The ACCC said processors under pressure from supermarkets unfairly used their bargaining power to shift risks onto dairy farmers © PA Images
The ACCC said processors under pressure from supermarkets unfairly used their bargaining power to shift risks onto dairy farmers © PA Images

Watchdog recommends more power for dairy farmers

1 December 2017

Australia’s competition watchdog has recommended a mandatory code of conduct and changes to milk supply contracts to give farmers more power to switch processors and negotiate better deals.

The Australian Competition and Consumer Commission’s (ACCC) year-long investigation was launched after two of the country’s biggest milk processors, Murray Goulburn and Fonterra Australia, suddenly and retrospectively cut milk prices in April last year, plunging thousands of farmers into vast amounts of debt. 

The ACCC said it found big power imbalances in the dairy supply chain, with supermarkets exercising their bargaining power over processors to drive down prices, which caused a “ripple effect” down the supply chain.

Mick Keogh, ACCC commissioner, said processors under pressure from supermarkets or export market competition, used their relative bargaining power to shift risk onto dairy farmers. 

He said farmers were not able to easily switch processors to seek out a better deal. 

“It was a view of some processors that irrespective of what prices they offered, farmers would remain loyal and those farmers effectively didn’t have much choice and we think that needs changing so that that situation doesn’t arise again,” he said.

Adam Jenkins, president of United Dairy Farmers of Victoria, said farmers bore most of the risk when milk prices dropped, with devastating consequences.

“We’ve actually dropped a lot of milk out of the system—we’ve culled cows out of the system for cash flow,” he said.

“It’s going to take us a long time to recover, from management decisions that were made in our supply chain; not the farmers’ decision, the management’s decision.”

The ACCC’s interim report said after reviewing the dairy industry’s pricing and trading practices, it was recommending a mandatory code of conduct so farmers were not left exposed to disproportionate levels of risk if things go wrong. 

Keogh said it had been too easy for the industry to simply transfer the risk and uncertainty through to the farm level. 

“We certainly saw that in April 2016 with the major step-downs that were retrospectively announced,” he said.

Responding to the report, processor Fonterra Australia said it had already simplified contracts and was providing greater transparency on milk prices, as well as introducing other initiatives to help farms remain profitable. 

The ACCC also looked into the major supermarkets’ decision to introduce $1-a-litre milk, which has been the source of frustration for farmers who claim it devalues their product. 

However, Keogh said the ACCC found farmers earned the same amount regardless of whether their milk ended up as private label or more expensive branded milk, as farm gate prices were isolated from other costs. 

“We don’t think that an increase in the retail price of private label milk would necessarily benefit farmers and that any additional profit would mainly be captured by the major supermarkets and processors,” he said. 

David Inall, Australian Dairy Farmers chief executive, said while the supermarket milk price may not feed directly back to the prices farmers receive, it set a precedent.

“We’re seeing further erosion of the retail cost of products in the dairy cabinet, cheese now at $6 a kilogram, equates to 60 cents a litre milk price back through the processing chain,” he said. 

“There are very thin margins and the fact that those margins are so thin leave us in a very, very weak position.”

The ACCC is seeking feedback on their interim report by 31 January 2018 and will release a final report in April 2018. 

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