Dairy Farmers Deserve Better

(TheSydneyMorningHerald) – In 2016, dairy farmers Bec and Glen Casey heard from milk producer Murray Goulburn that they would be cutting the price of milk. Worse, Murray Goulburn told them that it had been overpaying its producers, and would have to claw back some of the money they had been paid. The decision cost the Caseys’ 320-head operation a full two years of profit. Bec said that Glen “feels like someone’s come in and taken half the herd from underneath him”.

Whether you buy branded milk or supermarket label, the farmer gets approximately the same amount per liter.

In one sense, milk is big business. The average Australian drinks over 100 liters of milk a year. Add in butter, cheese and exports, and dairy farming turns out to be the fourth-largest agricultural sector.

But in another sense, it’s small business. Many dairy farms are family operations, and they’re feeling the squeeze. In the late 1990s, there were more than 12,000 dairy farms. Now, there are less than 6000. They sell to a handful of major processors – Murray Goulburn, Fonterra, Lion, Parmalat, WCB and Bega – who in turn sell to a heavily concentrated supermarket sector.

Last month, the Australian Competition and Consumer Commission produced a major report on competition in the dairy sector. Using its compulsory information gathering powers, it obtained over 25,000 documents, held public hearings, and met with stakeholders. The resulting report is essential reading for anyone seeking to understand the industry today.

Since the early-1990s, the farm gate milk price has generally fluctuated between 40 and 50 cents a liter (in today’s dollars). The competition watchdog found that in 2011, when supermarkets began selling home brand milk for $1 a liter, the squeeze was mostly on the margins of retailers and processors. That’s because farm gate prices were already close to the cost of production. Indeed, the competition regulator notes that whether you buy branded milk or supermarket label, the farmer gets approximately the same amount per liter.

But acquitting $1 milk doesn’t mean that everyone in the milk market is innocent. Dairy producers, the ACCC concludes, face significant imbalances in bargaining power. Processors have better information. Contract terms discourage switching. Although larger companies are better able to manage risk and uncertainty, the processors have successfully shifted much of their risk onto the small dairy farmers who supply them.

We see the problems facing dairy farmers as pretty similar to the problems facing workers in the labor market. The reason trade unions were created was to address a power imbalance in the workplace. The Dickensian mistreatment of workers by unscrupulous bosses was the motivation for the creation of unions. From minimum wage laws to annual leave, safety standards to penalty rates, the employment system recognizes that Goliath doesn’t always give David a fair go.

That’s why we are pleased to see the competition watchdog recommending a mandatory code of conduct. It will mean farmers get more information about prices, remove restrictions on switching to a new processor, and lead to a fairer allocation of risk. As the commission notes: “While the introduction of a mandatory code will not overcome farmers’ relative bargaining disadvantage, it will mitigate some of the significant negative consequences.”

It’s a good report, but it’s a pity it’s taken so long to get here. Unlike other competition agencies, the ACCC does not have a market studies power. This means that if it wants to do a deep dive into an industry, it needs to wait for a reference from the government. Labor would empower the commission to do its own market studies, so it can act quickly on cases like these.

When Murray Goulburn decided to make farmers pay for its own mistakes, Labor fought to force its board to do otherwise. The co-operative’s leaders had the option of reducing dividends to investors rather than hitting farming families. If the Turnbull government had joined our call, the board would surely have been left with no choice. But Malcolm Turnbull and Barnaby Joyce remained silent.

The government’s alternative was the Australian Competition and Consumer Commission review. Eighteen months on, it’s too late for many farming families; but it’s not too late for the Turnbull government to drop its opposition to a mandatory code of conduct. Farmers deserve no less.

Joel Fitzgibbon is the opposition’s agriculture spokesman. Andrew Leigh is opposition competition and productivity spokesman.