Analysing competition policy in agriculture

Teresa Fox, AFI Researcher, and Katie McRobert, AFI General Manager

Retailers may ‘sell’ the idea of farming as a bucolic lifestyle but in reality agriculture is a competitive, market-driven business. While Australian agriculture is primarily export-focused, the domestic food market is characterised by the dominance of the major retailers – usually referred to as the duopoly (Coles and Woolworths) – and increasing consolidation in processing sectors. 

Bargaining power imbalances are the subject of another new government inquiry, but the issue is hardly new. The sector’s history of statutory marketing arrangements, the deregulation which occurred through the 1990s and the structure of markets in which Australian farmers are involved have made competition policy a particular focus of AFI work over the past decade.

In February 2012 Insights looked at the ACCC findings on supermarket actions over the infamous $1-a-litre milk campaign. The inquiry addressed whether the supermarkets were engaged in ‘predatory pricing’ for the purpose of reducing competition, concluding that the major reduction in milk prices seemed to have been from a reduction in the supermarkets’ profit margins. A key issue highlighted was the importance of market transparency to enable efficiently functioning markets (Keogh, 2012).

Mick Keogh also discussed the neo-classical notion of the ‘invisible hand’, i.e. the potential of the perfectly competitive market. While neo-classical economists often argue that government intervention should be minimised to improve the competitiveness and efficiency of markets, this article noted the assertion of Nobel-prize winning economist Joseph Stiglitz that almost all markets could be improved with government intervention (e.g. by correcting unequal access to information, reducing negative externalities or encouraging positive externalities).

Across 2013–14 a series of blogs analysed unfolding events in the competition policy landscape.

In July 2013, Keogh took aim at the general failures of competition policy in Australia using the example of investigations into supermarkets abusing market power with suppliers. Such investigations require an extensive information-gathering process to ensure that evidence can withstand scrutiny in a court of law. This effectively means that victims of unfair practices are likely to have gone broke or suffered severe financial damage before the ACCC can even get to the point of being able to take action (Keogh, 2013a). In contrast, preventative measures are used in the EU and US which include mandatory reporting of stocks and use of the Herfindahl-Hirschman Index to calculate the degree of concentration.

Not long after this, the ‘dumped’ Italian tomatoes issue hit headlines in November 2013, highlighting the weaknesses in Australian competition laws. This case reaffirmed that it is only possible for findings to be made well after the damage has occurred and Australian businesses have suffered significant financial harm, and the recurring theme of data gaps. The Anti-Dumping Commission had to rely on data provided by the retailers to conduct the investigation, which was often very difficult to verify (Keogh, 2013b).

By June 2014, the narrative was shifting to query the long-term costs of the immediate consumer benefits resulting from Australia’s competition policy strategy. This blog noted the sobering fact that Australia had become a net importer of processed food, despite being one of the largest net exporters of fresh produce. Pure economic theory might suggest that this position came about due to Australia’s high wages; however, there are other high wage-paying countries with food on our shelves. Keogh suggested we might instead blame the leveraging of market power by the supermarket duopoly and detailed the dark side of intense pressure on supply chains. Loss of processing in Australia resulted in decreased consumer choice and supply chain components moving offshore, limiting the ability of the supply side to respond to changes in demand and thus a potential loss to the economy (Keogh, 2014c).

This theme was expanded upon in August 2014 with a lengthy piece looking at the background to the issue – still relevant to today’s debate – which stretches back to the era of statutory marketing boards for Australian agricultural commodities. Most of these were set up in response to farmers’ concerns about the behaviour of downstream market participants, and the perceived inequity of individual farmer’s bargaining power relative to other supply chain actors. Between 1990 to 2008, most of these statutory arrangements were dismantled. Most agricultural marketing arrangements in Australia now operate within the legal framework established by the Australian Competition and Consumer (ACC) Act of 2010. In contrast to statutory arrangements, which prioritised the interests of farmers, the focus of the ACC Act is very much on the consumer (Keogh, 2014b).

A subsequent article published in September 2014 discussed the draft review of Australian competition laws chaired by Prof. Ian Harper. While the views of the review panel noted that competition policy should “make markets work in the long-term interests of consumers”, Keogh asserted this principle isn’t qualified and creates the impression that consumer benefit is paramount regardless of cost: for example, that the misuse of market power by dominant market participants is acceptable as long as the consumer benefits by cheaper prices. While this was not likely to have been the panel’s intention, it is important that policy directives are unambiguous in communication of intention (Keogh, 2014a). These issues were also discussed at the AFI’s 2014 Australian Agriculture Roundtable.

In a 2017 blog on Australian chicken meat processing, Richard Heath noted that consolidation in value chains is detrimental to competition, as it leads to virtually all of the risk taken by the farmer being concentrated in one factor: namely, the ability to negotiate an acceptable supply agreement with a processor (2017). The Summer 2017–18 Farm Policy Journal contained papers interrogating the effects of consolidation and competition in agricultural markets, both domestic and overseas, noting in the editorial that:

“Finding the right balance between markets that are highly concentrated, and markets that exhibit healthy competition, is an enduring challenge that confronts agricultural policy-makers.”

Issues canvassed in this edition included whether efficiency gains arising from consolidation outweigh the small consumer price increases that typically occur, and the change of focus from consumer impacts of concentrated food markets to how farmers are impacted (due in part to the declining proportion of expenditure in household budgets attributed to food).

Papers noted that vertical coordination (facilitated by contracting) can be beneficial to farms and enhance efficiency in food systems (Saitone & Sexton, 2017), and horizontal mergers between competing agricultural  firms in the US frequently result in price increases for consumers (MacDonald, 2017). 

Authors also considered the role of technology in enabling consolidation, particularly in the example of the US dairy industry. On the negative side, it was suggested that the digital agriculture revolution could have a potentially detrimental affect on competition by locking farmers into a particular technology brand of production system.

Against this background of intense policy scrutiny, the 2020 John Ralph Essay Competition will investigate whether competition measures are delivering a fair go for farm businesses. Finalists will be published in the Summer 2020 Farm Policy Journal.

References

Heath, R (2017), Consolidation limits opportunities for competitive innovation, Australian Farm Institute, http://www.farminstitute.org.au/ag-forum/consolidation-limits-opportunities-for-competitive-innovation

Keogh, M (2012), A fog descending on Australian agricultural markets, Insights, Australian Farm Institute, 9(1), 12.

Keogh, M (2013a), Current competition policy just does not cut it, Ag Forum, http://www.farminstitute.org.au/BlogRetrieve.aspx?PostID=323084&A

Keogh, M (2013b), Dumped tomato ruling a problem for Australian supermarkets and competition laws, Ag Forum, http://www.farminstitute.org.au/BlogRetrieve.aspx?PostID=334965&A

Keogh, M (2014a), Competition laws are not just about consumer benefits, Ag Forum, http://www.farminstitute.org.au/BlogRetrieve.aspx?PostID=504375&A

Keogh, M (2014b), Competition policy—Expect a lot of smoke and noise in the next few months, Ag Forum, http://www.farminstitute.org.au/BlogRetrieve.aspx?PostID=500679&A

Keogh, M (2014c), The consumer benefits in the short term, but at what long term cost? Ag Forum, http://www.farminstitute.org.au/BlogRetrieve.aspx?PostID=486295&A

MacDonald, J (2017), Consolidation, Concentration and Competition in the Food Systems, Farm Policy Journal, 14(4).

Saitone, TL, & Sexton, RJ (2017), Concentration and consolidation in the US food supply chain: the latest evidence and implications for consumers, farmers and policy makers, Farm Policy Journal, 14(4).


Image:  APAL