One of the most interesting responses to the recent dramatic and retrospective price reductions in the dairy sector has been the disbelief expressed by senior executives in sectors such as banking, manufacturing, transport and IT about the extent to which major processors in the dairy sector can simply put all the price risk onto dairy farmers, and even retrospectively change the price those farmers are paid.
In the light of these responses and on reflection, it seems that it is time to seriously rethink the apportionment of risk along some Australian agricultural supply chains.
For some of the more traditional commodity sectors such as cattle, sheep and wool, the point of transfer of ownership of the livestock or commodities is fairly clearly defined in most transactions, and risk transfers from the farmer to the purchaser at the point of change of ownership, with the price clearly established and payment terms agreed. This applies in particular to auction sales, but is not quite as clear-cut in the case of direct-to-processor sales, where stock can be adversely impacted by events while they are held in the lairage which can have a negative impact on the eventual price received by the farmer.
In the grains and oilseed industries there is also a reasonably clear understanding of the point at which ownership changes, and the physical and price risk transfers from the farmer to the grain purchaser. This is not always clear in the case of pool arrangements, and there have been cases in recent times where the eventual pool returns have differed considerably from the ‘indicative’ price used in promoting the pool.
However, the dairy, horticulture and winegrape sub-sectors in particular are ones where virtually all the price and quality risk remains with the farmer long after it it seems rational for this to be the case.
For horticulture producers delivering produce to agents/wholesalers in the fresh produce markets, the lack of transparency about the precise role of the agent/wholesaler effectively transfers all the price risk onto the grower, sometimes for months after the produce has been on-sold to a third party. Most growers receive acknowledgement that their produce has been received by their agent/wholesaler within a week or so, but often receive no price information for several weeks. Even when they do, there is little to clarify whether the agent/wholesaler actually purchased the produce, or on-sold it to a third party and has extracted commission from the amount remitted to the grower. Even after being advised of price, some growers wait months to receive payment.
In the winegrape industry, many producers are not able to obtain any price information prior to delivering grapes to the winery, and often the only pricing information they have available is an ‘indicative’ price on a blackboard at the weighbridge. In addition, growers traditionally only receive their first part-payment some months after delivering grapes, and often it can be up to almost twelve months before they receive full payment for the grapes they delivered. This arrangement is presumably a carry-over from the times when there were cooperatives and winegrape marketing boards, but in these times when many wineries are operated by huge multi-national corporations, it seems extraordinary that growers would have available such limited price information, and would continue to carry both pricing and payment risk for almost a year after their grapes have been delivered.
In the dairy industry, events of the past few months have highlighted that some dairy farmers are bound by supply contacts that require exclusive milk supply to a processor, but that do not provide confirmed pricing, and in some cases the processor reserves the right to retrospectively adjust that pricing over a period of almost twelve months.
Some of these arrangements may have made sense in the past when farmers were often members of local cooperatives which had limited capital, and which shared the risks (both downside and upside) with their farmer members. These days are long gone, and it seems hard to justify an arrangement whereby a large multinational processor or a major retailer gets to use farmers proceeds to fund their operations long after any normal business arrangements would result in the farmer having been paid, and not exposed to any further price risk. According to a recent article carried by Crikey which was originally published by Michael West, Australia now ranks as one of the worst nations internationally in payment delays for small suppliers.
One of the most obvious effects of this transfer of risk to farmers is that it acts as a major disincentive to investment to upgrade or expand farm businesses. This, in turn, means that despite the huge potential that has emerged in export markets over recent years, Australian farmers will be less willing to scale up to take advantage of this, and the entire economy will suffer as a result.
It seems that the time is ripe to modernise marketing arrangements in these sectors which have so much potential, but which are held back by markets that are more suited to the nineteenth century that the twenty first.