ACCC recommends mandatory code

30 Apr, 2018 11:25 AM
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Mick Keogh: A mandatory code of conduct would address problems arising from the large imbalance in bargaining power and information that exists between dairyfarmers and processors.
There is a significant bargaining power imbalance between farmers and processors.
Mick Keogh: A mandatory code of conduct would address problems arising from the large imbalance in bargaining power and information that exists between dairyfarmers and processors.

BREAKING: The Australian Competition and Consumer Commission has recommended a mandatory code of conduct be introduced to apply to dairy processors.

The ACCC released its long-anticipated report into the dairy industry on Monday, April 30.

“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.

But the ACCC has made no recommendations about $1 a litre milk, despite calls from farmers to take action on it.

It found $1 a litre milk had no impact on farmgate prices received by farmers.

The ACCC inquiry into the industry was initiated by the 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 across 18 months.

The ACCC looked at a broad range of issues.

It said two key concern raised by farmers were:

  • contract and pricing practices that lacked transparency and gave processors too much power,
  • the impact of $1 per litre private label milk on the industry.
  • Mandatory code

    The ACCC found there was a significant bargaining power imbalance between farmers and processors.

    Farmers also had limited access to price and market information compared with processors.

    "Farmers rarely have the opportunity to negotiate prices or

    contracts with processors," the inquiry found.

    "This has resulted in contracts that allow processors to transfer risks onto farmers..."

    This included terms that allowed processors to reduce farmgate prices mid-season and terms that reduced farmers’ ability to switch between processors.

    "There are also ineffective dispute resolution processes," the inquiry found.

    "The ACCC’s view is that these issues are harmful to the efficiency of the industry."

    The inquiry said the industry-developed voluntary code of practice did not offer an adequate long-term solution.

    The voluntary codewas released on June 30.

    The ACCC said the voluntary code had resulted in some changes "but it is not enforceable".

    The report of the Senate inquiry into the industry, released in August, also called for a mandatory code.

    The ACCC said a mandatory code would reduce market failures.

    “A mandatory code would improve the quality of information and price signals available to dairyfarmers, enable fairer allocation of risk and enhance competition by removing switching barriers," Mr Keogh said.

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

    The ACCC said the mandatory code should force processors to give "timely and transparent information to farmers about the price and non-price terms".

    It would ban retrospective step-downs, remove unnecessary barriers to switching processors and provide for effective dispute resolution processes.

    But it would not regulate farmgate milk prices or restrict the types of contracting options that a processor could offer.

    The ACCC said the government would establish the content of the mandatory code, after a consultation process, and it would be enforced by the ACCC.

    Supermarket $1-a-litre milk

    The ACCC used its extensive compulsory information-gathering powers to compel supermarkets and processors to provide information about the effect of private label $1-a-litre milk.

    But it found $1-a-litre milk had no impact on farmgate prices because processors could "pass through" any change in farmgate prices to the supermarkets.

    "This means that processors set their own farmgate prices independent of the supermarkets’ retail prices," the inquiry found.

    "For this reason, changes to the retail price of private label milk are unlikely to result in any changes to the farmgate milk price received by farmers, because processor profits on private label milk are not influenced by whether farmgate prices are high or low."

    The ACCC also said it saw no evidence of supermarkets trying to influence farmgate prices.

    It also said the $1-a-litre milk did not have an indirect impact on milk prices.

    Instead, it found processors were wholly responsible for setting farmgate prices and paid only as much as they needed to acquire the volume of raw milk they needed in a region.

    "The minimum farmgate price that processors need to pay will generally be higher in areas where competition between processors for milk is the strongest," the ACCC found.

    In northern NSW, Queensland and Western Australia, processors' demand for raw milk was stable from year to year.

    "In these regions, the vast majority of dairy production is for drinking milk, and farming costs are too high to be competitive in export markets," the ACCC said.

    "Processors in these regions are faced with relatively fixed demand and have little incentive to invest in expanding capacity.

    "Increases in prices for drinking milk would not give these processors the incentive to buy more milk from farmers and therefore do not influence farmgate prices."

    In the other dairy regions - Victoria, Tasmania, South Australia and southern NSW -- most farmers’ milk is used to produce exportable dairy products.

    "Only a small amount of milk from these regions is used for private label drinking milk," the inquiry found.

    "In these regions, farmgate prices and profit movements reflect

    global dairy commodity price changes."

    Other issues

    The inquiry looked at a broad range of issues. Other key conclusions include:

  • There are shortcomings in the timeliness and reliability of pricing signals given to farmers before the start of a dairy season.
  • Announced farmgate prices do not reflect actual prices received for many farmers.
  • There was no evidence that the timing of farmgate milk price announcements involves anti-competitive ‘follow-the-leader’ behaviour.
  • Exclusive supply clauses deliver efficiency benefits for both processors and farmers. They may raise concerns if they have an anti-competitive purpose or effect, and must be assessed on a case-by-case basis.
  • Milk swaps have the potential to soften competition between processors, but the risk does not appear to be high.
  • Milk trades can be used to lessen farmgate competition. However, the specific trades analysed did not appear to have had a significant adverse impact

    on competition. Further, it is apparent that trades have some industry-wide efficiency benefits.

  • The full report is available at www.accc.gov.au/dairyinquiry

    Carlene Dowie

    Carlene Dowie

    is editor of Australian Dairyfarmer magazine

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