ADF answers questions about the dairy code

Australia’s peak dairy representative body, Australian Dairy Farmers (ADF), has not yet joined the ACCC and all but one of the state dairy bodies in calling for a mandatory code that would govern the interactions between farmers and processors.

I’m grateful to ADF’s President, Terry Richardson, for answering four questions about the ADF’s approach for Milk Maid Marian.

Terry Richardson2lores

Terry Richardson, ADF president

1. Does the ADF accept the ACCC’s finding that the voluntary code was not effective enough?
TR: ADF accepts the ACCC findings that the current industry Code had a positive impact on contracting practices but has been unable to secure participation by all processors, reduce risk and strengthen bargaining power for farmers, independently arbitrate complaints or penalise breaches.

When the Code was introduced, it was agreed that a review would occur twelve months of operation. This included an assessment of its strengths and weaknesses in the context of the ACCC report and industry feedback.

We were aware at the start of the code review process that the next version of the industry Code must have such procedures in place.

It is important to recognise that prior to 1 July 2017, there was no Code of Practice for Contractual Arrangements in the dairy industry, and Australian Dairy Farmers was pivotal in making this difficult yet important first step.

2. If you are still committed to the review of the voluntary code, what resources does ADF have that were unavailable to the ACCC and may have hindered its review?
TR: It is incorrect to assume that the ADIC is conducting its own review with the aim of coming to a different conclusion to the ACCC. The ACCC and ADIC reviews have different objectives.

The ADIC review is focused entirely on how the voluntary code operated, what elements were successful and what needs improving in a new Code of Practice.

We found that relatively little of the ACCC report considered the operation of the current dairy industry Code of Practice despite the shortcomings.

Our concern with the ACCC report was that in recommending a mandatory code of practice, the ACCC did not conduct an assessment against the Australian Government’s threshold test nor did it provide adequate analysis on how this new code would operate.

It is our understanding that it is difficult to amend or alter a mandatory code once it is enacted if farmers determine at some future time that they are unhappy with its operation.

It has been incorrectly assumed that continuing with the ADIC review is an indication that the Council or ADF is opposed to a mandatory code of practice. That is not true.

The ACCC report broadly discussed the different types of codes but we need to review all options and communicate to farmers the benefits and shortcomings of each.

These are significant decisions for the dairy industry and farmers should expect that ADF forms a view that is underpinned by detailed analysis

3. What steps has the ADF taken in response to the ACCC report?
TR: ADF, in conjunction with the Australian Dairy Industry Council, is using the ACCC report as a springboard to revise and strengthen the Code of Practice and act on the other recommendations contained in the report.

We are working with a legal firm who has considerable experience in working with industry codes. While this legal advice is in its early stages, we will work through number of key amendments that should be included in a new dairy industry code, including a dispute resolution mechanism and penalties procedure that would ensure compliance.

We are also using the ACCC Guide to Industry Codes of Practice to ensure a strengthened code is consistent with best practice.

4. What are the next steps and their timeframes?
TR: The introduction of a Mandatory Code would take 15-18 months, and with a federal election scheduled for the first half of 2019, this timeline could be extended as government moves into caretaker mode during an election.

Preparing a strengthened industry Code including dispute resolution procedures is the next step, and we expect this to be complete in the next couple of months.

This work is complex and ADF is proceeding one step at a time, recognising the urgency of moving this work forward.

Thank you, Terry Richardson, for explaining ADF’s approach to a dairy code!

Code of conduct vs contracts

CoC

The newly released Code of Practice has been promoted as industry working together to restore trust and confidence. It’s a step in the right direction but, as it stands, the Code brings little comfort for three reasons:

  1. Apart from a few tweaks around the edges, it preserves the status quo;
  2. Other than being labelled “very naughty”, there are no penalties for flaunting it; and
  3. It doesn’t apply anyway when processors demand new suppliers sign an individual contract. Easy!

Welcome improvements achieved by the code
Don’t get me wrong: the tweaks achieved by the code are welcome and important, especially these:

  • “Any downward changes to such adjustments (or adjustment calculations) cannot be made unless the dairy farmer has been given 30 days’ written notice…”
    In the heat of May 2016, Fonterra initially gave us minus 5 days’ notice. Thirty days would have allowed farmers to make better decisions under far less pressure.
  • “A farmer is entitled to all accrued loyalty and other payments where they have supplied to the end of a contract term, irrespective of whether they remain a supplier post a contract expiry.”
    This will make a difference because, while it effectively continues to reinforce at least a one-year term, farmers are free to switch processors afterwards without missing out on payments that could otherwise take months to arrive.
  • “Where a farmer has a contract with a processor and wishes to expand their production and a processor does not want to purchase the additional milk under the same contractual terms and conditions, the contract between the farmer and processor must allow the dairy farmer to supply the additional milk to other processors.
    This clause will apply if the primary processor is prepared to take milk in addition to the contracted volume at a lower price.”
    This aims to prevent the dreadful Tier 1 vs Tier 2 milk situation seen in fresh milk states like NSW for those on standard form contracts.

Sadly, none of this will stop a savage price drop again and farmers are still pretty much forced to sell all their milk to a single customer for a full year without any guarantee of the price they will be paid.

It’s sad but true that, even with the improvements made by the Code, dairy farmers are at a horrendously unfair disadvantage to the processors who buy our milk.

A Code with no bite
The first thing I should say is that it is clearly not within the power of dairy farmer representatives to mandate this Code. Only our politicians can make laws.

It does mean, though, the that Code is something of a toothless, arthritic tabby at best. In fact, the worst that can happen to any processor who breaches the code is that suppliers can leave (if they can find new homes for their milk) and the processor is labelled a very naughty boy.

Frankly, the shameless behaviour on display over the past 18 months shows it’s pretty clear plenty of processors don’t give a damn what we think of them.

In a piece published by the Stock & Land, UDV President Adam Jenkins said:

“But it’s up to us, as dairy farmers, to take ownership and hold the processors to honouring all the provisions.”

Sounds great. Unfortunately, we just don’t have the power to do that. After all, that’s why a Code was developed in the first place!

Code vs contracts
The Code only applies to “standard form contracts” (those which are the same or similar for all suppliers) rather than the increasingly-common individual contracts.

Burra Foods CEO Grant Crothers spells it out neatly for suppliers in his June 27 blog post:

Mr Crothers is on record now saying that his contracts comply with the Code. I’m not a lawyer, so I can’t comment on whether the clause below contravenes the Code’s insistence that “…no changes should ever be made retrospectively…” but can well understand why some dairy farmers are concerned it does.

Burra42.jpg

At any rate, simply moving from standard form to individual contracts provides an easy work around for processors not keen on meeting the terms of the Code.

The Code provides a starting point
While the Code is not the solution to all our woes, at least we now have a list of basic expectations regarding the way processors treat farmers. But I couldn’t put it better than Adam Jenkins himself, when he wrote: “…while the code is in itself a great achievement of the dairy industry, the real challenge will be ensuring that it is enforced”.

The Code is a foundation for other measures that will restore confidence to invest. Let’s hope there’s another few rounds in the locker to come.