When milk is cheaper than water, something's wrong

The next time a well-heeled retiree complains to me about the budget's superannuation changes and "retrospectivity"...

Let me tell you about real retrospectivity.

Until a few weeks ago Australia's 6000 or so dairy farmers were paid around $5.60 per kilo of milk solids. Each kilo cost roughly $5 to make, leaving them with a small profit. The milk itself isn't solid, but the solids in it are measured in order to make the payment.

Then on April 27 their biggest customer (for many, their only customer) the sharemarket-listed Murray Goulburn slashed what it was prepared to pay from $5.60 to somewhere between $4.75 and $5. It wanted them to sell to it at a loss.

And it got worse. Here's the (ungrammatical) way Murray Goulburn put it in a missive to farmers: "Due to the timing of the reduction of the milk price from $5.60 kgms to a range of $4.75 to $5 kgms, this wimay 2ll result in suppliers having being (sic) paid more for their milk over the whole year."

It was making the cut retrospective, decreeing that it had started 11 months ago at the start of the financial year, even though it had been paying the farmers at the higher rate right up until then.

It meant the farmers who supplied Murray Goulburn, and the farmers who supplied its rival Fonterra, which followed a week later, suddenly owed it huge licks of money: money they had already been paid and spent.

Estimates put the instantly created debt at $120,000 per Murray Goulburn farmer. Within hours their bank managers started ringing, sometimes at night, reassessing the future of their farms. Some walked off and sent their cows to the abattoirs. Others had not a clue how they would survive. Some of Murray Goulburn's drivers are reportedly too scared to enter farms, frightened of what they might find.

Meanwhile at our supermarkets, milk is cheaper than water. We pay less than we've paid in decades, and our Prime Minister doesn't want to talk about it.

Here's Malcolm Turnbull on Monday, in the only comment I can find. While in Perth making an announcement about shipbuilding, he was asked whether Murray Goulburn and its competitor were thugs.

"The Australian Competition and Consumer Commission is dealing with the issues," he replied.

"We're in the course of strengthening Section 46 to ensure large companies treat smaller ones and smaller suppliers more equitably, but I'm not going to go beyond that. This is something the ACCC has in hand. Can I just say this is such an exciting announcement for Australia's future, these are jobs, this is defence, this is the technology that builds our future and I'd look forward to some questions on that."

What's happening to milk is what happened to iron ore. In both cases Gina Rinehart was involved (she was buying into dairy farms just before the milk price collapsed) and in both cases there was talk of a never-ending boom fuelled by China. The world's biggest economic powerhouse was going to keep demanding ever-increasing quantities of iron to build new buildings and ever-increasing quantities of milk as its citizens became richer and adopted western diets.

But, as it had with iron ore, China cultivated other suppliers in order to flood the market. Murray Goulburn's problem was that it had hired an evangelist. Gary Helou turned what had been a farmers co-operative into a public company and told the farmers to put in even more cows because the price was heading to $6. As a symbol of his faith in the future he drove a Mercedes-Benz and spent the company's money on an industrial scale, parting with $6 million to break an agreement to move into a specially built headquarters because he preferred to work nearer the centre of Melbourne.

When the board faced reality and sacked him, he walked away with more than $10 million. Murray Goulburn is legally entitled to demand back the money it has paid farmers. It runs the risk of going broke if it doesn't. The farmers are talking about a milk levy, but it wouldn't help. Increasing the price of a commodity there's too much of usually sends sales down, not up. Some of the states are offering emergency assistance loans, which will push the farmers further into debt.

We are limited in what we can do. Buying milk and cheese on the scale needed to help wouldn't be possible. Boycotting Murray Goulburn products would make things even worse. Our politicians want to talk about anything else. Enjoy your breakfast.

In The Age and Sydney Morning Herald

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Breastmilk is worth more than you think. Gina Rinehart doesn't know the half of it

Gina Rinehart is on to something. The woman who picked the mining boom by betting on iron ore at a time when few realised what was about to happen in China, she is now betting on powdered milk.

So fast is China's market for infant formula growing that it doubled in five years and is expected to double again in three years. It's why foreign companies are falling over themselves to take over Australian milk producers.

And it's why the richest Australian is spending half a billion to build Hope Dairies from scratch. Bloomberg reports it'll take up 5000 hectares of Queensland farmland pumping out an extraordinary 30,000 tonnes of infant formula per year, all of it bound for China, gazumping Australia's present milk powder exports to China of 18,000 tonnes per year.

It would be great if it actually helped Chinese infants. But it won't. Infant formula is one of those rare products the use of which usually hurts rather than helps the user. And unlike others such as alcohol and unhealthy foods the user has no choice but to use it.

Formula milk displaces breast milk, a wonder-food specifically designed for emerging human beings. Formula-fed babies are less resistant to infection, more likely to suffer from diarrhoea and pneumonia and more likely to die of sudden infant death syndrome. Later in life they are more likely to contract diabetes, multiple sclerosis, heart disease and cancer. And they are likely to have lower IQs.

And that's where formula milk is prepared properly. Where it isn't – where water is tainted or where hygiene is bad – the results can be lethal. In 2008 around 54,000 Chinese babies were hospitalised after ingesting a chemical added to formula to give it a higher apparent protein content.

Yet the way we treat formula milk and breast milk in our national accounts is bizarre.

When more formula milk is produced or consumed we say that Australia's (or China's) gross domestic product has gone up. GDP is regarded as a measure of standard of living.

But our standard of living will have got worse. Breast milk is an incomparably superior product that formula necessarily displaces, and it isn't counted in GDP.

But it should be. Breast milk can be stored, exchanged and traded, like other foods. In Norway hospitals sell it for around US$100 per litre. 

An Australian study back in 1992 put the value of breast milk at $67 per litre. (By way of comparison wine often costs $20 per litre, petrol costs $1.60.) Multiplied by the number of litres produced it implied that more than $2 billion was missing from Australia's national accounts, around 0.5 per cent of GDP. At the time the sales of formula were worth $135 million.

The author, Julie Smith, says estimating the production and consumption of human milk is straightforward. It's the only food for which production equals consumption. There are no "post-harvest losses" and no "plate waste". It's simply a matter of estimating the daily volumes of breast milk produced per mother, the number of mothers breastfeeding and the market price. Australia has milk banks in Perth, Brisbane, the Gold Coast and Sydney's Royal Prince Alfred Hospital and Melbourne's Mercy Hospital for Women in Heidelberg .

The Bureau of Statistics already counts around $1 billion of backyard production in the GDP; things such as the on-farm consumption of eggs, fruit and milk.

This year it says it was thinking about going further, including the value the electricity produced by household solar panels and the water collected in backyard water tanks.

Its guidelines say it should include things in the GDP where there is "a reasonably satisfactory basis for valuing the transaction" and where "exclusion could result in distortions to the national accounting figures."

Yet it doesn't yet count breast milk. Dr Smith says this means that when farmers' children are fed milk from a cow, it counts in GDP. But when their children are fed by their mothers it does not.

The invisibility of one type of milk but not the other means less care is taken to support it. That could be through providing quality maternity care and mother and child health programs, through providing access to unpaid and paid maternity leave or through providing breastfeeding-friendly workplaces.

It also means that funds are likely to be directed to supporting the alternative, should its fortunes turn down, even though it usually harms rather than helps its users. In the United States governments assist the dairy industry by distributing free or low-cost formula to households with children.

And it also means that we can't work out what's missing – how much better off Australia (and China) would be if more mothers breastfed and fewer used formula.

What is counted and can be traded matters. Gina Rinehart knows that. It's why she dived into iron ore, eclipsing the exposure of her father. She can see an opportunity in formula milk as well.

If breast milk was counted and could be traded we would see an opportunity in that too. We should. It's worth more.

In The Age and Sydney Morning Herald

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