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.

What it will take to get this farmer growing

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The last two years – a drought and the infamous dairy debacle – have taken their toll and not just on my hip pocket. Unless there’s change, my cheque book is likely to grow cobwebs for up to a decade. Sounds melodramatic? Not really.

My reasoning is this: first, we need to recover the equity lost over the last two years.

Second, we need to catch up on the maintenance we couldn’t afford to do over the last two years.

Third, I want at least another $100,000 in equity as extra protection. Interest rates won’t always be this low and, when they rise, another shock of this magnitude could be devastating rather than debilitating.

It all adds up to roughly $300,000 in profit to make up before I have an appetite to invest in any project that takes more than a year to break even. And that will take me years and years to accomplish.

If other farmers have the same attitude, we will continue to see Australian milk production stagnate.

The problem with this is that the processors have been investing in hundreds of millions of dollars worth of new stainless steel that requires enough milk flow to make it efficient. Time and time again, they have said growth is the only way to return the maximum price to farmers.

Do we have the start of a vicious circle? I hope not to hear the processors blaming a low farm gate price on inadequate utilisation of bloated stainless steel created by a low farm gate milk price.

Making me even more risk averse is the lack of definitive action to prevent this happening all over again.

Both the big processors, MG and Fonterra, have pledged to be more transparent and that’s a good first shuffle. I say “first shuffle” because to call it a good first step would be overstating its importance. We need a game-changer.

MG has commissioned a price review that will consider farm gate price models from around the world. At the same time, the Bonlac Supply Company, which represents farmers supplying Fonterra, also announced it would present alternatives early this year. Will these be the game changers we need?

I suspect not. The game changer we need is one where risk is shared along the supply chain rather than simply shifted onto farmers.

After all, while the current system is a legacy of an industry dominated by strong co-operatives, it’s also a marvellous “magic pudding” business model for corporate processors.

Consider this recent ACCC submission by Warrnambool Cheese & Butter‘s new owners, Saputo:

In February, Saputo announced a quarterly profit of C$197.4 million. I’m not sure why it feels it is appropriate to make Australian farmers responsible for its inability to negotiate a better energy contract. But it does because it can.

It serves as a timely reminder that the push for farmer prosperity has to come from farmers.