The above letter was read during one of the public hearings of the
Inquiry and is just one of countless examples of how dairy farmers are affected
by the milk price war which was initiated by Coles on Australia Day 2011.
The Committee received dozens of submissions from dairy farmers around
the country, all outlining similar challenges as those faced by Nikki Slee and
While shoppers may be enjoying lower prices at the checkout now, the
benefits of the milk price war will inevitably be short lived and could well
result, not only in higher prices and less choice for consumers in the longer
term, but also significant and irrevocable damage to Australia's dairy
Many of these concerns were highlighted over a year ago during the
2009/10 Senate Economics Committee Inquiry into competition and pricing in the
Australian dairy industry.
That inquiry was initiated following concerns by dairy farmers that
larger players within the processing and retail sectors were taking advantage
of their market power to 'milk them for all they were worth', and those
concerns have been further confirmed by the current price discounting behaviour
of the two major supermarkets.
Twelve months after the 'Milking it for all it’s worth — competition and
pricing in the Australian dairy industry' Report was handed down, and the
Government has still failed to act on any of the 16 recommendations,
which included that:
- the Productivity Commission reviews and evaluates the
effectiveness of the national competition policy and publish its report by 30
the Government request the Australian Competition and Consumer
Commission to use its information-gathering powers, and draw on its work for
its recent report on grocery pricing, to provide more accurate estimates of the
proportions of the retail price of milk that reflect (i) the costs and (ii) the
profits, of farmers, processors and retailers and publish the results of that
review by 30 September 2010;
contracts with farmers should offer a clear, consistent formula
for milk pricing with unambiguous conditions;
the Government reviews the collective bargaining provisions of
the Trade Practices Act with a view to strengthening that framework to create a
more equitable balance of power between the negotiating parties and report by
30 April 2011;
the Government requests the ACCC to undertake monitoring of the
pricing practices within the dairy chain with a view to establishing whether
predatory pricing or misuse of market power is occurring;
the Trade Practices Act be amended to reinstate specific
anti-price discrimination provisions and inhibit firms achieving market power
through takeovers or abusing market power and that 'market power' be expressly
defined so that it is less than market dominance and does not require a firm to
have unfettered power to set prices. A specific market share, such as, for
example, one third (set based on international practice), could be presumed to
confer market power unless there is strong evidence to the contrary; and,
the ACCC conducts further study into the implications of
increasing shares of the grocery market being taken by the generic products of
the major supermarket chains ... [and report] by 30 April 2011.
Had these recommendations been adopted, the current difficulties being
felt by the dairy industry could have been ameliorated.
The current milk price war has further impacted the challenges already
being faced by dairy farmers and processors, and it is highly likely that, if
it is allowed to continue, Australia's dairy industry will be substantially
Australia's dairy industry shrunk both in the number of farmers (from
22,000 in 1980 to just 7,500 in mid-2010), and in volume of milk production
(from almost 11 million litres to just over 9 million litres) as a result of
deregulation of the industry in 1999, and there are serious concerns that the
milk price wars will have an even deeper impact.
ACCC's role (or lack thereof)
The ACCC has a key role in ensuring fair competition and outcomes for
consumers and the enforcement of the Competition and Consumer Act 2010.
However, the ACCC's evidence to this Inquiry to date has been less than
The ACCC seems to have taken a 'wait and see' approach to the milk price
war and its immediate and potential long term impacts and consumers. This is
entirely unsatisfactory given the statutory powers and enforcement mechanisms
available to it.
The ACCC told the Committee that it will, in effect, wait for the
impacts of the heavy price discounting to be fully realised, not just indicated
to as they already are, before taking any action.
Mr Cassidy—According to the wording in the act, we have to
have a reason to believe not necessarily that there has been a breach but a reason
to believe that there may have been a breach of the law or predation. We cannot
just do it off the top of our hats; we do need to have some basis to form our
suspicion. We have been challenged on this in court on occasions over a period
of time. It is a fairly large threshold but we do need to have something.
Mr Cassidy also told the Committee that:
Our frame of reference, if you like, is to enforce the law.
We need to have conduct which, at least on the face of it, may constitute a
breach of the act. We cannot look at a situation, and this goes a bit perhaps
to some of Senator Heffernan’s questions earlier, and say, ‘We do not like
that, so we’re going to do something about it.’ It has to be in the context of
a potential breach of the law.
However this is the ACCC's interpretation of the Act. It is of
significant concern that the ACCC does not consider it is within its scope to
foresee negative competition impacts and intervene, even despite concurring
comments and evidence by outgoing Woolworths' Chief
Executive, Michael Luscombe, processors, farmers and consumer experts.
Mr Luscombe, for example, has repeatedly commented that the price
reductions on milk are unsustainable and warned that they will negatively
impact the dairy industry.
We've said it's unsustainable for a lot of the dairy farming
community, and clearly they've had a reduction in their income, and if that is
sustained their businesses will be under threat.
What we've seen since [the price reductions], are reports -
especially from south-east Queensland - that dairy farmers are seeing a
reduction in income."
Also, the two major processors have indicated they might not
go ahead with much needed reinvestment in processing facilities.
Further, Parmalat Australia Ltd, which supplies milk via the brands,
Pauls, Oak, Vaalia and Ice Break, advised the Committee in its submission that:
... the heavy price discounting is:
* placing enormous pressure on processor margins through loss
of branded sales,
* has negatively impacted smaller retailers by channel shift
to the already [dominant] major grocers,
* has the potential to destroy the Queensland and Northern
NSW dairy industries, and
* will put at risk future investment plans of both processor
Given such evidence, it is also concerning that the Treasurer, the Hon
Wayne Swan MP, has championed the current heavy price discounting by the major
"No doubt some of this vigorous competition, when it
comes particularly to items like milk, is welcomed by millions of
The Treasurer did acknowledge that:
...we do need just to keep an eye on what this may mean at the
farm gate - if in fact the behaviour is predatory or collusive.
It would appear that Mr Swan is taking the same approach as the ACCC,
which is to wait until the damage has been done before action is taken, rather
than intervene and protect the dairy industry from the inevitable damage such
heavy price discounting will cause and which has already begun.
In evidence given to the Committee, the incomes of farmers are already
being affected. Parmalat contracts contain different pricing terms to farmers
depending on whether the milk sold is for branded or non-branded (ie. Coles or
Woolworths generic brand). This reduction in revenue is already impacting dairy
farmers' investment decisions, with some looking to exit the industry.
Down, Down but not Staying Down
During the Inquiry, Coles admitted to the Committee that despite
marketing the price reduction as 'Down, Down and Staying Down', they envisage
the campaign to be as short as six months in duration.
Coles also acknowledged in its submission that it was aware that:
...if Coles did not honour its price representations made in
respect of milk as part of our "Down Down" campaign, it may give rise
to misleading and deceptive conduct under provisions in the Australian Consumer
Law intended to ensure representations are fully honoured.
However, the ACCC again advised that it cannot investigate any
misleading or deceptive conduct around this claim until the conduct has occurred.
This sort of reactive approach is a fundamental flaw in the role, the
operations and the attitude of the ACCC.
When looking at an issue of possible predatory pricing, if
the alleged perpetrator of predatory pricing says, ‘I am going to keep pricing the
way I am forever more’—or at least for a lengthy period of time—then
clearly the timing issue is something we would take into consideration.
There is no question that the enormous market power of Coles and
Woolworths, with close to 80 percent of the grocery market, has allowed the
heavy price discounting to occur at significant disadvantage to smaller
retailers and, in particular, farmers and processors.
Section 46 (1AA) of the Competition and Consumer Act 2010, also
known as the Birdsville Amendment, deals with misuse of market power. It states
that a corporation that has a substantial share of a market must not supply,
or offer to supply, goods or services for a sustained period at a price that is
less than the relevant cost to the corporation of supplying such goods or
services, for the purpose of eliminating or substantially damaging a
The question of what constitutes a 'sustained period' was raised by the
Senator COLBECK—Can we go back to the time thing. How do you
determine it? You said that you look at it on an industry basis. What would you
pick up that might allow you to determine this? I will put something specific
on the record. I have already said that the background that I am getting is
that this will go for about six months and then prices will return to normal,
and that will be within a time frame that will not offend what is understood in
the act. But we have evidence from one of the processors that this sort of
activity considerably changed the market in the UK within three months. Would
that be something that would direct your attention to what sort of time frame
might impact on this sort of circumstance?
Mr Cassidy—We would look at the normal pricing behaviour
within the relevant market. I would not accept the proposition that has been
put to you that six months is necessarily not long enough, which is what I
think you are saying. I do not know how someone would make that judgment.
Certainly, we have not arrived at that sort of position. But as I say, it is something
that you look at in the context of the particular market and the pricing
practices in that market."
Associate Professor Frank Zumbo told the Committee during the inquiry
Prof. Zumbo—I have to say that some of the advertising that
has been undertaken by Coles and also Woolworths raises some very serious
issues under our laws against misleading conduct. If you say ‘staying down’ you
give the impression to the average consumer that prices are staying down for a
very long time.
Senator XENOPHON—Which is?
Prof. Zumbo—To me, it is indefinite—at the very least,
staying down for the foreseeable future. It depends on the impression that is
being created or that is likely to be created in consumers’ minds. But, to my
mind, the impression that is being created is for a very long time, which is
certainly way beyond this year and possibly next year. You are talking about
years here; you are not talking about months. In that sense, they have backed
themselves into a corner in that whenever the price goes below cost price there
may be issues under the Birdsville amendment.
During Senate Additional Estimates in February 2011, ACCC Chairman,
Graeme Samuel told the Committee:
Mr Samuel—...that is why I have indicated that they use the
words that, if the prices stay down for a reasonably long period of time, one
of the tests of the Birdsville amendment—that is, sustained period—may well be
satisfied. But there are several other tests that need to be satisfied,
including substantial share of the market, sale below relevant cost and having
a predatory purpose.
Senator XENOPHON—But, if Coles were to say, ‘Look, we say
that this is going to be for at least the next six months’, wouldn’t that be
evidence of potential predatory pricing if you can show that the milk was being
sold below cost?
Mr Samuel—It would certainly be an indication of an intention
to sell a particular price for a sustained period. Then we would have to take
into account the other tests relating to predatory pricing which I have just outlined—substantial
market share, selling below relevant cost and having the predatory purpose in
the three paragraphs, (a), (b) and (c), of section 46(1AA).
This provision has never been tested by the ACCC and the ACCC should
pursue this matter as a test case to see how the courts will rule on this key
predatory pricing provision.
The market power of Coles and Woolworths must be addressed. Divestiture
powers should be considered to reduce their dominance of the food and grocery
market which has allowed this heavy price discounting to occur at the detriment
of Australia's dairy industry and in the longer term interest of consumers.
Divestiture powers dealing with market power already exists in the
United States, where businesses have to 'break up' their companies once they become
so large they begin to be anti-competitive. There is also ability for an
industry to be restructured under the United Kingdom's competition laws.
Further to this, creeping acquisitions provisions to prevent Coles and
Woolworths from gaining any further market share must be strengthened. The
Government’s proposed amendment to section 50 of the Trade Practices Act (now
the Competition and Consumer Act) in 2010 was inadequate and did not go far
enough to prevent unfair competition in terms of market dominance. This
proposed amendment lapsed at the proroguing of the 42nd Parliament
and the Government has not reintroduced it.
Also, the Australian Consumer Law framework should be extended to
include small businesses to ensure that business-to-business contracts between
farmers and small businesses do not contain unfair contract terms.
The inaction of the ACCC, given the evidence the Committee has heard, is
extraordinary. It did advise the Committee that it is monitoring the issue in
Mr Cassidy—I have to say to you in the context of this
discussion that we are not sitting on our hands. We are engaged with the
parties involved in this. I do not want to go into the details of exactly what
we are doing or what we have done, but I have to say to you at this point that
we have no evidence that Coles is selling below cost. If someone has got that
Senator HEFFERNAN—I do not know—
Mr Cassidy—I am sorry. Just let me finish. If someone has got
that evidence—because there are some fairly wild claims being made—then we
would certainly like to have it. But on the basis of what we have got, we have
The ACCC needs to be more transparent about the information it has
collected, its views to date and potential breaches and what action it is taking
on the issue of heavy price discounting of milk.
It is unclear whether the ACCC has used its investigative powers to
obtain documents pursuant to section 155 of the Competition and
Consumer Act 2010, which provides that the ACCC may compel documents or
evidence relating to a matter that constitutes, or may constitute, a contravention
of the Act.
Given, as referred to by Senator Colbeck during the inquiry, that
"this sort of activity considerably changed the market in the UK within
it is a matter of urgency that the ACCC act on this issue and prevent any
further devastation to the local dairy industry.
Further, given the disparity of the bargaining powers between dairy
farmers and processors on the one hand, and the major supermarket chains on the
other, as well as the market domination of Coles and Woolworths and the
apparent lack of enforcement of current competition laws, a floor price should
be implemented for domestic drinking milk supply as an urgent interim measure.
If these issues are not addressed, Nikki Slee's comments that there will
be no dairy farmers left in her home state could well prove to be the case in
other parts of the country.
Independent Senator for South Australia
Liberal Senator for New South Wales
Nationals Senator for New South Wales
Australian Greens Senator for Tasmania
Navigation: Previous Page | Contents | Next Page