The plight of the dairy industry has become the first real issue of the election, with the Coalition committing more than half a billion in concessional loans to dairy farmers. The promise is far and away the Coalition’s largest for the campaign so far, but why do farmers need so much help? Why are there cows marching down Bourke Street in protest? Is Murray Goulburn screwing over the farmers? Are the supermarket giants to blame? And what can we do to help? Pour yourself a cold glass of milk, because we’ll try to separate the curds from the whey (sorry, we will try to keep dairy puns to a minimum).

What is the issue?

Farmers’ collective Murray Goulburn cut the amount it was paying its farmers for a kilo of milk solids, so farmers were suddenly making less per litre of milk than they had been. Even worse, from the farmers’ perspective, they were told that they should be paid even less still for a kilo of milk solids, but to soften the blow, Murray Goulburn would pay them an artificially inflated price for milk this year, with the understanding that the farmers would return the “extra”, i.e. the difference between market price and what Murray Goulburn was going to pay, over the next three years to the company.

Why is the milk worth less than it used to be?

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Murray Goulburn badly miscalculated how much demand there would be for a key driver of its milk price, adult milk powder. For several years the company asked its producers for more and more milk, and demand had been steadily climbing, driven largely by a seemingly insatiable appetite in China for Australian powdered milk (ever since China’s own milk supply was discovered to have been contaminated with melamine in 2008, China has been very keen to import milk from safer countries, like Australia).

But that insatiable demand turned out to be satiable after all. Demand levelled off, so the market was flooded and MG wasn’t going to hit its inflated sales targets. Plus MG failed to anticipate what the fluctuating Australian dollar would mean for its exports. Those two factors combined meant, 1) MG had too much milk in storage; and 2) it could not charge as much as it had expected to charge for it. To keep the commitments the company made during a recent capital raising, MG had to cut the amount it paid its farmers for milk solids.

Do the farmers owe Murray Goulburn money?

Not right now, but they will. For the company to return to viability it would have had to cut the price it paid to farmers for milk solids by a hell of a lot. So the company — which is, remember, owned by and very connected to farmers — decided on a compromise. Less pain right now for the farmers, with an interim price that was higher than what MC could really afford. That would help dairy farmers in the short term, rather than being hit with a massive price cut all at once, but they will have to repay that money. The company used its balance sheet to fund the over-payment and expect that money to be paid back. This money will be retrieved by Murray Goulburn offering a lower milk price over the next three years than it otherwise would have.

Is this because of Coles and Woolies’ $1 milk?

No. First of all, fresh milk — whether under Murray Goulburn’s Devondale brand, or under Coles’ home brand (which are exactly the same milk) — makes up only about 6% of Murray Goulburn’s milk production. This crisis is because Murray Goulburn badly miscalculated demand for its adult milk powder and the effects of the Australian dollar. That is not the stuff you will get in the refrigerated case at the back — though you can buy Devondale powdered milk in the long-life milk aisle, this is mostly about exports.

And secondly, milk is a loss-leader for the major supermarket chains; in order to entice customers to do their weekly shops there, Coles and Woolies are willing to take a bath on milk (on milk, not in milk). Murray Goulburn and farmers make a pretty good return on fresh milk, as the supermarket chains are willing to sell it to customers for less than the supermarkets themselves pay. The difference might only be a few cents a litre — and the supermarkets more than make it up elsewhere, since people usually don’t buy only milk once they set foot in the store.

What can we do to help? Waleed Aly said we should eat more cheese and pay more for milk.

Far be it from us to suggest that eating more cheese is not the way to save Australia. By all means, buy and eat more dairy — cheese, cream, butter, sour cream. And buying Australian brands will help Australian farmers. The farmers who supply Murray Goulburn would like you to buy its Devondale branded fresh and UHT milk, along with Devondale chilled cheese and cream.

They would also like you to buy Coles’ home-brand milk — remember, even though it only costs you $1, Coles is artificially making that price low, and Murray Goulburn and farmers are fairly compensated for it. But there are plenty of Australian brands you can buy to help Australia’s farmers. Ultimately, though, this isn’t about fresh milk or fresh products sold domestically; it is poor forecasting of the export market. And there’s not a lot you, as a consumer, can do about that.

I have heard a lot of conspiracy theories. Is Coles’ “fresh” milk actually powdered? And are the supermarkets hiding branded milk in order to push their home brands?

No. Using powdered milk to create fresh milk would be double handling and would cost the company more. And no, supermarkets are not hiding brand-name milk in some lactose-rich conspiracy.