By Ben Bennett, ADF President

They say transparency builds trust.

It’s curious then that some processors and their representatives in the dairy industry have been calling to expedite a scheduled review of the ACCC Dairy Code of Conduct without clearly articulating their reasons.

All the more curious given the timing, when we have competitive milk prices (which are set by the processors themselves and the marketplace).

It’s even more curious given some of the recent misinformation in the media, suggesting the code is responsible for high retail dairy prices, and that this is in effect driving a high cost of living, as well as exacerbating the differential between high domestic prices and cheap imports from overseas.

All this suggests that processors are feeling price risk pressure and that it is the code itself that is protecting farmers from this risk being passed down the supply chain in the form of price step-downs this season.

Could it be that processors would like to see the floor price removed from the code? Could it be that they are opportunistically using media around the cost-of-living crisis and the government’s subsequent supermarket inquiries to lobby for an earlier review of the code?

Let’s be clear, it is the processors themselves who have bid-up the price of milk to secure supply in the current market. This is the marketplace at work.

The code does not set the price. It provides the rigour around commercial contracts in the form of milk supply agreements.

Processors are required to honour the minimum price they themselves set after they have locked in a contract with the farmer. The processor can increase prices, and in certain exceptional circumstances, if justified, they can also decrease prices.

As the Australian Competition and Consumer Commission (ACCC) has stated, the code is the thing that “imposes minimum standards of conduct on processors and dairy farmers”.

These standards are needed. We know that’s the case, having lived through previous claw-backs and the subsequent impact on the industry. These led to farms leaving the industry and the declining milk pool, which is now ironically coming home to roost as processors compete for that reduced milk supply.

The Australian Dairy Products Federation (ADPF) commenced the campaign with its executive officer in The Weekly Times advocating that “a further three-year delay (on reviewing the code) is simply unacceptable”.

Yet more articles in mainstream urban press have attempted to tarnish the code as a mechanism that inflates prices. We’re now hearing some processors openly push to have the review of the code brought forward.

In an interview on ABC radio, the CEO of one processor was asked for their take on reviewing the code.

They implied the code wasn’t working for all parties, however couldn’t, or wouldn’t, stipulate what exactly he thought was broken.

The processing company in question received a significant fine last year for breaching the code. After the Federal Court finding, the ACCC Chair commented: “We took action because we considered (the processor’s) conduct would reduce transparency in the industry and served to perpetuate systemic bargaining power imbalances between processors and farmers.”

However, neither the processor in question nor the ADPF have articulated why they believe the codes should be reviewed, or why it isn’t working.

Presumably, processors weren’t feeling the price squeeze during the first review to the same degree as they are now.

Regardless, Australian Dairy Farmers (ADF) would like to see processors treat the rest of the industry with respect and engage in good faith when calling for the review of the code to be brought forward.

It’s time to come clean and be transparent!

After all, if it’s so urgent, we deserve to know the underlying reasons.

Is it simply because they want the floor price for milk withdrawn, making it easier for them to drop prices mid-season? Anyone who was dairying in 2016 will remember where that can end up.

Been here before

The code only came into effect just four years ago and has already been reviewed once in late 2021. This review, a separate Senate inquiry into the dairy industry and the ACCC Perishable Goods Inquiry found no evidence of reduction in competition arising from the dairy code.

In fact, they validated its appropriateness with only minor changes recommended. The second dairy code review has been deferred to allow changes from the 2021 review to take effect.

All parties were consulted and had opportunity to provide input during the last review. Plus, the Department of Agriculture, Fisheries and Forestry is already calling for input on the coming review.

Let’s remember that the code does not set prices. It provides rigour and protection for farmers.

Having considered all this, ADF believes the coming review should be completed. Not least to fulfill legislated obligations. However, there’s no need to bring it forward.

The code is protecting dairy farmers, bringing transparency to the market and addressing power imbalances.

It’s something we see so often in life – people seizing an issue and misrepresenting the facts to push their agenda.

That’s exactly what has happened recently in the dairy industry. If you haven’t yet heard of the cost-of-living crisis, you’re lucky. It has been all over the news.

Yet, some industry participants have seen this as an opportunity to pursue their agenda to effectively water-down the mandatory Dairy Code of Conduct. They’ve presented an argument that the Code is, in effect, setting prices and contributing to this cost-of-living crisis.

Blaming the Code for food inflation or the price difference between high domestic dairy prices and cheap international dairy products is, at best, misleading.

This deliberately misrepresents and confuses a number of issues, including the purpose of the Code, how milk prices are set, and underlying world supply and demand.

The misrepresentation is particularly concerning, given the timing. The Department of Agriculture, Fisheries and Forestry is currently seeking the industry’s feedback on aspects of the Code.

Firstly – the Code does not set prices. It adds rigour to contracts. It was introduced after the devastating behaviour of processors in 2016, when they clawed back payments to farmers – resulting in many leaving the industry and contributing to reduced supply.

Secondly – domestic prices are, in effect, set by milk processors. The processor places their price in the market. Farmers and processors then lock in commercial contracts accordingly.

Thirdly – the disparity between high domestic prices and low international prices is being driven by underlying market forces. It’s simple supply and demand.

Domestic milk prices were ‘bid up’ as Australian processors vied to fully utilise their excess processing capacity, as they (not the Code) set prices. Whereas, discounted international prices from the likes of New Zealand and the US are largely because these are major net exporters of dairy products. This domestic Australian shortage and the export surplus of our competitors is what causes a world price differential – not the Code.

It was the years of volatility and low prices paid by retailers and processors, as well as the 2016 clawbacks, that contributed to the declining milk supply in Australia and excess processing capacity.
In the ACCC’s words, the Code is intended to “account for the imbalance of bargaining power between dairy farmers and processors, and address longstanding industry practices which were seen to be unfair or had the effect of deterring farmers from responding to market signals”.

One way it brings rigour, discipline, and price transparency to the market is in forcing processors to nominate their minimum price and honour their fixed-price agreements.

Processors determine their (minimum) price which, upon signing a contract, is locked in. They’re able to increase prices, if they choose. In certain circumstances, if justified, they can also reduce prices.

Importantly, like all good market instruments, the Code helps farmers and processors share and manage risk.

It’s clear to us the Code is working. In taking action against a processor last year under the Code, the ACCC stated: “we considered (the processor’s) conduct would reduce transparency in the industry and served to perpetuate systemic bargaining power imbalances between processors and farmers”.

Ironically, if you want further proof the Code is working, you need look no further than this recent Code-price spin from our processors. It has also passed many other tests.

It was reviewed in November 2021 by the Federal Department of Agriculture. In that review, most stakeholders, including the ACCC, were highly supportive of the Code.

Similarly, the Senate inquiry into the dairy industry and the ACCC’s perishable goods inquiry found no evidence of a reduction in competition arising from the Code.

Farmers are business people. They require a strong, competitive and transparent marketplace to drive greater milk production and ensure milk processing capacity is fully utilised.

Targeting the Code as the cause of food inflation or international-domestic price spreads is clearly a misleading tactic to push an agenda to water it down.

If processors want to have an open conversation about price transparency and contracting options, they should do so. If they say they support the Code – then do just that. Park the spin.

Increasing domestic production is a real issue faced by the whole industry – something which farmers and processors are working on, and which is critical to the future of our industry.

At a basic level, knowing what they’ll be paid gives farmers the certainty they need to make investment decisions for their business. Without that certainty, you’ll see a whole lot more farmers leave our industry – right when we need them to increase supply.

As such, Australian Dairy Farmers (ADF) strongly supports the underlying principles of the Code.

No doubt we’ll continue to hear complaints about the Code. But let’s not get sidetracked by the agenda and the spin.

This indicated desire to wind back the Code cannot be allowed to snowball into a return to the years of volatility and low prices paid by retailers and processors. Such a situation would only serve to perpetuate the dilemma of declining milk supply in Australia and excess processing capacity.