The Australian Competition & Consumer Commission says dairy processors too often take advantage of unfair market power over dairy farmers, and has recommended the government implement a mandatory code of conduct to fix the issue.
The ACCC on April 30 released its final report from the dairy inquiry triggered by treasurer Scott Morrison, in response to massive cuts in milk prices by major dairy producers in April 2016.
ACCC commissioner Mick Keogh said the 18-month investigation concluded a code of conduct was the best way to address an imbalance in bargaining power in the dairy sector.
“Currently, processors can impose milk prices and other terms of milk supply contract terms that are heavily weighted in their favour,” Keogh said. “Some milk supply contracts also contain terms that restrict farmers’ ability to change processors for a better offer.
“These issues ultimately harm dairy production efficiency and reduce the effectiveness of competition between processors.”
While Keogh conceded a mandatory code of conduct couldn’t fully correct the imbalance in bargaining power, he said it would improve the quality of information and price signals available to dairy farmers.
It would also enable a fairer allocation of risk, and would enhance competition, he said.
As part of its inquiry, the ACCC analysed the impact retailers’ 2011 introduction of $1-a-litre milk on the dairy industry.
“Dairy farmers are understandably frustrated the retail price of milk has declined in real terms, since retailers adopted their milk pricing policies,” Keogh reported.
“The price set by retailers is arbitrary and has no direct relationship to the cost of production for the supply of milk.”
The solution isn’t as simple as ordering supermarkets to boost milk prices, however, as the ACCC found increases in the retail price of milk are rarely passed down to farmers.
“If supermarkets agreed to increase the price of milk and processors received higher wholesale prices, processors would still not pay farmers any more than they have to secure milk,” Keogh said.
“Given this, the ACCC believes that increases in the supermarket price of private label milk are unlikely to increase the farmgate prices received by farmers, unless farmers have improved bargaining power in their negotiations with processors.”
The ACCC’s 240-page report also recommends increased transparency in milk price offers made by processors to farmers, and the removal of barriers for farmers looking to switch between processors, such as delayed loyalty payments and extended notice periods.