Dairy code of conduct

The Dairy Industry Code of Conduct is a mandatory industry code prescribed under the Competition and Consumer Act 2010.

The Dairy Code

The Dairy Industry Code of Conduct (the Code) aims to improve the clarity and transparency of trading arrangements between dairy farmers and those buying their milk.

Dairy farmers and processors must comply with the Code. Some sections of the Code do not apply when a processor is a small business entity or a dairy farmer is dealing with a processor that is a small business entity.

The Code applies to retailers, such as supermarkets, only to the extent that they purchase milk directly from farmers. The relationship between retailers and processors may be covered by the Food and Grocery Code of Conduct.

The Code comes into effect on 1 January 2020.

Exclusions

Some sections of the Code will not apply to either a farmer or processor if a processor is a small business entity. However, all processors and farmers, regardless of size, must at all times deal with each other in good faith.

A small business entity includes a business which had an annual aggregated turnover of less than $10 million in the previous financial year.

The Code does not apply to dairy farmers and processors with a milk supply agreement that was entered into before 1 January 2020, unless that contract is varied or renewed.

All contracts, no matter when they were entered into, must be compliant with the Code from 1 January 2021.

The following table explains whether the Code applies in example situations.

Example Application of the Code
Joan is a dairy farmer who sells her milk to a processor with an annual aggregated turnover of less than $10 million. Some parts of the Code will not apply to either Joan or the processor because the processor is a small business entity. Both parties will still be required to act in good faith.
John sells his milk to a retail store that is not a small business. The retail store contracts a processor to process the milk. The Code will apply to the milk supply agreement between John and the retail store. The Code will not cover the contract between the retail store and processor.
James sells his milk to a processor which is not a small business under a three-year contract, which was signed on 1 July 2019 and expires on 1 July 2022.

The Code will apply from the earlier of:

  • 1 January 2021
  • when the contract is renewed or varied.

About the Code

Some of the rights, obligations and prohibitions under the Code are that it:

  • requires both processors and farmers to act in good faith in their dealings with each other
  • prohibits a processor from purchasing milk from a farmer without a milk supply agreement
  • specifies the circumstances in which price step-downs can occur
  • prohibits processors combining exclusive supply and either a maximum volume or tier pricing
  • requires any loyalty payment to still be made if a farmer switches processor
  • has a defined dispute resolution procedure
  • specifies a number of record keeping requirements for parties to an agreement
  • allows for ACCC investigations and compliance checks
  • has financial penalties and infringement notices for breaches of certain provisions of the Code.

Good faith requirement

Farmers and processors must deal with each other in good faith. Failure to deal in good faith can lead to penalties for breaching the Code.

Although the Code does not define exactly what good faith means, it broadly requires parties to make an agreement to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose.

For example, certain conduct may lack good faith if one party:

  • acts dishonestly
  • acts arbitrarily, unreasonably, recklessly or with ulterior motives
  • acts in a way that constitutes retribution for past complaints and disputes
  • fails to have regard to the legitimate interests of the other party (such as the need for certainty)
  • undermines or denies the other party the benefits of a contract.

Milk supply agreements

The Code requires processors to only purchase milk under a milk supply agreement. A milk supply agreement can be either verbal or written, but if an agreement is verbal the processor must provide the farmer with a written record of the agreement within 30 days of it being agreed.

The Code states the agreement must include certain things, such as:

  • set minimum pricing for the length of the contract
  • a justification for their minimum pricing
  • the processor’s quantity and quality requirements
  • a complaint handling procedure
  • other requirements.

Processors are required to publish Code-compliant standard-form milk supply agreements on their website by 1 June each year.

Price step-downs

The Code prohibits retrospective step-downs in all circumstances. The Code defines a retrospective step-down as a reduction in minimum price that applies to milk supplied to the processor before the variation occurs.

With respect to future step-downs, processors cannot reduce the future price below the minimum price except where there is the occurrence of exceptional circumstances that are:

  • temporary
  • involve an extraordinary event outside Australia that has a highly significant effect on supply, demand or costs in the dairy industry and which was not caused by decisions made by processors.

If the above circumstances do apply, a processor has to take all reasonable steps available to prevent or limit the impact of those circumstances before stepping down the minimum price.

If a processor does step-down the minimum price:

  • they must provide written notice of the step down to both the farmer and the ACCC at least 30 days prior to the step-down occurring
  • farmers will have the right to terminate the agreement and switch to another processor within 21 days of receiving notice of a step-down.

Dispute resolution procedure

Under the Code a milk supply agreement must provide for both an internal complaint handling procedure and a mediation process. The Code also provides both processors and farmers with a right to seek to resolve a dispute via mediation using the process set out in the Code.

A milk supply agreement may also provide for an arbitration process, including by adopting the arbitration process set out in the Code.

Record keeping under the Code

Under the Code, farmers and processors need to keep a written record of milk supply agreement, and any variations or terminations of the agreement, as well as other specified records for at least six years.

Enforcement of the Code

The Code contains penalty provisions. Not complying with a penalty provision could result in the ACCC taking court action seeking a financial penalty for the breach or issuing an infringement notice.

Persons who have suffered loss or damage as a result of contraventions of the Code may also take court action seeking other remedies, such as damages.

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