Executive Summary
Senate inquiry into competition and pricing in the Australian dairy
industry: milking it for all it's worth
This inquiry of the Senate Economics References Committee into
competition and pricing in the Australian dairy industry follows a number of
other investigations which the Committee has completed, which reflected on
various aspects of Australian competition policy. Like those inquiries, the
current examination of the dairy industry has raised issues concerning
competition, including questions of market power, mergers and acquisitions, and
the effectiveness of the Australian Competition and Consumer Commission. In
light of these inquiries, and the experiences of the dairy industry brought to
the Committee's awareness throughout this inquiry, the committee suggests that
a broader review of national competition policy is currently warranted.
Recommendation 5
The Committee recommends that the Productivity Commission
reviews and evaluates the effectiveness of the national competition policy and
publish its report by 30 April 2011.
Since its deregulation in 1999 the Australian dairy industry
has evolved from a protected and regulated industry with many small farms, to
one based on fewer but larger farms competing both nationally and
internationally. During this period significant consolidation has also been
occurring at the retail and processor levels, which are now dominated by two
supermarket chains and a handful of (now mostly foreign owned) processors,
placing the farmers at a competitive disadvantage. These structural changes
were masked in the boom years. Indeed in 2007-08 Australia's dairy farmers were
receiving record high farmgate prices for their milk and confidence was high –
there was overconfidence in some industry advisors. That changed more or less
overnight with a fall in the international commodity price which was followed
by processors announcing price step-downs.
The reduction in farmgate prices for Australia's dairy
farmers led the Senate to refer the matter for inquiry, with terms of reference
particularly focussed on the impact of consolidation that has occurred within
the dairy supply chain since deregulation of the industry in 1999 and the
effectiveness of the Trade Practices Act 1974. The inquiry commenced at
a time when dairy farmers were appealing to government that the larger players
within the processing and retail sectors were taking advantage of their market
power to 'milk them for all they were worth' in what was a volatile period in
the global marketplace.
Historically, the market for which a farmer's milk is
destined has determined the price received at the farmgate. Evidence taken at
this inquiry, however, suggests that the farmgate price of milk is now determined
more by the amount of competition (or lack thereof) between processors in the
various dairying regions rather than the international commodity market. While
it is hard to find precise data, it is evident that the retailers are making
far more profit from the sale of drinking milk than are the farmers.
Recommendation 3
The Committee recommends that the Government requests 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.
Recommendation 2
The Committee recommends that contracts with farmers should
offer a clear, consistent formula for milk pricing with unambiguous conditions.
The committee also heard that the use of collective bargaining
during the negotiation process has had some success in helping farmers achieve
a better return. The Committee therefore sees merit in bolstering existing
collective bargaining laws to ensure that parties to negotiations are on equal
footing and cannot simply 'walk away' from negotiations.
Recommendation 12
The Committee recommends that 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.
Recommendation 13
In reviewing the collective bargaining provisions the Committee
requests that the Government considers the effectiveness of any existing
alternative dispute resolution mechanisms and investigates:
- allowing collective bargaining groups to merge to address
imbalances in bargaining power;
- the introduction of a requirement that the ACCC facilitate the
timely appointment of a mediator should a party to a negotiation require such
assistance; and
- the introduction of a requirement that cooling off periods be
mandatory in contracts between dairy farmers and processors.
The Committee notes the success of farmer cooperatives in
the past and the continuing strength of Murray Goulburn. The Committee questions
the demise of these organisations and recommends investigating the need for
reform to facilitate their increased use.
Recommendation 11
The Committee recommends that the Federal Government commissions
an independent report into the main impediments to the establishment of new
processors owned by farmer cooperatives and how these impediments could best be
overcome and requests that the report be tabled by 30 April 2011.
In investigating the issue of farmgate price, the Committee
considered the price being received at all points throughout the supply chain.
The Committee notes with concern that the Australian retail grocery sector is
dominated by the two major supermarket chains of Woolworths and Coles who,
between them, have captured up to 80 per cent of the grocery market. This,
together with the growth in the sale of generic milk (and generic products in
general) led the Committee to investigate the relationship between the few
large processors and these two supermarkets. The Committee also heard evidence
suggesting that the supermarkets' increasing share of the milk market through
the sale of generics is putting pressure on processors who are increasingly in
the position of having to compete with their own branded goods.
What has been identified should, in the eyes of the Committee,
be of concern to all Australians. The evidence suggests that section 46 of the
Trade Practices Act is not operating effectively. Larger players are allowed to
dictate terms to the weaker parties in the chain (ie the dairy farmers).
In light of this evidence, the Committee has recommended a
raft of changes that are designed to enhance the effectiveness of the Trade
Practices Act, particularly those provisions relating to misuse of market
power, predatory pricing, mergers and creeping acquisitions and the need for anti-price
discrimination legislation.
Recommendation 1
The Committee recommends that the Government requests that
the National Competition Tribunal reviews the effectiveness of section 46 of
the Trade Practices Act in preventing price discrimination and considers
reinstating anti‑price discrimination provisions, particularly to protect
those parties participating in industries dominated by multinational
corporations.
Recommendation 4
The Committee recommends that 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.
Recommendation 6
The Committee recommends a moratorium on further takeovers
and mergers in the milk processing industry until the Productivity Commission
has published its report on the effectiveness of the national competition policy.
Recommendation 7
The Committee recommends that 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.
Recommendation 8
The Committee recommends that 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. The Committee
recommends that the terms of reference of any such inquiry include not just the
current and future impact on prices paid by consumers but also the needs of
Australia in terms of food security and economic and environmental
sustainability, as well as the economic viability of farmers and processors.
The Committee requests that the findings of these reviews be reported by 30
April 2011.
Recommendation 9
The Committee recommends the Productivity Commission
considers, in its review of national competition policy, the appropriateness of
separating the functions and powers of the ACCC with the effect that separate
agencies are responsible for the approval of mergers and the assessment of whether
concentration is subsequently excessive.
Recommendation 10
The Committee recommends that the topic of competition and
pricing in the dairy industry be again referred to the Senate Economics
References Committee in May 2012 to assess whether progress has been made or
whether tougher and more interventionist measures need to be adopted.
In recommending these changes the Committee also highlights
the issue of food labelling. In the interests of consumer education and choice,
the Committee strongly believes that, particularly where fresh products are
involved, matters of provenance, additives and production should be made clear
and urges the Australian and New Zealand Food Regulation Ministerial Council to
consider these matters in its existing review.
Recommendation 16
The Committee recommends that the Australia and New Zealand
Food Regulation Ministerial Council acts to ensure that labelling on dairy
products adequately and accurately informs consumers about the provenance,
manufacturer and contents of the product.
The evidence heard throughout the inquiry has identified the
interrelated nature of the issues and problems within the Australian dairy
industry. It is the view of the Committee that reform at each level within the
chain is required and that such reform must be driven by government at a
federal level. The Committee acknowledges that these issues are complex and
will take time to address but urges the Government to address these matters at
a federal level to ensure national consistency and commitment. It is only by a
'top-down' approach which addresses the problems evident at all levels of the
chain that the future of the Australian dairy industry will be secured.
Recommendation 14
The Committee recommends that the Government addresses the
issues of food security and the future sustainability of the dairy industry at
a federal level. The Committee suggests to the Government that this review be
facilitated through the Primary Industries Ministerial Council to ensure it
receives the commitment and attention required. The Committee recommends that
any review include the role of the ACCC and federal, state and territory
agricultural departments in ensuring Australia's food security.
Recommendation 15
In the light of the Tasmanian experience the Committee
recommends that where industry bodies are encouraging increased production, all
agencies involved in those bodies have regard to issues of long term
sustainability in the context of long term trends. They should identify the
source of increased demand, adopt cautious language and indicate the degree of
uncertainty around any projections.
Navigation: Previous Page | Contents | Next Page