Step down, step up: varying minimum milk prices under Milk Supply Agreements

Insights 16 September 2020

The Competition and Consumer (Industry Codes—Dairy) Regulations 2019 (Cth) (“the Dairy Code”) came into effect on 1 January 2020.

The Dairy Code is a mandatory code and provides a framework for the relationship between processors and farmers.  An overview of the Dairy Code can be found here.

As one of the big changes for the industry, the Dairy Code now places restrictions on the unilateral variation of the minimum price of milk payable under a milk supply agreement (“MSA”) by a processor.

The introduction of these restrictions as part of the Dairy Code has come about as a response to the concern for a number of years from farmers and industry groups with respect to the power imbalance between processors and farmers.

A lack of price transparency in the industry, along with MSAs which permitted unilateral variations in prices payable for milk supplied under MSAs had led to a situation where farmers were increasingly uncertain as to how much they would receive for their milk at any time.

These prohibitions were included to protect farmers from circumstances where they have entered into an MSA for the supply of milk at a particular price, however the minimum price payable for milk under that MSA has decreased.

The Dairy Code now prohibits the following being included in MSAs:

1. retrospective step downs; and

2. unilateral prospective step downs, unless the exceptional circumstances exception applies.

What is a retrospective step down?

Retrospective steps downs are variations of an MSA that reduce the minimum price payable for milk already supplied under the agreement.

Retrospective step downs are prohibited under the Dairy Code, regardless of whether they are by agreement or unilateral.  There are no exceptions to this prohibition.

An MSA which allows a retrospective step down is not Dairy Code compliant.

What is a unilateral prospective step down?

Unilateral prospective steps downs are variations of the MSA by the processor that are not by agreement with the farmer, and which reduce the minimum price for milk supplied after the variation occurs.

The only circumstances in which a processor can make a unilateral prospective step down is where exceptional circumstances exist, which are defined by the Dairy Code.

What are exceptional circumstances?

Exceptional circumstances are circumstance that:

1. are temporary;

2. involve an extraordinary event that:

(a) occurs outside of Australia;

(b) has a highly significant effect on demand, supply or cost in the dairy industry; and

(c) is not caused by a decision of the processor.

The processor must have taken all reasonable steps to prevent or limit the impact of the exceptional circumstances (where such steps can be taken) and the exceptional circumstances must make the unilateral step down unavoidable.

The Dairy Code provides examples of exceptional circumstances, including where a foreign country unexpectedly restricts the importation of dairy products or there is a trade shock involving one of Australia’s major trading partners.

It is noted that a change in the domestic supply market would not meet the definition of an exceptional circumstance. As such, milk processors who only supply to domestic markets will need to be aware that it is unlikely that a unilateral prospective step down is not available even where there may be a major upset in the domestic market supply.

In those circumstances, a processor would have to rely on agreement with the farmer to effect a prospective step down by agreement.

What must the processor do if they want to provide for a unilateral step down?

In order to vary the MSA under these provisions a processor must give notice to both the farmers affected and the ACCC, setting out the details of the exceptional circumstances, the proposed step down and the period the step down will apply.

The farmer has 21 days from the notice of the proposed unilateral prospective step down to terminate the MSA, if they wish to do so.

It is anticipated that once a notice is provided to the ACCC they will exercise their regulatory function to investigate the exceptional circumstances and provide their own view on whether the requirements of the Dairy Code have been met, and whether the proposed step down period is appropriate in the circumstances.

How can Coulter Roache assist me?

Coulter Roache can assist both processors and farmers to understand their rights and obligations under the Dairy Code.

Contact Us

If you have any queries about any of the matters raised in this article, contact Coulter Roache for a discussion about your individual circumstances.

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