Competitive tensions 
Markets are the key to growth and prosperity – except when they don’t work

Richard Heath

Executive Director, AFI

 


Articles about competition policy often tend to open with a statement along the lines of: Competition is central to the operation of markets, and fosters innovation, productivity and growth, all of which create wealth and reduce poverty. Even though that statement is definitive, it will be inevitably followed by a qualifier: but markets do not always work well.

Markets not working well provide an endless source of agricultural policy discussion. Not surprisingly, complaints of market failure, of imbalance of power and monopolistic (or monopsonistic, 1) behaviour, are enticing and full of passion. They usually involve the classic David and Goliath battle of the small business failing because of competition from larger competitors, of big companies using their market power to dictate prices to suppliers, and of whole industries declining because of a flood of cheap imports or sustained low prices. The villain is usually obvious and easy to target.

In agriculture it is very easy to focus on the qualifier – but markets do not always work well – part of the discussion. There is no doubt that there are many examples of poorly functioning markets, examples that have had significant and long-lasting impact on businesses and industries. But, as would be expected, there is inevitably much more complexity to the issue once the big versus small dichotomy is removed from the discussion and a more dispassionate analysis is performed.

At the coarsest level, Australian agriculture has continued to grow while consumers have benefited from cheaper, safer, and more abundant food and fibre. These facts support the notion that competition in agricultural markets has delivered a net benefit to society by way of increased innovation, productivity, and growth. However, at what point does the cost (particularly the environmental and social cost) embedded in that net benefit become too much to bear? At what point does the benefit delivered to consumers need to be tempered by the need to fairly distribute value created in supply chains? Addressing these questions is a fundamental policy challenge for delivering functioning agricultural markets that deliver fair outcomes to all participants.

Why do we need competition measures? 

The fundamental principle of most competition policy is to ensure that consumers receive the full benefit of vigorous competition between businesses to deliver goods and services. We are all consumers so obviously we all benefit from competition policy that delivers on that promise. Agricultural businesses in Australia are consumers of inputs and so benefit from the economically efficient provision of goods and services through globally competitive markets.

But what about as suppliers of goods and services? How does competition policy help agricultural businesses on this side of the equation? Part of the answer, according to competition policy orthodoxy, is that competition measures ensure that Australian agricultural producers are efficient enough to be able to compete in global markets. As export markets currently account for two-thirds (by value) of production, global competitiveness is obviously incredibly important and inextricably linked to the ongoing success of the industry.

Why is competition policy so important in achieving this competitive stance when participation in global markets has always been a big part of the story of Australian agriculture? Post-European settlement, the production of agricultural commodities for exports was a significant part of the Australian economy and up until the end of the Second World War contributed to agriculture typically providing more than 20% of the country’s GDP. However unconstrained competition and minimal government assistance have really only been a feature of Australian agriculture since the time of the Hilmer reforms of the mid-1990s.

In 1992 the Australian Government commissioned the Hilmer review of national competition policy in response to declining international competitiveness which was being reflected in record current account deficits. The review put forward the imperative to develop a national competition policy based on three main factors: that Australia is for all practical purposes a single market; that many goods and services provided by the public sector and some areas of agriculture were sheltered from international and domestic competition making them uncompetitive in the market place; and that competition policy to that point had been developed on a sectoral basis rather than a broad national framework (2). Most of the recommendations of the review were implemented on the basis of the government stance that:

Competition… drives businesses to operate efficiently, innovate and invest in new technologies, which allows Australia to better compete in international markets. Competition is also one of the surest ways to lift long-term productivity growth, which is what will keep wages growing and improve our living standards.(3)

In the decade immediately following the Hilmer review, more than 50 statutory marketing or single desk marketing arrangements were dismantled and by 2004 only vesting powers for the NSW rice industry and regulatory control of potato marketing in Western Australia remained. In some sectors (e.g. dairy, wool and sugar) the impact that removal of orderly marketing arrangements would have on small or inefficient farm businesses was recognised through the provision of adjustment packages designed to assist some businesses to exit the sector. The policy die had been set; rather than government assistance and orderly marketing, the future of agriculture was to be driven by unconstrained competition in free markets.

Although this central tenet of economic policy has not wavered since then, the issues associated with markets not always working well have endured. In fact, while this article was being written, the Federal Government announced that it has tasked the Australian Competition and Consumer Commission (ACCC) to spend three months investigating bargaining power imbalances across the perishable goods sector. The inquiry will investigate whether codes of conduct similar to the dairy code, which was developed to address imbalance of bargaining power in the dairy sector, should be developed for other perishable goods sectors and extended further into to the supply chain to include retailers as well as processors (4).

Has competition delivered growth and prosperity?

The value of Australian agriculture has doubled over the last two decades from around $30 billion to just over $60 billion. Productivity has also been growing during this period (albeit slowly) with most of the growth in Total Factor Productivity (TFP, 5) being delivered through more efficient use of inputs (Figure 1). In fact, output indexes have been steadily declining since the mid-1990s when the national competition policy was implemented. TFP has continued to grow because inputs have declined at a faster rate.



Figure 1: Input, Output and Total Factor Productivity Indexes (five-year running average).


While correlation should not be confused with causation, it is nonetheless interesting that TFP growth slowed due to a decline in outputs around the time of the Hilmer reforms. This characterisation of the data is aligned with most of the concern being expressed about markets not distributing value fairly to all participants.

To be clear, Australian agriculture is growing, and most direct participants as well as the broader community are prospering as a result. However, growth is being achieved through more and more efficient use of resources – and when the resources include land and people, that translates to bigger farms with fewer people on them. While the consolidation of less efficient businesses into bigger enterprises is the inevitable result of competition – and is the reason that all of us are experiencing higher standards of living than previous generations – it is still a bitter pill to swallow for those who are immediately impacted.

The danger ever-present in consolidation trends is going past the point where industries become so consolidated that the benefits of competition are lost. Monitoring this is one of the main functions of competition regulators like the ACCC, and is a focus of many of the competition issues in Australian agriculture (particularly in the post-farmgate part of the supply chain).

Short-term positive impacts of competition, particularly in markets where there may have been levels of protection previously, are easy to be found. Lower prices and innovation dividends are quickly realised. However, over the long term, the squeeze on profits is relentless which leads to less investment in research and development, followed by less innovation which in turn slows productivity growth and prosperity.

Getting the balance right

So are competition measures good or bad for Australian agriculture? There is no correct answer. While economists and productivity experts might argue that the data clearly demonstrates the overall benefits of competition, for most others the answer to this question will be much more subjective and will depend entirely on the lived experience, industry sector and personal circumstances of the person being asked the question. Competition measures have clearly created a paradigm of Australian agriculture being dependent on productivity and efficiency gains for continued growth. Once again, whether this is a good or a bad thing will depend entirely on whether the question is asked of the industry or the individual.

My personal experience is that the innovation environment created in Australian agriculture by the need to compete has resulted in an exciting, energised sector that is attracting new interest, participants, and investment. I also see that innovation and investment is starting to play a significant role in addressing environmental and social issues which have to this point been a cost of the drive for productivity. There is now a focus on delivering environmental and social outcomes as part of reporting against ESG (6) metrics that is delivering investment into new market-based mechanisms for improvement of these factors. Competitive markets may well deliver quick and easy gains in these areas where public intervention and protectionist approaches have as yet not delivered widespread or equitable outcomes.

However, as with all markets, the key will be balance. Balancing the value distributed to all participants, balancing the amount of efficiency gain against the cost of consolidation. If this balance can be achieved then no qualifier will be needed to the statement that: Competition is central to the operation of markets, and fosters innovation, productivity and growth, all of which create wealth and reduce poverty.


1. A monopsony is a market structure where single buyers can substantially control a market of multiple sellers. This type of market structure is becoming more of a concern in agricultural economies where there has been significant consolidation of processing and retailing functions in the supply chain.  

2. http://ncp.ncc.gov.au/docs/National%20Competition%20Policy%20Review%20report,%20The%20Hilmer%20Report,%20August%201993.pdf 

3. https://treasury.gov.au/sites/default/files/2019-03/Govt_response_comp-policy_factsheet.pdf

4. https://minister.awe.gov.au/littleproud/media-releases/accc-inquiry

5. TFP is a ratio that demonstrates how efficiently inputs (labour, capital, land, materials and services) are used to produce outputs (crops, wool, and livestock) over time.

6. ESG metrics are Environmental, Social and Governance factors which companies and countries report against to demonstrate how they are performing in delivering sustainability outcomes. 


Banner image:  Jed Sullivan