Relative bargaining power and other issues in the supply chain
The dairy supply chain is characterised by the dominance of a few very
large participants in both the processing and retail sectors, and a large
number of smaller farmers. Due to the nature of the drinking milk market and
the imbalances of bargaining power throughout the supply chain, the negotiation
process for prices and conditions between participants in the industry can be
Collective bargaining is when two or more businesses negotiate a deal
for the sale or purchase of products or services with a common customer or
supplier. The rationale behind collective bargaining can be put as follows:
In some industries a number of competing small businesses
must bargain with big business. Individually, the small businesses may lack
bargaining power and so may seek to join together and bargain collectively,
thereby exercising a degree of countervailing power to that of big business.
Collective bargaining at one level may lessen competition but, at another
level, provided that the countervailing power is not excessive, it may be in
the public interest to enable small business to negotiate more effectively with
While such conduct would ordinarily raise concerns under the anti-competitive
conduct provisions of the Competition and Consumer Act 2010 (CCA), a
process is available for businesses to gain immunity from legal action in order
to collectively bargain. The Australian Competition and Consumer Commission
(ACCC) may grant authorisation to businesses for them to engage in conduct that
may be anti-competitive where it is satisfied that the public benefit from the
conduct outweighs any public detriment.
The ACCC notes that since 2002 there has been an Australia-wide
authorisation granted to the Australian Dairy Farmers for dairy farmers to
collectively negotiate with processors within their relevant geographic area.
On 4 August 2011, the ACCC announced it had reauthorised this arrangement for a
further ten years.
However, the Chief Executive Officer of the ACCC opined that while these
forms of collective bargaining arrangements have been used:
... I think it could be used more, to be quite honest. The
dairy industry is just one of a number of industries where, in our view, there
is not as much use being made of collective bargaining as there could be, even
though there has been more made in dairy than perhaps in some other industries.
Given processors have an interest in reaching agreement with farmers for the
supply of milk, if they have certain overhead costs then the nature of
processing is that they require throughput so it is a situation where dairy
farmers would be well placed in getting together and collectively bargaining
Mr Cassidy also acknowledged the benefits of collective bargaining would
be limited for some producers in areas where they did not have a choice of
... the situation with dairy farmers does vary between
geographic areas, although in most—I would not say all—areas there is more than
one processor operating, so the majority of dairy farmers would have a choice.
During the committee's previous dairy inquiry, a significant amount of evidence
was received about problems in the operation of the collective bargaining
process, particularly in light of the Tasmanian experience in 2009.
In its 2010 report, the committee concluded that it was:
... disappointed by the behaviour by National Foods while
negotiating with dairy farmers in Tasmania. The Committee is concerned that
this behaviour has not been confined to Tasmania but has extended to other
dairy regions within Australia.
... The Committee considers that the ability of large companies
to 'walk away from the table' undermines the collective bargaining provisions
of the ... [Competition and Consumer Act] and enables the more powerful
participant in a negotiation to dictate the terms of trade.
Based on the evidence received and discussed in this report and this
inquiry's Second Interim Report, it is apparent to the committee that
many of the broad issues regarding negotiations and relative bargaining power
were also examined and reported on as part of the committee's 2010 inquiry. The
committee remains concerned about the effects that imbalances in bargaining
power throughout the supply chain may be having on the industry, and is
disappointed that the Government has not formally responded to the
recommendations the committee has previously made on these types of issues.
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.
Current dispute resolution mechanisms for grocery suppliers
Part of the terms of reference for this inquiry required the committee
to examine the suitability of the framework contained in the Horticulture Code
of Conduct for the Australian dairy industry.
The committee's Second Interim Report outlined the evidence
received regarding this issue—in short, 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 were not relevant.
Produce and Grocery Code and
The Produce and Grocery Industry Code of Conduct was also examined by
the committee. It is a voluntary code (originally known as the Retail Grocery
Industry Code of Conduct) created after the Joint Select Committee on the
Retailing Sector released its report Fair Market or Market Failure?: A
review of Australia's retailing sector in August 1999. Notably, rather than
a voluntary code that committee called for a mandatory code to be introduced.
The Department of Agriculture, Fisheries and Forestry described the
primary objective of the Produce and Grocery Industry Code as being to:
... promote fair and equitable trading practices among
industry participants. This is achieved through the encouragement of fair play
and open communication between industry participants as a means of avoiding
disputes. For unavoidable disputes, the voluntary code provides a dispute
resolution mechanism. The voluntary code is intended to cover all industry
participants (except consumers) in the Australian produce and grocery industry.
These participants include primary producers, processors, wholesalers,
distributors and retailers.
The code is administered by an industry-funded administration council,
with a government-funded ombudsman in place to assist in disputes.
The Produce and Grocery Industry Code Administration Committee submitted to the
committee that the code covers the dairy industry and is 'a successful code
that has helped reduce disputes within the produce and grocery industry and to
improve behaviour along the supply chain'.
Use of the Produce and Grocery
How effective the Produce and Grocery Industry Code and its Ombudsman
have been may be open to question. In 2009–10 and 2010–11, the Ombudsman
received 20 and ten enquiries respectively.
The administration committee for the Produce and Grocery Industry Code submitted
that dairy farmers have access to the dispute resolution system established by
the Produce and Grocery Industry Code.
However, the Queensland Dairyfarmers' Organisation informed the committee that
they have been advised that dairy farmers:
... cannot take action through the Ombudsman directly with
retailers as they do not contract directly with retailers but rather with
The South Australian Dairyfarmers' Association stated they were unaware
of the Produce and Grocery Industry Code's existence and suggested:
The fact that we were unaware suggests this is not an option
that is very relevant to the dairy industry.
Another submitter characterised the Produce and Grocery Ombudsman as 'nearly
Comparison with the United Kingdom
Developments in the United Kingdom may be particularly relevant in
considering dispute resolution mechanisms and codes of conduct; especially
given the supermarkets' pricing decisions on private label milk appears to have
been a strategy borrowed from that country.
In 2000, a voluntary Supermarkets Code of Practice was established. In
2008, the UK Competition Commission published the report of an inquiry
undertaken into the grocery sector, which found that that major supermarket
chains were passing on excessive risks and unexpected costs to their suppliers.
As a result, the report recommended that a mandatory Groceries Supply Code of
Practice (GSCOP) be introduced. After consultation, the GSCOP came into force
in February 2010 and covers all large retailers with a turnover of more than £1
billion. The GSCOP is intended to address concerns about relationships between
retailers and their suppliers regarding a variety of issues. It includes an overarching
fair dealing provision, provisions for binding arbitration, and otherwise
addresses matters relating to supply disputes, such as unexpected retrospective
payments, and a number of other payments.
It was announced by the UK Government in August 2010 that a Groceries
Code Adjudicator will be established to enforce the GSCOP. While not yet
enacted, draft legislation has been published and examined by a House of
Calls for a new code of conduct
An industry code is defined in legislation as a code which regulates the
conduct of participants in an industry towards other participants in the
industry or towards consumers in the industry.A
number of submitters called for a new industry code to be developed; either to
cover the drinking milk sector, or grocery suppliers more generally.
CHOICE and the Australian Food and Grocery Council (AFGC) suggested that
the Produce and Grocery Code could be amended to require that:
- All retailers’ contracts with
their suppliers include a fair dealing clause.
Retailers are prohibited from
making retrospective adjustments to terms and conditions of supply (unless
where this has been provided for).
- Retailers are required to enter
into binding arbitration to resolve any dispute with a supplier.
- Retailers are required to keep
written records of all agreements with suppliers on terms and conditions of
- The Ombudsman [a new office also
proposed by CHOICE and the AFGC] publishes guidelines on specific provisions of
the Code of Conduct when necessary and advises the relevant Minister on the
operation of the Code of Conduct.
Some submissions pointed to the United Kingdom's GSCOP as something that
should be examined, with a view to introducing a similar mandatory code in
A code that applies a 'sustainability test' to contracts was also suggested.
A code that applies to the all sectors that supply the major
supermarkets may be difficult to develop, and may attempt to address problems
that do not exist in some sectors. The experience of the dairy industry may not
be shared by others. In 2008, after conducting a lengthy inquiry into the
entire grocery sector, the ACCC stated it:
... is not persuaded that there is a significant buyer
power problem in the retail chain that requires broad regulatory action to resolve.
The sheer size of the MSCs [major supermarket chains] and their share of sales
in some categories obviously deliver to them a significant amount of bargaining
power in many transactions and there are suppliers who are disappointed with
the returns they receive when dealing with the MSCs. However, there are also
suppliers who are content with the terms they are able to obtain from the MSCs
... from the point of view of suppliers, no single picture emerges regarding
the buyer power of the MSCs.
These concerns are true even within the dairy industry—suppliers of
drinking milk in the southern manufacturing dairy regions do not appear to have
been significantly impacted by the January 2011 price cuts.
Framework for industry codes
There are two broad categories of industry codes. A mandatory code is
one which is binding on all participants in the relevant industry. A voluntary
code is binding only on those who have agreed to be bound.
Under Part IVB of the CCA, mandatory or voluntary codes may be
prescribed in regulations. Under section 51AD of the CCA, a corporation must
not contravene the provisions of a mandatory code (or a voluntary code they
have agreed to that has been prescribed.
The Government has published guidance on proposals for industry codes of
conduct, and when they may be considered. The document notes:
... codes of conduct which can be effectively developed,
implemented and enforced by the participants in an industry are generally to be
preferred over the prescription of industry codes in law. An industry will
generally only be subject to government intervention where there is a
demonstrable problem affecting other participants or consumers which the market
cannot or will not overcome.
The policy requires a compelling case for regulatory intervention be
made, and outlines the following criteria that are applicable to a decision to
prescribe an industry code:
- identification of a problem, and existing regulation that
applies, within an industry (i.e. whether additional regulation is need);
- effectiveness of any industry self-regulatory measures;
- other regulatory options (such as reliance on the CCA);
- goals of a prescribed industry code; and
- benefit-cost analysis.
Calls for an ombudsman
Issues remaining in the grocery sector have prompted calls from a number
of sources for either a dairy industry-focused or a broader supermarket
to be established.
The consumer organisation CHOICE 'strongly supports' the establishment
of a supermarket ombudsman.
The major representative organisation for food and drink manufacturers, the AFGC,
... there may be a role for a Food and Grocery Ombudsman
to investigate issues of food and grocery retail pricing behaviour. The role of
the Ombudsman would be to independently adjudicate concerns relating to
predatory pricing and anti competitive behaviour, including those related to
significant and dramatic price discounting.
Associate Professor Frank Zumbo recommended a broader office be created
to include all small businesses—an Australian Small Business and Farming
Commissioner. He described what role this could play:
In effect the Australian Small Business and Farming
Commissioner would be a "trouble shooter" who would systematically
investigate new and emerging areas of disputation in such areas as the
Australian dairy industry with a view to seeking to identify strategies,
mechanisms or legal options for efficiently and effectively resolving such
CHOICE and the AFGC later jointly submitted:
Rather than suggesting functions based entirely on existing
models, the most useful approach is likely to be one that identifies what is
'missing' from supermarket competition issues in Australia and works backwards.
For example, key issues identified through the recent milk discounting debate
include the need for a more proactive focus and follow-through on competition
concerns, greater transparency around pricing and the capacity to address
retailer market power where it results in anti-competitive behaviour.
The calls for an ombudsman were also closely linked to the calls for a
mandatory code of conduct:
It is important to note that there is a need for any new code
of conduct to have a referee to enforce and police the rules.
There has been some activity regarding business dispute resolution
generally and other matters directly related to the food sector. In May 2011, the
Minister for Small Business, Senator the Hon. Nick Sherry, released for
consultation an options paper on a national dispute resolution service for
small business (for business-to-business disputes). Additionally, in 2010 the
Government established a National Food Policy Working Group, and more recently,
a Food Processing Industry Strategy Group.
While these developments may have merit, they may not address the issues
regarding bargaining power in the dairy supply chain. A general small business
dispute resolution service, for instance, may not be appropriate for addressing
issues faced by farmers. Accordingly, there may be a gap within the current
framework of various government departments and agencies and voluntary industry
codes where the concerns of dairy farmers about their direct and indirect
relationships with other participants in the dairy supply chain can be
addressed. These issues are also likely to be shared by other grocery suppliers
As the ACCC has a specific role—to administer the provisions of the CCA—it
is not well-placed to address broader industry concerns. It is apparent that
this is not always understood; accordingly the ACCC often is criticised
regarding issues about which it has no power to act upon. A separate statutory
office that provides a point of focus for issues relating to grocery supply
chains could have some advantages with respect to whole-of-government
coordination as well as facilitating the building of expertise within
government on supermarket-specific issues. If such an arrangement were to
proceed, it would be expected that the new office and the ACCC would form a
close working relationship to ensure the appropriate referral of matters and
timely dealing of complaints when matters related to the CCA are involved.
On the other hand, if the new office did not have clear functions to
perform such as a code to enforce, it could create an expectation gap between
what industry participants believe an ombudsman can achieve, and what powers
have been granted to it.
Based on the evidence received during this inquiry, the committee
considers that the effectiveness of the Produce and Grocery Industry Code of
Conduct needs to be reviewed and made more relevant for the dairy industry. The
committee also considers there is a likely case for the Code to be
strengthened, particularly to capture entire supply chain relationships. If not
otherwise acted on by the processors, the committee is also interested as to
whether its recommendations in chapter 5 regarding the nature of contracts
could be incorporated into a strengthened Code.
The committee notes the arguments for a statutory office to be created
(generally referred to by submitters as a Supermarket Ombudsman) to enforce a
strengthened Produce and Grocery Code and/or otherwise help deal with perceived
supply chain issues in the grocery sector. The committee is of the view that
such an office could prove beneficial for more vulnerable participants in
grocery supply chains provided it has clear functions to perform.
However, in forming its views on the Produce and Grocery Code and the
need for a statutory office to deal with grocery supply issues, 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. Other industries would
need to have input into these proposals. In any event, these proposals would
require a number of detailed matters to be assessed. Accordingly, the committee
believes these proposals require dedicated consideration and requests that the
Government develop an issues paper and facilitate a public consultation process
on this matter as soon as possible.
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.
Senator David Bushby
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