Dairy farmers in danger of disappearing from industry

Published: April 2019 | By: Claire Stewart

Dairy farmers in NSW are still under pressure, despite the end of $1 milk. But is it too little, too late? And will the ACCC dairy inquiry recommendations save the industry?

Despite the extra 10c recently promised for milk prices, dairy farmers are still in dire straits. Source: Shutterstock.
THE milk war is the most identifiable and long-running battle waged by supermarkets competing for shopper loyalty in Australia’s $102 billion food and grocery industry. 

For eight years, Coles and Woolworths spruiked $1-a-litre private-label milk as the stalwart of consumer value, until finally Woolworths gave in to pressure and raised its home-brand milk to $1.10 a litre in February. After intense pressure – it took a month, Coles and Aldi followed suit in March. The supermarkets have promised the extra 10c will be passed back to farmers via processors.

The National Farmers’ Federation (NFF) welcomed the shift led by Woolworths. “Consumers must be willing to pay just a little extra to ensure a sustainable Australian dairy sector,” says NFF CEO Tony Mahar. 

“And we must also remember, it’s not just the price of milk that dictates farmers’ fortunes but that of all dairy products such as yoghurt, cream and cheese.”

Despite the positive moves, the dairy industry’s woes are far from over. 

Dairy farmers subject to unfair market pressure

Ongoing reports made to the Australian Competition and Consumer Commission (ACCC) suggest Coles, Woolworths and Aldi use unfair market pressure to such an extent that it makes some sectors, including the $3.7 billion dairy industry, unsustainable for producers. While this is nothing new, what has emerged in the past two years is the previously unacknowledged impact milk processors have on the economic outcome for dairy producers, who make up Australia’s third-largest rural industry.

Dairy farming is Australia’s third-largest rural industry. Photo by: Pip Farquharson. 

Last September, ACCC chair Rod Sims warned processors not to mislead farmers about milk prices after an ACCC inquiry found almost all contracts for the supply of private-label milk allowed processors to pass movements in farmgate prices through to supermarkets. “Dairy processors need to be honest with farmers,” he said. 

“We have written to a number of processors warning them not to mislead farmers by blaming private-label milk contracts for the prices offered for milk at the farm gate.”
We’re concerned this is misleading, as the power lies with processors to raise the farmgate price paid to farmers, and then pass these higher farmgate prices on to supermarkets.”

The ACCC’s 18-month Dairy Inquiry was launched at the behest of then-Treasurer Scott Morrison, after it emerged two of the country’s biggest milk processors, Murray Goulburn and Fonterra, had cut prices to below the cost of production. What’s more, they were contractually able to impose retrospective price reductions for milk. 

A beleaguered Murray Goulburn told suppliers in 2016 it would pay $6/kg for milk solids, but the eventual price announced was $4.80. The tipping point came when it demanded farmers reimburse it for what it effectively claimed to be an overpayment for milk that had already been delivered.

“Imagine you bought a TV and then three months later the retailer came back to you and told you your contract says that if any of their input costs changed, it was allowed to change the price of your TV, and by the way, it’s now more expensive, so you owe the retailer more money,” says NSW Farmers’ chief economist Ash Salardini. “Retrospective price changes like that, could you imagine it happening in any other industry?”

Karina Moore milking Holstein cows at the dairy farm she owns with husband Gavin. The ACCC dairy inquiry was launched after two major processors cut prices below the cost of production. Photo by: Nick Cubbin.

The move triggered widespread outrage and spurred the treasurer to ask the ACCC to investigate whether there was an imbalance of power in the market adversely affecting primary producers. The federal government simultaneously launched its own inquiry into competition in the sector.

Poor results for dairy industry drive inquiry into producers’ viability

An estimated 626 registered dairy farms make NSW the second-largest dairying state and the biggest supplier of fresh drinking milk in the country. It’s part of the reason the state parliament’s Industry and Transport Committee also launched an inquiry, and its findings, delivered in December 2018, portray an industry in crisis. It found that the $1-a-litre milk has removed considerable value from the value chain, contributing to financial pressure on farmers; that the power imbalance between farmers and processors impacts significantly on producers’ viability; that 2017-18 was the worst year for net dairy farm income in NSW since 2011-12; and that the farmgate price for raw milk is inadequate for NSW dairy farmers to cover the cost of production. 

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On a national level, the result of the ACCC’s public inquiry was a set of eight recommendations released in April 2018, around generating fairer contractual terms, transparency between processors and farmers, and a forum for enforceable dispute resolution. Crucially, it recommended a mandatory code of conduct to govern the relationship between dairy processors and farmers. 

That ruffled some feathers. A voluntary code between dairy farmers and processors was drawn up by the Australian Dairy Industry Council (ADIC) in June 2017 as a means of allaying government, regulator and public concerns about farmer exploitation in the fallout of the retrospective pricing scandal. But some processors are not signatories, and there are no penalties for breaches. 

NSW Farmers’ Dairy Committee chair Erika Chesworth, a dairy farmer from Dubbo, says while farmers are seeing improved behaviours by the processors, they still have little protection.

NSW Farmers Dairy Committee chair Erika Chesworth with husband Steve on their dairy farm near Dubbo. Photo by: Pip Farquharson.

“There’s some positive change, just little things – like Parmalat has always operated a calendar-year contract and not a financial-year contract, and this year they came out with the option of moving to a financial-year contract,” she says. “As farmers, we see that and think, ‘Oh, that’s the inquiry’.”

Does that mean dairy producers are feeling more confident now? “Absolutely not,” says Erika. “We are operating in market failure. Our processor says he’s getting phone calls from grain merchants almost daily, begging him to lift the price to farmers because they’re not getting paid. Last year, we were paying $180 a tonne for grain delivered and we’ve just taken a delivery at $503 a tonne. Farmers can’t carry that on a structure that doesn’t pass any costs back to the marketplace.”

Holstein cows at Erika Chesworth’s farm near Dubbo. While there has been some improvements as a result of the inquiry, Erika says dairy producers are still operating in market failure. Photo by: Pip Farquharson. 

However, Australian Dairy Products Federation president Grant Crothers says there is no need for a mandatory code, arguing it would increase costs along the supply chain. In an opinion piece for The Advocate newspaper last September, Grant, who is also CEO of processor Burra Foods, said the ADIC voluntary code was sufficient. “Much work has been done by the ADIC to strengthen the code, taking into consideration the ACCC 2018 Dairy Inquiry findings, and to develop a robust dispute resolution mechanism. We have invested the time because we do not believe imposing a mandatory code of conduct is the best solution for the industry,” he wrote.

The regulator’s April report noted the current voluntary code does not include a mechanism to resolve disputes between farmers and processors – unlike the Food and Grocery Code of Conduct, which introduced an independent adjudicator to resolve complaints. Not surprisingly, farmers want certainty around their rights against processors, if anything goes wrong.

Dairy farmers want certainty around their rights against processors, if anything goes wrong- protecting the value of a Holstein calf such as this one. Photo by: Nick Cubbin.

“There’s an arbiter there in the ACCC and they can give weight to the codes and they can enforce aspects of the code,” says NSW Farmers’ Ash Salardini. “It covers all the industry, whereas a voluntary code is by its nature voluntary, so certain people can opt in or opt out.”
NSW Farmers Dairy Committee keen on mandatory code

Erika Chesworth expects the code will ensure accountability around pricing and clawbacks that haven’t existed before. But, from a producer’s perspective, the idea of having to go up against a processor, even if it is using a regulated dispute resolution mechanism introduced in the new code, is still phenomenally daunting. 

“It’s why the NSW Farmers’ Dairy Committee is very keen that there is a mandatory auditing process or random auditing of contracts, so that it means whatever body is set up will do that,” she says. “As a farmer, you know that if your contract is on file for five years, it’s subjected to an audit.

"We already operate in that environment, with tax, workers’ employment records, et cetera, so I know it won’t stop that general angst but, in the back of your mind, knowing your contracts with processors are likely to come up to be reviewed periodically might help farmers.”

As for contractual transparency, she laughs.

“Currently [processors are] scrambling around for milk, but we still can’t get any handle on internal freight costs, for example milk from our farm to the factory.”

“Just simple things that would give us more bargaining power. But the processors won’t come to that party, so that’s pretty upsetting. On our farm, we could see that we could save on freight if they were a little bit more cooperative around that, but no, they don’t even want to entertain it.”

Dairy farmers could save significantly on freight if processors were more cooperative. Photo by: Nick Cubbin. 

Ash Salardini says the argument from processors that the voluntary code is sufficient is laughable. “The idea of a mandatory code is to create the behaviour that provides fair dealings,” he says. 
“The question is, the people who have participated in the unfair behaviour, do we trust them enough to run a voluntary code to mitigate these behaviours? I would suggest not. 

“Milk isn’t a disruptor, it’s not a new product and deregulation has been around for quite a while, so the fact this has become an issue where the ACCC had to undertake a specific review suggests the industry doesn’t move unless it has been nudged, and that brings you to a mandatory code.”

Dairy farmers need market power and fairness principles

A handful of mandatory codes are already in operation in Australia, including the horticulture and franchising codes, as well as codes of conduct governing the bulk wheat export and oil industries. 

Since last November, the federal government has held a series of meetings across Australia’s eight dairying regions, seeking input into what a mandatory code might look like, including cooling-off periods for entering or terminating contracts, a dispute resolution and enforcement process, limiting exclusive supply clauses between processors and farmers so farmers can shop around for the best prices, and banning retrospective clawbacks by processors.

A mandatory code would mean farmers can shop around for the best prices for their milk. Photo by: Pip Farquharson.

Minister for Agriculture and Water Resources David Littleproud supports a mandatory code, but it’s not a fait accompli. The government has been quick to emphasise it views the code as a first step, rather than a silver bullet, and agrees with farmers that more needs to be done. It has also made clear that a code will not regulate farmgate prices, or the relationship between milk processors and the supermarkets. That relationship is already covered by the Food and Grocery Code of Conduct.

Cost is expected to be a major roadblock, namely who should bear the burden of funding the code’s development, application and enforcement? The ACCC has acknowledged the issue, suggesting small processors might be exempt from the mandatory code so as not to unduly burden them with the costs of compliance, an option the government says it will explore during the code’s development. 

Saputo Australia is one of the top 10 dairy processors globally and the biggest in Australia, operating the Coon, Devondale and Warrnambool Cheese & Butter brands, among others. Last July, Saputo chief executive Lino Saputo Jnr told the ABC the company would support the code, subject to the cost of implementation. 

“One of the elements here definitely has to be that it is regulated without cost, because ultimately if the cost goes up, it’s going to create pressure in terms of pricing to suppliers,”
“As long as it’s a system that doesn’t cost too much to organise and implement, we’re 100% in agreement with this code being mandatory.” 
According to the ACCC, implementation costs could include legal and financial costs associated with preparing contracts and pricing to comply with the code, keeping records for extended periods of time and administrative reporting to parties or compliance bodies.

Source: Getty Images.

While the outcome of discussions around a mandatory code won’t be seen for some months, Ash Salardini says there is a danger of focusing so much attention on developing a code for the sector: it is a distraction from the real issue, which is the need to reform competition law in Australia. 

He says similar power imbalances will persist across primary industries supply chains because Australian competition regulators are toothless, and competition laws seem to promote consolidation. 

“We have been really poor in how we have developed our competition law and how we have prosecuted it,” he says. “Look at the European Union – they have specific principles around fairness. We don’t have that here. In the end, we’ve devised a system that has set us up to fail, and we don’t have more competition, we have consolidation. 

“We have a very strong position on this. Deregulation hasn’t failed in Australia – the lack of decent competition provisions on market power has failed us.”
Dairy farmer farewelling industry goes viral

The whole of Australia woke up to the milk price issue when a video by a dairy farmer went viral on social media (see below). South Australian dairy farmer Casey Treloar recorded a heartfelt farewell to her family farm in Parawa on the Fleurieu Peninsula. The third-generation dairy farmer said prices meant her family had no choice but to leave the industry.

Source: Casey Treloar's Facebook

“The clock has run out and it’s time to say goodbye,” Casey said in the video.“We are getting 38c a litre across the year and it’s completely unsustainable. We can’t really afford to keep going anymore. We’ve come to a point where we can’t do it any more — it breaks my heart.”

Casey’s video, released on Facebook, amassed more than a million views in the first few days. While she did not blame $1-a-litre milk entirely, she said: “The $1-a-litre milk has devalued our product. Milk that we produce is not worth as much as it once was, and it’s to the point where our production [costs] so much that we cannot sustain producing milk the way we have in the past.”

She was later invited to meet Minister for Agriculture David Littleproud to discuss what might be done to achieve better prices for farmers and ensure the future of the industry.

What’s the drought levy?

In September 2018 Woolworths and Coles announced a ‘drought levy’, a 10c/litre surcharge on home-brand milk with the money to go to beleaguered producers. 

But the outwardly altruistic move was criticised by some politicians as a cynical attempt to steer customers away from more expensive branded milk products. 

Farmers do not want charity via a levy, they want a fair price for their milk. Source: Getty Images.

Both supermarkets responded by defending their support of farmers, saying they had raised millions of dollars. 

Woolworths is carrying on with its Drought Relief Milk, although funds will only go to farmers whose processor has a contract with Woolworths. NSW Farmers’ Dairy Committee chair Erika Chesworth also estimates that farmers will receive about 6c/litre, rather than the full 10c. Coles, which only applied the levy to its three-litre containers, ended the fundraiser late last year. 

Mandatory code issues being considered by the federal government

  • Ban exclusive supply clauses.

  • Ban retrospective price step-downs.

  • ŸFuture step-downs only after 30 days’ written notice. Farmers can terminate the agreement during that period without penalty.

  • ŸCooling-off period for farmers when they give notice to enter or terminate a contract.

  • ŸTermination clauses included for fundamental breach of terms.

  • Independent and cost-effective dispute-resolution process included in all contracts.

  • ACCC to have enforcement powers e.g. infringement notices, financial penalties and court action.

ACCC Dairy Inquiry recommendations 

  • Provide simpler, clearer, more transparent contracts, with visibility into supply chain.

  • ŸBan contract variations unless with written agreement of farmers. 

  • Provide farmers with all the documents they need simultaneously to enable review of all terms before agreement.

  • Allow farmers to switch processors easily. 

  • Establish an independent body to hear disputes. 

  • Add transparency into processor price-setting, to improve farmers’ forward income estimates.

  • Encourage farmers to seek guidance before they sign contracts with processors. 

  • Introduce a mandatory code of conduct. 

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