Supermarkets selling home brand milk for $1 a litre is not to blame for Australian dairy farmers being paid low farm-gate prices, the competition watchdog has found.
The Australian Competition and Consumer Commission has instead fingered a power imbalance between farmers and milk processors, and called for a mandatory code of conduct to strengthen farmers' bargaining power and improve their share of profits.
"Processors, often under pressure from supermarkets or export market competition, use their relative bargaining power to shift risks onto dairy farmers," ACCC commissioner Mick Keogh said after releasing the watchdog's interim report into the dairy industry on Thursday.
Mr Keogh said the power imbalance saw farmers enter supply contracts that had unclear pricing terms, and with clauses that discouraged them from switching to a rival processor.
"A code would strengthen dairy farmers' weak bargaining position and therefore improve competition at the farm gate."
The inquiry was triggered by dairy giants Murray Goulburn and Fonterra last year retrospectively slashing how much they paid farmers for milk, driving many suppliers to the wall.
That saw a backlash against Woolworths, Coles and Aldi selling milk for $1, which farmers said caused low farmgate prices and devalued dairy products generally.
But the ACCC's investigation found that while dropping private label milk prices in 2011 had removed some value from the industry, this had mostly flowed from suppliers' bottom lines and into consumers' pockets.
Farmers were paid the same for their milk whether it ended up being sold as private label or more expensive brand label milk, the report says.
Increasing retail milk prices would likely result in supermarkets earning higher profits and make no difference to struggling farmers, because processors would still set farmgate prices just high enough to secure the milk they needed, the ACCC found.
The watchdog called for a mandatory code of conduct that would see simpler, more transparent contracts between suppliers and farmers that would give more clarity around how much farmers would be paid and make it easier for them to switch between suppliers
The code would also outlaw retrospective price cuts of the kind farmers were hit with in 2016.
'A little bit benign'
In a statement the dairy farmer lobby group Australian Dairy Farmers said the ACCC report confirmed what farmers had long known, that there is a "significant imbalance in market power with farmers having a weak bargaining position".
ADF president Terry Richardson said this was the reason why the code of practice was established.
"The ACCC has rightly recognised the bargaining power imbalance between farmers and processors, and processors and retailers," he said.
"We acknowledge the ACCC's recommendation to implement a mandatory dairy industry code of practice, as well as strengthening elements of the current code. This report is timely and we will incorporate ACCC's analysis into our already established review process," he said.
On $1 per litre milk, Mr Richardson said it was a strategy not in the long-term interest of the Australian dairy industry.
"Once money departs the supply chain, it is never returned. We have always strongly argued that $1 per litre milk is not sustainable long term," he said.
Adam Jenkins, president of the United Dairyfarmers of Victoria said the report was "a little bit benign".
Mr Jenkins said the report had identified "a huge amount of power that sits with the retailer, and there's an unfair power balance between the retailer and the processor, in the favour of the retailer. And the report has identified issues, but has not got any solutions for that."
"As a farmer, there's no point having one element of the processing/farmgate power balance being sorted out, when the other element between the processor and the retailer is not sorted out as well," he said.