3. Analysis of the determinants of prices and costs in product value chains
DAIRY PRODUCTS
Analysis of the determinants of prices and costs in product value chains

Overview of the dairy industry
The dairy industry is a major agribusiness sector which has historically been largely production and supply driven: • the majority of milk production enterprises supply dairy manufacturing or processing cooperatives which have developed into large enterprises aimed at achieving the best overall returns from supplied milk; • major volumes of milk are converted into storable dairy products which are sold into available international markets; and • national milk production is highly seasonal to take advantage of low-cost production conditions (such as spring pasture growth). With the strong forces of globalisation, the industry value chain has in the past decade been highly exposed to demand factors and forces in export and domestic market segments. These have had a profound effect on the returns to the overall industry and the nature of competition through the chain. The most marked of these changes has been in the domestic consumer product sector. Since the early 1980s the industry progressively removed internal support and regulation of prices and supply, and focused on taking advantage of low-cost production conditions to become a major player in the world market for dairy commodities and dispose of larger volumes of product. The final phase of that deregulation – of pricing and supply of milk to the packaged milk sector which directly affected less than a fifth of national milk output – is a relatively recent event. Considerable adjustment is still occurring in parts of the production and processing sector today.
P r i c e D e t e r m i n a t i o n i n t h e A u s t ra l i a n Fo o d I n d u s t r y A Re p o r t

The industry’s product and market mix
The chart