Why do Australian milk farmers need to protest supermarkets' milk price? Sorry this might be borderline off-topic (and I am an economics layman at best), but I found this rather puzzling and would like to know why this is happening.

I just came across an article which documents another development in the quarrels between Australian milk farmers and big supermarket chains. 

As I understand it, the farmers demand that supermarkets charge higher prices for milk and then pass on the additional revenue back to the farmers.

When I think of the free market, I would expect this to be unnecessary, as the farmers could charge more when they sell the milk to the supermarkets or, if that doesn't work (why wouldn't it?), some farmers would stop milk production leading to milk scarcity leading to higher prices or, more importantly, higher revenue for the farmers.

What am I missing?
I would like to contradict Kenny LJ explicitly on his claim that "the free market works".

It only works if the market is actually free, i.e. competition exists. Which, you can argue, is not the case in the milk market.

What you are looking at is a cartel.

(Excuse me for citing numbers for the German market, not Australia, as I am more familiar with that market and have numbers ready that I don't have for Australia. I am quite confident, however, that while the ratios might differ a bit, the overall structure will be the same.)



There are about 100.000 milk farmers in Germany, producing about 28 million tons of milk per year. As Mick pointed out, however, they are in the farming / production business, not in the transportation / processing business, so they have to sell their milk to dairies. There are just over 100 dairies in Germany.

And most of them have a monopoly on their region, meaning they're the only dairy a farmer could sell to.

Those dairies sell the processed milk to supermarket chains and other retailers / business consumers. About 60% of all the milk produced is sold by less than a half-dozen major supermarket chains.

Milk is a highly regulated food product, meaning that one dairy's milk is effectively the same as any other. There is very little competition in quality. The dairies don't even have "a product", the milk ends up packaged in the supermarket brand:


  Woolworths has bumped the cost of its own-brand milk by 10 cents a litre, but Coles has refused to follow suit because it might burden customers.


So the only competition is in the price. Whoever sells cheapest. Customers buy the milk where it's cheapest (supermarket), because they simply do not have any realistic option to go for a "premium" milk product that's provided by middle- or small-sized, or regional, producers at a sustainable price with a transparent premium for the producer as well. It's just not available. There are "bio" brands, but that label is only saying something about how the cattle is kept and fed -- the price dynamics still apply:

The supermarket buys where it's cheapest (dairy), and the dairy tells the milk farmers how much they are willing to pay, take it or leave it.

A farmer that is not willing to sell his milk at the price the dairy dictates (even if it's at a loss), will not get his milk to market at all, but still have running costs to pay. Which means he'll be out of business pretty quick, forced to sell his business, land, and lifestock to some bigger farmer that is able to use scaling effects to produce at a lower price.

You could claim that this is the result of an oversaturated market, that less milk on the market would drive the prices up. That is correct, in a way, but the market is oversaturated because producing large quantities of milk as cheap as possible is the only bargaining chip the producers have in a market where literally no-one is going to a farmer to buy produce. Rising prices would not equate to rising margins for the farmers, as they simply have no control over the supply chain.

Concentration of power at the retailer end, a lack of competition in quality, and the inability of the producer to cut out the middle man (dairies) or create a meaningful "premium" market means the retailer is dictating the price, to the point where producer's margins are minimized and the only way to be a profitable producer is by economics of scale -- large combines swallow medium and small-sized producers, and the retailers are able to push the price even lower, repeating the cycle.

This is beneficial to the customer insofar as that the product (milk in this case) is available at every supermarket and extremely cheap. But it comes at a high cost, destroying middle- and small-sized milk farms (and dairies!) in a race to the bottom. Which also includes a race for the most milk-efficient cattle, to the exclusion of all other considerations.



Refuting Kenny LJ's wholesale dismissal of regulation:


  Suppose instead that these farmers instead benefited from low grain prices and enjoyed profits of 20 cents per litre of milk sold. Should consumers then have stood outside supermarkets demanding that milk prices be lowered by 10 cents per litre?


The consumers wouldn't have had to, as the supermarket chain would already, preemptively, have realized the opportunity to lower prices (to stay competitive to the other supermarket chains who would have done the same).



Addendum:

In answer to a comment by @horns, this is a matter of official record and investigation.

Rewe was sentenced to 20.8 million Euro antitrust fine in May 2013. Spar was sentenced to 3 million Euro antitrust fine in November 2014. (Just two I was able to duckduckgo ad-hoc.)

Quoting the German Antitrust Office:


  Our investigations have shown that the contracts between milk producers and dairies in Germany have long periods of notice and duration. In addition, farmers in Germany are generally obliged to supply the milk they produce exclusively to their respective dairy. There is virtually no possibility for them to switch to another dairy. This is a problem for farmers and hinders possible newcomers on the dairy side or dairies wishing to extend their activities. Another widespread practice is that the price of raw milk is set only after delivery and is based on reference prices and market information systems.


Also from that article:


  The Bundeskartellamt questioned 89 private and co-operative dairies, which in 2015 procured approx. 30.9 million tonnes of raw milk. This is equivalent to around 98 % of the total milk supply volume. The authority's investigations have shown that in 2015 97.8% of the volume of raw milk covered by the investigations was sold subject to exclusive supply obligations. In addition, contracts for more than half of the raw milk supply volume can only be terminated with at least two years' notice.


There is no effective competition.