The dairy sector needs a mandatory code of conduct to give farmers more bargaining power and to prevent chaos like that spawned by surprise cuts to the farmgate milk price in 2016, the competition watchdog says.
The Australian Competition and Consumer Commission (ACCC) also says dairy farmers won't necessarily benefit from a supermarket price increase on private label milk.
The watchdog has released the interim report from its 12-month inquiry set up after Murray Goulburn and Fonterra Australia in April 2016 suddenly cut the price they give milk suppliers, prompting industry-wide chaos.
Some farmers were forced to quit the industry, and milk production fell substantially.
The ACCC says a mandatory code of conduct would improve price and production signals, stop practices that transfer risk and enhance competition for farmers' milk.
Commissioner Mick Keogh says dairy processors, under pressure from supermarkets or competing exporters, use their bargaining power to shift risks onto dairy farmers.
Contracts between the processors and farmers involve uncertain pricing information and contract terms which deter dairy farmers from switching to another processor.
"A code would strengthen dairy farmers' weak bargaining position and, therefore, improve competition at the farm gate," Mr Keogh said.
He said a recently developed voluntary code did not go far enough because it was unenforceable, and carried no negative consequences.
The ACCC also said farmers were angry over the sale of $1 private label milk in supermarkets, because it denigrates their efforts to produce milk.
Farmers earn the same regardless of whether the milk is private label or branded.
But a price increase would likely do little to help them, the ACCC said
"We don't think that an increase in the retail price of private label milk would necessarily benefit farmers, and that any additional profit would mainly be captured by the major supermarkets and processors," Mr Keogh said.
The ACCC found that big supermarkets use their buying power to force processors to lower wholesale prices and reduce processors' profit margins.
Supermarkets had kept some of these savings but had transferred most of them to consumers.
The ACCC expects to release its final report in April 2018.
