Hailing it as “a major breakthrough” for the relationship between Victorian dairy farmers and milk processors, the United Dairyfarmers of Victoria (UDV) has announced industry stakeholders will work towards a Voluntary Code of Conduct.
But what’s so special about the agreement to draft a voluntary code, you ask? A curious Milk Maid Marian asked UDV president Adam Jenkins a series of questions to learn more. Thank you Adam for responding.
MMM: Why is there a need for a code of conduct?
AJ: A voluntary code of conduct enables farmers and processors to come together to discuss agreed terms and conditions around the current Milk Supply Agreements and Contracts. This is to ensure that the risk is being borne fairly along the supply chain and that events of April 27th 2016 (essentially management decisions) are not pushed onto the farm producer.
MMM: What was the genesis of the code?
AJ: Events of April 27 2016 and the new legislation around Unfair contracts introduction on November 12 2016 is a prime opportunity to look at our industry and how businesses negotiate when entering into agreements.
MMM: What does the UDV hope will be included in the code?
AJ: The Code will include:
- Greater transparency in contracts and supply agreements
- Ensuring a pricing formula or mechanism is clearly defined within a contract
- Ensuring pricing adjustments to farmers throughout a contract are clearly defined and that there will be no retrospectivity
- Ensuring suppliers are given adequate notice if step-downs are to occur
- Ensuring that farmers receive all payments accrued over the term of a contract
- Ensuring processor exclusivity does not occur in cases where the processor has a contracted volume limit
- Ensuring a clearly defined mechanism for giving notice of contract termination
- Ensuring a clearly defined mechanism for modifying contract conditions, and giving farmers the right to negotiate variation
MMM: What does the UDV mean by: “Ensuring that farmers receive all payments accrued over the term of a contract”?
AJ: Farm businesses that have entered into milk supply agreements and contracts are entitled to the full value of milk they have supplied over that term of the supply period.
There needs to be more transparency around loyalty payments, quality bonuses and other price competitive hooks that effect the upfront weighted average but are not paid if you have ceased supply after the supply period has finished at 30th June. (In essence some companies have refused to pay these type of payments if people are not suppliers when the payment is made in July/August the in the new season.)
MMM: What impact would that have on flat milk and productivity incentives?
AJ: We are asking that the incentives paid reflect the true value of the milk to the market value of that milk. What we are proposing here, is to have the conversation as an industry to ensure that profitability/risk is discussed so that all can benefit in the long term.
MMM: Will transparency go beyond global trading conditions and reflect the unique product mixes of individual processors?
AJ: With the government committed to providing $2m for an Index or tools that provide market transparency, we are advocating for clearer market signals and the ability as an industry to have a process in place to question an anomaly in the market to minimise the events of April 27th 2016 happening again.
We are very keen to evolve the education of our industry to understand the global milk demand and supply tensions better. We also want to understand the true value of the commodities, the premiums that can be extracted from various product mixes and their markets and what these trends mean for Farm Gate Milk Prices.
Whichever processor a dairy farmer suppliers, we want them (the farmer) to be able to clearly see and understand how their milk price is set.
MMM: Who, other than processors, will have obligations under the code?
AJ: The obligations will be borne by processors and farmers.
MMM: Which processors have agreed to be bound by the code?
AJ: The code is very much in a draft form and all the major processors have indicated that they would be keen to be involved in the working committee going forward.
MMM: Who will determine whether a processor has complied with the code?
AJ: The code being developed is voluntary is so that the industry can come together and discuss developments as the situation changes. The ACCC will look over the voluntary code but will not have enforceable powers. Some agricultural industries have developed mandatory codes and have proven to be inflexible when market and trading conditions change making the code more detrimental for competition for business to business negotiations.
MMM: The code is voluntary but will there be any sanctions if its terms are breached?
AJ: See above but in addition it could be assumed that if a processor breaches the terms of the code, industry organisations and possibly government and the general public would frown upon the processors actions and their reputation would be greatly damaged.
Also dairy farm businesses will have the ability to chose to supply a milk processor that has stated that it will abide by the code.
MMM: What is the timeframe for implementation of the code?
AJ: With the unfair contracts legislation coming into effect Nov 2016 and the ACCC investigative report to be delivered Nov 2017 there is commitment to begin work on the draft asap, but no time line has been given yet.
MMM: What else is needed beyond the code?
AJ: A vision for the Australian dairy industry the allows the industry to come together to ensure that we can build resilient farm businesses of the future to sustainably compete in a very volatile competitive market place.
We are going to advocate strongly to include all elements discussed in the press release including transparency around milk commodity forecasting. The ability for poor management decisions to be pushed down the supply chain to be borne by farmers is unacceptable and anti-competitive. We therefore need to develop a system where the farm businesses have plenty of opportunity to adjust their businesses when pricing signals are to change.
The feeling amongst the farmer organisations is that, if processors can’t be confident in the market, then they should not be punting with the milk price. Setting opening milk price is not a game. Therefore, we are advocating for stronger reflection of the market milk price to the on farm milk price.
Thanks again to Adam Jenkins for answering Milk Maid Marian’s questions.