What rising energy costs mean for dairy

Compared with other primary producers, dairy is disproportionately vulnerable to high energy costs due to the industry's high power needs in processing and on farm. For dairy manufacturers, high power is necessary to maintain strict health and safety standards.

This, in turn, impacts dairy farmers' energy costs. Dairy farmers already incur increasing electricity tariffs and need electricity for milking machinery, milk cooling and storage, and milk processing procedures on farm.

ADF natural resources policy group chair Daryl Hoey said with several coal-fired power stations either closed or set to be decommissioned in the next few years, the complexity of Australia's energy network and the challenges of incorporating renewable technology meant there were no quick solutions.

"At the moment, I'm not sure many people understand what the real issues are because it's just getting clouded in political point scoring," Mr Hoey said.

"Renewables is definitely where we are headed, but the gap between where we need to get to and when renewables will be more reliable with adequate storage capacity, is still a while away."

The issue is made more complex by the variety of energy policies and systems across states and territories; and the absence of a national, long-term policy at the federal government level. The anticipated shortage of supply in both electricity and gas is driving increases in energy prices at a rate that is difficult to adjust to.

"Although dairy farms have the potential to negotiate and manage their energy supply arrangements as high energy users, it has not resulted in reduced electricity costs," Mr Hoey said.

"Most dairy farmers and manufacturers have seen their overall energy bills rise substantially, even when their energy consumption has remained much the same."

Policy reform and investment in infrastructure upgrades are needed so that regional areas enjoy the same reliability and capacity of electricity supply as urban areas. Reliability standards should ensure the same standard of service in rural and regional areas as enjoyed in urban centres. This will require specific solutions in regional areas.

Based on research recently undertaken by Dairy Australia, the figures show the current cost of energy (electricity and gas) for dairy processors is about $170 million a year. Further analysis from processors indicates a 50-70 per cent rise in new energy contract prices, due to be renegotiated this year.

The price rises in 2017/18 will significantly erode the already slim margins of the processing companies -- particularly those that are more exposed to the export commodity markets. This, in turn, puts downward pressure on milk price, which will place further economic strain on thousands of dairy farmers.

Analysis from Dairy Australia anticipates that dairy farms will pay 20 per cent more on their own power bills from dairy shed operations, which means dairy farmers will effectively pay twice, once through lower farmgate milk prices and the second through higher power bills. This could add an average $4840 to Australian dairy farmers' annual shed power bills.

The increases have been driven by several factors, including some States' investment in upgrading network infrastructure and the increase of associated tariff fees.

However, there is potential for improved energy efficiency as the next big step-change for dairy farms to address rising energy costs.

A solution is for the Government to establish incentive schemes to encourage adoption of energy-efficient measures and renewable energy technologies in agricultural industries to offset the effects of rising electricity prices.

Dairy farming, like most agriculture sectors, is a price taker in domestic and international markets and is unable to pass any energy cost increases on to consumers.

"This is not just about the dairy farmers this about the whole industry being able to manage rising energy costs while still producing food for Australian consumers at an affordable price," Mr Hoey said.