6.1
The future of the Australian dairy industry has been a matter of ongoing discussion and debate for a number of years, and in particular since 2011 with the first introduction of $1 per litre home brand milk offered by major retailers, and the 2016 price step-downs by major dairy processors.
6.2
For nearly two decades, the cost of production has outpaced the increase in milk price, putting pressure on profit margins and lowering financial returns. This reduced profitability has been coupled with unprecedented volatility in market variables and the domestic climate. This ongoing discussion as to the viability of the dairy industry has resulted in calls for the industry to be re-regulated.
6.3
While there are a number of challenges facing the Australian dairy industry, impacting on both profitability and overall performance, there are also farms performing strongly in the current conditions, with Dairy Australia acknowledging that there are 'many opportunities to better leverage these for greater success across the dairy industry'.
6.4
In recognition of these challenges and opportunities, in early 2019 four key dairy industry organisations—Dairy Australia, Australian Dairy Farmers (ADF), Australian Dairy Products Federation (ADPF), and the Gardiner Foundation—decided to develop a new single dairy industry strategic plan.
6.5
This plan, now formally known as the Australian Dairy Plan 2020–2025 (the Dairy Plan), aims to support a viable dairy sector into the future, and is discussed in further detail below.
Australian Dairy Plan 2020–2025
6.6
The Dairy Plan's purpose, according to its terms of reference, is 'to bring the whole of industry together to jointly determine key priorities and activities for the next five years'. Furthermore, it also aims to 'deliver fundamental change, which will build a more profitable, confident and united dairy industry'.
6.7
During the course of consulting with industry, a number of recurring priorities were identified. These were then refined into five core industry commitments, supplemented with implementation plans:
Commitment 1: We will reform industry structures to create a more cohesive dairy industry and strengthen our influence with key stakeholders.
Commitment 2: We will attract and support new people and investment to build our industry.
Commitment 3: We will increase our effort in marketing and promotion to build greater levels of trust and improve the value of dairy.
Commitment 4: We will intensify the focus on farm business skills to improve profitability and better manage risk.
Commitment 5: We will restore trust and transparency between farmers and processors to strengthen industry confidence.
6.8
In addition to the five commitments, the Dairy Plan identified a number of ongoing programs needed to support the industry. These included: research and innovation to reduce the costs of production and manage risk; policy leadership to achieve a more favourable operating environment and deliver a more confident outlook; market development; learning and capability development; leadership to create a positive culture; and leadership to sustain the trust and support of the community and consumers.
6.9
The Dairy Plan articulated a number of benefits that will be delivered over five years through the successful realisation of the action and implementation plans including generating around $500 million in additional value at the farm gate, increasing milk production by almost a billion litres and contributing towards the national target of $100 billion agricultural sector by 2030.
Consultations and feedback
6.10
In the lead-up to the publication of the Dairy Plan on 28 September 2020, a number of industry consultation and engagement processes were undertaken, and draft documentation was released for comment and feedback.
6.11
From May 2019 to July 2019, over 1500 farmers, service providers, processors, retailers, investors, and other stakeholders participated in consultation workshops across dairying regions, one-on-one interviews, and via an online forum.
6.12
Key findings from these consultations were then discussed by 130 representatives from across the industry at a two-day national workshop in Melbourne in July 2019. From these discussions, the following key themes were agreed by participants:
Transformational change to reform industry structures and strengthen advocacy to be more effective, united and efficient.
New measures to increase transparency and help manage market risk including the establishment of a functioning milk price market and new risk measures backed by government legislation.
A significant increase in marketing and promotion to build community trust and recognition of dairy products, the dairy industry and dairy farmers.
Increased effort and new initiatives to attract and support more new people to the industry, particularly the next generation of farmers.
A heightened focus to address rising costs, risks and volatility on farm, including building farmer capability, adopting new innovations, and accessing new risk management tools.
A concerted effort to change the culture of the industry to position dairy as an agri-business leader with a clear and positive focus on excellence.
Build on world-leading practice through the Sustainability Framework to stay at the forefront with innovative new practices that meet and exceed consumer expectations.
Better understand how climate change will affect our industry across Australia (particularly when it comes to water) and more investment in the technological solutions that will help us adapt to a changing climate.
Practical initiatives to work with the Federal Government and maximise support available from the $100 billion agriculture target and associated $4.9 billion drought fund.
A clear and ambitious vision for the future of the Australian dairy industry such as ‘A united, profitable and growing dairy industry built on high standards of environmental sustainability and animal welfare, producing high quality and nutritious dairy products to the Australian and international markets’.
6.13
Following the conclusion of the consultation process, a steering committee was formed to oversee the development of reform options, comprising two directors from three of the Dairy Plan partner organisations (Australian Dairy Farmers, Australian Dairy Products Federation and Dairy Australia).
6.14
Additionally, a dedicated taskforce, the Joint Transition Team (JTT), was created to develop options for the restructuring of the industry and to determine more appropriate advocacy arrangements. The work of the JTT is discussed in further detail below.
6.15
In responding to the key themes raised by industry representatives, a draft dairy plan (the Draft Plan) was developed and released on 6 December 2019. The independent chair, Mr John Brumby AO, stated in the forward to the Draft Plan that:
Over the last two decades, industry settings have changed more than was ever envisaged. In this new environment, farmers need better systems, better knowledge and skills as well as an increased focus from government to help them manage increased market and climate volatility.
6.16
In addressing these concerns and challenges, the Draft Plan focused on three core aims. These were to lift profitability across the supply chain; rebuild the confidence of dairy businesses in the industry's future; and unite the industry by working together to address its key challenges.
6.17
The Draft Plan intended to achieve these objectives by responding effectively to key priorities, continuing to do the fundamentals well, and building and sustaining a positive culture.
6.18
The Australian Dairy Plan 2020–2025 released in September 2020 included further refinements in response to industry feedback including ‘further work on our growth scenarios and profitability target as well as a stronger focus on cost reduction’. It also included ‘more detail regarding the initiatives that will support the delivery of the Dairy Plan and how they will be accomplished’.
Structural reform and the Joint Transition Team's report to the Dairy Plan Committee
6.19
Reform of industry structures and advocacy arrangements was one of the key themes that emerged during the nationwide consultation phase of the Australian Dairy Plan. As a result, a Joint Transition Team (JTT) was formed in late September 2019 to examine existing dairy industry organisational arrangements and recommend options to reform industry structures.
6.20
The JTT comprised eight people from across the industry chosen by the Australian Dairy Plan Committee for their experience in leadership, business, strategic transformation, and the dairy supply chain.
6.21
The JTT’s recommendations on reform of industry structures and advocacy arrangements were published on 29 January 2020 in a report (the JTT Report) to the Australian Dairy Plan Committee. The JTT Report confirmed the need for urgent transformational change, stating that:
[t]he JTT’s analysis confirmed the view expressed by industry participants that the current industry institutional arrangements are no longer fit for purpose for today or suitable to take the industry forward. There is little interest from the industry in continuing with the current structural arrangements and it is clear that achieving transformational change is both essential and urgent.
6.22
In undertaking its work, the JTT developed and tested three potential options for reform and decided upon the development of a national organisation responsible for providing all industry services—policy, advocacy, research and development, and marketing. The JTT named this entity 'NewCo B'.
6.23
The JTT Report highlighted a number of distinctive features of NewCo B, which are listed below:
One national organisation will be responsible for providing all industry services, such as policy, advocacy, R&D and marketing.
NewCo B will be the mandated R&D Corporation for the Australian dairy industry.
The integrated services will be provided across the entire dairy value chain at the national and regional levels.
NewCo B will have a regional presence through its offices, providing one national brand and a clear line of sight for regional dairy businesses (farmers, processors and other local businesses and organisations that have a shared interest in a thriving dairy industry).
There will be one levy for farmers and the integrated services will be funded from that levy.
Processors will be members and contribute financially.
There will be capacity for other membership categories, such as for people and organisations that form the wider dairy business community.
High performance and the implementation of efficient and effective systems and processes will be assured through the formation of a project management office that reports to the chief executive officer or the chief operating officer.
A national forum will provide a mechanism for collaborative discussion by dairy value chain businesses of the major issues and opportunities that could influence the future profitability and sustainability of the dairy industry.
NewCo B will provide one point of contact for all dairy businesses, governments, domestic/export customers, the media and the public.
NewCo B will develop its strategy in consultation with key stakeholders and incorporate the findings of consultations conducted in preparing the Australian Dairy Plan.
6.24
The JTT argued that this new entity represents a transformative change for the industry and will provide it with a 'modern, world class model that can excel, offering a clear line of sight and accountability to those who fund the company'. The JTT stated that a particular strength of the new model is its ability to effectively develop and advocate for evidence-based policy.
6.25
To ensure the viability of the new entity, the JTT envisaged that a one-off investment will be required, with ongoing funding from monies provided by farmers and processors through levies and membership fees, and the generation of income through capitalising on commercial opportunities.
6.26
In work in progress by ADF, ADPF and Dairy Australia in leading the reform, the JTT Report recommendations ‘will be further shaped and refined through consultation with a new industry structure to be put to a vote of industry stakeholders’ in the first quarter of 2021.
Views on the Australian Dairy Plan
6.27
Although not specifically referenced in the inquiry's terms of reference, a number of inquiry participants commented on the Draft Plan in the context of approaches required to deliver a more profitable, productive and sustainable dairy industry.
6.28
Dairy Australia, a partner in the development of the Dairy Plan, stated that 'Dairy Australia’s Strategic Plan for the period 2020–2024 will be strongly informed by the final dairy plan recommendations and we remain committed to helping to drive the reforms and initiatives identified through the dairy plan process to deliver a more viable dairy sector'.
6.29
ADPF, also a partner in the Dairy Plan, ventured that the Draft Plan offered a 'historic reset of how farmers and processors work together'.
6.30
To Dairy Connect, the direction taken by the Dairy Plan to provide leadership and support the integration of industry organisations is a positive development.
6.31
NSW Farmers 'strongly supports' the push for transformational change, and specified that the new organisation must allow for clear and precise decision-making, increased advocacy, extension with grassroots connections, measure performance 'through outcomes generated rather than activities undertaken', be not solely reliant on the levy for funding and have greater accountability for levy payers.
6.32
In its submission to the inquiry, the Queensland Dairyfarmers' Organisation maintained that many farmers feel disenfranchised and that as a result of the Dairy Plan:
… the new entity responsible for RDE and advocacy must have proportionally represented democratically elected farmers. It is via this grass roots election process that accountability back to farmers is created. Currently many farmers feel powerless to change what is seen as a broken system since their voice is lost.
6.33
A vocal group of stakeholders raised objections to the model for a single industry body under the JTT Report and plans to involve, and mandate a levy on, processors. Dairy farmer advocate Mr John Dahlsen submitted:
The Australian Dairy Plan Committee Chairman, John Brumby is recommending a new entity, which in addition to having dairy farm directors, would have representatives from the Processors in particular, Fonterra, Saputo and Lion /Mengniu. The basis of this recommendation is that it is important to represent the whole dairy supply chain and produce integrated plans for the chain. It suggested that issues of conflict between the dairy farmer and Processor on such things as pricing can be handled. This is naïve. The difficulty about the whole dairy sector is the imbalance of power between the retailers and the processors and the processes and the dairy farmers. The dairy farmers have very little power. An integrated committee reduces their power. The farmers need to have their own entity. If the Committee were to pursue a model like this, why not have dairy farmers on the boards of the Processors and the Retailers?
6.34
A number of inquiry participants expressed objections to the consultation process on the Dairy Plan and emphasised the need for stronger accountability and farmer representation in current and future industry organisations and greater engagement with dairy farmers on the development of critical industry changes. Witnesses objected to the prospect of dairy farmers being afforded a vote on a single model for the structure of industry organisations under the Dairy Plan.
Committee view
6.35
The committee commends the vision of the Dairy Plan to provide a unified, integrated approach to increase profitability and restore confidence throughout the dairy supply chain. The initiatives and implementation plans under the Dairy Plan open up the possibility of new collaborative opportunities, partnerships and programs for the benefit of the industry as a whole.
6.36
The committee acknowledges the concerns of some submitters who emphasised the need for democratic processes, and a strong voice for farmers in industry bodies. The committee encourages the Australian Dairy Plan Committee to integrate farmer grassroots representation into structural reforms under the Dairy Plan.
Alternative approaches to support a viable dairy sector
Government intervention and price regulation
6.37
According to the inquiry's terms of reference, a key aspect of the committee's work was to consider the merits of tasking the ACCC to investigate how it can regulate the price of milk per litre paid by processors to dairy farmers to ensure a viable dairy industry.
6.38
Price regulations existed prior to the dairy industry being deregulated in 2000. Back then, however, the federal and state governments regulated not only the pricing of milk, but also its uses, production volumes, and farmer returns. The ACCC stated that deregulation led to a substantial reduction in the retail price of milk as well as other dairy products and, in 2001, estimated that the savings from sales of supermarket milk to Australian consumers to be around $118 million per year as a result.
6.39
Shortly after the commencement of this inquiry, Senator Hanson presented a private member's bill to the Senate which, among other measures, proposed to set a base price for milk. The following discussion provides an overview of this bill, and the findings of the Senate committee to which it was subsequently referred for inquiry and report. This is then followed by a summary of evidence provided by inquiry participants in relation to government intervention and price regulation more broadly.
Saving Australian Dairy Bill 2019
Background and referral
6.40
On 2 December 2019, the Saving Australian Dairy Bill 2019 was presented to the Senate, as a private senator's bill, by Senator Hanson. On 5 December 2019, the bill was referred to the Senate Economics Legislation Committee (Economics Committee). The bill proposed three new measures to 'ensure the viability of the dairy industry', and included:
tasking the ACCC with establishing a base or minimum price for the milk fat and protein content of milk produced on a farm in each milk region;
establishing an inquiry by the Productivity Commission into the effectiveness of the above measure regarding the setting of a milk price, and whether a legislative regime that requires divestiture by corporations would encourage greater competition in food and grocery industries; and
introducing a mandatory code to replace the voluntary Food and Grocery Code of Conduct.
Findings of the Senate Economics Legislation Committee
6.41
In its final report to the Senate, the Economics Committee concluded that the bill had ‘the potential to weaken the domestic dairy industry’. It was of the view that setting a base farm gate milk price would not ‘fix the power imbalance between dairy farmers and processors and will not reduce input costs such as fodder, water, labour and electricity’.
6.42
The Economics Committee further concluded that an insufficient case had been made for making the Food and Grocery Code of Conduct mandatory, and that the bill, if enacted, had the ‘significant potential to damage dairy farmers, the supply chain’ and the export market.
6.43
In a dissenting report, Labor noted its support for the implementation of the mandatory code of conduct from 1 January 2020, but argued that this code would not fully address the power imbalance which exists between producers and processors.
Views on government intervention and price regulation
6.44
Many inquiry participants concluded that farm gate price regulation was not the appropriate mechanism to respond to the challenges of the dairy industry, with the possible negative impacts on productivity, trade and market competitiveness a particular concern.
6.45
The ACCC and the Department of Agriculture, Water and the Environment (the Department) highlighted the challenges with regulating the price of milk and some unintended consequences resulting from similar programs in other industries, such as the wool industry.
6.46
Similarly, the Department did not see the merit in regulating the price of milk per litre paid by processors to farmers. In their submission to the inquiry, the Department stated that '[r]e-regulating the milk price would slow the gains in innovation and productivity that have been made in the industry since deregulation'. It claimed that, by suppressing incentives to innovate and improve productivity, introducing a floor price for fresh milk would make the agriculture sector's ambition to reach $100 billion in gross value production by 2030 more challenging.
6.47
In relation to international markets, the Department stated that if a floor price was put in place which exceeded export parity, domestic exporters would be unable to pass on the additional cost and hence, have difficulty maintaining their international competitiveness. Furthermore, producers of manufactured dairy products would also become less competitive with imported products to the domestic market, potentially resulting in Australian businesses losing market share to international operators.
6.48
The Department also stated that an administered floor price could put Australia in violation of its commitments under World Trade Organisation rules, and undermine Australia's broader efforts to secure market access to other agricultural products.
6.49
To the United Dairyfarmers of Victoria, the impact on the export industry was the key issue with a floor price on milk:
To return to a regulated market, Victoria would have to reduce production to only supply the domestic market. This means 2 billion litres of milk would have to leave the Victorian dairy industry alone to make re-regulation viable. The average Victorian dairy farm produces 1.5 million litres annually; meaning over 1,100 Victorian dairy farmers would have to exit the industry. Re-regulation is not a viable option for the Victorian dairy industry and would force more farmers to leave the industry.
6.50
The ACCC stated that its previous inquiries and investigations have informed its view that regulating milk prices in Australia would cause region-specific issues, as well as broader economic, social and legal challenges. For example, it stated that regulation may risk the export competitiveness of processors and favour low-cost farmers, such as those operating in south-eastern Australia.
6.51
The ACCC noted that any price regulation would need to be 'responsive to the complexities of milk production costs that vary between farmers, across and between states, and throughout the year'. A single price applied nationally would favour those farmers with lower production costs, encouraging them to increase production and, given milk can be transported long distances and across borders, potentially crowd out those higher cost producers. To avoid this, the ACCC stated that a quota system would be required.
6.52
United Dairyfarmers of Victoria (UDV) highlighted the difficulties in standardising pricing across the country:
The cost of production is specific to not only a region but a farmer. We can have two dairy farmers side-by-side who have different calving periods and different cows on their farm which produce different solids. We can't standardise two dairy farms side-by-side, because of all the nuances within their own business.
6.53
Mr Kevin Ashworth presented a contrary position that it is ‘quite easy to calculate the base milk price and it’s quite easy to calculate it per region’. His solution involved using accounting or tax records to assess the financial position of dairy farms and the cost of production and then adding a mark-up to ensure viability.
6.54
Dairy business analyst Mr David Beca argued that that milk price is not relevant to the decline in profitability of dairy farms in Australia. In his published findings Mr Beca argued that Australian dairy farmers have been paid a competitive milk price in 2003–19 compared to major exporting countries and concluded ‘there does not appear to be objective evidence to suggest that the milk price has suffered as a result of deregulation’.
6.55
ADF highlighted that the Australian dairy market has lower government intervention than other major dairy-producing regions such as the United Kingdom, New Zealand, Canada, and the European Union. It stated that Australian consumers generally, but especially those who do not consume dairy products, benefit from this approach, as they do not have to fund government subsidies through their taxes.
6.56
Similar to the Department's concerns discussed above, the ADF stated that a minimum price set above the market clearing price would likely diminish incentives to innovate and improve productivity across the supply chain; and reduce profitability and international competitiveness.
6.57
WAFarmers Dairy Council, the peak advocacy group for the dairy industry in Western Australia, did not agree that the ACCC should lead an investigation into the regulation of milk prices. Instead, it stated that any such investigation should be undertaken by an independent body with dairy farmer representation.
6.58
South Australian Dairyfarmers Association argued that the 'anguish which has been caused in the Australian dairy industry in recent years has been the product of artificial price setting mechanisms' such as $1 per litre milk, that 'the imposition of a floor price is just another manifestation of an artifice which is artificiality by another means' and that the ACCC 'must be the overseer of the laws relating to competition … but it cannot be the organ of price fixing'.
6.59
Some submitters were, however, open to the idea of tasking the ACCC to investigate options to improve the viability and profitability of dairy farmers.
6.60
Dairy Connect stated that market failure has been prevalent in the industry since deregulation in 2000. Given this, it highlighted the vital role that the ACCC plays in relation to overseeing the dairy industry, and stated that there may be merit in enabling the ACCC to report on the regulation and marketing of milk on a regular basis.
6.61
NSW Farmers argued that 'owing to the critical state of the industry it is important that regulatory options to assist farmers are investigated' and that these might include 'a levy placed on dairy products at retail or a regional milk floor price'.
6.62
Queensland Dairyfarmers' Organisation (QDO) stated that pricing distortions have been a major problem in the dairy industry since deregulation and, if the problems cannot be resolved, then government intervention, of some form, will be required. Given this, QDO concluded that all options should be investigated as a matter of priority.
6.63
A number of submitters argued that more time is needed to evaluate the success of current initiatives before resorting to re-regulation. ADPF expressed the view of several submitters when it asked 'that the [Dairy] Code, along with the initiatives proposed under the Australian Dairy Plan are allowed a fair and equal opportunity to be implemented and evaluated before any other regulatory approach to [farm-gate milk pricing] is considered'.
Committee view
6.64
The committee notes the reservations expressed by submitters at government regulation of farm gate milk prices and agrees that such a scheme would need to be carefully considered to avoid negative effects on farmers in higher production cost regions and the industry's export competitiveness. However the committee agrees with the views of a number of submitters that all options should be fully explored. For this reason the committee supports tasking the ACCC to inquire into the merits and efficacy of establishing a floor price for milk to support a viable dairy industry.
6.65
The committee recommends that the ACCC be tasked with investigating a mandatory minimum farm gate price for milk in each dairy region.
Other approaches raised by inquiry participants
6.66
In addition to government price regulation, a number of inquiry participants proposed alternative ideas to improve the profitability and sustainability of the dairy industry. These are discussed below.
Extend the retail levy on fresh milk
6.67
In September 2018, following a campaign by the Queensland Dairyfarmers Organisation, supermarket retailers Woolworths and Coles agreed to add a 10 cents a litre drought levy to the retail price of three-litre private label milk in the drought-affected eastern states, with the extra margin to be passed back to dairy farmers.
6.68
By March 2019, Woolworths, Coles and ALDI had extended the 10 cents a litre price increases to help support drought-affected farmers onto both two- and three-litre private label milk.
6.69
ALDI lifted the price of its homebrand milk range by a further 10 cents a litre in July 2019 as ‘the direct result of the recent increase in the farm gate milk prices agreed between our milk suppliers and the dairy farmers’. While Coles and Woolworths rapidly followed suit, the secondary price rises did not directly benefit farmers.
6.70
After an ACCC investigation, Coles agreed in December 2019 to repay $5.25 million after it failed to pass the full amount of the March 2019 price increase on two- and three-litre private label milk onto farmers who supplied milk processor Norco.
6.71
There is growing support in the dairy industry for increasing support to farmers through retail sales. Witnesses from Dairy Connect, Australian Dairy Farmers, and NSW Farmers supported minimum retail milk prices of $1.50 per litre, with the proceeds flowing to farmers through the processors.
6.72
Other submitters have advocated for advancing the retail levy principle further, arguing that this mechanism does not invoke the international trade disadvantages of farm gate milk price regulation.
6.73
Australian Dairy Farmers argue that retail levy schemes 'would not breach Australia's World Trade Organization (WTO) commitments regarding export subsidy payments':
However, the pool of money that could be distributed back to dairy suppliers under any new regulated retail levy scheme would have to comply with Australia's existing domestic support commitments to the WTO (namely the total industry benefit must not exceed an AMS [Aggregated Measure of Support] ceiling for all agriculture of $472 Million per annum).
6.74
Under the WTO Agreement on Agriculture, there are specific rules regarding domestic support for agricultural producers. For agricultural support measures to be exempt from the agreement, the 'general criteria are that the measures must have no, or at most minimal, trade-distorting effects or effects on production' and must not involve 'transfers from customers'. Member countries are allowed non-exempt agricultural support measures such as price support up to a cap—the Aggregated Measure of Support (AMS).
6.75
ADF calculates that based on national milk sales of 2.48 billion litres per annum, a 19 cents per litre retail levy on domestic milk sales would raise $460 million. If the scheme were to be extended to all milk supplies (including manufacturing milk), the maximum allowable levy under WTO rules would be 6c per litre. ADF notes that in 'recent years Australia has reported a zero AMS to the WTO' but speculates that it is 'unclear whether the federal government would be prepared to allocate its entire AMS entitlement to just one industry (i.e. dairy)'.
6.76
Mr John Dahlsen put forward a model to the committee for a retail price transfer payment that would benefit all dairy farmers, rather than just those supplying private label drinking milk. Mr Dahlsen proposed that the retail price of milk be increased by 40 cents and that the revenue raised from consumers be forwarded to farmers via the processors, in proportion to the litres of milk delivered by the farmers to the processors. After adjustments taking into account farmers supplying milk for processing rather than the drinking milk market, an ‘increase of $0.40 to the retail price of milk will only give farmers a 13.3c increase on the average litre price at the farm gate from about $0.48 to $0.61 representing an increase of 27.7%’.
6.77
Mr Dahlsen submitted that this solution leaves farmers ‘free to regulate their prices as they see fit’ and avoids many of the issues associated with setting farm gate prices such as interrupting the flow of supply and demand or favouring inefficient farmers.
6.78
ADF argue that a regulated retail levy would constitute a state or federal tax and would require a formal budget appropriation, an independent agency disbursing the funds, an 'agreed method of disbursement including considerations for different farm ownership structures (sharefarmers etc)' and an independent auditing process.
Committee view
6.79
The committee agrees with the view expressed by the ACCC and many other submitters to the inquiry that market imbalance between farmers, producers and retailers is the core issue affecting the performance and profitability of the Australian dairy industry. While the mandatory Dairy Code goes some way to ensuring price security and fairer contract provisions in milk supply contracts for dairy farmers, the effect on increasing farm gate prices to ensure the viability of farm businesses is less certain.
6.80
The committee considers that the industry would benefit from instituting temporary measures to support dairy farmers until long-term structural changes can be made. A retail levy allows consumers to make purchasing decisions that support farmers without creating potentially market-distorting conditions while further investigations take place on the feasibility of introducing competition reforms and a floor price on milk. To this end the committee calls on the government to investigate options and mechanisms to support farmers as an interim measure through the application of a retail levy.
6.81
The committee recommends that the government consult with industry stakeholders to investigate a retail sales levy that would increase returns to farmers.
Improve labelling of products
6.82
A recurring concern raised by industry participants through the inquiry was inadequate origin labelling and the marketing of plant-based alternatives as 'milk' products.
Country of origin labelling
6.83
Country of origin labelling is regulated by the Country of Origin Food Labelling Information Standard 2016 which came into effect in July 2018. All dairy products covered by the Standard require country of origin labelling and most are required to indicate the percentage of ingredients sourced from Australia. Imported 'priority' food (which includes most dairy products) must carry a country of origin text statement in a clearly defined box. The ACCC promotes and monitors compliance with the Standard.
6.84
UDV stated in its submission that it would 'like to see much clearer country of origin labelling on all dairy products in supermarkets to help consumers make more conscious decisions when buying diary products'.
6.85
NSW Farmers also raised this as a key concern. In evidence to the committee, a Dairy Committee member, Mr Phil Ryan, noted that improved labelling would result in consumers making a more informed choice and, consequently, help a large number of dairy farmers in Australia. Specifically, he said:
Strengthening country-of-origin labelling to make it very clear that product is imported is one of the things that could help, let's say, 4,000 of the 5,200 dairy farmers in the country, to help protect us from cheaper imports. Coles and Woolworths are both importing butter. Their cheapest butter is from New Zealand, underselling Australian farmers. That is all fair under our free trade agreement with New Zealand, but the labelling of those imported products could be improved to help consumers make a choice to support us.
Region of origin labelling
6.86
The chairman of Premium Milk Group, Mr Peter Garratt, was concerned about consumers being misled into believing that all milk is of comparable freshness, regardless of how far away it originated. In his evidence he stated:
The issue that I'm trying to raise here is that that milk is brought up in a manner that is obviously meeting health requirements but is being sold as fresh milk alongside our Queensland milk—or any other region where it's being produced for the drinking milk market. It's being sold as an equivalent fresh product, and we don't believe that it is. Due to the lack of appropriate labelling standards, customers are unaware of these conditions and are being misled and deceived into believing that all milk is of comparable freshness. Customers who buy fresh milk expect it to be exactly that: fresh. I believe there is an opportunity here, particularly for Queensland, to see that this issue is addressed via a mandate from government to ensure retailers and processors are declaring the origin of the milk.
The use of the term 'milk' across products
6.87
ADF raised their ongoing concerns regarding the term 'milk' being used in product titles where it is not included in the product's ingredient list. ADF submitted that this is a clear form of market failure requiring government intervention to resolve, and results in consumers who are 'confused and misled'.
6.88
Mr Craig Hugh, the director of strategy and policy at ADF, also noted an inconsistency within the Australia New Zealand Food Standards Code allowing this to happen. In addition to a broader review of truth in labelling, he recommended this specific issue be resolved to allow regulators to enforce the standard. He said:
There is a clause in the Food Standards Code which clearly says that the definition of 'milk' is 'the mammary secretion of an animal'. Therefore, to use the word 'milk' on a plant based product is clearly inconsistent with that definition, but there is a clause in the Food Standards Code which actually permits that to occur, and therefore the regulators can't do the enforcement. So we've suggested that that clause be removed and also that a broader review of truth in labelling be done.
6.89
In responding to this issue, the Deputy Secretary of the Department, Ms Rosemary Deininger, said:
In relation to the issue of plant based milk, or beverages that might come from almonds or other products, I can confirm that there was a discussion at the Australia and New Zealand Ministerial Forum on Food Regulation.
At that forum in November, they agreed that the Food Regulation Standing Committee, the official committee which sits below that ministerial group, should look at the issue of synthetic foods, including giving consideration to plant based milk. That work is ongoing.
Committee view
6.90
The committee agrees that deceptive labelling of imported product is a serious issue but is of the view that the country of origin rules for food products are adequately covered by the Country of Origin Food Labelling Information Standard 2016. The committee encourages farmers and consumers to raise specific concerns about misleading country of origin product labelling with the ACCC.
6.91
The committee notes submitters' concerns with the labelling of plant-based dairy substitute products but recognises that whether such labelling is misleading depends on the context. The committee awaits with interest the outcome of the work of the Food Regulation Standing Committee of the Australia and New Zealand Ministerial Forum on Food Regulation into regulatory and labelling issues relating to plant based alternatives to animal-derived products.
6.92
The committee supports improved point-of-origin labelling of dairy products to provide customers with the information to choose to support regional produce but does not advocate a mandatory labelling standard.
Address dumping of dairy products into Australia
6.93
In its submission, Farmer Power raised concerns regarding the dumping of overseas manufactured dairy products in Australia, especially cheese, at a lower than normal value and the lack of government action to stop the practice. This issue was also mentioned by QDO, which was concerned that product is being dumped into Australia from countries which subsidise their domestic industries.
Committee view
6.94
Anti-dumping measures are vital to ensure that Australian farms face free and fair competition. The committee notes that Australian has a long-standing anti-dumping and countervailing system to provide suitable remedies against unfairly traded goods. The committee calls on the government to ensure that the anti-dumping legislation remains fit for purpose for protecting Australian dairy farmers.
Build management capabilities
6.95
Rabobank Australia, a financial services firm, stated in its submission that there should be a focus on building the financial and business management capabilities of dairy farmers. It noted a large discrepancy between dairy farmer performance across the industry and suggested that '[e]mbedding best-practice farm, financial and business processes can lift the performance of underperforming farms, which will significantly improve the viability of the dairy industry as a whole'.
6.96
ADF also submitted that a greater focus on lifting management skills is required across the industry, stating that '[n]ow more than ever farm business skills and tools are required to manage economic and production risk'. As one witness to the committee expressed it, ‘we need to be production managers, risk managers, financial managers and staff managers, and our skill sets have needed to develop and adapt’.
Committee view
6.97
High-level business management skills are required by Australian dairy farmers to respond to market and climate volatility and manage risk. The committee notes that Dairy Australia currently funds farm and business management and includes ‘capable people’ as part of its strategic priorities. The committee also endorses the programs and commitments in the Australian Dairy Plan to 'intensify the focus on farm business skills to improve profitability and better manage risk', increase the proportion of farmers with effective farm business plans, and extend the capability of the dairy workforce.
Access to labour
6.98
According to Australian Dairy Farmers, an additional 800 employees will be needed on Australian dairy farms by 2023. A number of inquiry participants stated that the dairy industry is facing a shortage of skilled workers, with one witness ranking the difficulty of getting good-quality staff alongside the milk price step-downs of 2016 as one of ‘two things that have come close to us thinking seriously about getting out’ of the industry. Noting this, NSW Farmers stated that a key objective of the industry should be the development and delivery of adequate programs to attract new entrants and to build industry capability.
6.99
UDV highlighted the importance of farmers being able to easily source skilled labour to help with their businesses and indicated that there is an increasing reliance on transient foreign labour. Given this, UDV believes that an expansion of designated area migration agreements could help meet the current labour shortage by providing access to more overseas workers than standard skilled migration programs.
6.100
ADF noted that the dairy industry offers rewarding careers, but there exist a number of barriers for new entrants to overcome around finance, relocation, and industry negativity. ADF concluded that 'strong and positive industry leadership, capability and culture' is required to overcome these barriers, and that more investment is required in education and culture development.
6.101
Mr Shaughn Morgan, chief executive officer of Dairy Connect, also spoke of the need for leadership in attracting young people:
Let's engage with them at the secondary school level. Let's find mentors for those that are on the farm at the current time. There are some strong young farmers in the dairy industry coming forward who will provide strong leadership for the industry in the years ahead, and we need to ensure that we're able to give them that support, and Dairy Australia and the national bodies need to play that role.
Committee view
6.102
The committee supports the commitment in the Australian Dairy Plan to attract and support new people in the dairy industry. Measures of success for this commitment suggested under the Dairy Plan include that by 2025 all sections of the industry will have access to skilled people they require to meet their operating needs and that there will be clear pathways to farm ownership and capital. The committee also observes that the impact of COVID-19 has critically affected the availability of overseas workers.
6.103
The committee encourages the government to investigate ways to reduce barriers to new entrants such as by reducing the regulatory costs of doing business, assisting young farmers to access low-interest loans and by providing incentives for school-leavers or graduates to take up on-farm careers.
Improve marketing and promotion
6.104
UDV observed that more could be done to improve consumer awareness of the health and welfare benefits of dairy products, and stated that the industry needed to 'increase the scale and effectiveness of marketing and promotion to build trust in dairy products and win support for the dairy industry'.
6.105
This position was supported by the national policy and advocacy body, ADF, which stated that there should be a focus on improving consumer awareness of the health and nutritional benefits of dairy, with an emphasis on the value of buying Australian dairy products.
6.106
Dairy Connect noted that there is a desire among dairy farmers for Dairy Australia to take a more 'holistic approach' to marketing dairy products and the other activities it undertakes. It stated that 'a more "hands on" approach should be encouraged in ensuring dairy products [receive] the recognition they deserve'. Given this, it recommends consideration be given to Dairy Australia becoming an 'industry champion', rather than focusing exclusively on RD&E.
6.107
Dr David Nation, Managing Director of Dairy Australia, informed the committee that Dairy Australia was active in industry marketing:
We have an industry marketing program called Dairy Matters that's been in the marketplace for at least 12 months now, and we're seeing some great results in lifting the profile of dairy products amongst consumers in this country. We've just run a substantial communication program recently, 'Dairy is here for you', in this COVID environment, reinforcing to people the importance of food and the importance of dairy, thanking society for all of society's care and support through droughts and bushfires, and saying that, through COVID, the dairy industry has done a remarkable job of keeping production going and is here for consumers.
Committee view
6.108
The committee observes that the need for improved marketing and promotion has been recognised in Commitment 3 of the Australian Dairy Plan. The committee notes that the implementation of this commitment aims to increase consumer recognition of the health and nutritional benefits of dairy, the industry's commitment to the environment and animal care and the value in consuming Australian dairy products. The committee notes that while marketing and promotion may support the viability of the dairy sector as a whole, it will not directly support the profitability of dairy farmers.
Undertake a royal commission
6.109
During the inquiry, QDO, Farmer Power and Dairy Connect backed calls for a royal commission into the long-term viability of the dairy industry.
6.110
The President of the Farmers Group of Dairy Connect, Mr Graham Forbes, stated that while the industry had been the subject of 'countless reports and recommendations', in his view there had 'never been a broad-ranging inquiry into the judicial powers appropriate to the critical analysis of the entire supply chain, from dairy farmers right through to the consumer or the supermarkets'. The industry, he argued, needed recommendations 'that the government of the day could not ignore'.
6.111
Mr Forbes told the committee that farmers 'feel pressured' and 'are quite concerned about making strong comments about the industry, whether that be processors or supermarkets'. His colleague, Mr Morgan, added that 'there are many dairy farmers or former dairy farmers who have exited in recent times who would only be too happy to provide information to a royal commission, given the safeguards that a royal commission provides'.
6.112
In response to questioning, Mr Morgan agreed that broadening the terms of reference of a royal commission to the perishable goods supply chain more generally would be supported by Dairy Connect, 'so long as it's understood that the dairy industry is quite unique within the agricultural world, in the sense that it has the processor in between the end market price point and the supplier'.
6.113
ADF, however, had not yet formed a view on whether a royal commission should be undertaken. In an appearance before the committee in June 2020, ADF's chief executive officer, Mr David Inall, stated:
As the national organisation, we haven't formally considered a royal commission. We don't have a view at this stage. I think, for good reason—it's no different, I believe, to a process you would go through in Canberra in setting policy—we need to manage that discussion through a number of prudent steps, and a stepwise approach to that consideration would be important. We have not discussed or formed a view yet on a royal commission into the dairy industry.
6.114
When questioned on whether a royal commission into dairy pricing was warranted, Mr Mick Keogh, Deputy Chair of the Australian Competition and Consumer Commission, replied that this was a matter for the government and the parliament. However, he further observed that the ACCC's 2018 inquiry into the dairy industry had powers to compel witnesses and documents similar to a royal commission:
… our inquiry into the dairy sector was highly forensic. We demanded and obtained detailed trading information from all the dairy processors that we thought were substantial enough to warrant it over a multiple-year period … We've got a very sophisticated data analysis unit. They were able to put all that information together. They were able to crosscheck what the processors said with what the retailers said and vice versa, so we were very confident that the information we provided in terms of the graphs and the report findings was very detailed …. I don't think there would be further information likely to turn up in addition.
Committee view
6.115
The committee is sympathetic to the views of submitters that a royal commission may shed further light on the actions of processors and supermarkets in wielding their market power to offer low prices to dairy farmers. However, given the dairy industry and perishable agricultural goods supply chains have been the subject of two recent ACCC inquiries, the committee does not support a royal commission into the dairy industry at this time.
Senator Glenn Sterle
Chair