The Effects of Policy Changes on the Production and Sales of Milk in New South Wales

Regulation of the New South Wales dairy industry creates inefficiencies and raises the cost of production. In this study, the industry is modelled by adapting an ABARE subregional programming model, and using spatial equilibrium linear activity analysis to examine the effects on the production of market and manufacturing milk within different regions of New South Wales of alternative policies. The output generated by the model includes regional market and manufacturing milk production levels, prices and quantities of market milk sold in each period and region, and market and manufacturing milk transfers between regions. The model also generates details of farm-level activities for each of the representative farms used in the construction of the model. Broadly speaking, the results generated by the model are consistent with economic theory and previous studies, and point to higher social welfare levels under a less regulated industry structure. However, with respect to the regional structure of the industry, some of the results generated by the model contradict earlier research. In a further series of experiments, the policy scenarios are re-examined after the model has been adjusted to correspond more closely with a long-run situation. Under these circumstances, the opportunity costs of land used in dairying heavily influences the long term structure of the industry. Differences in results between the long-run and short-run cases highlight the need for caution in interpreting the output from complex mathematical programming models.