ECON 1012  Supply in Perfectly Competitive Markets Paper

Topic/s of Primary Focus: Supply in Perfectly Competitive Markets

Read the following excerpt from ABC News article ‘Dairy farmers exiting the industry across NSW due to low milk prices’ (30 June 2018) https://www.abc.net.au/news/rural/2018-06-30/dairy…

Farmers across New South Wales are actively making plans to exit the dairy industry.

For many farmers, the last straw came as they received confirmation from processors this week that they could be facing another year producing milk below the cost of production.

“It’s quite disgusting actually, after the positive reports and Bega Cheese talking up a strong market at the moment,” said dairy farmer Michael Shipton.

Drought, rising input costs and fatigue are just some of the factors farmers say are undermining the viability of farms in traditional dairy regions.

The farm gate milk price was below expectations for many suppliers.

Bega Cheese announced the 2018–19 opening milk price of $6.70 per kilogram of milk solids or 50 cents per litre for NSW producers — a 3 per cent increase on last year.

The ABC spoke to half a dozen Bega Cheese suppliers who all shared their dissatisfaction with the dairy processor describing the price as “very disappointing”.

Mr Shipton, who operates just outside of Bega, said he would have to reduce the number of cows and staff over the coming months.

“For 20 cents a kilogram increase on last year, it’s just not enough for farmers in the valley to cover the costs,” he said.

“Input costs are up — grain prices, fuel, electricity, and on top of that wages go up on the first of July.”

Task:

Explain why some farmers producing milk would be exiting the market in the circumstances described above in June 2018. And why even though it is suggested that they were ‘producing milk below the cost of production’ in the previous year, that they had not already shut down in the short run.

Ensure in your answer that you use concepts such as shut down, exit, short and long run, profit, variable and fixed costs, and cost curves – and that you use diagrams to support your explanations where relevant.