The Dairy Code of Conduct has a number of sections that refer to the minimum price under a contract. 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, including milk supply agreements entered into between cooperatives with cooperative members.
The Code defines ‘minimum price’ as the lowest price payable under the agreement for milk supplied during the period, disregarding:
- loyalty payments
- any possibility of a temporary reduction in a price in accordance with section 28
- any fees payable by the farmer under the agreement.
The Code provides flexibility regarding how a minimum price can be disclosed to farmers, including as a single price that will apply across the entire supply period or by reference to a schedule setting out prices on a monthly or yearly basis.
The Code does not require the minimum price to be specified in any particular way, other than by reference to milk supplied during the period. For example, a minimum price may be specified by reference to milk solids (each of fat and protein), or number of litres that meet specified quality requirements.
To meet minimum price disclosure obligations under the Code, processors need to include a binding minimum price for milk (subject to any prospective step-down in accordance with the Code and milk supply agreement).
The minimum price (or schedule of prices) must allow a farmer to calculate the minimum amount they will be entitled to receive (plus any loyalty payments and less any fees for services payable) at the end of the contract if they supply milk in accordance with the agreement (including quality and quantity requirements).
The ACCC understands that it has typically been industry practice for a processor to announce a base farm gate milk price around the commencement of a dairy season. Typically this was a volume weighted average price that was expected to be paid over the season.
In some cases a processor announced an opening price and a forecast closing price, which assumed a number of step-ups or other increases in price throughout the contract.
The ACCC considers that such a forecast or volume weighted average price will not constitute a minimum price for the purposes of the Code, unless that price is specified as the minimum the processor is obliged to pay under the agreement.
Misleading or deceptive prices
If a processor wishes to provide a volume weighted average or indicative ‘closing’ price in addition to the minimum price for a season, they should be conscious of their obligation to not mislead or deceive farmers.
Whether providing a weighted average price or indicative closing price will be misleading or deceptive will depend on the facts and circumstances. Some relevant considerations may be:
- whether the agreement and any related representations clearly convey the minimum price that the farmer will receive (barring any price step-down in accordance with section 28 and the milk supply agreement) and that the processor is not obliged to pay any indicative price
- whether the agreement and/or any related representations clearly explain what is meant by the quoted indicative. For example, whether the price is an average for all farms in a particular area or farms of a particular size
- whether the processor has a reasonable basis for any representations about an indicative price, calculated by reference to the processor’s individual circumstances and expected market conditions.
A processor offers a one-year milk supply agreement to farmers. The milk supply agreement states that for the entire year of the agreement the processor will pay $x per litre for all milk supplied up to a particular volume, provided that the milk meets the quality requirements set out in the agreement. The agreement clearly states that $x per litre is the minimum price farmers will receive during the course of the agreement.
The processor separately states that it expects to be able to step-up to $y per litre by the end of the supply period and that, if the step-ups occur, this price will apply to all milk supplied during the course of the agreement.
It is the ACCC’s preliminary view that the agreement’s specification of a guaranteed $x per litre for milk supplied during the period will meet the minimum price disclosure obligations under the Code. Provided it is stated separately and clearly distinguished from the minimum price in the agreement, the $y per litre indicative price is unlikely to be considered a minimum price for the purposes of the Code.
The processor must have reasonable grounds for making the $y per litre indicative price representation.
A processor offers a one-year milk supply agreement to farmers. The processor wants to incentivise farmers to increase winter milk production, and therefore the agreement includes a 12-month schedule, which specifies the minimum prices that farmers will receive per kilogram of fat and protein milk solids in each month. This schedule specifies a higher minimum price during the winter months.
The processor also separately states a volume weighted average price the processor expects to pay over the season to the group of farmers taking up this contract. These materials clearly distinguish this volume weighted average price from the minimum price under the agreement and are not misleading or deceptive.
It is the ACCC’s preliminary view that the disclosure of a minimum price for fat and protein milk solids each month for the duration of the agreement will meet the disclosure obligations under the Code.
The processor must have reasonable grounds for making the volume weighted average price representation.
A processor offers a two-year milk supply agreement to farmers. The processor is concerned about their exposure to world milk prices in the second year of the agreement but still wishes to secure milk supply if possible to service contracts in that year.
The agreement includes a schedule specifying one minimum price for the first year and a lower minimum price for the second year. The lower price in the second year accounts for their exposure risk to fluctuations in world milk prices.
It is the ACCC’s preliminary view that the agreement would meet the minimum price disclosure obligations in the Code.
A processor offers a standard form milk supply agreement on its website. The milk supply agreement is accompanied by marketing material that states the processor expects to be able to pay $x per litre at the end of the supply period. The milk supply agreement states that the processor’s opening price is $y per litre but the processor has the discretion to decrease this price at any time.
The milk supply agreement does not state a minimum price as neither the expected $x per litre price or the $y per litre price are the lowest price payable under the agreement.
It is the ACCC’s preliminary view that the processor is likely to have breached the Code as it has published on its website a milk supply agreement that does not comply with the Code.