The Australian Competition and Consumer Commission has also threatened dairy companies with legal action if they persist in blaming supermarkets for refusing to help farmers cover their skyrocketing milk production costs.
ACCC chairman, Rod Sims, said supermarket contracts with milk processors had “pass through” clauses allowing milk factories to adjust milk payments to their suppliers when farm production costs increased.
“It’s a done fact,” he said.
“If processors decide they should pay suppliers more to secure their milk, the supermarkets will absorb the extra cost as part of their arrangements to sell milk at $1.”
“The ACCC has heard reports of farmers alleging processors say they cannot pay dairy farmers more for their milk because of the low price for private label milk – this is not correct.
He believed the cost flow-on clauses were common to all the contracts with major retailers which the ACCC examined during last year’s dairy inquiry.
He said a flow-on clause probably contributed to enabling Norco’s promise last week pay its suppliers a temporary five cents/litre increase in farmgate prices after hay and grain costs in southern Queensland and northern NSW doubled during July and August.
Norco packs $1/litre house brand milk to Coles supermarkets in NSW and Queensland.
Mr Sims said many different issues contributed to the complex milk pricing debate, but farmers should be aware supermarkets were not exactly at fault in the current stand-off which has seen producers pleading for retailers to lift milk prices so more money will trickle back to farmgate.
However, he admitted the flow through price clauses only applied to milk which ended up in private label bottles selling for $1/litre.
He also declined to comment in support of Agriculture Minister David Littleproud’s call for a rise in all retail milk prices at the supermarket as a direct means of helping farmers.
“He’s trying to help solve a different issue,” Mr Sims said of Mr Littleproud’s remarks.
“It’s fine to have that discussion as well, but our warning is to dairy processors to be honest with farmers on the $1 milk issue.
“The ACCC has heard reports from a number of farmers in NSW and Queensland alleging processors say they cannot pay dairy farmers more for their milk because of the low price for private label milk – this is not correct.”
Meanwhile, Mr Sims hoped the dairy industry’s solidified support for a mandatory code of conduct deal between farmers and processors would lead to stronger bargaining power for farmers in their negotiations with processors, and indirectly supermarkets.
“We’re still waiting for the government to respond to the plan, but we’re pleased the code is getting a better reception and optimistic about it being put in place,” he said.
“The ACCC will be heavily involved in drawing up the code to make sure it is a good deal for the farmer.”
Mandatory dairy code benefits
He expected, if implemented properly, the code could result in a flow on impact on supermarket prices if it resulted in farmers bargaining for better price deals with processors – and carrying less risk – subsequently resulting in more wholesale pressure on retailers to respond to rising production costs.
Queensland Dairyfarmers Organisation president, Brian Tessmann, argued the 2011 collapse in retail milk prices caused by Coles starting the $1/litre price war, robbed the fresh market milk industry of a cumulative $10m in revenue.
“Not only did this retail cut knock 30 cents off the minimum price, processors were forced to reduce the cost of their branded milk to stay competitive,” he said.
“The reality is Queensland, much of NSW and probably the WA dairy industries won’t be around in a few years if things stay as they are.”
However, Mr Sims, believed current contractual arrangements between processors and farmers probably provided milk factories with little incentive to pass on to their suppliers any higher price returns received from retailers.
A new code of conduct should, however, improve market transparency and bargaining options open to farmers.