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.

Protecting farmers from ourselves

Apparently farmers cannot be trusted with anything. Not even to want the highest farm gate milk price for ourselves.

Bega has just sold its stake in Warrnambool Cheese & Butter to Saputo, putting the Canadian billionaire on the brink of controlling WCB even though a higher price was on offer from Aussie farmer co-op, MG.

This happened because our co-op hasn’t been allowed to bid during the bidding period.

Australian farmers who want to invest in their own futures and who are willing to pay the highest price for WCB have been stymied by a government artifice in the name of protecting…you guessed it…farmers from themselves. Apparently, another processor that thrives on a low farmgate milk price is better for us farmers than having an efficient farmer-owned co-op.

This Aussie dairy farmer will never forgive Joe Hockey for sitting by and watching.

So, where to now? That, my fellow source of low-cost milk, is up to us, for although Saputo can buy WCB’s stainless steel, it cannot buy our future. Only Australia’s dairy farmers decide where our milk flows and our fortunes lie.

Australian dairy: does it matter if it’s sold to China?

Worth saving?

Worth saving?

Does Australian milk matter? We have to decide.

It seems two of Australia’s milk processors, United Dairy Power and Warrnambool Cheese and Butter, are about to be sold to China. Firms backed by the Chinese government are having unofficial talks that would put the price of WCB at a staggering $10 per share.  Meanwhile, the ruthless but charming Canadians continue to acquire a bigger stake of WCB.

Here, close to home, another Chinese firm has already purchased a formerly decommissioned factory and is repackaging milk powder to send back to China. (It’s been a debacle, with outraged and distraught workers regularly featured in the local papers desperate to be paid.)

It’s not limited to the dairy processing sector, either. The Chinese have been buying up our breeding stock for years and now, they want our farms, as Brett Cole reports in the Business Spectator:

“For more than a year, China Investment Corporation has contemplated acquiring Van Diemen’s Land Co, which owns and operates 25 dairy farms with 30,000 dairy stock. Other Chinese companies have moved decisively amid concerns about their nation’s safety standards.”

All this while our Australian farmer co-op, currently the highest bidder for WCB, languishes in the competition tribunal as it ponders – for months – whether we are allowed to bid at all.

Do you care? If you’re a dairy farmer, hell yes, you should. No foreign company cares about your future like you do or your co-op does. Perhaps worse still, once these assets are sold, the fragmentation and inefficiency of our processing sector is locked in, forever limiting the price farmers are paid for our milk.

If you’re not a farmer but an Aussie, there’s an awful lot to be lost. These international companies and governments so keen to pay more than twice the value of WCB are not irrational. They want control of their food. Does that matter to you?

Dear Joe, how will you be remembered?

Dear Joe,

Why have you betrayed me so cruelly?

You came to me in September with promises of fatherly love and affection. You described me as your pillar and that, after mining’s bloom had faded, I would be your everlasting rose. You said you needed me and that, without me, you would forever be insecure.

But now that my fate lays in your hands, you act swiftly to hasten the courtship of WCB by Saputo whilst locking me in the cellar, dressed in rags. I implore you to at least allow me to attend the ball so that I may win the hand of my beloved.

Your faithful Milkmaid

Okay, I never really fell for you, Joe, but here it is:

  • Before the election, you described agriculture as one of the five pillars of the economy and said that food security was important. I’ll hold you to that.
  • For Australia to have a dairy sector, it must be able to compete with the international goliaths. That means we need a big processor with scale.
  • Australia’s dairy farmers are sticking together and want to grow so we can be more resilient. We absolutely have to because we don’t have the subsidies, FTAs, cheap labour or government support enjoyed by most of our competitors.
  • Our 100% Australian farmer-owned cooperative exists to maximise farm gate prices and consolidation rather than competition is what’s needed. We are prepared to step up to the plate and invest in our futures.
  • You gave the giant, privately-owned, foreign Saputo a huge leg-up with swift clearance, declaring Australia “open for business” with a grin on your face.
  • Don’t hide behind the ACCC or the slow-as-a-snail tribunal. Where there’s a political will, there’s a way. Your Kiwi counterparts knew that doesn’t make sense and cast their equivalent aside to allow the much-admired Fonterra to take shape.
    To pin us to such a protracted process while ushering though our foreign competitor is to drive a stake through the heart of the co-op’s bid.
    You surely understand the irony of thwarting MG’s bid based on competition policy when it is Australian farmers themselves desperate to become more competitive who are driving this bid and, in turn, are being rendered non-competitive in this fight to keep WCB Australian-owned by you, our own government!
  • You are the biggest impediment to Australian farming families taking a greater stake in our own futures by keeping WCB Australian owned.
  • If you insist on holding us back, you will be remembered as the man who sold Australia’s dairy farmers down the river. And for what? The love of Lino?

Joe, it’s time you stepped out of the way and gave us a fair go.

Milk Maid in WCB wonderland as Saputo offers $8

Well, I wonder what MG will do now? And where will it end? Judging by the email I just got from MG, the co-op’s going to sit on its hands and hope the FIRB undermines Saputo’s bid.

“Murray Goulburn (MG) notes the revised conditional offer by Saputo for Warrnambool Cheese and Butter (WCB) announced today.”

“MG notes that Saputo’s offer continues to be subject to substantial conditionality. MG believes that resolution of the future ownership of WCB will be a long process and that WCB shareholders should not act prematurely in relation to giving up control of their shareholdings.

“MG remains committed to acquiring WCB and to satisfying all conditions associated with its offer as quickly as possible. MG presently owns 17.7% of WCB.

“MG believes it to be reasonable and in the national interest that Saputo’s Foreign Investment Review Board (FIRB) application to acquire WCB is not resolved until the public benefits of MG’s proposed acquisition of WCB have been given full consideration – pursuant to MG’s application for authorisation to the Australian Competition Tribunal to acquire WCB.

“MG considers its offer will bring many benefits for WCB shareholders, WCB suppliers, the Warrnambool community and the Australian dairy industry.”

But if push comes to shove, will MG go higher than $8?

I do understand the reasoning behind the co-op’s drive to acquire WCB for all the reasons outlined by Gary Helou when interviewed by the Australian Financial Review the other day (the video is very, very interesting). The WCB bid is important because it allows MG to grow quickly and achieve efficiencies similar to that of its giant Kiwi rival, Fonterra. Those efficiencies should mean better margins, which the coop would pass back to farmers.

On the other hand, it does make me feel like Alice in Wonderland just a little. When MG last launched a takeover bid for WCB in 2010, the price was $4.35 and WCB hasn’t suddenly hit the jackpot – its profits have fallen.

On the farm, we are in recovery mode from a year when the average Gippsland dairy farmer lost a lot of money. As the Dairy Industry Farm Monitor results 2012-13 showed:

“In what was a difficult year for many Gippsland farmers, average return on assets fell to -0.2% with average whole farm earnings before interest and tax down 82% to $37,609.  The average return on equity for Gippsland farms was -6.2% with average net farm income across the region reported at -$58,784. This performance impacts on the decision making ability of farmers in 2013-14.” 

The difference, says Helou, is that demand for milk is growing by 6 per cent while supply is growing at 2 per cent. If this is more than just a blip and a long-term trend, why wasn’t this foreseen three years ago? Curiouser and curiouser. Please forgive me for being a little confused.

MG makes its move

I used to think of our co-op as a bit like the ABC: your favourite aunty. Comfortable, dowdy, trustworthy and a little quirky.

But Aunty MG has undergone a transformation.

Since it acquired a new CEO, Gary Helou, in October 2011, Murray Goulburn has embarked on lancing $100 million of costs, opened up in Dubai, restructured the way farmers are paid for milk, revamped its retail trading store network, developed assistance packages for the next generation of farmers and forged the spectacular Coles fresh milk deal. At least, these are the “headline acts” that come to mind.

Now, MG is making a $420 million bid for its rival, Warrnambool Cheese & Butter, gazumping Bega Cheese and Canadian dairy giant, Saputo.

According to MG, (if the bid is successful) the new Murray Goulburn Warrnambool:

“Creates a new 100% Australian farmer-controlled dairy food company with over 3,000 supplier shareholders delivering more than 4 billion litres of milk to nine processing sites annually. The business will be positioned for strong growth in both domestic and international dairy markets with forecast revenues in financial year 2014 of $3.2 billion including export sales of $1.4 billion to over 60 countries.”

This, Gary Helou wrote in a letter to MG’s farmer shareholders yesterday, would bring the coop, “…the necessary scale, market reach and competitive strength to capture the benefits of the historic growth opportunity resulting from the consumer affluence of developing Asian economies.”

MG’s triple-jump

The bid is in, it’s the most lucrative on offer and it’s Australian, yes, but there are three serious hurdles for MG:

1. A bidding war

What will Saputo and Bega do next? WCB traded higher yesterday, closing at $7.89, a sign that markets believe MG’s $7.50 isn’t enough to win the bidding war.

2. Shareholder seduction

WCB rejected a takeover offer from MG in 2010. At the time, there was quite a bit of anti-MG sentiment. It’ll be interesting to see if the reinvention of Aunty and a bigger bucket of cash will make a difference.

The Sydney Morning Herald reported Mr Helou said yesterday that farmers supplying WCB needed to consider the future of the Australian dairy industry when deciding on the take-over bid.

“For farmers generally, they are at a fork in the road today.”

“If they sell out to a private company, that they have no control over … they will be spectators.”

“What we are putting on the table is an offer for them to take a stake in every step in the value chain.”

“It’s a fundamental, philosophical different point of view.”

3. The competition watchdog

Back in 2010, the ACCC was loathe to allow MG to acquire WCB. As reported in the SMH at the time:

THE competition regulator says its preliminary view is to oppose Murray Goulburn’s proposed acquisition of Warrnambool Cheese & Butter on the grounds it would cut competition in some markets for raw milk.

The Australian Competition and Consumer Commission said yesterday it was concerned the proposed deal “would substantially lessen competition for the acquisition of raw milk from farmers in the relevant markets within South Australia and Victoria”.

“The potential effects in the relevant markets include a significant reduction in farm-gate prices paid to farmers for raw milk; and reduced competition in the offer of non-price terms such as finance, field advice services and discounted hardware and grain supplies.”

The irony of the ACCC’s 2010 statement is that Murray Goulburn’s mission, as a 100% farmer-owned co-operative, is precisely to return the maximum price to farmers — something to which the listed Bega Cheese nor the privately owned Canadian giant Saputo cannot lay claim.

I hope it takes a broader perspective this time. A serious exporter battling subsidies and tariffs around the world, MG needs scale so that its processing can be as efficient as its farmers. The Australian government does not afford our dairy farmers the protections enjoyed by most of our competitors. The least it can do is allow us to grow.

UPDATE: See this article and extended AFR interview with MG CEO Gary Helou: http://www.afr.com/p/national/the_battle_for_warrnambool_kxxm78XXLgfsAJ6y7ARaVJ