ACCC Releases Final Report in Dairy Industry Inquiry

Monday 30 April 2018 @ 11.47 a.m. | Legal Research

This week, the Australian Competition & Consumer Commission (ACCC) released the final report into the inquiry into the competitiveness of prices, trading practices and the supply chain in Australia’s dairy industry. The report focussed on the performance of the dairy industry, and in particular analysed the behavioural and structural features contributing to that performance. The results of the report were summarised in the executive summary, located on page xii of the report:

“The dominant picture that has emerged is one of significant imbalances in bargaining power at each level of the dairy supply chain. This begins with the relationships between retailers and dairy processors, and progresses down to the relationship between processors and farmers.

The ACCC has identified a range of market failures resulting from the strong bargaining power imbalance and information asymmetry in farmer-processor relationships. These features of the industry result in practices which ultimately cause inefficiencies in dairy production.

Neither the existing provisions of the Competition and Consumer Act 2010 (Cth) (CCA), nor a voluntary code of conduct, sufficiently address these market failures. Therefore, the ACCC makes eight recommendations for improved transparency and allocation of risk in the commercial relationship between Australian dairy processors and farmers. Most significantly, the ACCC recommends that a mandatory code of conduct be introduced to address the market failures we have identified.”

Further information on the launch of this inquiry, initiated in October 2016 by the Treasurer, the Hon Scott Morrison MP, can be found in TimeBase’s article of 7 February 2017.

Background

This inquiry was spurred by a number of changes to the farmgate prices paid by two of Australia’s largest dairy processors in April 2016. These retrospective changes caused substantial detriment to the Australian dairy industry, which in turn caused a severe decrease in the productivity of the industry. The changes also caused many farmers to leave the dairy industry, signifying an even greater decrease in the volume of milk produced in the following season.

The catastrophic events of 2016 initiated public discussion into the effectiveness, structure and practices of the industry, which in turn caused the Australian Government to initiate this inquiry.

History of the Consultation

The terms of reference for this inquiry were released on 27 October 2016, by the Treasurer, the Hon Scott Morrison MP. These terms of reference, to be taken into consideration in the inquiry, included:

  1. the nature of competition between processors for both the acquisition of raw milk and the supply of processed milk and dairy products;
  2. the nature of retail pricing arrangements for milk and dairy products, and their impact up the supply chain;
  3. the effect (direct or indirect) of domestic retail and export prices, and level of domestic and overseas demand, for Australian processed milk and dairy products on dairy producers and processors;
  4. the nature of the commercial relationships between dairy producers and acquirers of raw milk and the impact of corporate structures adopted (including cooperative structures) upon those relationships;
  5. the mechanisms used by acquirers of raw milk to determine prices paid when acquiring raw milk and the transparency of those mechanisms;
  6. the availability, transparency and accessibility of market price information, and its effectiveness for forecasting movements in farm gate milk prices;
  7. the terms on which raw milk is acquired from dairy producers and the means by which such terms are agreed;
  8. the allocation of commercial risk across the dairy supply chain;
  9. the role of collective bargaining in the dairy industry and its effectiveness;
  10. the existence of, or potential for, anti-competitive conduct and the possible impacts of any such conduct on businesses within the dairy supply chain; and
  11. any other factors affecting farm profitability.

The ACCC then released an issues paper, on 1 November 2016, inviting stakeholder feedback on key fair trading and competition issues in the industry. Issues paper submissions closed on 12 December 2016.

An interim report was released on 30 November 2017, with submissions being received until 31 January 2018.

Findings of the Final Report

The ACCC made a number of key findings relating to the competitiveness, productivity, supply, and trading practices of the Australian dairy industry. In making these findings, the ACCC analysed factors such as:

  • Geographic influences on milk production and competition (p xv)
  • Bargaining power and risk allocation in the supply chain (p xv)
  • Farmgate milk prices (xvi)
  • Competition assessment of relevant dairy markets (p xvii)
  • Supply chain profit analysis (p xix)
  • Contracting practices (p xxii)
  • Collective bargaining and boycotts (p xxiii)
  • The need for a mandatory code of conduct (p xxiii)

These findings were summarised on page xiii of the report:

“The ACCC conducted an in-depth examination of the effects of retail pricing along the dairy supply chain. This included the use of compulsory information gathering powers to obtain data and documents from supermarkets and processors from FY2010 to FY2016, and summonsing all relevant processing and retailing businesses to give evidence under oath in private hearings.

The ACCC did not obtain any evidence that supermarket pricing, including $1 per litre milk, has a direct impact on farmgate prices. Importantly, we found that contracts for the supply of private label milk allow processors to pass the farmgate price paid to farmers through to the wholesale prices they charge to retailers. This means that processors do not have an incentive to reduce farmgate prices as a result of the lower wholesale prices they receive for private label milk, as the farmgate prices are passed through to the supermarkets.

Further, farmers’ lack of bargaining power means that they are unlikely to benefit from an increase in the retail (or wholesale) prices of private label milk or other dairy products. Even if processors were to receive higher wholesale prices from sales to supermarkets, this does not mean the processors will pay farmers any more than they have to secure milk.

Farmers’ ability to capture their appropriate share of profits will, as in all industries, depend on their bargaining power. As noted above, most dairy farmers have little bargaining power and limited scope to reposition their businesses or switch to a different farm enterprise.

Farmers are also disadvantaged by a significant imbalance in the amount of pricing, market and product information available to them compared with processors. Processors are also far better informed about the minimum price that farmers are likely to accept than farmers are about the maximum price that processors are willing to pay. These information asymmetries mean that farmers are more likely to settle for a good offer rather than a better offer that could be available if they were better informed.

We have found that the bargaining power imbalance and this information asymmetry result in practices that transfer disproportionate levels of risk to farmers and soften competition between processors. These include complex and poorly timed pricing information, and contract terms which deter switching. These features add to uncertainty of farm income and make it difficult for farmers to identify and act when it is in their interests to switch to a competitive offer from another processor.”

The Recommendations

In response to these key finding, the ACCC made a number of recommendations, which included recommendations to contracting practices in the dairy industry (p xxv):

  1. Processors and farmers should acknowledge in writing the terms and conditions for milk supply.
  2. Processors should simplify their contracts where possible, including by minimising the number of documents and clearly indicating which documents contain terms and conditions of milk supply.
  3. Processors should provide all contractual documents simultaneously before the commencement of the dairy season or contract term.
  4. Milk supply contracts should not include terms which unreasonably restrict farmers from switching between processors.
  5. The industry should establish a process whereby an independent body can mediate and arbitrate in relation to contractual disputes between farmers and processors.
  6. Farmers should ensure they have properly considered the legal and financial implications of their contracts with processors.

A recommendation concerning Farmgate milk prices (p xxvi):

  1. Processors should publish information identifying how their pricing offers apply to individual farm production characteristics to enable better farm income forecasts.

And a recommendation regarding the implementation of a mandatory industry code of conduct in the dairy industry (p xxvi):

  1. A mandatory code of conduct within the the act should be established for the dairy

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products. Nothing on this website should be construed as legal advice and does not substitute for the advice of competent legal counsel.

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