The Australian Competition and Consumer Commission has told potato growers in Ballarat, Victoria, that they would be acting illegally if they decided to withhold supply from processor McCain Foods.
The growers had been threatening to withhold their crop after McCain's sought to cut farm gate prices by A$3 a tonne.
Despite protracted negotiations McCain's has refused to budge from its offer of A$227 a tonne. The growers said this would cut the average grower's returns by A$30,000.
The commission phoned growers to warn them against withholding supply - and followed this up with a letter - saying it was illegal under the Trade Practices Act for a group of people to arrange to take an action to hurt another business.
At least one grower reacted by stating individual growers had every right not to supply McCain's if they weren't happy with the price.
"Why can't individual farmers stop supplying McCain's if they want to," he was quoted as saying. "I would like to see the commission look at how McCain's and Simplot put their customer prices up by three cents each on the same day, three weeks ago."
Australian Agriculture Minister Peter McGauran said the federal government would not stand idly by because the price cut was unsustainable for the growers' long term future.
"McCain's is acting like a bad corporate citizen," McGauran said. "These growers have a strong case. McCain's has benefited enormously from the growers and community of Ballarat over many years, and has community and social obligations beyond the profit margin."
But McGauran said the growers should negotiate with McCain's rather than withhold potatoes.
The minister then called McCain's officials and within days the company and its growers reached a compromise settelment that left neither farmers nor the company happy.
Growers accepted a two-year deal that will see them paid A$2.75 a tonne less than last year - A$227.25.