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Pricing under the dairy code

The dairy code does not regulate the price of milk. Processors are responsible for determining the price of milk under their milk supply agreements.

However, the code does require a milk supply agreement to specify a minimum price payable for milk. The code also:

  • limits the circumstances in which a processor can lower or ‘step down’ the price for milk
  • sets out rules in relation to the use of loyalty payments.

Minimum prices

All milk supply agreements must clearly specify the minimum price payable for milk supplied under an agreement.

The code defines the ‘minimum price’ as the lowest price payable for milk supplied under the agreement, not including any:

  • loyalty payments
  • potential prospective step-downs
  • fees payable by the farmer under the agreement.

Increasing the minimum price

The minimum price or schedule of prices allows a farmer to know the minimum amount they'll be entitled to receive - less any fees for services payable - at the end of the contract if they supply milk in accordance with the agreement.

Under the code processors can pay more than the minimum price or pay other kinds of bonus payments.

If a processor wishes to vary the agreement to change the minimum price, the variations must:

  • be made in accordance with the procedure set out in the milk supply agreement or with consent of both parties
  • account for the code’s rules on varying a contract.

How to set out the minimum price

The minimum price may be specified in different ways depending on processors’ needs. Generally, the industry will state the price of milk in terms of cents per litre or $/kg of fat and protein. Prices may fluctuate throughout the year depending on whether supply is flat or seasonal.

However, the milk supply agreement must specify the minimum price as:

  • a single minimum price that applies for the whole supply period, or
  • a schedule of monthly and/or yearly minimum prices that covers the whole supply period.
Example 1: Single minimum price
Supply period Price
1 July 2023 to 30 June 2024 55 cents per litre
Example 2: Schedule of yearly prices
Year $/kg of fat     $/kg of protein
2023-24 $6 $12
2024-25 $5 $10
2025-26 $5 $10
Example 3: Schedule of monthly minimum prices 
Period $/kg fat $/kg protein
Jul-23 $7.25 $11.00
Aug-23 $6.50 $10.00
Sep-23 $6.25 $9.50
Oct-23 $6.25 $9.50
Nov-23 $6.25 $9.50
Dec-23 $6.25 $9.50
Jan-24 $6.50 $9.75
Feb-24 $6.75 $10.25
Mar-24 $7.25 $10.70
Apr-24 $7.25 $11.00
May-24 $7.50 $11.00
Jun-24 $7.10 $11.25

Pricing estimates

Processors may provide farmers with a volume weighted average or indicative ‘closing’ price estimate. However, they must ensure they do not mislead or deceive farmers.

Whether a pricing estimate is misleading or deceptive will depend on the individual circumstances. To avoid misleading or deceiving farmers it is important for processors to clarify:

  • the relationship between the indicative price and the minimum price
  • that the indicative price is an estimate
  • any assumptions underlying the indicative price
  • that the processor acted reasonably when deciding the indicative price.

Statements of justification

All standard form milk supply agreements must include a statement justifying the minimum price.

A statement of justification must explain:

  • the factors the processor considered when deciding the minimum price
  • how those factors were relevant in setting the minimum price.

The statement of justification does not need to include any commercially sensitive material.

Retrospective step downs

Retrospective step downs are prohibited in all circumstances. The code imposes penalties for their use.

A retrospective step down is when a processor reduces the price payable for milk that has already been supplied below the minimum price specified in the agreement.

A retrospective step down includes any terms that allow a processor to:

  • retrieve money that has already been paid to farmers under the agreement
  • reduce the price payable for milk that a farmer has already supplied.

Unilateral prospective step downs

A unilateral prospective step down is when a processor reduces the minimum price for milk to be supplied after the step down comes into effect without the agreement of the farmer.

Under the code, unilateral prospective step downs are only permitted in exceptional circumstances.

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 a processor’s own decisions.

Whether circumstances are ‘exceptional’ is determined on a case-by-case basis. Processors should be careful not to implement a unilateral prospective step down lightly.

The ACCC considers that exceptional circumstances may include:

  • 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.

Processors must ensure they take all reasonable steps to prevent or limit the impact of an exceptional circumstance on the processor before implementing a step down. If the step down is still unavoidable then the processor may implement the step down.

Process for implementing a unilateral prospective step down

Under the code, processors must ensure all milk supply agreements:

  • detail the process for implementing a unilateral prospective step down - that complies with the requirements for under the code
  • specify that the processor will provide written notice of the step down to the farmer and the ACCC at least 30 days before the step down comes into effect.

Written notice to implement a unilateral prospective step down

The written notice must include information on:

  • the step down
  • the exceptional circumstances
  • what reasonable steps - if any - the processor has taken to limit the impact of the exceptional circumstances
  • why the step down is unavoidable, and
  • the period to which the step down applies.

Terminating an agreement in response to a step down

Milk supply agreements must grant farmers the right to terminate an agreement within 21 days of receiving notice of a unilateral prospective step down.

If a farmer chooses to terminate in this situation:

  • the termination must have effect from the date the step down occurs
  • the agreement must allow the farmer to withdraw the termination before the end of the original 21-day period.

Loyalty payments

Under the code, a loyalty payment is defined as any amount payable to the farmer because the agreement is not terminated before the end of the supply period. This is irrespective of whether it is described as a ‘loyalty payment’ or not.

The code neither requires nor prohibits the use of loyalty payments. However, the code does prohibit the use of any loyalty payments that are conditional on the farmer:

  • supplying milk to the processor after the agreement ends
  • agreeing to extend the supply period under the current agreement, or
  • entering into a new milk supply agreement with the processor.

The code does not regulate other kinds of supplementary payments, such as:

  • sign-on bonuses
  • pre-payments, or
  • loans.

However, if these payments are properly characterised as loyalty payments they will be subject to the loyalty payment requirements under the code.

Pro-rata payment of loyalty payments

If an agreement is terminated before the end of the supply period any loyalty payments included in the agreement must be paid out on a pro-rata basis – as long as the farmer has satisfied any conditions imposed on the loyalty payment, such as milk quality requirements.

The pro-rata payments must be calculated by reference to the proportion of the supply period completed before termination.

Example of pro-rata loyalty payments

A farmer and processor enter into a one-year milk supply agreement on 1 July 2023. The parties mutually agree to terminate the agreement on 30 September 2023 - a supply period of 91 days.

Assuming the farmer has satisfied any relevant conditions, they would be entitled to around 25% of the loyalty payment (91/365 = approx. 25%).

However, if a farmer commits a material breach of the agreement a processor does not have to pay any loyalty payments to the farmer – pro-rata or otherwise.

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