c04 by xiaohuicaicai


									                                      Chapter 4
            Prices and profitability in the supply chain
Farm gate prices
Differences between States/regions

4.1      Historically, the farm gate prices of drinking milk and manufacturing milk
have been set differently, with drinking milk attracting a premium due to the increased
costs associated with the production of milk year round to ensure continuous supply
and the price for manufacturing milk, used in the production of manufactured dairy
goods for both domestic and export consumption, set in accordance with movements
in international commodity prices.1

          Figure 4.1: Pre- and post-deregulation factory paid prices (cents/L)

        Source: Dairy Australia, Australian Dairy Industry in Focus 2010, p.15.

4.2     In Tasmania, Victoria and South Australia, where milk produced is primarily
destined for the manufacturing milk market and is export-focused, producers are more
exposed to volatility in the farm gate price of milk. Traditionally, these same
producers have tended to produce on a seasonal basis thus reducing their production
input costs.

4.3    In contrast, producers in the states of Western Australia, Queensland and New
South Wales, where the majority of milk produced is drinking milk for the domestic

1    Mr Kim Evans, Secretary, Tasmanian Department of Primary Industries, Parks, Water and
     Energy, Senate Select Committee on Agriculture and Related Industries Hansard, 6 October
     2009, pp. 32-34.
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market, have been protected from the volatility of the export market. A premium price
is also paid to producers in these areas to secure supply and to avoid high transport
costs.2 However, the required year round milk supply generally imposes higher
production costs as supplementary inputs are sourced during the winter months.3

4.4     Another defining factor of dairy production in these regions is that the supply
contracts are generally of longer duration given the processors' need to secure year
round drinking milk supply. In May 2010 Dairy Australia noted that farmers
supplying processors in NSW and Queensland were on two to three-year contracts.4

4.5     The strength of competition may also be another factor which causes
divergences in farm gate prices across states. During the committee's previous dairy
inquiry evidence was given that National Foods was offering farmers in New South
Wales 44 cents per litre while only offering Tasmanian farmers 33 cents per litre. A
Tasmanian expert gave the following explanation:
          Senator MILNE—...Is there no logical explanation for this business of
          National Foods offering 44c in New South Wales compared with their
          offering down here?
          Mr Smith—...It is the market that they are in there. It is not the costs of
          Senator MILNE—So you think it is because there is competition in the
          marketplace in New South Wales [that prices there are higher].
          Mr Smith—Yes.5

Trends in farm gate prices

4.6   Changes in farm gate prices over the past few financial years have been
summarised as follows:
          Farmgate milk prices reached record highs in 2007/08; and despite falling
          15% during 2008/09, remained well above those of previous seasons.
          However the collapse in world dairy commodity prices during late-2008
          saw a stepdown in milk prices during the second half of the 2008/09 season
          for the 75% of Australian dairy farmers who supply exporting companies.
          Consequently, the 2009/10 season opened with the lowest milk prices in a
          number of years. Nevertheless, prices improved strongly during the year to
          finish within 12% of the previous season.6

2    Australian Competition and Consumer Commission, Report of the ACCC inquiry into the
     competitiveness of retail prices for standard groceries, July 2008, p. 230.
3    Dairy Australia, Dairy 2009: Situation and Outlook, June 2009.
4    Dairy Australia, Australian Dairy Industry in Focus 2010, p. 37.
5    Mr Mark Smith, Dairy Tasmania, Senate Economics References Committee Hansard, Inquiry
     into competition and pricing in the Australian dairy industry, 6 November 2009, pp. 25-26.
6    Dairy Australia, Australian Dairy Industry in Focus 2010, p. 13.
                                                                                     Page 37
                       Table 4.1: Trends in typical factory paid prices
                           2004–05     2005–06 2006–07 2007–08 2008–09     2009–10 (p)
             Cents/litre     32.9        34.3    35.7    48.6    52.4         48.7
             $/kg MS*        4.62        4.80    5.02    6.73    7.29         6.72
             Cents/litre     31.5        32.9    32.0    50.0    39.1         33.9
             $/kg MS         4.23        4.44    4.32    6.68    5.14         4.49
             Cents/litre     35.0        36.6    38.8    51.8    57.2         55.8
             $/kg MS         4.84        4.99    5.38    7.14    7.89         7.57
             Cents/litre     30.1        32.0    32.6    48.6    44.6         34.6
             $/kg MS         4.19        4.49    4.57    6.75    6.19         4.73
             Cents/litre     27.3        29.1    32.4    41.4    49.0         42.4
             $/kg MS         3.91        4.12    4.55    5.80    6.77         5.96
             Cents/litre     30.9        33.6    36.5    50.2    41.3         34.6
             $/kg MS         4.05        4.39    4.79    6.63    5.40         4.46
             Cents/litre     31.5        33.1    33.2    49.6    42.4         37.3
             $/kg MS         4.28        4.50    4.51    6.68    5.66         4.98
         * MS refers to milk solids.
         Source:     Dairy     Australia,     www.dairyaustralia.com.au/Our-Dairy-
         (accessed 23 February 2011), originally sourced from dairy manufacturers.

Increasing divergence between state farm gate prices

4.7      As can be seen by Table 4.1 above, the farm gate prices in the regions that are
focused on domestic drinking milk production have, over time, shifted away from the
prices in the export states. For example, Queensland farm gate prices were 11 per cent
above those in Victoria in 2004–05, but are estimated to be about 65 per cent more
than Victorian prices in 2009–10. It is important to note that during this period factors
such as the economic downturn caused by the global financial crisis had a significant
effect on international prices, and therefore the farm gate prices in the exporting
states. This clearly supports the argument that there are two distinct markets for
drinking milk in Australia, and that the different characteristics and issues faced by
each need to be considered individually.

Farmers' profitability

4.8     Income for dairy farmers has been decreasing in recent years. A survey of the
financial performance of Australian dairy farms by ABARE found that average farm
cash income for dairy industry farms fell from $129 300 per farm in 2007–08, to
$88 000 per farm in 2008–09, and was estimated to fall to around $50 000 per farm
for 2009–10. ABARE noted that, on a national level, this trend was as a result of
lower farm gate prices, high purchases of fodder due to dry conditions and low
Page 38
availability of irrigation water and increased interest payments due to increased
average debt.7

      Figure 4.2: Farm cash income and farm business profit (average per farm)

          Source: Australian Bureau of Agricultural and Resource Economics,
          Australian dairy: financial performance of Australian dairy farms, 2007–08
          to 2009–10, June 2010, p. 3.

4.9    The Senate Select Committee on Agricultural and Related Industries
examined dairy farm costs during its inquiry into food production:
          ABARE data indicate that an average farm's total production costs would
          be approximately 38 cents per litre in 2008-09. National Foods however
          disputes this figure arguing that, based on its estimates, milk production
          costs would be around 35 cents per litre. The Tasmanian Department of
          Primary Industries estimated dairy farmers' costs of production at 42.3 cents
          per litre in 2007-08, 37.9 cents per litre in 2008-09 and 38.3 cents per litre
          in 2009-10.8

4.10    The costs faced by farmers differ between states and regions. The committee
heard during its previous inquiry that costs are generally lower in Tasmania than in
other regions.9 Conversely, Queensland was acknowledged to be a less suitable area

7    Australian Bureau of Agricultural and Resource Economics, Australian dairy: financial
     performance of Australian dairy farms, 2007–08 to 2009–10, June 2010, p. 3.
8    Senate Select Committee on Agricultural and Related industries, Inquiry into food production
     in Australia—Third interim report, 26 November 2009, p. 12.
9    Mr Mark Smith, Dairy Tasmania, Senate Economics References Committee Hansard, Inquiry
     into competition and pricing in the Australian dairy industry, 6 November 2009, p. 25.
                                                                                           Page 39
for dairy production, with the Queensland Dairyfarmers' Organisation noting that
although Queensland farmers are paid more on average, this is countered by higher

4.11    During this inquiry, the committee again heard evidence that the levels of
profitability were low and precarious:
        The ABARE farm survey exercises for 2009-10, said that the average farm
        profit in Queensland and northern New South Wales was 2c a litre for those
        farms. So if you took 2c a litre off those farm industry returns, there is the
        farm profit for that region.10

4.12  The nature of how farming investment decisions in the dairy industry are
made was described to the committee:11
        One of the other things, which we often miss with dairy farming, is that the
        time frames for business planning are so long...we were given some very
        strong price signals three years ago to grow business with incentives from
        all the milk companies to produce new milk. That led to a very large wave
        of investment and leveraging to do that because there were strong signals in
        all markets that milk was growing to say, ‘Here is additional money for you
        to produce more milk over and above the milk that you produced last year.’
        Those investment decisions have three, five, 10 year turnaround times to
        get returns. On top of that the actual programming of decisions that we
        make with herd management and milk production in the short term have
        minimum 12-month turnarounds. But having no information that we can
        actually rely on it makes business development in this market next to

4.13    Uncertainties in the dairy industry related to future prices and profitability
could affect investment decisions made by farmers:
        The current action instigated by Coles will further damage the confidence
        of the dairy industry and may have the added effect of reducing Australia's
        total milk production. Already, there are indications by some dairy farmers
        that they are not prepared to invest further funds in their farms and will exit
        the industry.13

10   Mr Christopher Phillips, General Manager, Trade and Strategy, Dairy Australia, Committee
     Hansard, 8 March 2011, p. 12.
11   These issues were also examined in the committee's 2010 report. See Senate Economics
     References Committee, Milking it for all it’s worth—competition and pricing in the Australian
     dairy industry, 13 May 2010, pp. 77-81.
12   Dr Neil Moss, Senior Consultant, SBScibus, Proof Committee Hansard, 10 March 2011, p. 67.
13   Amalgamated Milk Vendors Association, Submission 91, p. 3.
Page 40

Contracts between farmers and processors
4.14   The committee received helpful evidence about the contract arrangements
between farmers and the major processors, notably those with National Foods and

4.15    The contracts between the major processors and farmers are usually for a few
years in duration. National Foods advised that, typically, their contracts with farmers
are for a minimum of one year, with a number of two and three year contracts also
offered.14 The contracts the processors have with the major supermarkets differ in
duration; Woolworths advised that their contracts are for either 12 or 24 months,
whereas Coles informed the committee that the majority of their contracts end in
January 2014.15 The interaction between the contracts the processors have with dairy
farmers and those with the major supermarkets was explained by National Foods:
          For farmers, the pressures arise because they must make investment
          decisions about the size and composition of their herds and the nature of
          their plant and equipment. Those decisions necessitate a longer term
          investment horizon and exposure to ongoing fixed costs. Consequently,
          farmers look to the processors to provide guaranteed cash flows over the
          farmers’ investment horizons. However, the processors are not able to
          commit to supply arrangements with farmers until the processors have
          finalised their contracts for house brand volumes with the supermarkets.16

4.16    After the merger of National Foods and Dairy Farmers in 2008, virtually all
supermarket private label milk was provided by National Foods.17 Since then other
processors have gained contracts, such as Parmalat to supply Woolworths in

4.17    Both National Foods and Parmalat utilise a multi-tier pricing structure in their
contracts, however, the milk that is allocated to each tier, and the variation in the
prices between each tier, differ. Clover Hill Dairies described how they supply
National Foods, through the Dairy Farmers Milk Co-operative:
          The current practice is for LNNF [Lion Nathan National Foods] to
          announce what is known as an Anticipated Full Demand (AFD) to DFMC.
          For DFMC to meet their obligations under the AFD system our regional
          dairy farmers are allocated milk allotments akin to quota and sell this milk
          to DFMC at an announced price. This milk price is known as Tier 1 milk.
          Farmer suppliers who produce above their allotment or do not hold an

14   Mr Peter Walsh, Manager, Government Relations, National Foods, Committee Hansard,
     9 March 2011, p. 66.
15   Mr Pat McEntee, General Manager, Fresh Foods, Woolworths, Proof Committee Hansard,
     29 March 2011, p. 3; Mr John Durkan, Merchandise Director, Coles, Proof Committee
     Hansard, 29 March 2011, p. 43.
16   National Foods, Submission 97, p. 17.
17   National Foods, Submission 97, p. 16.
                                                                                       Page 41
        allotment receive a lower price which is currently close to 50% of the price
        of Tier 1 allotment milk. This milk is known as Tier 2 milk...A secondary
        processor to processor milk markets occurs for Tier 2 milk. There is no
        transparency at farmer level as to what Tier 2 milk is being sold to other
        processors for.18

4.18     In July 2010, the Dairy Farmers Milk Co-operative (DFMC) described the
basis of the AFD and two-tier pricing model used by National Foods as follows:
        The overarching requirement of the AFD is to maintain the appropriate
        milk price signals for All Year Supply and to align DFMC milk intake to
        the commercial needs of National Foods Limited (NFL) and its
        subsidiaries. As a consequence, every DFMC member has an annual
        Each supplier has been provided with their annual allocated maximum
        volumes per month (either as a flat allocation which attracts a flat milk
        price or a variable allocation which attracts a variable milk price). These
        monthly maximum volumes represent the T1 price which is negotiated by
        DFMC with NFL. Supply over these allocated litres may attract T2 pricing.
        Excess milk supplied above the regional AFD will be sold on the best
        economic return possible.19

4.19    Parmalat appears to essentially follow the pricing system in place prior to
deregulation, which paid different prices for drinking milk and manufacturing milk,
except for the drinking milk which goes into the supermarkets' private label products,
which is bought at the lower manufacturing price. While Parmalat also utilise a
two-tier pricing system, unlike National Foods' model their tiers are linked to specific
end products:20
        There is a group of farmers in Queensland who actually have an
        arrangement with their company where they get a certain percentage of
        their cheque from branded sales and then other. With a reduction in branded
        sales those farmers are expecting to see a cut in part of their margin this
        year. We do believe that there may be an anomaly in that because of the
        drop in production in Queensland. So the cents per litre figure might not
        necessarily change, but the total volume of the branded sales will change.
        We hope to be able to verify that when we see the milk cheques.21

18   Clover Hill Dairies, Submission 53, p. 2.
19   Dairy Farmers Milk Co-operative, Milk Policy Guide,
     www.dfmc.org.au/docs/Milk%20Policy%20Document%202010.pdf (accessed 2 March 2011)
     pp. 2-3.
20   Mr Brian Tessmann, President, Queensland Dairyfarmers' Organisation, Committee Hansard,
     8 March 2011, p. 89.
21   Mr Adrian Drury, Vice President, Australian Dairy Farmers, Committee Hansard, 8 March
     2011, p. 11.
Page 42
4.20   The differences between the National Foods and Parmalat arrangements were
examined further:
          Parmalat base theirs directly on the branded sale. Their tier 1 is just the
          branded sales, and that is why it varies from month to month. It will drop
          off if you have a bad month or a slow month. December is always low with
          Christmas, because they do not sell as much milk, and we expect
          significantly less. So that is directly related to sales. Tier 2 is less, but is not
          quite as low as the National Foods one.22

4.21    Under the National Foods model, and to some degree under the Parmalat
contractual arrangements as well, it is clear that the full effects the retail price cuts
will have on the prices offered to farmers will not be realised until their contracts
are renegotiated. National Foods hinted at what the future may bring:
          ...the nature of our procurement with our farmer base is through longer term
          contractual arrangements and the impact of a sustained discounting
          arrangement that is beneath what last year we were saying was an
          unsustainable price will only be fully felt by the suppliers that supply milk
          to us when those contractual arrangements fall due.23

Clarity of contracts

4.22    After its previous inquiry into competition and prices in the Australian dairy
industry, the committee recommended that contracts with farmers should offer a clear,
consistent formula for milk pricing with unambiguous conditions.24

4.23     In its submission to this inquiry, this recommendation was supported by the
Queensland Dairyfarmers' Organisation who claimed there is a 'real need for greater
transparency and comparability for dairy farmers with regard to contracts offered by
processors'.25 Farmers in areas such as Queensland, where separate major processors
hold contracts for supply of private label milk to the major supermarkets, could
particularly benefit from this.

Processors' profitability

4.24    The prices paid by the major supermarkets, and consequently the profits
earned by the processors, are quite different for branded and generic milk. Dairy
Farmers Milk Co-operative suggested that private label milk could have a significant
effect on the profitability of a processor:

22   Mr Brian Tessmann, President, Queensland Dairyfarmers' Organisation, Committee Hansard,
     8 March 2011, pp. 86-87.
23   Mr Peter Walsh, Manager, Government Relations, National Foods, Committee Hansard,
     9 March 2011, p. 72.
24   See Senate Economics References Committee, Milking it for all it’s worth—competition and
     pricing in the Australian dairy industry, 13 May 2010, pp. 32-37.
25   Queensland Dairyfarmers' Organisation, Submission 113, p. 27
                                                                                                Page 43
          ...when Dairy Farmers was about a $1.2 billion business, with a lot of
          products and a lot of milk in a lot of places, Parmalat was half the size and
          made equal if not more profit, and the simple reasoning was that they were
          not in private label milk. They were not in the game. That is the effect of
          being in this game. Of course there is a lot of milk for the processors. They
          have got a lot of milk and farmers in localities. They need throughput. They
          bid for this. Part of it is the processor fault. But it is just the exposure of the
          market to these two big players, and one of them now is abusing that

4.25   Coles' submission claims that National Foods, Fonterra and Parmalat have
announced profit margins higher than Coles.27 Coles also suggested:
          In terms of their overall margins, there is an assumption made that lowering
          the retail price automatically means that the farm-gate price will be put
          under pressure. Our view on that is that there are higher levels of
          profitability within those companies overall and they can look for
          alternatives to improve their overall efficiency, improve their innovation,
          improve their product development and look to other ways to make savings
          should they wish to protect the margin, or invest some of it in the dairy
          industry here. There are a number of different ways in which they can take
          action through their broader level of economic strength, rather than just
          simply taking the easy route of squeezing the dairy farmers.28

4.26      National Foods' submission provided information about their profit levels:
          An EBIT this year of approximately $100 million provides a return on
          invested capital of approximately 2.5%, whereas the accepted cost of
          capital in Australia is around 10%. The book value for Kirin of National
          Foods’ business was written down by $832.3 million in 2010.
          Kirin has a strong commitment to social responsibility and has a longer
          term focus for delivering acceptable shareholder returns. Indeed, patience
          has been required by Kirin who recently updated the market in Japan that
          there has been a significant deterioration in business conditions affecting
          National Foods.29

4.27    National Foods elaborated at their hearing, advising the committee that their
margin on Coles and Woolworths' private label milk was close to zero, with their
overall profitability on milk sales (generic milk plus National Foods' branded milk)

26     Mr Ian Zandstra, Chairman, Dairy Farmers Milk Co-operative, Committee Hansard, 8 March
       2011, p. 71.
27     Coles, Submission 131, p. 11.
28     Mr Ian McLeod, Managing Director, Coles, Proof Committee Hansard, 29 March 2011, p. 49.
29     National Foods, Submission 97, p. 6.
Page 44
being approximately two per cent.30 National Foods also advised that they were
making a loss on their private label contract with Coles prior to the wholesale price
increase recently paid by Coles.31

4.28    Fonterra also objected to statements about the comparative profitability of
milk processors:
          It has been suggested that the processors who sit between the farmers and
          retailers are the ones who are making unreasonably high margins and taking
          value out of the system. Nothing could be further from the truth. Dairy
          processing is a capital intensive exercise and those in the industry struggle
          with seasonal conditions, price volatility, higher input and energy costs,
          higher safety and quality costs, and erosion of margin. Further, developing
          market leading dairy brands with consumer propositions around health,
          wellbeing, superior nutrition, taste and convenience, requires significant
          investment in research and development. Dairy processors in Australia
          make only a modest return on their invested capital and this may be a
          reason why Australian interests have sold dairy assets to foreign entities in
          recent years.32

4.29  Suppliers of the processors were also willing to recognise that milk processing
companies are in a difficult operating environment:
          Senator O’BRIEN—In the circumstances of New South Wales and
          Queensland markets, for example, they are already higher than Victoria and
          Tasmania. The point that I am raising with you is: is there a point below
          which the processor cannot go if the processor wants to keep a consistent
          supply of milk for processing?
          Mr Phillips—There will be a challenge for them. If the retail price gets
          squeezed down, they will have to take it in their own margins. But since
          January there has not been any change in actual processing costs: the costs
          of buying the bottles, packaging and all that associated with production. So
          it is a drop in processor margins. Ultimately that will have to come back to
          a lower farm gate price. Given that ABARE said that the average profit for
          farmers in Queensland and northern New South Wales last year was 2c a
          litre, it does not take much of a price movement to see that farm gate profit
          disappear if there is a drop in farm gate prices. Then you either have a
          reduction in local production, and there is a question then about what
          actually happens to pricing in the longer term. That is one of the issues the
          industry have about the sustainability of the move. It may drop prices now
          but if we see a reduction in regional production in those areas, to get

30   National Foods noted that at the time of their hearing it was too early to update these figures to
     reflect shifts from branded milk to generic as a result of the retail price discounts: Mr Duncan
     Makeig, Group Sustainability Director and General Counsel, National Foods, Committee
     Hansard, 9 March 2011, p. 63.
31   Mr Duncan Makeig, Group Sustainability Director and General Counsel, National Foods,
     Committee Hansard, 9 March 2011, p. 67.
32   Fonterra Australia, Submission 81, p. 1.
                                                                                              Page 45
          sustainable milk supplies in those volumes you are either going to have to
          move it from another region, with a lot of transport added in, or pay farmers
          higher prices. Neither of those are consistent with the dollar a litre retail
          [Coles] are going to use any excuse to extract value, and one of them is:
          ‘Everyone else is making more money than we are.’ They probably are, the
          price they paid. But I do not think National Foods is making a lot of money
          in dairy at the moment, and this will squeeze them further.34

Transparency of pricing information
4.30    The committee received evidence from a number of submissions and
witnesses regarding the lack of transparency of pricing and other conditions
throughout the dairy industry supply chain. This is likely to result in information
asymmetry between participants in the industry which may affect contract

4.31      Coles suggested:
          While retail milk prices are available on shelf every day for everyone to
          see, there is a lack of transparency about what the multinational milk
          processing companies pay Australian dairy farmers at the farm gate.
          Coles believes there should be greater transparency of farm gate pricing by
          the multinational milk processing companies so that everyone knows what
          is really going on. The multinational milk processing companies should not
          be able to sit between Australian dairy farmers and customers and protect
          their profit margins.35

4.32   National Foods were asked for their view on Coles' statement, with their
Group Sustainability Director stating:
          I do not know how to respond to that other than to say that we are being
          very transparent. We do not have a lot of margin to share. To the extent our
          margins are pressurised from to two to one to zero, there is not a lot to share
          with the farmers, but we recognise that the farmers need to have a
          sustainable business proposition as well. Other than that, I do not know how
          to respond to that, because I just disagree with it.36

4.33   In fact, it seems that information on farm gate prices is readily available (as
demonstrated by Table 4.1). Murray Goulburn appears to issue a media release

33     Mr Christopher Phillips, General Manager, Trade and Strategy, Dairy Australia, Committee
       Hansard, 8 March 2011, p. 7.
34     Mr Ian Zandstra, Chairman, Dairy Farmers Milk Co-operative, Committee Hansard, 8 March
       2011, p. 71.
35     Coles, Letter to Senator Alan Eggleston, Additional information no. 1, 18 February 2011, p. 1.
36     Mr Duncan Makeig, Group Sustainability Director and General Counsel, National Foods,
       Committee Hansard, 9 March 2011, p. 72.
Page 46
detailing changes to their farm gate prices when they are made. Dairy Australia
collects and publishes both on their website and in regular publications farm gate
prices by region. The availability of this information was mentioned to the committee:
          Senator O’BRIEN—I am interested to know whether Dairy Australia can
          supply the committee with details of the sorts of prices that dairy farmers
          have been obtaining for their milk in the various states over the last two
          years. Are you able to supply us with that information?
          Mr Phillips—That is public information. That is up on our website. We can
          provide that. It is in our Dairy in Focus publication, which has the farm
          gate price by state.37

4.34      Norco also advised that it publishes its farm gate prices each year, and pointed
          The reality is that when farmers are investigating their options regarding
          which processor to supply they freely share other processors' prices
          between themselves.38

4.35    The apparent discrepancy in the transparency of the prices between the
processor and the producers, compared to the retailers and the processors, was further
discussed during Australian Dairy Farmers' appearance at a public hearing:
          Senator COLBECK—…I wanted to make sure it was on the record that
          some of the arguments that are being used by Coles in this whole debate are
          pretty spurious. In their letter they talk about transparency in pricing. You
          gave some evidence that farm gate prices are on your website, so it is pretty
          easy to get information on farm gate prices. The real place where prices are
          hidden is, in fact, between the wholesaler and the retailer. That is where we
          have trouble getting a real understanding of what the numbers are. So
          where costs are really hidden is not at the farm gate; they are, in fact,
          hidden because of commercial-in-confidence reasons between the
          wholesaler and the retailer. Would that be correct?
          Mr Drury—Yes.
          Senator COLBECK—You do not have any sense of any of those numbers?
          Mr Griffin—No, I am not aware of any. I have asked the question: is it
          commercial in confidence? That is the answer we get.
          Senator COLBECK—So for Coles to claim that the lack of transparency is,
          in fact, at the farm gate is not necessarily the case.
          Mr Griffin—That is right.39

37     Mr Christopher Phillips, General Manager, Trade and Strategy, Dairy Australia, Committee
       Hansard, 8 March 2011, p. 5.
38     Norco Co-operative, Response to questions on notice no. 1, received 23 March 2011, p. 1.
39     Australian Dairy Farmers, Committee Hansard, 8 March 2011, p. 18.
                                                                                        Page 47
4.36     The confidentiality agreements between retailers and processors and the
resulting lack of transparency in their pricing was also noted by a number of other
producer organisations, including the South Australian Dairyfarmers' Association, the
DFMC and the Queensland Dairyfarmers' Organisation.40

4.37     This limits the ability of individuals and organisations to analyse pricing and
related issues in the dairy industry:
        Given that the company margins are confidential it is hard to be 100 per
        cent specific, but, in the work that we do in tracking it, there is probably
        between a 30c to 40c a litre difference in the margins for the processors
        between their branded product lines at the moment and what they sell to the
        supermarkets as house brands. If there is a significant shift to house brands
        then most of that milk is being sold at a significantly reduced margin and
        that just means that there has to be a drop-off in industry revenue
        somewhere that has got to be worked through.41

4.38    The Australian Bureau of Agricultural and Resource Economics and Sciences
(ABARES) aims to 'provide professionally independent, world-class research,
analysis and advice to inform decision-makers on current and future policy challenges
affecting Australia's primary industries'.42 However, their work in the dairy industry is
also limited by key information being treated as commercial-in-confidence:
        Senator MILNE—…You said that, in the work that you are doing on this
        issue, you are looking at the various factors, including farm gate prices.
        Have you done an analysis from the farm gate to the retail sector of the
        different margins? Is there a graph or an analysis of exactly what those
        margins in various states, for example?
        Mr Morris—We at this stage only have the information up to the farm gate.
        In the submission that we provided to the committee, we provided some
        information on the costs of production for farmers, which is derived from
        our farm surveys and the price that is received at the farm gate.
        Unfortunately, there is not a lot of information that we can access at this
        stage, anyway, on the costs through the rest of the chain through to the
        retail sector. We would love to have that information, but unfortunately we
        do not.43

4.39    The committee noted in Milking it for all it’s worth that ‘it is not an easy
matter to apportion the typical supermarket price of milk…between the costs and

40   See Committee Hansard, 8 March 2011, pp. 55, 63, 78 and 90.
41   Mr Adrian Drury, Australian Dairy Farmers, Committee Hansard, 8 March 2011, p. 10.
42   Australian Bureau of Agricultural and Resource Economics and Sciences, 'ABARES Home',
     www.daff.gov.au/abare-brs (accessed 18 March 2011).
43   Mr Paul Morris, Deputy Executive Director, Australian Bureau of Agricultural and Resource
     Economics and Sciences, Proof Committee Hansard, 10 March 2011, p. 27.
Page 48
profit margins of the various players in the chain'.44 The report’s attempt to allocate
the components of the retail price of milk from the information available to the
committee resulted in a significant residual remaining.45

4.40   The evidence submitted to this inquiry has provided some insights into
wholesale pricing at this point in time:
          I have looked at the National Foods presentation and they are saying about
          54 per cent of the wholesale price is the cost of milk. I think they have let
          us in the door there because no-one wants to talk about these things, but I
          know from the Dairy Farmers Milk Cooperative that the average milk price
          is probably about 54c or 55c. We are looking at a dollar offer price.46

4.41     The availability of pricing information in Australia may not be in line with
other jurisdictions:
          Information on wholesale and retail prices is more difficult to obtain.
          Unlike the United Kingdom where Dairy Co (the United Kingdom
          equivalent of Dairy Australia) regularly publishes the margins obtained
          along the supply chain, the prices received by processors in Australia
          remains a mystery.47

Impact on dairy farmers

4.42     The unclear pricing arrangements between processors and retailers may affect
the ability of dairy farmers to collectively bargain effectively:
          Mr Brokenshire—At the least I and my colleagues in the dairy industry
          would like access so we can see some transparency. Then I guess it is up to
          us to be able to drive our argument based on some knowledge…
          Senator O’BRIEN—I suggest that, if you are involved in bargaining, these
          are the sorts of issues that dairy farmers ought to be bargaining about.
          Mr Brokenshire—I totally agree, but there is one problem—they say, ‘We
          can’t give you that information,’ ‘We won’t give you that information,’ or,
          ‘We don’t have to give you that information.’ That is our dilemma. If we
          had that information, it would make it much easier for us to bargain. We are
          bargaining pretty much blind— seriously.48

44   Senate Economics References Committee, Milking it for all it’s worth—competition and
     pricing in the Australian dairy industry, 13 May 2010, p. 40.
45   Senate Economics References Committee, Milking it for all it’s worth—competition and
     pricing in the Australian dairy industry, 13 May 2010, p. 42.
46   Mr Ian Zandstra, Chairman, Dairy Farmers Milk Co-operative, Committee Hansard, 8 March
     2011, p. 73.
47   NSW Farmers' Association, Submission 124, p. 6.
48   The Hon. Robert Brokenshire MLC, Proof Committee Hansard, 10 March 2011, p. 57.
                                                                                         Page 49
4.43    The DFMC recommended that the government require the major supermarket
chains to publish the contract terms and wholesale prices of their private label milk
contracts with processors in each state.49 The DFMC discussed this recommendation
at a public hearing:
        Senator RYAN—…I wanted to talk about your suggestion that you
        recommend the government require Coles, Woolworths, Aldi and Franklins
        chains to publish the contract terms and wholesale prices of their private
        label milk contracts with the processors in each state. I am not sure but is
        that required in any other sector that you are aware of?
        Mr Zandstra—No, honestly I cannot say.
        Senator RYAN—I was not sure whether you were drawing upon another
        idea for it.
        Mr Zandstra—No. The issue here is that everyone is wondering: what really
        is the wholesale price? This revolves around Coles still selling this at a
        pretty tidy margin. We can imagine from the previous Tasmanian inquiry
        on the percentage margin that they said they had, and the amount of drop
        that they have had, and also the increase in the wholesale price, but I do not
        know where that line of margin is.50

4.44    The DFMC was also asked why the dairy industry should be singled out for
transparency of contracts when this was not the case for other industries, including for
suppliers of other grocery items:
        ...the reason this is happening in milk is that it is exposed to this sort of
        hold-up situation. It is a staple; it is sold every day; it is produced every
        day; there is a cold chain there—National Foods and others, say. Milk can
        easily be used for marketing reasons rather than value reasons and that is
        the issue here. We like to know what the value point is on the shelf, because
        it has clearly been used for marketing reasons here now. It is to generate
        traffic down to the back of the store and all these sorts of things and to get
        convenience trade. Pretty well, Coles have said they have forfeited their
        margin or are carrying the cost of this. Well what is that? Are they still
        there at margin? We can hardly say it is loss leading if we do find they are
        making some money on this—I clearly believe it is loss leading in certain
        areas. So we really have to know this relative to milk.51

4.45    Some submissions proposed that the government go further. Clover Hill
Dairies suggested that the terms and conditions of contracts should be monitored, with

49   Dairy Farmers Milk Co-operative, Submission 66, p. 6.
50   Mr Ian Zandstra, Chairman, Dairy Farmers Milk Co-operative, Committee Hansard, 8 March
     2011, p. 73.
51   Mr Ian Zandstra, Chairman, Dairy Farmers Milk Co-operative, Committee Hansard, 8 March
     2011, p. 73.
Page 50
onerous conditions removed, and that each processor must gain ACCC approval of
their contract.52

52   Clover Hill Dairies, Submission 53, pp. 8-9.

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