The consumer watchdog has found that Australia’s dairy industry is being damaged by power imbalances between farmers, processors and suppliers, with the result being failures in the market.
Following an 18-month investigation, the Australian Competition and Consumer Commission (ACCC) on Monday said it had found “significant imbalances in bargaining power at each level of the dairy supply chain.”
New rules are needed to make the industry fairer, the ACCC has concluded.
However the ACCC said it has found no evidence that $1 per litre milk – introduced by Coles and Woolworths in 2011 – has had a direct impact on the price farmers are paid for their product.
ACCC commissioner Mick Keogh said dairy farmers were “understandably frustrated” by the $1 pricing.
The report found that many farmers “believe that the major supermarkets pricing their milk at $1 per litre devalues the work they, their families and staff do” but Mr Keogh said the study had not found a direct impact.
“If supermarkets agreed to increase the price of milk and processors received higher wholesale prices, processors would still not pay farmers any more than they have to secure milk,” Mr Keogh said.
The ACCC found milk supply agreements currently favour big dairy processors and reinforce farmers’ poor bargaining position, while the major supermarkets use their superior position to negotiate low wholesale prices that reduce the margins of processors.
“Ultimately this has enabled the supermarkets to maintain low retail prices,” the ACCC found.
But while supermarkets have transferred much those savings on to consumers, farmers have little bargaining power and limited scope to reposition their businesses when dairy processors choose to pass on costs or change contract prices.
“The glut of farmers relative to processors, the brief shelf-life of raw milk means effective contract negotiations between farmers and processors is unlikely, the ACCC said.
Despite opposition from processors the watchdog recommended a mandatory code of conduct be established to address the issues that allow the industry to transfer risks unfairly onto farmers and cause inefficiencies .
Among issues identified wa the ability of processors to impose milk prices and set terms that are “heavily weighted in their favour.”
“These issues ultimately harm dairy production efficiency and reduce the effectiveness of competition between processors,” Mr Keogh said.
The ACCC will recommend that when a processor cuts prices during a multi-year contract, farmers should have the ability to exit the contract without penalty.
The ACCC said that at the moment the vast majority of farmers are “price takers” with no capacity or position to negotiate with processors.
“A farmer’s only discretion is its choice of processor, which in some regions can be limited,” the report noted.