Referral of the inquiry
On 5 December 2019, the Senate referred the Saving Australian Dairy Bill 2019 (the bill) to the Senate Economics Legislation Committee (the committee) for inquiry and report by 20 March 2020.
The bill was introduced in the Senate as a private senator’s bill by Senator Hanson on 2 December 2019.
Purpose of the bill
The bill seeks to promote the long-term sustainability of the dairy industry by amending the Competition and Consumer Act 2010 (Competition Act) to empower the Australian Competition and Consumer Commission (the ACCC) to determine a base price for milk. The bill requires the relevant Minister (the minister) to:
refer to the Productivity Commission for inquiry the effectiveness of determining a base price for milk and of a divestiture regime for the dairy industry; and
to make regulations to prescribe a mandatory industry code for the food and grocery industry.
The structure of the Australian dairy industry since its deregulation in 1999–2000 has given rise to circumstances that have affected the viability of dairy farms. In 2018–19 milk production dropped to less than 9 billion litres—the smallest volume since 1996—while the number of dairy farms dropped by nine per cent to 5213, forty per cent of the number operating in 2000.
A significant factor in the profitability of dairy farms is the price of raw milk that farmers can obtain from processors. According to Dairy Australia, ‘volatility in farmgate milk prices and farm incomes have impacted farmer confidence and the industry’s ability to grow’ and at ‘times of low farmgate milk prices, farmers choose to leave the industry’.
Farmgate milk prices are based on the milkfat and protein content of milk. Prices are determined by processors and incorporated into contracts entered into with farmers and can vary significantly around Australia.
Inquiries into the dairy industry have pointed to an imbalance in bargaining power between farmers and processors negotiating milk supply contracts. This power imbalance has allowed processors to use their market power to control the supply chain by transferring commercial risks onto farmers.
Features of the industry contributing to these circumstances include:
market dominance by a small number of large milk processors and supermarkets;
the perishability of milk which restricts the ability of farmers to hold stock or supply to more distant processors offering higher prices;
the lack of access by farmers to pricing, market and product information; and
contract terms that constrain the ability of farmers to switch processors.
Several crises have highlighted market pressures within the dairy industry. In early 2011, Coles and its competitors commenced heavy discounting of milk and dairy products, including retailing one dollar per litre milk, reducing the profit margins of processors. In April 2016, two major processors, Murray Goulburn Cooperative and Fonterra Australia, cut farmgate milk prices in southern regions by 10 per cent, backdated to July 2015. This adversely affected farmers who had expected 2015–16 prices to be similar to the higher milk prices of previous years.
The Economics References Committee inquiry Australia’s dairy industry: rebuilding trust and a fair market for farmers (market fairness inquiry) in August 2017 noted that to many stakeholders in the industry, ‘addressing the imbalance of power between retailers, processors and farms is of central importance to ensuring the sustainability and viability of the dairy industry in Australia’.
In a concurrent inquiry, the ACCC observed that information and bargaining power asymmetry promote market failure and inefficiency in the dairy farming sector:
These features result in contracting and industry practices that are weighted in favour of processors and which make it difficult for farmers to make efficient investment decisions. Efficient investments are likely to be deterred if farmers do not have the certainty that they will be able to capture a sufficient share of the returns to make their investment profitable.
ACCC inquiry scope and findings
In August 2016, the government announced it would direct an inquiry into the national dairy industry by the ACCC (the ACCC inquiry).
In April 2018, the ACCC published its final report, Dairy inquiry, into the competitiveness of prices, trading practices, supply chain, bargaining power and proposals for a mandatory code of conduct for the dairy industry.
The majority of the recommendations of the ACCC inquiry related to improvements to contracting practices and access by farmers to legal and financial advice.
The ACCC inquiry recommended that processors be required to publish information on contract pricing terms, allowing farmers to compare estimated milk prices that would broadly apply to the circumstances of their farm in given market conditions.
The ACCC inquiry also recommended that a mandatory code of conduct within the Competition Act be established for the dairy industry. Such a code:
… should therefore be designed to improve transparency and certainty in contracts, set minimum standards of conduct and provide for dispute resolution processes. In particular, a mandatory code should contain obligations on processors to improve the timing and manner of processors’ communication of price and other key information, and increase farmers’ ability to switch in response to significant changes to their trading terms.
The ACCC also considered that ‘a mandatory code of conduct can be designed in a manner that improves the efficiency of the industry without substantial regulatory burden on processors’.
Dairy industry codes of conduct
There are two regulatory codes of conduct prescribed under the Competition Act that govern dairy industry participants. These are the Competition and Consumer (Industry Codes—Food and Grocery) Regulation 2015 (Grocery Code) and the Competition and Consumer (Industry Codes—Dairy) Regulations 2019 (Dairy Code).
The relationship between supermarkets and processors is governed by the Grocery Code:
The Food and Grocery Code of Conduct is a prescribed voluntary code regulated by the ACCC under the act, meaning that it is binding on, and enforceable against, industry participants who become (and remain) signatories … Conduct governed by the code includes grocery supply agreements, payments, termination, dispute resolution and a range of other matters.
The Grocery Code was created in ‘recognition of the significant imbalance in bargaining power between supermarkets and their suppliers, including processors’. It applies to a wide range of defined products in the grocery supply chain, of which dairy products form a part.
The Grocery Code was independently reviewed in 2018.
The Dairy Code is a prescribed mandatory code of conduct which sets out the minimum standards of conduct for the supply of milk by farmers to processors. The Dairy Code is intended:
… to help protect farmers against egregious conduct from processors, to improve transparency in the industry and to set enforceable minimum standards of conduct for business practices between farmers and processors.
The Dairy Code has its origins in the milk price reductions by Murray Goulburn and Fonterra Australia in 2016. In response, the peak national representative body of the Australian dairy industry, the Australian Dairy Industry Council, drafted a voluntary code of practice (the voluntary code) for contractual arrangements between dairy farmers and processors. The voluntary code was endorsed from 1 July 2017 by many, but not all, industry participants including processors and state-based dairy farmer organisations.
The April 2018, the ACCC inquiry recommended that a mandatory code of conduct be prescribed for the dairy industry within the Competition and Consumer Act 2010 and administered and enforced by the ACCC.
In September 2018, the then Minister for Agriculture and Water Resources, the Hon. David Littleproud MP, announced his intention to work with dairy farmers industry body Australian Dairy Farmers on a mandatory code of conduct. After public consultations in late 2018 and early 2019, an exposure draft was released on 28 October 2019.
The then Minister for Agriculture, Senator the Hon. Bridget McKenzie, in a statement to the Senate in December 2019 explained:
The code will cover seven of the eight recommendations made by the ACCC in its 2018 dairy inquiry. Recommendation 6 is covered by our election commitment of half a million dollars to Dairy Australia to provide financial and legal advice to farmers so that they can properly consider the implications of their contracts with processors. This means that by
1 January 2020 all of the ACCC recommendations will have been delivered …
After further consultation, the mandatory code came into effect on 1 January 2020.
Previous Senate inquiries into the Australian dairy industry
In the last decade, three Economics References Committee inquiries have reported on competition and pricing in the dairy industry:
Milking it for all it’s worth—competition and pricing in the Australian dairy industry, reported May 2010;
The impacts of supermarket price decisions on the dairy industry, reported November 2011; and
Australia’s dairy industry: rebuilding trust and a fair market for farmers, reported August 2017.
On 17 October 2019, the Senate referred an inquiry into the performance of Australia’s dairy industry and the profitability of Australian dairy farmers since deregulation to the Rural and Regional Affairs and Transport References Committee. The terms of reference of the inquiry included the merits of tasking the ACCC to investigate how it can regulate the price of milk per litre paid by processors to dairy farmers to ensure a viable industry, the introduction of a mandatory industry code of practice and alternative approaches to supporting a viable dairy industry. The Rural and Regional Affairs and Transport References Committee had not reported prior to this report’s finalisation.
Divestiture orders in the Competition Act (Part XICA)
The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Act 2019 (Market Misconduct Act) inserts new Part XICA into the Competition Act to provide processes and remedies to deal with energy companies engaged in certain conduct detrimental to competition or consumers.
Among other remedies for lesser prohibited conduct, Part XICA sets out procedures by which the Treasurer can apply to the Federal Court for a divestiture order requiring an energy company to dispose of interests in securities or assets that are part of its electricity business. The divestment provisions will commence on 10 June 2020.
The application of divestiture as a remedy for anti-competitive conduct for the food and grocery industries was considered in the Economics References Committee inquiry into supermarket price decisions and the dairy industry in 2011 and was the subject of a minority report recommendation.
Protecting Australian Dairy Bill 2019
This current bill is an amended form of the Protecting Australian Dairy Bill 2019, which was introduced into the Senate by Senator Hanson on 16 October 2019 and negatived at the second reading on 11 November 2019.
Differences in the bill compared to the Protecting Australian Dairy Bill are outlined below.
Schedule 1 defines the base milk price as a price determined for a specified area.
Subsection 95ZRB clarifies that in determining a price per kilogram of raw milk solids, the Commission must not give preference to any State or part of a State.
Subsection 95ZRD clarifies that the offence committed by a processor who acquires milk for less than base price applies to a price per kilogram of raw milk solids produced in a specified area.
Regulations relating to industry codes
Subsection 51AE(4) clarifies that regulations made by the minister relating to mandatory industry codes must be made within six months of the commencement of the subsection.
Provisions of the Saving Australian Dairy Bill 2020
The bill contains two schedules:
Schedule 1—Milk prices; and
Schedule 2—Encouraging competition in the food and grocery industries.
Part VIIB: Milk prices
Schedule 1 inserts a new part into the Competition Act, Part VIIB—Milk prices. Part VIIB seeks to empower the ACCC to determine a base price per kilogram of raw milk solids for a specified area for a 12-month dairy season. The objective of the schedule is to ‘increase prices paid to farmers, which will be paid to consumers’, rather than to ‘involve a subsidy by the government paid by the taxpayer’.
Matters for the ACCC to consider in determining the base milk price are specified in section 95ZRC and include the costs of collecting and processing milk and selling dairy products, the long-term food security of Australia and the commercial viability of dairy farms and milk processors in all states and territories.
Section 95ZRB further provides that, in accordance with section 99 of the Constitution, while determining the base milk price, the ACCC must not ‘give a preference to one State or any part thereof’.
Processors who enter into an agreement to purchase milk for less than the base price for the dairy season for a specified area commit an offence under section 95ZRD, punishable by 2000 penalty units.
Schedule 1 also specifies definitions for interpretation and, under section 95ZRE, the constitutional basis for the bill under the trade and commerce and corporations powers of the Constitution.
Item 1: Productivity Commission inquiry
Schedule 2 seeks to encourage competition in the food and grocery industries.
Item 1 inserts a new section 46AA into the Competition Act requiring the minister to refer to the Productivity Commission an inquiry into the effectiveness of the amendments relating to milk prices made under Schedule 1.
Paragraphs 46AA(1)(b) and 46AA(1)(c) provide that the Productivity Commission inquiry consider whether legislation requiring divestiture by corporations who misuse market power, as enacted in Part XICA of the Competition Act applying to the electricity industry, would encourage greater competition in the food and grocery industries.
Further subsections in section 46AA specify details of the conduct of the inquiry and a clarification that the minister with responsibilities under item 1 is the minister responsible for administering the Productivity Commission Act 1998.
Item 2: Regulations relating to industry codes
Item 2 adds new subsections 51AE(3) and 51AE(4) to the Competition Act requiring regulations to prescribe a mandatory industry code for the food and grocery industry be made within six months of the commencement of the Saving Australian Dairy Act.
The existing Grocery Code is a voluntary code prescribed under the Competition Act to govern conduct by grocery retailers in their dealings with suppliers, including dairy processors.
A mandatory Grocery Code—when combined with the mandatory Dairy Code governing the supply of milk by farmers to processors introduced on 1 January 2020—is intended to complete ‘the supply chain from the farm-gate to the supermarket shelf in respect of the dairy industry’.
Neither the Senate Standing Committee on the Scrutiny of Bills nor the Parliamentary Joint Committee on Human Rights commented on the bill prior to this report’s finalisation.
According to the Explanatory Memorandum (EM), the bill is compatible with human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Conduct of the inquiry
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 14 February 2020.
The committee received three submissions, which are listed at Appendix 1.
The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions.