The committee received three submissions to the inquiry, two confined comments to schedule 1 of the bill (milk prices). Both of these submitters broadly supported government intervention to support the viability of the dairy industry, but expressed concerns that the bill would not achieve this aim.
A late submission was also received from the Australian Dairy Farmers which addressed both schedules of the bill supporting neither proposal.
Base price for milk
The bill seeks to empower the ACCC to determine a base price for milk for a specified area, having regard to the costs and commercial viability of farmers and processors.
As further explanation of the proposed regional variations in milk prices, the Explanatory Memorandum (EM) notes:
Dairy production systems vary between milk-producing regions with seasonal milk production systems common in South Australia, Tasmania and Victoria while in Queensland, northern NSW and WA farmers tend to use year-round milk production systems. These variations reflect different levels of rainfall, types of pasture and geographical influence and all these factors and others will be considered in determining a minimum or base farm-gate price for milk.
Mr Kevin Ashworth argued that there were potential difficulties for the ACCC in determining a base milk price ‘given the different business structures of Australian processors’ and queried how the price would be determined ‘if one specified area is serviced by two processors that market different products’.
Mr Ashworth raised further issues with the veracity of the data available to the ACCC in determining base milk prices, suggesting instead the use of accountancy data from tax returns to establish the cost per unit to produce kilograms of solids, fat and protein and the profit margin required to ensure the survival of the industry.
According to Mr Ashworth, the requirement under the bill that processors only purchase milk for more than the base price ‘is detrimental to the very concept of free market supply and demand’. Unintended consequences could include customers favouring cheaper imported dairy products or milk substitutes such as soy and almond as well as the over-production of milk by farmers seeking to take advantage of increased milk prices.
Mr Ashworth also drew attention to the lack of support for minimum milk pricing among peak industry bodies, expressed particularly in the recommendation of the Joint Transition Team (JTT) established by the Australian Dairy Plan (ADP) Committee to examine reforms of dairy industry structure:
Some ADP consultations and submissions received by the JTT raised the question as to where milk pricing would fit into the new model.
The JTT considered this question carefully and believes that decisions about milk price are fundamentally a commercial matter between buyer and seller. Therefore, milk pricing issues are best resolved through negotiations between the businesses concerned.
Consumer perspectives were raised in the submission by Mr Benjamin Cronshaw. Mr Cronshaw outlined his concerns about price cutting by supermarkets and the limited ability of farmers to secure better deals from processors, but concluded that setting a floor price ‘may not necessarily be the answer’.
Mr Cronshaw further submitted that while low priced milk is ‘good for consumers’, it ‘creates misperception about the real value of milk’ and ‘indicates to some farmers that their work is not valued by the community’. To this end, Mr Cronshaw proposed that there be more information available to consumers on ‘which milk brands support farmers’.
Mr Cronshaw identified other issues that exacerbate the structural problems in the dairy industry and that are not addressed in the bill including ‘extreme weather conditions causing property damage and raising costs of production’ and the need for investment in new technology including water infrastructure.
Australian Dairy Farmers (ADF) did not support the proposal to set a minimum [base milk] price above the market clearing rate, stating it would diminish incentive to innovate and improve productivity across the supply chain. Specifically, ADF contend that if a minimum price was set:
1.it would incentivise producers to increase production to obtain more revenue
2.customers would lose by paying a higher price or dropping out of the market
3.producers would also lose because gains obtained from customers paying a higher price are offset by loss of sales (customers who dropped out will now be purchasing alternatives like cheaper imports) and increased capital costs (debt incurred from production expansion which can no longer be serviced from the loss of customers).
ADF stated that 'more importantly' such a move 'would undermine profitability and international competitiveness as consumers and processors source alternate suppliers e.g. NZ dairy and substitute products e.g. plant-based alternatives.'
ADF highlighted a number of what it characterised as 'market failures' that continue to exist in the dairy industry today:
1.The ACCC found farmers have a lack of information with regard to contracts and pricing. To address this deficit, it made eight recommendations to improve contract management behaviour and price transparency. The ADF has not only supported all of ACCC's recommendations it has been leading their implementation. This has been demonstrated in the development of an industry led ACCC Dairy Inquiry implementation plan, mandatory code of practice and other initiatives, in particular the government's $22m Dairy Support Package.
2.Domestic support and other trade barriers are a negative externality. Australian dairy farmers are losing markets due to unfair foreign policy and competition. ADF, through the Australian Dairy Industry Council, released a Federal Election Policy Statement placing a significant focus on resolving these inequitable distortions.
3.Inappropriate setting of prices by Australia's major supermarkets are also a negative externality. This has led to farmers supplying the domestic market all year round having their margins squeezed to the point they are forced out of the industry. The Food and Grocery Code provides an opportunity for government to reposition the retailers towards market led regional pricing and appropriate value distribution across the supply chain.
Schedule 2—Encouraging competition in the food and grocery industries
ADF was the only submission to comment on Schedule 2.
Schedule 2 inserts two new items into the Competition and Consumer Act 2010 (ACCC Act).
Item 1 inserts new section 46AA into the ACCC Act which requires the relevant Minister to establish an inquiry by the Productivity Commission into the effectiveness of the amendments made by Schedule 1 of the Bill in relation to milk prices. The inquiry must also consider whether a divestiture regime should be introduced in legislation.
Item 2 adds a new subsection 51AE(3) into the ACCC Act which requires that a mandatory industry code be established for the food and grocery industry which will include the supply chain from the farm-gate to the supermarket shelf in respect of the dairy industry.
The ADF does not support the proposal as set out in Schedule 2. ADF notes that there have been a number of inquiries and recommendations that languish, awaiting implementation, that would in their opinion address the issues facing the Australian dairy industry.
Furthermore, the ADF does not support the idea of a Productivity Commission inquiry into a possible divestiture regime for the food and grocery sector. Rather it suggests that the 'wording' needs to:
Abolish fixed pricing of dairy products; replacing it with prices determined according to demand and supply fluctuations.
Establish a universally agreed percentage pass through margin for farmers to remain viable and sustainable.
Enshrine the ACCC's 'Dairy Specialist' role as a position of oversight and advocate on the dairy farmers behalf.
The committee recognises the challenges facing the dairy industry in Australia and the importance of ensuring the viability of the dairy industry.
The committee considers that setting a base farmgate milk price will not fix the power imbalance between dairy farmers and processors and will not reduce input costs such as fodder, water, labour and electricity.
Raising the price of milk paid to dairy farmers may suppress initiatives to improve productivity, reduce the competitiveness of our export market, make imported dairy products cheaper in comparison to domestic products and place international trade agreements at risk.
The committee considers that an insufficient case has been made for prescribing that the Grocery Code be mandatory.
The committee notes the introduction on 1 January 2020 of a mandatory Dairy Code and the government’s announced additional funding for Dairy Australia to provide financial and legal advice to farmers.
The committee is confident that these existing measures will support market conditions to bring about efficient production and supply of dairy products, as recommended by the ACCC inquiry.
By comparison, this bill has significant potential to damage dairy farmers, the supply chain, international export markets and the viability of the dairy sector overall.
This bill would create a significant deterrent for processors to buy local milk from farmers in regions that would have artificially high farm gate base prices as a result of this bill. These areas would likely be those with low rainfall levels, different types of pasture and geographical influence, such as Queensland, Northern New South Wales and Western Australia.
The bill would dis-incentivise and remove rewards for innovative farmers in regions with high farm gate prices set by the bill in competing for local processor supply.
Additionally, in contravention to the stated purpose of the bill, this would not be ‘Saving Australian Dairy’ across Australia. It would incentivise processors to purchase and transport milk from milk markets with lower input costs, typically southern milk markets to supplement higher cost markets.
Further, if the price of milk was set above a competitive level with international milk supply, it may incentivise imports of fresh milk to supply the domestic market.
If introduced, this bill has the potential to weaken the domestic dairy industry – particularly the fresh milk markets in QLD, Northern NSW and WA.
The committee recommends that the Senate not pass the bill.
Senator Slade Brockman