The ACCC has released the final report arising from its dairy inquiry, which includes the key recommendation that a mandatory code of conduct be implemented to improve contracting practices between dairy processors and farmers.
The inquiry was initiated by Treasurer Scott Morrison, in response to large and retrospective reductions in milk prices imposed by two major dairy processors in April 2016. The inquiry involved extensive investigations, consultation and data analysis over a period of 18 months.
“A mandatory code of conduct would address problems arising from the large imbalance in bargaining power and information that exists between dairy farmers and processors,” ACCC Commissioner Mick Keogh said.
“Currently, processors can impose milk prices and other terms of milk supply contract terms that are heavily weighted in their favour. Some milk supply contracts also contain terms that restrict farmers’ ability to change processors for a better offer.”
“These issues ultimately harm dairy production efficiency and reduce the effectiveness of competition between processors,” Mr Keogh said.
The ACCC explored ways to address these concerns and found the existing provisions of the Competition and Consumer Act (2010), the dairy industry’s voluntary code of conduct, or a prescribed voluntary code would be inadequate.
“A mandatory code would improve the quality of information and price signals available to dairy farmers, enable fairer allocation of risk and enhance competition by removing switching barriers. While introducing a code won’t fully correct the bargaining power imbalance, it will reduce some of the negative consequences,” Mr Keogh said.
The inquiry also analysed the impact on the dairy industry of $1 per litre milk, first introduced by major retailer in 2011.
“Dairy farmers are understandably frustrated the retail price of milk has declined in real terms, since retailers adopted their milk pricing policies. The price set by retailers is arbitrary and has no direct relationship to the cost of production for the supply of milk,” Mr Keogh said.
“In examining the impact of this on farmgate prices, however, the ACCC found almost all contracts for the supply of private label milk allows processors to pass through movements in farmgate prices to supermarkets. Therefore, there is no direct relationship between retail private label milk prices and farmgate prices.”
“Therefore, if supermarkets agreed to increase the price of milk and processors received higher wholesale prices, processors would still not pay farmers any more than they have to secure milk,” Mr Keogh said.
“Given this, the ACCC believes that increases in the supermarket price of private label milk are unlikely to increase the farmgate prices received by farmers, unless farmers have improved bargaining power in their negotiations with processors.”
The ACCC also recommends increased transparency in milk price offers made by processors to farmers, and the removal of barriers to farmer’s switching, such as delayed loyalty payments and extended notice periods.