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Economics References Committee
02/02/2017
Australian dairy industry

IRVIN, Mr Barry Andrew, Executive Chairman, Bega Cheese Ltd

CHAIR: Ladies and gentlemen, I declare open this public hearing of the Senate Economics References Committee. The committee is hearing evidence on the committee's inquiry into the dairy industry. The Senate referred this inquiry to the committee on 14 September 2016 for report by 24 February 2017. I welcome you all here today. The committee has received 43 submissions so far, which are available on the committee's website. This is a public hearing, and a Hansard transcript of the proceedings is being made.

Before the committee starts taking evidence, I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public, but, under the Senate's resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken, and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may of course also be made at any other time. On behalf of the committee, I thank all those who have made submissions and sent representatives here today for their cooperation in this inquiry.

I now welcome the representative from Bega Cheese. Thank you for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so, and then we will open it up for questions.

Mr Irvin : Thank you, Senator, and thank you for hearing me today. The dairy industry is in my blood. I am a fifth generation dairy farmer, and, on a personal level, my son is about to become the sixth generation of dairy farmers in our family. He told me last week that he is coming home, which is wonderful. I have been on the board of Bega Cheese for quite a period of time. I took my current position in 2000, right in the middle of deregulation, and at the time I think it is fair to say that Bega Cheese was probably on the list of companies that would not survive, as a result of deregulation. Bega is on the lower south coast of New South Wales, quite isolated, and there was a small pool of milk—it met about one per cent of Australia's milk needs. We had a position in New South Wales and most of our farmers received their income from the regulated New South Wales liquid milk industry.

I took over at a time of great turmoil and change, and I guess set about not only wanting to improve the circumstances of the farmers in the Bega Valley and the Bega community but also with ambitions to grow the company—I suppose against the common view, that we did not have any reason to exist. I think when I joined we had 80 staff and after our most recent acquisition we will have about 2,000. We had about 130 million litres of milk, and we will handle 700 to 800 million litres of milk this year, and of course we had one site and now we have six, with a new one soon to join. We have had a record of growth and acquisition that has included, at first, buying 70 per cent of Tatura Milk Industries up here in northern Victoria. I have to say this feels like a second home to me, and people here have always been wonderful to me. We bought 70 per cent of Tatura Milk Industries in 2007; in 2009 we bought a rather large cheese packaging facility from Kraft up at Strathmerton, again in northern Victoria, so northern Victoria became the place of our largest assets. We also in 2009 purchased a cheese plant in Coburg, in Melbourne, and we then listed the company in 2011. History will show that we then attempted a takeover bid on Warrnambool Cheese and Butter, which we were not successful with, and that went to Saputo. Most recently, this year, only two weeks ago we purchased the Mondolez grocery business. I am proud to say that we now own the Vegemite brand back in Australia. So it has been a time of almost constant change.

I think in that time I have never forgotten where the company began. I reread my submission a few hours ago, and listening to the people giving evidence this morning it reminded me as to why I was so angry at the time when the price cuts occurred, first by Murray Goulburn and then by Fonterra. I did not believe that they were fair and I felt that the pain that was being put on farmers was wrong. That is the only way I can say it. I was determined that Bega Cheese/Tatura Milk Industries would not go down that path, and we did not. I was also determined to take some leadership in the industry. Quite frankly, I believe the decision should have been reversed. I am a pragmatist, if you like, in terms of what drives milk price and what drives industry circumstance, and I will always say that milk price will go up and down. There has been a lot of discussion this morning about how much domestic and how much international, and I am happy to go into more detail about that later. It was not the fact that milk prices go up and down. I think people in agricultural production understand that their prices change. It was the fact of how it was done, when it was done and that it was too late for farmers to be able do anything about it.

I would sit before you today and say that I am very proud of Bega's record. I absolutely recognise that one of my own suppliers is up here saying that he is losing money this year. It breaks my heart to hear that, but, of course, I know it to be true, and I know it to be true in circumstances where the market is just not returning a cost-of-production figure for suppliers. We do have some optimism looking forward as the market inevitably turns and changes again, as it almost always does. The downturn that we have experienced in this industry in the last three years is the longest I have ever experienced. Therefore, it needed careful management, and we have looked to do that. I think my suppliers do know that we are very responsible across our entire supply chain. We do our farmers no favours by not reflecting the market to them, because you can see the consequence of not reflecting an appropriate price and then doing it late and not giving enough time for those signals to be absorbed. You can also see the consequences of companies collapsing or, indeed, not investing because they have not got that balance right. Sadly, there is not an easy answer around the fact that the market sometimes runs against you, and in something like agriculture it has always been the case that sometimes the market will run in the positive for you and sometimes in the negative. For me, it is about long-term development, long-term investment and long-term strategy that needs to be carefully enacted and carefully risk managed because this is an increasingly volatile industry.

As I said, I am proud of our record in that and I am proud of our relationship with our farmers. The comment that I would make, which I was reminded of so much this morning, is that it is a trust relationship. As much as I understand that people are trying to work out how things can be contractually made stronger or the balance can be stronger, for me, I feel like my farmers trust me and I trust them. The relationship is a long-embedded one, and I am proud of it. I am highly distressed to see not only that that trust from other companies has been broken but that the breaching of trust has extended across the industry now. It is not just isolated to those companies. I think farmers are shaken, their confidence is shaken, and they are not sure whether they should have the trust in their leadership that they once had. That is extraordinarily damaging, and it is extraordinarily damaging for the way in which we will inevitably navigate our way as an industry out of what has been a very difficult period. That is me.

CHAIR: Thank you very much, Mr Irvin. As you commented, we have heard from a couple of Bega suppliers this morning, and, whilst one of them indicated he had significant losses, I think they were all appreciative of the different approach that Bega took at that time. You mentioned in your submission that prices go up and down and that a farmer:

… would expect that the processor with their knowledge of the market would deliver an opening price that was appropriately conservative and has the potential to be improved upon or at least remain flat. They would not expect that the price may be reduced.

How is it that your organisation operates on that basis and others do not? Perhaps you could tell us a bit about it.

Mr Irvin : Again, it is always best to be completely candid. We have had to drop our price once, and it was in the global financial crisis. I think I mentioned in my submission that in a force-majeure-type event like that, where we saw 50 or 60 per cent of the returns from prices drop in two months and it was something that affected the global economy, we, in that circumstance, did need to reduce our price. I have to say that at that stage we owned 70 per cent of Tatura. We reduced our price to the minimum we could reduce it by and declared quite a hefty loss in the company, so it was a shared pain, if you like, which I think our suppliers accepted a lot more.

Senator XENOPHON: How much did you reduce it by?

Mr Irvin : We had committed to a price of 45c a litre for the full year. We had actually opened at 42c but had guaranteed the three step-ups. We ended up closing at 40c. I believe in facing people when you have got a problem, so I went and talked to all my farmers. I felt like I had betrayed them, quite frankly, or like I had breached their trust. They were understanding about it. I think they were understanding about it from the point of view that it was the GFC and that the company was also declaring a loss. But that was the form of reduction.

Senator XENOPHON: Unlike Fonterra, which had $846 million in profit?

Mr Irvin : Yes. You are right. That is the point, I suppose. The pricing system over a great period of time has really been about sharing the risk and sharing the opportunity. But, as you pointed out in my submission, the knowledge of that risk and opportunity sits with the leadership of the companies. There can be something that is significantly left of field, but I think it has got to be something dramatic, and, even when it is, I think it is something that needs to be shared, not slated home to one particular person—and again, as I was quite vocal about it at the time, somebody that had no choice. It was slated home to somebody in the supply chain that did not have much power in that supply chain. I have not purposely avoided answering your question; I just wanted to make sure I was accurate on the one time that I have had to reduce.

For me, it is about having a balanced business. If you look across the Bega Cheese business and what we have tried to build over a long period of time, we have elements of our business that are not exposed to global commodity prices, or global swings and roundabouts, and may not even be exposed on the supply side. We are a very large cheese cutter, packer and processor—not only of our own product but of others' products. That business is a very stable business. It gives us some stable returns. We balance that with some more entrepreneurial businesses, if you like. That means that, as I think about the business going forward all the time, I try and have a balance between the opportunity that is markets, brands, premiums and international as well as domestic with the fact that I need to make sure I manage risk well.

My perspective, again, on some of the elements of this is that we knew the caps were coming off in Europe. We knew it was going to become very difficult to predict, so we were watching it very carefully. The argument was that this was not predictable, but we had seen—and, again, any farmer would know this—for 30 years that there were supply caps in Europe: 30 years of development, better technology, better capability from the animals and better feeding regimes. That suppressed growth was going to explode, and it was going to explode in a very short period of time. Nobody could really say what that number would be, but it made us very cautious.

CHAIR: You comment in your submission about contractual arrangements, and I am interested in how you see they should be changed into the future. You say in your submission that those contractual arrangements need to be looked at in the context of the long-term relationships that have been refined over many years. You suggest that goodwill is a very important part of that. However, are we unscrambling the egg now? As you said in your opening statement, there is a lack of trust there. We need to look at how these contractual arrangements can be improved for the benefit of suppliers. How do you say that should happen?

Mr Irvin : I have thought that the arrangement over a great many years has been very effective, but it was really an arrangement where the contract was formed by a letter from us the company to the supplier saying, 'This is our opening price and here is the supplier handbook with the conditions in it of the supply.' There was no formal signing of an arrangement or anything like that. That was just what happened each year, and, generally, while some farmers would look around, which I say is absolutely their right, to see whether they would get a better price elsewhere, the vast majority were happy to stay with you. That is really how the arrangement has worked. As I said in my submission, generally you would have an opening price that you are comfortable you could manage and, if the market improved, you could reflect some improvements in that market—or indeed your particular product mix improved, which is also important.

I know there is a lot of work being done, and we are participating in having a code of conduct established, and having some of those elements that I would say are naturally there more formalised, and I am comfortable with that.

So, what I am seeing and hearing, and what I would say myself, is that you want to be able to reflect the returns from the market and you want to be able to share the opportunity and sometimes recognise that there is a risk there, but there is a point in time where that risk becomes the company's. Again, my perspective was that the change in price so late in the year was too late. I know some of the code of conduct is talking about: under what circumstances could a company change its price in the negative? I think nobody minds if they change it in the positive. But, if they change it in the negative, under what circumstances can they do that? I think a stronger definition of that is something that (a) helps the farmer and (b) adds an additional discipline on the company, which I think is fine because, quite frankly—and I think I noted this in a number of other dairy companies' submissions anyway—I have done it once in my life and I never want to do it again. It occurs to me, anyway, that naturally we will try to do anything but that, but the ability to have it probably means that you can be a little stronger in your pricing initially because you know you have an option. But it has to be an option that is in extreme circumstances, not circumstances of what I think I said in my submission—poor risk management.

CHAIR: In your submission, you talk about the importance of the relationship with your suppliers, particularly for the efficiency of your manufacturing operation. That is fairly critical. What does a close relationship between Bega and its suppliers look like? Does a company rep come round to the farm on a regular basis; do you provide regular updates to the farmers about prices and other things; and how are the contracts, such as they are, negotiated?

Mr Irvin : As I said, really, in terms of the negotiation it is just an opening price from us, and an announcement. Of course, there is discussion with suppliers around what the basis of that price was and how we came to open with it. So if I were to talk about the relationship in the broadest terms, given that we have suppliers in Gippsland, in western Victoria, in northern Victoria and of course in Bega, about three or four times a year I will be out on the road doing supply meetings. At every one of those meetings, I will have information around the world markets, information around what the company is doing and what its financial performance is—obviously, after the first half and full year results—and I will talk to them about whatever issues they might be dealing with as well, and I make sure that I do that personally. Once a month, I personally write a note to our suppliers, like just a newsletter, which again will tend to touch on those subjects but also might touch on some more personal things. We run big charitable events up here and in Bega, so I will talk about what we are doing there as well.

Then, in those other periods, there is a field service team in all areas, and they go out and meet suppliers and deal with any of their issues and talk to them. To me, the culture and the values of how we approach the suppliers are set from the very top, and I am always very delighted to see my field service team—make sure they have empathy, make sure they are listening, make sure we are out there working with suppliers, even if it includes giving bad news. When you are discussing things like price indexes, again, I am very comfortable with something like that because it is something I do anyway. So, if it needed to be more formalised, it does not concern me. It makes me little sad, if I am honest, but having done this job for so long and having been through so many cycles and challenges and droughts—just the nature of agriculture—I have come to the absolute conclusion that the more information you can give a dairy farmer, not only about what is going on in the markets and the business but also what is going on in your business, the better equipped they are. You equip them to actually understand your challenge as well as their own and that is really what you want to do in terms of them being able to manage through a cycle such as this. So I am a great believer—as you have probably noticed, in talking too much— in giving as much information as I can.

CHAIR: How many of your suppliers have left you in the last two years?

Mr Irvin : I would have to check. I would love to say none but that is not true. We have probably lost maybe half-a-dozen or 10.

Unidentified speaker: Would the majority be through retirement?

Mr Irvin : Through retirement? No, I think to another company.

Unidentified speaker: [inaudible]

Mr Irvin : Three, across the region. So we will lose suppliers and we will lose them because they get offered a better price. That can be because their supply curve suits a market milk company so that if they are very flat suppliers, or something like that, or quite a large volume supplier, we will lose them. My attitude to losing them is that if they have improved their circumstances I will shake their hands and say, 'Look, I hope you come back one day but I understand that you have to make the right decisions for your farm.' We do have them go but we obviously win plenty as well.

CHAIR: Do you have contracts with the major retailers?

Mr Irvin : Yes, in cheese but not in liquid milk.

CHAIR: How are those contracts structured?

Mr Irvin : We actually just changed one. There is a little bit of commercial-in-confidence here so I will try and be general. The one that was very public was the Coles contract that we had for generic cheese or retailer's marked cheese. It was a five-year contract. It had a number of provisions around costs, rises and falls. For us, a lot of our contracts are structured around reflecting the world market. While people might say, 'Why would you do that?' the challenge of not doing that is that if the world market takes off, suddenly you have a real difficulty coming up with a milk price that is actually competitive. So the world market does indeed affect the domestic market more than just that 35 per cent. It affects a lot of other products that are traded within the domestic market. Part of the reason is that if you could pick the bottom of the cycle, you would, of course, take a fixed price above that and say, 'Gee, I am happy about that. Aren't I smart?' But if you happen to miss the fact that the market is going to take off—and it is starting to move quite strongly now—suddenly you have accepted a price that is way below what could be earnt on the international market and therefore you need to be able to reflect that in your transactions. So they will vary but there is generally some reference point to the global value of dairy products if you like.

CHAIR: My final question relates to collective bargaining. What would be your company's attitude if some of your suppliers wanted to collectively bargain?

Mr Irvin : I respect the rights of individuals or groups. I think we are very transparent about how we come up with our price. You can see in our accounts how it divides up and the sort of profit targets we might have in the business. If people went down a collective bargaining path, it would be up to them and we would not fight them. But I would probably say that whether it is an individual or a collective, we would treat them the same. Maybe another way of me putting it is that I think the dairy industry is unique. I think sometimes people look at a traditional supply chain which starts here with supply and goes up to the customer. I think the dairy industry, if you get it right, is more like a U-shape so that the customer and the supplier are of equal importance. It is no good having a dissatisfied customer because you will not have the right price for your supplier, but it is no good having a dissatisfied supplier either. People who are not familiar with the dairy industry do not think that way or have that discipline but, as I said, I see it as a U rather than a straight line and, therefore, I treat my farmers that way. I treat them as customers.

Senator HUME: Mr Irvin, you mentioned the importance of careful risk management. I am interested in your opinion on who should carry the risk of that domestic demand and international pricing volatility?

Is it something that you think should be borne more by the processors or the suppliers, or a combination of the two? And where do you think the retailer fits in here? Where does their responsibility stop and start?

Mr Irvin : I guess the risk is really born across the supply chain. If I think about how we might describe that, it is the processor that bears it all. The processor sets a price and hopes for the best, for want of a better way of putting it. Too many losses in the processing sector means they do not invest in their infrastructure, which means they do not create value-added businesses. It is not all sweetness and light at Bega Cheese with our farmers, sometimes. So it is really interesting, when I go out to suppliers and announce a $20 million or $30 million profit, if they are having a difficult time. And what I will inevitably always talk to them about is what infrastructure we are investing in and what we are trying to do to improve the business and what we are trying to do to create an ability to be more stable and improve returns and have a strong balance sheet. Interestingly, in the circumstances that occurred last year, they said things like: 'we see why you want to keep doing that', 'we see why you want to keep investing and why you want to have a strong business', and 'we see why it is important that the market be reflected in our price'. If we did not reflect the market in their price, you could get circumstances of overproduction or indeed underproduction, because they would not be getting the right price signal. So some of the risk is no doubt borne by the supplier, and some the risk is borne by the company.

As far as the role of the supermarkets are concerned, I noted in their submissions that they talked about their obligation to the customer. I actually recognise that and I recognise that in virtually all cases, the supermarkets are actually putting out a tender to ask whether you would like to supply a product, and we compete for that. Australia is one of the most competitive dairy markets in the world. I suppose they would say they are fulfilling their responsibility to the customer by asking who would like to supply and at what price. And we are, as was mentioned earlier, joining tenders and hoping to win, quite frankly. But we are hoping to also manage the risk of how we might win that, and that is why you have rises and falls, clauses in contracts and cost reflections in them and whatever else.

So what happens when competition gets a little out of hand? Probably what you saw last year. I certainly would never want to downplay it, because it was terrible. But what happened was that there was aggressive competition for milk actually pushing the price up above what could be returned. Farmers, for a period, benefited from that competition, but it was, quite frankly, irresponsible. We could deal with it, but the competition was too aggressive, and the price went down for the farmers and there was not enough shared risk management or shared pain. On the other side of the coin, there was aggressive competition for space on the supermarket shelves. On the one side you had people chasing milk at a price above market and on the other side you had them chasing retail position at very skinny margins. I am not sure that we can lump the supermarkets in there and say it is their fault. I do not actually subscribe to that, because I say we are the ones that put the price in.

Senator HUME: Do you think that this responsibility for shared risk management, while fair in theory, means the burden falls more heavily on the suppliers? They are so much smaller. They are often small, family businesses whereas the processors, manufacturers and retailers have more skill, experience, expertise and resources to better manage risk.

Mr Irvin : That is a very good question. In this region, as I sit here today, there are seven different companies still out there trying to win the favour of suppliers. They are out there trying to convince somebody that they should supply to them, so the supplier's strength is, in fact, in competition for their milk. In the circumstances of the Australian dairy industry today, there is overcapacity, so companies want to fill their capacity. If you run the big stainless steel things that I run, and they are empty, you are in a lot of trouble. So you are out there trying to win. That is the supplier's strength.

I think what we have heard today—which, again, saddens me a little—is that suppliers were once confident that they did not need to go and test that and that their company would be competitive and would deliver them all that they might expect, and they would benefit from that competition, and they would stay with the one company for a long period of time, and we have heard this morning that they are now saying, 'Well, I'll check every year and I may move every year if I have to.' I do not think that is a good thing for the industry, but that is, I guess, where their strength comes from—which slightly argues with what I was saying earlier. But where their vulnerability comes from is that, if you were offering a price and then you change it, they cannot respond to that quickly. What I was concerned about last year was that some of those suppliers could not move. We had such a long list of people wanting to move to us that we could not take them all, because obviously we are not running our infrastructure empty; we are running it quite full. So that is where the power goes away. But I think, on the positive side, competition is what drives the ability for the farmer to have choice. What hurts them is when something like last year occurs.

Senator HUME: My understanding is that the competition is quite fierce in Victoria and potentially New South Wales, but when you move into states like, potentially, WA or Queensland that competition dries up somewhat and the suppliers are at the mercy of a very few organisations that are looking to take on their product, because it is largely liquid milk. Do you think that that changes the argument somewhat?

Mr Irvin : I do. Quite frankly, I think that aggressive competition drives performance, which benefits everybody. I think, in areas where there is oversupply, the need to compete for that milk is obviously significantly reduced, and that does put the farmer in a weakened circumstance. I would honestly say that I do not have a good knowledge of the Western Australian dairy industry. I know that is a terrible thing to admit, and I do not have a much better knowledge of the Queensland dairy industry. I have been a manufacturer all my life, and that is what I really understand.

Senator XENOPHON: Mr Irvin, thank you very much for your evidence. It is quite refreshing evidence, given what we have been hearing lately. I want to put this question to you: your company behaved somewhat differently from the likes of some of the other processors, and we have heard some very legitimate complaints from people about that. You have decided to take a different path, but that path comes at some commercial cost to you, to Bega. Is that right?

Mr Irvin : It certainly did in that year.

Senator XENOPHON: I want to put this to you: what do you think would level the playing field so that you are doing, as much as possible, the right thing by your suppliers? What do you think should be the minimum benchmark rule? Should there be a mandatory code of practice? Should there be clear rules in terms of representations made as to what the local price would be? Should there be some form of prohibition of clawback mechanisms so that processors have to take risks? You may want to take this on notice. I think you have alluded to it in the submission, but I think this committee wants to find solutions that will be long term and lasting. If what Bega is doing is a benchmark, as close as possible, of good practice, what do you say the others should be forced to do as well?

Mr Irvin : I might take it on notice, but I would make these comments, and if I can then provide further information I would be happy to.

Senator XENOPHON: That would be very helpful.

Mr Irvin : My perspective would be, and it saddens me a bit to say it, that with some of the things that have been mentioned—a mandatory code of practice—I think the industry bodies and the processors can come together and say, 'This is what practice should be,' and each side can—and if it has to be made mandatory—

Senator XENOPHON: And the retailers, the Coles and Woolies of this world?

Mr Irvin : I would probably be careful and say I cannot really speak for them. I have a relationship with them that is a supplier-customer relationship, which I find generally reasonably constructive. When we talk about building a business, we have built our business from $100 million to $1.2 billion, and it probably would be an obvious thing to say that about 35 per cent of it is now international and about 65 per cent is domestic, so clearly we have successfully dealt with supermarkets along the way.

Does it need to be mandatory? I would have to think about what that might look like, because I think what the concern is, which I would recognise completely, is that the suppliers were indeed weak in this. When they had the clawbacks placed on them all—the cut price—they did not have any power in that decision.

I think when it is processor to retailer it is a more even playing field. I would quite frankly say that part of my job is to create options for my product. It is to be able to send it internationally; it is to be able to make it into infant formula, or to do something else. The power that we should be continuing to develop is to have an option for the very valuable product that we produce which means that, if you like, there is competition for the retailers to want to convince you to deliver it to them rather than to somewhere else. Now, that is a perfect world, but I take some of the responsibility about saying I have got to develop the markets that allow that. So I would not say no; I just need to think about the answer there around the retailers.

Senator XENOPHON: Because of time constraints, perhaps you could just provide your view—

Mr Irvin : Sure, sorry.

Senator XENOPHON: on notice. That would be very useful.

Mr Irvin : I would be happy to do that.

Senator XENOPHON: Thank you.

Senator RICE: Thank you, Mr Irvin, for your evidence. It has been really interesting, particularly you saying that you did not believe that the price cuts that were imposed upon farmers last year were fair. The question I was going to ask was pretty much the same as Senator Xenophon's, as to what you felt needed to happen so that that sort of unfair practice could not happen again in the future. If there were a mandatory code of conduct—I am not quite sure what it would include that would stop that—do you think that would be sufficient or go a long way towards helping out?

Mr Irvin : The two things that have been talked about that I would say we do anyway are the idea of giving price indexes that communicate to suppliers what is going on in their markets—and, as I say, you can have the debate about whether international prices affect domestic prices, but the truth is if you have a look at a trend line of—

Senator RICE: They do.

Mr Irvin : farm gate prices, it is obvious that they do. It is really that trend line that is important, as the evidence was given this morning: if the prices are going down, how does it help me to know? In fact, it does help people to know. Having something like that is important, and having an understanding of the parameters under which a price reduction can occur, I think, can give people some confidence. That includes notice periods, it includes what time of the year, and it might even include under what circumstances. I regret that it is on the table because I actually think—not that it is a good thing; I just think that that should be how we deal with it. As I have said, it has only once occurred to me: it was the GFC, I suspect, which was this force majeure type event and not a management issue, if you like.

Senator RICE: One of the other suggestions that were made this morning was farmers would appreciate having longer term contracts, say, for at least half their milk supply. I have not heard this, but the idea of your contracts having some link to such a commodity price index to enable a long-term contract that would seem to be fair—would that be a way of going?

Mr Irvin : I am not sure that it would help the farmer. I think the reason for wanting to have a long-term contract is that they would like price stability.

Senator RICE: Yes.

Mr Irvin : So, if you link it to that curve, they do not get the key thing that they wanted out of a long-term contract. Having said that—

Senator RICE: But they know that at least it is fair and there is no-one gouging the price.

Mr Irvin : Yes, that is right. When I was thinking about it this morning, the only way you could deliver a long-term contract would be if you did link it against some sort of price movement up and down according to the international market. For some, that may well work. For others, it probably would not.

Senator RICE: Finally, I know you know that Bega do not provide liquid milk into the market, but do you have a view on the $1-a-litre milk from the major supermarkets and what that has done to the industry.

Mr Irvin : I think the sentiment expressed this morning—you cannot deny that farmers feel devalued by that pricing. The thing that I am always careful to say is that there are actually a lot worse returning products in the dairy industry than $1-a-litre milk and so it needs to be held in perspective in terms of how much of the volume there is. For example, last year, in the pit of the commodity price crash, whole milk powder was worth 34c. Bulk cheese was lucky to be worth 40c. Of course, at the other end of the spectrum infant formula was quite nice to be involved in. That has all changed around this year.

Therefore, the way I look at $1-a-litre milk is that, in the cold, rational perspective, it is part of the spectrum of returns and the spectrum of prices, some better, some worse. The way the farmers feel about it, which I absolutely understand, is that they feel devalued by it and they feel like, when they look at water and they see that as more expensive, which is inevitably always mentioned, it does affect confidence. It does affect the way they feel that their work is viewed. To me, when we look across the circumstances of the last year or so, there have just been body blows to the farmers around how they feel about the industry. Back when I was really upset—I spent my life trying to get respect for the dairy industry and dairy industry farmers and trying to build something to be proud of, and from the farmers' perspective and even the general community out there, saying the dairy industry is a mess. People are referring to $1-a-litre milk as a devalued position for farmers. That all affects confidence and that all affects how we actually navigate our layout. As I said, on the commercial side of it, as mentioned here, it is not a big part of supply, particularly in areas like this. It is obviously more important in some of those market milk states, so it does vary region to region—I should have said that—but in this region it is not the driver but does affect how people feel.

Senator RICE: Thank you.

CHAIR: If there are no further questions, thank you very much for appearing before us. Answers to questions on notice are to be returned by 8 February.

Mr Irvin : Thank you.