Performance of Australian Dairy Farmers since deregulation in 2000

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By Shaughn Morgan - Chief Executive Officer - Dairy Connect

Dear Secretary,

I refer to the call for submissions by Senate's Rural and Regional Affairs and Transport References Committee (Committee) in relation to the performance of Australia's dairy industry and the profitability of Australian dairy farmers since deregulation in 2000.

By way of background, Dairy Connect is an industry body representing the value chain of the Australian dairy industry and other industry stakeholders. We also work cooperatively and collaboratively with other agricultural and dairy bodies to ensure that the best outcome is obtained for the dairy industry in NSW specifically and in Australia generally.

Prior to addressing the Committee's terms of reference, it is worth reviewing a number of general comments regarding the Australian dairy industry. Since deregulation in 2000, the dairy industry has seen a continual decline in production volume, the ongoing 'slumping' of fresh milk prices in major supermarkets, which has resulted in high numbers of farmers exiting the industry, as evidenced by the number of registered dairy farms as recorded by Dairy Australia (source: Australian Dairy Industry in Focus 2018 at page 6, Dairy Australia). These trends are exacerbated by record high energy cost and an ongoing and unremitting drought in the majority of production areas along the eastern states of Australia.

Stopping or reversing these trends will require a bold approach and what is at stake is nothing less than the core idea of the 'Australian dairy farmer', being the small to medium scale family run dairy farm.

Terms of Reference:

The ability of Dairy Australia to act independently and support the best interests of both farmers and processors.

The term 'dairy industry' is worth conceptualizing before answering the question of Dairy Australia ' s ability to support such an industry. The industry consists of 3 major conjuncts, each dependent on one another and hardly viable without the others. These conjuncts are dairy farmers, processors and retailers. Each of these entities have particular interests and, in some instances, these interests may conflict with one another. Indeed, the 2018 ACCC inquiry into the dairy industry concluded that power imbalances between different segments of the supply chain were a major obstacle for individual dairy farmers.

In regard to Dairy Australia's ability to support both the interests of farmers and processors, it might be the time to recognize that the interests of individual dairy farmers are somewhat irreconcilable with those of the major processors and may profit from a dedicated RD&E industry body, as would those of the processors.

In recent times, Dairy Australia's communicative strategy may be considered as passive, but this has changed in recent times with a number of marketing initiatives. Indeed, through their network of 'branches' in the States, they continue to communicate issues associated with RD&E to dairy farmers in the differing regions. Each region having its own set of parameters that they must engage with.

For example, NSW & Queensland (as a 'fresh milk States') have differing requirements as against the southern States, whose dairy produce is directed more towards dairy exports.

However, one matter that should be considered, is that of advocacy. Currently the governing legislation underpinning the creation , model and operation of Dairy Australia prevents it from being able to be involved in the development of policy and thereafter undertake its advocacy. The policy development that is undertaken by Dairy Australia is utilized by the state dairy industry bodies in their discussions with government and stakeholders.

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There may be some sound grounds to consider that Dairy Australia should have a broader approach in relation to policy development and then advocacy as against merely policy development to be utilized by other bodies.

Such direction would require legislative change. However, this dual role has appeared to have been well received in the pork commodity area. Such opportunities could have played an important role in the development of the Mandatory Dairy Code of Conduct (Code} that the Federal government is currently seeking final submissions for the Code's implementation within the Australian dairy industry.

Of course, this could extend to other areas of dairy policy and how it would be implemented. Issues, such as opposing government policy, would need to be carefully balanced as the Federal government continues to provide matching funds for the ongoing operation of Dairy Australia. It is the submission of Dairy Connect that such proposals should be carefully considered and weighed as to the benefits that could flow to dairy farmers in the different States.

Given the conflicting interests between dairy farmers and processors policy matters may lend itself to the creation of separate bodies, as noted above.

The policy initiatives of Dairy Australia can be best highlighted by the campaign that they have been involved with industry bodies on plant-based beverages. They have been able to undertake research, both domestically and internationally, that is able to be used by industry bodies {such as Dairy Connect, which has been lobbying for ' truth in labeling' and protection of iconic dairy terms like ' milk' since January 2017} in their lobbying activities on this matter but having them available to run a policy campaign could provide benefits to the industry as a whole.

Dairy Connect would also submit that there must be a higher level of transparency and openness in the operations of Dairy Australia, with reflect ion upon the duties of the board and the senior staff. This would be seen as a benefit to those dairy farmers to contribute to the financial operation of Dairy Australia through the levy that is collected from the dairy farmer. This is particularly so with respect to the differing classes of membership of Dairy Australia, as defined by their constitution.

The accuracy of statistical data collected by Dairy Australia and the Australian Bureau of Statistics.

Dairy Connect does not question the accuracy of the st atistical data collected by Dairy Australia and the Australian Bureau of statistics. Dairy Connect contends that they undertake the collection of such information in a diligent manner. However, again greater transparency in its collection would enable a clear understanding by the dairy industry (and particularly the dairy farmer} to better understand the reason for the collection of information and what it will be used for. Indeed, Dairy Australia must improve in the timely dissemination of such information, as and when collected.

The funding of Dairy Australia and the extent of its consultation and engagement on the expenditure of levies revenue.

During consultation with Dairy Connect members, respondents in general did not object to funding Dairy Australia through a levy model. Further, the education and training offered by Dairy Australia is a valuable contribution to the dairy value chain.

Regardless of this, the desire among dairy farmers in regard to Dairy Australia as an RD&E body, would be for it to take a more holistic approach to marketing dairy products and other activities that it is charged to do. Despite its policy development having to be balanced between different stakeholders, a more 'hands on' approach should be encouraged in ensuring dairy products receiving the recognition they deserve. Having the terms 'milk', 'cheese' and 'butter' watered down by ambiguous marketing for other alternatives is not in the interest of the dairy industry.

In that regard, consideration should be given by the Committee to recommending that Dairy Australia should act as an industry champion, rather than focusing exclusively on RD&E.

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It is also to be regretted that the development of research and development has, in recent years, been declining. This is especially so in States such as NSW.

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.

In its 2018 inquiry into the Australian dairy industry, the ACCC stated that there are power imbalances along the dairy supply chain. Thus, an asymmetric risk allocation was to blame for market failure within the dairy industry. However, the introduction of the Code is not intended to address this market failure but rather to restore the 'level playing field' between the dairy farmer and the processor.

Having the ACCC have increased powers to oversee the dairy market (beyond that provided for in the Code) may be a viable pathway, if a fair relationship between producer and processor is enabled and the ACCC has tools at its disposal to appropriately oversee this relationship. This may require legislative change to enable the ACCC to properly undertake this role.

There may be also merit in enabling the ACCC to provide a report to government as to the regulation and marketing of milk within the Australian dairy industry as well as internationally on a regular and on-going manner. The current market value that is being experienced by dairy farmers throughout the States illustrates the market failure that has encompassed the industry over the past years since deregulation. It may be said that the deregulation has not assisted in the development and growth of the dairy industry in Australia but rather hindered its growth.

This can be attributed to a number of causes, including the power imbalance between those players within the dairy value chain. This can be evidenced by the market bastardisation that can occur through low-priced dairy imports (e.g. cheese) sold by the retailers and the lack of accountability in ensuring that a sufficient amount of the profits flow through the processor to the producer through a higher farm-gate price.

In the view of Dairy Connect, the power evidenced by the retailers in, for example, the $1/L milk needs to be considered and reviewed in light of commodity areas generally but dairy specifically. Dairy Connect has called upon the supermarkets, on a number of occasions, to raise the prices within the dairy cabinet generally. If such increases do occur, they would need to be overseen and monitored (perhaps by the ACCC) to ensure that sufficient amounts of the increased price are passed along the value chain to the dairy farmer.

The power imbalance between the different players within the dairy value chain has been clearly demonstrated by previous reports undertaken and made public, particularly by the Senate, over the past years.

It is the view of Dairy Connect that the ACCC can have a vital role to play in relation to oversight of the dairy industry value-chain and particularly so since deregulation occurred in 2000.

Alternative approaches to supporting a viable dairy sector.

Dairy Connect is aware that re-regulating the Australian dairy industry may be inhibited by international trade agreements and Australia's WTO membership. The recently proposed 'dairy floor price' might be difficult to embed into a free trade framework, overseen by the ACCC. However, this should NOT be a hindrance to reviewing and considering such a floor price to ensure food security within the dairy industry and the long-t erm viability of dairy farming enterprises.

Viable alternatives could lie in extended cooperation with the not-for-profit sector, as recently seen in Victoria. The State of Victoria has entered into partnership with the NGO 'Foodbank', to serve dairy products as part of a pre -school breakfast program in some schools. This not only stimulates the Victorian dairy industry but also helps ensure a nutritious breakfast for school children. In recent times, New South Wales Government has provided similar support to 'Foodbank' within NSW.

Further, the Federal Government could consider subsidies for the industry. On a global scale, Australian dairy farmers receive minimal subsidies, yet must compete with for example European dairy farmers on the world market, which profit from EU-farm-subsidies.

In more recent times, the former Chairman of the ACCC Professor Allan Fels has publicly endorsed the return of Government funded levies to ensure a sustainable dairy industry. Professor Fels reported:

"To my mind, the levy was an adequate solution for that period following the deregulation of the dairy sector and it expired at a time when the industry had adjusted to the new way of operating ... obviously, times change and sometimes this form of assistance can be re-examined, particularly in light of the difficulties faced by farmers."

The Introduction of a mandatory industry code of practice (Code).

Dairy Connect has previously indicated that the Code will not be a panacea for the Australian dairy industry, but rather a viable tool in its sustainability. The Code provides an opportunity for restoration of transparency and trust in negotiating milk supply agreements between processors and their dairy suppliers. In that regard, a 'balanced playing field' must be restored in negotiating milk supply agreements.

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There should not be any doubt that introducing the Code as early as possible (and have it overseen by the ACCC) is the minimum viable option if a market-based solution is desired. The Code, in which the 2018 ACCC recommendations would be partly implemented, would help alleviate fundamental flaws in the producer-processor relationship.

It would, for instance, prohibit retrospective price changes and exclusivity clauses offered to farmers at this point in time, amongst other reforms that are required urgently within milk supply agreements. Ensuring this 'even playing field' for all the involved parties would mark a first step in revitalizing family dairy farms and support the small/ medium businesses that rely on them.

Dairy Connect recently provided a submission in response to the most draft of the Code, which had been released for public comment (https://haveyoursay.agricult ure.gov.au/dai ry­ code-conduct). This latest draft of the draft Code has, in the view of Dairy Connect, fatal fundamental flaws which we have brought to the attention of the Federal Government.

Dairy Connect (at the time of writing this submission) is currently advocating fundamental changes to the draft Code, as distributed in October 2019.

It should be remembered that the Federal Department of Agriculture has published the principles of the Code as determined by its consultation with dairy farmers and dairy industry stakeholders (including processors) over 3 periods of consultation, commencing in October 2018 and concluding in November 2019. Yet the dairy industry is awaiting the introduction of the Mandatory Code. The principles enunciated are:

"The code will cover nine principles to increase fairness and transparency between dairy farmers and processors:

1. require parties to deal with each other in good faith and to operate with fair dealing by having due regard to the other party's legitimate business interests

2. prevent unilateral changes to agreements

3. require that annually on a set date processors publicly release a standard form agreement covering the terms of supply and a price (and if applicable a pricing mechanism for longer-term agreements) that covers the term of the agreement

4. prevent retrospective price step downs

5. prohibit prospective step downs unless in specific circumstances such as force majeure, or exceptional market circumstances or major changes in global market conditions

6. prohibit exclusive supply arrangements in combination with two-tier pricing

7. prohibit processors withholding loyalty payments if a farmer switches processors

8. introduce a dispute resolution process for matters related to contracts between farmers and processors, and

9. alleged breaches of the code, to be investigated by the Australian Competition and Consumer Commission, which may include penalties for breaches of the code." (source: (https://haveyoursay.agriculture.gov.au/dairy-code-conduct )

It is to be regretted that the current draft Code differs manifestly from the previous incarnation of the Code that was released for public comment and the current draft Code fails disturbingly in complying with its own principles.

For the information of the Committee, please find attached and marked Annexure 'A' a copy of the submission provided by Dairy Connect to the Federal Department of Agriculture in relation to the most recent draft of the Code released in November 2019.

Concluding remarks

The Australian dairy industry requires a strong national body representative of dairy farmers regardless of the membership of other bodies. An organization that has a broader scope in relation to its remit and which may be funded through dairy farmer levies and supported by Government with matching funds. As Dairy Connect has stated, this could be one outcome that could be considered by the Committee in making its recommendations.

However, this will require careful consideration of the many varied and complex issues confronting the Australian dairy industry at the current time. It is vital that the necessary steps to ensure that retain a viable and sustainable Australian dairy industry into the future. This will, by necessity, raise issues and questions of 'food security ' as well as the ongoing availability of Australian produced fresh nutritious milk and dairy products.

As indicated, the Australian dairy industry is facing a crisis that it has not previously faced. The actions that are taken in the coming months will determine whether Australia continues to have a sustainable dairy industry, serving both the domestic and international markets, or become a larger net importer of dairy produce and fresh milk.

Matters need to be examined that once would not have been at the forefront of anyone's minds. Issues such as a minimum floor price for dairy farmers may provide one mechanism by which a fair and sustainable farm-gate price could be achieved. While the implementation of a Code, overseen by the ACCC, will not be a panacea for the industry, it can restore trust, transparency and a balanced playing field.

It cannot be underestimated as to the crisis that the Australian dairy industry is facing. The dairy 'doomsday clock' is a minute to midnight and action is urgently needed to address the continuing market failure within the Australian dairy industry.

Dairy Connect looks forward to working with the Committee. Representatives of Dairy Connect would be willing to appear before the Committee to augment our submissions, if so requested.

Yours Faithfully,

Shaughn Morgan

Chief Executive Officer - Dairy Connect

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