Summary and recommendations
Australia has a large and efficient dairy industry which
acts as a major regional employer. While the bulk of milk production occurs in
the south-east regions of Australia, dairying continues to be a geographically
widespread economic activity with dairy farms operating in each state.
The industry has experienced much consolidation,
rationalisation and adjustment, particularly since deregulation in 2000. At
times, dairying can be an uncertain and challenging occupation. As with other
agricultural industries, phenomena such as drought and flooding can make the
occupation difficult, and for some farmers, no longer viable. International
prices have a significant influence on farm gate prices (although the extent of
this influence varies between dairy regions depending on the volume of
exports). Negative external shocks to these international prices, such as those
following the global financial crisis, can significantly reduce the value of
the supply chain, sometimes leading to tense contract renegotiations and
eventually impacting farmers' incomes. The structure of the supply chain and
domestic market trends, issues which are directly relevant for this report, can
also have various short and longer-term implications.
This committee was tasked by the Senate with examining the
impacts of the decision in January 2011 by the major supermarket chain Coles
(followed by its competitors including Woolworths, ALDI and Franklins) to
heavily discount the price of its 'private label' or 'home brand' milk and
other dairy products. In particular, the price cuts mean that milk can now be
purchased by consumers for $1 a litre—a price many argue does not reflect the
significant effort put into producing and distributing milk, as it is lower
than the price of many other food and drink products which are not perishable
and are less costly to produce.
The circumstances which gave rise to this inquiry appear
unusual in many respects. In recent years, public debate about the
competitiveness of the supermarket sector has been focused on concerns about
food price inflation and grocery prices being too high. In conducting this
inquiry, the committee has been troubled that the benefits gained by consumers
have not received sufficient attention in the debate about milk prices. In
general, price discounting is likely to be pro-competitive and of benefit to
consumers. Provided it does not constitute predatory pricing, a retail price
cut should not be discouraged. The January 2011 price cuts in a staple product
is undoubtedly good news for consumers in the short‑term. Attempting to
predict with any certainty any longer-term impact on overall consumer welfare
is difficult, if not impossible.
Along with the impact on consumers, the committee focused on
any impacts, or likely impacts, on the other end of the supply chain. When the
inquiry commenced, the committee had strong concerns about the effect the price
cuts could have on dairy farmers' incomes. The committee is grateful to the
large number of individuals and organisations involved in the dairy supply
chain who were willing to provide detailed evidence and material for this
inquiry. Much of this information, however, concentrated on concerns about
shifts in sales away from the processors' branded milk products to the discounted
supermarket private label milk. As a matter of overall principle, these types
of free market outcomes should not be a matter for government. Many private
label grocery products have grown in share in recent years, fulfilling the
demand of those consumers who are happy to purchase them—particularly when
there are little distinguishable characteristics between the branded products
and their lower priced private label equivalents.
Milk is one such product; it is apparent that there are very
little quality and specification differences between many of the processors'
branded milks and the private label alternatives. It should not be a matter for
public policy to protect brands that consumers no longer value. It also does
appear that the steadily increasing sales of private label milk—which have more
than doubled their share of sales in supermarkets over the past decade—is a
trend that is unlikely to be reversed.
Impact on dairy farmers
It is apparent that when looking at the dairy industry at a
national level, most dairy farmers will not be significantly worse off because
of the price cuts. This is because the vast majority of milk production occurs
in states such as Victoria where a number of processors operate and drinking
milk represents a relatively small share of production, compared to the
production of manufactured dairy goods. Due to significant export
opportunities, international prices are a key determinant of the income farmers
in those areas receive.
However, it is clear that in states which do not have these
characteristics, such as Queensland and Western Australia, the impact is
potentially greater. In these states, there are few processors operating and
milk production is primarily for drinking milk. The emphasis on drinking milk
means any pressure on retail prices could potentially be pushed back down the
chain, although at this stage there is no evidence the major supermarkets have
done this. Additionally, in some areas it is also difficult to distinguish
between the consequences of natural disasters, such as the Queensland floods,
and the impacts of the discounting.
One key area of concern for the committee, however, was the
speed and ease with which a certain group of farmers in Queensland contracted
to Parmalat were affected by the cuts in the retail price of private label milk
led by Coles. Under these arrangements, it appears the risk of any retail price
movements or other shocks that affect the sales of branded products are in
large part being passed immediately onto the farmers. It is not clear why this
should be the case when the processor has chosen to supply both products to the
supermarket. Whether a consumer chooses to buy a bottle of processor-brand milk
or the supermarkets' private label should not (again, as a matter of principle)
be a concern for farmers. Although processors are undoubtedly in a challenging
position, the management of their branded products and the terms on which they
supply private label milk to the supermarkets is a matter for them.
5.43 The committee
urges processors to make their pricing structures for sourcing drinking milk:
- reflect the volume they estimate they require to meet their total
- offer more stability in prices rather than changing frequently;
- not be dependent on the final retail sales of branded versus
private label milk.
5.45 The committee
recommends that contracts with dairy farmers should offer a clear, consistent
formula for milk pricing with unambiguous conditions.
The committee received evidence about the current deficit in
drinking milk production in Queensland and, given present market signals, the
likely ability of the dairy industry in the drinking milk-focused states to
meet future demand.
If it is the case that it is more economically viable for
processors to transport milk from other states where it is cheaper to produce,
this is also not necessarily a matter for public policy. Such a result can be
argued to be an outcome dictated by realities in the market, as well as similar
to the interstate trade which occurs for other agricultural produce. However,
the committee believes these issues need further examination to allow an
informed discussion about the future of the industry in those states.
5.47 The committee recommends that the Government
commission a study of the dairy industries in Queensland, New South Wales and
Western Australia. The study should focus on the future sustainability of the
dairy industry in each of these states and their capacity to meet future local
consumer demand. The report of the study should also examine possible policy
options and be tabled in the Senate.
A number of organisations that participated in this inquiry
called for an investigation of Coles' conduct by the Australian Competition and
Consumer Commission (ACCC) and for aspects of Australia's competition laws to
The ACCC undertook an examination of Coles' conduct against
the current competition law, and concluded that there was no evidence that
Coles was engaging in predatory pricing in contravention of the Competition
and Consumer Act 2010. The committee discussed the details of this
investigation extensively with the ACCC, and also passed on other issues to the
ACCC regarding the milk discounts, such as certain statements made in Coles'
initial advertisements relating to its 'Down Down' campaign.
The committee is not of the view that the specific price
discounts by Coles which were the subject of this inquiry warrant legislative
amendments. Care needs to be taken when suggesting amendments to the
Competition and Consumer Act based on the experience of one industry (or part
of one industry, as is the case with the milk discounts) as they would apply to
the entire economy. Even if amendments to Australia's competition law were
needed, it is not clear that the amendments proposed during the inquiry would
actually provide a 'remedy' to the milk pricing issue.
The committee, however, notes the recent comments by the new
chairman of the ACCC that some aspects of section 46 of the Competition and
Consumer Act, which deals with misuses of market power, are 'worth debating'.
The effectiveness of Australia's competition laws has been raised in the
context of various sectors and has been considered by this committee on
numerous occasions. It has also been some time since the Dawson Review in 2003,
which was the last independent review of the Act undertaken. The inquiry before
that was the Hilmer Review, which was finalised in 1993.
Since the report of the Dawson Review, a number of
amendments have been made to section 46 of the Competition and Consumer Act. The
committee urges the ACCC to identify and litigate appropriate matters that will
enable these recent amendments to be tested in the courts. However, questions remain
about the operation of certain provisions. Additionally, in recent years a
number of other competition issues including price signalling, creeping
acquisitions and geographic price discrimination have been raised. It appears
appropriate that, rather than recommending piecemeal amendments, an independent
inquiry be formed to fully address any perceived gaps in, or issues with,
Australia's competition law.
7.100 The committee
recommends that the Government initiate an independent review of the
competition provisions of the Competition and Consumer Act 2010.
It is clear that Coles and Woolworths have a very strong
position in Australia's grocery market. While the recent signs of Coles and
Woolworths more fervently seeking to attract consumers to their respective
stores are encouraging for competition, the effects need to be closely
monitored. Other possible developments, such as implications for the major
supermarkets' dealings with their suppliers due to the growth in private label
products generally, need to be monitored for any signs of anti-competitive
conduct. The committee expects the Government and the ACCC to keep a watching
brief on these issues and the grocery sector in general.
Transparency of ACCC investigations
An issue which the committee considered was the transparency
of the investigations the ACCC undertakes. Whether or not the ACCC was
undertaking an active investigation into Coles' milk price cuts was a question
that frequently arose during the early stages of this inquiry. More broadly,
there can be significant concern within certain sectors and the wider community
regarding the effectiveness of the ACCC in enforcing the legislation for which
it is responsible.
In most cases there will be little public information
available as to whether or not the ACCC is investigating or has investigated a
particular matter; however, substantial public interest appears to pressure the
ACCC to provide some insight into its investigative activities. The committee
is pleased that the ACCC was, on this occasion, willing to publish a statement
that provided a high-level summary of the findings of its investigation. Such
public statements on key matters help inform the broader public debate.
It is important to keep in mind that the ACCC is a law
enforcement agency, and accordingly there are certain principles and practices
it should be expected to adhere to. While increased transparency of what the
ACCC is investigating at any point in time may be desirable in terms of
ensuring public confidence in the ACCC, there are important consequences to
consider. Overall, while the majority of investigations would still require
confidentiality, there may be some scope for increased transparency or improved
communication of the ACCC's enforcement activities.
6.58 The committee recommends that the Australian
Competition and Consumer Commission (ACCC) review its approach to publicly
releasing information about its investigations, with a view to providing
greater general information about its current enforcement activities and
relevant issues of particular public concern.
6.59 This recommendation is subject to the proviso
that such action would not deny procedural fairness to the parties involved or
threaten the integrity of the ACCC's investigations.
Imbalances of bargaining power and
use of collective bargaining
More so than raising questions about the effectiveness of
Australia's competition laws, the milk pricing issue is fundamentally a matter
that reflects imbalances of bargaining power at various points in the dairy
industry supply chain. These imbalances can be more pronounced in some regions
The dairy industry makes use of allowances contained in
legislation for some collective bargaining arrangements. However, the ability
for processors to 'walk away' from negotiations with collective bargaining
groups (as highlighted during the committee's 2010 inquiry), market realities
such as the number of drinking milk processors in some areas and the fact that
the processors must deal with the two major supermarket chains that dominate
the grocery sector, can mitigate the benefits of collective bargaining
Evidence was given, however, that although the dairy industry
is utilising collective bargaining arrangements to some extent, they could be
used more in situations where there is a choice of processor. While imbalances
of bargaining power issues are difficult to resolve and are always going to be
present in some form, the committee considers this is an area that warrants
8.9 The committee
recommends that the Government review the effectiveness of collective
bargaining laws and arrangements for agricultural industries, with a view to
strengthening that framework to create a more equitable balance of power
between the negotiating parties and to otherwise improve their operation.
Industry codes of conduct
The terms of reference for this inquiry required the
examination of the suitability of the framework contained in the Horticulture
Code of Conduct for the Australian dairy industry. No significant support was
given to extending this type of arrangement to the dairy industry, largely
because the issues dealt with by the Horticulture Code did not appear relevant.
The Produce and Grocery Industry Code of Conduct was also
examined by the committee. It is a voluntary code created after the report of a
joint parliamentary committee in August 1999. A government‑funded
ombudsman is in place to assist in dispute resolution.
This Code was put forward as a mechanism that is already in
place for resolving disputes between suppliers and the major supermarkets.
However, it is apparent that there are a low number of enquiries received by
the Produce and Grocery Industry Ombudsman, and many representative
organisations for dairy farmers were either unaware of the Code, or did not
consider it relevant. Based on the evidence received during this inquiry, the
committee considers that the effectiveness of the Produce and Grocery Industry
Code should be reviewed.
A number of submitters also called for a mandatory code of
conduct and an ombudsman or commissioner to be created, either for the drinking
milk industry or covering the grocery sector more broadly. There may be merit
in some form of office to act as a point of focus for grocery sector issues,
particularly for responding to matters which are outside of the remit of the
ACCC. However, the committee is aware that it has been asked to focus on one
sector that supplies the major supermarkets—namely the dairy industry. Certain
issues which are relevant to dairy farmers may not be relevant to other
producers. Others would need to have input into any grocery sector-wide
proposals. This consultation and debate could take place as part of the review
of the Produce and Grocery Industry Code, which the committee also recommends.
8.43 The committee
recommends that the Government initiate the following:
- A review of the effectiveness of Produce and Grocery Industry
Code of Conduct and mediation process undertaken through the Produce and
Grocery Code Ombudsman. The review should include a consultation process
regarding options to strengthen the Code, including that it captures entire
supply chain relationships, and whether a revised Code should be made a
prescribed mandatory industry code under the Competition and Consumer Act
- A consultation process on the need for a new statutory office to
address issues regarding supply relationships in the grocery sector, and the
role, powers, coverage and governance regarding such an office.
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