Thursday, 13 May 2010
Economics References Committee; Report
I present the report of the Senate Economics References Committee, Milking it for all it’s worth—competition and pricing in the Australian dairy industry, together with the Hansard record of proceedings and documents presented to the committee.
Ordered that the report be printed.
That the Senate take note of the report.
I defer to others who I know wish to speak on this question.
This report is one which has been produced cooperatively on a multipartisan basis—if I can put it that way. It was the subject of a reference that I moved and that was co-sponsored by Senators Milne and Colbeck. The inquiry was initiated by serious problems in the state of Tasmania in relation to negotiations between dairy farmers and milk processors but has proceeded way beyond the remit of that particular problem, although that problem has been given serious consideration in the report.
The report points out that the dairy industry was the subject of deregulation and that up until the year 2000 there was much regulation around the country in the dairy industry. At that time a process of deregulation took place and it was examined then by the Senate Rural and Regional Affairs and Transport References Committee, a committee of which I was a member at that time. The report of that committee is one in which I participated on a very active basis. This report refers to the circumstances that existed at that time and in the lead-up to that time and talks about one of the findings of that report. This report of the Senate Economics References committee says in paragraph 2.18:
In their findings however, they also noted that of serious concern was the suggestion that the controlled regulation provided would ‘shift to processors and large retailers who would then be able to dictate terms to the industry and marketplace.’
This report essentially has found that the Senate Rural and Regional Affairs and Transport References Committee’s finding at that time has proven to be correct and that power in the industry has indeed moved substantially into the hands of processors and large retailers. In relation to the balance of power between those entities, large retailers held by far the most power.
There are 15 recommendations made in this report. They refer to the state of trade practices law in this country and matters which pertain to the negotiation between dairy farmers and processors and other entities. They refer to the state of affairs which relates to the regulation of acquisitions and takeovers, particularly as they relate to the dairy industry. There are references in the report to members of this committee who are concerned with that issue as it pertains to other industries as well. In other words, the findings in this report are compounding the views of members of the committee in relation to other issues.
This report is one which has very broad support. It is, if I can perhaps put it this way, one which is made beyond politics and made on the evidence before it. It is one of the reports which typically used to come from the rural and regional affairs committee—but it has now come from this committee—where members of the committee make a finding based not on politics but purely on the evidence before them. We would encourage the government and the public to have regard for the report on that basis.
There is limited time today to present a full debate about this matter, and the government is very keen for other legislation before the chamber this morning to proceed. We hope that we have the cooperation of all parties in that regard. I want to thank the secretary, John Hawkins, and a member of the secretariat, Sandra Kennedy, for their very hard work in the production of this report and the work of the committee. It certainly has been greatly enhanced by the work and the drafting that they have done for us. I think many members of the committee would share the view that this report would not read as well and probably would not be as soundly presented without the assistance of members of the secretariat.
I thank members of this committee who have participated in this inquiry for their cooperation. We hope that this report illuminates the affairs in this industry and will have some impact on policy of any government in the future in this regard.
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.
I rise today to comment on the Senate Economics References Committee report Milking it for all it’s worth—competition and pricing in the Australian dairy industry. I think this is an extremely good and timely report and I join with my colleagues who worked on the committee in thanking the secretariat for the exceptionally good job they did. I also thank my colleagues on the committee for the effort put into trying to get a consensus report here, because a consensus report means that there is a much better chance of delivering the outcomes and the recommendations, which are very strong. I became involved in this inquiry from the start, as Senator Colbeck and Senator O’Brien acknowledged. There was genuine concern right across the political spectrum from Tasmania about the way that dairy farmers were being treated by the processors in terms of the prices that the farmers were being offered. It was very clear that they were being offered prices that were below the cost of production.
The dairy industry has come a very long way since the time that I was brought up on a dairy farm on the north-west coast of Tasmania. The farm had two brothers operating a small acreage, milking 120 head of cattle and with six bales in the milking shed. That was the kind of life that many people across Australia experienced on dairy farms in those days. Since deregulation and consolidation of the industry, whilst there has been an increase in the volume of milk produced and the herd sizes, the number of farms has reduced because they have had to get bigger in order to operate on the scale that is required to be profitable in the industry these days. Therein lies the problem: a lot of people have had to borrow huge amounts of money in order to increase the herd size and in order to buy the machinery that is necessary to carry out dairying these days. They have been vulnerable to the field officers from the processors coming onto their properties and saying, ‘If you buy a bigger and better machine, if you change your calving times and if you change your regime on the property, you can increase your production by X and this will be good for you.’ On a handshake in the paddock, which I still find extraordinary—and I acknowledge that it is the culture of the country; it was certainly my father’s culture as well that if you shook hands with somebody on the property then that was a done deal—these people went and borrowed sometimes a million dollars. It is unbelievable that the banks would actually lend them the money on the basis that a field officer said in the paddock that if they upgraded their machinery and bought X then production would increase and there would be a market.
That is what Senator Colbeck referred to a short while ago and the cause of the difference of opinion on the committee. There was not a difference of opinion on the committee about the behaviour of some of the field officers from the processing companies. Everybody agreed that it is irresponsible to go on to a property and encourage people to increase their production levels without an additional responsibility on the side of the processor to agree to take the additional milk, so that is clear. The difference of opinion was about the strategic plan for the industry in the longer term. I have a different view. I believe that the dairy industry representatives—from government, the processor side and the bureaucracy, if you like, of DairyTas and Dairy Australia—have encouraged increased production and given people the notional view that there is a very bright future for dairying, without saying where those markets are or actually qualifying, in my view, where they intend to process and sell into overseas markets. Until they get that, in my view they are being irresponsible in advocating for increased supply without indicating where the increased demand is likely to be and what responsibility they take for delivering those markets. But, in the context of saying that, I do acknowledge that in the midst of all this there were the global financial crisis and other issues which impacted upon processors—in particular Fonterra, in this case, not making a decision to expand in the way they had said they would.
In commenting on this report, I want to say that I am really quite excited about it, because I listened to not only dairy farmers but vegetable growers and other primary producers in Tasmania and around the country. They are all saying that the problem for them is that they just cannot get a decent price because of the duopoly between Coles and Woolworths—it is just impossible these days—and because of the way that the Trade Practices Act operates. Also, the ACCC is both the organisation that approves a merger and the organisation which then determines whether there is excessive competition or not enough competition in the marketplace. All this has to be changed.
So this report goes beyond the dairy industry in saying that we want a review by the Productivity Commission of National Competition Policy. I am so excited about this, but my excitement is nothing compared with that of former Senator Dee Margetts. She does not know yet but I imagine she will be so excited when she knows about this, because she has done her PhD on competition policy and its complete failure in Australia. A lot of claims were made a decade or more ago, when we established National Competition Policy, about how it was going to increase competition, but look around Australia in the primary industry sector: it has done the exact opposite. If we get an evaluation of National Competition Policy we will at last go back to some sense in relation to this.
There are a couple of other issues that I want to comment on. One is the Trade Practices Act. As a result of the repeal of section 49 of the Trade Practices Act, corporations were prohibited from discriminating between buyers of goods of like grade and quality in relation to the price of those goods if that discrimination was of such a degree or of such a recurring or systemic nature that it would have the effect, or be likely to have the effect, of substantially lessening competition in the market. But that was repealed in 1995 and what happened was that other provisions did not kick in to regulate the issue, so now we have the retailers engaging in price discrimination. There is absolutely no doubt about that. Generic milk is the same as branded milk, yet they discriminate on the basis of price and there is nothing anyone can do about it because of the repeal of section 49. Section 46 does not do it. We definitely need the review of the Trade Practices Act. I would have liked to go further than my colleagues. There is a note in the report that says that the Greens would ban generic milk—and I would if I could—but my colleagues thought that was a bridge too far. But at least I acknowledge they all recognise the problem that is there, because the differential between branded price and generic price is higher for milk than for any other product. On many occasions there is a 33 per cent difference in milk price, which does not occur in other products, and it is exactly the same product; it is just different packaging. If that is not price discrimination then I do not know what is, so we have to deal with this issue.
This report recommends a review of trade practices, a look at restoring provisions around section 49—the whole price discrimination issue—and the evaluation of National Competition Policy. There are also specific recommendations regarding collective bargaining and labelling and so on. I think our colleagues in the dairy industry around Australia are going to really welcome this report from the Senate. They will become excited about it only if they see that the government is prepared to move on it, because now there is a consensus in the Senate that we have to look at trade practices and at National Competition Policy—we have to do these things. Let us hope we will get some action on it, because we only have a temporary ceasefire, in my view, with dairy farmers and the processors for the moment. It can degenerate at any time depending on what happens, for a range of reasons. I would like to fix it in the long run, separate the powers of the ACCC, restore the powers under the Trade Practices Act and have a really good look at whether National Competition Policy has been a panacea and at the claims that were made at the time so that somebody is accountable for them, because out there in rural and regional Australia a lot of people have suffered because those claims have never been substantiated.