Raw milk pricing and supply contracts
Raw milk pricing is determined by processors as negotiated within the
terms of supply contracts entered into with farmers. Each processor has
different supply contracts and the price farmers receive depends on a variety
of factors—such as, milk quality, volume supplied, timing of volume supplied,
and premiums associated with contract length.
Different supply agreements and contract arrangements are used by
processors to meet their needs for raw milk. As such, it can be challenging to
compare milk supply agreements and contracts. However, there appears to be a
number of common elements in these supply agreements and contracts that
contribute to a power imbalance heavily in favour of the processors. Even in
regions where there may be multiple processors, farmers can face difficulties
moving between processors due to limited processing capacity.
Industry stakeholders have put forward a range of options to improve
farm gate milk price stability and address the power imbalance between
processors and suppliers,
including more equitable sharing of risk. This includes strengthening provisions
for collective bargaining, and better understanding the implications of unfair
contract term laws for milk supply contracts. In addition, the industry has
developed and is commencing the implementation of a code of conduct for best
practice in contractual relationships.
How milk prices are set
Farm gate milk prices are based on the milkfat and protein components of
raw milk, with protein attracting a higher price. Processors in the Southern Milk
Region typically set prices based on each kilogram of milk solids ($ per kgMS)
in milk supplied, while processors in other regions set prices based on litres
of production (cents per litre). The quality and composition of milk can
vary depending on location, cow breed, age, nutrition and feed quality.
With approximately 34 per cent of milk production being exported as
butter, cheese or milk powder, Australian farm gate milk prices are heavily influenced
by global dairy commodity prices and exchange rate movements.
According to the Department of Agriculture and Water Resources, up to 75 per
cent of Australia's milk production is exposed to world prices for dairy commodities.
The impact of international dairy markets on farm gate prices was
outlined by Lindsay and Ann Jarvis:
Even states that see themselves as domestic marketers are
impacted by the greater proportion of imported dairy products being sold under
our free market policy.
Variations in milk prices are also influenced by the ownership
structures of the individual processor, the quality and volume of milk, and
other contract terms and conditions which may also specify when milk is to be
delivered during the year. Milk pricing also varies between processors due to
the product mix, marketing strategies, the utilisation and efficiencies in
factory processing capacity, and exchange rate hedging policies. Competition
for milk among processors may influence milk prices as can the distribution
policies of farmer owned co-operatives.
In relation to farm gate milk prices, Bega Cheese commented that price
variations between regions are often driven by three factors:
the market return derived from the milk;
the alternative source of milk or dairy ingredient; and
the sustainability of dairy farming within a particular region.
Hence, the value attributable to a litre of milk in one market
ultimately has the potential to affect the value of a litre of milk in another
market. Mr Brett Findlay argued that Murray Goulburn (MG) was the main price
setter of the farm gate milk price across eastern Australia:
Deregulation of the industry has removed barriers to milk
movement across state borders so processors, particularly in NSW and Qld, have
the option of buying milk wholesale from Victoria instead of buying from local
farmers in those regions. For these regions, MG is, by and large, the price
setter for farm gate milk price for the dairy industry throughout eastern
As noted, farm gate milk prices vary across Australia according to the
In the southern regions, a 'blended' price incorporates returns
from the milk used in manufactured dairy products. The pricing of milk in kgMS
terms reflects the compositional content of milk supplied and the importance
this has in the manufacturing processes.
In the northern and western regions, higher farm gate milk prices
are paid to ensure year-round supply where production is predominately focused
on the domestic milk drinking market.
Southern Milk Region
Farm gate milk pricing in the Southern Milk Region—Victoria, Tasmania, southern
NSW and South Australia—reflects the seasonal nature of production and the
higher exposure to international markets.
Most farmers supply milk via standard term contracts. For example, MG reports
that 76 per cent of its milk is supplied under Standard Milk Payment Terms and
these suppliers are free to leave MG at any time. Fixed term contracts are used
for remaining 24 per cent of MG milk suppliers.
Under standard term contracts, milk pricing is determined at the end of
the season but opening and expected final prices are set at the start of the
season. Opening prices are typically around 90 per cent of the expected final
price. However, a relatively high opening price has the potential to result in
a significant retrospective 'step-down'. Adjustments to milk pricing
occur across the season as greater certainty of the market returns is realised:
...farmgate milk prices can be increased or decreased. Price
increases are referred to in the industry as "step ups" and are
usually paid retrospectively for milk supplied from the beginning of the
season. Price decreases are referred to as "step downs" and generally
do not require suppliers to repay payments for milk already supplied; rather,
the milk price is reduced for milk supplied for the remaining months of the
season to achieve a season average.
Murray Goulburn outlined its strategy in setting the opening price:
MG typically announce a forecast full year final FMP [farm gate
milk price] and then pay 90-92 per cent of the forecast final FMP as the
opening price to support supplier cashflows. Traditionally this has been common
practice for other Australian processors operating in the Southern Milk Region.
The balance of the milk pool is paid to suppliers throughout the year as
backdated step-ups...The level of the opening price does come with risk when
there is increased volatility in either commodity markets or foreign exchange rates,
particularly given MG's exposure to export markets.
While competition for milk supply is robust, some farm gate milk prices
are dependent on the price paid by the 'leading supplier'—Murray Goulburn. For
example, Fonterra highlighted that it is required to pay farmers no less than
the price paid for that season by the leading Victorian processor by milk
Standard milk supply contracts generally have the ability for the
processor to vary the price paid for milk supplied. This price is then adjusted
over the season as market expectations change. The committee notes that while
the price reduction in 2015–16 was regrettable (see chapter 5), the
retrospective elements of milk contracts were legal:
The reduction in the opening price was done by MG in
compliance with terms and conditions of the milk contract.
That said, it should be noted that downward price adjustments are rare
and, according to MG, this has only happened three times in the last 65 years.
In all other years, MG has delivered a final price equal to or in excess of the
opening price for suppliers.
Although not as common as milk supply agreements, some processors have
sought to lock-in milk supply and give farmers greater price stability by
offering fixed term contracts. For example, Lion Dairy and Drinks has been
responsive to farmers looking to reduce price volatility:
Since 2013, Lion has offered its dairy farmers in the
southern region (Victoria, Tasmania and South Australia) a broad range of fixed
and variable farm gate pricing options for contracts of varying lengths (one,
three or five years) that help farmers to better manage market volatility.
Fonterra also notes that it 'gives farmers options to manage the risk of
step downs by "locking in" a fixed milk price or range':
Our Fixed Base Milk Price allows suppliers to lock in a
volume of milk at a set price, similar to locking in part of a home loan at a
fixed interest rate.
In the case of MG, approximately 40 per cent of its fixed term contracts
[approximately 6 per cent of total contracts] arose as a result of supplier
participation in MG's capital restructure 'Supplier Share Offer' (see chapter 5).
Suppliers were offered discounted MG shares if they signed supply agreements
with MG for between one and three years. The remainder of MG's fixed term
contracts are part of commercial business arrangements.
Other milk supply regions
In other milk supply regions—central and northern NSW, southern Queensland
and Western Australia—processors generally seek to smooth production across the
year to meet domestic fresh milk production. In these regions, processors make
greater use of contracts and price signals to encourage flat supply and avoid
surpluses, as there is limited capacity to process surpluses into storable dairy
Contracts often place constraints on the quantity and timing of milk supply,
and pay lower prices for milk supplied outside agreed parameters.
Farm gate milk prices in these regions are usually higher than in the
southern region, reflecting high costs associated with providing a more stable
supply and the higher costs of production more generally. Processors are often
willing to pay higher prices to balance the lower fresh milk transport costs of
MG noted that the different pricing structure in the NSW-Sydney
Milk Region reflects the use of milk produced in this region as daily
pasteurised milk and the associated need to have a consistent year round supply.
The Standard Milk Supply Payment Terms also apply to suppliers in the
NSW-Sydney Milk Region that are not on fixed contracts; however, suppliers in
this region are generally paid a higher rate than MG suppliers in the Southern
While contract terms and conditions for other processors were not
readily available, the committee understands that most terms and conditions are
fairy generic and pertinent to the supply of raw milk.
Not all processors have constraints on the volume of milk supplied. Norco,
a cooperative based in northern New South Wales, offers milk suppliers a range
of milk supply agreements of up to five years duration. In return for entering
into a milk supply agreement, Norco guarantees to pick up all the milk produced
on member farms. Norco has invested in manufacturing facilities that enable it
to process excess milk not needed for the drinking milk market into value-added
Reflecting on the declining volume of milk being produced outside the
Southern Milk Region, Mr Andrew Weinert commented that many of the
competitiveness issues currently faced by the dairy industry in Western
Australia and Queensland were the result of payment systems established before
deregulation. The quota payment system discouraged the production of milk in
excess of set volumes and, as a result, did not create incentives for
investment in manufacturing plant and infrastructure to produce storable dairy
products. Following deregulation, processors in these regions were not in a
position to compete with more efficient processors either domestically or
The Queensland Dairyfarmers' Organisation (QDO) considered that a lack
of equity in competition in the market had reduced opportunities for dairy
farmers in Queensland, particularly relative to other employment opportunities.
This has resulted in a lack of investment on the farm to keep it a viable and
Alternative fresh drinking milk suppliers
Some smaller drinking milk operations also explained how they set farm
gate prices. Many of these operations are owned by farmers who have taken the
initiative to set up their own small-scale milk processing facilities and
to sell their milk to independent retail outlets or as part of an integrated
supply chain. While taking on more risk, these small-scale processors have been
able to increase the farm gate milk price relative to what they might have
received from supplying a large processor.
Harris Farm Markets, a retailer based in New South Wales, explained how
they were able to influence the farm gate price for two of the products they
We only set the farm gate price for two products that we
sell—a small range of pure Jersey milks and an organic private label milk. We
pay the farmers at least 80c/L for these milks...This price was directly
negotiated with the farmers and we included in the negotiation the ability to
review the price once a year or if there was a very significant movement in the
cost of producing the product. Part of that discussion was ensuring we
established a price that allowed the farmers to produce, maintain quality and
invest in their farms for the long term...
Mr Greg Dennis, who started the 4RealMilk label in southern Queensland,
said that a farm gate milk price of 65c/L was paid to farms supplying this
brand. This was about 15 per cent a litre more than farmers in that region were
getting from large processors.
As discussed later in chapter 4, both Coles and Woolworths have entered
into arrangements that purport to support farmers either directly (in the case
of Woolworths) or indirectly (in the case of Coles). While these initiatives
provide higher farm gate prices or other assistance, there are only a
relatively small number of farmers who can access and benefit from direct
supply arrangements for drinking milk. Smaller operations have higher costs
structures and are competing in a very competitive market dominated by larger processors
and retailers with significantly more market power.
Fonterra noted in its submission to the ACCC inquiry into the dairy
industry that it was firmly of the view that 'competition is intensifying as
processors compete for a declining milk pool'. Demonstrating the impact of
price competition, Fonterra highlights its milk supply agreement with the
Bonlac Supply Company (BSC), where it is required to pay farmers no less than
the price paid for that season by the leading Victorian processor (by milk
volume), which for the term of the agreement has been Murray Goulburn.
That said, Fonterra announced in July 2017 that it is seeking to transition
away from the Bonlac Supply Agreement and move to a new agreement with better
farmer input and governance.
Issues with current contracting practices
Contracting practices in the dairy industry have been raised as an
ongoing issue in the many and various examinations of the industry undertaken
since deregulation. Farmers consistently highlight the power imbalance between
processors and suppliers as an important factor in the viability and
sustainability of the dairy industry in Australia.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) considered
there to be three broad issues of critical importance:
a lack of clarity and certainty around price within supplier
agreements and contracts, resulting in risks being borne by those least able to
manage the risks (especially retrospective changes);
a lack of price signalling that is visible and communicated
across the industry so that trends and opportunities are unclear and not understood;
contracting practices are poor with contracts not being openly
negotiated and lacking flexibility and transparency.
Numerous stakeholders expressed concerns about milk supply arrangements
and farm gate milk price setting. Farmer Power neatly summarised what it saw as
the problem with the current contracting system:
A contract is normally understood to be something that spells
out two way rights and responsibilities. Most of the milk supply contracts fail
to meet this test, as they give processors all the rights and farmers all the
Similarly, Dairy Connect noted that:
...the decision by retailers to sell milk at such a low
cost...may be considered a symptom of the current dairy crisis rather than a
cause. It is...the low cost of the farm-gate price that is paid to dairy farmers
that is of most concern and this relates to the current terms and conditions
contained in milk supply agreements between dairy producers and processors.
Australian Dairy Farmers emphasised transparency and fairness in
contracts as high priorities for farmers to restore confidence.
Similarly, DairyTas commented that 'there needs to be improvement in
contracting arrangements with dairy farmers to give them better certainty and
More generally, Mr John Cochrane considered that:
We definitely need to get the balance of power back to the
people that are producing. We produce a quality product. It must go every 24
hours, so there is a huge case to give the farmers the balance of power.
Indeed, the perishable nature of raw milk production means farmers
require terms and conditions in contracts that rebalance power between
themselves and processors.
Pricing clarity and certainty
For many farmers, improving pricing clarity and certainty within milk
supply contracts is central to levelling the power balance and facilitating
more risk sharing between processors and suppliers. The ASBFEO highlighted the
importance of better sharing risk across the supply chain through:
contracts setting out a clear price, pricing mechanism and/or
price notification processes (including appropriate notification and
transparency in retrospective price step‑downs); and
appropriate sharing of risk by those most able to manage the risk
(including through hedging by processors and/or improved contracting
Some farmers highlighted the difficulties of running a dairy farm with
variable pricing. Mr Rhys Palmer commented that:
Just looking at it from a farmer's point of view, the
fluctuation in pricing causes a lot of grief. It goes from low to high in one
year, and it is very difficult to run a business under those conditions. I just
wonder whether there is some way—and I know it is very difficult—that we can
have the price on a more level basis.
Similarly, Ms Penny Williams suggested that:
... the biggest thing that would help the dairy industry is if
we just knew that we were going to receive a price that could cover all the
costs year in and year out.
Some processors have sought to better balance the pricing risk with
farmers. For example, in 2013, Lion Dairy and Drinks (Lion) responded to farmer
concerns about managing volatility in the milk price in the Southern Milk
Region by offering fixed price contracts for three years to lock in a price for
50 per cent of milk production. This approach has provided some farm gate milk
price stability while still allowing farmers to benefit when prices are high,
but effectively providing a floor price when prices are low:
...by locking in only 50 per cent we can manage it together. If
it were 100 per cent, what would happen is we might lock in pricing, but then
if the market moves the farmers will all detest that our price is not
competitive enough. The flipside is that, if I locked in 100 per cent and then
all my competitors had an advantage, there would be a new managing director
appearing in front of you because it would have been such a bad decision. So at
50 per cent we can hold hands together and manage the risk.
Lion also relayed their experience in having a pricing approach that
differentiates between milk that is used for private label products and milk
that is processed for branded products:
In the past, Lion has experimented with a two-tier pricing
structure of this kind which reflected the return Lion could secure for its
product. This proved unpopular with farmers as returns on highly commoditised
products were very low. In practice, if this approach was applied to sales of
private label and branded milk, such an approach would only be beneficial to
farmers if the long term decline in branded milk market share is reversed...
Some stakeholders were concerned about the appropriateness and
application of retrospective price changes, both up and down, for milk supplied
throughout a season. As retrospective price reductions have been implemented
twice in the last decade, there would appear to be issues in the opening price
setting mechanism. Strong competition for milk in the Southern Milk Region has
seen opening prices set at levels that may not realistically account for lower
market prices across the year.
Bega Cheese highlighted the faith that many farmers place in processors
where the farm gate milk price can vary throughout the year:
...the dairy farmer would expect that the processor with their
knowledge of the market would deliver an opening price that was appropriately
conservative and has the potential to be improved upon or at least remain flat.
They would not expect that the price may be reduced.
Fonterra highlighted the importance of transparency for the milk pricing
system to work effectively:
For this milk pricing system to function successfully across
the industry and be sustainable, it is very important that processors provide
transparent and timely price forecasting so farmers can do their income and
Given the privileged position of processors in understanding their own
operating environment, there would appear to be an onus on processors to
communicate clearly and regularly with suppliers signalling prospective price
reductions as early as practicable. That said, setting more conservative
opening milk prices may also hopefully reduce the need for, and incidence of,
retrospective price step-downs.
Further, there is recognition within the dairy industry that better
price signals are required. Noting this, the government has set aside funding in
the 2017–18 budget to develop a dairy commodity index to assist in the
communication of trends and facilitate business decision making. The ASBFEO
advocated for this work to be extended to also assist farmers to understand and
apply that pricing information.
Consideration of the proposed commodity milk price index is undertaken in
The committee also heard evidence from farmers that retrospective price step‑ups
were not paid to farmers who had changed processors part way through the season.
Their argument was that the price for milk delivered by parties under the same
supply terms should be pro-rata, the same regardless of whether suppliers have
switched processors. Fair contracting principles should ensure that retrospective
price increases are paid to all farmers regardless of the whether they supplied
for the whole year or just part of it.
Contract terms and conditions
Contract terms and conditions were another issue that was raised regularly
by stakeholders. The ASBFEO emphasised the need for contracts to be redrafted
to ensure that they are clear, realistic and clearly understood. In addition,
the ASBFEO considered the following issues with current contracts should be
the ability for processors to unilaterally terminate milk
collections and processing;
loyalty payments operating in a way so as to unnecessarily lock‑in
farmers to a particular processor;
volume and exclusivity arrangements limiting farmer ability to
sell excess milk to other processors;
unreasonable notice of termination periods; and
lack of notice, transparency and negotiation of contract
Similarly, Dairy Connect considered that the anti-facilitative nature of
milk supply contracts remains a barrier to established market principles. Dairy
Connect cited exclusivity clauses as creating a heavily one-sided power bias in
favour of processors as well as uncertainty in milk prices and contract length
as issues that needed to be addressed.
Dairy Connect highlighted the predicament faced by many dairy farmers:
Basically a farmer is put in a position where the field
officer comes along and says, 'If you don't sign this agreement, you're not
going to have a home for your milk.' So the farmer is in a weak position. You
cannot really go out and say you are going to sell to somebody else.
The other side of it is that basically there has been a
reverse cartel situation working within the industry, where, once you have been
so-called signed up with one processor, basically you are not allowed to talk
to the other processors and negotiate a better price or a better deal whilst
that so-called agreement is in place.
Farmer Power were critical of the behaviour of some processors that
would appear to be taking advantage of their position:
In applying unfair contract provisions, processors have been
found to be threatening farmers who complain or otherwise cause problems.
Farmer Power has had reports from farmers about threats to reject milk on
falsified claims of contamination, failure to collect milk, reduce the price
paid, or even put into effect repossession of the farm.
Farmer Power also cited a range of restrictions on farmers in milk
supply contracts that they consider 'rob them of their collective bargaining
At present contracts contain anti-competitive components
which take money off farmers without justification. Farmers earnings eroded by
"loyalty provisions" (withheld payments), "penalty
provisions" (effectively fines for not being able to supply milk due to
circumstances beyond the farmer's control), "loan repayments"
(including capital and interest deduction from milk payments, even when no loan
has been agreed to, or under undisclosed conditions of loans) and
"privacy" requirements (preventing disclosure of what or how farmers are
Dairy Connect noted that there were concerns about milk testing:
...farm gate milk prices are based on compositional (fat and
protein content) and safety and quality parameters such as somatic cells and
microbiological tests. These tests are conducted or arranged by processors and
dairy farmers have expressed concern about the consistency and reliability of
these tests and how processors manage the milk payments based on test results.
Such tests should be conducted in a manner that ensures consistency, openness
WA Farmers argued for fairer termination periods to be embedded in
We believe unreasonable termination periods for dairy farmers
by one processor are unacceptable. We believe 3 months is a fairer termination
period for both dairy farmers and processors alike. WA dairy farmers don't have
the luxury of picking up another contract given the limited access to the
number of processors operating in WA.
Even when reasonable termination notice was given, a lack of competition
among processors in some regions created difficulties for farmers seeking to
find a home for their milk. Former dairy farmers from Western Australia told
the committee of how Brownes Foods effectively forced them from the industry by
not choosing to renew their supply contract, even when they were willing to
take a much lower farm gate milk price.
Similarly, the QDO raised concerns about the ability of dairy farmers to
switch between processors:
The issue with offsetting contracts is that they do not all
come at the same time. So, for some farmers, even when they might have a couple
of options, the options are not really there because if they come off contract
as of 30 June and the other processor is not coming on contract until 1
January there is a hiatus...In domestic marketplaces like Queensland, the options
for those farmers to...play the market simply do not exist.
In consultation with farmers, it was apparent that there was some
misunderstanding of the terms and conditions within contracts. For example,
many of the farmers that signed up to the MG Supplier Share Offer (SSO) did not
appear to realise that they were locking in their production to MG for a fixed
period. In regards to the SSO process, Mrs Sarah Parker noted that:
...at the time that that contract was delivered, by the time
you did your farm rolls and tried to find legal support or legal advice, the
time was so short that to find a particular lawyer who understands milk
contracts, for example, as a specialist field almost, you do not have a lot of
time to do that.
Mr Ben Govett commented that he thought 'farmers definitely need better
advocacy at a legal level to work through these contracts and know exactly
where they stand'.
This position was supported by Mrs Parker:
When a farmer is offered a contract, he needs to be
told—because not everybody has the time or the energy or is thinking—'You need
to get legal advice about this.' There is nothing wrong with saying that to
somebody before they sign something.
There appear to be limited services provided by dairy farmer advocates
to assist farmers understand milk supply contracts and their legal and
financial ramifications. Mr Ben Govett commented that:
Immediately after this happened I was involved in a meeting
with our advocacy bodies. One of the things we asked for was for someone with
legal knowledge to go through the contracts and see about the legalities, and
go through the claw-back scheme and loans for the claw-back. We were told that
would happen...but talking to Murray Goulburn suppliers and other Murray Goulburn
suppliers who were not at that little meeting, they seem to have no further
information after being told by the advocacy bodies that they would get a legal
team to look at it. It may have happened, but I am unaware of any major
developments. Obviously, these guys have not heard anything about this.
Improving transparency by removing secrecy provisions in contracts was
also raised as an issue:
...there is no doubt that in our industry contracts have been
signed under confidentiality agreements, even within companies. That has caused
a fair bit of a rift between people coming forward, even to the ACCC, to hand
over their information, because they have supplied a company, then they have
moved and their neighbour has supplied that company for 20 years but they have
signed up to a better deal...To get rid of the secrecy in the pricing structures
would be really good.
A number of the issues relating to contract terms and conditions have
been addressed in the code of conduct for contractual relationships (see
below). However, other issues, such as improving supplier understanding of
contractual terms, may be appropriately addressed by farmer representative
bodies and/or the ASBFEO.
Opportunities for collective
Some stakeholders advocated for improvements to the ability of dairy
farmers to form collective bargaining groups, and for these groups to engage
with processors to determine supply contracts.
In the dairy industry, collective bargaining is when two or more dairy
farmers collectively negotiate terms and conditions of supply with milk buyers.
However, collective bargaining risks breaching the Competition and Consumer
Act 2010 (CCA Act). That said, collective bargaining has the potential to
encourage vigorous competition because it can address power imbalances between
farmers and processors. While ACCC approval provides protection from legal
action under CCA Act, approval is not automatic, and the ACCC assesses each
application to decide if the public benefits outweigh the detriment to the
Australian Dairy Farmers explained that there have been circumstances
where collective bargaining has brought beneficial results:
South Australia had always had manufacturing milk somewhere
about 10 to 15 per cent below the Victorian price. That particular collective
bargaining group went and talked to a Victorian company and said: 'Please come
and pick us up. We've got about 65 million litres.' That happened, and they got
paid the Victorian manufacturing milk price. Within a week, for every dairy
farmer in South Australia the manufacturing milk price was the Victorian milk
price, and it has basically stayed the same since. So sometimes they can be so
successful that they are not needed any longer.
That said, some farmers saw potential with the collective bargaining
model. Mrs Parker commented that:
The one thing that is positive about collective bargaining is
that you have a milk volume that is greater than in individual bargaining. What
it does is that it places some of the power—not a lot—in the farmers' hands,
because they have a greater pool of milk to negotiate with, which means that
potentially, for a milk company, they are negotiating with one representative
rather than maybe 10 or 15 individual groups.
However, Dairy Connect explained the problems with current collective
The processors do not have to engage with a collective
bargaining group if they do not wish to. Whilst we, as farmers, can go through
the whole process of joining a collective bargaining group and go through all
the hoops, at the end of the day you can quite often get a letter back saying
that they do not recognise your collective bargaining group...We have seen in New
South Wales that it has been very hard for collective bargaining groups to
continue long term.
Indeed, Australian Dairy Farmers noted that it may be difficult to
strengthen the collective bargaining process:
We cannot force a company to negotiate with a collective
bargaining group. That would be in breach of our authorisation. It is a right
of a company to decide who it wants to negotiate with. The provisions that are
there now are quite strong, but it is a challenge at times to get people to
The United Dairyfarmers' of Victoria (UDV) reflected on why collective
bargaining was not prevalent in Victoria:
It has not had a place in the Victorian milk industry to this
point. I think perhaps the reason for that is the farm gate competition for
milk. I think Barry Irvin talked about seven or eight different people hunting
for milk in northern Victoria at the moment—the sense that a farmer can provide
their milk to a number of different companies has given them the sense that
they have a certain control in the process that perhaps the northern or western
dairy farmers do not have, which is why they are looking for collective
Australian Dairy Farmers also saw that the costs of arbitration for
smaller collective bargaining groups were an issue.
For example, the Premium Milk Collective Bargaining Group (PMCBG), representing
193 farmers in the south-east region of Queensland and northern New South
Wales, noted that their collective bargaining agreement with Parmalat had
broken down after 17 years of operation. The PMCBG contended that there had
been a fundamental shift in attitude by Parmalat to using the collective
bargaining process to reach a sustainable and predictable outcome for farmers.
Of most concern to the PMCBG was the proposed removal of minimum price
guarantees and associated uncertainty in farm gate milk prices over the term of
the contract. This dispute has been taken to arbitration and is anticipated to
cost the PMCBG an estimated $40 000 in external costs.
Code of best practice in
A code of best practice for contractual relationships has been mooted
several times over the last decade. Following the industry upheaval of May
2016, Australian Dairy Farmers released a discussion paper outlining a set of
principles which industry could consider in working together to develop a Code
of Best Practice on Contractual Relationships. These principles were discussed
by farmers and processors in October 2016, and a small working party was formed
to further progress the issues raised with a view to developing a draft code of
conduct for further consideration by the wider group.
The Department of Agriculture and Water Resources noted that as a result
of the meeting between farmers and processors:
...milk processors have agreed to the development of a code of
conduct with dairy farmers to ensure more transparent and less ambiguous
The fundamental principles that the code addresses include:
pricing adjustments to farmers who are out of contract being
clearly defined in the contract and how this might happen;
how price changes should be made;
no price changes should be made retrospectively;
all farmers should receive payment at the time it is accrued over
the contract—that is, loyalty payments should not apply to milk previously
the pricing formula and the price setting mechanism are clearly
defined with the contract;
exclusivity clauses should not apply if the processor is not
prepared to pay the same price for the last litre of milk as the first litre;
clearly defined mechanisms for how contract terms and conditions
can be modified.
Australian Dairy Farmers noted that they had attempted to put in the draft
code that step‑downs should not occur, but this was resisted by
processors which cited directors' fiduciary responsibilities in times of
Arguably, more conservative opening prices and more equitable risk sharing
arrangements could alleviate the need for retrospective price step-downs, and
give more price stability and certainty for farmers.
Australian Dairy Farmers explained their approach to developing industry
buy‑in for the code:
Our objective is to have everybody signed up here and if we
have everybody signed up we have a capacity to manage it into the future,
collectively again. A mandatory code sits within the ACCC and then the industry
tends to be not the keeper of it; the ACCC is the keeper of it. That in itself
can be a challenge in this space. So I reiterate that, if we have everybody on
board, we are in a good space.
In relation to a code of best practice, the ASBFEO noted that:
Our overall position is that industry issues are best
addressed, wherever possible, by the participants in the industry. This
approach should ensure a solution that is fit‑for‑purpose, is
"owned" by the industry, and is focused on developing and growing the
industry to remain competitive in international markets.
Support for the introduction of a code was widespread but not universal,
and there was considerable debate about whether the code should be voluntary or
Parmalat Australia agreed that a code of conduct between processors and
farmers would be beneficial:
Competition remains an important mechanism to drive
innovation and reward success. However, farmers locked into long term
agreements with a processor with little or no price commitment or certainty is
not enabling competition. A code of conduct for farmer/processor contracts or
at the very least an industry agreed standard contract template, is overdue and
would go a long way to restoring farmers confidence that they are being treated
Parmalat Australia also considered that:
Common and widely adopted and agreed industry standards for
farmer supply agreements that reflect a genuinely fair and appropriate sharing
of market risk would re-build confidence and trust between producers and
The UDV supported the development of a voluntary code and considered
that the development of a Code of Best Practice on Contractual Relationships is
key to the way forward for the industry.
Similarly, Dairy Connect hoped that:
...a voluntary code would provide the mechanism for price and
volume certainty; that it would provide a way for collective bargaining to
operate; and that it would ensure that a way could be provided for the farmgate
price to be at a level that would allow them to pay their bills and be above
the cost of production.
Dairy Connect noted that the UK introduced a voluntary Dairy Industry
Code of Best Practice on Contractual Relationships in 2012, and supported
the introduction of a similar code in Australia as an invaluable tool for
setting out protocols and ethical practices for all parties along the supply
chain, particularly in challenges market conditions:
...the Code acknowledges that a downturn in milk prices is
almost always due to volatility in global markets, so in response there should
be greater local promotion of dairy produce as well as better facilitated
Dairy Connect elaborated on this at the Brisbane hearing saying that
...been advocating for quite some time the Dairy UK model in
terms of a voluntary code. We have indicated previously that we believe that
code provides price and volume certainty—something that farmers throughout
Australia require. It also has provisions in relation to collective bargaining
that provide a mechanism by which they can come together and provide an output
that can give a good outcome.
However, Mr John Cochrane was wary of the effectiveness of a voluntary
I am not so sure people voluntarily want to give up money, so
we need to look at the terms. I think at this stage I support a mandatory one.
Many stakeholders supported the introduction of a mandatory code of
conduct. The QDO citied the UK experience where a voluntary code was replaced
with a mandatory one:
Having a mandatory code of conduct I think is really
important, and in Britain we have seen that they had a voluntary code of
conduct for some time and then had to go into a mandatory form of a code of
conduct because it simply didn't work—the voluntary one was not sufficient.
Farmer Power was critical of the slow progress in developing a code of
conduct in Australia given that idea was first raised in 2011.
They supported the introduction of a mandatory code of conduct:
A longer term solution [to the dairy crisis] would be to
introduce a mandatory code of conduct that requires fair treatment of dairy
farmers by processors. This would include introduction of fair two-way
contracts, establishing transparency in pricing of milk, benchmarking price to
agreed market indicators, and providing for affordable and fast dispute
At the hearing on 2 February 2017, Mr John McQueen relayed how stakeholder
engagement to develop the code had changed with the legislating of unfair
So in about a four-month period, there has been an enormous
amount of goodwill developed here to progress that—for something that people
did not think was necessary; particularly the processors did not think it was
necessary. But once it became clear to them that, from 12 November last year,
the new unfair contracts legislation was going to apply, and they became aware
that it would apply to them—because they did not think it would apply to
them—as soon as they realised that, it really was a serious discussion.
The implications of the introduction of unfair contract
legislation are considered in chapter 6.
The committee notes that a Code of Practice for Contractual
Arrangements between Dairy Farmers and Processors in Australia was released
on 30 June 2017. The voluntary code reflects an agreed positon between
Australian Dairy Farmers Limited, the Australian Dairy Products Federation and
the dairy processors that are signatories (which include the five largest dairy
processors). The code is designed to set out the recommended minimum good
practice standards in terms of milk supply contracts. A copy of the code is
available at Appendix 3.
Avenues to resolve disputes
In addition to improving terms and conditions and providing more pricing
clarity and certainty, there appear to be limited low cost avenues to resolve
disputes around milk supply without resorting to legal engagement. Even in
collective bargaining disputes, the costs of going through arbitration seem
high for groups that operate with limited budgets.
The introduction of the code of conduct for contractual relationships, together
with the oversight provided by unfair contract term legislation, may provide
the necessary incentives for processors to include clauses for dispute
resolution into milk supply contracts and agreements. The ASBFEO supported the
introduction of clear dispute resolution clauses into all supply agreements to
facilitate dealing with issues in an efficient, timely and low-cost manner.
That said, Dairy Connect saw value in having an ombudsman to assist both
with contract negotiations and in resolving disputes once contracts had been
At the moment as individual farmers you have no opportunity,
other than to go through a fairly lengthy legal battle with processors, to get
changes in those agreements, and also to have those agreements ratified, that they
are legally correct. Secondly, if there were disputes on those agreements or
contracts, farmers would have a body they could go to without having to go into
extreme legal costs and a legal battle.
Following the release of the code of best practice for contractual
relationships, the ASBEFO, Ms Kate Carnell, indicated that she will monitor its
effectiveness over the next 12 months to make sure it is working as intended.
The committee notes that its 2010 report into competition and pricing in
the dairy industry revealed that processors have all the market power in the
short term (as it is not possible to 'turn off the cows') and the majority of
the market power in the medium term (due to limited competition within
Without some type of radical intervention, it is unlikely that this power
imbalance will be altered. Indeed, there has been limited progress towards any
type of reform of contracting practices within the industry as a whole, and
only with the retrospective price cuts of May 2016 was a draft code of conduct
progressed and formal discussions commenced with urgency.
The committee welcomes the release of the industry‑led, voluntary
code of conduct. However, as the code is in its early stages of implementation,
it is not yet apparent the extent to which it will change contracting practices
within the industry. The committee remains concerned that a voluntary code may
not be sufficient to bring about widespread change in milk supply arrangements
and contracting practices.
The committee is disappointed that the code still gives producers the
opportunity to impose retrospective price reductions on suppliers. It considers
that processors should bear the risk for setting relatively high opening prices
and this should be reflected in the code.
The committee believes that farmer advocacy bodies have an important
role in assisting dairy farmers to understand milk supply contracts and their
associated legal and financial obligations. To this end, the committee
encourages these organisations to consider how they can meet the needs of their
members by offering such services.
The committee considers that collective bargaining in the dairy industry
can play a role, in conjunction with other measures, to strengthen the power of
farmers in negotiating milk prices and terms with processors. There would
appear to be opportunities to improve collective bargaining provisions,
particularly around the engagement of processors with collective bargaining
groups, in the development of the code of conduct in contractual relationships.
While the committee notes that the code encourages processors to
negotiate with recognised farmer collective bargaining groups, it is
disappointed that the code does not include provisions to strengthen collective
bargaining arrangements which have the potential to address the power imbalance
between farmers and processors.
The committee considers that ombudsman services have the potential to be
more active in supporting farmers to resolve disputes regarding milk supply
contracts and welcomes the ASBFEO's interest in the dairy industry.
While provisions have been made for the voluntary code to be reviewed
after the first year and then regularly every three years, the committee
believes that this review should be conducted by an independent party that can
objectively assess whether the code is working as intended and consider if a
mandatory code would be more appropriate.
The committee recommends that the Australian Competition and
Consumer Commission (ACCC), as part of its inquiry into the Australian dairy
industry, evaluate the extent to which the code of conduct will reduce power
imbalances between farmers and processors, and recommend improvements to the
code may better achieve this outcome. Any outcomes from the ACCC inquiry should
be incorporated in the proposed review of the code after its first year of
The committee recommends that the ACCC consider how collective
bargaining in the dairy industry could be strengthened to enable these
provisions to be more widely used and assist in addressing the power imbalance.
The committee recommends that any review of the code of conduct
for contractual relationships should be undertaken by an independent party that
can objectively assess whether the code is working as intended and consider if
a mandatory code would be more appropriate.
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