Structure and Stages of Production

In the modern world of growing consumer goods, milk and its subsidiary products owe constant importance in the consumption basket through ages since the importance of milk in balanced healthy diet. The constant and growing demand with time led the market for the product highly competitive and concentrated (Argent 2017.). Such dairy market is evident in Australia, which is the theme of discussion in this paper. The paper throws light on the structure of the dairy market the nation has with proper explanation of the stages of production of dairy products. The competition in the processing and retail distribution of retail products blocks the profit potential of many other firms in the industry. With presenting the current strategy analysis of Inglenook Dairy operating in Australia the report further discusses the opportunity and threats the firm pose in the industry and recommendations are made to ascertain profit and good position of the firm in the industry.

Dairy products own the third largest position in the Australian produced goods basket and form the 4^th largest position in terms of export. The annual production in 2015-16 has been 9.54 billion liter. Almost 30% of the raw milk is used in cheese processing, 29% in skimmed milk powder and butter,6% in whole milk powder,  26% consumed as drinking milk and rest 9% is used in producing dairy products such as yogurt, dairy desserts custards and so on. The domestic production is excess of domestic consumption creating room for enough export of the products that accounts to 34% (2014-15) of the goods being exported. This export includes 65% of the manufactured dairy products and 6% of the drinking milk (Klerkx and Nettle 2013.). The huge production and operation of enormous firms with greater competition and concentration makes indication of presence of perfectly competitive market structure in the industry.

The production of milk involves complex procedure of converting the pasture into raw milk. The maximization of pasture and maintaining proper management of the cattle are necessary to make the conversion capacity maximized. Pasture is the first stage of production that requires to be maximized. The maintenance of cattle and healthy production of calves are important step in a way to ensure milk production and harvest.

The major intermediate goods in milk production is the availability of potential and healthy cattle that ensures the quality as well as quantity of the milk. The dairy of Victoria, the largest producer state, herd almost 1.1 million head consisting of 66% of the national herd. Existence of  4268 licensed firms depicts the largest spread of the industry in Victoria over three production region. The increase of the farms and herd size have been 56% till 2013-14 from 1999-2000 (Dahl, Leith and Gray 2013). The large production stems from huge operation of 1000 cattle on an average per farm.  The market spread follows a location-based concentration. Mostly farms are accumulated in the South East of Australia mostly in coastal region. Victoria is ground of huge dairy farms making the local market more competitive and highly concentrated. The existence of perfect competition is evident. The numbers of supplier are as high as the demand of consumers. The seasonal production of the state mostly channeled out in export responsive of volatile global prices. Based on the dairy farms various dairy manufacturing have come into existence influencing the local as well as national economy of Australia through its overtime growth. Murray-Goulburn Cooperative, Lion and Fonterra are the three largest processors among 20 major manufacturer of liquid and manufacturing farm in the state. Another major intermediate in milk production is water as the industry has heavy reliance on water.  The dairy industry is heavily reliant upon water availability; the industry is currently facing uncertainty over water policy.

The importance of market structure lies at the heart of market power as captured by the producer or supplier group. Different market structure has provided seller different circumstances regarding selling pricing and setting strategies of them. The dairy industry undoubtedly follow perfect completion since there are huge producers spread all over the country and specially concentrated in Victoria that alone accounts for 66% of the production (Ho, Newman, Dalley, Little and Wales 2013). The presence of perfect completion stops seller form discriminating pricing with other sellers and the products are always homogenous. The presence of many sellers of same goods disallows the producer to charge higher price and earn more economic profit that is the case in monopoly market. The sellers are generally price taker and can not go beyond the price determined in the market through market forces as that might lead to loss of customers who would prefer now other sellers for their purchase. However, the sellers do have option of selling more units in order to earn profit. In perfect compactions since perfect information prevails in there is no barrier to entry or exit the industry, there is no possibility of economic profit and all farm manages to capture only the normal profit.

Figure 1: Perfect Competition Market Equilibrium

 Inglenook Dairy was founded in 2011 as business owned by family operating in heart of Victoria. The farm offers naturally fresh milk free of additives compared to artificial dairy products. The farm captures largest share of market due to the authenticity in their quality evident by the existence of brands and extent of the products in local market.

The existence of huge farms already gives birth to higher competition prevailing in the market.. Moreover, the challenges have increased over time due to presence of various other manufacturers who bring differences in their quality of the products by following differed processing techniques. Adding of preservatives and additives have make the products more appealing and heterogeneity of the products have started increasing in the industry. This brings forth the competition in greater scale. Consumers also resort to greater research before purchase to ensure health related concerns. Moreover the packaging and advertisement plays big role in making the products appealing to the customers and play important role in sales in sellers part.

Keeping all these mind the farm Inglenook Dairy’s has resorted to adopt some strategies to develop a boutique mode of production, processing and distribution. The major aim is to ascertain the profit even in long run through consolidating the competitive advantage of the farm (McDowell and Nash 2012). The strategy of modulating their goods through differentiation and distribution in order to meet specific needs has allowed the farm to capture higher market share amidst growing competition. The integration of downstream milk process and distribution within their function have actually allowed the farm to free itself from the depending upon raw milk producers and contingencies associated with them. This has led the farm to come up with fresh and authentic products that attracts health concerned customers.

Implication of market structure on market power

By adopting newer strategies, the farm has managed the operating risks in production amidst the present competition. The major opportunity of the farm has been increased efficiency in the production and distribution that has allowed the farm to create stronger brand image as well as capture higher market share. The demand from Asian market has been higher that adds to the potential of the profit of the farm. The major threat the farm is exposed is to the climate and location of farms that play pivotal role in the operation of the farm (Regulations 2013). Moreover prices of the inputs and protectionism and competition in the intermediate market are also major source of threat to the profitability of the farm

Since domestic consumption as well as export both are major concern of the farm’s production it is highly recommended that the farm should meet the growing trend through changes in production process or diversify its range of goods to attract more consumers all over the world (Wilson 2013). The grater management would allow the farm to check its production cost allowing them To charge lenient price globally that enhances the sales and increases profitability over time.

Conclusion: 

Dairy industry in Australia owes much importance in the national economy and plays pivotal role in world export of the same. The larger production and distribution of them has brought forward the higher completion and concentration of the farm. Perfect competition hinders the farm from making higher profits and overtime change in the trends of processing and composition of products increased more competition and calls for adoption of newer strategy to deal with the situation. Inglenook Dairy being part of such larger supply chain has been able to incorporate newer strategies in order to tap the opportunities and subside the threats the farm face in the concentrated industry domestically as well as internationally.

References:

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Klerkx, L. and Nettle, R., 2013. Achievements and challenges of innovation co-production support initiatives in the Australian and Dutch dairy sectors: a comparative study. Food Policy, 40, pp.74-89.

McDowell, R.W. and 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), pp.680-693.

Nettle, R., Brightling, P. and Hope, A., 2013. How programme teams progress agricultural innovation in the Australian dairy industry. The Journal of Agricultural Education and Extension, 19(3), pp.271-290.

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