In 2019, in response to the Dairy Inquiry final report recommendations, the Australian Government announced the introduction of a mandatory dairy code of conduct.
Recommendation 8 of the Dairy Inquiry outlined the need for a mandatory code, highlighting the inherent imbalance in bargaining powers between the processors and dairy farmers and the unequal availability of information between them.
The Competition and Consumer (Industry Codes—Dairy) Regulations 2019 (Cth) (“the Dairy Code”) came into effect on 1 January 2020. The aims of the Dairy Code are to improve transparency in the dairy industry, create certainty for processors and farmers alike in their contractual relationships and set a minimum standards of conduct for all parties.
The Dairy Code places a number of obligations on processors and farmers, including to deal in good faith, to have written MSAs which are Dairy Code compliant, to publish standard forms of MSAs and to meet reporting and record keeping obligations. The Dairy Code largely places obligations on processors, though famers do have some important obligations to meet.
We have summarised some of the main obligations below, but this list is not exhaustive. You should take the time to ensure you understand your obligations under the Dairy Code and seek legal advice where required.
Breaches of any of these obligations can lead to penalties being imposed on the breaching party or parties. As such, it is important that processors and farmers alike are aware of how the Dairy Code requirements may impact them and how to ensure they are Dairy Code complaint.
The Dairy Code is mandatory, and parties cannot agree to opt out. If you are a ‘processor’ or a ‘farmer’ you are subject to the operation of the Dairy Code, as it applies to you.
A ‘farmer’ is defined as any person (or corporation) that produces, or may produce, milk.
A ‘processor’ is defined as any corporation that purchases, or may purchase, milk from farmers, whether or not that corporation processes the milk. This extended definition of the term ‘processor’ ensures that the mandatory code also covers those cooperatives and milk brokers who purchase milk, but do not process it.
Small business entities exempt
The Dairy Code does not apply to processors who are ‘small business entities’, save that the small business entity is required to comply with the obligation to deal in good faith.
A processor is a small business entity for a financial year if it:
1. is a sole trader, partnership, company or trust;
2. operates a business for all or part of an income year; and
3. has an aggregate turnover of less than $10 million for that income year.
The Dairy Code came into effect on 1 January 2020, however has a twelve month transition period.
All MSAs entered into or varied after 1 January 2020 are required to be Dairy Code compliant.
If you entered into an MSA prior to 1 January 2020, you can take advantage of the transition period. The transition period in relation to an individual MSA, ends on the earlier of:
1. The date the agreement is varied after 1 January 2020 (except where the variation is only to increase a minimum price for milk); or
2. 31 December 2020.
If the transition period applies, the parties to the MSA are not required to comply with the requirements of the Dairy Code in relation to that MSA until the transition period comes to an end.
The Dairy Code sets out mandatory content for an MSA. An MSA may include other terms, in addition to those required by the Dairy Code, provided that these provisions are lawful and not inconsistent with the Dairy Code.
From 1 January 2020 (or later, if the transition period applies), MSAs signed between processors and farmers must provide for matters including but not limited to:
1. the supply period, including a definite end date (except in the case of MSAs between cooperatives and their farmer members);
2. minimum milk price;
3. requirements in relation to quality and quantity of milk (including testing procedures and volume accuracy assurances);
4. ownership of the milk;
5. circumstances in which either or both parties can vary or terminate the MSA; and
6. the dispute resolution process, which must not be inconsistent with the Dairy Code dispute resolution process.
The MSA must have be in plain English, consist of a single document, and allow for a cooling off period of 14 dates. It cannot provide for both exclusive supply and a maximum volume / tiered pricing.
The Dairy Code now restricts the circumstances in which a processor can unilaterally vary or terminate the MSA. Unilateral termination of the MSA by a processor must involve material breach of the MSA by the farmer.
A processor can only unilaterally vary the contract if there is a change in law (and only to the extent necessary to comply with that change in law) or otherwise to provide for a unilateral prospective step down of minimum milk prices, in the limited circumstances permitted by the Dairy Code. Retrospective steps downs of minimum milk prices are prohibited under any circumstances.
Processors must, on or before 2:00pm on 1 June in each financial year publish one or more standard forms of MSA on their website, which they will enter into in respect of milk supplied for that financial year.
These MSAs as published must not be varied or removed from a processors website prior to the end of the financial year to which that standard form MSA applies.
For each standard form MSA published, the processor must include a written statement setting out the circumstances (ie the region for milk supply, the quantity of milk to be supplied or the supply period) in which the processor will enter into an MSA in that form with a farmer.
The standard form MSAs can be for exclusive or non-exclusive supply of milk, however if a processor publishes a standard form exclusive MSA that they would enter into in particular circumstances, the processor must also publish a standard non-exclusive MSA which they would enter into in those particular circumstances.
The requirement that processors be required to publish a standard form of MSA is not affected by the transition period. As such, by 2:00pm on 1 June 2020, processors were required to have published a standard form of MSA, which is Dairy Code compliant, on their website, which is Dairy Code compliant.
A breach of some of the provisions of the Dairy Code can result in a penalty. Penalties for a breach of the Dairy Code range from between $22,200.00 (for farmers) to $66,600.00 (for processors).
The ACCC is responsible for investigation and enforcement of the Dairy Code.
A copy of the Dairy Code is available here.
There are a number of resources which have been produced by ACCC and various dairy industry organisations, including factsheets which help farmers and processors better understand what the Dairy Code means for them. These are good general advice resources to assist you to understand how the Dairy Code works and what obligations you have. You should not rely on these as a substitute for legal advice.
If you have specific concerns or questions about the Dairy Code, and its application to your situation, we recommend you seek legal advice.
If you are a processor, there are significant penalties for a breach of the Dairy Code. For this reason it is important you are aware of whether you are required to comply with the Code and your obligations under the Code, including importantly that any MSA you enter into or vary is Dairy Code compliant.
For farmers, you should request a lawyer review any MSA you seek to enter into, to ensure compliance with the Code but also to advise you generally as to your rights and obligations under the MSA.
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