ACCC: the cost of a mandatory code

Suddenly, we’re not talking about whether the voluntary code has worked but how much a mandatory code might cost.

Everyone (including lobby body, the Australian Dairy Farmers) was taken by surprise when the CEO of Australia’s largest dairy processor, Lino Saputo told ABC Radio his company would support a mandatory code provided that it wasn’t too expensive.

So, how much would a mandatory code cost? To hear directly from the horse’s mouth, Milk Maid Marian asked ACCC Deputy Chair Mick Keogh a few questions to help explain the costs.

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ACCC Deputy Chair Mick Keogh

MMM: What are the mechanisms that a mandatory code might use to resolve disputes or breaches and how do they differ?

MK: In its Dairy Inquiry final report, the ACCC recommended the industry should establish a process for an independent body to mediate and arbitrate contractual disputes between farmers and processors (or collective bargaining groups and processors).

The ACCC recommended ADIC should be responsible for establishing the body, and as part of this process should consult closely with farmer representative groups to determine how the dispute resolution process would work.

There are examples in other agriculture industries where an industry body has successfully developed dispute resolution process. For example, Grain Trade Australia administers a dispute resolution process where decisions are made by independent arbiters (that both growers and traders agree on) and disputes can only be brought if there is an arbitration agreement in writing.

GTA publishes detailed Dispute Resolution Guidelines that set out the procedure when parties are seeking to have a dispute resolved. GTA also publishes the decisions of arbitrators on its website (removing the parties’ identities) to allow industry participants to share in the findings and possibly modify their commercial behaviours.

The establishment of an independent mediation and arbitration body is not contingent on legislating a mandatory code for the dairy industry; however the ACCC considers a mandatory code should require that contracts contain terms that provide for an effective independent dispute resolution process.

MMM: Which of these is preferred by the ACCC in the dairy industry’s case and why?

MK: The ACCC’s preference is that ADIC establish an independent body to mediate and arbitrate contractual disputes between farmers (or collective bargaining groups) and processors.

The feedback received by the ACCC indicates there is not an appropriate existing body that could facilitate an effective dispute resolution process in the dairy industry, which is why a new body should be established.

MMM: What costs would the implementation of a mandatory code potentially bring? How large are these costs? Who would bear these costs?

MK: In our final report we outlined several ways a potential code could help address the contracting and bargaining power issues we identified through the Dairy Inquiry. These include:

  • obligations on processors to give timely and transparent information about the terms on which they propose to acquire milk from farmers (including through provision of written contracts and price guidance)
  • obligations on processors not to include contract terms which unreasonably restrict farmers’ ability to switch processors
  • restrictions on processors’ ability to change key trading terms (including prohibition of retrospective price step-downs and unilateral variation of agreement terms)
  • as noted above, requirement that contracts contain an effective independent dispute resolution process.

The ACCC recognises that there is industry and farmer concern about potential cost burdens associated with a mandatory code. However, the ACCC considers the compliance costs associated with the recommended mandatory code, particularly for farmers, would not be substantial.

The ACCC would be consulted on a code proposal and would not support an excessive regulatory burden being placed on farmers.

Farmers’ regulatory responsibilities would only require them to retain signed or acknowledged copies of milk supply agreements and act in good faith in their dealings with processors (similar requirements would be placed on processors too).

For processors, the potential compliance costs could include:

  • updating their contracts so they comply with the code
  • keeping a copy of contracts signed with farmers for a minimum time period, similar to requirements in other industry codes.
  • a requirement to participate in any compliance checks the ACCC undertakes
  • that they inform themselves of the code’s requirements and update their practices to ensure they are compliant.

Records of transactions and contracts currently need to be retained for taxation purposes for seven years, so any code record keeping requirements are unlikely to add any additional administrative cost for processors.

Thank you very much, Mick Keogh, for clarifying the costs surrounding the implementation of a mandatory code.

A new big Aussie dairy co-op?

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Fonterra Australia’s managing director, René Dedoncker

“It’ll be months, not years,” says Fonterra Australia’s managing director, René Dedoncker when I ask him about plans to form a new big Australian dairy co-op.

Industry veterans will tell you the idea of Fonterra forming an Australian co-op is not new and seemed a real possibility after the demise of that other great milk co-op, Bonlac, in the early 2000s. So, why now?

“I think the time is right,” says René. “This is a value proposition at a time when the industry is fragile.”

“Fonterra Australia is also in a great position to reduce risk. We have learnt from our mistakes and have a stable, repeatable business model with a balanced customer and product mix. Confidence, if not trust, is running high.”

I cough a little nervously and ask René how he expects farmers would rate Fonterra in the trust stakes and whether that might be a problem.

“Trust may well be a stumbling block.” he concedes. “Farmers – even those who’ve been supplying us for many years – tell me it will take years to rebuild. Purely on trust, we could well be ranked quite low but we are working hard to regain that.”

“I can tell you that there is not a key decision made without the input of farmer voices.”

The consultation on the co-op idea will officially begin at the Bonlac Supply Company AGM next week and be discussed at farmer forums across the country.

If it gets a sufficiently warm welcome, the next stage in the process will be discussions about the form the co-op would take.

“We already have several different models in mind,” René says, “but at this stage we want to keep it simple and see whether there’s an appetite for this co-op.”

What Rene can say is that there won’t be a mandatory requirement for farmer suppliers to “share up”, matching share numbers to milk production.

“We need to make it attractive and give everyone an opportunity to participate. Farmers will also be able to supply Fonterra Australia without becoming shareholders,” he explains.

It’s also decided that the shares would be in the Australian operation only, rather than the global Fonterra organisation. The Australian co-op has the blessing of the board of directors but would not need to clear a Kiwi shareholder vote.

The plans towards forming a co-op has “paused” the progress of a replacement for the Bonlac Supply Agreement, René says. While that replacement has already been drafted, it won’t be made public until it’s clear it would suit any new co-op model.

It has done nothing, however, to dampen Fonterra’s Australian expansion plans. The processor has already committed to lifting its processing capacity by another half-a-billion litres over the next six months and will add another half-a-billion within 18 months.

While René stresses that the 3 billion litre target is in capacity rather than milk supply (allowing enough headroom for a bumper season), he says the processor is aiming for a milk supply of 2.6 to 2.7 billion litres within two years.

At the same time, Lino Saputo Jr is on record saying Warrnambool Cheese & Butter will win back the milk MG lost. And, of course, the main beneficiaries were Fonterra and WCB itself.

“What about Saputo?,” I ask.

“We’re running our own race,” says René. “We have incredible confidence in our business and they’re offering powerful competition that’s good for our industry.”

“It might be better to ask Saputo about us.”

About the loss of MG

“We are stealing from the graves of our founding fathers and the cribs of our children,” were the words of former co-op chairman Ian MacAulay after the vote in favour of MG’s partial float was passed.

History has proven him right and it’s a travesty for our industry.

I’m not going to dwell here on how it feels because I’m sure that, by now, you’ve heard from plenty of others and my story is by no means unique.

All I can offer you is a list of questions for MG to help explain what comes next and the implications of the agreement it’s signed with Saputo. I’ve been assured they will respond but, understandably, it might take a little time.