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Australian Competition and Consumer Commission dairy inquiry report calls for more power for farmers
November 30, 2017

The 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 and a bigger share of profits.

The year-long investigation by the Australian Competition and Consumer Commission (ACCC) was launched in the wake of an industry crisis sparked by two of the country’s biggest milk processors, Murray Goulburn and Fonterra Australia, suddenly and retrospectively cutting milk prices in April last year, plunging thousands of farmers into huge levels of debt.

Power imbalance disadvantages farmers
The ACCC found big power imbalances in the dairy supply chain, with supermarkets exercising their bargaining power over processors to drive down prices, with an example being the introduction of cheap, private label milk.

Mr Keogh said processors under pressure from supermarkets or export market competition, then used their relative bargaining power to shift risks onto dairy farmers.

He said farmers were not able to easily switch processors to seek out a better deal, as was seen in last year’s milk price drop.

“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.”

Ron Paynter, a dairy farmer in Victoria’s Gippsland region, said the power imbalance was something farmers wanted to see addressed, claiming supermarkets and processors held negotiations behind closed doors, with farmers locked out.

“We have no concept of what’s happening and we just have to accept whatever small amount dribbles back through to our level.”

In a statement, 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.

Analysis from the ACCC found the more bargaining power a party has, the more revenue it will receive along the supply chain, and farmers have the least of both. (Photo Source: ACCC analysis)

Analysis from the ACCC found the more bargaining power a party has, the more revenue it will receive along the supply chain, and farmers have the least of both. (Photo Source: ACCC analysis)

Farmers carry burden of risk
A key element of the ACCC’s interim report from its review of dairy industry pricing and trading practices is the recommendation of a mandatory code of conduct so farmers were not left exposed to disproportionate levels of risk if things go wrong.

“It’s been easy for the industry to simply transfer the risk and the uncertainty through to the farm level,” ACCC agricultural commissioner Mick Keogh said.

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

Victorian dairy farmer and president of United Dairy Farmers of Victoria, Adam Jenkins, said farmers bore a lot of the risk when milk prices dropped last year, 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.

“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.”

Upping the price of $1 a litre milk wouldn’t help farmers
The ACCC also looked at the major supermarkets’ introduction of $1 a litre milk, which has been a source of frustration for farmers who claim it devalues their product.

But Mr Keogh said the ACCC found farmers earned the same regardless of whether their milk ended up as private label, or more expensive branded milk, as farm gate prices were quarantined from other costs which affected prices paid by supermarkets and margins earned by processors.

“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.”

Mr Paynter said while the supermarket milk price might not necessarily feed back directly to the prices farmers receive it set a precedent.

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

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

Dairy industry under scrutiny
The ACCC began its inquiry in November last year, after the Federal Government asked it to investigate the dairy industry’s competitiveness of prices, trading practices and supply chain.

The commission received more than 80 submissions, and heard evidence during public forums in dairy farming regions of Queensland, Victoria, Western Australia, South Australia and Tasmania earlier this year.

Forget dollar a litre milk. The dairy crisis has more to do with global trade wars than it does with cheap supermarket milk.

This inquiry was separate to one in which the ACCC specifically investigated the actions of milk processors Murray Goulburn and Fonterra Australia, after the companies last year retrospectively cut the price paid to dairy farmers for milk solids.
That inquiry led to a case against Murray Goulburn in the Federal Court, with the watchdog alleging the company behaved unconscionably and misled farmers on the milk prices they could expect to receive.

As well as the two ACCC inquiries, the dairy industry has also been subject to a Senate inquiry, which reported in August this year. While, earlier this month Murray Goulburn reached a settlement with corporate regulator, ASIC, admitting it had broken the law by failing to meet disclosure requirements in the lead up to the dramatic price cut paid to its farm suppliers.

The ACCC’s final report is due in April 2018.

 

Source ABC News

 



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