Dairy Inquiry mooves to the next stage: ACCC releases Issues Paper

Yesterday the ACCC released an Issues Paper for its Inquiry into the dairy industry.  The Issues Paper seeks feedback on key competition and fair trading issues across all geographical and major product markets within the Australian dairy industry.

Key issues of focus for the Inquiry

The Issues Paper asks interested parties to answer 11 questions under the following six issues:

1. Competition for milk, focusing on the level of competition between purchasers of milk at the farm gate and the ability of producers to switch between processors or other buyers;
2. Contracting practices, including the different types of supply contracts across the supply chain and in certain regions, and anti-competitive conduct such as unfair contract terms or collective bargaining;
3. Transparency and price signals, namely, how farm gate milk prices are set and communicated to producers, and the availability and use of meaningful global market information and price signals across the industry, including by dairy farmers;
4. Domestic retail markets, in particular, the range of domestic supply channels and the impact of $1 per litre milk on the industry;
5. Global markets, including options to supply into export markets and any barriers to selling into those markets; and
6. Production costs and profitability, namely, the key factors influencing the profitability of dairy farms, including costs of production.

Interested parties have until 12 December 2016 to submit feedback in response to the Issues Paper.

As can be seen by the questions and topics covered in the Issues Paper, the Inquiry will have a broad focus on the industry as a whole, rather than on particular issues such as price cuts or the behaviour of particular traders.

The ACCC will also issue initial information requests to retailers, farmers and processors to assist with the Inquiry and will conduct public forums and hearings in dairy-producing regions, which are likely to take place from March to May next year.

As it is an investigation under Part VIIA of the Competition and Consumer Act 2010 (Cth) (CCA), the ACCC will also have powers to compel the information it needs from industry participants.

The final report for the Inquiry will be released in November 2017.

The ACCC has stated that the Inquiry may lead to a range of outcomes, such as:

• making recommendations to and / or working collaboratively with governments and the industry to develop solutions;
• ACCC action to address behaviour that contravenes the CCA; and / or
• improved transparency about competition and trading practices in the supply chain.

Background to the Inquiry

On 27 October 2016, the Treasurer, The Hon Scott Morrison MP, issued a notice requiring the ACCC to hold an Inquiry into the competitiveness of prices, trading practices and the supply chain in the Australian dairy industry. The Terms of Reference require the Inquiry to cover a range of matters, including:

• the nature of competition between processors;
• the nature of retail pricing arrangements;
• the effect (direct or indirect) of domestic retail and export prices;
• the nature of commercial relationships between dairy producers and acquirers of raw milk;
• the mechanisms used by acquirers of raw milk to determine pricing;
• the availability, transparency and accessibility of market price information;
• the terms on which raw milk is acquired from producers and the means by which they are agreed;
• the allocation of commercial risk across the supply chain;
• the role of collective bargaining and its effectiveness;
• the existence of or potential for anti-competitive conduct; and
• any other factors affecting farm profitability.

The dairy industry attracted a large degree of media attention in April and May this year when two of Australia’s largest dairy processors, Murray Goulburn and Fonterra, unilaterally and retrospectively lowered the prices they paid to farmers for their milk (known as the “farm gate milk price”).

Murray Goulburn and Fonterra were responding to the deteriorating international market for dairy, which was caused by the 2015 abolition of milk quotas in the EU, the slowing Chinese market and Russia’s ban on agricultural imports from the EU, United States, Australia, Canada and Norway in retaliation for the coordinated sanctions imposed by the EU and the aforementioned states on Russia for its involvement in the Ukrainian crisis.

The farm gate milk price cuts attracted scrutiny from the media, which created momentum for the ACCC’s investigation into Murray Goulburn’s and Fonterra’s price cuts and for an inquiry into the dairy industry more broadly.

Inquiry Process

Under subsection 95H(1) in Part VIIA of the CCA, the Minister may direct the ACCC to hold an inquiry.

Conducting an inquiry under Part VIIA gives the ACCC a range of investigatory powers, enabling it to issue notices to compulsorily obtain information or documents from businesses and to summon witnesses to appear at public or private hearings. Refusal or failure to comply with notices issued by the ACCC is a criminal offence.

ACCC investigation and Senate Inquiry

Separately, the ACCC is investigating whether the conduct of Murray Goulburn and Fonterra constitutes false, misleading or unconscionable conduct in breach of the CCA.

An inquiry by the Senate Economics References Committee is also afoot and is due to report by 24 February 2017. The Senate Inquiry is examining ways to establish a fair, long term solution to Australia’s dairy crisis, with particular reference to fresh milk security and the legality of retrospective elements of milk contracts, the behaviour of Murray Goulburn, and any other related matters.

Photo credit: Rikki’s Refuge / Flickr – remixed to black and white and resized