Do Australian competition laws protect farmers and small businesses?

For this section of farm institute insights, ‘in my view’, the Institute will invite comments on a particular topic from two politicians with differing policy viewpoints. In this February edition of farm institute insights, Senator Nick Xenophon, Senator for South Australia, and Senator Richard Colbeck, Liberal Senator for Tasmania, give their opinions on the effectiveness of Australian competition laws in protecting farmers and small businesses. Continue the discussion on the Institute’s blog.

Senator Nick Xenophon
Senator for South Australia

A lot has been said about the effect the Coles and Woolworths duopoly has on consumers. We know that, according to OECD data, Australia has some of the highest rising grocery prices in the developed world.

We also know that consumers are facing fewer choices, both in where they shop and what products are available. But not a lot is said about the other side of the coin: what this lack of competition means for producers.

Along with Lower House MP Bob Katter, I recently introduced a bill to the Senate to require all major grocery retailers to display the producer or ‘farmgate’ price of fresh produce next to the retail price.

The aim of the bill was to give consumers a point of comparison, so they can see the profit margins of the big retailers compared to the prices paid to producers. The bill was referred to the Senate Economics Committee for inquiry.

During this process, the committee heard, over and over, how good Coles and Woolworths were to their producers, how they respected those relationships and supported Australian industry.

But then Peter White, President of the South Australian Farmers Federation, gave evidence.

He told of how he’d heard from producers too scared to speak out publicly for fear of their contracts with Coles and Woolworths being cancelled.

This kind of silencing of critics makes it incredibly difficult when it comes to reforming competition policy.

If producers can’t speak out about problems, how can politicians attempt to fix the system?

But I don’t blame producers.

After all, when Coles and Woolworths have the majority of the market, where else can they go to sell their goods?

I’ve heard personally from producers who are in this situation. They are subject to low prices, changing contracts and unfair terms.

If they make a complaint to the ACCC, the first thing that happens is that the ACCC contacts the supermarket in question to let them know who has made a complaint.

In November, the same Senate Committee completed an inquiry into the dairy industry, and how it’s been affected by the ‘milk price wars’ between Coles and Woolworths.

This inquiry heard from farmers who are receiving as little as 36 cents a litre for grade one milk.

The low prices set by Coles and Woolworths put pressure on suppliers, who in turn have to cut their costs and pay producers even less. Essentially, Coles and Woolworths are dictating how an entire industry should run.

In doing so they are running that industry into the ground.

The inquiry heard from many producers who said they simply could not survive. They said that, even if milk prices rose again, it may not be enough for them to recover.

 Perhaps most disturbingly, the ACCC didn’t have a problem with what Coles and Woolworths were doing.

I believe Australia needs a Supermarket Ombudsman to oversee the industry, and act as an independent referee between retailers, suppliers and producers.

This would work in conjunction with a mandatory Horticulture Code of Conduct, which would apply to the entire supply chain, retailers included.

It is damaging to competition for two companies to control such a massive share of the market. It’s time we looked at the laws that are in place in the US, and other parts of the world, which limit the percentage of market share owned by an individual company.

In the UK, four separate chains hold about 80% of the market between them, the same amount held by Coles and Woolworths here. In the US, the largest chains hold only about 20% each, thanks to laws limiting market share. Coles and Woolworths should each have control of no more than 20% of the market.

Independent retailers, Australian companies and Australian producers are not asking for a free ride. They are merely asking for a level playing field.

Breaking up the Coles and Woolworths duopoly will allow the market to correct itself, and we will all benefit from that.

Senator Nick Xenophon first became involved in politics in the 1997 South Australian election, where he campaigned on a ‘No Pokies’ platform for the State’s Upper House. He ran simply to make a point. Nick scraped in with a little under 3% of the statewide vote.

Over the next eight years, Nick worked to fight the spread of poker machines. He also campaigned on issues where individuals and communities weren’t getting a fair go, including asbestos victims, victims of crime and land tax. Nick was re-elected in 2006 with just over 20.5% of the statewide vote.

Nick ran in the November 2007 Federal Election and was elected to the Senate with just under 15% of the vote. Nick has continued to push for changes in the key areas of gambling reform, the water crisis, consumer law and food labelling. He believes the most important part of his job is speaking up for people who might not otherwise have a voice.

 

Do Australian competition laws protect farmers and small businesses?

Senator Richard Colbeck
Liberal Senator for Tasmania
Shadow Parliamentary Secretary for Innovation, Industry and Science
Shadow Parliamentary Secretary for Fisheries and Forestry

I am not sure whether it was just a bad choice of words, but Coles’ statement in their submission to the Senate Select Committee on Food Processing…

We explain the purpose of competition law as applied to vertical supply chains. This is to protect the long run welfare of Australian consumers. Firm behaviour is irrelevant for competition law purposes unless it also harms the long-run welfare of end customers in the vertical supply chain. (Coles’ emphasis)

… really makes you bristle when you consider that the purpose of the Competition and Consumer Act is all about managing behaviour in the marketplace.

Coles’ statement also does not quite line up with the object clause of the Competition and Consumer Act 2010:

The object of this act is to enhance the welfare of Australians through the promotion of fair trading and provision of consumer protection. (My emphasis)

Note the difference?

So when the AFI asks me whether I think Australia has appropriate competition laws in order to ensure farmers and small business owners are not subject to unfair practices in markets that are dominated by a small number of players, it seems like we are on a no brainer.

The answer, of course, is never simple. This has been demonstrated many times over the last two years via a number of Senate inquiries and quite public spats – particularly two relating to milk contracts and pricing that focused heavily on the operation of the Competition and Consumer Act.

Generally I think the Act works well. However if you follow the old saying, there is no smoke without fire, the level of complaint about the behaviour of the major supermarkets indicates all is not completely as it could be.

There’s no question, as Coles also says in its submission, that those down the supply chain don’t like pressure on their prices but that is a function of the market which most players understand and grudgingly accept. It seems to me that the level of complaint goes beyond that type of pressure.

And again Coles provides a hint that some of those claims may have credence with its recently reported and quite extraordinary missive that buyers should ‘behave themselves’.

This suggests two things – that Coles might believe it is being watched quite closely in a way it hasn’t before; and that our current laws may not have been tested as well as they could.

The two may even be working in tandem, with the new chair of the ACCC saying that he will take a more active approach to administering the Act, manifesting in a higher level of scrutiny.

There is evidence to suggest the work of the Senate Economics References Committee prompted the ACCC to have another look at Coles’ milk pricing. That scrutiny is continuing is a good thing, and it is appreciated by the Committee.

So that I can’t be accused of picking on just Coles, there are plenty of reports of very average behaviour by their major rival, Woolworths.

The reality is that markets and market behaviour continue to evolve and our regulatory framework must continue to evolve with it.

The current level of concern, scrutiny and criticism has been brought about by a change in behaviour and business model by one of the dominant players.

The likelihood is that this model would have come to the Australian market regardless of the number of players.

It has been effective in the UK where there are more participants than there are here.

The market has evolved a long way since the introduction of the Act, and the more recent major reviews in the early 90s and the Dawson review 2001–03.

In my view it is more than appropriate 10 years down the track to conduct another comprehensive, independent, Dawson-style review to ensure that our regulatory framework remains effective – as per recommendation 5 of the Senate Economics References Committee report, The impacts of supermarket pricing decisions on the dairy industry.

The adequacy of the Competition and Consumer Act is dependent on behaviour, of both market participants and the regulator. I think we can legitimately ask questions of behaviour all round.

We need to ensure a fair balance of market power without losing the necessary characteristics of our market economy.

Richard Colbeck has been a Liberal Senator for Tasmania since 2001. Prior to entering politics, Senator Colbeck worked in the construction industry, was an alderman on the Devonport City Council and was a director of the Tasmanian Chamber of Commerce and Industry.

Senator Colbeck has a strong affinity for regional communities – which he credits to spending his younger years on a dairy farm at Wilmot, in the hinterland of Tasmania’s North West – and he enjoys working with primary industries to achieve better outcomes for rural and regional Australia.

To continue the discussion on the effectiveness of competition law in protecting farmers and small businesses go to the Institute’s Ag Forum.