4.1
The Competition and Consumer (Industry Codes—Dairy) Regulations 2019 (dairy code) are a mandatory prescribed industry code made under the Competition and Consumer Act 2010. The dairy code came into effect on 1 January 2020.
4.2
The dairy code aims to provide a fairer process for negotiating contractual arrangements between dairy farmers and dairy processors by enforcing minimum standards for the conduct of business for the supply of milk. It replaces the previous voluntary industry code and includes dispute resolution and mediation processes.
Background
The development of the mandatory code
4.3
A voluntary code of practice to govern the commercial relationship between dairy farmers and processors was drafted by the Australian Dairy Industry Council in 2017 in response to the farm gate price reductions (step-downs) experienced in the industry in 2016.
4.4
In April 2018 the Australian Competition and Consumer Commission (ACCC) published the results of its 18-month inquiry into the dairy industry, Dairy Inquiry. Central to the ACCC inquiry’s findings were that:
processors have significant bargaining power over farmers;
milk supply contract terms favour processors and make it difficult for farmers to compare rival offers and switch processors; and
the uncertainty farmers experience in both the price they receive and the costs they incur makes it difficult to make investment decisions to increase productivity.
4.5
The ACCC inquiry identified shortcomings in the enforcement and dispute handling process of the industry’s voluntary code of practice and recommended the establishment of a mandatory dairy code:
A mandatory code should therefore be designed to improve transparency and certainty in contracts, set minimum standards of conduct and provide for dispute resolution processes. In particular, a mandatory code should contain obligations on processors to improve the timing and manner of processors’ communication of price and other key information, and increase farmers’ ability to switch in response to significant changes to their trading terms.
4.6
Work on a mandatory dairy code by Australian Dairy Farmers and the federal government commenced in the second half of 2018 in consultation with the dairy industry. As described by the Minister for Agriculture:
The department undertook consultation on the dairy code in three rounds of public consultation between 31 October to 28 November 2018, 15 January to 15 February 2019 and 28 October to 22 November 2019. The department sought feedback during this time through a range of initiatives, including 18 public consultation meetings held in all dairy regions, multiple meetings with industry representative bodies including the Australian Dairy Farmers and State Dairy Farming Organisations, three tele-town hall meetings, as well as emails and calls from dairy farmers and other industry members.
4.7
The dairy code introduced on 1 January 2020 seeks to address the imbalance in bargaining power between dairy farmers and processors and respond to the recommendations made by the ACCC in its 2018 dairy inquiry.
4.8
The code does not regulate the relationship between processors and retailers, which is governed by the voluntary Food and Grocery Code, or the retail pricing arrangements for the sale of dairy products. The Food and Grocery Code is discussed further in the context of the ACCC inquiry into bargaining power in supply chains for perishable agricultural goods below.
Main provisions of the code
Obligation to deal in good faith
4.9
A core feature of the dairy code is the requirement that processors and farmers act in good faith in business dealings relating to the supply of dairy milk. This provision includes penalties for non-compliance for both farmers and processors. According to the Minister for Agriculture:
The Dairy Code has been designed, among other things, to prohibit egregious practices and behaviours that have been previously applied by processors in their business relationships with farmers. These include two actions that led to wide-scale industry turmoil in 2016 with the largest processor applying a retrospective step down (a unilateral reduction of the price) for milk already supplied during that financial year by farmers, and the second largest processor unilaterally drastically reducing the future price it would pay to farmers for the remainder of the financial year … Provisions on dealing in good faith were subsequently considered necessary to include in the Dairy Code to restore confidence and good faith in the business relationships between farmers and processors …
4.10
Good faith provisions are discussed further in the issues raised by the Committee for the Scrutiny of Delegated Legislation below.
Agreement changes
4.11
Sections of the code relating to agreements directly address the dairy industry’s past experience with unilateral price reductions. Retrospective reductions of the minimum price for milk are prohibited with penalties to apply for non-compliance. Unilateral prospective reductions (mid-season price cuts) are allowed only in exceptional circumstances such as an emergency or major change in the global market. Allowance is made for variations in milk supply agreements where processors are required to comply with a change in law.
4.12
If a milk agreement is terminated early, the farmer is entitled to a portion of any loyalty payment specified in the agreement in proportion to the supply period completed. This provision aims to remove a disincentive for farmers to switch processors identified in the ACCC dairy inquiry.
Milk supply agreements
4.13
Processors are required to publish one or more standard forms of milk supply agreements on or before 1 June each year. Mr Mick Keogh, deputy chair of the ACCC explained to the committee:
The 1 June publication date means there's a full 30 days, in effect, and also a 14-day cooling off period, which gives much better opportunity for farmers to consider the implications. In the past, they were virtually handed a contract on the death knell, with the potential that their milk wouldn't be picked up the following day unless they signed up.
4.14
A standard form of agreement is:
… a publicly available agreement that farmers can enter into or use as a starting point for further negotiations with processors. This will enable farmers to compare contract terms and prices across different processors, and choose a business arrangement that best suits their individual purposes.
4.15
Exclusive supply agreements must not include a maximum volume which would result in farmers having excess milk they are unable to sell to another company or two tier pricing, where processors can pay different amounts for milk supplied by the same farmer. The need for these provisions was illustrated for the committee by the Queensland Dairyfarmers’ Organisation (QDO):
At times some farmers have been told by processors that some of their milk—they've been in a two-tier price system—really isn't wanted. They were going to get a price that was nothing more than a token for picking it up, really. That was all they were going to be paid. Yet they couldn't supply anyone else, even though maybe just down the road there was a more boutique-type cheese factory that wanted the milk and they were often struggling to get supplies. That has really not only hit the farmers directly in the short-term, but, when you have those other cheese factories or whatever and other people needing the milk on a more niche-market basis can't get the milk, often they will go out of business.
4.16
Milk can only be purchased by processors under milk supply agreements which comply with the dairy code, are recorded in writing and include, among other things:
a 14-day cooling-off period;
the duration of the period during which the milk is to be supplied;
the quality and quantity of milk to be supplied and actions the processor may take if the requirements are not met;
information on any loyalty payments; and
the minimum prices under the agreement.
4.17
If an agreement is longer than three years, the agreement must allow for farmers to postpone the end of an agreement by 12 months. This clause ‘allows farmers who wish to exit the industry to resolve their business, sell assets and address any animal welfare and environmental concerns’.
4.18
Milk agreements already in place before 1 January 2020 have 12 months to transition to become compliant.
Dispute resolution
4.19
Milk supply agreements must provide a complaint-handling procedure and mediation for resolving disputes and may also provide for arbitration. A processor must have an internal complaint handling officer to manage complaints.
4.20
As the dairy code is a prescribed code, under the Competition and Consumer Act 2010 the ACCC can monitor compliance ‘by assessing reported breaches of the code and conducting compliance checks’. Furthermore, as Mr Marcus Bezzi of the ACCC explained to the committee:
Whether or not the code applies, the Competition and Consumer Act applies. There are obligations under that act in relation to unfair contract terms, misleading and deceptive conduct and various other things … The code is additional to the Competition and Consumer Act. It doesn't exist on its own.
Reviews
4.21
A review of the role, impact and operation of the code will commence following the first year and third year of operation.
4.22
Ms Rosemary Deininger, Deputy Secretary of the Department of Agriculture, Water and the Environment, advised the committee that the first review would be completed in the 2021 calendar year.
ACCC inquiry into bargaining power in supply chains for perishable agricultural goods
4.23
On 26 August 2020 the government announced the ACCC would commence an inquiry into bargaining power in supply chains for perishable agricultural products in Australia including the relationships between farmers, processors and retailers.
4.24
The inquiry’s terms of reference included an examination of the effectiveness of the dairy industry’s mandatory code of conduct in addressing bargaining power imbalances throughout the supply chain.
4.25
In its November 2020 report the ACCC concluded that while the requirements relating to contract publication under the dairy code had been operational for only a short time, the dairy code had brought many positive changes to the industry. These included:
evidence of competition among processors on raw milk prices after prices were announced on 1 June 2020
increased transparency as farmers were able to access price information a sufficient period ahead of needing to make a decision about which processor to supply
written agreements were in operation across the vast majority of processors.
4.26
Matters that required attention which were identified by the ACCC included difficulties experienced by farmers in interpreting and comparing minimum prices offers made by processors, the requirements surrounding non-exclusive contracts, and the duration of the cooling-off period.
4.27
The ACCC recommended that the Food and Grocery Code governing conduct between retailers and wholesalers with suppliers be made mandatory and updated to include significant penalties for non-compliance and an independent dispute-resolution process. Further recommendations were aimed at strengthening measures to combat unfair contract terms and introducing an economy-wide prohibition on unfair trading practices in the Australian Consumer Law.
Issues raised by the Committee for the Scrutiny of Delegated Legislation
4.28
The dairy code was tabled in the Senate on 4 February 2020. On 14 May 2020 the Chair of the Committee for the Scrutiny of Delegated Legislation (scrutiny committee) gave the Senate notice of its intention to disallow the regulations.
4.29
The scrutiny committee drew the Senate’s attention to section 11 of the dairy code which requires processors and farmers to deal in ‘good faith’ in relation to the supply of milk. The scrutiny committee queried whether in view of the lack of a definition of good faith in the written law and the significant penalties for failure to comply with these obligations, section 11 was drafted with sufficient clarity ‘to enable persons and entities, particularly farmers, to understand their obligations and the consequences of non-compliance’.
4.30
In his correspondence with the scrutiny committee, the Minister for Agriculture the Hon. David Littleproud MP argued that a non-exhaustive list in subsection 11(4) gave guidance on the meaning of good faith and that the provision was consistent with other industry codes.
4.31
At the scrutiny committee’s request, the Attorney-General agreed to refer the broader issue of the codification of good faith obligations in Commonwealth legislation to the Australian Law Commission for inquiry. The scrutiny committee also requested the ACCC consider this matter as part of its inquiry into bargaining power in supply chains for perishable agricultural products. On this basis, the committee withdrew its motion to disallow the dairy code.
Stakeholder views on the code
4.32
Inquiry participants were broadly supportive of the code and its objectives to bring some certainty and transparency back into the industry. Mr Joseph Conheady, a dairy farmer from the Warrnambool region in Victoria, gave the committee a first-hand account of the difficulty in making production decisions in the absence of knowledge of future milk prices:
When determining an action output strategy at the time as far back as the November previous with drought-induced grain prices at record levels, my safely conservative, historical milk price estimates indicated that a lower cow number and a low-cost diet were the most sustainable profit drivers for that season. By the time the lucrative milk prices were announced, the decisions had already been made to sell the extra cows as meat, feed had been purchased and the remaining herd had spent the summer months on a lower quality diet. Essentially, the complex algorithm we run to sight our production output was based on the wrong prices. At the end of the day, had I had clarity around the reality of that future milk price, as producers of other commodities enjoy, not only would I have enjoyed far greater returns from a higher production curve but also the processors would actually have received the extra milk they were scrambling for … It is an actual dead weight loss to the whole industry.
4.33
In hearings held in June and July 2020, many inquiry participants reported on the early effectiveness of the dairy code in the period leading up to and immediately following the release of contracts and minimum prices on 1 June 2020.
4.34
Mr Peter Garratt, chairman of Premium Milk Group, a collective bargaining group of about 90 members across southeast Queensland and northern New South Wales, informed the committee that in late 2019 Lactalis circumvented the collective and dealt directly with individual farmers to encourage them to sign contracts prior to the introduction of the dairy code. While this was an ‘unprecedented move’, Mr Garratt explained that it was his understanding that Lactalis were ‘within their rights to do that, under the ACCC guidelines’.
4.35
Ms Annabel Johnson, Head of Policy and Advocacy at NSW Farmers, informed the committee that problems with the undermining of collective bargaining are wider than the dairy industry and that it is ‘difficult for the group to remain cohesive when elements of the group get offered contracts with incentives’. NSW Farmers concluded that ‘There certainly needs to be an investigation into how we can actually strengthen and get collective bargaining working so that those groups are able to get better outcomes for farmers’.
4.36
Premium Milk Group also related the details of a new clause in all Lactalis contracts nationally that gives Lactalis the right to decline an offer of supply of milk where ‘in the opinion of Lactalis, the supplier has engaged in public denigration of processors or key customers’. Other inquiry participants confirmed to the committee that this was not an isolated case.
4.37
Mr Eric Danzi, executive officer of QDO reported QDO’s observations of continuing milk under-pricing:
We’ve had issues with some processors in our region only quoting 50c a litre as the minimum price for two to five years, which is completely unrealistic, and others who are quoting 58c without disclosure of a provenance premium. Some of those things—if they’re not against the code, they’re certainly against the intent of the code …
4.38
Mr Graham Forbes, president of New South Wales industry advocacy body Dairy Connect, also outlined concerns about code compliance with longer term contracts:
We've seen some of the processors offer up to five-year terms in contracts, with only one-year pricing and very low minimum pricing as well as very strong clawback provisions for their loyalty payments if those farmers wish to exit that agreement and supply another processor within a three- to five-year period. So they're very anti-competitive.
4.39
Mr Danzi observed that due to having received legal advice that multi-year contracts cannot have ambiguous or non-existent minimum price clauses, processors in Queensland have moved to shorter contracts ‘in line with what they believe they can offer legitimately as a schedule of prices’. One processor, however, has:
… offered a very reasonable first-year price in the order of 70c a litre, with a very detailed pricing schedule of monthly payments, bonuses, penalties and everything else, and chose to have, for years 2 to 5, a minimum price of 50c, which just doesn't make any sense at all.
4.40
Mr Danzi also pointed to issues surrounding non-exclusive contract clauses:
We certainly have processors that will offer a non-exclusive supply contract, so a farmer technically could supply some of their milk to another processor, which, under most of the current contracts, they're not allowed to do, certainly in our region. But the contract for the rest of that milk is at a price that's completely unrealistically low. We realise that there would have to be provisions around non-exclusive supply contracts, as to how much you supply each day, but we feel that that should be on a volume basis, not on a percentage-of-farm-supply basis.
4.41
Mr Brad Teese, a dairy farmer from Beaudesert in Queensland, concluded that ‘the dual supply contract is a wasted bit of paper unless there are some rules and regulations on the variance that they have to pay to the processor’. He related his experience with a dual-supply contract brought in under the new dairy code:
I asked for one this year, which ended up a complete and utter joke. I was offered a dual-supply contract from my processor, and I had to supply them 70 per cent minimum of the milk supplied, and that was at a 12c a litre discount from anyone else that had a—
CHAIR: That is 12c cheaper than the other 30 per cent if it went to another processor?
Mr Teese: No; than the processor that had a single-supply contract, which basically equates to about 90c a litre … When I advised them that it wasn't financially viable, I offered them first dibs on any milk that I had available, which was an ad hoc contract. And on the 15th day of the month they said that I had not supplied 70 per cent of the milk to their factory so therefore, for every litre after that from that day forward, they would pay me 40c a litre.
4.42
Mr Teese expressed frustration with his attempts to have his difficulties with the processor resolved through the small-business ombudsman. This was echoed by Mr Garratt of the Premium Milk Group who pointed to an omission in the dairy code in its failure to implement recommendation 5 of the ACCC Dairy Inquiry that the ‘industry should establish a process whereby an independent body can mediate and arbitrate in relation to contractual disputes between farmers and processors’. Mr Garratt observed that subsection 43(4) of the dairy code stipulates that a ‘milk supply agreement may provide for arbitration’. He noted that:
Since the Dairy Code 2019 has been released, we have seen processors offering milk supply agreements that do not have any provision for binding determination of arbitration … The result could see farmers come to the end of the mediation, as set out in the code, and still have an unresolved and unsatisfactory result.
4.43
Mr Graham Forbes of Dairy Connect suggested the creation of a statutory 'fresh food and dairy commissioner' who could 'assist with mediation and arbitration, advise parties with milk supply agreements, have the ability to adjudicate on farmgate milk prices, have powers of coercion and have the ability to publicly name those who breach their agreements'.
4.44
Another shortcoming of the code was suggested by QDO. In the view of Mr Danzi, the exemption from the requirement of milk supply agreements to have end dates where the processor is a cooperative and the farmer is a member of a cooperative (subsection 24(3)) was ‘being used to get around the whole intent of the code’. This point was also made by the President of Dairy Connect who noted that ‘the code came about due to the failure of the Murray Goulburn Cooperative and actions of Fonterra, a New Zealand based co-op, and no leniencies should be given to co-ops in addressing the compliance of the code’.
4.45
Mr Forbes observed that ‘farmers probably haven't been provided with enough information to be able to understand the effects of the mandatory code and what advantages farmers may have going forward in negotiating with these processes’. Mr Shaughn Morgan, chief executive officer of Dairy Connect expressed the view that it will:
… require cultural change, and this will have to be done over a period of time; it can't occur instantaneously. I think we're finding, in terms of the milk supply agreements and ongoing discussions at the present time, that in some ways there probably hasn't been much difference between the discussions held this year as against last. What we will find is that (1) we have publicly available milk supply agreements; (2) we've finally got a minimum price; and (3) we've gotten rid of some unconscionable clauses in milk supply agreements that caused great concern.
4.46
Mr Keogh informed the committee in June 2020 that the ACCC had commenced work ‘reviewing the 100 or more milk supply agreements that have been published to determine the extent to which they meet or are in breach of those requirements of the code, and we will take action in the event that we identify situations where they don't meet those requirements’.
4.47
Mr Keogh also advised the committee that unfair contract terms law is being reviewed by the government to raise the threshold for business annual turnover from $300,000 to $10 million, which would take in most dairy businesses.
4.48
Moving forward, Mr Danzi of QDO conceded that:
… a lot of the processors have amended their behaviour and complied with the direction of the code, and that's improved outcomes already, but some have not heeded that advice. I think there are going to be two steps: firstly, what happens now and how the ACCC responds to the identified bad behaviours; and, secondly, what learnings there are over the first two years in order to undertake the review next year, because there's supposed to be a new code in place for 1 January 2022. So it's about enforcement now, learning what the gaps and challenges still are—and I think tightening exclusivity and minimum price obligations are probably two of them—and then we can see a much more effective code released on 1 January 2022.
Committee view
4.49
The committee considers that the mandatory dairy code is a positive step forward to manage the business relationship between farmers and processors. The publishing of minimum prices and terms and conditions for milk supply before the commencement of the dairy season has assisted to clear the air, allowing farmers to see what is on offer, plan ahead and make investment and production decisions with a greater degree of certainty and security for the future.
4.50
While the committee is encouraged that the introduction of the dairy code has seen the removal of some unconscionable clauses in milk supply contracts, the experience of inquiry participants suggests that some ongoing coercive behaviour by processors, such as contractual sanctions penalising public comment, persists.
4.51
Previous inquiries into the dairy industry have stressed the importance of collective bargaining in addressing the power imbalance in the dairy industry. Evidence before the committee of processors circumventing farmers' collectives and providing incentives for farmers to sign individual contracts suggest that there is a need to further strengthen collective bargaining.
4.52
The committee considers non-exclusive contracts to be a vital means of providing competition in the industry. Allowing farmers to split their milk supply between processors allows farmers to access premium markets and provides the flexibility to allow smaller processors to flourish. Furthermore, splitting the supply pool into smaller groups may exert upward pressure on prices. The committee agrees with witnesses that milk supplied as part of non-exclusive contracts should not be on the basis of a percentage of farm supply.
4.53
While the committee welcomes the provision of mediation as a means for resolving disputes in the dairy code, the committee believes that the code should be strengthened to provide for mandatory arbitration.
4.54
The committee recommends that the government make the Food and Grocery Code of Conduct a mandatory code under the Competition and Consumer Act.
4.55
The committee recommends that the government investigate price discrepancies between exclusive and non-exclusive milk supply contracts, processors circumventing collective bargaining groups, and the fairness of pricing for multi-year contracts.
4.56
The committee recommends that the government in its 12-month review of the dairy code of conduct give consideration to amending the code of conduct to require that:
non-exclusive supply contracts be on a volume not percentage basis; and
arbitration be made mandatory.
4.57
The committee recommends that the government produce and distribute information for farmers on the bargaining advantages afforded by the code of conduct to assist in their negotiations with processors.
Competition in the dairy supply chain
4.58
Many submitters discussed the extent to which the dairy code provided farmers with greater bargaining power. Ms Annabel Johnson of NSW Farmers noted that while ‘the mandatory code of conduct which commenced this year has made improvements to milk supply agreements, there is still a larger competition reform piece that is required’. The code did not alter the fact that farmers still ‘have to deal with powerful providers for their water, electricity, farm supplies, finance and freight solutions’ and ‘have to sell their goods into supply chains dominated by a few’.
4.59
Other submitters agreed that despite the strengths of the dairy code of conduct, it doesn’t solve the fundamental problem of the imbalance of power in the structure of the industry. To Mr Danzi of QDO, ‘it’s unfair for farmers to be thrown into a market where they’ve got no ability to bargain’.
4.60
To many submitters, a solution would be to include supermarkets in the code. According to Mr Ken Bryant, executive member of the Far North Coast Dairy Industry Group, which represents 140 farmers in northeast NSW:
The mandatory code has been a step in the right direction, but the problem is it doesn't address the relationship between the processor and the supermarkets, which, in my view, is where the real problem lies. The supermarkets still hold the power. For example, when our contract prices were released just at the end of May for 2021, the big question was: will the supermarkets keep the drought levy on? They have chosen to do that for 12 months, but they can take that away as soon as they decide the drought is over. And we believe the real price is at least with that on.
4.61
Mr John Dahlsen agreed that retailers should be included in the dairy code but cautioned:
… to have a tri-party arrangement involving dairy farmers, processors and retailers would be extraordinarily complex and difficult to negotiate, and I don't believe you would reach an agreement with the retailers.
4.62
In its 2018 Dairy Inquiry, the ACCC found that the 'relative bargaining position of supermarkets, processors and farmers is an important determinant of profits that each earns in the dairy supply chain'. Inquiry participants agreed that supermarkets were the strongest players in the dairy supply chain and farmers, as price takers, the weakest. Some participants backed calls for stronger regulation of the supermarket sector to address this bargaining asymmetry.
4.63
Mr Andrew Weinert, an agricultural consultant, observed that supermarkets and distribution chains are strong buyers due to their home brands and ability to allocate shelf space. NSW Farmers saw that the retail market, 'being one controlled by a few retailers', resulted in retailers being able to 'squeeze margins from the rest of the supply chain, particularly in establishing discounted dairy products'.
4.64
Mr Weinert argued that processors are also in a strong buying position in the supply chain as ‘most of the major processors are international and so they just want to be making their own margins and not sending it back to the farmers’. The ACCC also observed that the 'generic and perishable nature of raw milk' also worked in the favour of processors. However, according to the authors of the Australian Dairy Plan, processors are also weak sellers due to a 'tough domestic trading environment, marked by 10 years of retail price deflation and low volume growth' which has led to 'Australian processors [having] little capacity to pass through rising production costs, increased energy, labour and compliance costs in a deflationary retail environment'.
4.65
The result, as NSW Farmers sees it, is that '[f]armers accrue the greatest loss due to the tendency of processors to pass on the costs associated with private label brands, rather than challenge the power of the supermarkets'.
4.66
The ACCC in its submission disputed that producers are locked into exerting downward pressure on milk prices for private label drinking milk due to their relationship with supermarkets, explaining:
… almost all contracts for the supply of private label milk allow processors to pass-through movements in farm gate prices to supermarkets. This means that processors do not have an incentive to reduce farmgate prices as a result of the lower wholesale prices they receive for private label milk, as the farmgate prices are passed through to the supermarkets.
4.67
The ACCC further argued that 'even if processors were to receive higher wholesale prices from sales to supermarkets, this does not mean the processors will pay farmers any more than they have to in order to secure milk'. Rather, 'movements in farmgate prices can be attributed to changing demand conditions within the export or domestic market'.
4.68
Coles Group confirmed that it had 'agreed to multiple cost price increases [from processors] over the past 12 months'. Coles further noted that apart from some limited direct sourcing from farmers it had commenced in July 2019, it 'is not involved in the setting of the farm gate price between processors and suppliers'. Coles was adamant that:
The domestic retail price does not dictate the farm gate price. The farm gate price paid to farmers is set by the processors and reflects prevailing market conditions including conditions in international markets.
4.69
During hearings for the inquiry, attention focused on how supermarkets could ensure that their suppliers were acquiring milk at a fair price from farmers. Ms Vittoria Bon, Government and Industry Relations Manager for Coles Group, informed the committee that Coles had an Ethical Sourcing Policy, Ethical Sourcing Supplier Requirements and required its fresh produce suppliers to register on the Supplier Ethical Data Exchange (Sedex), a global ethical supply platform. Its ethical sourcing document included provisions that allowed Coles to terminate or amend a trading agreement if it was not satisfied with the ethical supply of its products.
4.70
Mr Oliver Bongardt, managing director of ALDI Australia, similarly assured the committee that ALDI had ‘contractual agreements that refer to ethical sourcing’ and an ethical sourcing document last updated in April 2019. When asked how ALDI can establish with certainty how its Queensland processor, Lactalis, pays farmers above the cost of production, ALDI informed the committee:
As part of our contractual arrangements, ALDI receives detailed financial information from Lactalis on their costs of supply to us. This includes the average cost they are paying Queensland dairy farmers at a given point in time, and ALDI is then able to compare this against the average price published by Dairy Australia for Queensland.
4.71
During questioning on how Woolworths Group assured itself that farmers were being paid fair prices for milk, head of government relations and industry affairs Mr Christian Bennett replied:
You'll appreciate that we are unable to place pricing pressure on our suppliers—upwards, downwards or a fixed price. That would take us into very dangerous territory with respect to Australian competition law. It would take us into very dangerous territory with respect to the food and grocery code.
4.72
One of the strongest voices for increased regulation of supermarkets came from NSW Farmers. In her evidence to the committee, Ms Annabel Johnson, the Head of Policy and Advocacy at NSW Farmers, maintained that:
Deregulation has not necessarily failed farmers. Competition policy has. It is not reregulation that the industry requires; it's a fairer competition policy and retail pricing that reflects the value of fresh milk. Despite having one of the most concentrated supermarket sectors in the world, the number of compliance and enforcement actions should sound some sort of alarm for people.
4.73
In its submission, NSW Farmers put forward three actions the federal government could undertake to reset the competition framework in favour of farmers: reform the unconscionable conduct provisions in the Australian Consumer Law; review the National Competition Policy to include fairness as a consideration in business dealings; and adequately resource the ACCC to undertake compliance and enforcement actions to effectively oversee the competition framework. NSW Farmers further stated that strong resourcing and investigative powers for the ACCC were crucial because:
The cost of third party legal action is unfeasible for most farmers and small businesses, and the power imbalance between farmers and processors means that many farmers will be reluctant to provide evidence against processors out of fear of being locked out of supply chains … Similarly, the ACCC’s investigative capabilities need to be heightened, especially in response to claims of unconscionable conduct. Legal cases relating to unconscionable conduct typically require specific evidence around harm of a competitor in order to be successful, and investigation is often needed to demonstrate this.
4.74
In its final appearance before the committee, the ACCC provided further information on its inquiry recommendations on bargaining power in supply chains for perishable agricultural goods.
4.75
NSW Farmers' observations on the high threshold for unconscionable conduct in the courts were supported by the deputy chair of the ACCC. Mr Keogh explained that the ACCC's recommendation for reform of unfair trading practices in the Australian Consumer Law was necessary as 'there's a gap below the threshold of unconscionable conduct, which causes economic harm, which reduces incentives to invest and which creates uncertainty amongst suppliers in a supply chain … but which isn't captured by the unconscionable conduct threshold'. Additionally, a lot of these behaviours 'aren't part of the terms of a contract', so fall outside unfair contract terms law.
4.76
Mr Keogh reported that the government was about to release a decision and regulatory impact statement on the proposed reforms to unfair contract terms law that would include 'lifting the threshold, clarifying what a standard form contract is, [and] including penalties'.
Committee view
4.77
The committee welcomes recommendations made by the ACCC in its 2020 inquiry into bargaining power imbalances in perishable agricultural goods markets to further address weaknesses in the Australian Consumer Law as it relates to small business unfair contract terms and trading practices.
4.78
The committee strongly supports supermarkets maintaining and applying ethical supply contracts and policies aimed at ensuring supermarkets and their suppliers purchase milk at a fair price that factors in the regional cost of production.
4.79
The committee shares the concerns of inquiry participants about a market imbalance in favour of supermarkets in the supply chain and is concerned both that supermarkets are not doing enough to ensure that their suppliers are treating producers ethically and at the lack of controls over supermarkets that behave unethically.
4.80
The committee supports the introduction of penalties in the Food and Grocery Code for supermarkets breaching good faith and their ethical supply contracts by buying milk from processors at a rate that is not meeting farmers' costs of production.
4.81
The committee recommends that the government introduces provisions for the ethical supply of milk to the Food and Grocery Code aimed at ensuring that supermarkets and their suppliers buy milk at a price that exceeds the regional cost of production.
4.82
The committee recommends that the government reforms the competition framework to make unconscionable conduct provisions in Australian Consumer Law more accessible to farmers, and to incorporate the principle of fairness into contractual dealings between supermarkets, processors and farmers.