ACCC releases interim report from dairy inquiry

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To alleviate bargaining-power imbalances between processors and farmers, the ACCC has recommended a mandatory code of conduct following its 12-month inquiry into the Australian dairy industry.

After comprehensive analysis of the sector over decades, the ACCC has suggested a mandatory code to address bargaining-power imbalances, improve price and production signals, stop practices that transfer risk inappropriately while enhancing the competition for farmers’ milk.

ACCC Commissioner Mick Keogh says that processors who are often under pressure from supermarkets or export-market competition use their bargaining power to shift the risk onto dairy farmers.

“The power balance is evident in the nature of contracts between processors and farmers,” he said. “These involve uncertain pricing information and contract terms which deter switching.

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

According to the ACCC, the recently developed voluntary code has helped improve contract terms in milk-supply agreements, but doesn’t go far enough.

“There’s been some improvement 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,” Mr Keogh added.

The ACCC also looked at the impact of $1-per-litre private-label milk on earnings through the dairy supply chain to determine whether this pricing is hurting dairy farmers’ effort to produce milk.

“However, the ACCC found that farmers earn the same, regardless of whether their milk ends up as private label, or more expensive branded milk,” Mr Keogh said. “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.”

The ACCC notes that strengthening the bargaining power of farmers, and limiting the extent to which processors can simply transfer risk onto them, appears the best way to address bargaining-power imbalances and ensure the events of April 2016 are not repeated.

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