OUR Response to the ACCC's Interim Report into The Australian Dairy Industry

(Note: The full ACCC Interim Report of their inquiry into Australia's dairy industry can be found here.)

 

31 January 2018

 

Mr Rod Simms

Chairman

Australian Competition and Consumer Commission

GPO Box 3131

CANBERRA ACT  2601

 

Dear Mr Simms,

Re: Australian Competition and Consumer Commission’s Interim Report into the Dairy Industry

By way of background, Dairy Connect is an industry body representing the value chains of the Australian dairy industry, including but not limited to dairy farmers, processors, vendors and other industry stakeholders. We also work cooperatively and collaboratively with other agricultural and dairy bodies to ensure that the best outcome is obtained for the dairy industry in Australia. 

For the sake of clarity, this response has been broken down into the eight points noted under ‘Interim recommendations’ in the Australian Competition and Consumer Commission (ACCC) Interim Report released for public comment in November 2017.

 

Recommendation 1 & 2 - Milk supply contracts should be both easy to comprehend and condensed into a single document, enabling farmers to fully understand the terms of the agreement which they are signing.

Dairy Connect agrees that the first step in creating fair contracting practices is ensuring that all parties are made fully aware of the terms stipulated in such agreements.

The ACCC finding at page 169 of the ACCC Interim Report stating that Milk Supply Agreements are often extensive, difficult to understand and spread over many documents, is in line with the experiences of our producer members. Their response has been very positive toward creating a simplified, compiled document which clearly states the key terms of a contract, such as supply, timings, delivery method, milk quality testing, etc.

It is submitted that this would create contracts that are easy to understand and can be easily referred to by both parties in the event of dispute. The current system utilising multiple documents including Supplier Handbooks and Milk Supply Agreements causes confusion, particularly when it comes to calculating / forecasting receivable farmgate milk prices.

Dairy Connect also supports the need for a confirmation signature, thus indicating agreement, from both parties in the event that changes to any documents relating to milk supply should be made, prior to any changes coming into effect. This means that any documented modifications to the expected practices involved in milk supply will be made known to farmers, to ensure they are in agreement with the proposed changes, which can then be implemented.

Given the inequity in the power relationships between the parties and the high cost to obtain independent legal advice on such contracts, it is suggested that a program be implemented to allow producers to obtain such advice from their industry bodies or an independent single body established by, or funded by, the Government.

For your assistance, Dairy Connect has previously raised the issue of ‘milk labelling’ and the ‘quality of milk testing’ with the Senate and a copy of that letter is attached.  We would request that you consider its contents for your final report.

 

 Recommendation 3 - Contracts should not restrict farmers from switching processors

The Interim Report acknowledges that the bargaining power processors have over farmers is related to problems that arise with milk supply contracts, in particular those that shift the risk of milk supply onto farmers and impose clauses which act as barriers for farmers to switch between processors (pages 21-24)*. Dairy Connect supports these findings and agrees that supply clauses which restrict the ability of farmers to transact with third parties via exclusivity measures should be removed from milk supply contracts**. It is our opinion that these changes should be immediately implemented via the revised changes to the voluntary code of conduct and through an introduced mandatory code for milk supply contract negotiations as recommended by the ACCC (See Recommendations 7&8).

Should this recommendation be followed and a non-exclusive supply model be implemented, there would be issues such as farmer notification times, logistics management and risk distribution that would all need to be recognised and implemented through a better regimented code of conduct. Dairy Connect recognises the magnitude of this task however feels that ridding the industry of supply exclusivity issues would be a great step toward long-term milk supply resolutions.

Attached to the submission is a ‘dual supply model’ that has been endorsed by the Farmers Group of Dairy Connect and which provides a mechanism for consideration by the ACCC as a way forward.

 

*Dairy Connect would like to query however, that on page 112 of the interim report the ACCC noted that “past or existing clauses are unlikely to have substantially lessened competition among processors”. It is our opinion that this view may leave the door open for processors to be able to circumvent ACCC recommendations by leaving the potential for explicit exclusive supply clauses to remain in supply agreements. Most farmers lack the bargaining power to negotiate non-exclusive supply agreements with processors, and should the final report not recognise this there is a threat that the industry may remain as ‘status quo’. Farmers would still bear all the risk of processor decisions, would have no bargaining power to gain access to price risk management tools, and would not be able to generate competition for their milk for the majority of the year.

**Further, as per page 112 of the Interim Report, it is stated that many processors submitted that exclusivity clauses provide benefit to farmers, including certainty that milk will be collected, be properly tested for quality assurance, and that collection and sampling processes are performed efficiently. We would submit that the above benefits can be delivered through other mechanisms, and that they don't need to be tied to the sale of the milk. For example, in theory a farmer could have a logistics provider that ensures pick up/ sampling / testing, but with that milk still being able to be sold to a number of buyers.

 

Recommendation 4 - Independent body(ies) should be able to mediate contractual disputes

The role for an independent body to act as a mediator and a binding arbitrator in relation to farmer-processor contractual disputes is a further positive initiative proposed in the Interim report and is supported by Dairy Connect. At bare minimum, Dairy Connect would agree that detailed dispute resolution clauses should be included as part of all contracts as highlighted under Recommendation 4.

In regards to feedback as to the most appropriate body to establish a dispute resolution framework, Dairy Connect would be pleased to be involved in further discussions to find an appropriate model. For instance, we could consider the current method of dispute resolution in the horticultural code of conduct, linked here (https://www.accc.gov.au/business/industry-codes/horticulture-code-of-conduct/dispute-resolution-under-the-horticulture-code).

It is our understanding of the Horticultural Code that the establishment of ‘Horticultural Mediation Advisors’ has been a useful, independent party to intervene in dispute resolutions should the initial dispute resolution process fail to settle the issue. By establishing an external independent body fair negotiations of price and quality can be ensured, and this would pose an alternative of lesser financial cost to producers as opposed to taking legal action.

 

Recommendation 5 - Farmers should fully consider the implication of contracts with processors

Dairy Connect firmly supports the statement made in the Interim Report that farmers should fully consider the contracts that they enter into.

In continuation from Recommendation 3, it is vitally important that unfair bargaining power cannot be leveraged during discussions between farmers and other parties; thus ensuring open and transparent negotiations of each contractual agreement. In addition, the adoption of Recommendations 1 and 2 would mean that simpler, ‘plain english’, compiled agreements are established to enable the thorough consideration of supply agreements by farmers.

Given the Interim Report’s findings that farmers do not, in general, seek professional legal advice in making contract decisions, independent industry organisations are in a positive position to act as a general advice body to these producers. This would signify, for instance, Dairy Connect adding an additional branch to our current member services, and similarly to the services offered by our fellow industry bodies. Given the importance of this recommendation there would be merit to allocating additional industry or government funding to help facilitate this process.

 

Recommendation 6 - Processors should better publish pricing information

Dairy Connect is in strong agreement with the need for greater transparency in the ways in which processors determine farmgate milk prices. This has been a recurring issue raised by members and dairy farmers with our Farmers’ Group, with many highlighting the processing and calculations required to determine even a singular price estimate takes too much time and effort. This no doubt results in many producers bypassing or ‘skimming’ over such important functions to determine the profitability of their farming enterprise.

A further issue with the current methods of pricing is that the contract pricing terms are presented very differently between the various processors. This means that comparison between processors is difficult for farmers, and can be viewed as a hindrance to basic market transparency and hence anti-competitive.

The bare minimum revision to the way in which processors present their milk pricing terms should be to create an industry-standard format, to at least provide farmers the ability to compare and evaluate their offers with a sense of clarity. “We need to be able to compare apples with apples” one Dairy Connect member has commented.

The Interim Report’s idea of the use of an interactive online price modelling system is an interesting one and Dairy Connect encourages the viability of such a system to be explored further. A few comments regarding this proposal would be the need to make sure the site is as user-friendly and easy to navigate as possible, as well as the importance of strenuous road-testing of the pricing models to make sure they will not be giving producers misguided forecasts.

 

Recommendation 7 & 8 - The Voluntary Code should be strengthened, whilst a mandatory code be seriously considered.

Dairy Connect and our members agree that it is absolutely necessary for the voluntary code to be strengthened. After its release in 2017, Dairy Connect had concerns regarding its structure, and as we said upon its release, time will tell whether or not a voluntary code is sufficient to address the core industry issues.

Almost a year on and it is our opinion, as well as the findings of the Interim Report, that the voluntary code as it stands is not sufficient. The two proposed additional obligations and one ‘other change’ are agreed with by Dairy Connect, as we have highlighted earlier through our responses to Recommendations 1, 3, 4 and 6.

It is our hope that by making these positive amendments processors may be more willing to adopt the voluntary code, but it is our concern that without a form of market or consumer pressure, the voluntary code by nature will continue to allow processors to bypass its recommendations and continue to hold the unfair and unconscionable negotiating power.

In which case, intervention in the form of a proposed mandatory code of conduct for the dairy industry would be supported by Dairy Connect. It is our belief that the return to a form of ‘regulated dairy industry’ may be one mechanism to provide a sustainable way forward, should there not be appropriate response by processors (and retailers) to the voluntary code of conduct. A mandatory code of conduct, as highlighted by the Interim Report on page 26, could permanently remove the negative contracting practices which currently result in terms that impede competition and distribute greater levels of risk to farmers.

In the event that a mandatory code be considered as the correct direction in the long term for the dairy industry, Dairy Connect would urge the importance of collaboration in establishing such a code. We would be willing to be involved in any industry wide discussion of the contents of a mandatory Code for the dairy industry.

 

Concluding Remarks

Might we also indicate our support for the development of a commodity milk price index (Index), which had begun its development but was then terminated by mutual consent between the parties. Might we strongly indicate that mechanisms that may assist the producer make informed decisions regarding farm gate price should be encouraged by industry and the Government. The concept of the Index was firstly raised by the then Minister for Agriculture, the Hon Barnaby Joyce MP and then subsequently endorsed for development by the Office of the recently commissioned Minister for Agriculture, the Hon David Littleproud MP.  We are indicating our continued willingness to participate in the development of the Index.

In conclusion, the dairy industry has been under sustained pressure over the past years and it is evident that systemic and fundamental change is required to ensure the continued viability and sustainability of the dairy industry into the future.  It is submitted that the dairy industry may be seen to be at ‘crossroads’ with a ‘once in a generation’ opportunity for positive collective change to occur.

Over the years there have been many reviews into the dairy industry but the comprehensive review by the ACCC and its interim recommendations, which we state should become part of its final Report, are a mechanism to provide guidance and direction for the industry as a whole and for industry bodies to embrace and support their implementation. 

Failure to do so may result in the decline of the dairy industry’s importance to the economic vitality within Australia and elsewhere throughout the world where Australian dairy produce provides sustenance to growing nations.

Dairy Connect compliments the ACCC on its Interim Report and Recommendations. Dairy Connect is willing to augment its comments, if required.

 

Yours Faithfully,

Shaughn Morgan

Chief Executive Officer

 

Attachments:

- ‘Dairy Directions’ Paper

- Milk labelling letter, dated 3 February 2017

 
 

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