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.
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This is a great analysis, thank you. I guess the "marginal adjustments" explanation here is key. About the "catastrophic" (fall in dairy farm numbers) vs. "not necessarily a bad thing" (if a result of market adjustment): Could you expand on that a tiny bit? How should I think about "good" vs. "bad" in this context? Is "natural" or "free market" always good?
The baseline presumption in economics is that "natural" or "free market" adjustments are usually good for society as a whole, but there may be some losers. Here for example, the losers may be the dairy farmers. But even such losses for the farmers are temporary, because they can always shift to other agricultural products or alternatively leave agriculture altogether. Nobody is forcing them to keep making losses or do something they don't like.
And in those unusual cases where the free market isn't good for society as a whole, we say that there has been a market failure. Most introductory economics textbooks go through a fairly standard list of market failures, in which the free market does not work so well and in which intervention may make things better. You want then to take a look at these market failures. However, this article and Farmer McInnis have failed to present any argument for why there has been any market failure and why the price of milk should be artificially and forcibly increased by 10 cents per litre.
Though from a purely market-based observation this is a terrific answer, it completely ignores the food security aspect. Australia, and all other nations, should specifically encourage local production of food even if free market economics would otherwise have them import it. I will leave the discussion of why food security is important aside.
@dotancohen: I have deliberately left that out as that would require another lengthy addendum. I have previously posted another question on food security here to which you're welcome to respond. To my knowledge, food security is another popular argument that economists mostly dismiss.
It should be noted that these dairy farms are contractually obliged to supply milk to the processors at set prices, they do not have the ability to adjust their own prices which they sell to supermarkets.
@AaronLavers: I think you are trying to suggest that these farmers are somehow less free than others in the labour market. But voluntarily entering into a contract is a common fact of life in a free market and is not really a severely constraining factor. If I want to work at McDonald's, I have to sign a contract that stipulates my pay, work hours, etc. If two weeks into my job, I run into adverse financial circumstances, is it within my rights to protest for a 10-cent raise in hourly wages?
While comments aren't generally for extended discussion, I was merely pointing out that there are more complexities surrounding the highly regulated milk market here in Australia than simple free market economics. If you wish to produce milk for major supply chains, you cannot do it independently.
Farmers are less free, when you get down to it. Cows do not have an off-switch. They keep producing milk as long as you milk them, then it stops until they are in calf again. This is a bit of a long lead-time. During this time they still have to be fed and watered and housed and visited by the vet. The profit margin for dairy is not high; it is easy for a farmer to give up. Just take the cows to slaughter and get a nine-to-five job. Once a farmer has given up he can't come back. They farm because they love it.
I whole-heartedly agree with this answer except for one bit: "some sort of strange morality" (emphasis mine). This is a moral intuition many people have. The fact that it leads to undesirable results in a way that is, again, counter-intuitive to many people is part of why we have economists to inform us better, but sneering at a common moral intuition is not helping you sell your point.
@henning how? Not to mention they are in competition with one another...
In Germany, the same problem exists. Of course a solution is to just let the free market extinguish the small farmers and let only big ones survive. But this is not really an option because we want to preserve small farmers for various reasons, one of which is that they are seen as an important part of culture.
@RedSonja being paid well enough to live off doing what you love is, for better or worse, not a right. Being a farmer might not be easy, but nobody forces you to be a farmer, and nobody should be forced to pay for other people to be able live off of what they love. I don't want to be mean, but many people can't afford to do what they love and instead have to work jobs that pay what they need or want. Why should farmers get preferential treatment ?
So, what you're saying in your points 1-3 is: farmers don't need to demand a price raise because when some farmers go out of business, the supply will drop and the prices will go up on their own. OK, but how is it any better than a negotiated price raise?
@RedSonja The same is true of many enterprises. Indeed, that's why profits exist in the first place - it's essentially a reward for risking in the production of something valuable. Look at the statistics - most enterprises fail. People try again, doing something else. Would you support making sure that no enterprises fail?
@IMil The first farmers to go out of business are those that have the lowest productivity, or can do something else more profitably. You've ensured the society as a whole now produces more value - the per capita productivity increased. If you artificially increase prices (or add subsidies, tax breaks, whatever), you're essentially rewarding and stimulating unproductive behavior. Your mileage may vary on whether this is a good thing, of course.
@Luaan Being from a farming family myself, I know it just feels bad when you send your beloved animals off to slaughter because you failed. It's not the same as shutting down a shop. But of course you are right.
@RedSonja I sympathize - but that's exactly the reason why we don't e.g. let criminals be judged by the people they wronged. You'd also find cases that feel even worse - a failed orphanage, a failed school, a failed hospital, a failed charity... But really, in the end, even just feeling like you let your employees and/or customers down. People often start businesses because they have strong feelings about something, which tends to make the failure feel even worse. In the end, that's part of the risk - higher cost of failure (including emotional) counts.
This analysis makes sense in a mostly free market where competition is present. Does the Austrialian Dairy Market provide a situation like that, or does government regulation and limited available buyers alter the analysis?
@IMil The thing is, price of any individual item doesn't matter all that much. In the end, you're finding a balance between the capital goods, work costs, consumer preferences etc. If you artificially increase the buyout prices of milk, you're not directly harming anyone all that much. But economical efficiency isn't some ephemeral holy cow - it really is just using resources efficiently. And in the end, that translates in real wealth (for everyone), including all those hard to measure things like pollution. You'll attract capital where it isn't warranted, and encourage waste.
@IMil For example, let's say that good use of fertilizer makes or breaks your business (often true for farmers). Let's say that normally, you get some 10% profit margin on your production, and 80% of your costs is the fertilizer and the cost of its application (fuel, vehicle depreciation etc.). If you "just" double the price of your product (let's assume you only have the one), suddenly, you don't have to be quite as careful with fertilizer use. More is going to be produced, used, wasted; more pollution, carbon dioxide, soil erosion and compaction, all that. Ecology and economy are one.
Discussion on answer by Kenny LJ: Why…
Discussion on answer by Kenny LJ: Why…