There is a 'bargaining power imbalance' between farmers and processors © 123RF
There is a 'bargaining power imbalance' between farmers and processors © 123RF

Mandatory code needed to decide milk price

30 April 2018

A mandatory code of practice should be implemented in Australia to improve the balance of power between dairy processors and suppliers, according to a watchdog.

The Australian Competition and Consumer Commission (ACCC) released the final report in its dairy inquiry, which was set in motion by treasurer Scott Morrison in response to large and retrospective reductions in milk prices imposed by two major dairy processors in April 2016.

“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.”

Keogh said that such issues ultimately harm dairy production efficiency and reduce the effectiveness of competition between processors.

According to the ACCC both the existing provisions of the Competition and Consumer Act (2010), the dairy industry’s voluntary code of conduct and a prescribed voluntary code would fail to redress the balance.

“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,” Keogh said.

“While introducing a code won’t fully correct the bargaining power imbalance, it will reduce some of the negative consequences.”

The inquiry conducted extensive investigations, consultation and data analysis over 18 months and analysed the impact on the dairy industry of $1-per-litre milk, first introduced by a major retailer in 2011.

Keogh said farmers were understandably frustrated that the retail price of milk has declined in real terms since retailers adopted their milk pricing policies.

He described the price as “arbitrary” and said it had no direct relationship to the cost of production.

“In examining the impact of this on farmgate prices, however, the ACCC found almost all contracts for the supply of private label milk allow processors to pass through movements in farmgate prices to supermarkets.”

This meant there was 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,” Keogh added.

“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 commission also recommended 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.

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