1.4        While shoppers may be enjoying lower prices at the checkout now, the benefits of the milk price war will inevitably be short lived and could well result, not only in higher prices and less choice for consumers in the longer term, but also significant and irrevocable damage to Australia's dairy industry.

1.5        Many of these concerns were highlighted over a year ago during the 2009/10 Senate Economics Committee Inquiry into competition and pricing in the Australian dairy industry.

1.6        That inquiry was initiated following concerns by dairy farmers that larger players within the processing and retail sectors were taking advantage of their market power to 'milk them for all they were worth', and those concerns have been further confirmed by the current price discounting behaviour of the two major supermarkets.

1.7        Twelve months after the 'Milking it for all it’s worth — competition and pricing in the Australian dairy industry' Report was handed down, and the Government has still failed to act on any of the 16 recommendations, which included that:

• the Productivity Commission reviews and evaluates the effectiveness of the national competition policy and publish its report by 30 April 2011;
• the Government request 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;
• contracts with farmers should offer a clear, consistent formula for milk pricing with unambiguous conditions;
• 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;
• 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;
• 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; and,
• 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 ... [and report] by 30 April 2011.

1.8        Had these recommendations been adopted, the current difficulties being felt by the dairy industry could have been ameliorated.

1.9        The current milk price war has further impacted the challenges already being faced by dairy farmers and processors, and it is highly likely that, if it is allowed to continue, Australia's dairy industry will be substantially damaged.

1.10      Australia's dairy industry shrunk both in the number of farmers (from 22,000 in 1980 to just 7,500 in mid-2010), and in volume of milk production (from almost 11 million litres to just over 9 million litres) as a result of deregulation of the industry in 1999, and there are serious concerns that the milk price wars will have an even deeper impact.

The ACCC's role (or lack thereof)

1.11      The ACCC has a key role in ensuring fair competition and outcomes for consumers and the enforcement of the Competition and Consumer Act 2010.

1.12      However, the ACCC's evidence to this Inquiry to date has been less than satisfactory.

1.13      The ACCC seems to have taken a 'wait and see' approach to the milk price war and its immediate and potential long term impacts and consumers. This is entirely unsatisfactory given the statutory powers and enforcement mechanisms available to it.

1.14      The ACCC told the Committee that it will, in effect, wait for the impacts of the heavy price discounting to be fully realised, not just indicated to as they already are, before taking any action.

Mr Cassidy—According to the wording in the act, we have to have a reason to believe not necessarily that there has been a breach but a reason to believe that there may have been a breach of the law or predation. We cannot just do it off the top of our hats; we do need to have some basis to form our suspicion. We have been challenged on this in court on occasions over a period of time. It is a fairly large threshold but we do need to have something.[5]

1.15      Mr Cassidy also told the Committee that:

Our frame of reference, if you like, is to enforce the law. We need to have conduct which, at least on the face of it, may constitute a breach of the act. We cannot look at a situation, and this goes a bit perhaps to some of Senator Heffernan’s questions earlier, and say, ‘We do not like that, so we’re going to do something about it.’ It has to be in the context of a potential breach of the law.[6]

1.16      However this is the ACCC's interpretation of the Act. It is of significant concern that the ACCC does not consider it is within its scope to foresee negative competition impacts and intervene, even despite concurring comments and evidence by outgoing Woolworths' Chief Executive, Michael Luscombe, processors, farmers and consumer experts.

1.17      Mr Luscombe, for example, has repeatedly commented that the price reductions on milk are unsustainable and warned that they will negatively impact the dairy industry.

We've said it's unsustainable for a lot of the dairy farming community, and clearly they've had a reduction in their income, and if that is sustained their businesses will be under threat.[7]

What we've seen since [the price reductions], are reports - especially from south-east Queensland - that dairy farmers are seeing a reduction in income."[8]

Also, the two major processors have indicated they might not go ahead with much needed reinvestment in processing facilities.[9]

1.18      Further, Parmalat Australia Ltd, which supplies milk via the brands, Pauls, Oak, Vaalia and Ice Break, advised the Committee in its submission that:

... the heavy price discounting is:

* placing enormous pressure on processor margins through loss of branded sales,

* has negatively impacted smaller retailers by channel shift to the already [dominant] major grocers,

* has the potential to destroy the Queensland and Northern NSW dairy industries, and

* will put at risk future investment plans of both processor and farmers.[10]

1.19      Given such evidence, it is also concerning that the Treasurer, the Hon Wayne Swan MP, has championed the current heavy price discounting by the major supermarkets.

"No doubt some of this vigorous competition, when it comes particularly to items like milk, is welcomed by millions of consumers."[11]

1.20      The Treasurer did acknowledge that:

...we do need just to keep an eye on what this may mean at the farm gate - if in fact the behaviour is predatory or collusive.[12]

1.21      It would appear that Mr Swan is taking the same approach as the ACCC, which is to wait until the damage has been done before action is taken, rather than intervene and protect the dairy industry from the inevitable damage such heavy price discounting will cause and which has already begun.

1.22      In evidence given to the Committee, the incomes of farmers are already being affected. Parmalat contracts contain different pricing terms to farmers depending on whether the milk sold is for branded or non-branded (ie. Coles or Woolworths generic brand). This reduction in revenue is already impacting dairy farmers' investment decisions, with some looking to exit the industry.

Down, Down but not Staying Down

1.23      During the Inquiry, Coles admitted to the Committee that despite marketing the price reduction as 'Down, Down and Staying Down', they envisage the campaign to be as short as six months in duration.

1.24      Coles also acknowledged in its submission that it was aware that:

...if Coles did not honour its price representations made in respect of milk as part of our "Down Down" campaign, it may give rise to misleading and deceptive conduct under provisions in the Australian Consumer Law intended to ensure representations are fully honoured.

1.25      However, the ACCC again advised that it cannot investigate any misleading or deceptive conduct around this claim until the conduct has occurred. This sort of reactive approach is a fundamental flaw in the role, the operations and the attitude of the ACCC.

When looking at an issue of possible predatory pricing, if the alleged perpetrator of predatory pricing says, ‘I am going to keep pricing the way I am forever more’—or at least for a lengthy period of time—then clearly the timing issue is something we would take into consideration.^[13]

1.26      There is no question that the enormous market power of Coles and Woolworths, with close to 80 percent of the grocery market, has allowed the heavy price discounting to occur at significant disadvantage to smaller retailers and, in particular, farmers and processors.

1.27      Section 46 (1AA) of the Competition and Consumer Act 2010, also known as the Birdsville Amendment, deals with misuse of market power. It states that  a corporation that has a substantial share of a market must not supply, or offer to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying such goods or services, for the purpose of eliminating or substantially damaging a competitor.

1.28      The question of what constitutes a 'sustained period' was raised by the Committee.

Senator COLBECK—Can we go back to the time thing. How do you determine it? You said that you look at it on an industry basis. What would you pick up that might allow you to determine this? I will put something specific on the record. I have already said that the background that I am getting is that this will go for about six months and then prices will return to normal, and that will be within a time frame that will not offend what is understood in the act. But we have evidence from one of the processors that this sort of activity considerably changed the market in the UK within three months. Would that be something that would direct your attention to what sort of time frame might impact on this sort of circumstance?

Mr Cassidy—We would look at the normal pricing behaviour within the relevant market. I would not accept the proposition that has been put to you that six months is necessarily not long enough, which is what I think you are saying. I do not know how someone would make that judgment. Certainly, we have not arrived at that sort of position. But as I say, it is something that you look at in the context of the particular market and the pricing practices in that market."^[14]

1.29      Associate Professor Frank Zumbo told the Committee during the inquiry that:

Prof. Zumbo—I have to say that some of the advertising that has been undertaken by Coles and also Woolworths raises some very serious issues under our laws against misleading conduct. If you say ‘staying down’ you give the impression to the average consumer that prices are staying down for a very long time.

Senator XENOPHON—Which is?

Prof. Zumbo—To me, it is indefinite—at the very least, staying down for the foreseeable future. It depends on the impression that is being created or that is likely to be created in consumers’ minds. But, to my mind, the impression that is being created is for a very long time, which is certainly way beyond this year and possibly next year. You are talking about years here; you are not talking about months. In that sense, they have backed themselves into a corner in that whenever the price goes below cost price there may be issues under the Birdsville amendment.[15]

1.30      During Senate Additional Estimates in February 2011, ACCC Chairman, Graeme Samuel told the Committee:

Mr Samuel—...that is why I have indicated that they use the words that, if the prices stay down for a reasonably long period of time, one of the tests of the Birdsville amendment—that is, sustained period—may well be satisfied. But there are several other tests that need to be satisfied, including substantial share of the market, sale below relevant cost and having a predatory purpose.

Senator XENOPHON—But, if Coles were to say, ‘Look, we say that this is going to be for at least the next six months’, wouldn’t that be evidence of potential predatory pricing if you can show that the milk was being sold below cost?

Mr Samuel—It would certainly be an indication of an intention to sell a particular price for a sustained period. Then we would have to take into account the other tests relating to predatory pricing which I have just outlined—substantial market share, selling below relevant cost and having the predatory purpose in the three paragraphs, (a), (b) and (c), of section 46(1AA).[16]

1.31      This provision has never been tested by the ACCC and the ACCC should pursue this matter as a test case to see how the courts will rule on this key predatory pricing provision.

1.32      The market power of Coles and Woolworths must be addressed. Divestiture powers should be considered to reduce their dominance of the food and grocery market which has allowed this heavy price discounting to occur at the detriment of Australia's dairy industry and in the longer term interest of consumers.

1.33      Divestiture powers dealing with market power already exists in the United States, where businesses have to 'break up' their companies once they become so large they begin to be anti-competitive. There is also ability for an industry to be restructured under the United Kingdom's competition laws.[17]

1.34      Further to this, creeping acquisitions provisions to prevent Coles and Woolworths from gaining any further market share must be strengthened. The Government’s proposed amendment to section 50 of the Trade Practices Act (now the Competition and Consumer Act) in 2010 was inadequate and did not go far enough to prevent unfair competition in terms of market dominance. This proposed amendment lapsed at the proroguing of the 42^nd Parliament and the Government has not reintroduced it.

1.35      Also, the Australian Consumer Law framework should be extended to include small businesses to ensure that business-to-business contracts between farmers and small businesses do not contain unfair contract terms.

1.36      The inaction of the ACCC, given the evidence the Committee has heard, is extraordinary. It did advise the Committee that it is monitoring the issue in some way.

Mr Cassidy—I have to say to you in the context of this discussion that we are not sitting on our hands. We are engaged with the parties involved in this. I do not want to go into the details of exactly what we are doing or what we have done, but I have to say to you at this point that we have no evidence that Coles is selling below cost. If someone has got that evidence—

Senator HEFFERNAN—I do not know—

Mr Cassidy—I am sorry. Just let me finish. If someone has got that evidence—because there are some fairly wild claims being made—then we would certainly like to have it. But on the basis of what we have got, we have no evidence.[18]

1.37      The ACCC needs to be more transparent about the information it has collected, its views to date and potential breaches and what action it is taking on the issue of heavy price discounting of milk.

1.38      It is unclear whether the ACCC has used its investigative powers to obtain documents pursuant to section 155 of the Competition and Consumer Act 2010, which provides that the ACCC may compel documents or evidence relating to a matter that constitutes, or may constitute, a contravention of the Act.

1.39      Given, as referred to by Senator Colbeck during the inquiry, that "this sort of activity considerably changed the market in the UK within three months"[19], it is a matter of urgency that the ACCC act on this issue and prevent any further devastation to the local dairy industry.

1.40      Further, given the disparity of the bargaining powers between dairy farmers and processors on the one hand, and the major supermarket chains on the other, as well as the market domination of Coles and Woolworths and the apparent lack of enforcement of current competition laws, a floor price should be implemented for domestic drinking milk supply as an urgent interim measure.

1.41      If these issues are not addressed, Nikki Slee's comments that there will be no dairy farmers left in her home state could well prove to be the case in other parts of the country.

NICK XENOPHON
Independent Senator for South Australia

BILL HEFFERNAN
Liberal Senator for New South Wales

JOHN WILLIAMS
Nationals Senator for New South Wales

CHRISTINE MILNE
Australian Greens Senator for Tasmania

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