ACCC says farmers suffer under milk processor power imbalance

The national competition watchdog’s final inquiry report into the dairy industry has recommended a mandatory code of conduct be introduced to improve contractual deals between milk processors and farmers.

The Australian Competition and Consumer Commission has identified “a range of market failures resulting from the strong bargaining power imbalance and information asymmetry in farmer-processor relationships”.

“These features of the industry result in practices which ultimately cause inefficiencies in dairy production,” its report noted.

However, the ACCC has dismissed popular dairy industry theories which argue heavily discounted supermarket milk brands have undermined farmgate milk payments to farmers.

It doubted processors would pay farmers more if supermarkets lifted the price of their house brand lines above $1 a litre.

“In examining the impact of $1/l milk on farmgate milk prices, we found almost all contracts for the supply of private label milk allow processors to pass through movements in farmgate prices to supermarkets,” the ACCC said.

“Therefore, there is no direct relationship between retail private label milk prices and farmgate prices.”

The ACCC said a mandatory code of conduct would address problems arising from the imbalance in bargaining power and information. 

“We explored ways to address these concerns and found the existing provisions of the Competition and Consumer Act, the dairy industry’s voluntary code of conduct, or a prescribed voluntary code would be inadequate”, the commission noted in a statement.

While dairy farmers were understandably frustrated that retail prices for milk had declined in real terms since retailers had slashed milk pricing policies in early 2011, the ACCC inquiry found the impact of this on farmgate milk prices was minimal.

“There is no direct relationship between retail private label milk prices and farmgate prices,” the ACCC said.

“We believe that if supermarkets increased the price of milk and processors received higher wholesale prices, processors would still not pay farmers any more than they have to to secure milk.

“Our view is that farmers are unlikely to receive higher farmgate prices unless they have improved bargaining power in their negotiations with processors.”

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