DAIRY DEREGULATION AN AUSTRALIAN JOURNEY IN STRUCTURAL CHANGE Acknowledgments This history of the deregulation of the dairy industry was commissioned by Milk Marketing Ltd, whose purpose was to promote and encourage the production, supply, sale and consumption of milk and dairy products in NSW. All sectors of the dairy industry had been regulated in NSW since the 1930s. In 1998, deregulation of the processing sector commenced, followed by deregulation of pricing and supply management in 2000. This brought a radical change to the structure and operation of the dairy industry in NSW. This publication records the major driving forces leading to deregulation and the impact this had on all sectors of the industry, and regional communities. Additionally, it also documents policy lessons around how the deregulation process was developed, managed and implemented. Thank you to Dr Jan Todd and the contributions made by many farmers, industry organisations, companies and government representatives. Dairy Deregulation: An Australian journey in structural change First published February 2017 Author Dr Jan Todd Industrial & Science Historian Yowie Bay NSW Editor Matthew Stevens, ScienceScape® Editing © Dr Jan Todd by contract with Milk Marketing (NSW) Pty Ltd, 2010. Dairy Deregulation Contents Chapter 1: Why regulate? 1 Chapter 2: Regulation going wrong 15 Chapter 3: Haves and have-nots 22 Chapter 4: Shrink, grow or share? A national debate 40 Chapter 5: An industry parliament in NSW 59 Chapter 6: Milk war 76 Chapter 7: Kerin comfort 92 Chapter 8: Reluctant reform 108 Chapter 9: Shocks and visions 122 Chapter 10: The ‘D’ word 140 Chapter 11: Playing for time 155 Chapter 12: Preparing for D-day 171 Chapter 13: And then came Hilmer 190 Chapter 14: The ‘public benefit’ test 205 Chapter 15: 1998 222 Chapter 16: Victorian wildcard 235 Chapter 17: The art of the possible 250 Chapter 18: When the walls came down 267 Chapter 19: Deregulation decade 281 Chapter 20: Supply chain capture? 300 Chapter 21: Fightback 319 Abbreviations 327 Select bibliography 330 July 2016 v Dairy Deregulation Chapter 1: Why regulate? In theory regulation shouldn’t be necessary. Free markets do all the work. Scarcity is a fact of life; the free trade of goods helps us make the most of what is at hand. Self interest is the magic ingredient that makes it possible, with players striving to maximise their own pleasure and gain. Because people want different things, buyers assign their personal value to a product and seek a compatible seller. If both parties can satisfy their desires at an agreed-on price, the transaction takes place. If supply exceeds current demand, the buyer gains the upper hand and takes home a bargain. If demand outruns supply, the seller can stretch the price limit of the keenest buyer. Through myriad daily exchanges, the invisible hand of the market sorts out relative values, sums up all individual preferences and finds that pivotal price at which supply matches demand. Through this constantly adjusting mechanism, the multitude of trades within the economy can rank and meet the needs of the community. All without the visible hand of government. Competitive markets favour the efficient, the perceptive and the creative. Those who assemble assets in the most productive way can offer better value for money: they are rewarded with more customers and bigger profits. This process appears to allocate scarce resources between competing claims to best effect. The miracle of the market is that it forces self- interested suppliers to think about what other people want. Through their selections, consumers unwittingly provide direction to producers and investors on the most rewarding industries in which to engage. In choosing from potential candidates, wise entrepreneurs will seek a speciality in which they have some advantage over likely competitors: perhaps special skills, scale, geo- graphy or access to cheaper inputs. Some fail, but as these will be the ones who misread market signals or respond less diligently, their loss is society’s gain. In this way, the nation’s collective resources are directed into the most efficient uses, everyone achieves optimum value in all their purchases and each person is better off. The same process applies to competing countries: each produces and exports according to what it does best, and the exchange benefits all. Unfortunately, the theory of free markets comes with some complications and a darker side. Competitive markets are about seeking and exploiting advantage. Success compounds and concentrates the advantage; competition can morph into monopoly. Certain conditions are necessary to sustain the competitive balance that makes markets work. Only reasonable parity of bargaining power can ensure the promised efficiency of resource pricing and allocation. Only the presence of multiple competing entities, on both sides, ensures that the buyer or seller truly has a choice and maintains that balance of power. Only genuine choice keeps the invisible hand working adroitly, matching goods and services to personal preferences. To make sound choices, all parties need good access to accurate information, at reasonable cost in time and money. For contracts to be enforceable, buyers and sellers must have confidence in the rule of law and its ability to protect their property rights. In reality, perfect competition in an idealised free market rarely occurs. Markets sometimes ‘fail’ when left to their own devices. Though markets reflect cultural values, some social objectives may simply not be met. Some goods just don’t attract private providers, because the return won’t compensate the outlay. For ‘public goods’, there is no way of charging each separate user: the provision of clean air, medical research, street lighting and defence forces are typical cases. For other goods, the market might step up but work poorly: perhaps some vital factor of production is lacking; perhaps tough competition spurs safety shortcuts or deleterious side effects such as pollution; perhaps the access to timely and reliable information unduly favours some competitors at the expense of others, or producers at the expense of consumers; perhaps the power of one participant inhibits competitors, curtails the free play of market forces and free choice and enforces excessive prices. Market malfunctions often attract government attention and lead to remedial legislation and regulation. If so, they usually stimulate intense political debate. Competition can be brutal, and disastrous for losers. Sometimes it’s not the markets that fail but the combatants. Some of the biggest political debates revolve around what constitutes a ‘failing’ market, how to identify it and how to rectify it. Some social objectives are so valued that governments feel obliged to supply or regulate a market to ensure a particular outcome. The rhetoric of regulation usually names the public interest as the intended beneficiary. Various theorists have ventured the contrary view July 2016 1 Dairy Deregulation that sectional interests—often with considerable political or economic power—are the real initiators of regulatory action and the major winners. In the motivations that led to regulation of the Australian dairy industry, we see evidence that lends support to both these perspectives. At certain times governments seemed moved to regulate in the interests of general public welfare; at other times, sectional interests were more prominent. Public partners and free traders Australians always knew that the story of free markets was more nuanced than the theory. Simple geography said the free market alone was unlikely to bring forth the labour, capital and technology needed to create a wealthy society in the Antipodes. Nineteenth century colonial governments took a lead role in development, generally in a spirit of partnership with the private sector. Public ownership of vital but unprofitable services such as transport, communications and urban utilities was common, sometimes occurring after private enterprise failed. In a similar spirit, industry legislation tended to steer rather than police colonial production. Australians nevertheless contested the relative virtues of free markets and government intervention. Political forces lined up for or against free trade or protection. Australian colonies won self-government at the height of international free trade and of Britain’s power as the world’s industrial giant. Free trade inhabited the cultural code. But Australia was a stranded economic infant, and ready-made arguments from Europe and the US said ‘infant industries’ required careful nurture and protection. It seemed to many Australians that local industries would need to build a critical mass at home before they could confront the world. The free-trade versus protection debate was fought ferociously, the prevailing opinion in each colony depending on the dominant industries and interests. In pastoral and mercantile NSW, the winning politics focused on strong export industries like wool and gold and voiced a vigorous free-trade policy. The famed Father of Federation, Henry Parkes, won four terms as Premier as an ardent free-trader: ‘good government and commercial freedom’ was his formula.1 Victorian politics favoured embryonic manufacturing and a protectionist path. All colonies used custom duties to protect themselves from each other. It took years to reach the compromise that allowed the Australian Federation to be born in 1901. The Constitution was crafted to create a national market and a unified nation while maintaining state rights and integrity. Central to that compact was the agreement to end the customs tariffs that taxed cross-border trade and any similar border barrier. The trade-off gave the states the power to control their own internal trade, production and services. The Federal Government was limited to external affairs and anything not explicitly designated for the states. Governments and dairying Colonial governments actively encouraged the dairy industry but did not regulate it: land legislation and agricultural services were its major supports. As a simple, low-cost enterprise, family dairying was deemed an admirable vehicle for close settlement of the land outside the city.