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

LOSBERG, Mr David, Senior Policy Manager, Australian Dairy Farmers

McQUEEN, Mr John, Interim Chief Executive Officer, Australian Dairy Farmers

[14:08]

CHAIR: Welcome. Is there anything you wish to add about the capacity in which you appear today?

Mr McQueen : For complete disclosure: I was the CEO of Australian Dairy Farmers for 20 years and left at the end of 2007. I was asked to come back last year to help try and deal with some of the issues in the industry.

CHAIR: 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 McQueen : Thank you. May I say how good it is that the committee has done these hearings in regional areas where dairy farmers can come attend. I think they provide the backbone of what we do at Australian dairy farmers and they provide you with the real, on-farm impacts of a number of things that we deal with at a national level. Over the last few months we have been putting a lot of effort into working with the manufacturers and our farmer organisations in each of the states to develop a code of practice for contracts. We are close to a final draft of that. It has been a very valuable exercise in farmers and manufacturers working together to try and ensure that what happened last year does not happen again—at least through much greater transparency, much greater fairness and much greater disclosure in contracts.

One of the other things that have happened in the last couple of months which will be a big help for the industry moving forward is the extension of unfair contracts legislation to small businesses. It used to apply only to consumers. That started on 12 November, and I think that we will see a significant impact on small business in general and dairy farmers in particular over the future years of that unfair contracts legislation becoming operative.

The effects test that the government has introduced is another one of those areas that we find absolutely essential and have been lobbying for for quite some time. An effects test will help to address some of the issues that farmers are not a part of that happen between processors and retailers like, for example, marketing deals or sale deals between a processor and a retailer. That is a processor-retailer exercise, and yet the impact that can sometimes have on small businesses in general and on dairy farmers in particular can be quite significant.

One of the other things that the minister, Deputy Prime Minister Barnaby Joyce, announced last August was funding for the development of an index. We have been working very closely with the Department of Agriculture over the last four or five months on this. As I think others have demonstrated in evidence just now, there is lots of information out there about what indexes are and what is happening with world market prices, but one of the problems has been that farmers have tended to trust the company and the management of the company. As Mr Irvin pointed out quite clearly, a lot of that trust has been severely adversely impacted. We believe—and I think the Department of Agriculture has come to this conclusion as well—that an educational program around an index is a major component of the benefits that can be delivered to dairy farmers out of the development of an index.

I will leave it at that.

CHAIR: Thank you. Can you give us an update on your work to improve contracts between farmers and processors? What changes do you think might be implemented there?

Mr McQueen : I will give you a little bit of a feel for it. We have developed a number of principles that have to be applied in contracts. We have not tried in any way, shape or form to enter into any areas that might be a competitive differentiation between companies and their suppliers, but we wanted to ensure that there were some fundamental principles that were dealt with like, for example, pricing adjustments to farmers who are out of contract being clearly defined in the contract and how that might happen, how price changes should be made and that no price changes should be made retrospectively.

We believe that all farmers receive payment at the time it is accrued over the contract. In other words, a farmer who stays with a company but supplied milk till 30 June should be paid for all of that 30 June milk in the same way as anyone who stays with the company.

Mr Losberg : That was referenced earlier in the context of royalty payments by a couple of farmers who presented earlier.

Mr McQueen : We want to ensure that the pricing formula and the price-setting mechanism is clearly defined within a contract and agreed with the farmer, not just 'This will be it.' While acknowledging step-ups do occur and step-downs have in the past occurred under severe circumstances, as much notice as possible should be provided before any step down. We tried as a farm organisation to suggest that step-downs should not happen. That is very challenging for companies given directors' fiduciary responsibilities to their companies if a disaster occurs like, for example, the global financial crisis.

One of the other things that we have dealt with is exclusivity clauses in contracts where farmers have been required to supply one company and one company only. Where we have come to with that is that, where a company is prepared to take every litre of milk that a farmer produces at the same price for the first litre as the last litre, exclusivity is probably a reasonable thing for the farmer to accept in a contractual arrangement. Where a company wants to contract a certain volume of supply but does not want to take every litre of milk a farmer is prepared to produce—and a small business should be able to produce as much of a product as they like—and where a company wants to have a second price for that additional milk that a farmer produces but do not want to negotiate that, the farmer should have the right to sell that additional milk to a different entity. In other words, there should not be exclusivity of supply if the company is not prepared to pay the same price for the last litre as the first.

We should ensure there is a clearly defined mechanism on how contract terms and conditions can be modified so that the farmer knows that they cannot be told today that tomorrow their terms and conditions are going to change, that at least there is a process identified within the contract of a time frame for that to happen, for a negotiation to be able to take place and for a farmer to be able to decide whether they do or do not want to continue to operate with those changed terms and conditions.

Those are a number of the principles that are incorporated into it.

CHAIR: Are those principles together going into a code of best practice on contractual relationships?

Mr McQueen : All of those are. As I said, that is close to a final draft.

CHAIR: How will that be settle? Do farmers have a right to express a view about that or to vote on it?

Mr McQueen : Each of our farmer organisations have been dealing with that with their members and their central councils over the last six months. The most recent draft of that has gone to everybody who was at a meeting that we had to initiate this back in September. So, yes, there have been mechanisms for farmers to have an input into that process.

CHAIR: How do we strengthen collective bargaining arrangements? Is that part of your prescription for improvement of the industry?

Mr McQueen : It is a very good question. Australian Dairy Farmers was the first to use an element of the Trade Practices Act 1974 back in 2002 which allowed for an organisation to get an overarching authorisation. It was the first time that had ever happened, and the ACCC had a fair amount of difficulty coming to grips with how that might work where collective bargaining groups form under ADF when they do not have to be authorised individually by the ACCC. That happened in 2002. There have been some collective bargaining groups that have—

CHAIR: You got that through, didn't you?

Mr McQueen : Yes, we did, absolutely. There have been some collective bargaining groups that have formed since then that have been more successful than others. I think it is fair to say that, in the majority of cases, companies do not want to work with collective bargaining groups. There are still some collective bargaining groups that operate. Many of those are operating on the basis of supplying a specialty-type branded product to a supermarket, for example. There have been a few examples where they have been extremely successful. Senator Xenophon, in your state probably one of the most successful was in the early days of that authorisation for ADF, where one particular group got together. South Australia had always had manufacturing milk somewhere about 10 to 15 per cent below the Victorian price. That particular collective bargaining group went and talked to a Victorian company and said: 'Please come and pick us up. We've got about 65 million litres.' That happened, and they got paid the Victorian manufacturing milk price. Within a week, for every dairy farmer in South Australia the manufacturing milk price was the Victorian milk price, and it has basically stayed the same since. So sometimes they can be so successful that they are not needed any longer.

To strengthen it is very hard. We cannot force a company to negotiate with a collective bargaining group. That would be in breach of our authorisation. It is a right of a company to decide who it wants to negotiate with. The provisions that are there now are quite strong, but it is a challenge at times to get people to negotiate. It tends to be smaller groups of farmers for relatively small amounts of milk, with the exception of a premium collective bargaining group in Queensland which was formed after the ADF authorisation and as a separate authorisation. That is a different issue again, and it has been operating for the last 12 years, I think.

CHAIR: It seems processes are somewhat resistant to collective bargaining. Are there any instances where there have been any repercussions for farmers who sought to collectively bargain?

Mr McQueen : I think there has been some anecdotal evidence that farmers have suggested that they are better off not going through a collective bargaining group and coming and negotiating with us singularly.

CHAIR: Should there be a requirement for processors to accept collective bargaining, if that is the will of their suppliers?

Mr Losberg : I think Mr Irvin spoke very clearly about that open and trusting relationship. If that relationship exists between the processor and the farmers, you would be willing to work together for a mutually beneficial outcome. I do not see how working with a collective bargaining group or individual farmers can adversely affect the processor there.

CHAIR: Against that, Mr Losberg, we heard from Mr Cochrane of the premium negotiating group who basically said that there was a requirement for goodwill to exist before collective bargaining can work—

Mr Losberg : On both sides—

CHAIR: On both sides. But then there is also scope there for arbitration. Are you aware of how many cases of arbitration there have been in relation to failed collective bargaining negotiations?

Mr McQueen : It is only a handful of them. I think that a couple of them have been with the one collective bargaining group, which is the dairy farmers' manufacturing supply co-op, who have been to arbitration on more than one occasion. It is not something that our smaller farmer collective bargaining groups have undertaken. It starts to be a potentially expensive exercise for them.

Mr Losberg : It is probably worthwhile also mentioning ADF—Australian Dairy Farmers—has an authorisation which was quite an onerous process to go through. We have gone through it twice and had it renewed. The ACCC has set up a notification process where you basically notify them that you want to collectively bargain and, within two or three weeks, they will make it public. If anyone has any objections, so be it. But, if there are no objections, within two or three weeks you can basically have that ability to collectively bargain, which is a good thing.

CHAIR: My final question relates to the range of representative advocacy bodies within the industry. There has been some criticism of those bodies. We heard the same criticism this morning—you may have been in the room. I am not sure if your organisation was particularly singled out, but there was some concern about whether advocacy groups necessarily had the interests of farmers at heart. What do you say to those complaints in relation to membership fees paid and those sorts of things? What is your response to those criticisms?

Mr McQueen : Firstly, ADF is a national advocacy body. A lot of people have tried to put Dairy Australia into an advocacy role, and it is not the role of Dairy Australia; it is a service body for the industry. I want to make sure that we are seen to be quite separate to Dairy Australia. We are a significant player in Dairy Australia's strategic planning operations but we are the advocacy body. There will always be some who have a different view to a national organisation. When there is criticism, there are things that any organisation can do better, and I think Australian Dairy Farmers recognise that through a range of actions that have been taken over the last 12 or 18 months. I am not going to be critical of those who are critical. That is their right. ADF does get on with the job of developing good policy. It goes to government with solutions. It does not just say to government, 'We want you to fix a problem for us.' That is usually a recipe of making sure you do not get what you want. Going to government with solutions, which is what we have done for a long time, provides a beneficial outcome for the industry that is often not seen at the grassroots to the level that it might otherwise be. It has been important on, for example, the code of practice to have those negotiations quietly between the farmers and the processors. It initially began with the involvement of ACCC's new agricultural commissioner and the small business ombudsman so that everybody was aware of what their responsibilities were—working constructively and collectively together to achieve something that I think the industry has been looking for for a long time and it is something that industry is better capable of doing than asking government to do it for us.

CHAIR: Do you think that there is some merit in a restructure perhaps of the nature of the representation so it can better serve farmers, bearing in mind that we have clearly identifiable different dairy regions within the country with their own particular peculiarities?

Mr McQueen : Any organisation that does not keep closely aware of its structures and ensures its structures allow for the best outcomes for the farmers of this industry, as in our case, is not doing its job well. There are always some things we can do better and that is part of striving to be the organisation that is best capable of representing.

CHAIR: Is that something that is actively being considered at the moment?

Mr McQueen : That is something that is always on the agenda for Australian Dairy Farmers.

Mr Losberg : It is always worthwhile mentioning. I totally understand how farmers can feel the way they feel and I empathise with that. Some of these solutions do take a long time. They are long-term solutions. In these organisations there are usually small numbers of staff and fundamentally the organisations are made up of dairy farmers, the representatives. It is always worthwhile mentioning that as well.

Senator HUME: Another of our submitters, Dairy Connect, suggested that a voluntary code of conduct—they actually gave us a copy of the UK voluntary code of conduct—was the way to go, yet we have heard from other witnesses that a mandatory code of conduct might be a better solution. Personally, I am an advocate of voluntary code of conducts. I would much rather you guys sort out how to work this rather than government telling you what to do. However, what is your position? What do you feel is your members' position?

Mr McQueen : In our view a voluntary code of conduct is the appropriate thing to do here. If we can get all the processors to sign up to a voluntary code of conduct, it is essentially mandatory in that everybody is signed up to it. There are not many mandatory code of conducts. The ACCC has a couple. Usually those who are signed up are those who are not the major players in those mandatory codes of conduct. I am not saying they have been spectacularly unsuccessful, but they tend to have major players run away from them. Our objective is to have everybody signed up here and if we have everybody signed up we have a capacity to manage it into the future, collectively again. A mandatory code sits within the ACCC and then the industry tends to be not the keeper of it; the ACCC is the keeper of it. That in itself can be a challenge in this space. So I reiterate that, if we have everybody on board, we are in a good space.

Regarding the point you made about the UK code, yes, we considered the UK code and some elements of the UK code are part of what we have done with our practice, our code. I think people would also say that the UK code has been fairly unsuccessful. Some of our processors would say it has been spectacularly unsuccessful. I am not being dismissive of what Dairy Connect's submission is saying, but the experience has been, 'Let's use those examples but apply them to Australian conditions and circumstances particular to Australia.'

Senator HUME: Obviously, the number of processors and the competition between them are particularly important to fair contracting with suppliers. Do you think that, if collective bargaining were more prevalent, it would lessen that competition or potentially push processors into a position where they were either less competitive or even unviable?

Mr Losberg : It is difficult to say. There is that much difference Australia wide that it is really difficult to give a categorical answer to that. In Queensland, there is—

Senator HUME: I am just looking for unintended consequences of collective bargaining, which seems to be something that is being repeated, particularly today.

Mr Losberg : In Victoria, which is basically two-thirds of the industry, you are not going to have the whole state allowed to collectively bargain. Clearly, there would be an unintended consequence there. If they are limited to a reasonable size—a fair community of interest in the area—I could not see that having too adverse an impact.

Mr McQueen : But there are a lot of farmers out there who would prefer to do their own thing, so there is a balance to be found in this.

Senator HUME: That is it from me.

Senator RICE: I have two general questions. From the farmers' panel this morning, it seemed to me that the main changes required are so that those farmers get a fair return for their milk. What do you think are the key things that need to happen to improve the situation now?

Mr McQueen : For the people who are adversely impacted?

Senator HUME: In general. Across the board, it seems that, in the dairy industry at the moment, there is a lot of evidence that the returns the farmers are currently getting are not enough. It is not a sustainable industry when people are getting very low returns on all of the inputs that they are putting in.

Mr McQueen : We are a market that is affected by the world market. I think Mr Irvin made that very clear. There is another point I would make in regard to that. Our domestic price is going to be driven by world market prices, unless we hide behind tariff barriers or domestic subsidies, neither of which there is an appetite for on any side of politics, whether state or federal. But the purest free trade agreement in the world is the one we have between Australia and New Zealand, and New Zealand is the largest exporter of dairy products in the world. It is the biggest supplier of the world market, and it is closest to us. So we have to be competitive with New Zealand. We are fortunate. I do not say this lightly, because our domestic returns to our farmers are poor right now, but New Zealand farmers are much worse off. But four or five years ago, New Zealand farmers were above us when the world market price was much higher than it is now. They ended up with a much better return. They tend to take a bigger high and a lower low.

There are some in the industry who believe re-regulation will do the trick, as at least one farmer said this morning. There are some who would like to change all sorts of other things and force people to do things. We are an industry that has been through the highs and lows of regulation and deregulation. The issue now is transparency and fairness in contracts that will help to minimise what has happened over the last 12 months, which has been patently unfair. I think that, once these analyses by the ACCC and ASIC on what happened last year are completed, they will demonstrate there was a fair degree of unconscionability in what took place.

Senator RICE: You basically think that getting fair contracts and getting transparency will be—

Mr McQueen : I think you heard that a lot from most of the farmers this morning. They were saying, in a very firm and passionate way, that fairness in contracts was a high priority for them. That is why I say that having these hearings in a regional area is so valuable.

Mr Losberg : The timing of what happened is so important, as a couple of the farmers and Mr Irvin mentioned, and the code of conduct with the processes will help with that as well.

Senator RICE: Given that we have got transparency, fairer contracts and a code of conduct—if that were implemented—where do you see the Australian dairy industry in 10 years time?

Mr McQueen : Viable, sustainable and in a better place than it is now—a vibrant dairy industry. For the last 30 years it has been at the forefront of the adoption of new technologies. It will continue to be at the forefront of the adoption of new technologies. Just to give you a little bit of an idea of what I mean by that: in 1982 our average dairy cow produced about 2,800 litres of milk; last year it produced 5,500 litres of milk. That has come from the adoption of new technologies in genetic improvement, breeding, pastures and better management of pastures, and the list goes on. To put that another way: there has been a 190 per cent increase in the milk produced per hectare in those 30 years from 1980 to 2010, for example. That is all because of the adoption of new technologies. The industry needs to and will get back to the adoption of those new technologies. There are some things that government will be able to help us with in some of that space in terms of regulation of some of those new technologies, but nevertheless that will be a significant contributor to the growth of this industry and its vibrancy in a decade from now.

Senator RICE: Are there other things that you think governments need to do, that processors need to do, that retailers need to do or that farmers need to do?

Mr McQueen : I think that, as we move forward with things like the application of the effects test and with things like the application of the new legislation that started last year in the extension of unfair contract terms to small business, if we find in the application of those that the outcomes are not what was intended, government revisiting those and ensuring that they are then amended to ensure the outcomes envisaged are achieved will be a significant contributor. There is no magic silver bullet, but all these things together can have a significant impact.

Mr Losberg : A lot of those production improvements that John mentioned were through, obviously, research and development conducted through organisations like Dairy Australia. So, that funding to those organisations—organisations like the Australian Dairy Herd Improvement Scheme and others—that R&D, is incredibly important. That was also mentioned a couple of times.

Senator RICE: Maintaining the resources to research and development is critically important?

Mr Losberg : Or tripling it.

Senator RICE: Okay. It is good to be ambitious.

Mr McQueen : It is important to note that, of the R&D funding that Dairy Australia has in total, 50 per cent comes from government, Commonwealth and states, matching the farmer levy, but the federal contribution is only paid if there is a farmer levy. So the matching dollars that the farmer levy provides give a significant lift to the amount of R&D we can do. The more we can get that moved to a greater contribution from the Commonwealth and the states, the better off we will be.

Senator RICE: You would prefer not to be matching but rather to have guaranteed levels of funding that were then topped up by the matching funding?

Mr McQueen : I do not think that we will hold our breath waiting for central agencies to agree to that, but nevertheless it is an important contributor to business in general in Australia. R&D and R&D capability are the way the Australian economy has grown over the last 30 to 40 years—the application of new technology.

Senator RICE: That sounds like your evidence of what that research and development has yielded over the last 30 years. It would be a good return on investment.

Mr McQueen : Yes, unquestionably.

Senator XENOPHON: Yesterday in Perth, Mr Andrew Weinert, a dairy industry consultant—I do not know if either of you are familiar with Mr Weinert—described the situation that faces the dairy industry now as akin to market failure. He actually used the words 'market failure'. Could you reflect on that? In fairness to both of you, you may want to look at Mr Weinert's submission and at his evidence to the inquiry. He paints a pretty bleak picture about the imbalance. Could you reflect on that and let me know? Because there are people out there who say that the market has failed in a substantial way, and they are using the definition of market failure. Can I just ask the ADF: what percentage of dairy farms do you represent? You are comprised of a council of constituent groups. Is that right? Mr Losberg, we have dealt many times with each other.

Mr McQueen : Yes. Our members are the six state dairy farm organisations.

Senator XENOPHON: That is right. And what percentage of dairy farmers do they in turn represent?

Mr McQueen : It varies from state to state from about 65 per cent down to around 50 per cent.

Senator XENOPHON: Right. That is still pretty reasonable.

Mr McQueen : It is reasonable; it is never going to be 100 per cent.

Senator XENOPHON: Sure. Some of the evidence we heard earlier today was that people felt that they were not getting sufficient advice on contracts, that it is not a fair bargaining process—the bargaining powers are not any different, but there is an information asymmetry and a knowledge asymmetry between a processor and a dairy farmer, who has got their job to do and they are not interested in the legal niceties. What support does your association—and the state association—provide to give that basic level of advice? For instance, do you encourage template contracts so that there can be that levelling of the playing field?

Mr McQueen : We have not done the template contract issue. We have, when it comes to collective bargaining groups, assisted them in understanding some—

Senator XENOPHON: Do you think you should? That is an issue where people felt they were quite bewildered by the contracts they signed.

Mr McQueen : There are so many different contractual arrangements—even within the one company supplier group: in Queensland it will be different to the contract they have with suppliers in New South Wales versus Victoria et cetera. It becomes very challenging, to say the least.

Senator XENOPHON: Is there a case for some simplification of these contracts? Allowing for the different circumstances—

Mr McQueen : It may well be that as a result of the code that we have developed, that may well lead to more simplification—

Senator XENOPHON: Sure—and I am just racing through this because there is not much time. This is a discussion that I have had with Mr Losberg in the past, the whole issue of the code. It is something that you have been pushing for. Where we are at with that? It has been quite a while, hasn't it? What are the hold-ups with that code being put into effect? It is not a criticism; I am just saying it has been a long time.

Mr McQueen : No; certainly, ADF has pushed for a code of conduct for quite a long time. That morphed, if you like, into the grocery code of conduct between the retailers; it ended up there. That included a lot of clauses that Australian Dairy Farmers and particularly Queensland Dairyfarmers' were pushing. We can provide more information on that as a question on notice, if you like, Senator.

Senator XENOPHON: Sure. But you can understand: the fact that there have been other groups—such as Farmer Power—that have emerged, with a fair degree of support from dairy farmers, shows that they do not feel that their voices are being heard through traditional advocacy groups. How do you deal with that?

Mr McQueen : I think it is fair to say that, to be in a position where we are now where we have just about got a draft to put signatures to—a penultimate place—when really, the first meeting we got between processors and farmers to develop this was at the end of September. So in about a four-month period, there has been an enormous amount of goodwill developed here to progress that—for something that people did not think was necessary; particularly the processors did not think it was necessary. But once it became clear to them that, from 12 November last year, the new unfair contracts legislation was going to apply, and they became aware that it would apply to them—because they did not think it would apply to them—as soon as they realised that, it really was a serious discussion. And so in that time frame—I know you are not being critical, but I think it is fairly significant to get a lot of processors together—

Senator XENOPHON: I could be critical if you want me to, but I was not planning to!

Most dairy farmers are doing it tough. You have heard about the clawbacks. I take it that ADF, under its constitution, does not allow for processors to be members. Is that right?

Mr McQueen : That is correct.

Senator XENOPHON: So you do not have the processors being members of your association?

Mr McQueen : That is correct.

Senator XENOPHON: You cannot be a processor to be part of the constituent groups or the ADF, is that correct?

Mr McQueen : Yes.

Senator XENOPHON: Most dairy farmers are doing it tough; they are going backwards. There is no way most of them would want their kids to be involved in the business or for young people to get involved in the business. Aren't we at a point of an existential crisis for the dairy sector given what has happened, and given the behaviour of Fonterra and Murray Goulburn in terms of those clawbacks? You have seen the contrast with Bega Cheese. This is unsustainable. If this keeps going the way it is going you will see a lot more dairy farmers walking off the land, will you not?

Mr McQueen : Senator, I think the criticism that has been made of those couple of companies that you just mentioned is playing out in the marketplace in no uncertain terms. I do not think it is just Bega that has benefited from that—and Bega have acted very responsibly, as you heard from Mr Irvin.

Senator XENOPHON: Should we force the others to act responsibly?

Mr McQueen : I think Warrnambool Cheese and Butter is another one of those that did not cut its prices back.

Senator XENOPHON: Yes, so my question is: should there not be a minimum benchmark in a code of practice so that the conduct can be measured by a benchmark of Bega and Warrnambool Cheese and Butter rather than what Murray Goulburn and Fonterra have done?

Mr McQueen : That starts to get you into some difficult competition policy territory. The difficulty is where, I think, you are starting to impinge on what might be commercial, competitive environments between one company and another. I think there are a lot of farmers—

Senator XENOPHON: What about the dairy farmers that are going broke, that are going backwards? Where are their rights?

Mr McQueen : They are in a very difficult space as you heard this morning, and we understand that. It is one of the reasons why we have been advocating very strongly for the programs that government have put in place with household support et cetera and making concessional loans easier to access.

Senator XENOPHON: Very few dairy farmers have taken on those concessional loans, have they?

Mr McQueen : Very few, and that is partly because of the complexity of the conditions that are applied, some of which you heard this morning, in terms of who can have access to the equity that is there to be held against a loan, for example.

CHAIR: Thank you, gentlemen, for appearing before us today.