Senate inquiry into dairy competition

Posted by Nicole Eckersley on 26th May 2010

A Senate report on competition and pricing in the Australian dairy industry has slammed the results of a deregulated dairy industry, with dominance by the two major supermarket chains and a handful of mostly foreign-owned processors placing farmers at a competitive disadvantage.

The inquiry investigated the varying prices being paid to dairy farmers in different Australian states, particularly focussing on the impact of consolidation that has occurred within the dairy supply chain since deregulation of the industry in 1999 and the effectiveness of the Trade Practices Act 1974, in response to claims from dairy farmers that the processing and retail sectors were taking advantage of their market power to ‘milk them for all they were worth’.

According to the report, the competitive disadvantage of the farmers was masked by favourable economic conditions, but when commodity prices fell, farmgate prices dropped accordingly.

“There is no question that right down the supply chain there are significant pressures. We did start to receive some evidence as to where the profit lies in the supply chain. Certainly, the dairy farmers were not making much profit, if they were in fact breaking even. I think there is quite severe pressure on some of the processing companies and that gets applied down the supply chain, particularly by the supermarkets,” said Tasmanian Liberal Senator Richard Colbeck at the report’s tabling in the Senate.

The report recommended that the entire national competition policy be reviewed, with results by next April, and that the ACCC immediately investigate milk prices in terms of costs and profits. A review of collective bargaining was also recommended, with a view to creating a more equitable balance of power, and an independent report on impediments preventing farmers’ collectives from establishing their own processors.

The report also made a sweep of recommendations designed to increase the effectiveness of the Trade Practices Act, which they state is not operating effectively in preventing large players from dictating terms to weaker parties. The recommendations address “particularly those provisions relating to misuse of market power, predatory pricing, mergers and creeping acquisitions and the need for anti-price discrimination legislation.”

These included an investigation by the National Competition Tribunal, close monitoring by the ACCC, a moratorium on further takeovers and mergers in the milk processing industry, a specific amendment to the Trade Practices Act to reinstate anti-price discrimination and abuse of ‘market power’ (to be redefined as less than complete market dominance) and an investigation by the ACCC into supermarket own-brand generics.

The Queensland Dairyfarmers Organisation welcomed the report, saying that it verified the widespread dissatisfaction about the lack transparency and balance of market power in the domestic dairy industry value-chain beyond the farm-gate.

“During the inquiry, QDO in particular raised concerns about the imbalance of market power and the impacts on returns to the industry’s value chain from supermarket private label products and marketing strategies,” QDO president Brian Tessman said.

“We also highlighted the need for greater transparency of pricing and the need to strengthen collective bargaining provisions for farmers.”

“With just two major retailers in this country – both of which own their own milk ‘brands’, which compete with processor brands – it makes for a difficult environment for farmers when seeking to negotiate a sustainable price for our milk.”