THE Mandatory Dairy Code of Conduct that came into force in January this year will have its first test in the coming months, as milk processors begin releasing their new season contracts and announcing opening prices for the 2020/21 season.

With a significant reduction in the Australian milk pool, processors will be keen to secure their milk requirements for the coming season.

June 1 is fast approaching, and by this date all processors will need to be on the front foot with their opening price released as required under the code.

Indications are that many processors will aim to have their price out well ahead of the deadline, in an attempt to secure milk early.

This proved an effective tactic for the likes of ACM (Australian Consolidated Milk) last season, who gave farmers the reassurance in February 2019, that the minimum price it would pay for the coming season was $6.50 per kilogram of milk solids.

This was later upped to $7 early June as its record breaking opening price, however the early announcement gave suppliers the confidence to secure water and fodder needs early.

This season basically all milk supply agreements will have to be re-written.

Behind the scenes lawyers will have been working away at ensuring each factories agreements will comply with the code, given the ramifications of unenforceability and potential fines if they don’t.

A change that the milk industry will have to grasp is the move away from a ‘weighted average’ price.

While processors may have given their opening price in the terms of the average price they expected to pay for their milk over the season, they must now also use the terminology minimum price.

This minimum price needs to be the minimum that will be paid for milk under their contracts.

This will be a positive change, as previously there has been little clarity around exactly how some of the bigger processors have calculated this mysterious average.

The reality is that often the advertise price is simply not achievable for many farms, and it’s likely deals made with larger farms outside of the publicised standard prices is bringing up the average.

The Australian Competition and Consumer Commission (ACCC) reminds processors in their information guide that providing an inaccurate weighted average or expected closing price can constitute misleading or deceptive conduct, in breach of both the code and other Competition Policy.

One major sticking point of the code was the ability of processors to still reduce their minimum milk price mid-season in certain circumstances (Clause 28).

As coronavirus (COVID-19) sweeps the globe, we are faced with our first circumstances merely months after the code was created that could fit the criteria that allows for a price stepdown.

Given the widespread impact the virus is having, it will no doubt at some point impact our global milk markets.

Is this then sufficient to allow a step-down?

Potentially.

A summary of the ACCC’s advice regarding the step-down previsions are below.

A particularly worrying aspect of Clause 28 of the code is that it states a milk supply agreement must allow the processor to unilaterally vary the contract in some circumstances.

So it appears that even processors who voluntarily included a ‘no step downs from the stated minimum prices in any  circumstances’ clause in their previous contracts will be forced to change their milk supply agreements to give themselves the option of stepping down in ‘exceptional circumstances’.

Which inevitably will leave farmers worse off. 

Step Downs

THE code only allows unilateral prospective step-downs in ‘exceptional circumstances’. The Code defines exceptional circumstances as circumstances that are temporary; involve an extraordinary event (including an emergency or change in market conditions) that occurs outside of Australia, has a highly significant effect on supply, demand or costs in the dairy industry, is not caused by decisions made by processors.

The ACCC considers that some of the circumstances that may meet the ‘extraordinary event’ requirement are the imposition of import restrictions in a key foreign market in response to a temporary biosecurity threat, or a temporary trade shock involving one of Australia’s major dairy trading partners.

Additional requirements

THE above circumstances must also satisfy particular requirements before a processor can prospectively step down a price.

These requirements are that the processor has taken or will take all reasonable steps to prevent or limit the impact of the exceptional circumstances on the processor, or there are no reasonable steps that the processor can take; because of the exceptional circumstances, the unilateral step-down is unavoidable; no later than 30 days before the step-down comes into effect, the processor provides the farmer and ACCC with notice of the step-down, including the exceptional circumstances, the reasonable steps (if any) the processor has taken to prevent or limit the impact of the exceptional circumstances, why the step-down is unavoidable or the period to which the step-down applies.

The ACCC considers that one of the circumstances in which the unilateral prospective step-down may be ‘unavoidable’ may be if, without the step-down, the processor will become insolvent as a direct result of the exceptional circumstances.