Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Economics References Committee
02/02/2017
Australian dairy industry

GOULDING, Mrs Bridget Alwyn, Private capacity

GOVETT, Mr Benjamin Joel, Owner, Tandara Brown Swiss

HARNEISS, Mr Lionel, Private capacity

McINNES, Mr Ben, Private capacity

McINNES, Ms Rennae, Private capacity

NICHOLSON, Mr Patrick, Private capacity

KNOEPFLI, Ms Danielle, Private capacity

PARKER, Mrs Sarah Anne, President, Australian Women in Agriculture

PELL, Mr Russell Keith, Private capacity

ROBERTSON, Mr Alex, Vice President, Farmer Power

WELLER, Mr Paul, Private capacity

Committee met at 10 :09

CHAIR ( Senator Ketter ): Good morning, ladies and gentlemen, and welcome. We will now commence the public hearing into the dairy industry inquiry in Shepparton, Victoria.

I welcome those dairy farmers who have come to participate in the first part of our hearing today. The committee is interested to hear about your experiences and issues related to the inquiry's terms of reference. We are very interested to hear your stories today. The farmers who have registered with the committee are invited to come forward to the table to constitute an informal panel. That might be a good opportunity to start the process.

Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. I remind those contributing that you cannot divulge confidential, personal or identifying information when you speak. If you wish to supplement your evidence with written information, please forward it to the secretariat after this hearing.

As you can see, there are members of the media here today. I understand that some photographs will be taken today, so I want to place that on the record and find out if anyone has any objection to photographs being taken, which may appear in a newspaper. As there are no objections, we will proceed.

I indicate that we are going to try to hear from as many people as possible. Although there are others in the room, we will start with the dairy farmers. We would like to try to get through as many submissions as possible. We are going to limit each person's opening statement to about five minutes so that we can hear from everybody. We expect that the forum will take on the characteristic of an organic discussion, so issues will be raised and hopefully some free-flowing conversations take place in the course of the hearing. Would anyone like to go first?

Ms Goulding : I will.

CHAIR: Ms Goulding, welcome to our public forum. Thank you for appearing. I invite you to make an opening statement.

Ms Goulding : First off, I would like to thank you for holding this Senate inquiry locally, because this is a big dairying area and there is a lot at stake in this area. I am coming at this from two approaches. My first approach is the business ethics of Fonterra, because we are a Fonterra supplier and we have been a Bonlac company supplier. We have been one of them for 20 years. We have remained loyal to this company through a lot of highs and lows, and this is where it is at.

The second approach is that I am the social issues secretary for the Baulkamaugh CWA up in Numurkah, and I will talk about the family impacts. The mechanics of how Fonterra can try to justify their clawback have been covered in other submissions, so I would like to come at the problem from the point of view of business ethics. In both cases of sudden price drops, in January '09 and the clawback last May, I had attended supplier cluster meetings only a few weeks beforehand and was assured that the price stood at the promised year-end level. In late '08, there was a meeting at Monichino's winery where our milk supply officer—do I say his name? Maybe not?

CHAIR: We have asked people not to divulge confidential information.

Ms Goulding : That is fine. I will keep those out of it. Our milk supply officer told us, 'You've got the water and the milk pay, lock in contracts and go for it.' This statement was made despite concerns about the GFC being raised by those suppliers present. Only weeks before the May clawback, I attended a cluster meeting at the president's room at Numurkah and at the end of the meeting it was confirmed by staff members present that we were looking at $5.60 a kilogram of milk solids by the end of June and, if the dollar remained around 74c against the greenback, then a similar price for the new season. This was a time when final winter fodder requirements were being locked in along with purchases for water for the last of the season and carryover. At the tail end of a very difficult year climatically, it was not essential for such an extreme price drop just to match Murray Goulburn.

My main reason for being here today is to encourage the Senate to research Fonterra's performance over the last decade. I know I will be howled down by the question of relevance, but it is totally relevant to their company culture. Around the price drop in '09, Fonterra had just been involved in the Sanlu melamine scandal, losing $290 million. Talk to the New Zealand government about Fonterra's delay in publicising the incident and how the government of the day had to deal with China to halt the disaster which affected 250,000 children, killing six. Talk to the World Health Organisation, which has called it one of the worst food safety accidents in the last 50 years. Talk to newsagencies about Fonterra's, as well Sanlu's, culpability in a poorly researched and executed foray into the Chinese dairy industry. Research some of their other food quality mistakes. Each time governments and media allow Fonterra get away with behaviour that does not measure up against other reputable companies, they become more cavalier. At the supplier meeting at Numurkah after the clawback was announced, the chief financial officer said, when questioned about the delay in repairing the fire damaged Stanhope site, that it was self-insured by Fonterra but the money had been spent on the previous year's milk price.

The suppliers were understandably nonplussed at this announcement, and when questioned on this he reiterated that this had occurred. Theo Spierings had commented in an article that their product mix was wrong due to the Stanhope fire and this was affecting milk price. Surely this kind of management warrants scrutiny by ASIC. By the time we were talking to our milk supply officer about the FSAL loan—that is the Fonterra Supply Assistance Loan package—their story had changed again. Apparently, the money had not been spent on milk price, and they started repairs as soon as possible. Thank you for listening. Please investigate a bit deeper. MG's problems were due to bad management, but Fonterra just took an opportunity, once again, to get suppliers to foot the bill for a windfall to shareholders and to recoup some of their avoidable, massive losses from their many troubles over the last decade.

So that there is the business ethics side of things. Can I go onto the family side of things, and a few comments?

CHAIR: Yes.

Ms Goulding : First off, there is the comment here that Heather Stacey, who was general manager of milk supply in Australia prior to our current one, was apparently involved in the Murray Goulburn share flow. She was an ex-employee of their major competitor, and maybe that is something that needs to be looked into. As I said, we have supplied Bonlac supply company since we shifted to Australia in 1997. I do have concerns that my speaking out will have an impact on us. Prior to shifting to Australia, we were suppliers to NZ CDC—what Fonterra was known as. Due to the fact that they had a monopoly, farmers had to toe the line because they had no-one else to supply to. This must not be allowed to happen in the Australian dairy industry. Fonterra must not be allowed to either take over or become a major shareholder in MG. This would lead to an even bigger crisis. We keep getting reminded that they are a global dairy giant. How about they start behaving like one?

As I said, I am the social issues secretary of our CWA. The generosity shown to farmers in this time has been heartwarming. Lions groups, community houses, CFA, 'Doing it for dairy' and the northern Victorian rural financial assistance group are some non-profit organisations, to name a few, that have taken Murray Goulburn and Fonterra suppliers under their care to try to assist them in some way to get through the stress or mess that has occurred.

At the moment we keep getting rammed down our throats that the drop in milk supply is due to the weak winter. This is not true. The lack of milk supply has been due to the massive cow cull after the clawback that was caused by Fonterra and MG's lack of planning and reactive management style. It would be interesting to see how those two major offenders stacked up milk production wise in comparison to a sensibly run dairy company such as Bega. Barry Irvin must be congratulated for saying publicly, 'When did MG and Fonterra suppliers become a liability? Without farmers there is no dairy industry.'

There is another concern here. I have noticed recently that mainland cheese products that are getting sold in supermarkets locally are packed in Australia from New Zealand product. This also needs to be looked into.

CHAIR: Just for my information, are you currently a supplier to—

Ms Goulding : I am currently a supplier to Fonterra. The milk tanker is due up our driveway today. It is then due again in two days time. I sincerely hope that keeps happening after speaking out today!

CHAIR: By appearing here today, you are protected under parliamentary privilege. So there should be no repercussions.

Ms Goulding : Thank you.

Senator XENOPHON: And, if there are, you let us know.

Ms Goulding : I will. I will want to know what to do with my milk! Perhaps Bega will pick me up.

CHAIR: Thank you, Ms Goulding. Mr Weller, would you like to go next?

Mr Weller : Yes, thank you. I am part of a family dairy farm at Lockington. We milk 780 cows over two farms. We were Murray Goulburn suppliers all my lifetime until about 13 July last year when we swapped to Fonterra. Our farming business has always relied on our milk companies for information. From that information, our farming business made decisions on what we could pay for water, hay and grain. Last year, the opening price was $5.60 and, yes, they said that if things went right they would get to $6.05. So Murray Goulburn were not saying $6.05; they were saying $5.60 as an opening price. Then as late as 8 March in 2016 a quarterly letter came around. It is on Murray Goulburn's website. It said, '$5.60 is still the price provided there isn't further deterioration in world prices or the Aussie dollar.' For them to make the call on 27 April that they were dropping back from $5.60 to about $4.80 meant that for the last quarter of the year the price must have dropped 60 per cent. That just did not happen. So what they are saying, to me, does not stack up. They must have known earlier.

At a suppliers' meeting in March I asked the question, 'Why did you have more in stock inventories at 31 December 2015 as compared to 31 December 2014?' They said that it was because it was a higher value product. Why then, if it was a higher value product, were we getting a lower price? Obviously if we were getting paid a lower price the inventories should have been a lower price per tonne, which meant that people were carrying more tonnes. My observation—and this is just my observation—is that they were gambling on a price rise later in the year that never came.

We rely on companies for information, and I believe that, as investors in the share market are protected by disclosure rules, suppliers of milk companies should be protected the same. There should be the same rules on giving out information about milk prices as there are about information to the market so that people can make decisions on investing in the market on shares.

There are some positive things that the government could do to help the dairy industry in this area. There is research and extension. There are farmers in this region who are achieving in the vicinity of three to four tonnes of dry matter per megalitre of water used. The average is probably somewhere between one and 1½ tonnes, but it is how we get all the industry up to achieving the three to four tonnes. Through that, we need extension. Over the last 20 to 30 years, both sides of government have reduced their investment in extension. Extension gets the farmers understanding how to use the latest technologies.

We also need money in research. There have been great gains in productivity from research that has been done over the last 40 to 50 years, and the dairy industry has been a beneficiary of that. We need to continue to invest in research so that the dairy industry can continue to, firstly, turn water into dry matter and, then, turn dry matter into milk. So, that is an efficient cow, turning dry matter into milk; it is an efficient farmer growing feed that turns water into dry matter. That would help the industry compete because it would mean that the more milk we can get from a megalitre of water the more competitive we are with the other industries that are coming in to use water, whether it be table grapes, whether it be almonds, whether it be walnuts or whether it be many other commodities that have come in—even cotton is being grown at Kerang.

We need to maintain the water in the district, so the worst thing that any government could do would be to take more water away from this region under the Murray-Darling Basin Plan. Under the Murray-Darling Basin Plan, there has been discussion about the 450-up water. Victoria share would usually be about 43 per cent. That comes to just under 200,000 megalitres. The average dairy farmer uses about 500 megalitres, so you are talking 400 less farms if you were to go ahead and do that. With 400 less farms—each dairy farm in this region generates eight jobs—you are talking 3,200 jobs out of this region. It is not a good thing to do for this region. To support the dairy industry in this region, water is of utmost importance. We need assistance in maintaining the water here, and also in research and development so that we can get more litres of milk from a megalitre of water used. Thank you for the opportunity.

CHAIR: Thank you, Mr Weller. Mr Nicholson?

Mr Nicholson : I am from Girgarre, just local. I am a fourth generation dairy farmer. I have been dairy farming for 26 years as part of a family operation. I have come along today just to have my say. There are not that many farmers here, which is disappointing. But I think a lot of farmers, since it happened back in April, have got to the stage now that they have just had enough. They are probably sick of inaction, and that is why we do not have too many along here today, I believe. Dairy farming has always been my passion ever since I left school. I have two sons and I would like them to have the opportunity to follow in my footsteps, if they choose to. We are actually Tatura Milk suppliers—Bega—so we are very fortunate.

Following the price drops last April, like many others I questioned what the future held for myself as a dairy farmer and for the industry, as no business can operate below the cost of production. As I said, we were fortunate to be supplying to Tatura Milk, and they maintained their price to the end of the season. We knew that, at the start of this season, there was going to be a significant price drop, but that gave us time to plan and put in place some mechanisms. We were able to then cope better with the lower milk price this season.

We have not had to withstand clawbacks. We have not had loans forced upon us, like the other milk companies have done to their suppliers. However, we still have to deal with service providers to the industry who, after the price drops, became very nervous about dealing with dairy farmers and were even known to contact dairy farmers to find out what companies they were supplying as to whether they would allow extended terms on credit. Can I just speak about our own business?

CHAIR: Yes, definitely.

Mr Nicholson : It is a family business. My parents have been involved and are still involved, but to a lesser extent, with my brother, and we have two part-time workers as well. At the start of this season when our opening price was $5, when we had done our budgets, we were looking at a $300,000 loss for this season. We reduced our cow numbers to try and cut our feed costs. We have done no capital expenditure this season, only essential spending. We had a full-time worker. They actually finished up with us to go share farming, and we did not replace them, so we have been doing more of the work ourselves and just doing what we have to do, and there is obviously some work that is not getting done, because we just physically cannot do it. We had to take out a $200,000 bank loan to get through this season, so that is extra debt onto our farming business.

The flow-on effects of this to our local community—and Kyabram is our larger local town—happened immediately. Businesses with products or services that had already been ordered were contacted, and they were cancelled. That flows on to your local community, and employees in those businesses were put off.

There has been a lot said about the international markets and the export markets in this whole crisis, and I believe it is easy to blame the international markets for where we are at. But nearing 70 per cent of all dairy products are now sold domestically, so I believe the domestic market has huge potential to provide a buffer for our industry against international ups and downs. We need to put value back into our domestic products, and I think this begins with the end of the dollar milk. We have allowed the supermarkets, together with the milk companies, to devalue our products. The milk companies have undercut each other to gain contracts with the supermarkets, and it has been allowed to happen. And all along the value of our milk, cheeses, yoghurts and butters has been getting lower and lower.

Then we have got imported products coming in, and—I think it has been mentioned—the Mainland cheese is a very good one. There is a huge amount of imported cheese coming in from New Zealand being dumped on our market at a much lower price, and this only drags down the value of our own products.

The other thing that has disappointed me throughout this whole crisis has been our industry bodies. I think they may now be coming up to speed, but, when it first happened, they lacked leadership. They just did not get out there and support the farmers. I believe there are too many conflicts of interest within our industry bodies, whether it be within Dairy Australia or the UDV, right down to our local Murray Dairy and local groups like that. Too many people involved in both organisations are involved in milk companies that have got vested interests in seeing things not being said and maybe not putting out the actual truth to everyone of what is actually going on, and I think this really does need to be looked into. I think they have lost sight of who they are advocating for: us, the dairy farmers. After all, many of these groups are funded by our levies, and yet they are not supporting us as much they certainly could.

I am still very positive about the future in the industry, and I certainly want to continue as a dairy farmer in this industry. I think we can get through this, but I think we have to make sure that what happened in April is never allowed to happen again; otherwise, we will not have a dairy industry in Australia. I do not think we want our milk coming in from overseas because our own domestic market is not able to supply the product. We need to capitalise on the support out in the community. The consumers are certainly behind the dairy farmers, and this has been seen through many different avenues. They want to use the products that support the Australian dairy farmers. We as dairy farmers need to be valued and not treated as second-class citizens. Thank you for the opportunity to speak today.

CHAIR: Thank you, Mr Nicholson. Mr Pell, do you have a comment?

Mr Pell : Yes. I am a dairy farmer from Wyuna. I farm on a family farm. I have been farming since 1971. I am a community person. I am also a member of the Basin Community Committee. I would like to paint you a bit of a picture of where we come from. Since starting back in '71, I have seen a lot of changes. I have seen ups and downs. The industry really peaked in 2002. In 2002, this area, the greater area here in the north of the state, did 3.2 billion litres. The millennium drought came along and we actually dropped back to 2.2. This is where we have stayed. We have stuck around that number and we probably do not look like going too far further forward under the current scenario.

We all knew the Basin Plan was going to have an impact. Most of us supported the Basin Plan because we actually care for the environment and we realised that there was too much water going to agriculture. But, in saying that, we have got to a stage now where the first part of the Basin Plan is almost completed. There are some bits and pieces around. One of the things that really upset most people that I have talked to is the 450 gigs of up-water. Part of the reason for that was—and I was, as I said, part of the Basin Community Committee—for three years we tossed around what number to come up with, and after a considerable debate the figure of 2,750 was decided upon. And, mind you, I can remember at the time there were not too many groups happy with that. The environmental ones wanted more. We as irrigators wanted less. But, at the end of the day, we agreed. From that, all of a sudden there was an inclusion of 450 up-water. Probably at the time we did not take too much notice. I know Craig Knowles was the chair at the time, and I said to Craig: 'Where do we sit with this for 450?' and Craig said, 'It's not ours. Don't worry about it. Let's get on with the 2,750.'

It has probably been kicked around a fair bit since. There has been a lot of debate probably in the last three or four months—it has raised its head. Our belief for a start was that 450 up-water was: if there was any social and economic impact in the community—which there has been, as I demonstrated, with the amount of milk that is being produced now is what was being produced before—it would not go ahead. Now I have been told that it has actually changed and that it is not about community but a farmer. If it is no impact for him on that particular farm, it will go on. What I am actually saying is: you could up the money to get that water; it might be good for that farmer but, I can tell you now, it will not be good for the community.

The dairy industry supports about 6,600 jobs in our area and a lot of major factories. Those factories are probably under threat. I think the biggest thing they are under threat from is the 450 gigs. I talk to a lot of farmers. There are a lot of farmers hurting. It is all about confidence. While that 450 sits there, I am afraid the confidence is going to be hard to win back.

Traditionally in this area in the Goulburn Murray irrigation district we had a high-security entitlement which was about 68 per cent of the water we used. We bought sales to make up that 100 per cent, or even more in some years. When things changed and the high security came into play, and the sales water went into low division water, there was always plenty of water around to buy. But since the Basin Plan, a lot of that low-hanging fruit has been taken up and it is becoming harder and harder to buy. If you put on top of that an extra 450 gigalitres, which, as Paul pointed out, our part of that will be 200 gigs or close to it, you will have an absolutely devastating impact on our region.

The other part I want to bring up is the water trade. Water trade was supposed to be freed up in the southern connected basin and that actually has not happened. On the Murrumbidgee at the moment, water is half the price of what it is here and it cannot be traded out of the Murrumbidgee. We also have a Barmah Choke, which distorts trade. So it is probably not a completely level field with water trade trading, even though that was a part of the Basin Plan. I suppose it gets me to a point where even our own irrigation system that has since been modernised—it works extremely well—but, if we keep on losing water from it, it will become uneconomic to run. It will become very hard to run in the future if there is not enough water. Traditionally, we used to use about 2100 gigs in the GMID. We are now down to 1,200 or 1,300 so it is a significant change. That is probably all I will say at this stage.

CHAIR: Mr Pell, I take it that you see those water related issues as far more significant for the future than the other matters we have been talking about, the supply contracts, the clawbacks, changes in the industry? You have chosen to speak exclusively about the water issues. Do you see that as much more important?

Mr Pell : I suppose we have probably heard today which company we supply. I am a Bega supplier and I have every confidence in the Bega hierarchy. I have been in it for a while. I can remember '75; we actually shot cows. I do not think we ever want to go back there but I have seen it come up and down. Just listening to the speakers here today, what you want is honesty, to believe in people, to believe in what they say. I am not going to talk about other factories. It has been very disappointing to me to hear what has gone on at Murray Goulburn and Fonterra. It has made me angry, actually, and I probably saw it before with Bonlac years ago. We do not appear to have actually learned much. I suppose that is where I sit. I am quite satisfied with the way that Bega are going about their business.

CHAIR: Mr Weller, you were a Murray Goulburn supplier. On 13 July, you say you swapped to Fonterra. Could you tell us about why you did that. Do you feel that you are getting a better deal now because we hear that every processor is not necessarily perfect.

Mr Weller : After the announcement in April by Murray-Goulburn, we supplied Murray Goulburn for the rest of that year. The companies then came out with their opening prices. Fonterra's appeared to be better. So I got an income forecast from Murray Goulburn and an income forecast from Fonterra, which they were both happy to do, which they always are. On our farm, the price was $4.10 with Murray-Goulburn and $4.54 with Fonterra. Every farm is different because every farm has different quality milk and they produce different amounts of milk in different months so on our farm there was a difference. It was not an easy decision to make. It was a tough decision. I am a former director of Murray Goulburn so I did not really want to leave. My family supplied the Rochester butter cooperative before it was Murray Goulburn, back in my grandfather's days, and we had considerable shares in Murray Goulburn, but in the end we are milk producers and it was better for our family company to supply Fonterra.

Since then, Murray Goulburn have had a rethink on their clawback and it has closed the gap but not fully closed the gap. So I am still in front being a Fonterra supplier. When we get to 1 July next year and the companies come out with their opening prices, I will have another look. The days of supplying a company for years and years have changed. Businesses will go where the best return is for their farm.

Senator HUME: Was it difficult to leave Murray Goulburn contractually?

Mr Weller : No. As I said, we have been in the dairy industry for a long time. We had no debt with Murray Goulburn. Some people have next-gen packages, which encourage them to produce more milk. They borrowed money from Murray Goulburn or they got paid extra. They were tied in. When Murray Goulburn had their unit float, they financed suppliers from other companies to come over to their company. That was a reason why I was a bit upset with Murray Goulburn as well, because here we were, a family that had supplied Murray Goulburn for over 50 years, and they were financing people to come over and buy shares at somewhere between $1.10 and $1.27, approximately—I do not know if that is exact; it would be about there—but, if we wanted to buy shares, because we had been buying shares and supporting the company all our lives, we had to pay $2.10. So they were not exactly being loyal to their loyal suppliers.

Senator HUME: Before we move on, can I acknowledge that Mr Weller was the former member for Rodney—were you not?

Mr Weller : That is right; that is one of my other things. I was the former state member for Rodney, which is west of here, and I was a National Party member.

Senator HUME: Thank you very much.

CHAIR: Are you able to comment on the nature of the contracts that you had with Murray Goulburn versus Fonterra?

Mr Weller : It is basically the same contract. They will come in each day and pick up our milk, provided it is of a quality that they want. If we have trouble with bacto counts, thermoduric counts, sediment or penicillin—or antibiotics, I should say—in the milk, they have the right to say, 'No, we're not going to pick up your milk.' But, other than that, they will come in and pick up as much milk as we produce.

CHAIR: So there is no exclusivity in the contracts?

Mr Weller : No. They probably do offer that, but we have never had those contracts.

CHAIR: What are the arrangements for terminating the contracts?

Mr Weller : I ring them up and say, 'Don't come tomorrow.' That is terminating the contract. If it is a quality issue, they will work with us to try to improve the quality. If we cannot improve the quality, they then say, 'We don't want to pick up your milk,' which rarely happens.

CHAIR: That sounds like a fairly flexible arrangement. There has been a lot of talk about the contractual arrangements and the uneven bargaining powers between suppliers and processors. You seem to be saying you are reasonably happy with your contractual arrangements.

Mr Weller : We can get contracts with other companies probably at higher prices, but it does not work for my farm, or I have not wanted to go down that track because usually we have to have a flatter milk curve. Here in northern Victoria it is easier to grow feed in the spring, and that is when the majority of our cows calve—in August-September. Other people in the district have moved to calving three and four times a year so that they have a flatter milk curve, and companies like that because it utilises their stainless steel better. They will be paid a higher amount of money and offered contracts by some companies to do that. We have chosen not to do that and it has always suited us to maximise their production in the spring when the feed was cheap.

Senator XENOPHON: Thank you all for speaking out today. Can I say to Mr Pell and Mr Weller: in terms of the Murray-Darling Basin—coming from South Australia—my reading of the plan is that the 450 gigalitres can be taken out of the system only through some negative impact on the communities and also from water efficiency measures so there cannot be a net loss of production. I do not know if that gives you any assurance, but I would commend to you to look at the wording of the plan and the safeguards there. It is about those efficiency measures so you can do more with less, which I think has happened over the years. I will go to you, Ms Goulding. One of the issues that have been raised here—and this was in your statement—is that you were given assurances, you were told everything is pretty fine and you make big commercial decisions based on that. Do you think that there ought to be a kind of continuous disclosure requirement—as public companies have to their shareholders—to suppliers that needs to be strengthened?

Ms Goulding : Absolutely.

Senator XENOPHON: The other issue that has been raised is to have an effective mandatory code of practice between suppliers and processors, and indeed between processors and wholesalers, because the evidence that we have heard has been mixed evidence. Some have said the $1 milk that Coles instigated back on Australia Day 2011 had a pretty profound impact in devaluing the value of milk as a commodity. Do any of you have any views on that—a mandatory code of practice, stricter disclosure requirements and maybe reform to unfair contract laws so that you can rely on representations made if you are relying in good faith on representations to make commercial decisions as to what you are going to do for the next 12 months? There should be some protection for you on that. Any comments?

Mr Pell : Yes, I would like to make a comment. It really sends out a bad signal, a signal that sort of says, 'You as dairy farmers can produce milk for this price much cheaper than water,' and in my opinion way below the cost of production. That is what it says. It is not a good look, but you know how the supermarkets operate. They are a real force and, as far as we as dairy farmers go, it is a bad look.

Senator XENOPHON: Would a mandatory code help, Mr Weller?

Mr Weller : Can I just add in there that while it is a bad look—and I agree it is definitely a bad look—let's keep things in perspective. Fresh milk is only about six per cent of the milk in Victoria. The milk sold in the supermarkets is about half of that, so that is three per cent of the milk in Victoria. And probably half the milk sold in the supermarkets is your $1 a litre, so you are talking about 1½ per cent of the milk production in Victoria. I grant that it is a bad look but, if we spend all our energies fixing that, there is another 98½ per cent of the milk where there is an opportunity.

Senator XENOPHON: In economic terms, though, by draining the price down it actually sets kind of a benchmark of what the price is, doesn't it? Even though it is only a fairly small proportion of the market, it actually does send a price signal as to what milk is worth as a commodity.

Mr Weller : Basically what sets the price of milk in Victoria is what the manufacturers can pay, and you have your fresh milk people paying a premium above what manufacturing can pay.

Senator XENOPHON: Sure.

Mr Weller : We need to focus on getting the manufacturing up. This is one thing that Murray Goulburn did right: investing in machinery that is going to turn milk into higher value products. They did that right.

Senator XENOPHON: Although in Perth yesterday one of the milk processors there basically admitted that supplying milk for Woolworths, for instance, was actually costing them money; I think there were words to the effect that there was nothing in it for them. When you took into account all the other production costs involved and the ancillary costs, it was actually almost a loss leader for them in a sense. It meant almost like a waterbed effect—you put the price down there but it meant that they would have to increase prices for other products or that they would not be able to pay as much for others. Do you think that could be a factor that skews the market somewhat?

Mr Weller : In Victoria, when it comes to farm gate milk prices, the manufacturing companies set the price. Your Begas and your Saputos are obviously the leaders at this stage and they are into manufactured milk products. Other milk companies set their prices off that. Because they want a flatter milk curve, they may pay a premium above that, but it is set off the manufacturing milk price. We need to make sure that we have efficient manufacturers here in Victoria and around Australia to produce our milk and that fresh milk people set their premium above that.

Senator XENOPHON: Sure. In Mr Nicholson's statement, he made reference to imported products from New Zealand being dumped on the market. There is a WTO definition of dumping that if it is below the price of your domestic market, effectively, in broad terms, then that is illegal under the WTO rules. Is there any suggestion that New Zealand product is being brought into Australia below the cost of its own domestic market?

Mr Nicholson : We have an opportunity with such a huge percentage of our product being sold domestically that if we are able to increase the value of our domestic product then we are able to increase ultimately returns to farms. If we can get our domestic products up to a value that then returns a decent value back to our farmers, we are not as open to international markets. The percentage of our domestic product is very high—nearly 70 per cent of all dairy products are now sold domestically. So the bulk of our product is sold here within Australia.

Senator XENOPHON: You might want to take this on notice, but you referred to the New Zealand product coming into our market. Do you know what it is being sold for or wholesaling for? What is your understanding?

Mr Nicholson : Not off the top of my head, no. But I was surprised how much imported cheeses were actually coming into Australia and being sold through the supermarkets alongside our own domestic products.

Senator XENOPHON: There is also a suggestion about European cheeses brought in because they have a lot of hidden subsidies in their market.

Mr Nicholson : And more specialty products coming from the European side, but the New Zealand products are competing, especially in the cheese market.

Ms Goulding : Can I make a comment with the $1 a litre milk. I went to the Fonterra annual general meeting over in Echuca back in the middle of last year and Judith Swales presented her report. They have a big, state-of-the-art plant in Cobden for the liquid milk side of things. Very interestingly, as you are probably well aware, Fonterra milk is the $1 Homebrand milk at Woolworths and I believe Murray Goulburn is the Coles one. I outright asked Judith Swales at that meeting how hard it had hurt Fonterra when the Australian public got behind and said no to the $1 a litre milk. She said, 'I can't deny that it didn't hurt us, but we picked it up by the branded milk side of things.' So they are all right; it is the farmers who are not.

Senator XENOPHON: There has been a suggestion that an emergency measure might be to put a temporary levy on milk—10c or 20c a litre to get farmers back on their feet, maybe higher for the unbranded milk products. Is there any view around the table as to whether you think that would be a good or bad idea as a short-term measure?

Ms Goulding : Speaking on behalf of Fonterra, the parent company made an $843 million profit in New Zealand. I think it was disgustingly opportunistic what they did here. I asked them outright in Numurkah about the tag that was being bandied around by Murray Goulburn—#605keepthedreamalive—and they said, 'If nothing changes, that's where you're going to be at.' All the other dairy companies held their prices and respected their suppliers, and, as the two gentlemen down the end there have said, they are suffering financially because of the drop in production. They have admitted that they did not suffer from a loss of income, and it was the loss of income for farmers with companies such as Fonterra and Murray Goulburn that has been particularly hard, because we had locked in fodder, locked in work, locked in water purchases—all that kind of stuff—and we had to work through that with a huge loss of income. To see on the front of the Weekly Times Theo Spierings saying that they were taking it back to their shareholders in New Zealand was disgusting.

Senator XENOPHON: So no levy or a levy?

Ms Goulding : I think at this stage of things the dairy companies need to be made to do it, to sort it out. The public have got behind the dairy companies on this. They have voiced their disgust over what has happened. But personally I think the dairy companies need to get their act together and, as I said, not manage reactively. They are big global dairy companies. This is appalling.

Mr Weller : I do not believe in the levy. I think it is more important that we get the right information from our companies. As I said before, there are laws about disclosure to the stock exchange. There should be similar laws about disclosure on milk price and what farmers can make. We are businessmen; we can make our decisions on the information we are given. As we have seen here today, it is not all milk companies. Bega did not have the drop that Murray Goulburn and Fonterra had.

CHAIR: Mr Weller, what was the impact on your business of the price drop?

Mr Weller : I think the figure, if I had stayed at Murray Goulburn, was $330,000, which they were meant to claw back over the next three years. They have now reviewed that. It has stretched out to five or six years, and they may even review it again and not do it. But that was what we were likely to pay. Because we were not locked in and owing them money we were able to move to another factory.

Can I make a comment on the WTO and the rules? Back in the nineties I was a member of the UDV central council. I think it was Dutch edam cheese that we took to the court because we believed it was being dumped in Australia. We were unsuccessful because it was using only part of the milk. It was not whole milk. They are tough ones to get through. With New Zealand, while there are antidumping laws, there is also the closer economic relations agreement that you have to work through.

CHAIR: So there are no formal processes going on in relation to the Mainland cheese?

Mr Weller : Not that I know of. I am out of the UDV and ADF.

CHAIR: We are moving around on a number of different topics. Can I just come back to the contractual arrangements issue and see if we can exhaust that for the time being, because that has been a major issue. Does anyone have any other issues they would like to talk about in terms of their relationship with the processor—any suggested improvements, any particular issues that you have?

Ms Goulding : Fonterra, up until probably October or November last year, had suppliers based in Wagga. They were under the Riverina Fresh label up there. When the opening prices came out they were sworn to secrecy over what they were receiving as the price, because they were essentially the liquid milk for cafes. So we were all under the Fonterra umbrella, but the Wagga Wagga suppliers, Riverina Fresh suppliers, were getting a better price. It was said on the ABC rural report that they were sworn to secrecy and not allowed to divulge what it was. Since then Fonterra has sold that side of the business to a different company. But that is not open. That is not open at all. In the case of my husband and me, we milk about 150 or 180 cows depending on the season. This year because we have been forced to cull cows to keep trading and to keep current with my suppliers, we are down around the 130 mark. I am not sure if the senators realise how the milk price works. At the moment, it is generally on what is referred to as a seven-five or five-seven agreement. Back in November when I went to the roundtable meeting that Senator Bridget McKenzie and Damian Drum put on here, my husband worked out that we were roughly in the $3.82 per kilogram for milk solids. As I speak here, at the moment, for example, we are on $4.75, at the other end of the year. That is when you are paid premiums for winter and autumn milking and that side of things. The dairy companies will always say that they cannot tell me what Mr Weller is getting paid in relation to me because everything is different, which it is to a point—we have a Friesian herd and Mr Weller may have a Jersey herd and there are different sides with that. They need to have loyalty to suppliers who have remained when they have been wanting to get milk in. In times like now, I would imagine they are trying to get other suppliers and offering them more. It should not be allowed. It needs to be open.

CHAIR: So you would like to see more transparency—

Ms Goulding : Absolutely!

CHAIR: in the formula—

Ms Goulding : Absolutely!

CHAIR: that is used to—

Ms Goulding : If we all ran our businesses like Murray Goulburn and Fonterra have run theirs, what a sad state of affairs it would be.

Senator XENOPHON: When a processor says to their supplier, 'We expect the price is going to be X dollars per kilo of milk solids', is there a let-out clause so that if that indicative clause varies by a certain percentage, you can get out of the contract? Or do you think there ought to be that ability to walk away from the contract if the estimate is out by a certain percentage?

Ms Goulding : If you walk away from a contract part way through the year, I would imagine that you would not be entitled to any step ups—that is when they increase the price during the course of the year—that may be coming your way, so you would forfeit that side of things.

Senator XENOPHON: So they have basically got you anyway?

Ms Goulding : They have so got you!

Mr Weller : For twelve months.

Ms Goulding : For twelve months pretty much.

Senator XENOPHON: But should there be a let-out clause, so that if there is a variation of a certain percentage from what they have said—if they have said, 'We expect the price to be this'—you can walk away from it without any penalty?

Ms Goulding : I am not sure. If I were to leave Fonterra, I would not get any of the step ups that were retrospectively coming to me, would I? No. So maybe that is a way it can be looked at: if you do leave and there is a step up on the milk you have supplied up to the date you leave then should be entitled retrospectively to be paid for it. I would say that they probably would not do that. Their argument would be, 'You've gone'.

Senator RICE: If I could just clarify the step-up pricing: it steps up but is paid retrospectively?

Ms Goulding : It is paid retrospectively.

Senator RICE: So even if you have a period of time where you will eventually get that step-up price, you have not got it.

Ms Goulding : Yes.

Senator RICE: You will not have had it if you decide to walk away?

Ms Goulding : Yes.

Mr Weller : Traditionally in the industry companies opened conservatively—

Senator RICE: Yes.

Mr Weller : and as they went through the year and traded better than they thought they were going to, they passed those step ups on to their suppliers as quickly as they could. Now they call them loyalty payments, so that is why you still have to be there—

Senator RICE: At the end of the year to get them.

Mr Weller : to get them.

Senator RICE: So that sounds like something you would suggest could be changed and that going back to the old system would be fairer to the farmer.

Ms Goulding : That is why you often find that a supplier may not leave at the end of the year and will leave once the final payments have come through.

Mr Weller : It could be 16 August because they get—

Ms Goulding : The final payment coming through then.

CHAIR: So some sort of obligation—that a farmer, even if they walk away from a particular process, is entitled to the difference in the step-up retrospectively prior to leaving it, even if they left a particular processor.

Mr Weller : That would make it easier for farmers to move from one company to another, which would give farmers greater choice and would make sure that the companies had to sharpen up their act.

Ms Goulding : Wouldn't it just.

Senator XENOPHON: Some competitive tension.

CHAIR: Mr Nicholson, you made a comment about service providers to the suppliers and the treatment you received after the announcement of the price drop. I am just interested: were any of the major banks involved in this? What level of support did you get in the financial area?

Mr Nicholson : Certainly, I know of service providers as in rural stores that supply products to farmers. I know—I am 100 per cent certain—that one of our local ones did ring their creditors and asked them who they supplied. If you were a Murray Goulburn or a Fonterra supplier, your terms remained at 30 days. If you were a Bega-Tatura milk supplier like ourselves, you get it extended. They were more confident of being paid. Because of a sharp drop in income for Murray Goulburn and Fonterra suppliers, they knew they would not have the income to pay their accounts and they did not want to let them get out any more than 30 days.

I can only speak for the dealings we have had with our own bank, the Commonwealth. We certainly had no problems at all. Perhaps we were in a position where we were able to go to the bank and seek more finance. A lot of farmers were not in a position that they could go and seek more finance to get through this season.

Senator HUME: Mr Nicholson, a few of the farmers we have spoken to have mentioned access to finance as a massive issue. As part of the government's support package which was announced in the middle of last year, there were concessional loans made available. They were highly concessional and had long interest-free periods, but they did not seem to be taken up with the enthusiasm that I think the government expected. Can you give me an indication as to why that might be the case.

Mr Nicholson : I think a lot to do with that was just the trouble to actually qualify for those concessional loans to start with. The problem was it was just another loan. It was just more debt for a business. A lot of people chose not to go into more debt and either got out of the industry or reduced their business to a size where they did not actually have to go into further debt. I think that was the problem. The answer to the problem was not just to increase your debt load. A lot of people just did not have the opportunity. They were already in debt to a high level and they did not want to go further into debt.

Senator HUME: Have you had any feedback on the state Rural Finance Corporation's administrative issues, which was something that another group raised?

Mr Nicholson : I believe you had to change from your old bank to rural finance to actually qualify. So that is a problem in itself. If you have had a long relationship with your own bank and if you are with the way you have been treated and with the dealings you have had, why should you have to change who you bank with just to have access to support?

Ms Goulding : We went through our accountant to sort out getting the farm household allowance side of things. Also, while we were having the meeting with him, we discussed that concessional loan. The general feeling with it was: you take out that loan now, but, at the end of 10 years, you have to then find somebody to take you back into the mainstream side of things. Our accountant was dealing with somebody at the time who was, obviously, at that point. I am sure if it had anything to do with the drought or what, and he said it was not an easy situation. So a lot of farmers had thought twice about it.

On the farm household assistance package, I went to the Congupna roundtable meeting with regards to it. Thank goodness they did it. There were people there from human services—the rural counsellors, et cetera—and we were able to cut through a lot of the tape. Within probably 10 days my husband and I had had it granted to us. We had had over five months of waiting, trying to get it, having given them every piece of information, and having a fairly large bill with our accountant, because he was the one who rang us and said, 'You two have lost in excess of two years' worth of your personal side of things with the Fonterra claw-back, and you are entitled to it and you should apply for it.' So it was an extremely long, tedious and stressful time, trying to sort it out.

Senator HUME: So the time between applying for it and getting it was five months?

Ms Goulding : Between applying and getting it, and thank goodness that Damian Drum and Bridget McKenzie did that one, because it got the people there and it got sorted for a lot of people at that time. Up until then it just seemed to be lost in the system.

Senator HUME: Terrific. That's great feedback. Thank you, Ms Goulding.

CHAIR: I will just flag that there may be some other farmers now present in the room, and I just wanted to stop for a second to say: if there are any other farmers who have comments they would like to make, would you just raise your hands? Okay. I just wanted to flag that in the interests of hearing everybody. I just wanted to thank you. Before we do that, Senator Rice has some further questions.

Senator RICE: I have some questions particularly to Ms Goulding, with your submission about Fonterra. We had a view put to us at the hearing in Melbourne that Fonterra were basically taking the opportunity of the market share that they have now to be soaking up customers—given that Murray Goulburn are having a hard time—and offering them inducements to come over to Fonterra, with the idea of trying to knock Murray Goulburn out of the market; I think that is basically the summary. Have you got any thoughts on that view? That seems to be quite a strong position to have taken.

Ms Goulding : Well, they are in the position at the moment where suppliers that have not taken out loans with them are not committed to them to change over. As Mr Weller has said, it was beneficial for him to change dairy companies. Over the 20 years that we have been with Bonlac, or Fonterra, they have always, always done these incentive payments to entice people over there. You have never been rewarded for being the loyal one that has stayed there and had their tanker pull up in your driveway to pick up the milk that keeps the tanker driver and the factory staff and all of that in jobs. As I said, to me the biggest risk to the Australian dairy industry is if Fonterra were to get a bigger foothold in this industry. We do not need Fonterra taking over Murray Goulburn or becoming a major shareholder in Murray Goulburn, because that would mean that they would set the price. They are a proprietary limited. They will only pay what they have got to pay.

Senator RICE: So basically they will then be in much more of a—well, not quite a monopoly, but with far too much market share to be healthy.

Ms Goulding : They would have a lot of market share.

Senator RICE: Mr Weller, do you have a comment about that, given that you have just swapped from Murray Goulburn to Fonterra?

Mr Weller : I did not get any inducement to come. I just got what the price was—their advertised price—which means that I am free to leave whenever I want to. That is how we have always farmed. We may change in the future, but at the moment we just take what the going price is so that we can go.

I am not as negative about Fonterra as obviously Bridget can be. I think that Fonterra do not have all the capacity to take the milk that Murray Goulburn has got. They have lost suppliers to Bega and other companies; they have lost suppliers that have given up; and they have lost suppliers because, as Bridget has quite rightly pointed out, suppliers are producing less because of the season and because finances have forced them to do that. That has given them capacity to take milk from other companies, but there is not the ability for them to take all the milk. I would imagine the Foreign Investment Review Board would have a look if they were to make an offer on Murray Goulburn. And the ACCC would, quite rightly, have a look as well.

Senator RICE: You have all talked about the problems of the dollar milk, plus wanting to get a higher price for manufactured milk products—I certainly took your point on that, Mr Weller. Do you think there is a case for reintroducing a floor price?

Mr Weller : No, I do not believe there is a case for a floor price. We have seen what happened to the wool industry with a floor price. You have seen that there are companies in this area—you have got Bega; you have got ACM; you have got the Mulcahys; and you have got some cheese groups out of Melbourne coming and picking up milk out of this—that are all paying higher than Murray Goulburn and Fonterra. It is about companies getting into the right product mix.

Senator RICE: Is there any support for a floor price from any of you?

Mr Pell : No. We do not want to go back there. We were there once. While there is competition in milk—and what you have heard here today is that there is competition to get milk—and when the international price picks up again, I am sure there will be added competition. I think what happened to Murray Goulburn and Fonterra is really sad. It is a really sad infliction on the dairy industry. The dollar milk we talked about before is a bad look. There is not much of it, as Paul has indicated, but it is a bad look. So they are some of the things that are sort of happening, and international prices are supposed to be picking up. Let's hope they do.

Senator HUME: Can I ask a couple of questions about another one of the potential parts of the support package that the coalition presented last year, which was the introduction of a commodity milk price index, and how that might work. Has anyone got any comments on that? My understanding is that, if you introduce an index, it allows you to risk-manage commodity prices more effectively. Will that work in the dairy industry, and, if not, why not?

Mr Weller : My view would be that the more information that you can give dairy farm businesses about the outlook for prices, the better. But it has to be accurate information. Our business suffered last year because we were buying water and buying hay and buying grain on the assumption that we were going to get a $5.60 a kilo milk solids price. Then, two months from the end of the year, we were told it was $4.80. I had already gone and bought my water, bought my hay and bought my grain. So a price index would be good for farmers to use as information, but it needs to be accurate.

Senator HUME: That is interesting.

Ms Goulding : Just a comment on what both Mr Nicholson and Mr Weller have just said then, especially Mr Nicholson, with regard to our suppliers: by Murray Goulburn and Fonterra doing what they did, they essentially made a lot of farmers use their suppliers' overdrafts. We had to negotiate and say: 'Look, I'm going to split'—I know that sounds bizarre—'my Murray Goulburn trading account over two months or speak to the bloke that we get hay through and say, "Troy, I'm really sorry, but, where I thought I was going to be finishing off your bill at the end of the financial year like I have always done, I'm going to have to make you wait a few more months for that. You will get some, but it will not be finished off."' So we were essentially using their overdraft facilities.

Senator HUME: Essentially you are saying that the suppliers are carrying all the risk for domestic demand and international dairy prices, milk prices—

Ms Goulding : Yes, we were.

Senator HUME: and the processor was just passing those on.

Ms Goulding : And they were carrying nothing.

Senator HUME: So what we are really looking for here is a way to ensure that the processor carries some of those risks rather than just passing it on to suppliers.

Ms Goulding : Yes, absolutely. In Fonterra's case, God—to use Michelle Obama—couldn't they have gone high, instead of going low, and held the milk price? They were not having problems like Murray Goulburn were. They saw the opportunity for a chance, and they damn well took it. They made us wait 10 days for that. My husband said to me, 'That will happen,' and I said, 'No, maybe it won't.' He said to me: 'Don't be Pollyanna. You know it will happen.' It was literally like waiting for the axe to fall. The sadness in families from that day through has been unbelievable. We are lucky that our two daughters are off and working. For farming families that have little families around the place, it has been a nightmare. There have been people out there unable to put food on their plates; there have been bills that they have not been able to pay. There has been an awful, awful lot of hardship, and all because two companies could not organise their way out of a paper bag.

Senator HUME: I am hoping that the ACCC inquiry is going to cause ramifications for those two companies. Mr Nicholson, as we have been doing these hearings around the country what has struck me is how many advocacy groups the dairy industry have—there are so many. I have asked each one of them how they are funded, and inevitably they are funded by a levy. There are national groups and there are state groups and there are regional groups—there are so many groups, yet this has been allowed to happen. You mentioned that you think that the advocacy groups are potentially not as effectual as they could be but also that they potentially have conflicts of interest. Can you extrapolate on that a little bit?

Mr Nicholson : I think you have hit the nail on the head—there are so many different groups. We need one single group that is representing us, the dairy farmers, and advocating for us. The problem is that, yes, we have had all these groups and one group is doing this and one group is doing that but they are not working together effectively. Granted, that has definitely improved since it all went down in April, that is for sure, but I also have major concerns about industry groups who have members in these groups who are members of dairy companies as well, or their partners are members of dairy companies. I do not know how you can operate as an advocacy group for the dairy farmers in particular if you have vested interests elsewhere that are conflicting with the interests of the dairy farmers.

Ms Goulding : So it is a conflict of interest, isn't it?

Mr Nicholson : It is definitely a conflict of interest.

Senator HUME: Are all of you at the table at the moment paying a levy to an advocacy group of some sort?

Ms Goulding : Yes, it comes out of our dairy cheque each month.

Mr Nicholson : It is compulsory.

Mr Weller : I pay the Victorian Farmers Federation, and they pay the dairy group, which is UDV. So I pay a levy there. I also pay a levy to Dairy Australia. My understanding is that Dairy Australia is not meant to be advocacy—they are meant to be into the research and development and promotion of the industry.

Senator XENOPHON: There is not much R&D now, though.

Mr Weller : That is why I mentioned earlier that governments could indeed invest in R&D. To remain competitive we need to be given technologies that turn more water to dry matter, and then cows that produce more milk from dry matter. Then we need companies to get a greater return out of our milk.

Senator XENOPHON: But we have slashed our R&D in this country for that sector.

Mr Weller : I made that statement earlier, that we perhaps need to review that and invest more in R&D if the dairy industry is going to continue to compete.

Senator XENOPHON: Agreed.

Mr Nicholson : The reason there are so many groups is that people are not all that happy with the main groups. If they were happy with the main groups you would not see all these little splinter groups set up. That is probably the main reason. I myself belong to the VFF and the UDV. We pay a levy each month, and of course a levy comes out for Dairy Australia. Then, as you say, there are other groups that are not happy with the main VFF groups, and this is why they are started up.

Ms Goulding : It was interesting that the rally that happened down in Melbourne was organised by one of those splinter groups, Farmer Power, because they obviously could not see what was getting done to help at the time. Busloads arrived from all around Victoria and I believe interstate to draw attention to what was happening.

CHAIR: In the interests of trying to ensure that as many people as possible have an opportunity to speak, I will say thank you very much to the four at the tables now. There is nothing to preclude you from continuing to speak at some point, but I might invite other farmers in the room to come forward to the front tables and have their say. We are not just limited to four, if more than four want to come up. I understand there are others who might want to come forward.

I thank our next group of witnesses for coming here today and for being prepared to tell us your stories. What I propose to do is this: if you have a brief opening statement you would like to make about your particular circumstances, we are particularly interested in which processor you are with and your experiences there. If you would like to make a brief opening statement, we will then have a conversation much like we have just been having with the previous witnesses. For everyone in the room we have photographers in the room, so unless I hear any objections to that we can propose to continue to allow photography by the media to occur.

Ms McInnes : We are from Gunbower, the other side of Echuca. We currently supply Murray Goulbourn. In the last three weeks we have been approached by another supplier, and Murray Goulburn will not let us out of our contract. We have signed an SSO. Around a year-and-a-half ago we bought Ben's parents' dairy farm off them. At the same time, we were approached by Murray Goulburn to share up with them. We were told at that time, when we bought the shares, that the milk price was going to get to $6, which it never did. We told them last week that we wanted out of our contract so as to supply somebody else and they will not let us.

Senator XENOPHON: What difference would that other contract, that other offer, you have had made to you mean in financial terms each year?

Mr McInnes : Basically, at the minute we are offered a milk price from Murray Goulburn of roughly about $4.95 for the year. To go to the other company we would be on $6 for the second half of the year.

Senator XENOPHON: So what would that mean in dollar terms for the year?

Mr McInnes : Probably $15,000 for the last five months. Murray Goulburn have a thing, a flat milk incentive, where you are paid a bonus for milk sent in the off season so that is why it is not a great deal of money at the minute. But month on month, it might be $10,000 and then reduced down further on into the year.

CHAIR: Can you tell us a bit more about the nature of your contract with Murray Goulburn? What is the duration of the contract?

Ms McInnes : Three years. There are another 18 months to go.

Senator HUME: At what point were you told that the milk price was going to get to $6, and who was it who told you that? At what point in the negotiations?

Mr McInnes : It was just that was their predicted price, $6. I think they had said somewhere along the line if people invest in the company, then hopefully they would be able to increase their efficiencies and hopefully pay a $1 a kilo over the market.

Senator HUME: So when you say 'they said', who was it specifically that said it?

Mr McInnes : Gary Helou, I was sure.

Senator HUME: So it was a public statement as opposed to something that your specific contact—

Mr McInnes : Yes, it was at a supply meeting.

Senator HUME: It was Gary Helou at a supply meeting? Thank you.

CHAIR: You are saying that there is another processor who is offering you a $6 price?

Ms McInnes : Yes.

CHAIR: How confident are you that that price is going to be met?

Mr McInnes : Pretty confident. They were a company that did not drop their price last year. They held the price they said they were going to. That is what it comes down to: good faith, I guess. We listened to a company that did not deliver and got burnt by them.

Ms McInnes : They said that price will not drop this year.

CHAIR: Have you had a draft contract that sets that price?

Ms McInnes : Yes, but we cannot leave. We were meant to have our first pick-up by them today, and Murray Goulburn will not let us leave.

Senator XENOPHON: So when you said $10,000 or $15,000, are we talking over a year about a $100,000-a year difference or not between the two contracts for you?

Mr McInnes : In a normal year, we are roughly about the same as Murray Goulburn, but it is just that they are not paying for the milk at the minute.

Senator XENOPHON: So you would be better off with this new contract.

Ms McInnes : Yes.

Mr McInnes : Yes.

Senator XENOPHON: By how much a year, in basic terms?

Ms McInnes : It is about $15,000 from February onwards to the end of the financial year.

Senator XENOPHON: Okay. Thank you.

CHAIR: This proposed contract with the new processor—how long does that contract go for?

Mr McInnes : Just to the end of the financial year.

CHAIR: Are there any other terms in that contract which are—

Ms McInnes : Ninety days. You have to give them 90 days notice if you are going to leave the company. That is all.

CHAIR: So you would like to see more improvements in the laws in relation to your contract terms to ensure that there is more flexibility for you?

Ms McInnes : Yes, because, in hindsight, we would never have signed that contract if we had known what was going on.

CHAIR: Right.

Senator HUME: May I ask a question about the contract itself? Do you think that Murray Goulburn is actually in breach of the contract that you signed?

Ms McInnes : They did not put anything in there about milk price. It is more about us supplying them. It has got nothing in it, really, from their side of things.

Senator HUME: Do you think that if there was something in the contract specifically about milk price that was part of a code of conduct, whether it be voluntary or mandatory, that that would make a difference?

Ms McInnes : Yes.

Senator HUME: Thank you.

CHAIR: I am just trying to come to some understanding of the nature of the pricing arrangements in the two contracts that you have before you. Just to be clear, the price in the new contract is explicit, or is there a formula there that you are happy with that leads you to believe that you will be receiving a $6 figure?

Mr McInnes : Yes, just pay it on your fat and protein, just the same as how Murray Goulburn pay it. It is just that they are paying more. I would be pretty confident that the company delivered what they said.

CHAIR: All right. If there are no further questions, we might move to Mr Harneiss. Would you like to tell us your story?

Mr Harneiss : Thank you. I am in a very similar position to the McInnes's. I supply Murray Goulburn and I am locked into a three-year contract, like they are, with about 18 months still to go. When the price fall was announced, we considered leaving Murray Goulburn, but my son pointed out that, of course, in the fine print it said we have to supply them for three years. If we do not, the first thing they will do is to seize the additional shares we bought at $1 a share.

As the months have drawn on, we are not particularly keen to leave Murray Goulburn. We feel we are loyal people to them, even though there is no reason to be; we have certainly been badly treated. For the time being, we will continue with Murray Goulburn, but it is a real battle.

We are in a fortunate position in that neither my son, whom I farm in partnership with, nor myself draw any money off the farm, and have not done so now for at least two years. We live off other outside income and, indeed, from those sources, put money into the farm. The farm basically pays its own general costs, but if we were a consumer family living off the farm we would have been sold up a while ago because approximately what our payment equates to is roughly 30c a litre excluding GST, and that is way below the cost of production for us, and we believe we run a very efficient farm.

The price of a common postage stamp, which must be one of the cheapest commodities in Australia, is about two to 2½ times the price of a litre of milk. I really feel that the value of a litre of milk must be more than that of a postage stamp, but it takes something like two to 2½ of our litres to do that. We strive to make a premium product. We are normally in premium—very often we have been in Murray Goulburn's top 20 suppliers for low cell count et cetera—for which we do not receive any additional payment. Premium is premium; there is no additional payment for better quality.

But that is pretty well our story. As I say, we discussed leaving the company, trying to find a milk processor who would pay a higher payment, but the local company field rep told us in no uncertain terms that they would see us in court if we attempted to leave before the end of our contract.

CHAIR: Mr Harneiss, the previous group of farmers indicated they did not have any difficulty with their supply contracts with the processor and that they could terminate them virtually at will. What advice have you received? Are than other options available? We have now had two Murray Goulburn suppliers this morning telling us they are locked into three-year contracts. Why are your situations different to those of the other farmers we have heard from?

Mr Harneiss : I have not looked into it. I have not sought legal advice on it. Rather, I have just sort of accepted that a contract is a contract. Where I put my signature, I tend to abide by it. But I gather there are farmers who are able to leave those contracts. I do not know how. But, as I say, I have not sought legal advice on it.

CHAIR: Isn't there a role here for some of your representative organisations to develop contracts which are of a form which would be suitable and in the interests of the farmers? I am surprised that there are arrangements that exist across the industry which vary so dramatically and with such dramatic impacts on people. Are you able to shed some light on that?

Mr Harneiss : As I say, I have not really looked into the legalities of it.

Ms McInnes : It is a supplier share offer—an SSO. That is why.

Mr Harneiss : Yes, the SSO.

Ms McInnes : That is the three-year contract with the supplier share offer. We got offered to buy shares at a lower price—when was it?—about 15 months ago, but in order to buy those shares we had to supply the milk for three years. A lot of other people already had shares in the company. We had only just bought the farm and were starting out.

CHAIR: So you were part of that capital-raising exercise.

Mr Harneiss : Yes, we were in that capital raising. They offered an additional 36,000 or 37,000 shares at $1, and we had three weeks to pay for it in cash—like a receipted full payment—which we just managed to do rather hastily, because we did not really look into the fine print—

Ms McInnes : That is like us.

Mr Harneiss : and that is probably our fault. It states quite clearly that we are bound to supply them for three years. Also, we are allowed to buy those shares, but I believe we are not allowed to sell those shares for the same period of time.

Ms McInnes : For the three years.

Senator HUME: Did your advocacy group give you any advice on those contracts knowing that there was a tight time frame around which they were being offered?

Ms McInnes : No.

Mr Harneiss : No, we had no advice. We thought at the time: 'This is a good opportunity'. Murray-Goulburn does have a substantial amount of property, real estate, stainless steel and sales contract staff experience. They are a big company with a lot of value behind them, so we thought: '$1 a share that is pretty good; we will go for it', and we went like willing lambs to the slaughter. The rest is history.

Senator XENOPHON: Thank you for being here. Are you a member, Mr Harneiss, of any dairy organisation or representative organisations?

Mr Harneiss : No, I am not. I am a bit shamefaced to say I am not a member of UDV—I should be. The only levies we pay to any such group is the deduction from the milk payment for Dairy Australia.

Senator XENOPHON: But that is not an advocacy group.

Mr Harneiss : No, I do not pay to any advocacy group.

Senator XENOPHON: Are any of you at the table members of these advocacy groups? Mrs Parker, do they help? I would have thought that the advocacy groups could help out with those sorts of issues.

Mrs Parker : I am a member of the UDV, so I pay a levy. It is an optional levy, unlike the Dairy Australia levy, which is compulsory, and it is used for RD&E. I am very clear on what each of those two organisations do. I do not supply Murray Goulburn and I do not supply Fonterra. I actually supply one of the small cheese companies called Fresh Cheese Company which you were talking about. I also work for them casually as a field officer. We actually advertised the day before genuinely looking for suppliers; before the announcement was made by Murray Goulburn and the successive announcement by Fonterra. As part of my role there, I actually fielded phone calls from farmers who wanted to swap. It was just ironic, it was not planned and it was when things fell into place. For two months, I was taking 30 to 40 phone calls a day from different people, so I actually got to understand the human side of what was happening in the organisation. Being a dairy farmer, I saw what it did to families and people in communities.

There is not a lot the advocacy groups can do with regard to shares, unless you ask for help. I would say that the UDV does not advise me on what shares to invest in, whether they be non-dairy companies or not, but they are working around contracts and things like that. There is a lot of smoke and mirrors about and people do not realise, I suppose.

As an advocacy group, the UDV has to find out information and work with professionals, lawyers and such. When the announcement happened, I know that everyone got caught out, including the farmers. A lot of farmers were quick to react. I heard a lot of stories and I have heard a lot of stories that concerned me about people and their lives. I saw a lot of people exit the industry at the time. I also think that when we talk about our communities, I know of an example of a farmer who milked 200 cows and turned over about $800,000, give or take, a year, because he had a sideline of dairy beef and things like that. That farmer has now left the dairy industry. He sold all his water, he owns his farm and he is now turning over $100,000 a year. He can live quite comfortably and probably earns the same amount of money, but he released three staff from employment.

That farmer no longer uses any of the services that, as a dairy farmer, he required—things like the vet, fencing companies, feed companies, hay, AI companies and anyone who supported his business. All the money that he would have spent as a dairy farmer has disappeared from the community. That is one story. If you multiply that out over the people who have exited the industry, then we are actually losing some of our services. So, as dairy farmers, we are losing the competitiveness that we actually need in our industry. We, as a business, probably have a right to be able to choose and see a competitive price for things that we require, but when there are fewer people that need a service, there are fewer service providers, so there is less competitiveness. Once again, the farmer is probably paying more rather than less. That is my spin on how things are.

I also wear a hat where I am president of another advocacy organisation, Australian Women in Agriculture, which is a membership based organisation where people choose to pay a member levy a year, and we work on broader issues rather than dairy specific issues. But the members who have actually called have commented on the stress and the strain on families. Some of those issues being that, as a wife or a partner—a female partner—in a dairy business, they have actually had to take on a job off farm to supplement their income because the farm household allowance has been a disaster in its planning and implementation, to be honest. You still need to feed your kids, you still need to pay your school fees and your kids still need shoes on their feet, and, if you have to wait five or six months or constantly get harassed for paperwork you have already submitted, it is easy to go out and get a job, even if that is cleaning houses or stacking shelves at a supermarket. So now you have a mother who is in two places at once trying to care for younger children, do school runs and work off farm, and often they are working on farm at the same time, or the role is reversed where the male partner is working off farm as well as doing their normal farm work.

The other thing is that the kids are not taking part in normal activities. The kids actually end up sometimes being labour units on farms as well as helping out. Another thing that has been raised as an implication of what has gone on in the industry is that a lot of year 11 and 12 students have chosen to leave school and work on the farm. A lot of these students probably had the potential to finish year 12, move on and maybe do a degree, an apprenticeship or something in their own time. The fact is those kids have had to grow up fast and start working for mum and dad or family members. So there are a whole range of things that are economically impacting on families and farmers, and I would say that we get to see a lot of the impacts.

CHAIR: Thank you, Mrs Parker. In the interest of ensuring everyone has a chance to say something, Mr Govett, did you want to tell us your situation?

Mr Govett : I am a Parmalat supplier, or Lactalis—whatever you want to call it—so this milk price cut has not immediately directly affected me at a milk price level. We did actually have a milk price cut three years ago that was pretty unannounced in the media, because we are a small company, and the industry was probably travelling along not too badly at that stage. Yes, that was a fairly substantial cut to our business but things move along. My involvement in all of this is I was brought in to the Farmer Power group when the cuts happened to be the head of that in our area and to be on the frontline to help advocate or get the message out about what has happened and what we are going to be doing. I was involved heavily in meetings with our lobby groups, with the heads of the lobby group et cetera. I had meetings with senators and people involved in the government et cetera. I have a lot of experience.

In the last six or seven years I have spent a lot of time down in Melbourne at university. I had a lot of involvement with Dairy Australia and the research they have done and the things they do. I have spent a lot of time overseas in the European dairy industry and in Canada and America, so I have a fairly reasonable understanding about what happens worldwide versus what happens here in Australia. I did not really plan on speaking here today, but I just wanted to make a comment about some of the things that have been said earlier.

CHAIR: Yes, take this opportunity now to do so.

Mr Govett : There was talk about splinter groups et cetera. There has been schoolyard fighting between some of the lobby groups and the splinter groups, and that all originated from lack of action. That is why Farmer Power started when the dollar-a-litre milk started, and the dollar-a-litre milk started well before Murray Goulburn and Fonterra were even in the liquid milk markets. Actually, my company was one of the companies involved in the liquid milk market and, when Murray Goulburn decided to get into that market, our company actually lost the contract and they were actually happy about it. They said that the prices that Murray Goulburn had undercut them by were extremely unsustainable and were going to be bad.

Our company was in that market because they got better deals on paying for shelf space and advertising in the supermarkets for their branded products. In the end it was better for them to lose their contracts, and they substantially told us that there is no way that a company that was not already set up to be involved heavily in the liquid milk market could make that work. We have all seen the statistics or the evidence that supermarkets sell that dollar-a-litre milk at little or no profit to get consumers in the door. As farmers, not just dairy farmers but I think all farmers—we are seeing it in the fruit industry, lamb, chicken at the moment—the supermarkets continue to go full slather cutting farmgate prices in the dealings they are having with farmers. I do not think I have met any farmers that feel, with government or legal representation, that they are getting a fair run. I speak to a lot of different farmers and they are all pretty upset about how the supermarkets are allowed to operate at the moment. Obviously in our milk industry everyone is pretty disgusted about the actions of particularly Fonterra, and Murray Goulburn to a lesser extent, I think.

CHAIR: Taking your international experience into account, are there any other countries where there has been some work done on more ethical, sustainable supply chains which you feel we should look at?

Mr Govett : We could sit and talk about other countries all day if we wanted to. If you look at the Canadian system, they have a highly regulated system. I am not saying that would be good for Australia, but they have a system where farmers are treated pretty respectfully. They get a price that is profitable. They are all doing very well. Anecdotally, if I compared our well-to-do farmers here, they would be at the low end of how well off the Canadian farmers are. It has been about 12 years since I have been in Europe, and things have changed there now, but a similar thing could be said about the European market. They are heavily subsidised, they do not work anywhere near as hard as us and they all have a lot more staff than us per head of cattle or land size. Compared to the majority of what I would call Australian dairy farmers, they are a lot better off. America is very similar. Things have changed in the world market with deregulation in Europe, and it will take time to adjust. There are a lot of farms over there where farmers are probably going backwards, similar to us. Obviously there has been a lot of protesting throughout France and others. America is going through a tough time. I think the milk price is down everywhere in the world. That is the fact of the matter. There is a huge oversupply. It is similar to what is going to happen over the next two years in the grain market.

CHAIR: Does the answer for us lie in improving contractual arrangements? Is it collective bargaining arrangements? What do you think?

Mr Govett : I think it is all those things. Milk contracts are probably a reasonably new thing in Australia—like some of the contracts that Fonterra and Murray Goulburn have probably bought in. Over the years, a lot of farmers probably have not been involved. It has probably just been on a yearly situation, having been loyal to the companies, as you heard today. I think the contracts that are being written up are fairly well written and only favour one side. I think we can work through these things and I think the farmers definitely need better advocacy at a legal level to work through these contracts and know exactly where they stand. I think things will get better. Long-term contracts and short term contracts: once the industry stabilises, I think that is the best way to move forward. Farmers know what they are going to get or what there is potential to get, rather than year on year being up and down.

Over the last 15 years it has been hard. We have gone from droughts and floods, and water prices and feed prices have been fluctuating so much. It has been very hard to get a five-year gap of knowing where we are. Everything changes year on year, and it is not just a milk processor thing; it is a climate thing and a regulation thing. There is not necessarily anything anyone can do about it right now, but hopefully moving forward in the future things can stabilise a bit more and we can get more years of stability and know exactly where we are. In the last five or seven years, I feel that everything has been up and down and around and it has just been luck of the draw about where your farm is situated or how you farm that has been a major player in your profitability.

CHAIR: Are you a Parmalat supplier?

Mr Govett : Yes.

CHAIR: Are you familiar with the Premium collective bargaining group in Queensland, which is negotiating with Parmalat?

Mr Govett : Yes, I have a bit of familiarity. I have friends up in Queensland and know one of the major players in the Parmalat collection.

CHAIR: I am just interested in your views about why collective bargaining is not more frequently used in the industry. Are you an advocate for it? If there are some improvements needed in the system, what would you say they are?

Mr Govett : In regard to the Queensland industry, I think they have been so totally different to the Victorian industry. My personal views probably are not popular in that, over the years, Queensland has got a fairly large premium over Victorian milk, and I think that has caused a lot of animosity, especially on my behalf and especially considering we are supplying the same company. Over the years, a lot of my milk has travelled to Queensland at a reduced price to supplement their lack of production, and I feel a lot of animosity towards them. Obviously their farming situation is different. Deregulation had a different effect on them up there, but I think with collective bargaining, unless it is on the farmer's side, there is only going to be one winner out of it. I think there is too much segregation and animosity through the industry for us all to come together to collectively bargain. The thing that I see going forward is that we need to come together as one to do collective bargaining, because the way I see it at the moment is that the milk companies are fighting against one another, not us, to lower the price and to increase their profits. I think we have already seen that Fonterra releases massive profits after decimating farmers' profits.

CHAIR: So you have not had any personal experience with collective bargaining?

Mrs Parker : Can I just comment about collective bargaining. The one thing that is positive about collective bargaining is that you have a milk volume that is greater than in individual bargaining. What it does is that it places some of the power—not a lot—in the farmers' hands, because they have a greater pool of milk to negotiate with, which means that potentially, for a milk company, they are negotiating with one representative rather than maybe 10 or 15 individual groups. But within that milk pool that you might be negotiating with you have to remember that you have different types of calving patterns, different breeds of cows and different qualities of milk in terms of fat and protein. So there are a lot of unknowns that come into play when you are looking at that.

CHAIR: And yet the Premium group has been doing it for some time.

Mrs Parker : There are some groups around here that do it as well.

CHAIR: I think the Dairy Farmers Milk Co-operative group also were telling me they have been involved in collective bargaining for some time, and in fact they have gone to arbitration on a number of occasions.

Senator HUME: Mr Govett was speaking about the uncertainties in the market, and you guys do seem to have hit a perfect storm in the last couple of years. I want to ask you about the potential introduction, or the slated introduction, of a commodity milk price index and whether that would make a difference to the market by providing more transparency, potentially more certainty and a guide for milk supply contracts in the future—and risk management opportunities.

Mr Govett : I guess any information that is accurate is good information, but my view of it is that it is probably an excess that we do not necessarily need at this stage. That is my view. The milk companies have their own indexing. I can get information at the touch of a phone about what the world milk price is doing—whether it is going up or down and what is predicted to happen next month. Having an index that tells me the milk price is going to go down in six months does not help my business if I have no money to plan for it anyway. I do not think the majority of farmers, before this milk price drop, would have had reserves of capital to either do quick improvements or improve efficiencies et cetera to plan for this. I think the industry has gone through a pretty lean time, so I do not think that would have helped. A lot of farmers already say they knew the price drop was coming and could predict it, and some obviously probably planned for it if they were able, but a lot of people probably just chucked their heads in the sand and hoped that it would not happen as badly as they thought, because there was no way they could do anything to plan for it, really.

Senator HUME: There are other agricultural commodity indexes out there, and other farmers use those to risk-manage their business. Why is it that milk is different?

Mr Govett : Because we cannot store milk.

Senator HUME: Because it is perishable.

Mr Govett : It is perishable. What I produce today has to be gone off the farm by tomorrow. I cannot store grain for 12 months. I cannot put it in bunkers or silos. To produce milk, I have to plan, you could say, two or three years in advance. For a calf that is born today, it is two years before she produces milk, and for a cow that is producing milk today there is a 12-month plan for her to be producing milk next year. Obviously we cannot store it; we cannot store it when prices are bad; we cannot reduce our stores when prices are good. And I think we are probably at the top end of the scale of being unable to do that, versus, potentially, the grain market, that can store grain for years or for 12 months.

Senator XENOPHON: My question applies to any of you, and I think Mr—is it 'Harnice' or 'Highness'?

Mr Harneiss : Harneiss.

Senator XENOPHON: Harneiss; okay; I got it wrong both times! Mr Harneiss—and this applies to the McInneses as well and to anyone else who signed up for the share offer with Murray Goulburn—were you given any information about your contract changing as a result of the share offer? In other words, how informed were you before you put your signature on the line?

Mr Harneiss : Very little information at all.

Senator XENOPHON: So what information was given? How was it presented to you?

Mr Harneiss : Just in a letter form.

Senator XENOPHON: Can you provide us with a copy of that letter?

Mr Harneiss : I will have it somewhere.

Ms McInnes : I have got one here.

Mr Harneiss : Oh, you have got one?

Senator XENOPHON: Can we get a copy of that before you leave?

Mr Harneiss : That is extra good. A lot of these things, as they come across the farm kitchen table as letters in the mail, are briefly read before we go out and continue work, and we often do not pay attention to the finer wording. We were lured by the basic thing of the dollar share offer and we thought, 'Everything must be above board. We'll go for it.'

Senator XENOPHON: Did you know your contract would change, though?

Mr Harneiss : No, we were not aware of that. We were not really aware of that at all. Field officers never pointed out anything. We just thought the milk tanker will come up the drive and still—

Senator XENOPHON: Sorry; old habits die hard, being a suburban lawyer! When the field officers came to see you and they mentioned the share offer, did they also say, in any way, that the contract would also change?

Mr Harneiss : No, not that I recall.

Senator XENOPHON: And the McInneses?

Mr McInnes : No, but there was a sentence on your form that said that if you bought X amount of shares, you could be locked in for one, two or three years.

Senator XENOPHON: But it did not say whether it would be one, two or three? You did not know?

Mr McInnes : It depended on how many shares you actually bought.

Senator XENOPHON: So there was some information?

CHAIR: The actual contract that you signed in relation to the SSO did specify this lock-in period?

Mr McInnes : Yes.

CHAIR: But what you are saying is that the amount of time you had to consider that contract and sign, in order to take advantage of the share offer, was somewhat limited—is that the case?

Ms McInnes : Yes.

Mr Harneiss : Yes, it was a very short period of time.

Ms McInnes : It was only four weeks.

CHAIR: What sort of period of time?

Mr Harneiss : I think we had exactly three weeks to decide to accept the share offer and to pay for it in full. The money had to be receipted by Murray Goulburn's bank on a specific day, and it was a bit of a scramble. We did not have that kind of money lying around, and it took a little bit of arranging. But at the time we were happy to do it. With hindsight, we were a bit hasty.

Ms McInnes : We took out a loan to buy our shares.

CHAIR: Are there many other people in your situation?

Ms McInnes : Yes.

CHAIR: Are you in contact with those people?

Ms McInnes : Yes.

Mr Harneiss : Yes, we know a number of people in our area likewise locked in. We feel locked in. I do not think any of us have really sought legal advice on it.

Ms McInnes : We are in the middle of seeking legal advice now.

Mr Harneiss : Different people say to us that contracts can be broken if you can prove an unfair sort of presentation of it, or an unfair result of it. But all this would be a bit difficult, probably, to prove and to go through the long legal process of appealing. Also, in our case, my son and I have decided for the time being to weather the storm out and to stay with Murray Goulburn because we do hear quite often that, although other companies are offering a higher milk price, the conditions attached make it difficult to achieve a premium payment. They assume that you are going to be supplying top-quality milk as and when they want it and if you slip outside that, with a higher cell count or bacto or thermoduric count or something, they penalise you very severely. That brings the milk price back, in a lot of cases, to something similar to that which Murray Goulburn was paying, overall.

CHAIR: I am an old union official, so one of the things I am familiar with is that as a union you supply your members with information about their conditions of employment and provide legal advice on those things. From my perspective, the advocacy bodies should be looking at all the pitfalls associated with these types of contracts. I would have thought that that was one of the fundamental roles of an advocacy group in this industry. I could be totally wrong, but it does not seem to be happening. Mr Govett, do you have a view about that?

Mr Govett : Immediately after this happened I was involved in a meeting with our advocacy bodies. One of the things we asked for was for someone with legal knowledge to go through the contracts and see about the legalities, and go through the claw-back scheme and loans for the claw-back. We were told that would happen. Not being involved with Murray Goulburn as such I obviously did not know, but talking to Murray Goulburn suppliers and other Murray Goulburn suppliers who were not at that little meeting, they seem to have no further information after being told by the advocacy bodies that they would get a legal team to look at it. It may have happened, but I am unaware of any major developments. Obviously, these guys have not heard anything about this.

CHAIR: Mr Harneiss is not a member of any organisation.

Senator XENOPHON: Were you members?

Unidentified speaker: No.

Mrs Parker : I am not a Murray Goulburn supplier, but I do know that there has been a group working on looking at contracts and things like that. They have been using the appropriate people, which is lawyers. One of the issues I heard a lot about with Murray Goulburn suppliers who wanted to swap to fresh cheese was that at the time that that contract was delivered, by the time you did your farm rolls and tried to find legal support or legal advice, the time was so short that to find a particular lawyer who understands milk contracts, for example, as a specialist field almost, you do not have a lot of time to do that. So something that I would push for in the future is that we need the knowledge of whom you can go to. So, for future reference, which lawyers or solicitors or law firms are able to advocate for farmers or even vet a contract before you sign it. It is not the purchase of a house or farm—it is a milk contract.

Senator XENOPHON: Surely the advocacy groups should do that.

Mrs Parker : As in the list of solicitors?

Senator XENOPHON: They should provide general advice.

Mrs Parker : There could be three or four contracts with each milk company that are different according to your farm. When you look at a contract you also have to look at the financial implications of it. A contract for my farm, because I have a split calving herd, versus Ben, who might calve all year round, versus a spring calving herd, has different implications, depending on our calving patterns. So it is actually a solicitor and an accountant, or solicitor and a farm adviser, involved together. In three weeks you would not be able to look at four or five different contracts, or even one contract, to make a decision properly.

Senator RICE: Are there enough people, whether solicitors or farm advisers? Are they around to be working with you to provide that good advice? Or is there a need for more expertise in that area as well?

Mrs Parker : Some people have a regular farm adviser they might see every month or every quarter. That person would know your business and know what is going on. Others may use them intermittently when they are needed. But in my opinion you do have to wait to see someone who has the experience that you need for your farm. So it could be that you make a phone call at the start of the month and you may not see them till mid-month or the end of the month, depending on what they are doing and how big their client base is.

Senator RICE: So the short timescale for the contract signing will not work with that.

Mrs Parker : It just does not work.

Mr Govett : As I said earlier, these sorts of contracts are relatively new, as a whole industry thing. There are small pockets and small companies that have been doing this for a while now, but at a Fonterra or Murray Goulburn level these have not been happening for a long period of time, so there is not a great deal of expertise out in the rural communities suited to this. I think that might change now. It is all about volume and numbers. Being in a contract for last 15 years—a different contract out—but we are only a small company, so there is not a lot of requirement, until now.

Senator RICE: I want to ask a summarising question. We have heard lots of evidence. The bottom line seems to be that we need to change things so that farmers are being paid a fair price for their milk. At the moment you are not. Certainly, Mr Harneiss, you are really doing a public service in providing milk at that price and not getting anything out of it. I think the general community supports that, and has the sense that farmers are not being paid a fair price for their milk. What change would each of you like to see that would end up allowing you to be paid a fairer price per your milk?

Mr Harneiss : I have a suggestion to put to the senators. It will not be popular in view of the fact that the federal government is favouring free trade. I really feel that because of the mess that the milk industry is in at the moment with this race to the bottom, as it would seem, and vast confusion, we must go back into regulation and quota. I can already feel stones being thrown at me over this one.

Senator RICE: Would you support a floor price, Mr Harneiss? That is what I have been asking people and I have not had much support from the people who have been presenting to us so far.

Mr Harneiss : Yes, wholeheartedly. I feel that is where we have to go. We have to get to a rallying point. It must be a fair milk price to the farmer, the processors and the consumers. That will take a bit of juggling, but it needs to come from a central authority. We need to look at it federally, not just as Victoria, Queensland or whatever. That is my two bob's worth. I really believe in that. We have been in deregulation for some 16 or 17 years now. It has been a race to the bottom, and here we are. Quite bluntly, it has not worked. We need to go back into regulation and quota.

Senator RICE: Thank you. How about the rest of you?

Mrs Parker : Can I comment about regulation? I moved from Brisbane to commence dairy farming in Victoria 12 years ago. We moved because we could see that we could not afford to get into the industry as self-funded starters where the regulated market was, because you had to purchase quota. As an industry, we have trouble with succession and attracting younger people into the industry. If a floor price or regulated market were to create an increase in the price of entry into our dairy industry, we may not have enough new farmers coming in to sustain our milk production.

An example would be that for my husband and myself to enter the industry in Northern New South Wales we would have had to purchase probably around half a million dollars in quota. Then we also had to purchase a farm and cows and machinery. We moved to Victoria and we were able to enter the industry through leasing and then purchasing a farm for around $700,000-$800,000. I did not have to purchase quota; I did not have to purchase my right to supply milk apart from purchasing shares in whichever company we chose to supply. I could see that being a major barrier to new entrants.

The other thing about a price ceiling or quota is that it often puts our input prices up, because people know what you are going to get for your milk so they assume they can put their price up. So you would also create problems in other markets. Finally, we all operate under different water price structures. For some it is rain-fed systems, versus here where we are irrigated. I think sometimes the market price does reflect that, where some people pay more for their water than others. So there are a whole lot of different prices and input products that we all have to pay for as farmers. If we had a flat price across Australia I do not see how if Queensland does not—for example for the rain-fed farmers water is next to nothing compared to last season. I think some were paying between $250 and $300 and megalitre just to water pasture.

Senator RICE: So what would you see as being the most important thing for you to be guaranteed a fair price?

Mrs Parker : Transparency, I think; but also having some good, honest ethics involved.

My husband has got a saying that everyone who drives onto a farm takes money from the farmer. They all rely on the farmer to keep milking those cows so they earn a living, but the farmer is not where the price seems to start; it is where the price seems to end. So we actually need to put a value at the other end of the market and start looking at a sustainable price. A part of that probably involves some good honest thinking, an approach to companies where if they want a future and if they want to maintain their milk supply then they need to be honest and they need to actually start thinking a bit laterally.

Senator RICE: Would transparency and accountability help?

Mrs Parker : And some decent contracts in place the farmer understands and that protect a farmer's right to supply milk. There is nothing wrong with including clauses in a contract where a price cannot be backdated retrospectively or that there has to be written notice, for example, if the milk price is dropping—three months or something like that—things that are up-front. When a farmer is offered a contract, he needs to be told—because not everybody has the time or the energy or is thinking—'You need to get legal advice about this.' There is nothing wrong with saying that to somebody before they sign something.

Mr Govett : I agree. To add to that, I think we lost a bit. Most of the farmers in this room with a few exceptions are not being farmers to become multimillionaires and rich.

Senator RICE: No, you just want to be paid a fair price.

Mr Govett : We just want to live comfortably. We all work hard, more than the average person. Obviously there is a difference between the average family farm and the big companies that are now becoming more and more popular—there is more of them now. We just want to be paid a fair price that is sustainable long term. There are many different ways you could do that.

I have objections to floor pricing. We could talk about the wool market. I do not think it was the floor price that was the problem; it was the way they managed the floor price and changed it and ultimately destroyed it. It is all about how you manage something. I believe in the free trade theory but the fact is, other than New Zealand, the majority of the rest of the world's milk is produced under a regulated system.

Senator RICE: Yes, and we are out on a limb.

Mr Govett : Exactly. We are only a small player in the market. We are pretty insignificant really and we are going against what the big players are doing.

Mr McInnes : That is why regulation is a good thing.

Senator RICE: What is one thing you think would need to change for you to be paid a fair price?

Mr McInnes : Long-term contracts, I think, would probably be a good thing. If you could have the option to lock in half of your milk for, say, three years just to give you some security so that if the price goes up or down it is not on all of your milk. I think that would be a good idea. It would give you some security and the bank some security. If you were planning infrastructure upgrades then everybody would know where they were at.

Mr Govett : Before I finish, I would like to say that with the price going under $4 or under $5 recently, some farmers are still getting over $5 and there is probably a bit of animosity towards that. But I think, as an industry and the people in it, any milk price long-term that does not have a six in front of it is not a good price for the industry. That is the problem: we are all fighting trying to get a $5 price and long-term it is not sustainable. We are a long way behind where we really need to be for the next 20 years.

Senator XENOPHON: A speaker said the other day, one of the witnesses out of Perth, it was market failure. Do you think there is an element of market failure here?

Mr Govett : There is definitely a market failure. The price has been driven down by unconscionable actions and by fighting the supermarket milk contracts. The processors are held to unfair stipulations as well by the supermarkets. The processors are held to ransom by the supermarkets in some terms, I think. My big campaign would be for the supermarkets to be held accountable for their actions as well.

CHAIR: Whilst I personally accept what you are saying, Mr Govett, as far as the Devil's advocate is concerned, we heard earlier that the milk market with the $1 milk is 1½ per cent of the total.

Mr Govett : I do not believe that to be correct.

CHAIR: What do you say?

Mr Govett : I do not have the figures in front of me but when all of this happened we went through the Dairy Australia figures to work all this out and it was a long way ahead of that 1½ per cent.

Senator XENOPHON: You might want to take that on notice then.

CHAIR: We seem to be very close to finishing up here. Before we do are there any other people in the room who have any final comments that they would like to make to the committee? We will be adjourning for lunch.

Ms Knoepfli : Can I come back?

CHAIR: Yes, if you would like to come back.

Ms Knoepfli : My husband and I are also Parmalat suppliers. We probably have a different story in that we came to Victoria because of deregulation in Queensland. We used the sale of our quota to pay out my father-in-law so he could retire on a reasonable amount of money. We came down here because water was cheap and abundant, whereas the Darling Downs can be challenging.

All through our dairy career down here, we have constantly been told by processors—Kraft, Parmalat—that they do not wish to pay more than 1c or 2c a litre ahead of Murray Goulburn. We also have a three-year contract. I think some of the behaviour of processors is immoral. It might be legal but I do believe it is immoral.

Our contract is probably the same as Ben's: three years and a guaranteed minimum price, which was why we signed on. We wanted the security of a guaranteed minimum price. It was $5.20 a kilo for milk solids plus a 2c-a-litre sign-on bonus, and they actually had to throw in the 2c-a-litre sign-on bonus to get everybody to sign up at the time. This was after they crashed the price on our first contract, because the price on the front was not the same as the price in the contract. So then they had to convince us all to re-sign with a 2c-a-litre bonus.

What they do not talk about is that Parmalat does an awful lot of milk swapping with Murray Goulburn, and so most days our milk goes to Cobram. Sometimes it goes to Tatura, about once a week probably, and then that goes to Brisbane. Sometimes it goes to Bendigo. It just depends on the time of day.

Because of all this milk swapping business, my December milk price was $3.95 a kilo for milk solids, which is 26c a litre for premium milk, including the 2c-a-litre bonus. That makes life very challenging—as challenging as all of Murray Goulburn. And some Fonterra suppliers told me that I get less than what they have been getting, so that makes it interesting too. I have also been told things by other Parmalat suppliers that are up in the north-east. One particular supplier's son came home and he wanted to lease a neighbouring 500-cow dairy herd, but that was a Murray Goulburn farm. He was informed by the Parmalat supplier that they would not be able to lease that property because he would not be able to pick up that milk. They did not want to upset Murray Goulburn, because Murray Goulburn takes the Parmalat milk back down the valley to Cobram or wherever. So we have a lot of behaviour happening that is like this: you are supplying a processor but really it is going to Murray Goulburn.

When Murray Goulburn crashed the price and Fonterra, despite making $420 million profit, offered a new contract with a cover letter that said, 'If you wish to supply Parmalat beyond 2017, you should consider signing a new contract and forgoing the $5.20 minimum milk solids and we will give you a three-year contract with a minimum of $5.' I can tell you that if there had been a manure pond alongside the Strathmerton bowling club, I think several executives might have got a dunking. So come July, there might be 200 Parmalat suppliers in our area looking for a new home for their milk because we really do not know if we are going to get offered a new contract when ours expires, even though now they have backed off and said, 'Yes, you will be.' Between saying and getting is anybody's guess.

One of the excuses for dropping back to the $5 was, 'We need to protect our profit.' Now, the year that we got $6.20 a kilo for milk solids, they purchased out of cash flow the Tamar Valley yoghurt factory and the Fonterra factory in Echuca that currently has everybody locked out, and they still had $32 million profit. This year they have not bought any factories and they have screwed us down to $5.20—they would have loved to have screwed us to $5 if they could have—and their profit is going to be I do not know any million. I do not have a problem with people making a profit, but at the end of the day what is wrong with making $32 million again and paying us a price that covers all our costs? When we got our 26c a litre at Kraft in 1996, we redid our dairy out of cash flow and our electrician was on $28 an hour. Today, our electrician is on over $90 an hour, but I am still getting 26c a litre or 30 or 32—and 40 next, I hope, which means I can finally pay some bills. But it should not be so difficult. With our input costs, we have the dearest labour in the world and that does not make it very simple.

ACTING CHAIR ( Senator Hume ): Between Parmalat and Murray Goulburn you are suggesting if not overt collusion certainly misuse of market power—is that correct?

Ms Knoepfli : Parmalat exports a bit of fresh product to Asia, Hong Kong, Singapore and China a bit. But at the end of the day, everything in their factory lands in the local supermarket in the form of yoghurts, flavoured milk—and flavoured milk is going through the roof. I believe Coca-Cola Amatil are having trouble selling Coca-Cola because everybody wants to buy iced coffee. So it is all premium product that is expensive. Nothing gets cheaper. Every time you turn around, a kilo of yoghurt is pushing $7. How much milk is in a kilo of yoghurt? So we have all these expensive products. I watch people in the supermarket and they do not go up and down the supermarket looking for the cheapest, reduced product that they can find for their trolley that is going to last two days at home; they just willy-nilly load stuff into their trolley and they willy-nilly pay $300 for a trolley full of groceries, and they do not appear to care what their product costs, it is just: 'I want passionfruit yoghurt and I want it now.' I think there is a lot of profiteering and we are paying for it.

Ms Goulding : I want to continue with the FSAL side of things after listening to Murray Goulburn suppliers. There was our support package that Fonterra suppliers were offered to offset the clawback of the 60c. If we leave Fonterra, that has to be paid in full. Not only that, but there is also a clause in there that if you fall below a certain level of your production—and I think, from memory, the production is based over an average of three years—they have the ability to call on part of that line. It is going to be interesting to see what happens with that one, because milk production has dropped in the area, and whether or not they start an act on that remains to be seen.

I am thinking you are aware also—my husband and I were in a position that we needed to take the FASL loan. We have to wear what was being touted as the 2c interest rate on the loan. There are actually suppliers—if a neighbouring Fonterra supplier did not take the loan they still have to pay that interest component. I am not quite sure where that one actually comes in with that. That is like me going to the bank and saying, 'Don't give me a loan, but I'll pay you some interest for the year.' So, that is something that needs to be looked into.

The other one is just a comment. When farmers lose their farms—and you are hearing that farmers are having that happen—they lose their homes. That is it. The farm is gone. They have nowhere to live. It is very devastating as farmers to be going through all this on farm stuff. We do not have the luxury at the end of a bad day at work of going home to a house that is in a street in town or whatever. We drive from shutting the cows in, back to our house, which is on the farm, and we look out at what is going on. You do not get a break from this. It is there. It is happening day in day out. Your office is in the next-door room from where you may be sitting or sleeping. One last thing: Fonterra has announced a step up this morning. Go figure!

Mr Danieli : I was an owner of a stockfeed business up until June last year. I just wanted to make a comment from a business perspective, because I do not think you have heard of the impacts of what has happened on businesses that are reliant on dairy farmers. I think immediately the effect of the price drop with MG and Fonterra, a lot of businesses like my own suffered a downturn in demand. We had immediate problems with payments of our commodity that we were selling to the dairy farmers. In my case, I sold my business in June. I projected that had I stayed there I probably would have been carrying an extra million dollars of debt. That is not to say that it was bad debt, but it would have been slow debt. They are the sorts of impacts that businesses that are reliant on farmers incurred.

We spent a lot of our time straight after the announcement taking food parcels out to Murray Goulburn and Fonterra suppliers. That was through the generosity of groups like Vinnies and Aussie Helpers. That is the sort of assistance that was needed, not this concessional loans business. There were people out there suffering, and they needed immediate help. They needed food; they needed money; they needed some sort of assistance. We spent a lot of our time—we were a stockfeed manufacturer; we were not a government organisation—and we did that sort of work.

Senator HUME: If I could just interrupt: did you have to change your contract terms for a lot of your customers that you knew potentially were going to be bad debts?

Mr Danieli : I sold the business at the end of June last year. I am still getting debt back in. I will put those people on a slow payment to assist them. A lot of customers who were never slow, never bad, became slow, and some became bad debt. I feel a lot of empathy for farmers. I am community minded. I am not just there to make money out of them. I was there to improve them as well. That is why I was quite lenient on payments. But you cannot be a bank. That is the unfortunate thing. I still have debt going back to way before last year.

I think the conduct of Murray Goulburn was atrocious. I think Fonterra was even worse. That was opportunistic profiteering. That is what I would like to see you guys do something about—to prevent that sort of activity ever happening again. I think the industry representation needs to look at itself. People such as the VFF, UDV, Dairy Australia and ABF. The industry representatives need to be focused on the farmer, not on their own employment, not on the fringe benefits. Whatever the industry representation is, that has to change to have an industry that does not see contracts written that are detrimental to the people they are supposed to represent. I think that was unconscionable, so I would like some sort of feedback to the industry representation that they have to do better for the money that they receive from farmers.

I would like to say that the $1-a-litre milk has got to stop. Regardless of what the percentage is—and people pull figures out of their hats—I do not believe it has that low an impact. By establishing $1-a-litre, it undervalues the rest of the milk production. We need to make the supermarkets set realistic prices on what they are selling from farmers.

The other thing to be aware of in what you are hearing is that there are people out there who have the 'I'm all right, Jack' approach. You have heard from farmers who are from a different company. They have their enterprises set up. They might have all their permanent water, so they are not at risk from the temporary prices of water. They have had good prices from their milk suppliers. Be very careful about how you take notice of the 'I'm all right, Jack' people. They are interested at the moment because it is affecting their bottom line or one aspect of what is happening in the rural sector is affecting them. You need to listen to the people who are actually hurting and react to what they are saying, not the ones who are not hurting at all. Thank you very much.

CHAIR: As there are no further questions, I want to thank you very much for your very considered comments today. I thank everybody for their participation.

Proceedings suspended from 12:42 to 13:23