Overmind
CC BY-SA 4.0
2019-03-15T12:45:40.990Z
@Overmind You pay more for moving stuff around, but in the end, you pay far less overall. That's why you do it in the first place. The volume of trade has been one of the best drivers of wealth (for the poor *and* rich) as far as we know, long even before the earliest human civilizations. You're severely underestimating how much connections there are between even quite simple enterprises, and how much the diversification and specialization of enterprise increased the wealth of everyone. As for taxation, that's why you usually have a system that avoids you paying the same tax twice :)
Luaan
CC BY-SA 4.0
2019-03-15T18:56:27.963Z
@lejonet: those farmers who do not have a university degree over here (Germany) typically have leaned a trade such as mechanic for heavy machinery or metal worker or the like. And also these trades are taught here in a way that includes "how to be a business owner".
cbeleites
CC BY-SA 4.0
2019-03-13T08:10:04.600Z
2019-03-13T13:15:13.773Z
2019-03-13T13:15:13.773Z
Mick
<p>Farmers cannot operate as ideal model businesses that can just turn off and on without impact. Only large corporations can even approach that level of abstract capitalism.</p>

<p>More specifically farmers 
(1) have certain minimum expenses both for family and farm related (loan payments),
(2) are not diversified to get income from other product lines, 
(3) have little/no work knowledge or capital to get into diversification
(4) limited ability to instantly increase or decrease the milk cows in production
    especially without significant surge losses. Cows cannot be stored like machinery.
    In fact if whole industry kills cows beef sale price plummets and 
    it takes 2-3 years to "manufacture" many replacement cows on milk price upturn.<br>
(5) Can sell significant volumes of milk only to the major grocery wholesalers. Direct 
    sales to end customers fell off rapidly during 1930s-1950s, and is not viable for 
    the vast majority of farmers today.</p>

<p>So basically farmers are economically trapped and unable to respond to market faster than 2-3 year time frames. Economically and politically its pretty easy for grocery stores to out last any actions farmers take. Stopping production? Most the blame would go to farmers even if all the independents could stick together. The government might even just seize assets in the name of the public good.</p>

<p>Typically wise grocery store chains in highly urbanized areas worldwide use this to take over private farming. They simply pay farmers low because they control sales. Eventually the store can buy out bankrupt farmers for a few cents on the dollar then hire the farmers back at low fixed wages. </p>

<p>In the end its true the grocery businesses assume most the economic risks. But grocery corporations usually curtail any chance of decent living doing farming as well. Wages after takeover generally aren't the sort to support much of a family and definitely not sending kids to higher education.</p>

<p>So the issue is the coming end of a way of life. Whether that is really intrinsically bad is debatable. Certainly going to stir up emotions among the adherents. But as a society It might be best to treat them as just another cult that refused to fit with the modern world. Maybe even need to fund mandatory government deprogramming and reeducation.  </p>

<p>...Because big money WILL find a way around any such protections put up to protect this lifestyle based on old agricultural tech. And probably ways to pervert such an effort to make things even worse.</p>

<p>I do note that farmers who just want to remain independent might be able survive by going high tech in some way -- especially ways that allow faster more economic ways to respond to the market and economics. Perhaps "synthetic" milk not produced by a cow but closer than a pure factory. "Udder in a vat" 2.0!!!!</p>

CC BY-SA 4.0
2019-03-14T17:20:08.373Z
Going high tech might keep smart farmers independent and in the general food supply arena. But the lifestyle endangerment issue is about herd milk cows.
NotSoSimple
CC BY-SA 4.0
2019-03-14T17:17:01.047Z
2019-03-14T17:17:01.047Z
NotSoSimple
<p>Your economical assumptions are completely correct. There are too many farmers/dairies and the least profitable should shut down.</p>

<p>What you are missing is that the least profitable farmers are, well farmers. They know no other trade and have probably inherited it. They can't easily switch jobs and they probably do not want to give up 'the family business.'</p>

<p>So they are turning this into a political/moral issue. There are a few things that help tremendously:</p>

<ol>
<li><p>Nations always subsidize farmers to stay independent. Farming is an inherently political issue.</p></li>
<li><p>All farmers benefit from higher selling prices or subsidies. So even the most profitable support the case.</p></li>
<li><p>Farmers enjoy a good public image, even when they're not profitable or their treatment of animals isn't professional.</p></li>
</ol>

CC BY-SA 4.0
2019-03-15T18:45:03.297Z
"They know no other trade" a) no difference to other small business owners. b) at least here (Germany) it is also often not true: Many of the farmers I know have also learnt a trade such as mechanic, metal worker or the like. (And if you have a degree in agriculture there are jobs other than running a farm that you can do. Don't forget that a farmer is a business owner) In my region, many farmers nowadays work an "outside" job and run the inherited farm as side-business. Not the dairy or meat farms, though. Or combine the farm with a metal workshop or construction business (fencing). Note that
cbeleites
CC BY-SA 4.0
2019-03-15T18:49:42.320Z
... the farm may do OK in terms of profit per hectar farmed land, but isn't sufficiently large to produce the absolute profit to feed the family. In that situation, a small farm worked part-time plus a "regular" job can provide diversification of income and thus be less vulnerable than trying to grow the farm. Plus, it keeps the family business (and land). A third possibility to adjust this is to rent out part of the land to another farm that chose the "growth" option.
cbeleites
CC BY-SA 4.0
2019-03-15T09:58:35.530Z
2019-03-15T09:58:35.530Z
knallfrosch
<p>Sorry this might be borderline off-topic (and I am an economics layman at best), but I found this rather puzzling and would like to know why this is happening.</p>

<p>I just came across <a href="https://www.news.com.au/national/breaking-news/qld-farmers-to-protest-coles-1lt-milk/news-story/0cce4910d585803f4e23caadbfd1ce91" rel="noreferrer">an article</a> which documents another development in the quarrels between Australian milk farmers and big supermarket chains. </p>

<p>As I understand it, the farmers demand that supermarkets charge higher prices for milk and then pass on the additional revenue back to the farmers.</p>

<p>When I think of the free market, I would expect this to be unnecessary, as the farmers could charge more when they sell the milk to the supermarkets or, if that doesn't work (why wouldn't it?), some farmers would stop milk production leading to milk scarcity leading to higher prices or, more importantly, higher revenue for the farmers.</p>

<p>What am I missing?</p>

CC BY-SA 4.0
2019-03-14T09:59:31.113Z
I found the following video about the low milk prices in Australia, and the available consumer choices quite informative:  MILKING IT - The Checkout https://www.youtube.com/watch?v=IIOvRO8k7uI
Dhara
CC BY-SA 4.0
2019-03-14T12:49:19.710Z
@jean That depends entirely on the difference between the buy and sell prices of milk. Plenty of farms make loads of money by selling door-to-door (and obviously, organizing - which isn't as complicated as it might sound) where I'm from, since the difference between the prices is just ridiculous, which in turn comes from prices being determined country-wide, rather than through a normal market process. Obviously, this varies like crazy in different regions, countries etc.
Luaan
CC BY-SA 4.0
2019-03-14T13:02:51.523Z
@Luaan Depends also on food commerce regulation, consumers habits, how much can the farms invest and lots of logistics. Milk needs to be pasteurized, stored, bottled, stored again (in bottles), sold and delivered. Of course, farms can get organized, create a cooperative milk processing facility, distribution logistics company, start a media campaign and even use crowdfunding to create an application to sell milk and profit a lot in the end, but that is a lot easier to talk than to do
jean
CC BY-SA 4.0
2019-03-14T13:09:29.777Z
@jean Indeed, but regulations can hardly be considered "free market" - whether you agree with individual regulations or not. The distortion gets particularly bad when "big enterprise" gets control over the regulations, since regardless of whether any particular regulation helps the consumers or not, it almost always helps big business (especially if they can push the legislation themselves :).
Luaan
CC BY-SA 4.0
2019-03-14T13:16:19.360Z
@Luaan I see your point, but while I also enjoyed milk direct from the source be sure most health and food regulations are here for good (thanks Monsieur Pasteur). If you wish further discussion pls create a chat room.
jean
<free-market>
Why do Australian milk farmers need to protest supermarkets' milk price?
FriendFX
# Why do Australian milk farmers need to protest supermarkets' milk price?

(Asked by: username_0 on 2019-03-13)

Sorry this might be borderline off-topic (and I am an economics layman at best), but I found this rather puzzling and would like to know why this is happening.

I just came across [an article](https://www.news.com.au/national/breaking-news/qld-farmers-to-protest-coles-1lt-milk/news-story/0cce4910d585803f4e23caadbfd1ce91) which documents another development in the quarrels between Australian milk farmers and big supermarket chains.

As I understand it, the farmers demand that supermarkets charge higher prices for milk and then pass on the additional revenue back to the farmers.

When I think of the free market, I would expect this to be unnecessary, as the farmers could charge more when they sell the milk to the supermarkets or, if that doesn't work (why wouldn't it?), some farmers would stop milk production leading to milk scarcity leading to higher prices or, more importantly, higher revenue for the farmers.

What am I missing?

**Tags:** free-market
> **Comments:**
> **username_1**: I found the following video about the low milk prices in Australia, and the available consumer choices quite informative:  MILKING IT - The Checkout https://www.youtube.com/watch?v=IIOvRO8k7uI  
> **username_2**: @jean That depends entirely on the difference between the buy and sell prices of milk. Plenty of farms make loads of money by selling door-to-door (and obviously, organizing - which isn't as complicated as it might sound) where I'm from, since the difference between the prices is just ridiculous, which in turn comes from prices being determined country-wide, rather than through a normal market process. Obviously, this varies like crazy in different regions, countries etc.  
> **username_3**: @Luaan Depends also on food commerce regulation, consumers habits, how much can the farms invest and lots of logistics. Milk needs to be pasteurized, stored, bottled, stored again (in bottles), sold and delivered. Of course, farms can get organized, create a cooperative milk processing facility, distribution logistics company, start a media campaign and even use crowdfunding to create an application to sell milk and profit a lot in the end, but that is a lot easier to talk than to do  
> **username_2**: @jean Indeed, but regulations can hardly be considered "free market" - whether you agree with individual regulations or not. The distortion gets particularly bad when "big enterprise" gets control over the regulations, since regardless of whether any particular regulation helps the consumers or not, it almost always helps big business (especially if they can push the legislation themselves :).  
> **username_3**: @Luaan I see your point, but while I also enjoyed milk direct from the source be sure most health and food regulations are here for good (thanks Monsieur Pasteur). If you wish further discussion pls create a chat room.  

---

## 6 answers

### Answer by username_4 on 2019-03-13. Score: 73

I would like to contradict Kenny LJ explicitly on his claim that "the free market works".

It only works if the market is actually free, i.e. competition exists. Which, you can argue, is not the case in the milk market.

**What you are looking at is a [cartel](https://en.wikipedia.org/wiki/Cartel)**.

(Excuse me for citing numbers for the *German* market, not Australia, as I am more familiar with that market and have numbers ready that I don't have for Australia. I am quite confident, however, that while the ratios might differ a bit, the overall structure will be the same.)

---

There are about **100.000 milk farmers** in Germany, producing about 28 million tons of milk per year. As Mick pointed out, however, they are in the farming / production business, not in the transportation / processing business, so they have to sell their milk to dairies. There are just over **100 dairies** in Germany.

And most of them have a monopoly on their region, meaning they're the only dairy a farmer *could* sell to.

Those dairies sell the processed milk to supermarket chains and other retailers / business consumers. About 60% of all the milk produced is sold by **less than a half-dozen major supermarket chains**.

Milk is a highly regulated food product, meaning that one dairy's milk is effectively the same as any other. There is **very little competition in quality**. The dairies don't even have "a product", the milk ends up packaged in the *supermarket* brand:

> Woolworths has bumped the cost of its own-brand milk by 10 cents a litre, but Coles has refused to follow suit because it might burden customers.

So the only competition is in the price. **Whoever *sells* cheapest.** Customers buy the milk where it's cheapest (supermarket), because they simply do not have any realistic option to go for a "premium" milk product that's provided by middle- or small-sized, or regional, producers at a sustainable price with a transparent premium for the producer as well. It's just not available. There are "bio" brands, but that label is only saying something about how the cattle is kept and fed -- the price dynamics still apply:

The supermarket buys where it's cheapest (dairy), and the dairy tells the milk farmers how much they are willing to pay, take it or leave it.

A farmer that is not willing to sell his milk at the price the dairy dictates (even if it's at a loss), will not get his milk to market *at all*, but still have running costs to pay. Which means he'll be out of business pretty quick, forced to sell his business, land, and lifestock to some bigger farmer that is able to use scaling effects to produce at a lower price.

You could claim that this is the result of an oversaturated market, that less milk on the market would drive the prices up. That is correct, in a way, but the market *is* oversaturated *because* producing large quantities of milk as cheap as possible is the only bargaining chip the producers *have* in a market where literally no-one is going to a farmer to buy produce. Rising prices would not equate to rising margins for the farmers, as they simply have no control over the supply chain.

*Concentration of power at the retailer end, a lack of competition in quality, and the inability of the producer to cut out the middle man (dairies) or create a meaningful "premium" market means the retailer is dictating the price, to the point where producer's margins are minimized and the only way to be a profitable producer is by economics of scale -- large combines swallow medium and small-sized producers, and the retailers are able to push the price even lower, repeating the cycle.*

This is beneficial to the customer insofar as that the product (milk in this case) is available at every supermarket and extremely cheap. But it comes at a high cost, destroying middle- and small-sized milk farms (and dairies!) in a race to the bottom. Which also includes a race for the most milk-efficient cattle, to the exclusion of all other considerations.

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Refuting Kenny LJ's wholesale dismissal of regulation:

> Suppose instead that these farmers instead benefited from low grain prices and enjoyed profits of 20 cents per litre of milk sold. Should consumers then have stood outside supermarkets demanding that milk prices be lowered by 10 cents per litre?

The consumers wouldn't have had to, as the supermarket chain would already, preemptively, have realized the opportunity to lower prices (to stay competitive to the *other* supermarket chains who would have done the same).

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**Addendum:**

In answer to a comment by @horns, *this is a matter of official record and investigation*.

Rewe was sentenced to 20.8 million Euro antitrust fine in May 2013. Spar was sentenced to 3 million Euro antitrust fine in November 2014. (Just two I was able to duckduckgo ad-hoc.)

Quoting the [German Antitrust Office](https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2017/13_03_2017_Milch.html):

> Our investigations have shown that the contracts between milk producers and dairies in Germany have long periods of notice and duration. In addition, farmers in Germany are generally obliged to supply the milk they produce exclusively to their respective dairy. There is virtually no possibility for them to switch to another dairy. This is a problem for farmers and hinders possible newcomers on the dairy side or dairies wishing to extend their activities. Another widespread practice is that the price of raw milk is set only after delivery and is based on reference prices and market information systems.

Also from that article:

> The Bundeskartellamt questioned 89 private and co-operative dairies, which in 2015 procured approx. 30.9 million tonnes of raw milk. This is equivalent to around 98 % of the total milk supply volume. The authority's investigations have shown that in 2015 97.8% of the volume of raw milk covered by the investigations was sold subject to exclusive supply obligations. In addition, contracts for more than half of the raw milk supply volume can only be terminated with at least two years' notice.

*There is no effective competition.*

> **Comments:**
> **username_5**: Comments are not for extended discussion; this conversation has been [moved to chat](https://chat.stackexchange.com/rooms/91066/discussion-on-answer-by-devsolar-why-do-australian-milk-farmers-need-to-protest).  
> **username_6**: I don't believe this is correct. I don't think we are seeing cartel behaviour. I think we are seeing monosony - a situation where there are very few buyers (supermarkets) and many sellers (milk producers). Supermarkets are able to exert market power. The situation is that if a producer declines to sell their milk at the low asking price, they risk not selling their milk at all.  
> **username_7**: Note that @Jamzy has a small spelling error in that comment: a situation where a group has a "monopoly power" of purchasing in a region has *monopsony* power, not *monosony* power.  

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### Answer by username_14 on 2019-03-13. Score: 13

Getting milk from the dairy farm to the retailer is too expensive for individual farms to manage on their own, with transporting, processing and packaging. There are also a host of consumer and health regulations that prevent dairy farms selling direct to consumers without first processing the milk. They are dependent on distribution networks to buy and collect the milk. Thus they have little bargaining power when it comes to negotiating the price, it often comes down to accepting what is offered as a take-it-or-leave-it deal. Some would liken it to paying "protection" to racketeers, except this is legal.

Farmers are also generally not well educated in areas such as economics or marketing, and so the quotes and sound bites are emotive and often a simplistic view of what would solve the problem as they see it. In this case, Coles charging 10 cents per litre more and passing that 10 cents back to the farmers would approximately ***double*** what they earn from their milk.

The supermarkets sell their own brand milk for about \$1.00 per litre, other brands are more expensive. But regardless of the brand, farmers typically get \$0.08 - \$0.15 per litre.

Possibly the only alternative solution that would deliver more money back to the farmers is if they were to organise into a collective, which could bring significant bargaining power, and dictate for what price they will sell their milk. The two main obstacles to this, however, are that the farmers are mostly parties to a supply contract which they would either have to break, at the risk of being sued for breach of contract, or wait until it expires, and the risk of falling foul of the various laws designed to protect consumers from anti-competitive practices such as price-fixing.

> **Comments:**
> **username_8**: To suggest that farmers are "generally not well educated" is short-sighted at best.   Honestly.   Maybe that's how Australian farmers are, but not in America.    In America it's very common for farmers to have college degrees.   Having said that, they may not be as informed on economic issues as others.  
> **username_15**: „Farmers are also generally not well educated“. This might be true for farmers in subsistence agriculture in less developed countries. This belief is certainly not true for people running agriculture businesses in the western world, where your local farmer might have an university degree.  
> **username_16**: "Might" have a degree - there are countries where *almost entire universities* are focused on agri-/horticulture courses, diplomas and degrees. They might have other subject areas and qualifications of course, but these are far smaller and less broad programmes generally.  
> **username_17**: 'Great' 'Economy'. Source and client get scammed by all the intermediaries.  
> **username_2**: @Overmind Without the intermediary, there would be no trade - the consumer wouldn't get the product, and the producer wouldn't get the money. If the conditions are such that this is not true, then it's also true that you *can* avoid the intermediaries - though you'll probably find that on average, those "scamming intermediaries" are actually a net value to both the consumer and producer anyway. Let's stop using Marx's theory of value in serious economic discussions please; it's been outdated long before it was formulated.  
> **username_17**: Worked better without them. Manufacturing, transport and distribution actually were planned many ears ago, meaning that if you wanted to produce a basic product you would make your factory near where you find the resources needed (so no transporters) and all derivatives could be manufactured there. Then, the next factory that used what you produced was also near, not needing bloody ages for your product to get there. Now different entities obtain the resources, different ones transport them to you, different ones process them in the end. You'll end up paying more for moving stuff around.  
> **username_17**: And at each step you get taxed in various forms.  
> **username_2**: @Overmind You pay more for moving stuff around, but in the end, you pay far less overall. That's why you do it in the first place. The volume of trade has been one of the best drivers of wealth (for the poor *and* rich) as far as we know, long even before the earliest human civilizations. You're severely underestimating how much connections there are between even quite simple enterprises, and how much the diversification and specialization of enterprise increased the wealth of everyone. As for taxation, that's why you usually have a system that avoids you paying the same tax twice :)  
> **username_18**: @lejonet: those farmers who do not have a university degree over here (Germany) typically have leaned a trade such as mechanic for heavy machinery or metal worker or the like. And also these trades are taught here in a way that includes "how to be a business owner".  

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### Answer by username_8 on 2019-03-13. Score: 8

Not sure about Australia, but in America it's quite common for a large retailer to simply dictate to the producers the price they will purchase the commodity from them for. If a farmer's primary customer can simply declare that they will be paying 5% less for a product, the farmer really does not have much recourse. Or, if for whatever reason the expenses increase, the farmer either eats that cost, or it gets passed on. Unfortunately, they are not a storefront that can make up for it by selling to more customers -- they have their major customers, and they sell it to them. So if that major customer simply refuses to pay it, the farmer has no recourse.

> **Comments:**
> **username_9**: The free market says the farmer should shut down their farm and stop selling milk. If the retailers set the price too low, they'll quickly find themselves unable to buy any milk because all the farms are shut down, and they'll have to raise it back up. Unfortunately, by that point all the farms will be shut down, which isn't a good thing. It would be much better for all parties to work out a sustainable price in advance.  
> **username_8**: Agreed.   And in this case, the farmers are banding together to attempt to prevent that.  That is still free market.      If the government steps in and picks a winner in the market, it ceases to be a free market.  
> **username_10**: @Keith for one thing free is entirely arbitrary terminology, governments already regulate (almost) all food produce in (almost) all nations and given that 'the market' is as designated by government jurisdiction above and beyond any other marker, it hardly makes any sense to claim 'government action equates with a non-free market.' The wholesale failure of the terminology gets worse when one considers that in a democratic (free market,) theoretically the same people(with the same interests) are the market as are the primary motivator of governance.  
> **username_2**: @Mazura Nope, subsidies are a pretty much a world-wide phenomenon, especially for things considered "national security", like food, energy etc. Of course, in the end, subsidies are far worse - instead of people buying milk paying for the production of milk, *everyone* pays it in their taxes.  
> **username_11**: @Luaan While farm subsidies may be widespread, the level of subsidy varies significantly between governments. Australian farm subsidies are one of the the lowest in the OECD, and farmers receive **" no payments for commodity production"**. [Source](https://farmers.org.au/blog/farm-subsidies-in-australia-the-facts/)  
> **username_2**: @traktor53 Nice to see that - and indeed, a good showcase of just how inefficient subsidies get. Being able to compete on the international market where plenty of the "competition" gets half (or more) of their income from subsidies is quite awesome, especially when you compare the average salaries ("cost of work") in those countries.  
> **username_12**: That's why I felt swearing was appropriate. Get back to me when your government pays farmers to grow stuff that will just be destroyed so as to preserve the market, and the country's ability to produce a surplus if necessary.  

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### Answer by username_13 on 2019-03-14. Score: 7

Other answers and comments have outlined the general economic principles at work here. Here are the details unique to Australia:

1. Two companies, Coles and Woolworths, control the majority of the supermarket sales in the country. Critics call them a "duopoly." There are other stores, but the big two dominate. Their control of the market allows them to effectively dictate prices to some of their suppliers.
2. From 2011 to 2018 they were competing aggressively on the price of basic store-brand milk (presumably at little or no direct profit to themselves or dairy farmers; the major supermarkets may have profited indirectly by attracting customers away from smaller chains, who then buy profitable non-milk items).
3. Coles is still selling milk cheaper in 2019 than it was in 2010.
4. Last year Woolworths sold a limited run of "drought relief" milk at an increased price, marketed as helping out struggling dairy farmers. A significant number of customers chose to pay 10% extra (for the same product with a different label). Woolworths have now raised the price of their basic store-brand milk and dairy farmers want Coles to do the same.
5. Dairy farmers feel that pegging the consumer price of milk to $1/L for 8+ years while the prices of every other consumer product went up at the normal rate is not the kind of market behaviour they want to see.


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### Answer by username_19 on 2019-03-14. Score: 5

Farmers cannot operate as ideal model businesses that can just turn off and on without impact. Only large corporations can even approach that level of abstract capitalism.

More specifically farmers
(1) have certain minimum expenses both for family and farm related (loan payments),
(2) are not diversified to get income from other product lines,
(3) have little/no work knowledge or capital to get into diversification
(4) limited ability to instantly increase or decrease the milk cows in production
especially without significant surge losses. Cows cannot be stored like machinery.
In fact if whole industry kills cows beef sale price plummets and
it takes 2-3 years to "manufacture" many replacement cows on milk price upturn.  
(5) Can sell significant volumes of milk only to the major grocery wholesalers. Direct
sales to end customers fell off rapidly during 1930s-1950s, and is not viable for
the vast majority of farmers today.

So basically farmers are economically trapped and unable to respond to market faster than 2-3 year time frames. Economically and politically its pretty easy for grocery stores to out last any actions farmers take. Stopping production? Most the blame would go to farmers even if all the independents could stick together. The government might even just seize assets in the name of the public good.

Typically wise grocery store chains in highly urbanized areas worldwide use this to take over private farming. They simply pay farmers low because they control sales. Eventually the store can buy out bankrupt farmers for a few cents on the dollar then hire the farmers back at low fixed wages.

In the end its true the grocery businesses assume most the economic risks. But grocery corporations usually curtail any chance of decent living doing farming as well. Wages after takeover generally aren't the sort to support much of a family and definitely not sending kids to higher education.

So the issue is the coming end of a way of life. Whether that is really intrinsically bad is debatable. Certainly going to stir up emotions among the adherents. But as a society It might be best to treat them as just another cult that refused to fit with the modern world. Maybe even need to fund mandatory government deprogramming and reeducation.

...Because big money WILL find a way around any such protections put up to protect this lifestyle based on old agricultural tech. And probably ways to pervert such an effort to make things even worse.

I do note that farmers who just want to remain independent might be able survive by going high tech in some way -- especially ways that allow faster more economic ways to respond to the market and economics. Perhaps "synthetic" milk not produced by a cow but closer than a pure factory. "Udder in a vat" 2.0!!!!

> **Comments:**
> **username_19**: Going high tech might keep smart farmers independent and in the general food supply arena. But the lifestyle endangerment issue is about herd milk cows.  

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### Answer by username_20 on 2019-03-15. Score: 1

Your economical assumptions are completely correct. There are too many farmers/dairies and the least profitable should shut down.

What you are missing is that the least profitable farmers are, well farmers. They know no other trade and have probably inherited it. They can't easily switch jobs and they probably do not want to give up 'the family business.'

So they are turning this into a political/moral issue. There are a few things that help tremendously:

1. Nations always subsidize farmers to stay independent. Farming is an inherently political issue.
2. All farmers benefit from higher selling prices or subsidies. So even the most profitable support the case.
3. Farmers enjoy a good public image, even when they're not profitable or their treatment of animals isn't professional.

> **Comments:**
> **username_18**: "They know no other trade" a) no difference to other small business owners. b) at least here (Germany) it is also often not true: Many of the farmers I know have also learnt a trade such as mechanic, metal worker or the like. (And if you have a degree in agriculture there are jobs other than running a farm that you can do. Don't forget that a farmer is a business owner) In my region, many farmers nowadays work an "outside" job and run the inherited farm as side-business. Not the dairy or meat farms, though. Or combine the farm with a metal workshop or construction business (fencing). Note that  
> **username_18**: ... the farm may do OK in terms of profit per hectar farmed land, but isn't sufficiently large to produce the absolute profit to feed the family. In that situation, a small farm worked part-time plus a "regular" job can provide diversification of income and thus be less vulnerable than trying to grow the farm. Plus, it keeps the family business (and land). A third possibility to adjust this is to rent out part of the land to another farm that chose the "growth" option.  

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