Dairy farmers should have more power, says ACCC

An interim report into the dairy industry by the Australian Competition and Consumer Commission (ACCC) has suggested that a mandatory code of conduct should be implemented to help address bargaining power imbalances between processors and farmers.

A 12-month inquiry was initiated after milk prices suddenly dropped in 2016, causing many farmers to go into debt. The ACCC report suggested a code would address bargaining power imbalances, improve price and production signals, stop practices that transfer risk inappropriately and enhance the competition for farmers’ milk.

“What’s clear is that processors, often under pressure from supermarkets or export market competition, use their relative bargaining power to shift risks onto dairy farmers. The power imbalance is evident in the nature of contracts between the processors and farmers. These involve uncertain pricing information and contract terms which deter switching,” said ACCC Commissioner Mick Keogh.

“A code would strengthen dairy farmers’ weak bargaining position and therefore improve competition at the farm gate.”

While the code has been voluntarily adopted by many, which has helped to an extent, more needs to be done to see overall changes in the industry.

“There’s been some improvements following the introduction of the voluntary code but, in the ACCC’s view, it is unlikely to fully address the issues that cause detriment in the industry in the longer term. The voluntary code is not enforceable and processors can choose to not participate or not comply, and there are no negative consequences,” Keogh said.

Most notably, the pricing of private label milk has had a negative effect on farmers. Supermarkets have leveraged their buying power to drive wholesale prices down and reduce the profit margins of processors. Although these profits often benefited the consumer with lower prices, the ACCC looked at how the supermarkets’ decision to sell private label milk for $1 per litre impacted the dairy supply chain. It found that with little bargaining power, even an increase in retail or wholesale price will still not benefit farmers, but instead supermarkets and processors.

“However, the ACCC found that farmers earn the same regardless of whether their milk ends up as private label, or more expensive branded milk. Farm gate prices are quarantined from other costs which affect the prices paid by supermarkets and the 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,” explained Keogh.

The ACCC concluded that strengthening the bargaining power of farmers and preventing processors from transferring as much risk onto them is the best way to address these problems going forward.

The interim report put forward eight recommendations and is seeking feedback by 31 January 2018. The ACCC will release a final report in April 2018.