Globalisation, uneven development and marginalisation: dairy restructuring in New South Wales.

Social scientists have long been exploring the historical and comparative transformation and restructuring of agriculture in contemporary capitalism. At least three distinct yet related themes can be identified in the literature; the demise or decline of family farms and the rise of industrial-style corporate enterprises, uneven regional development and the consequent marginalisation of certain segments of the agricultural community, and the massive changes in the agri-food system accompanied by industry deregulation. Initially concerned with agricultural production at the farm enterprise level, the focus shifted towards delineating commodity chains and more recently to food regimes and state-(de)regulation in the context of a globalising (1) world economy (Arce and Marsden 1993; McMichael 1994; Bonanno et al. 1994; Buttel 1996). Nevertheless, debates about agricultural restructuring are not simply about the mechanics or rhetoric of transformations in capitalist social formations. At the forefront were and are contested images of what `the forces of change' are and the directions those forces are driving the agricultural sector, including the types of social relations and associations upon which it should be based (for an excellent overview see Buttel 2001). Indeed, a significant question arises over how new socio-economic and political forms of power and authority will (re)shape agriculture and the agri-food system (Marsden 2000; Marsden et al. 1996).

What the various perspectives appear to have in common are that agricultural industries in general and virtually every agricultural producer and consumer in particular, have been touched by what is known as globalisation. The situation in Australia is no different. While it is possible to locate Australia within a globalised economy in earlier times, the present wave of globalisation is a different phenomenon. The nascent globalisation project is embedded in a coincidence of interests between dominant states and powerful transnational corporations, and in a set of institutions (i.e., WTO, GATT) facilitating globalised finance and capital mobility (Buttel 2001: 174). Firmly anchored within a neo-liberal framework promoting structural reform (Hyden 1997; Rose 1996), Australian agriculture now finds itself in an environment of deregulation. Initiated in part by the Hilmer report in 1993 on what has come to be known as the National Competition Policy, the protectionist carapace that long insulated Australian farmers has given way to export-oriented policies emphasising competitiveness and efficiency with the aim of providing conditions for economic growth. (2) Notwithstanding increases in agricultural exports, a significant outcome of deregulation within Australia has been locational shifts in agricultural production, as well as a consistent decline in producers and an increased concentration in the number of producers along the agribusiness chain.

The literature on globalisation and agricultural in Australia is rich in documenting the effects of globalisation on a wide array of commodities (for an overview, see Burch et al. 1999; Burch et al. 1996). The study of the restructuring of the diary industry can also provide important insights into the impacts of globalisation (Schwarzweller and Davidson 2000). Given the prominence of milk products in peoples' daily diet and the ubiquitousness of institutional structures that have long shaped the dairy industry in Australia, dairying permits critical insights into the immediate affects of deregulation. Furthermore, dairying is an enterprise that does not lend itself to part-time farming practices; dairy farms, even the very smallest, are "full-time operations" and, as such, represent the quintessential mutual dependence between farm business and farm family (see Schwarweller and Davidson 2000; Davidson 1997).

Framed within this perspective, what can we expect with the dismantling of corporatism (3), given that it has long constituted an important cornerstone in the discourse on national dairy polices in Australia? Proponents of deregulation claim that it is an inevitable consequence of globalisation and will strengthen rural economies through increases in efficiencies (4) and productivities through competition (Costello 2000; Sinclair 2000). (5) Critics, on the other hand, question its inevitability and caution that "its outcomes will be spatially differentiated because of the strongly localised geography of production" (Cocklin and Dibden n.d.: 4). The purpose of this article is to help re-frame the debate in Australia by posing new descriptive understandings and analytical alternatives through an examination of New South Wales' dairy industry. I will briefly address the debate on the unevenness of the effect of deregulation on the dairy industry and whether or not smaller-scale enterprises are inimical to an unregulated milk industry and one that is increasingly oriented to producing milk for an export market.

Regional and Enterprise Marginalisation

Viewed from an historical perspective changes over time in the wider global and national economies gave shape to what has long been noted as regional specialisations in commodity production. Unlike today, however, such regional specialisations were affected largely by local agro-environments. More importantly, changes occurred slowly and without generating severe dislocations that constrict rural peoples' life chances (Van der Ploeg 1992, 1985). This is no longer the case. Current changes in agricultural specialisations are more appropriately conceptualised as an aspect of globalisation and as an element of its unevenness and relative to larger more complex configurations of economic activities. It is becoming increasingly clear that farm profitability and the viability of farming communities in advanced industrial countries are conditioned not so much by the specific agricultural commodities being produced as by the region's distinctive socio-economic character, by its relation with the wider political economy, and by the types of national policies that condition the local economic environment.

Expressed in terms of uneven development, changes within Australia's dairy industry assume a different significance; the focus of attention shifts from the behavioural characteristics of individual entrepreneurs, with its overwhelming emphasis on the personality attributes associated with the adoption of scientifically prescribed farm practices, to the structural parameters of the development process or globalisation itself. One of the outcomes of the present trajectory of globalisation and its concomitant rural restructuring is the marginalisation of large segments of the dairy industry (as in agriculture in general). When agriculture is central to a region's economy, the marginalisation of agricultural production can lead to the erosion of regional and community vitality and make painfully clear the vulnerability of rural people and their local institutions to economic forces beyond their control (Jansen 1991).

Marginality, as the term is used here, is a structural condition that implies a lack of independence from the wider political economy (Black 1992). Regional marginality not only conditions the form and profitability of dairying (and other enterprises in the region), it also tends to intensify, often in very exaggerated and deleterious ways, the impacts of seemingly minor adjustments by the industry at large (Schwarzweller and Davidson 1997). Nevertheless, the economic impacts of marginalisation are complex, variable and uneven. One cannot expect to observe homogeneous conditions within a given region. Similarly, enterprises within such regions exhibit different patterns of organization and various degrees of vitality.

Dairy Restructuring in Australia and NSW 

Dairying is a major Australian rural industry, comprising about 1 percent of gross domestic product and 13 percent of total processed food and beverage output (Pritchard 1998). Australia's climate and pasture-based grazing system give it a comparative advantage and relatively low cost milk production (along with New Zealand). (6) Based on farm gate production values, it ranks third behind the wheat and beef industries. The gross value of dairy production in 1997/1998 was about AU$ 3 billion (ADC 2000). Dairying is also one of the leading rural industries in terms of the proportion of downstream employment and processing it generates. At an ex-factory level, industry output was valued at around $7 billion in 1997/98, earning in excess of AU$ 2 billion in exports (ADIC 1999a, 1999b). Australia is currently the third leading dairy exporter with 12 percent of the global trade, compared with the European Union's 38 percent and New Zealand's 31 percent (ADC 1999). According to the ADIC (1999a: 9), however, "While the domestic industry has grown successfully ... future growth lies in the expansion of export markets and the major exporters believe this requires the removal of price regulations."

Total milk production in Australia is steadily increasing. Much of this increase is due to increased productivity per cow, about 4,744 litres per year in Australia, but about 5,014 litres per year in NSW (ADICb 1999). Unfortunately for the Australian dairy farmer, the wholesale price of milk remains comparatively low. Compared with the U.K. and U.S., the wholesale price in Australia is 40 and 29 percent lower, respectively (ABARE 1995). And, when factory prices paid to farmers for milk are adjusted for inflation, prices have remained relatively flat from 1982 to 1998 (ADIC 1999b). It appears, then, that many Australian dairy farmers are caught in a cost/price squeeze; costs of inputs are rising more quickly than the price of milk at the farm gate.

Quantifiable trends in the dairy industry, as in other agricultural sectors, are invariably associated with changes occurring in the agricultural and food supply system. The Australian dairy industry has been undergoing a dramatic transformation over the past three decades. Initially the forces driving the restructuring of the Australian dairy industry were technological innovations in milk production, transport, and storage in the early 1970s (Lembit et al, 1991; Muller, 1978); the entry of the United Kingdom (then Australia's largest market) into the European Community in 1973 (Moran 1999). Additional, and more far-reaching, pressures include the introduction of the Kerin Plan in 1986 directly linking domestic prices to international market returns (7), the Crean Plan in 1991 mandating compliance with the WTO, and now the government's complete deregulation of the milk industry at the national and state levels. The resultant reordering of dairy farms appears to have come largely at the expense of the smaller and medium-sized operations.

Since 1975, the number of "registered" dairy farms in Australia has declined a staggering 57 percent, while cow numbers (in milk and dry) declined nearly 35 percent (ADC 1995; ADC 1998; Safe Food Production 2000). Average herd size, however, has risen from about 93 to 153 (and is currently estimated to be 161) (Safe Food Production 2000). Interestingly, the number of cows fell as in other industrialised countries, but now is increasing, about 11 percent since 1995. Average annual yield per cow also has risen some 47 percent since 1990, an indication of better breeding and improved feed regimes (mostly improved pasturage). Commenting on these trends, many industry experts conclude that smaller farms will find it increasingly difficult to remain viable in a highly competitive international milk market (Pritchard 1998; ADIC 1999a, 1999b; ADC 1998; Kaine et al, 1994; Bardsley and Hughs, 1985).

Trends in New South Wales' dairy industry have, in many ways, parallelled those occurring nationally and regionally--fewer dairy producers and larger herds (Berrevoets 2000). Since 1975, the number of "registered" dairies has declined 63.4 percent and the number of cows 42.7 percent, although cow numbers have increased 19 percent since 1995 (ADC 1995; Safe Food Production 2000). Average herd size has risen from 84 to 146, slightly less than the national average. Dairy farms in the other States are also getting larger; the current herd mean size in Victoria is 164 cows, 124 in Queensland, 151 in South Australia, 166 in Western Australia and 192 in Tasmania (Safe Food Production 2000). The smaller mean herd sizes in NSW and Queensland are probably due to the fact that these states lagged behind the others in the deregulation of their milk industries, most notably in their dairy quota systems which subsidised returns for liquid milk. Since 1994, the number of dairy farms has decreased 8.8 percent in NSW and 17.7 percent in Queensland, compared to the other states that lost 7.9 percent collectively.

Today more than half of Australia's milk and more than 60 percent of its manufactured dairy products are exported, mostly to Asia (Japan consumes 21 percent of Australia's food export sales and 37 percent of exports to Asia) (1999 ADICb). (8) Most export-oriented milk production occurs in the southern (colder) states of Victoria and Tasmania, with the remaining dairy regions (located in New South Wales, Queensland, South Australia and Western Australia) oriented towards satisfying local demand. Victoria is the major milk producing State with 43 percent of Australia's dairies and accounts for 63 percent of total milk production. In 1998/ 99, Victoria exported 83 percent of its total milk production (only seven percent goes to fluid milk), earning 80 percent of the industry's export revenues. Dairying, however, is no less important in NSW. With 13 percent of the market, NSW is second only to Victoria in terms of milk production and number of dairy farms. Dairying is the fifth largest rural industry in NSW, with production at the farm gate estimated at about AU$ 462 million in 1999 (Safe Food Production 2000). Unlike Victoria, NSW milk production has long been oriented towards producing milk year round to supply the fluid milk market (44 percent of its total milk production) (ABCb 1999). Consequently, seasonal patterns are less pronounced than in either Victoria or Tasmania and require NSW dairy farmers to provide cows with supplemental feeding grains and concentrates when pasture growth is poor, which adds to their cost of production.

Figure 1 suggests that the differential pressures exerted by the wider political economy can and do generate different developmental trajectories; in this instance, variations in dairy farm scale by State and region (for an insightful analysis of dairy trends by State see Berrevoets 2000). It also suggests that although economic forces and policies are pushing dairy farmers to expand, smaller and medium-scale operations persist (Davidson 1995, 2000). Nevertheless, some dairy enterprises are better positioned to take advantage of changes within the wider political economy; in the present case, with changes associated with dairy industry deregulation. Although, it is not a foregone conclusion that the smaller family farm is inimical to a deregulated environment, the outlook is not promising for many dairy farmers. Industry experts anticipate a large shakeout, especially those "unable to survive on reduced real returns" and those who either do "not have the financial ability or inclination to achieve further efficiencies or to create economies of scale" (ADIC 1999a: 2; Pearson 1999; Koutsoukis 1999; Mitchel 1999).

[FIGURE 1 OMITTED]

Dairy Industry Deregulation

If neo-liberalism is about the politics of restructuring, then globalisation is about the economics of it..... Cocklin and Dibden n.d.: 1

Dairy regulation in Australia has its origins in attempts to stabilise milk production in the 1930s recession, parallelling in many ways the American experience of this time (Grant 1991). Under the Australian constitution, the regulation of fluid milk falls under State jurisdiction, while the support scheme regulating manufactured milk is a federal prerogative (Domestic Market Support Scheme). Through complex market access arrangements and pooling systems, a two-tiered pricing mechanism was established for fluid and manufacturing milk. Typically, dairy farmers received higher prices for fluid milk than for manufactured. In New South Wales, for example, the average farm gate price for manufactured milk in 1999 was 24.6 cents but 47 cents for fluid milk.

The establishment of corporatist arrangements facilitated a production system organised through regional cooperatives. (9) This administrative system remained largely unchanged until the Kerin Plan in 1986 brought cross-subsidy payments for exports more in line with international prices (usually manufactured milk), thus making Australian dairy imports more competitive (Courtney 2000). During the 1990s, deregulation efforts shifted to the state level--the fluid milk market, especially price setting and zoning regulation (restrictions on interstate sales, especially of excess manufactured milk). Market forces now determine processor, vendor and retail margins, and retail price. Farm gate prices and milk sourcing were wholly deregulated 1 July 2000, leaving the milk industry completely exposed to market determinants. (10)

From the beginning, the debate on the deregulation of the dairy industry has been driven by an ideology of `economic rationalism.' (11) According to Latham (2000: 49), "The truth is unavoidable: national economies have only ever expanded by aiming at the world market and export production." Evans (1994: 47) goes so far as to claim that Australia and New Zealand laboured for a century under "socialism," and now are "cutting back government and freeing their economies". In this sense, policymakers hold firm to the idea that market forces generate the most efficient economic performance by creating appropriate investment strategies for both farmers and manufacturers alike (Friedman 1980) (12), culminating in Prime Minister John Howard's Supermarket to Asia approach designed to align its agri-food policies more closely with the Asian market. (13) Furthermore, many Victorian dairy farmers, with the bulk of dairy production and dairies, viewed deregulation as a means to facilitate their access to the markets of other States, while expanding their already large powdered-milk export market (Mitchell 1999).

The press towards industry deregulation has occurred seemingly irrespective to domestic social consequences. In a study of 121 family-operated dairies in the Bega Valley and Eurobadalla Shires (NSW), it was estimated a five cent reduction per litre for their milk would make eight dairy farms unviable, a 10 cent reduction would make 70 farms unviable and a 15 cent reduction would place all at risk (Pearson 1999). Moreover, an ABARE report found that small dairy towns would be especially hard hit (such as Monto in Queensland and Dungog in NSW), and that many dairy farmers have lost 30 percent of their income (Asia Times 2001).

Dairy companies and manufacturing plants have also been a significant driving force behind deregulation. Throughout the 1980s and 1990s a wave of consolidations and mergers occurred as Australian companies sought to achieve greater economies of scale and to compete domestically against each other and from imported products, and in the international market (see Laffan 2001). World wide there were some 469 mergers or acquisitions in the dairy industry between 1998 and 1999 (Dairy Good 2001). Currently, Dairy Farmers, National Foods (14) and Pauls process 90 percent of Australia's fresh milk output (Fisher 1999), while two cooperatives--Murray-Goulburn and Bonlac--account for 70 percent of dairy exports (Pritchard 1998). This too worries many dairy farmers.

Uneven Development and Marginalisation of Dairying in NSW

Dairy restructuring has been and continues to be an uneven process. So too with the deregulation of the dairy industry; the costs and benefits have been highly variable, both spatially and by enterprise size. Realistic expansion requires adding more than four or five cows. It is estimated that in order to survive in a deregulated market, dairy farms will need to be milking between 400-500 cows (15) and producing between 750,000 to 1.5 million litres of milk per year (Pearson 1999). Approaching even half of this will prove difficult for many farmers, especially those in NSW's outlying dairy regions. The mean dairy herd in the Central Region is 119 and 89 in the North Coast Region, smaller than those in the Southern Region (particularly the Riverina) with a herd average of 157 and the Inland Local Areas averaging 143 cows, both of which rely heavily on irrigation for pasture production (Safe Food Production 1999). But there are few alternatives. The Senate inquiry into the impact of dairy deregulation in NSW and Victoria heard evidence that "selling dairy farms is now almost impossible due to industry uncertainty ... there are very few buyers willing to invest" (ABC 1999a). The chief executive of the NSW Dairy Farmers' Association concludes that less than a year after the onset of deregulation that about one third of dairy farmers would be forced to close out, while others placed the figure at closer to 50 percent (Newcastle Herald 2001). (16)

Larger dairy farms enjoy a relatively strong economic base for further expansion, although this will depend in part on the robustness of land values required to secure external finance. The Australian Milk Producers Association contends that there has been a significant collapse in land values post deregulation (Cocklin and Dibden n.d.). The future of smaller dairies is doubtful. Middle-scale dairies are at a crossroad; they will need to increase herd size in order to become competitive in an unregulated dairy environment. Failing this, many more will be forced to close out. In addition, many dairies, and seemingly regardless of scale and `efficiencies', will be hard pressed due to their location. Some areas are at risk of falling below a critical mass of dairies necessary to attract transport, while others simply will be too far from processing plants. (17) In the end, the prognosis for many remaining dairies in NSW is rather bleak.

Prospects and Conclusions

The study of the restructuring of the Australian dairy industry, as in agriculture in general, can provide important insights into the development processes. Some enterprises are better positioned to take advantage of changes within the wider political economy; in the present case, with changes associated with dairy industry deregulation. Still, it is not a foregone conclusion that the smaller family farm (and small enterprises in general) is inimical to a deregulated environment. The outlook, however, is not favourable, especially for dairies in marginal regions and those that have become marginal operations through changes in efficiency wrought by deregulation. It should be noted that what is happening in dairying is also occurring within other sectors of the agricultural economy (Burch 1999).

The processes leading to marginalisation are modifiable and manipulatable. There is no inevitable outcome of globalisation (see, for example, Norberg-Hodge 2001; Pires-O'Brien 2000). (18) There are things that governmental policy makers, industry directors, private organizations and outreach programs can do to overcome the disadvantages imposed by deregulation and to build upon existing, though often unappreciated comparative advantages. What this requires is clearly differentiating the variable effects and relevance of the system externalities associated with deregulation, both at the regional and enterprise levels. This understanding recognizes that uneven development is a complex socio-economic and political phenomenon, and not necessarily an irreversible consequence of geography, regional resources, or local entrepreneurial skills.

It is doubtful that there will be a return to corporatist arrangements that marked the past; but neither do we favour the rise of an economic environment where only the largest firms can exist. Current changes are generally expressed in terms of the neo-liberal rhetoric of freeing the market and taking government "off the backs of people." Any disadvantage arising from these seemingly necessary changes are referred to as externalities and transaction costs, to be borne by the public at large and benefited from by private individuals. Politicians are staying the course of economic rationalism, even though social indicators point to the erosion of rural social cohesion, vitality and viability (Suter 1999; Banks 2001). Now, rural Australia is in crisis (Bourke and Lockie 2001; Lawrence 1995). Not only is there a concentration in business enterprises, but closures of essential rural services such as banks, telecommunications, and hospitals exacerbate the situation in declining rural communities. Thus when farms close out, they are just a small part of a larger trend marking rural decline.

(Footnotes)

(1) According to Weisman (1998:14), globalisation is the most appropriate way for "describing the many ways in which space and time have been compressed by technology, information flows, trade and power so that distant actions have local effects."

(2) Australia's nine governments agreed to implement the National Competition Policy reforms in 1995 which served to stimulate the pace of restructuring in all areas of the economy including agriculture. Actual benefits to the economy derived from the NCP have been the subject of considerable debate and disagreement (see Quiggen 1996; Davidson and Grant 2001).

(3) Corporatism is a special relation between the state and interest organizations of sectors of the economy, and that is why the conceptual model is often applied to agriculture in general and dairying in particular (see Just 1994; Young 1989). Institutional corporatism implies that "competition among interest associations is no longer open" and that "these associations are to some degree institutionally dependent on the state and consequently have to check their behavior" (Williamson 1989: 67).

(4) Within neo-classical economics, efficiency is configured as a mathematical construction to measure farm management decisions and frequently fails to take into account macro-level pressures--such as system-externalities--and non-economic considerations that also shape decisions.

(5) Australian Treasurer Peter Costello (2000: 58) claims that "Open markets and increased competition help make an economy more adaptable and innovative, more able to take advantage of the productivity benefits flowing from information and communications technology." Similarly, Ian Sinclair (2000: 103), former leader of the Australian Federal National Party, contends that "Globalisation is inevitable because it makes sense."

(6) Production costs are two-thirds of those in the European Union and three quarters of those in the U.S.; production costs are slightly lower in New Zealand (Moran 1999).

(7) According to the Australian Dairy Industry Council (1999b: 2), "From 1986 to 1992, export support was wound down from 44.2% above world parity prices to 22%. By 2000, the scheme [deregulation] will have reduced support to 10%."

(8) According to a report by the ADIC (1999a: 2), "The Australian dairy industry competes with the rest of the world ... [such that] over 75% of Australia's milk production is now exposed to the vagaries of the international market place."

(9) Cooperatives have become quite powerful over the years, accounting for 75 percent of all milk output with the two largest (Murray Goulburn Cooperative and Bonlac Foods) controlling about 45 percent of all milk intake and around 50 percent of all milk used for manufacturing (Fisher 1999).

(10) Of course dairy farmers faced an additional policy change at this time --the GST. Aside from raising certain costs of production, the government significantly underestimated the average cost of compliance and record keeping.

(11) In general, economists only consider "that there is a function for regulation only in the case of market failure.... when the market process does not lead to an efficient allocation" (Traxler and Unger 1994: 1).

(12) The 1980s saw the consolidation of the dominating neo-classical or neo-liberal paradigm as the only approach to national development (Portes 1997), based, in part, on the work of Porter (1990) and his concept of "clusters," or groups of interconnected firms, suppliers, related industries and institutions that arise in particular locations.

(13) Supermarket to Asia traces its origin back to the Hawke-Keating era with their efforts to promote and strengthen greater regional political and economic ties, leading to the formation of the Agri-Food Council in 1992 (Pritchard 1999).

(14) In the roller coaster of global acquisitions and mergers, Italian-based Parmalat has been joined by the New Zealand Dairy Group which has seven percent of National Foods (Browning 2000).

(15) In fact, according to a report prepared on dairy deregulation for the Australian Senate, average herd size "is considerably below the level at which economies of scale are exhausted [which] is believed to approach a herd size of 2,000" (Moran 1999: 4).

(16) According to John Cartwright, Australian Milk Producers Association spokesperson: "Farmers aren't any better off, they've gone backwards. Consumers are worse off and the supermarkets are claiming a windfall profit" (Asia Pulse 2001: 1).

(17) There is also a reordering of dairy processing plants with a number of closures in recent months such as in Gloucester in the Upper Hunter Valley.

(18) An interesting aspect of globalisation is how its proponents--in this case industry leaders and much of the Federal government--phrase it in terms of its inevitability and unified outcome, thus precluding any broad based community discussion.

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Andrew Davidson is a Senior Lecturer in the School of Sociology at the University of New South Wales.