Chapter 1


Chapter 1

Introduction

Referral of the inquiry

1.1        On 10 February 2011, the Senate referred the following matter to the Economics References Committee for inquiry and report by 15 April 2011:

The impact on the Australian dairy industry supply chain of the recent decision by Coles supermarket (followed by Woolworths, Aldi and Franklins) to heavily discount the price of milk (to $1 per litre) and other dairy products on the Australian dairy industry, with particular reference to:

a)      farm gate, wholesale and retail milk prices;

b)      the decrease in Australian production of milk from 11 billion litres in 2004 to 9 billion litres in 2011, of which only 25 per cent is drinking milk;

c)      whether such a price reduction is anti-competitive;

d)     the suitability of the framework contained in the Horticulture Code of Conduct to the Australian dairy industry;

e)      the recommendations of the 2010 Economics References Committee report, Milking it for all it’s worth—competition and pricing in the Australian dairy industry and how these have progressed;

f)       the need for any legislative amendments; and

g)      any other related matters.

Conduct of the inquiry

1.2        The committee advertised the inquiry in the national press and on its website. It also wrote to relevant companies, organisations, academics and individuals to inform them of the inquiry. To date, the committee has received 152 submissions, which are listed in Appendix 1. 

1.3        The committee held public hearings in Melbourne (8 March 2011), Sydney (9 March 2011) and Canberra (10 and 29 March 2011). It heard from individual dairy farmers, national and state dairy farmer organisations, members of federal and state parliament, consumer advocates, academics, smaller supermarket chains and independent retailer groups, major milk processing companies, milk vendors, senior representatives of relevant government departments and agencies, and the two major supermarket chains—Coles and Woolworths. The witnesses who appeared at these hearings are listed in Appendix 2. The committee thanks those who have participated in this inquiry.

1.4        In conducting this inquiry, the committee utilised information received during its previous inquiry into competition and pricing in the Australian dairy industry (May 2010), as well as submissions and transcripts of evidence from the former Senate Select Committee on Agricultural and Related Industries.

1.5        To enable the committee to consider the significant amount of information received, the committee sought an extension of its reporting date to 20 April 2011, which the Senate approved on 21 March 2011. On 20 April 2011, the committee tabled an interim report seeking a further extension and will now present its final report by 1 October 2011.

1.6        As outlined in its earlier interim report, the committee is aware that the inquiry has generated considerable interest and understands that many parties are awaiting the release of the final report. It is also aware, however, of the need to balance timeliness with the quality of the analysis. Many of the issues which are the subject of this inquiry require scrutiny over a longer period of time. There are complex interactions between farmers, processors and retailers; and short-term effects may differ significantly from medium-term effects. In particular, the committee believes the impact of the reductions in retail milk prices depends crucially on how long they are in place, and the extent to which they are reflected in upcoming contract renegotiations with processors.

1.7        Accordingly, the committee considers that it is not able to draw final conclusions or make recommendations at this stage. However, the committee has decided to release this interim report which seeks to summarise certain key issues, as well as the views on these issues that were put forward in submissions and by witnesses at the public hearings. This may be of assistance to interested parties and aid further debate on the issues.

1.8        Other matters which are not addressed in this report, as well as the committee's conclusions and recommendations, will be contained in the final report later this year. The committee welcomes further and supplementary submissions to help inform its final report.

Outline of the report

1.9        This interim report consists of five chapters:

  • Chapter 2 provides background information on the pricing decisions made by Coles and followed by other supermarket chains, discusses the unique nature of milk as a product, the possible consequences of the price cuts that were suggested and similar supermarket strategies that have been employed in the United Kingdom.
  • Chapter 3 presents an overview of production trends in the Australian dairy industry.
  • How prices throughout the dairy supply chain are determined, and the transparency of contracts and pricing information, are discussed in Chapter 4.
  • Chapter 5 discusses specific imbalances of bargaining power throughout the dairy supply chain, and possible remedies which were put forward, including the increased use or strengthening of collective bargaining provisions, codes of conduct and an industry ombudsman.

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