Key requirements for milk supply agreements

The Dairy Code requires processors to only purchase milk under a milk supply agreement. All milk supply agreements must comply with the Code.

Milk supply agreements

The Dairy Code requires processors to only purchase milk under a milk supply agreement.

All milk supply agreements must comply with the Code, which means they must among other things:

  • include a 14-day cooling-off period
  • in most cases, specify the supply period of the contract, including a final calendar date
  • specify quality and quantity requirements for milk, including testing procedures and consequences for milk that does not meet the requirements
  • specify the minimum price payable for the milk
  • not allow for price step-downs except for prospective step-downs in limited circumstances
  • not allow for unilateral variation of a milk supply agreement by a processor, except in the case of a change in a Commonwealth, State or Territory law and only to the extent necessary to comply with that change
  • specify the circumstances (if any) in which either party may unilaterally terminate the agreement, including that a processor must not unilaterally terminate the agreement unless the farmer has committed a material breach of the agreement
  • specify what services the processor may or must perform, and specify the fees payable for those services
  • specify when transfer of ownership of the milk supplied occurs
  • provide for payment of a portion of the loyalty payment in circumstances that a contract is terminated before the end of its supply period, if an agreement provides for a loyalty payment to a farmer
  • contain a dispute resolution procedure, including an internal complaints handling procedure and mediation

A milk supply agreement may include other terms in addition to those required by the Code, provided they are lawful and consistent with the Code.

Cooling-off period

Milk supply agreements must provide a 14-day cooling-off period, during which the farmer may terminate the agreement with immediate effect without incurring any liability.

The cooling-off period must start when the parties enter into the agreement, and expire:

  • if it is a written agreement, 14 days after the parties enter into it
  • if it is an unwritten agreement, 14 days after the processor gives the farmer a written record of the agreement.

If the agreement is terminated during the cooling-off period, the agreement continues to apply to all milk supplied under the agreement up until the date on which the termination takes effect.

Supply periods

The Code does not specify that contracts must be of a particular duration. However it does require that all milk supply agreements have a start date and definite end date (except agreements with some cooperatives).

This means, in most cases, those agreements will end on the definite end date (or before that date if terminated prior) regardless of whether the farmer has given notice.

These requirements are intended to enhance contractual certainty, and to reduce barriers to farmers switching between processors, such as through the use of rolling agreements.

Where the supply period is longer than 3 years, the executed MSA must provide the farmer with the option to extend the supply period by an additional 12 months through written notice to the processor.

Processors should ensure that none of their contractual requirements around renewal or termination of their agreements have the effect of creating a rolling agreement.

Minimum price

The Code has a number of sections that refer to the minimum price. These include provisions in relation to step-downs and a requirement for milk supply agreements to specify the minimum price. The requirement to include a minimum price applies to all milk supply agreements.

Step-downs

The Code prohibits retrospective step-downs in all circumstances. There are specific requirements regarding the use of prospective step-downs that can only occur in limited exceptional, temporary circumstances.

Variations and terminations

All milk supply agreements must specify the circumstances (if any) in which the farmer or processor may unilaterally vary or terminate the agreement.

A milk supply agreement must not allow for a processor to unilaterally vary or terminate a milk supply agreement except:

  • for prospective step-downs, only in temporary, exceptional circumstances
  • for terminations, only when a material breach of the agreement by the farmer is involved
  • for all other variations, only in the case of a change in a Commonwealth State, or Territory law, and only to the extent necessary to comply with that change.

This does not prevent a processor from agreeing with a farmer to vary the agreement, for example, to increase the minimum price.

What is a material breach?

The Code does not define what constitutes a ‘material breach’. The ACCC recommends that processors specify in their MSAs what they consider constitutes a material breach, noting that a court may come to a different conclusion from the processor about whether particular conduct is a material breach.

As a guide, the ACCC considers that it is likely the term ‘material breach’ refers to an important or significant breach, for example because the breach has a serious impact on the benefit which the processor would have otherwise gained from the MSA.

The ACCC considers that this would likely include at least breaches by the farmer that are not able to be remedied. In some circumstances, this may also include:

  • some regular or habitual breaches by the farmer (whether or not they are remedied or able to be remedied), and
  • a significant number of remediable breaches by the farmer that have not been remedied.

It is important for parties to remember that the exercise of any right to unilaterally terminate an MSA for a material breach must be done in good faith.

Process

The milk supply agreement must also specify how the parties can unilaterally vary or terminate the agreement. The Code does not prescribe a particular process, but requires that any unilateral variation or termination by either party:

  • be in writing; and
  • include the reason for the variation or termination and the date on which the variation or termination takes effect.

Where an agreement is terminated, it continues to apply to milk supplied under the agreement up until the date on which the termination takes effect.

Loyalty payments

A loyalty payment under the Code is any amount payable to the farmer under the agreement because the agreement is not terminated before the end of the supply period.

The Code does not require or prohibit loyalty payments, and processors may place certain conditions on them. However, the Code prohibits milk supply agreements from containing loyalty payments that are conditional on the farmer:

  • supplying milk to the processor after the agreement ends
  • agreeing to vary the agreement to postpone the end of the supply period, or
  • entering into a new milk supply agreement with the processor.

Pro-rata payment

If a milk supply agreement provides for a loyalty payment to a farmer, but the agreement is terminated before the end of the supply period (for example, through the agreement of the farmer and the processor), the Code requires that the loyalty payment be paid out to the farmer on a pro-rata basis.

The Code specifies that the pro-rata payment is to be calculated on the proportion of the supply period completed before termination. The ACCC considers this period begins on the day the agreement commenced and ends on the date the agreement ended, and not when notice of termination was given.

There is a penalty for withholding pro rata loyalty payments. However, the payment is subject to any other conditions attaching to the payment being satisfied (for example, the farmer meeting quality thresholds over the course of the agreement). Payment is not required if the agreement is terminated in circumstances involving a ‘material breach’ of the agreement by the farmer.

Other types of payments

The Code does not prohibit or place conditions on other types of supplementary payments, such as sign-on bonuses, pre-payments, or loans.

However, processors should be mindful that the Code’s requirements for loyalty payments will still apply if a payment is in substance a loyalty payment as defined by the Code, regardless of what it is called in an MSA.

Processors should also remain mindful of their other legal obligations, including the Code’s good faith obligation, and the unfair contract term laws and the prohibitions on unconscionable conduct in the Australian Consumer Law, which may be relevant to any supplementary payments they agree with farmers, including any requirements around repayments of those amounts

More information

Dairy code of conduct

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