The Dairy Code of Conduct places significant restrictions on price step-downs in milk supply agreements. A price step-down is a reduction in the price payable for milk below the minimum price that has been stated in the MSA.
A retrospective step-down is a price reduction below the minimum price for milk that has already been supplied under the contract. In other words, it creates an obligation on the farmer to pay the difference to the processor, such as through paying back past earnings.
The Dairy Code of Conduct prohibits retrospective step-downs in all circumstances.
A prospective step-down is a price reduction below the minimum price that will apply to milk that is supplied after the step-down comes into effect.
The Dairy Code of Conduct significantly limits the extent to which a milk supply agreement can give a processor a unilateral right to prospectively step-down the minimum price payable under a contract. The Code only allows unilateral prospective step-downs in ‘exceptional circumstances’.
Exceptional circumstances and extraordinary events
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.
The above circumstances must also satisfy additional 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
- 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.
Right to terminate
The milk supply agreement must also provide the farmer with a right to terminate the agreement within 21 days after receiving the above notice. If a farmer exercises this right to terminate:
- the termination has effect from the date at which the step-down comes into effect or (if the agreement allows) an earlier date
- the agreement must allow the farmer to rescind that termination before the end of the original 21-day period.
A processor may be subject to a civil pecuniary penalty if it unilaterally varies an agreement (including by way of a unilateral prospective step-down) other than as provided for by the agreement.
Processors should seek legal advice on whether their milk supply agreements comply with the unilateral prospective step-down provisions of the Code and, if they intend to implement a step-down, whether the requirements for a prospective step-down are satisfied.