Chapter 5

Chapter 5

Supplier-purchaser relationships

5.1        This chapter examines issues relating to the relationships and bargaining power between suppliers and purchasers throughout the dairy industry, and the grocery sector generally.

Comparative negotiating strength

5.2        The dairy supply chain is characterised by the dominance of a few very large participants in both the processing and retail areas and large numbers of small farmers. Due to the nature of the drinking milk market and the imbalances of bargaining power throughout the supply chain, negotiations of prices and conditions between participants in the industry can be significantly affected.

5.3        The fresh nature of the product also distinguishes the dairy industry from many others:

Unlike bottled water or soft drinks, fresh white milk cannot be stored for long periods of time and its production process (including on the farm) cannot be stopped and started on demand.[1]

...we cannot store it the shed or silo until we can achieve a better price—we are in a weak position of bargaining...[2]

5.4        The recent Queensland floods clearly demonstrate the perishable nature of the product, as many farmers had to dump their milk because floodwaters isolated farms or because tankers were not available.[3]

5.5        Issues about the perishable nature of milk, the need to move product and the bargaining power of the major supermarket chains are also felt by the processors:

Senator RYAN—...We have processors complaining about the damage that generic milks, private label milks discounted, are doing to the industry, to you as farmers—they do not seem to mention their own interests but we know that they are there—yet the product is only there because they constantly supply it. The processors are not compelled to supply milk to Coles for less than $2 for two litres.

Mrs Strong—Who is their other market? We have National Foods with a billion litres, if they do not supply Coles and they do not supply Woolworths, who are they going to sell that billion litres to? You do not turn round overnight and become an exporter. That takes major capital investment.[4]

5.6        On the other hand, Treasury observes that consumer preferences will influence what the supermarkets have to supply, which may mitigate the supermarkets' long-term bargaining power:

...if it were the case that consumers continued to have a preference for fresh drinking milk the market should be working to provide that.[5]

5.7        This was acknowledged by the Australian Dairy Farmers:

I do not think that consumers’ preferences will change overnight. I think Australia will be a fresh milk drinking country for a very long time to come. Considering that in the order of 100-plus litres per person is consumed in this country a year, I think there is a long way between that and UHT milk, which certainly has a different flavour.[6]

5.8        And given the nature of the product, supermarkets cannot economically import fresh milk:

...the milk has to come from somewhere, and the only place that the milk can come from is from dairy farmers in Australia.[7]

5.9        Transporting milk produced in states with lower farm gate prices to states that have higher farm gate price would be also difficult for processors and supermarkets, as the cost associated with transport appears to quickly become prohibitive. For example, the cost of transporting milk from Victoria to Queensland was estimated at 12 to 14 cents a litre.[8]

5.10      During its previous inquiry into competition and pricing in the Australian dairy industry, the committee heard evidence about the experience in Tasmania in 2009, where National Foods offered the Tasmanian Suppliers Collective Bargaining Group a price of 29 cents per litre (cpl), later increased to 33 cpl. This was significantly below both the price of 49 cpl paid in the previous year and what is considered to be the average costs of the Tasmanian farmers (around 40 cpl). National Foods announced in October 2009 that they would walk away from the collective bargaining process and would only deal with individual farmers. After significant negative publicity, including some generated by the committee's Tasmanian hearings, and consumer boycotts of National Foods' products a deal was reached in December 2009.

Collective bargaining

5.11      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. While such conduct would ordinarily raise concerns under the anti-competitive conduct provisions of the Competition and Consumer Act 2010, 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.

5.12      The ACCC operates a streamlined authorisation process for collective bargaining applications. Since January 2006 the ACCC has aimed to 'respond to requests for interim authorisation and issue a draft determination within 28 days of receiving an application and will finalise its consideration within three months'.[9]

5.13      A collective bargaining notification process was also introduced on 1 January 2007. This process is characterised by the shorter time and cost involved for businesses seeking to collectively bargain, as immunity from legal action can be achieved within 28 days, compared to the six month authorisation process, and with a lower fee for lodgement applicable.

5.14      However, subsection 93AB(4) of the Competition and Consumer Act restricts this option to arrangements where the parties involved expect that the total value of the transactions they each will conduct with the target business over a 12-month period under the arrangement will not be greater than $3 million, or such other amount as is prescribed by the regulations.

Collective bargaining in the dairy industry

5.15      The ACCC notes that there is an Australia-wide authorisation granted to the Australian Dairy Farmers since 2002 for dairy farmers to collectively negotiate with processors within their relevant geographic area.[10]

5.16      This authorisation expires on 30 June 2011. On 8 March 2011, Australian Dairy Farmers lodged an application for re-authorisation, which is currently being considered by the ACCC. In its application, Australian Dairy Farmers submitted that the authorisation:

...allows dairy farmers to take advantage of current and new market opportunities that are available to a group of farmers. It also aims to continue the development of an environment and outcome that will deliver a more professional relationship between dairy farmers and the processors they supply, fostering a change in the culture of the milk supply process.[11]

5.17      Some of the benefits of collective bargaining were brought to the committee's attention during its previous inquiry into the dairy industry. A farmer from southern Tasmania described their negotiation process with National Foods prior to forming a collective bargaining group as:

...every year we basically were given a contract and they said: 'This is what we are going to pay you. Sign it'.[12]

5.18      The Chief Executive Officer of the ACCC advised the committee that:

We know of some dairy farmers who, as part of that collective bargaining, have shifted from one processor to another where they had a choice of processors.[13]

5.19      However, Mr Cassidy opined that while the arrangement has 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 with processors.[14]

5.20      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 processor:

...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.[15]

5.21      The South Australian Dairyfarmers' Association described the collective bargaining arrangements in South Australia:

Mr Basham—...There are a couple of collective bargaining groups in South Australia. I was involved with one that started operating about five years ago and actually attracted one of the export players into the region around Adelaide. Prior to that, there were only domestic markets and those two companies were not competing very well and the price was actually lower than the export price. We were able to convince the other player. They did not pay us any more than they were paying Victorian suppliers, but that was more than we were being paid at the same time.

Senator O’BRIEN—Are the collective bargaining provisions of the act too restrictive, about right or not restrictive enough?

Mr Basham—Probably still a bit restrictive. They do not really give us enough power to actually influence. As I said, all we were able to do was get a third player to come to the region because we had a large enough quantity to make it attractive enough to them. We were not actually able to get any money out of the other companies at the time. Interestingly, once we had agreed to get the third player in, they all came back to the table offering us more money but we decided that the third player was more important than short-term money.[16]

5.22      The South Australian Dairyfarmers' Association further observed:

I have never been involved in a collective bargaining group and I get paid more than guys who are involved in a collective bargaining group. Things work differently for different people. Really, unless the dairy industry can collectively bargain as one unit, it may be beneficial to tinker around the edges but I do not think this is the solution to the problem we have got at the moment.[17]

5.23      While Ms Nola Marino MP suggested that collective bargaining 'does need to be strengthened',[18] doing so would only be:

...part of the answer...they need to be able to negotiate in good faith and to be able to negotiate the types of outcomes that you would expect from that. If they negotiate, and yet they are still no better off, what has it achieved?[19]

Codes of conduct

Horticulture Code of Conduct

5.24      Under the terms of reference for this inquiry, the committee was required to consider the suitability of the framework contained in the Horticulture Code of Conduct to the Australian dairy industry.

5.25      The Horticulture Code of Conduct is a mandatory industry code prescribed under the Competition and Consumer Act and enforced by the ACCC. The Department of Agriculture, Fisheries and Forestry described the aims of the Code as improve the transparency and clarity of transactions between growers and wholesalers and to provide a fair and equitable dispute resolution procedure. It is intended to:

1.      increase transparency of prices, margins and charges that are determined by wholesalers and returned to growers; and

2.      provide clarity so that both growers and wholesalers understand the terms¬† and conditions under which business will be conducted and so growers can compare what terms, conditions and opportunities are on offer from various wholesalers and marketers.[20]

5.26      No significant support was given to extending this type of arrangement to the dairy industry:

In many respects, the issues addressed by the Horticulture Code are already dealt with effectively within current commercial dairy marketing arrangements....based on current dairy experience it is not apparent that extending the Horticulture Code to dairy would add any significant support or protection to dairy farm businesses, particularly as its provisions do not extend to issues relating to retail sales.[21]

The horticultural code of conduct (HCC) was set up to clarify the relationships between vendors, agents, wholesalers and retailers in the horticultural industry. The Association believes it is not entirely appropriate when applied to the dairy industry, especially with issues of this nature.[22]

Coles does not believe the Horticulture Code of Conduct is an appropriate code for the Australian dairy industry. Primarily, the Horticulture Code of Conduct covers the interface between growers and traders and under its current framework would not extend to Coles if it were to be applied to the dairy industry.[23]

Woolworths has long held the concern that extending the Horticulture Code of Conduct to retailers would impose burdensome record retention and administration and compliance costs upon retailers and suppliers without any additional benefit beyond what is provided by the PGICC. Woolworths therefore does not support extending the scope of the Horticulture Code of Conduct either in relation to the horticulture or dairy sector.[24]

AFGC considers the Horticultural Code of Conduct ill suited to the current Australian Dairy Industry due to intent of the Horticulture Code to review and provide clarity on arrangements between wholesalers and agents. The dairy sector has different sourcing and supply arrangements compared to the horticultural sector. Specifically, producers or farmers sell milk to milk processors, which then supply the supermarkets. This is not analogous to the situation in the horticultural sector where there are a range of different market mechanisms and environments that result in a level of ambiguity in trading terms and conditions.[25]

The [Horticulture Code] does not apply to retailers, processors or exporters because they are not wholesale intermediaries and because it was considered that transparency and clarity, the issues which the code addresses, were not issues of concern as they generally trade with clear and written terms.[26]

Produce and Grocery Industry Code of Conduct

5.27      The Produce and Grocery Industry Code Administration Committee (PGICAC) submitted to the committee that the Produce and Grocery Industry Code of Conduct 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'.[27]

5.28      The Department of Agriculture, Fisheries and Forestry describes the primary objective of the 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.[28]

5.29      Unlike the Horticulture Code, the Produce and Grocery Industry Code is a voluntary code with an industry-funded administration council and government‑funded ombudsman to assist in disputes.[29]

5.30      The Produce and Grocery Industry Code (which was originally named the Retail Grocery Industry Code of Conduct) was 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 of Conduct, which would regulate conduct in vertically integrated relationships throughout the supply chain. Being mandatory, the Code of Conduct would enable the courts to take into account provisions of the code in determining whether or not business conduct has been unlawful.[30]

5.31      While supportive of a code of conduct, the Howard Government's response to the inquiry disagreed with the recommendation that the code be mandatory:

The Government's preference is for industry to take ownership of self regulatory schemes with minimal government involvement. The Government is committed to industry self regulation to address marketplace problems as an alternative to onerous regulation. The regulatory option of mandatory codes will only be exercised where voluntary self regulation has failed and where the market failure or social policy objectives addressed in a code are serious enough to warrant enforcement of the code at law.[31]

5.32      Ms Nola Marino MP observed that prescribing a mandatory code could have wider implications and the development of a code would need to be carefully considered:

You would also need to look at the word 'mandatory' and how it affected the whole supply chain. That is the work you would have to do with that.[32]

5.33      Although Associate Professor Zumbo pointed out:

There are mandatory codes already and they work effectively in other sectors.[33]

5.34      The voluntary nature of the code may have some advantages regarding flexibility and adaptability to account for any developments or changing needs in the industry.[34] The voluntary nature of the code was also supported by Australian Dairy Farmers:

Mr Drury—...I noticed that on page 4 of the Woolworths submission they talked about the voluntary Produce and Grocery Industry Code of Conduct and I suppose the picture you glean from that, from a farmer’s perspective, is that without actually having a regulated price—because you are actually dealt back into the game—would be a lot better position than we had...

Senator RYAN—I want to clarify what you said earlier about a regulated price and the relationship with the code of conduct. You are not proposing that the code of conduct be made compulsory or that we go back to a regulated price, are you? Or have I misunderstood what you said?

Mr Drury—No. The reason I pointed out that statement on the top of page 4 in Woolworths’s submission is that it is termed 'voluntary Produce and Grocery Industry Code of Conduct' and I stress the 'voluntary'.[35]

5.35      However, the Australian Dairy Farmers later recommended that a mandatory drinking milk code of conduct be developed.[36]

5.36      The Queensland Dairyfarmers' Organisation also formed the view that, 'due to the situation that the Australian fresh milk supply chain now faces', a code would need to be mandatory in order to be effective.[37]

Use of the Produce and Grocery Industry Code

5.37      How effective the Produce and Grocery Industry Code and its Ombudsman have been may be open to debate. The Ombudsman's website states that in the 2009‑10 financial year, it received ten enquiries and conducted two mediations (initiated from complaints lodged in the previous financial year).[38]

5.38      The PGICAC submitted that dairy farmers have access to the dispute resolution system established by the Produce and Grocery Industry Code.[39]

5.39      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 processors.[40]

5.40      The South Australian Dairyfarmers' Association were unaware of the Produce and Grocery Industry Code and suggested:

The fact that we were unaware suggests this is not an option that is very relevant to the dairy industry.[41]

5.41      The committee was advised that the Australian Dairy Farmers resigned their membership of the PGICAC in January 2009. The PGICAC submits that the reason given was as follows:

The ADF considers the high value work of the PGICAC was delivered sometime ago with the bedding down of the code. As such, we feel that we are now well able to progress any future considerations that emerge in this space through our membership of the National Farmers Federation.[42]

5.42      However, through the Australian Dairy Industry Council, Australian Dairy Farmers considers that further discussion of issues in the dairy industry, with government participation, is necessary. It recommended that the Government:

...convene, and participate in, an ACCC-authorised roundtable forum of the dairy industry supply chain, from farmers to retailers, to constructively discuss solutions for ensuring a sustainable drinking milk market with fair returns for all.[43]

Calls for an ombudsman

5.43      As noted in the previous section, there already exists a Produce and Groceries Industry Ombudsman funded by the government. For the reasons also outlined in the previous section, however, this process may be of limited use to dairy farmers. Issues remaining in the grocery sector have prompted calls from a number of sources for either a dairy industry-focused or a broader supermarket ombudsman to be established:

CHOICE strongly supports the establishment of an Australian Supermarket Ombudsman to tackle competition and fairness across the grocery sector. The ombudsman would provide much needed leadership in reforming the supermarket sector, and would ensure there was ongoing and pro-active monitoring of key issues.[44]

Recommendation: That a fresh drinking milk market specific Ombudsman/Commissioner and/or a Supermarket Ombudsman be established.[45]

[the Australian Food and Grocery Council] considers 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.[46]

5.44      Choice submitted that a supermarket ombudsman would provide:

5.45      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 would 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 disputes.[48]

5.46      Associate Professor Zumbo elaborated on the need for such an office, noting that, due to their specific remits, this function was not being performed by the state fair trading offices, or by the ACCC:

Senator O’BRIEN—Do the state fair trading agencies work in this field at all—the small business and farming sector?

Prof. Zumbo—Generally not. In terms of the enforcement of competition and consumer laws and fair trading laws, it is basically the ACCC. If they do not look at the matter, and they generally do not get involved in individual disputes, unless there is some other code of conduct that applies, that case falls between the cracks.[49]

...While the ACCC should be concerned with identifying and prosecuting breaches of the Competition and Consumer Act, there will clearly be instances where the viability of industry participants is the central issue and resolution of that issue needs a business assessment by an independent party such as the proposed Commissioner rather than a legal assessment by the ACCC.[50]

UK Groceries Supply Code of Practice and Adjudicator

5.47      Developments in the United Kingdom may be particularly relevant in considering codes of conduct for suppliers or an ombudsman. In 2008 the UK Competition Commission published the report of its inquiry into the grocery sector. The inquiry 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 Groceries Supply Code of Practice (GSCOP) be introduced. After consultation, the GSCOP came into force in February 2010 and is intended to address concerns about relationships between retailers and their suppliers, such as supply disputes and unexpected retrospective payments.

5.48      The GSCOP will prohibit retrospective changes to terms and conditions, and limit the extent to which suppliers are required to pay for listings, promotions, inaccurate forecasts or customer complaints.[51]

5.49      The establishment of an Ombudsman to enforce the GSCOP has been called for some time. The National Farmers' Union argued that an Ombudsman is particularly needed to 'help scrutinise some of these damaging and unfair practices which threaten the long-term future of the dairy industry'[52]

5.50      It was announced by the UK Government in August 2010 that a Groceries Code Adjudicator will be established. Although the Adjudicator will be based within the UK Office of Fair Trading, the Government indicated that it will remain 'independent of and separate to the OFT’s Executive'.[53]

5.51      In response to a written question on notice on what steps the UK Government is taking in relation to the price for milk paid to dairy farmers, the establishment of a Groceries Code Adjudicator was recently cited as being a major part of the Government's action:

David Morris: To ask the Secretary of State for Environment, Food and Rural Affairs what steps she is taking in relation to the price for milk paid to dairy farmers.

Mr Paice: The Government are not involved in setting milk prices; these are the result of commercial decisions. However the market must work fairly and be transparent. I am working with the Dairy Supply Chain Forum to try to achieve this.

We are also establishing a Groceries Code Adjudicator (GCA) to monitor and enforce the Groceries Supply Code of Practice. The GCA will investigate complaints from anyone in the supply chain who is directly or indirectly affected by a breach of the Code and can deal with them anonymously. This means suppliers from both the UK and overseas will be able to complain confidentially for the first time about breaches of the Code. A Bill is currently being drafted.[54]

Interim concluding comments

5.52      While the committee is mindful of the many submissions outlining the potential impacts of lower supermarket milk prices on the dairy industry, it is equally cognisant of the benefits to consumers from sustained lower prices. As a general rule, lower prices are good for consumers. Provided farmers have the opportunity to make a reasonable profit and in the absence of substantiated damage to the dairy industry, the interests of consumers must not be overlooked.

5.53      The committee thanks the individuals and organisations who have participated in this inquiry up to this point. The committee is of the opinion that no final conclusions can be made or recommendations given until it knows:

(a)        the duration of the 'Down Down' campaign and if it becomes permanent; and

(b)        the outcome of renegotiated contracts with the processors and impact on farmgate prices.¬†

5.54      It will only be when the answers to these questions are known that the committee will be in a position to draw definitive conclusions about the impact of Coles' campaign and broader supermarket price decisions on the dairy industry. Therefore, the committee regards further submissions as critical to its decision making and invites updates or new submissions regarding these two matters to help inform its final report and recommendations, which will released on or before 1 October 2011.

Senator Alan Eggleston

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