Thank you Australia for fighting the good fight with our dairy farmers

CHAIR —Welcome. We are little late but we finished a little late too, so we apologise for any inconvenience caused to you. Your submission to this inquiry has been numbered 53. I invite you to make an opening statement.

Mrs Strong —Thank you. My family and I own Clover Hill Dairies at Jamberoo on the New South Wales south coast. We thank you for allowing us this opportunity to share our story. Whilst the Clover Hill Dairies submission covers a broad range of issues, I would like to focus today on my area of expertise as a farmer and comment specifically on farm gate, wholesale and retail prices.

Firstly, I would like to make the following triple-bottom-line comments. From an economic perspective, Australian farmers need and deserve to see a bright future to ensure continuing resilience. Dairy farmers who supply the fresh milk market have battled deregulation, and they won that one. They have survived 10 years of drought, they have been devastated by floods and now the industry’s future viability is threatened as a result of a marketing campaign dreamt up by the big end of town. Not surprisingly, Australian dairy farmers are waking up every morning wondering what new battle they will have to face. Worse still, this one is man-made.

From a community perspective, the community must be able to see a bright future for our industry so we can maintain and increase our ability to attract the best and the brightest. On top of this, consumers today have high expectations, and quite rightly so, that the food that they buy will be produced on farms with high standards of animal welfare and environmental protection. They want food that is produced in a way that meets or exceeds those consumer expectations. Coles’ attack on milk price is seriously threatening this consumer right. Also, farmers must be able to bridge that rural-urban divide to share stories and build relationships with consumers so that consumers will value the milk that we produce and the farmers that produce it. I believe no-one should feel that they have the right to undermine this in a blatant attempt to increase their market share.

By way of introduction, my family and I milk 400 cows three times a day at Jamberoo on the New South Wales South Coast. Whilst our farms are only two kilometres apart, the topography and the climate are very different. Clover Hill is nestled in very steep high-conservation value rainforest on the north-east face of Saddleback Mountain and it is 100 hectares. Lemon Grove Research Farm on the other hand is situated on a flood plain. It was set up to diversify our business in 2008. Not only do we milk cows at Lemon Grove Research Farm; we also conduct agronomic and pharmaceutical milk research. What our two dairy farms share in common is a high urban-rural interface. Clover Hill is part of a dairy-centric rural-residential subdivision of 12 blocks, ranging from 0.4 to 40 hectares. Lemon Grove is located directly adjacent to the Jamberoo township. So not only do the thousand people who live in the village see our farming practices every day, so too do the tens of thousands of people who drive by on the highway each year.

In 2000, prior to deregulation, our business was a one-man operation. Today we are proud to say that we employ 10 people. We graze twice the industry average of cows per hectare to provide five times the industry average of milk per hectare, with a water-use efficiency of 10 times the industry average per hectare, 35 times the industry average of water use efficiency per litre of milk produced, and our cows are believed to be the highest producing cows on pasture in the world. All of this on just 110 hectares.

Our strategy has been to increase milk production using fewer resources, generating less waste and reusing the waste that we do generate, and it works. We have been able to fence of 50 per cent of the home farm for conservation purposes. Today, over 80 per cent of the prime agricultural land in our region is owned by rural lifestylers. We have seen this as an opportunity. We now lease over 75 per cent of the land we farm on. Our business can be successful in this environment because we are committed to building cross-community partnerships and cross-border partnerships to secure our social licence to operate and our right to farm. Beyond the farm gate, we are highly committed to building lifelong relationships between rural producers and consumers. I am lucky enough to chair a network of young people called Picture You in Agriculture With the support of our funding partners, we deliver self-managed events and activities that focus on youth, careers, the environment and the arts, and link all of these back to agriculture.

Innovative programs like the Archibull Prize use creative arts and multimedia to celebrate the role that Australian farmers are playing in feeding the world. The average person does not even consider the resources required to keep Sydney well fed, let alone six million people. Our programs tell this story. They build a bridge for farmers and communities to reach out to each other to share stories and improve understanding and work through potential issues together. Our programs also help build the capacity, which is so important, of young rural people to farm with resilience and confidence. Most importantly, our programs create the necessary sense of urgency in the community. Six billion people will soon become nine billion people, and the next generation is going to have to decide how to feed and house all of these people on a declining natural resource base. We believe our programs help to provide our children with the tools to make the best choices.

We are very proud to say that Clover Hill Dairies is playing our role, like all Australian farmers, in feeding 60 million people. We are proud to say that we are playing our role in assuring Australians that agriculture is alive and well and it is a great career choice for their children. Excitingly, the programs that my youth group are working with have proved that young people do want to work in our industry. As I said, our farm employs 10 people, and the average age of our team is 25.

Farmers are competing with other industries to attract the best and the brightest, and this pricing war is directly undermining our efforts in this area. What young people want to have a career in an industry that’s future viability is threatened, as I said earlier, as a result of a marketing campaign dreamt up by the big end of town? This type of pricing war is detrimental to the future growth and sustainability of not only the domestic milk industry but also the export trade as it potentially undermines the very foundations of our industry. This is capital investment and human resources.

Sadly, at the moment, it just flies in the face of common sense. Demand for dairy products globally has never been higher and it is increasing. The dairy industry should be encouraged and it should be ready, willing and able to ride this wave. Australian dairy farmers will increase production to meet this demand if the pricing signals are right. Increasing production requires long-term capital investment, innovative ideas and practices and highly skilled labour.

Beyond the farm gate, we believe the milk price war is short-term gain for price conscious customers and Coles market share and it is long-term pain for Australian consumers and the wider international communities that Australian farmer supply. The unsustainable pricing of house brand milk leads to an inevitable removal of branded products from supermarket shelves. Eliminating competition means choice for consumers becomes a thing of the past. Consumers will be corralled towards house branded products sourced at the cheapest price and then sold with maximum margins. Competition is critical in any sustainable market. The government should not and must not allow milk and dairy farmers who produce it to be collateral damage in a war between retailing giants.

We believe the answers to this problem are relatively simple. We must have well-informed policy and decision makers and consumers making wise choices. We must have farm production systems that are ethically grounded, scientifically verified and economically profitable. We must have markets and pricing that reflect both the commodity value of farm produce as well as its environmental, social and animal wellbeing values. Continuation of this milk price war forces farmers to consider economics only. Animals, the landscape, the environment and people and communities will suffer. This is certainly not a world where my farm team want to farm.

In summary, we ask you for true leadership by our policymakers and decision makers. We need our policymakers to ensure that competition and fairness are driven at a national level. There must be a constant and proactive focus on improving competition within Australia’s supermarket sector. We ask for fair rules and we ask for fair conduct. We need our regulators to enforce their rules and, where the regulatory structures are deemed insufficient to deal with these issues, to suggest changes. We ask for genuine price transparency along the supply chain and an open dialogue between major retail supermarkets and farm producers on regional supply and demand issues.

In this way, we will be able to have strategies that will ensure that affordable, nutritious and sustainable supplies of fresh milk, drinking milk, can be delivered daily to consumers across Australia through a range of retail outlets. Consumers just want fair trade milk in their fair trade coffee.

Neil Moss, our farm consultant, can give you a broader perspective on what is happening in the wider farming community.

Dr Moss 13:54:31—I will speak briefly and add to what Lynne has had to say. I am a veterinarian and a farm consultant working principally in the dairy industry. I have been working with dairy farm businesses to improve productivity for over 10 years in this role. Prior to that I had a role in clinical and private veterinary research and veterinary practice, in both university and private practices throughout New South Wales. I now work with a very diverse range of dairy businesses. They vary in size from 120 to 1,200 cows. They are spread geographically, from Wauchope to Bega, from the Illawarra to Dubbo, Wagga Wagga and the Hunter Valley. My clients supply milk to Norco, DFMC, National Foods, Bega Cheese, Hastings Co-operative and Fonterra.

Our business employs four other professional consultants, two research scientists and three administrative staff. Our business is intimately linked to the dairy industry as well. Our broader client base stretches from South Australia through the Western District, Gippsland and northern irrigation areas of Victoria and to Tasmania and southern Queensland. We consult the farms that supply milk for both the fresh and the manufacturing milk markets. We have consulted in the USA, New Zealand, China, South-East Asia and South America. I am here today to provide some technical support for Lynne Strong of Clover Hill Dairies. It is a farm that I have been lucky enough to be associated with for over 10 years.

From my perspective, the recent decision by Coles and subsequent competitive responses from other retailers is a major concern. Overwhelmingly, this is the burning issue of conversation with our clients on farm—it occupies up to half of our consultation time at the moment. The market aggression that we are seeing is further eroding confidence in the industry, and there is little doubt in the minds of my clients that the farm gate price must eventually be adversely impacted. We are already seeing evidence of this with current negotiations between farmers and milk processors. This will affect farming businesses and families in many ways. Farm gate prices are already falling for those supplying drinking milk. I have some additional literature here to supply to the committee with some evidence of that.

CHAIR —If you would like to table the documents, please ask.

Dr Moss —I would like permission to table the documents.

CHAIR —Yes, the committee agrees to that. Thank you, Dr Moss.

Dr Moss —This is a price announcement from 23 July 2010 generally circulated to the supply base of DFMC. Further price drops are programmed into existing contracts, and these can be seen in the documents tabled.

In addition, tier 1 volume allocations have been dramatically cut in Queensland and are likely to be reduced for many dairy farmers in New South Wales as well. Recent returns to profit on farms following many years of drought are set to be reversed. Erosion of profitability will encourage many to exit the industry. We are already seeing this decision, in combination with the price and contract deliberations between DFMC and National Foods, erode farmer confidence. Farmers are contemplating exits in response to this. The ongoing stress this is causing is a major contributing factor to the number of my clients considering exit from the industry in the very near future. In the last month I have been involved in development of exit strategies with two highly viable progressive farmers. They are lifetime career farmers. They are not ready to move on, but it is getting to them.

The exit of farmers from the industry, particularly those in proximity to major centres of the milk consumption, will eventually force up the price of milk. Milk will need to be sourced from elsewhere to cover the deficits that will eventuate. This is already occurring in late summer months, autumn and early winter in many regions. Climate variability and events such as the Queensland floods have exacerbated this situation. As farmers and milk production leave these areas, supporting infrastructure and services will decline, processing capacity will be reduced as volumes for factories decline, rendering them unprofitable.

We will see more situations such as we did in Queensland were milk during the floods was trucked in bulk to Sydney then trucked back in cartons for sale in Queensland markets. This will greatly add to the carbon footprint of Australian milk production and consumption as milk is forced to travel large distances from cows to processors and on to retailers for further sale. Major supermarkets in northern parts of New South Wales and Queensland will be forced to ship liquid milk all the way from Victoria rather than source it locally, as local supply is further curtailed through unsustainable supermarket pricing.

Rural landscapes and the environment will suffer. A large proportion of Landcare and on-farm environmental projects are funded by farmers. As profits and margins are eroded, this often discretionary spending with long-term benefits to all will need to be slashed to allow short-term survival. Animal welfare may also suffer as farmers are forced to slash spending on animal health, move towards riskier feeding practices and reduce spending on essential repairs and maintenance on things like laneways and tracks that allow cows to move around farms in safety and comfort. Human safety and employment may suffer as farmers are forced to reduce employed labour and take on even longer hours themselves to maintain profitability.

I have many clients at the moment that work over 80 to 100 hours a week. This is only going to be worsened as more labour is forced to be let go while these farmers take on the load to remain profitable. Jobs will be lost on and off farm. Clover Hill Dairies is a shining example of how a sustainable milk price can allow businesses on the peri-urban fringe to prosper. Animal wellbeing, the environment and staff and owners are all able to be ethically and sustainably managed while being on the very doorstep of Sydney. The future of this and many other model agricultural enterprises is being placed at serious risk by the behaviour of our major retailers. Thank you.

CHAIR —Thank you. I will ask Senator Ryan to begin because he has to catch a flight to Melbourne.

Senator RYAN —My apologies in advance for leaving after my questioning. I do not mean to be rude, but I have to get that flight. Dr Moss, I want to clarify a point you raised there, where you expressed a concern about milk being trucked up from, say, Victoria—it would most likely be trucked up—and the loss of local dairy farming. I appreciate that dairy has already been through a very difficult adjustment phase. The economy never stops adjusting. Are you suggesting—and please say if you are not; I do not mean to mischaracterise you—that we should be looking at the pricing of milk to maintain dairy farming in every area of Australia where it is currently being undertaken?

Dr Moss —I think that we need to look at the long-term costs of trucking milk and weigh that in context with those issues. If we take a short-term approach to things and remove industries now from local production and then move to shipping, in time we will find that those costs of transport—the direct rises in fuel costs in addition to the carbon footprint associated with shipping that milk those long distances—are going to be factors that we need to consider with respect to maintaining those businesses.

Senator RYAN —I am happy for the market to have different labels about carbon footprints, but I have to admit I am not going to approach competition policy from a carbon footprint point of view. That is something for producers to work out. I take your point. I am not going to argue with you, other than to say that I take a long-term view and have a different answer. The long-term view does not necessarily mean maintaining current activity in every place where it is currently happening.

Dr Moss —I think we have seen that arise to a degree already. With respect to long-term availability of milk supply in proximity to where it is being produced, for liquid milk, as we see increased pressure on our manufacturing milk with increased demand from overseas, over time we will find that that demand for locally produced supply will return. The issue is whether or not you will be able to re-establish those businesses in future years once they have gone from those environments.

I have many clients at the moment that work over 80 to 100 hours a week. This is only going to be worsened as more labour is forced to be let go while these farmers take on the load to remain profitable. Jobs will be lost on and off farm. Clover Hill Dairies is a shining example of how a sustainable milk price can allow businesses on the peri-urban fringe to prosper. Animal wellbeing, the environment and staff and owners are all able to be ethically and sustainably managed while being on the very doorstep of Sydney. The future of this and many other model agricultural enterprises is being placed at serious risk by the behaviour of our major retailers. Thank you.

CHAIR —Thank you. I will ask Senator Ryan to begin because he has to catch a flight to Melbourne.

Senator RYAN —My apologies in advance for leaving after my questioning. I do not mean to be rude, but I have to get that flight. Dr Moss, I want to clarify a point you raised there, where you expressed a concern about milk being trucked up from, say, Victoria—it would most likely be trucked up—and the loss of local dairy farming. I appreciate that dairy has already been through a very difficult adjustment phase. The economy never stops adjusting. Are you suggesting—and please say if you are not; I do not mean to mischaracterise you—that we should be looking at the pricing of milk to maintain dairy farming in every area of Australia where it is currently being undertaken?

Dr Moss —I think that we need to look at the long-term costs of trucking milk and weigh that in context with those issues. If we take a short-term approach to things and remove industries now from local production and then move to shipping, in time we will find that those costs of transport—the direct rises in fuel costs in addition to the carbon footprint associated with shipping that milk those long distances—are going to be factors that we need to consider with respect to maintaining those businesses.

Senator RYAN —I am happy for the market to have different labels about carbon footprints, but I have to admit I am not going to approach competition policy from a carbon footprint point of view. That is something for producers to work out. I take your point. I am not going to argue with you, other than to say that I take a long-term view and have a different answer. The long-term view does not necessarily mean maintaining current activity in every place where it is currently happening.

Dr Moss —I think we have seen that arise to a degree already. With respect to long-term availability of milk supply in proximity to where it is being produced, for liquid milk, as we see increased pressure on our manufacturing milk with increased demand from overseas, over time we will find that that demand for locally produced supply will return. The issue is whether or not you will be able to re-establish those businesses in future years once they have gone from those environments.

Senator RYAN —We heard from a witness on Tuesday that, in very broad terms, the price of milk in Victoria effectively reflects the export price, given the huge volumes from my home state that get sent overseas, and that up the eastern seaboard to a particular point the price, in very rough terms, reflects the Victorian price plus the cost of freight. If that is the cost of milk then, knowing that it is cheaper, effectively, the further south you go, I am yet to be convinced that what Coles are doing, followed by Woolworths, Aldi and others, is automatically going to hit the farm gate in the contract price being paid. I take the point about the tier 1 and tier 2 pricing and how that can flow through, but that is effectively a product of the processors’ contracts with dairy farmers.

Dr Moss —Yes. I think that those prices in northern zones also reflect the additional costs of production associated with producing year-round at a flat line—

Senator RYAN —Security.

Dr Moss —And security around productivity. There are certain features of the southern market that do not allow that to happen either, in particular its reliance at the moment on Mediterranean rainfall patterns associated with winter and spring rain. Once again, there are times of the year in southern markets where the costs of production are extremely high. As we go forward, the ability to produce that milk locally will be very important, because the production costs in the south will come under increasing pressure as well.

Senator RYAN —Potentially, although I suppose that is a contestable issue.

Dr Moss —Absolutely.

Senator RYAN —As a general rule I do not have a fear of goods being moved around. I enjoy fresh produce that I know is not grown anywhere in my home state. Mrs Strong, it will not surprise you to hear that the challenge for the witnesses and for the committee is, effectively, to nail down something that can be done, and we have different views. We have had people talking about reintroducing the old section 49 of the Trade Practices Act. That will not necessarily help farmers at all, quite frankly; that is just going to help independent retailers get access to milk at the same price that the big chains do. Just playing devil’s advocate, as is my natural place, what specifically are you looking at in terms of a government or legislative response? Someone has proposed a floor price, which would not surprise you, but it is not something that I particularly support. Someone went so far as to propose re-regulation. Others have proposed transparency in the pricing arrangements between farmers, processors and retailers. What do you think could be done to address your concerns?

Mrs Strong —From a personal perspective, if you asked me for one key thing, I as a farmer would like to see transparency in the supply chain. At present, the tendering process for milk for Woolworths and Coles is basically a race to the bottom. The processors are just putting in a price, as low as they think they possibly can go. That obviously has to flow down the chain. Because of this lack of transparency in and focus on the tendering process so they can get product on the shelf, there are no supply and demand signals back to the farmer, and farmers, especially dairy farmers, need to make—

Senator RYAN —What do you mean by ‘supply and demand signals’ in that sense?

Mrs Strong —For example, two years ago, we were getting paid 5c a litre extra to produce more milk. As you can see, I have a document that I will tender later on, with your permission—also in my submission. We were promised we would be told the milk price going forward for 2010-11 in December. Because National Foods and Dairy Farmers, who I supply, cannot come to an agreement, it is likely that I will be given a price on 15 June and made to sign a contract by 30 June. So you have farmers who have to make a decision about million dollar businesses in a two-week time frame. This is exacerbated by the fact that nobody knows what is going on in the supply chain, and that has never been more highlighted: Coles is saying this, National Foods is saying this and the farmers are saying this.

Senator RYAN —We do not do that in other sectors of the economy, and a previous witness outlined, as did one of my colleagues at the table, that the reason it should be done here is that it is a perishable product. That makes it unique. So, because we do not do it elsewhere, it would be a very big step to force the exposure of private, contractual arrangements.

What I do not understand is this: even if there were transparency, how does that stop National Foods or whoever saying to a farmer on 15 June, ‘Here’s your price; we want the contract back by 30 June’? Transparency is only the supply of information—unless we were after a regulated approach to the relationships between processors and farmers or between retailers and processors. I do not want people to be disappointed by transparency—

Mrs Strong —It would allow us the knowledge bank to be able to actually go in and bargain competitively, for instance. In the situation that we have at the moment, National Foods are saying, ‘We have a two per cent margin.’ It makes it very difficult then, in a collective bargaining situation, to turn around and say, ‘Well, that’s not true.’ We have no idea whether that type of thing is true.

Senator HEFFERNAN —They could be pulling your leg and you would never know it.

Mrs Strong —We would not have a clue, yet—

Senator RYAN —I suppose a lot of other suppliers to major corporates do not have that information either.

Mrs Strong —My understanding is that, working with boutique producers, for example, they go in, they put their books on the table and Woolworths put their books on the table. This is very common with a supplier to Woolworths or a supplier direct to Coles arrangement. They just put their books on the table. ‘This is what I need to survive; this is what I need to make my business sustainable.’

Senator RYAN —None of that would stop Coles selling milk at a dollar a litre. One of the points you mentioned was that that is inevitably going to put pressure on the farm gate. I do not know that anything you have proposed there would stop Coles selling milk for a dollar a litre.

Mrs Strong —At least it tells us who is actually benefiting from the supply chain. Coles is making many statements that say, ‘Nobody is going to lose,’ but we do not actually know if anybody is losing here—

Senator HEFFERNAN —You do not know what the rest of the market is doing.

Mrs Strong —We have no idea what the rest of the market is doing.

Senator HEFFERNAN —It is the same in South Australia with the new wheat conglomerate. They know what is in storage everywhere but the other buyers and sellers do not get access to that information; therefore it kills them.

Mrs Strong —It does.

Dr Moss —One of the other things, which we often miss with dairy farming, is that the time frames for business planning are so long. As Lynne previously said we were given some very strong price signals three years ago to grow business with incentives from all the milk companies to produce new milk. That led to a very large wave of investment and leveraging to do that because there were strong signals in all markets that milk was growing to say, ‘Here is additional money for you to produce more milk over and above the milk that you produced last year.’ Those investment decisions have three, five, 10 year turnaround times to get returns. On top of that the actual programming of decisions that we make with herd management and milk production in the short term have minimum 12-month turnarounds. But having no information that we can actually rely on it makes business development in this market next to impossible.

Senator RYAN —I take your point. I suppose the hurdle I have to leap is why dairy as opposed to the many other industries that have the same constraints. You have explained your perspective on that. I have one last question. I asked this of National Foods yesterday because it struck me as odd that they were complaining about this and yet they supply the product. We have processors complaining about the damage that generic milks, private label milks discounted, are doing to the industry, to you as farmers—they do not seem to mention their own interests but we know that they are there—yet the product is only there because they constantly supply it. The processors are not compelled to supply milk to Coles for less than $2 for two litres.

Mrs Strong —Who is their other market? We have National Foods with a billion litres, if they do not supply Coles and they do not supply Woolworths, who are they going to sell that billion litres to? You do not turn round overnight and become an exporter. That takes major capital investment.

Dr Moss —I would like to table another document. This is an analysis from Fat Prophets on Wesfarmers and it gives an interesting external perspective.

CHAIR —We have had a request to table this document and we agree.

Dr Moss —It is interesting to get an external perspective from a stock market analysis company.

Senator HEFFERNAN —If anyone intimidates you, other than this bloke here and he is not very intimidating, because of evidence you give today—and I have an instance of a dairy farmer who is a supplier to one of the three processors who has been told they will no longer take his calls and also a milk vendor—will you let us know?

Senator RYAN —If anyone does that, that would be a very serious issue for the whole Senate which I assure you the Senate itself would take very seriously, completely across any consideration of issues whatsoever.

CHAIR —Threatening a witness to a Senate inquiry is a breach of privilege and the Senate can take very strong action against any person who does that. If you are threatened then please let the secretary know and we will report the matter to the Privileges Committee and the individuals concerned will have to suffer the consequences of the law. It is totally illegal to do that.

Dr Moss —Thank you. I will read this short section:

Senator RYAN —If it is so critical to Coles or Woolworths, it is a two-way street. They have to have that stuff in their supermarket, otherwise people will walk over the road to Woolworths, Aldi, IGA or anyone else. There are not many people that can supply the volumes of milk that Coles and Woolworths need.

Senator HEFFERNAN —It is consolidation of the market, both the processing and the retail.

Senator RYAN —Just let me finish the point. It has been put to me that the reason suppliers do this is: ‘If we don’t do it, someone else will.’

Mrs Strong —Can I as a farmer make a comment on that? We are talking about a perishable product. We are talking about animal well-being here. So National Foods says, ‘Okay. We’re not supplying you,’ but they have got nowhere else for that milk to go. The first day it goes into Sydney Harbour. The next day they say to their farmers, ‘We’re not getting paid, so we’re not paying you.’ But every day we get up three times a day and milk cows straight up for animal welfare. What do we say to the cows? Where do we tip our milk until Coles and Woolworths—

Senator RYAN —I think the farmers in my home state when I was growing up tipped milk out because of a problem with the milk market there.

Mrs Strong —I can understand that, but it is different now. We produce five times the amount of milk we produced in 2000. Our cows are under pressure. I am not going to do that. I have been approached to do that in the past. I will not do that to the people who get up every day and work for me. I will not do it to my cows.

Senator HURLEY —I would like to continue in that vein. You say on page 8 of your submission:

Can you explain to me why that situation has come up; why are you forced to do that?

Mrs Strong —In the marketplace in which we operate, the major processors are major clients of each other and therefore they know each other’s pricing structures. National Foods has traditionally been, for example, a processor who prefers not to have suppliers and to trade on the secondary milk market. They have found themselves in a situation because of the purchase they made of Dairy Farmers company. To get it over the line, they also had to look after Dairy Farmers shareholders, who were the farmers. Dairy Farmers worked very hard to make sure those shareholders were looked after, so National Foods found themselves in a situation where, realistically, they have a large amount of suppliers that they possibly would prefer not to have.

National Foods traditionally have been a major client of most of the major milk processors. Each of these processors obviously wants to protect their major client. So while I cannot table a document that quantitatively says this is happening, I know I personally have made approaches to be a National Foods direct supplier. I cannot get a phone call back. I have made approaches to Bega Cheese, I have made approaches to Parmalat and, without going any further, it is impossible. I cannot move, yet I am sitting 90 minutes from Sydney and we are the national Landcare primary producer of the year. One would think that people would want our milk. It is just impossible; I cannot move. I am told that if I move there will be no going back.

Senator HURLEY —This is an agreement amongst processors in a sense.

Mrs Strong —It would appear that way.

Senator HEFFERNAN —It is market power. This is the dumb ACCC.

Senator HURLEY —I am actually asking the witness.

Dr Moss —This is market segmentation. You look at Parmalat. Parmalat have started to strategically acquire clients for their Sydney base. At the moment, these have been very strategically acquired in the Hunter Valley and on the mid-north coast of New South Wales. You look from the outside and say, ‘There are probably sane reasons for them to be going down that path’ because that would then allow them to bring market to Sydney or freight it to southern Queensland in the event that they were short there. To my knowledge—and I am in touch with a fair swag of the production south of Sydney—there have been no approaches made, particularly in the Shoalhaven and Illawarra areas, by Parmalat directly to farms.

Similarly with Bega and National, they have been mutual clients of each other and they have milk-sharing arrangements that account for some overlap of clients. For logistic reasons some of the Bega supplies in the Gerringong area end up going to Sydney and some of the National milk produced in areas such as Bodalla, which is further south, will find its way down to Bega. From what I have seen in the past, there has been very little crossover of clients between those two suppliers. There has been some. But the experience I have had with my clients in the Illawarra is that it has been very difficult for them to progress too far down the line towards moving towards supplying Bega at this stage. That may change as Bega goes through some changes in coming years. It will remain to be seen.

There are also some smaller players such as South Coast Milk and those supplying Country Valley Milk at Camden. Again those markets are extremely small and have at this stage not been open to additional suppliers. So realistically the situation is, if you are in the Illawarra, you can supply National direct and they are the only people that have done that in the past, they have not opened their books to ex-DFMC members—

Senator HURLEY —The farmers supply National direct?

Mrs Strong —They get more per litre.

Dr Moss —They get different pricing structures.

Mrs Strong —Which is usually higher.

Dr Moss —A lot of this goes back to a split that occurred about the time of deregulation and there were some fairly solid divisions between people have wanted to go one way and people who went the other. A historical division evolved between those that supplied National and those that wanted to continue to supply the Dairy Farmers Co-operative. That division has remained and really has not been recrossed since then in many instances.

Mrs Strong —And the fact that dairy farmers are in the dispute resolution court and are very clearly saying that National Foods want to widen the gap between their direct suppliers and DFMC suppliers and this is contrary to the milk supply arrangement that was instigated when the two companies came together is a clear example that that is occurring and that DFMC suppliers are being disadvantaged.

Dr Moss —Over and above that, and I am not speaking of DFMC specifically, we have had a number of our clients who have been told, and this is right through the industry, ‘If you leave us you will not supply us again.’ One of the things deregulation was supposed to bring us was the ability to move freely amongst—

Senator HEFFERNAN —So that could be described as fairly predatory. Yet the ACCC in the little social wine group they involve themselves in cannot see that.

Dr Moss —You will never see any of this written down, but these are conversations that farmers have had with people up the chain, the companies. They are real conversations.

Senator XENOPHON —A supplementary question to Senator Hurley’s. Can you going to more detail publicly about the sort of conversations you have heard?

Dr Moss —They have approached other processors to pick them up and some market has been agreed to. In doing that they have contacted their current processors and said, ‘We are contemplating leaving,’ and basically have been told, ‘If that happens you will not be welcome back.’

CHAIR —Does that matter if you want a different processor?

Dr Moss —Absolutely, because it restricts the ability of that farm to say in a free trading environment, ‘I want to go to where I can get my best price and I want to have the freedom and to do that provided they have capacity to take my supply,’ which is an economic constraint, rather than a wall being put up to say, ‘If you go don’t bother coming back.’

CHAIR —Is that an empty threat? If all the farmers say, ‘We will choose our processor according to price,’ then maybe the game changes, the power is then with the farmers and the processors who want the milk have to offer more money.

Senator HEFFERNAN —It would be fair to say if that is the case if I am the processor who told you to go to hell if you change and I know that you are going off and there is only one other in the area and I occasionally have a glass of wine with him, he will know that he can screw you knowing that I have knocked you off. I mean, duh.

Dr Moss —You cannot go back.

CHAIR —Are there too few processors for there to be a free market?

Senator HURLEY —It is more that the processors are not competitive enough, that it is not a competitive market.

Mrs Strong —That is a fair assessment.

Senator HEFFERNAN —As plain as the nose on your face.

Dr Moss —That flows on to the supermarkets as well. ‘If you take National milk and do not sell it at Coles, don’t bother coming back.’

Senator HEFFERNAN —To take you to another arm of this: I am a milk vendor with 200 or 300 clients. I am contracted to a processor, one of the three majors. Obviously I negotiate a price. The local baker decides it is cheaper just to go down in the morning in the ute to get the milk from Coles. Does that not allow this behaviour to crib on market share by putting milk vendors out of business? Aren’t they pinching more market share? As I understand it, they are now prepared to deliver to the bloke who used to take the ute down to Coles, to save him the trip to Coles. Is that something which you blokes have got your heads around?

Mrs Strong —Totally. It is a market share issue. It is all they want—

Senator HEFFERNAN —We had Treasury here this morning where you are now sitting. They just walked around in circles all morning with meaningless mumbo-jumbo—they looked like cadets. Why don’t they get it? Yet you have a galoot here called Stephen King, who is a professor, who says, ‘What are you complaining about? If Coles drops the price of milk, you’ll sell more milk; therefore, dairy farmers can milk more cows.’ How illogical is this dead head?

Mrs Strong —A lot of the time we are forgetting that private label milk is sold into Coles and Woolworths at a very low price with the only aim being getting the branded product on the shelf and getting their product on the shelf. That is the only way they can do it. It has been that way traditionally. It is the requirement. ‘You have to sell us the private label at rock bottom.’ That is why this tender process is a race to the bottom. They need it to be that low so that they can create the differentiation. The more you draw profit away from the brand and give it to the private label the more you are destroying the processors’ ability to share profits with the farmers.

Senator HEFFERNAN —Surely this is all about Coles retrieving market share from Woolworths—they both have too much market share. Do you think we should all go to the farewell party to Mr McLeod when he gets his $38 million and goes back to live in his castle in Scotland? That is what it is all about. It is market share, repositioning Coles in the market in case Tesco or someone else wants to buy it. I mean, God help us!

Mrs Strong —With the committee’s permission, I can tender some documents which expand on that particular issue within the milk supply arrangements between processors. It clearly states that what was promised in deregulation has not been delivered. Farmers are virtually stuck where they first put their hats in the ring.

Senator HEFFERNAN —I would be happy to see them tabled.

CHAIR —Yes.

Senator HEFFERNAN —Don’t forget, if anyone intimidates you, let us know.

Senator XENOPHON —Dr Moss, you consult more broadly or you give advice on dairying overseas as well—is that correct?

Dr Moss —My business partner does. I have very little work overseas myself.

Senator XENOPHON —How do we compare with other countries? It seems from the limited information we have that New Zealand dairy farmers are in relatively much better shape than we are. What impact does that have on the market, on consumers and on the industry generally? Concerning the argument by Professor King and by Coles that this will not affect the chain, your evidence is that the industry is already working on very tight margins as it is.

Dr Moss —That is correct.

Senator HEFFERNAN —Do you think it is possible that Fonterra, with the rebate to their dairy farmers in New Zealand, are gaining a bit of that out of Australia?

Dr Moss —It is a listed company that generates profits from Australian business, so some of that must go back to their shareholders.

Senator HEFFERNAN —And the rebate to the New Zealand farmers, who own the joint.

Dr Moss —The world is full of fundamentally different dairy industries. If you look at Canada, for example, you have got an industry there where milk prices are extremely high but extremely regulated. You have a very strong quota system that still exists over there. Farmers have to buy the right to supply milk and those quotas are extraordinarily expensive.

Senator XENOPHON —Milk is much more expensive there?

Dr Moss —Absolutely. Lynne has had family spend time in Canada and there are a number of 40-, 60- or 80-cow farms over there that are completely viable. It is a very different situation to that in Australia. We just cannot function like that. If you look at New Zealand, the market is completely different as well.

CHAIR —Would you give us some details on New Zealand because we are interested in that comparison.

Dr Moss —It is a large market that is predominantly manufacturing in orientation. I would estimate that 90 per cent of their milk is not consumed in New Zealand; it is exported. Because of the climate in New Zealand—it is a very Mediterranean style climate in that country characterised strongly by winter rainfall and spring rainfall—their production is extremely seasonal and highly linked to grass. At the moment they are definitely beneficiaries of a world export market. The flip side to that is that when world prices have been poor, such as during the global financial crisis, the New Zealand market was quite exposed and there was significant trouble within that market, as there was in the southern parts of our own manufacturing market. During that time, a number of our year-round suppliers were engaged in contracts that had been written well in advance. They were actually performing quite well in New South Wales and southern Queensland because they had decent long-term contract arrangements at that time that provided sustainable milk prices for those businesses to function and perform well. If we look at the South American market, which is a developing market, it has got quite a strong local base of consumption but it also has an evolving export base. We can supply, if required, on notice some more details on those markets to the committee.

CHAIR —We would actually appreciate that because we want to be able to make comparisons. The Canadian story is very interesting. The New Zealand story is interesting.

Senator XENOPHON —Finally, the argument of Professor King and perhaps of Coles as well is: ‘There is a strong export market. What are you worried about? Fresh milk is only a small part of it.’ The argument of Mr Brokenshire, a South Australian member of parliament and a dairy farmer, was that you need that fresh milk market to underpin your other activities. Who is right on that?

Dr Moss —There are two markets in Australia. It is almost like comparing wool and beef. We have got the southern market, which is our commodity market, that is performing will at the moment. Luckily that is allowing a very high cow value at the moment, which is actually underpinning some of the financial difficulties in northern Australia because of the sale of cattle and good prices for cows. If you look at what is happening in New South Wales and Queensland, over the last five years we have had a progressive dismantling of our secondary processing capacity. Milk surplus to drinking milk requirements could previously be processed within those states predominantly at plants in Hexham and in southern Queensland. As that has been progressively removed, our year-round milk-producing businesses, which are completely separate to the Victorian business, are now faced with a situation where, if they produce milk over and above the drinking requirements in those markets they are in, they are exposed to the price of milk in Victoria less the cost of freight, as opposed to what Senator Ryan was referring to before where we were actually given prices that were the cost of milk produced in Victoria plus the cost of freight. We have effectively moved back to quota systems being regulated through our tier 1 and tier 2 milk systems. If we are producing above tier 1 milk in spring in particular, previously we would have been working our business on getting 45c, 50c or 55c for that milk depending on where you are, but it is now effectively being dumped back into Victoria at prices just below 20c.

Mrs Strong —And then you are assuming that those processors, whose manufacturing plants are tailored to supplying the export market, would then decide that they wanted to play games with Coles and Woolworths. If you were getting much more money for your export milk, why would you then want to come back into an anticompetitive market and play games in Australia; move up to Sydney, obviously, where the consumer is; and set up liquid milk processing plants? I certainly would not move into that market if I were Murray Goulburn. This is the issue. We are assuming, ‘All right; all the fresh milk producers fall over. Okay; we will just get our milk from Victoria.’ But that would depend on those major processors and whether they want to get involved in a market that is sending those fresh milk market producers broke. I certainly would not. I do not think you can assume that that would happen. I think that would be a very dangerous road to travel.

CHAIR —Where do you see the dairy industry in 10 years time?

Mrs Strong —I believe that the Australian dairy industry has a great deal to offer, both export wise and domestically. The health, wealth and happiness of Australians depend on it. Australian consumers should be able to have fresh, affordable, nutritious milk supplied directly from farmers like ours who are only 90 minutes from Sydney. You could not ask for a more perfect place to dairy. And farmers in our region have shown that they can actually cope with the fact that over 80 per cent of the prime agricultural land is owned by rural lifestylers. We can adapt. We can supply that fresh food market. We should be able to do that, because we do a great job at it. But to do that we have to operate in a fair market.

Senator HEFFERNAN —So just coming to terms with what has happened in Australia—which seems to be what Tesco, Sainsbury’s and others have just done in the UK. These guys have come out here to teach Australia how to do what has happened and be paid a substantial amount more money in Australia than they got back there in England. Part of the commotion that caused, the inquiry found, was that major supermarket chains were passing on excessive risks and unexpected costs to their suppliers. You could take this on notice if you like: could you provide any evidence of that here, given that the Tesco model is what is being tried in Australia under the cover of increasing export prices? Everyone says, ‘It’s A-OK, brother; the cows won’t go to the saleyards.’ The bill that they have proposed will pay a minimum price. But one of the problems they came across in England was that the suppliers copped the added costs of advertising, which are not in the contracts, and all the add-on bits were passed back to the suppliers. Do you have evidence of that here—that you get unexpected costs? Anyhow, take it on notice. And could I refer you to page 37 of today’s briefing pack.

CHAIR —I am sorry but we are well over time, we have another witness and we are going to lose our quorum in 20 minutes.

Mrs Strong —Thank you so much for giving us this opportunity.

Dr Moss —Thank you.

CHAIR —Thank you very much indeed for your evidence.

[2.39 pm]