Levelling the dairy field


 

Mick Keogh

Deputy Chair
Australian Competition and
Consumer Commission (ACCC)


Terry Richardson

President 
Australian Dairy Farmers (ADF)


Mick Keogh was appointed as Commissioner of the ACCC in February 2016, and then as Deputy Chair of the ACCC in 2018. Mick’s diverse history with the agriculture sector has included employment as a farm manager, a university researcher, an agribusiness consultant and a policy advisor. Mick’s role at the ACCC includes involvement in a range of committees and oversight of the small business, franchising and agriculture units of the ACCC. Mick was awarded the Order of Australia Medal for services to agriculture in 2015 and was the founding Executive Director of the AFI. 


Terry Richardson is the President of Australian Dairy Farmers (ADF). He has held many positions in the Australian and New Zealand dairy industries, including as a director of several companies and a consultant. Terry has a Bachelor of Agricultural Economics, a Diploma of Business Studies, and is a Member of the Australian Institute of Company Directors.


Question 1: Is consolidation of the dairy industry inevitable – and is this good or bad? 


Mick Keogh, ACCC

Consolidation has been occurring in the dairy industry (at both a farm and processor level) for at least the last 20 years, driven by a number of factors. Productivity growth at the farm level (milk production per cow has increased by 24% from around 5,000 litres in 2000 to 6,200 litres in 2019) has outstripped demand growth in regions with a domestic market focus, keeping farmgate prices static and squeezing out higher-cost producers. In the case of export-focused dairy regions in southern Australia, global developments (particularly the removal of quotas in the EU and the Russian embargo) have increased supply in export markets, dampening prices, and again putting pressure on higher-cost farm businesses. At the processor level, a combination of essentially static prices in domestic markets, subdued export markets, and the productivity gains available from increased investment in processing infrastructure have also resulted in consolidation (although some more specialised small-scale processors catering to very specific product or regional markets are emerging). 

Whether these changes are good or bad depends on an individual’s perspective. A farmer or a processor perceiving opportunities for expansion because a competitor or neighbour is ceasing production probably considers consolidation in a positive light, whereas the owner of a business forced to close down because they can no longer compete would have a much more negative perspective. The key question is not whether consolidation is good or bad, but whether any changes that are occurring are a result of competition that is occurring in a properly functioning market. 

The lessons available from the past are that such changes are inevitable and will continue into the future (and indeed are not confined to dairy), that industries and businesses that successfully respond to these changes remain competitive and viable while those that don’t respond inevitably decline.   


Terry Richardson, ADF

Farm consolidation is not unique to the Australian dairy industry. It is in fact an inevitable outcome for all agriculture commodities operating in competitive Western market economies. As economies become more service orientated, productivity in the farming sector increases, with a smaller number of farms producing same of higher output. The number of businesses in an industry is not a measure of success or economic contribution. 

The majority of Australian dairy farms are family owned and we can’t ignore the social cost on dairying families as a result of consolidation. But from a purely economic perspective, consolidation has recorded positive results. While the number of dairy farms has decreased from 8,844 to 5,771 between 2005 and 2017, the number of farmers employing labour increased by 25% over the same period. Today around 86% of dairy farms employ over 24,400 people. The gross value of dairy production has also consistently increased, from $425 million in 1970 to $4.2 billion now. The average profit at full equity for a dairy farm during 1990–2000 was $40,000, but was $106,000 from 2010–19, while the average dairy farm equity has increased from $1.5 billion in 1990 to $4.4 billion in 2019.


Question 2: Will a mandatory code of conduct for the dairy industry level the playing field? 


Mick Keogh, ACCC 

The Dairy Inquiry conducted by the ACCC identified that the bargaining power imbalance that exists between major dairy processors and their individual farmer suppliers meant that, over time, processors had transferred more and more of the pricing pressure and risk they faced to farmers, via the terms and conditions of their milk supply agreements. That is, rather than responding to the changing industry by finding ways to manage the new risks they faced, many simply transferred much of the pressure onto their farmer suppliers. The most striking example of this was the large retrospective price step-downs announced by two major processors in April 2016, but this ‘market failure’ also manifests in other ways, including overly complex and restrictive contracts, impediments to farmers switching processors, opaque and overly complicated pricing, and contract conditions that gave considerable latitude to processors to make changes, while restricting farmers. The ACCC recommended a Mandatory Code as the best way to tackle the bargaining power imbalance, by establishing minimum standards of behaviour so risk is more evenly distributed and competition for milk at the farmgate improved. The extent to which the Dairy Code ‘levels’ the field in terms of how each consumer dollar spent on dairy products is shared between farmers and processors remains to be seen. The first review of the Code’s effectiveness (scheduled to commence on or after January 2021) will provide an opportunity to more fully answer this question. 


Terry Richardson, ADF

The mandatory Dairy Industry Code of Conduct will play a critical role in improving the playing field between farmers and dairy processors, but it is just one mechanism that is required to address the market failure identified by the ACCC Dairy Inquiry. The Code of Conduct has clauses that will:

provide clear and transparent price signalling, methodology and negotiation arrangements
offer notification periods for contract variations and termination
never issue retrospective changes 
honour loyalty payments
allow farmers to supply additional milk to other processors
provide a dispute resolution process in the event of a contract disagreement
stipulate other requirements like record keeping.

These clauses, coupled with the implementation of other actions, including a standardised milk supply agreement template, provision of contract and farm production advice, and digitalisation of supply chains and milk trading in real time, will provide greater fairness, transparency, risk management and professionalisation of contracts and trading in the sector.


Question 3: What lessons should the rest of Australian agriculture take from the dairy market?  


Mick Keogh, ACCC

The structure of the dairy sector is not dissimilar to that of a number of other agricultural sectors, including wine grapes, chicken meat, a number of horticulture sectors, and sugar. In each case the market consists of a small number of very large-scale processors, and a large number of small-scale farmer-suppliers. In such industries, there is often limited competition at the processor level, and farmers may only have available one or two businesses they can supply. This means farmers have very limited bargaining power, and sometimes fear retribution if they challenge what processors are offering. Like dairy farmers, they face unequal bargaining power compared to processors in trying to obtain what they consider to be a fair share of the consumer dollar the sector generates. There are some policy measures in place to address this imbalance, including the ability to form collective bargaining groups, unfair contract terms legislation, and in some instances industry codes. Which of these measures might be appropriate for a particular sector, and whether there is a need for additional or different policy approaches are questions that policy-makers and industry participants continue to grapple with. Either too little, or too much regulation can create problems in markets, and what works in one sector may not necessarily in others.  

Terry Richardson, ADF 

There are several lessons that can be learned from the dairy industry. Firstly, any form of market intervention has to be designed to address the specific market failure and not cause undue cost or benefit to buyers or sellers. The ACCC Dairy Inquiry and the other nine dairy inquiries conducted by industry and government over the past decade made various recommendations consistent with this principle. This included reforms seeking to increase competition, marketing and price setting transparency, reduce trade barriers, professionalise contracting, encourage investment in research, development and extension, and reform industry structures.

Secondly, the capacity for price increases through the dairy supply chain has been limited since the introduction of discount milk in 2011. While retailers and – to a lesser extent – processors, bear the greatest profitability impact, they can offset these losses via margin gain on other products. Dairy farmers have no options. They are price-takers and only have a single perishable product to sell.

Other commodity groups and sectors may have similar outcomes to dairy. While consumers are clearly benefiting from discount dairy products, the extent of damage being caused across industries and the economy more broadly needs to be objectively determined. It is only when this data and analysis is delivered can we appropriately target market intervention.