Please also see the new Additional Addendum at the bottom written a few days after I first wrote this answer.
You are correct and not missing anything. Absent good reasons to the contrary (and none have been given here), we may presume that the free market works.
If the Queensland milk industry is being "squeezed", then this suggests that there are simply too many dairies and some should shut down.
"We've got 370 dairies in Queensland at the moment, that could get down to 150 in eight to 10 years' time, and there will be more imported milk," he [Farmer McInnes] added.
Farmer McInnes's alarmist scenario illustrates a commonly-held economic fallacy that probably arises from the common tendency to think about everything in binary terms.
To him, it's either:
- Queensland raises the price of milk by 10 cents a litre and thereby preserves its 370 dairies; OR
- Queensland does not raise the price of milk and thus sees a catastrophic fall in the number of dairies from 370 to 150.
Such binary or all-or-nothing thinking is a failure to recognise how to free market works. The free market is capable of making marginal adjustments.
If at present, the Queensland milk industry is being "squeezed", then this suggests that there are simply too many dairies relative to demand. What should naturally happen is:
- The least profitable/productive dairies voluntarily shut down.
- Supply will fall.
- The price of milk will rise to the point at which the remaining dairies are happy with the prices they receive.
The end result is that the number of dairies will fall, but probably by only a handful and not catastrophically to 150 (I don't even know where he gets this number from).
But even if the number of Queensland dairies does fall to 150, then this is not necessarily a bad thing, so long as this fall is a result of natural market adjustments.
Lengthy addendum. Producers seeking government/public protection have always made certain specious arguments. Here in this article, in addition to the main such argument refuted above, several other of such arguments were also made. They are well worth refuting:
the costs are enormous.
Drought has led to soaring grain prices, making it more expensive for farmers to feed their herds on top of costs like water and power. ...
10 cents is the difference between getting by and making a profit, but have invested too much to pull out.
Under the free market or capitalist system, individuals take risk and can then enjoy either rewards or losses.
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?
This would, of course, have been absurd -- but it is also exactly what the present farmers are doing.
At play here is also some sort of strange morality, in which it is thought "fair" that consumers "should" help pay for producers' costs.
But suppose I spend 20 years of my life creating what I (and no one else) consider to be a magnificent work of art. Should I then protest when nobody out there is willing to pay me $1M for this work of art and all the years of hard work I put in? No. Consumers (be it of milk or my magnificent artwork) are free to pay whatever they like and need not be coerced into paying more than they'd like.
Mr McInnes runs ... a family farm that's been operating for 104 years
Here the age of the farm was simply included without comment. This is an emotive argument based on age/history/tradition that clearly has some appeal.
It is not altogether invalid. Some communities/countries may collectively decide that certain things (like farms or art performances) are worth promoting, preserving, and hence subsidising or being otherwise protected from market forces.
However, such subsidies should be made clear, transparent, and explicit. And ideally, they should arise through the democratic process, rather than through a few farmers' protest outside a supermarket.
[raising the price of milk by 10 cents per litre] would only cost consumers an extra \$8 a year.
This, by itself, is not an argument at all. Why should each milk consumer in Queensland have to pay \$8 more per year to milk producers? Should they also each pay \$8 more to Queensland's avocado producers, the King of Thailand, or Mel Gibson?
Just because a cost is perceived to be small (and I personally do not perceive paying an extra A$8 a year for milk to be small) doesn't mean we can ignore the cost. Instead, every cost must be weighed against the corresponding benefits. And here, no benefits whatsoever have been articulated, other than that of helping out a few dairy farmers. And no reason has been given for why dairy farmers are any worthier of special help than are avocado farmers, the King of Thailand, or Mel Gibson.
Another addendum. My answer above has been correctly criticised for being overly theoretical. And so I have spent a little more time studying the specifics of the Australian dairy industry. One particularly important reference is the Australian Competition & Consumer Commission's (ACCC) Dairy Inquiry: Final report (April 2018).
It turns out that there are market failures in the Australian dairy industry.†
However, these market failures are not what everyone here has assumed.
A little background: On January 26 2011 (Australia Day), the supermarket chain Coles began its milk price war by offering $1-a-litre milk. Soon after, two other chains, Woolworths and Aldi, followed suit (see e.g. this story).
Everyone has thus assumed that the "villain" in this story is the supermarkets (and especially Coles). However, it turns out that the "villain" (if there must be one) is instead the processors, which are another intermediary between the dairy farmers and the supermarkets.
According to the Dairy Inquiry (p. xii), the key market failures arise from:
the strong bargaining power imbalance and information asymmetry in farmer-processor relationships.
The Dairy Inquiry issues 8 recommendations (pp. xxv–xxvii). All 8 pertain to rectifying the power imbalance and information asymmetry between the farmers and the processors. All 8 are contractual and informational. All 8 pertain to increasing clarity, transparency, simplicity, and the ease with which farmers can switch between processors in the farmer-processor contracts.
Importantly, the ACCC does not recommend raising supermarket prices as a possible solution:
The ACCC did not obtain any evidence that supermarket pricing, including $1 per litre milk, has a direct impact on farmgate prices ... farmers’ lack of bargaining power means that they are unlikely to benefit from an increase in the retail (or wholesale) prices of private label milk or other dairy products. Even if processors were to receive higher wholesale prices from sales to supermarkets, this does not mean the processors will pay farmers any more than they have to secure milk.
A common lay reaction to many economic problems is to call for artificial price floors. (Indeed, the Australian Labor Party has proposed doing so with milk prices if it wins the federal elections -- this is thus evidently a popular "fix".)
However, economists know that artificial price (and quantity) restrictions are generally a bad idea and usually cause even more problems. If there are market failures, then we should try to address those market failures directly, instead of using artificial price restrictions.
For example, if there are externalities, then one possibility is to use the appropriate Pigovian taxes and subsidies.
And in this particular example, the market failure is that of uneven bargaining power and information asymmetries between farmers and processors. Therefore, the economist's preferred solution is not a milk price floor, but to tackle the market failure directly, namely by reducing the information asymmetries between farmers and producers.
†I never claimed otherwise. In particular, I never claimed, as has been caricatured by some of my opponents, that the Australian dairy industry is a perfectly competitive and free market. I merely claimed that all of the arguments in the originally-cited article were invalid and failed to explain what, if any, the market failures or imperfections were.
All markets in the real world are imperfect. The onus is on one to explain and ideally quantify what the market failures are. That way we can better understand the problems and find a better solution, instead of simply screaming for a price floor whenever there is perceived "unfairness"/"injustice"/"exploitation".
I have also deliberately put "villain" in scare quotes. In economics, we are less interested in looking for the "villain" or someone to blame than in trying to find solutions for each problem. And there usually are solutions, once we set aside our moral outrage.