Thursday, 13 May 2010
Economics References Committee; Report
In speaking to this report of the Senate Economics References Committee, Milking it for all it’s worth—competition and pricing in the Australian dairy industry, I also acknowledge the work of my colleagues who sat on the committee, particularly Senators O’Brien and Milne, who co-sponsored the motion on this particular report, and Senator Eggleston, who chaired the inquiry and travelled around the country with us. I would also like to share with Senator O’Brien in thanking the secretariat, particularly John Hawkins and Sandra Kennedy, for their work. It was quite intense at times. There was quite a deal of negotiation to get a consensus report, which is one thing that we all thought was important in dealing with this issue.
As Senator O’Brien has indicated, I think it perhaps has broader implications. We did look very closely at the dairy industry because of circumstances that occurred in that sector at the time, but the recommendations have a much broader remit when you consider their potential applications through the Trade Practices Act, the recommendation to review the National Competition Policy and also some of the other issues, particularly relating to the dairy industry.
Like Senator O’Brien, I came into this inquiry after talking to some dairy farmers and having made a note in my diary, ‘How do we more equitably create a balance between the negotiating parties in these sorts of circumstances?’ where you have a large multinational company and a group of, basically, individual operators who are working under a collective bargaining process that has been set up under the auspices of the ACCC and the Trade Practices Act.
It is really a very difficult question, but it is one which we hear about increasingly. I also acknowledge Senator O’Brien’s comments in relation to the balance right down the supply chain, particularly in relation to our food products, starting with the supermarkets at the top and finishing with the primary producers at the bottom of the supply chain—if that is the way that you want to arrange it—leaving the farmers, in fact, in the place of being price takers. The influences on the price that the farmers get are multiple. There are the local conditions in the domestic market, and we heard a lot of discussion about those. I think there is even some conjecture about what those really are, depending on who is making the argument. Obviously, international market conditions have an influence in certain sectors of the dairy market. There is no question that those who are supplying the market in the manufacturing milk sector are certainly influenced by the global market, but the arguments as to the extent to which that flows through into the domestic supply for drinking milk is another question. The evidence that we have received about the variations in those prices around the country, depending on what were described as local market conditions, leads me to believe that there is scope to look at this further.
It was interesting to see that there were higher prices being paid at farm gate for milk in places where there was competition in the marketplace for that farm milk, particularly in northern New South Wales and Queensland. There were claims that related to cost of supply, yet cost of supply was one of the issues that the dairy farmers in Tasmania were looking to achieve as part of their negotiations with the companies at the time of the major dispute. It is interesting to note that when we looked at retail milk prices versus price paid at farm gate for milk there did not seem to be any correlation. In fact, some of the cheapest milk in the country was available in the places where the companies were paying the highest farm gate price for milk. I think that, again, bears some further consideration at some point in time.
There is no question that right down the supply chain there are significant pressures. We did start to receive some evidence as to where the profit lies in the supply chain. Certainly, the dairy farmers were not making much profit, if they were in fact breaking even. I think there is quite severe pressure on some of the processing companies and that gets applied down the supply chain, particularly by the supermarkets.
One of the things that interested me and that came out through the evidence that we received was a process, or a factor, called waterbedding, where the price of one commodity within the market is pushed down and the prices of other similar products are pushed up. That is particularly illustrated through the pricing of generic milk in the market versus what is branded ‘label’ milk. This issue was considered as part of the ACCC’s inquiry into supermarket pricing, and in my view the ACCC need to go back and have another look at this. They came to the conclusion, on my reading of their report, that there did not seem to be too much of a problem. I do not believe that; I believe that there is genuinely a problem. In fact, when you talk to companies away from the glare of public evidence and the spotlight, they are more than happy to say that they would like to see the end of generic milk because it was initially produced using what they would call marginal costs but now something in the order of 50 per cent of the milk consumed in Australia is of a generic label. It is quite clearly, in my view, having an impact on the price of the other products that are being supplied into the market by the major manufacturers, and I think that is something that we really need to look at.
The issue of price discrimination is dealt with in the report and our recommendations, and I believe that this is something we need to consider further as part of our discussions. It will be very interesting to see what the outcomes of the current negotiations that are occurring between the manufacturers and the major supermarkets on those generic supply contracts are, particularly in relation to price. It appears to me that the low price that is being offered for generic milk is also forcing manufacturers to charge a higher price for their own labelled product. This makes them, over time, uncompetitive with the supermarket and generic products. When close to 50 per cent of the product in the market is being supplied by supermarket and generic producers, I think it makes things very difficult for the other manufacturers of milk.
I would like to make some quick comments about one element of the report where we talked about the future of and the planning for dairy in Australia. There were a couple of views expressed in the report in respect of that, particularly on the Tasmanian dairy plan, which was promoting growth. One of the difficulties that we had in this report was that there were two Senate inquiries that occurred as part of this process—one through the Senate Select Committee on Agricultural and Related Industries—and sometimes, certainly in my mind, evidence was confused to a certain extent. There was some criticism from some of my colleagues of the dairy plan, although I have to say that I thought it was quite well put together and relatively conservative in the way that it was designed. What really brought this about was the global financial crisis, which nobody could have foreseen coming. Some of the companies which were promoting taking more milk actually took more milk, but I have to say the behaviour of National Foods towards their dairy farmers was just so short-sighted and really exacerbated conditions in the Tasmanian dairy industry and brought all this about. It really caused some problems when they said that they would not take more milk. In fact, they were penalising farmers for producing over a certain quantity.
I agree with the recommendation that, when plans are put together, consideration be made of factors that might crop up, as occurred in this circumstance. But there is clear evidence in my view that the global financial crisis played a significant role in the circumstances. I am very pleased that National Foods have started to repair their relationship with the dairy farmers in Tasmania. They are working very closely with them now. But I have to say that their behaviour in other sectors of their market still bears some consideration and they really do need to look at the way that they are operating because it is very disappointing. I seek leave to continue my remarks later.