Milking it for all it's worth - competition and pricing in the Australian dairy industry
Senate Economics Reference Committee
Inquiry home page
Referred to Senate Economics Committee on 10 September 2009
Submissions due: 22 October 2009
Reporting date: 28 February 2010 - extended to 13 May 2010
View Government Response (February 2012, Treasury site - PDF and word format)
Chapter 4 of the report deals with competition in the dairy industry (pages 53-66). Be warned, if you know anything about competition law or economics the content of the report may cause offence.
Terms of reference
This inquiry will investigate the current circumstances of the varying prices being paid to dairy farmers in different Australian states, including:
(a) the economic effect on the dairy industry of announced reductions in prices to be paid to producers by milk processors,
(b) the impact of the concentration of ownership of milk processing facilities on milk market conditions in the dairy industry;
(c) the impact of the consolidation of the ownership of the market or drinking milk sector with the manufacturing milk sector on milk market conditions in the dairy industry;
(d) the impact of the concentration of supermarket supply contracts on milk market conditions;
(e) whether aspects of the Trade Practices Act 1974 are in need of review having regard to market conditions and industry sector concentration in this industry; and
(f) any other related matters.
Relevant recommendations [emphasis added throughout]
4.21 The Committee recommends that the Productivity Commission reviews and evaluates the effectiveness of the national competition policy and requests that it publish its report by 30 April 2011.
4.22 The Committee recommends a moratorium on further takeovers and mergers in the milk processing industry until the Productivity Commission has published its report on the effectiveness of the national competition policy.
4.42 The Committee recommends that the Trade Practices Act be amended to reinstate specific anti-price discrimination provisions and inhibit firms achieving market power through takeovers or abusing market power and that 'market power' be expressly defined so that it is less than market dominance and does not require a firm to have unfettered power to set prices. A specific market share, such as, for example, one third (based on international practice), could be presumed to confer market power unless there is strong evidence to the contrary.
4.65 The Committee recommends the Productivity Commission considers, in its review of national competition policy, the appropriateness of separating the functions and powers of the ACCC with the effect that separate agencies are responsible for the approval of mergers and the assessment of whether concentration is subsequently excessive.
Relating to market concentration
There has been a trend towards increased concentration among both processors and retailers of milk in Australia. ... The victims of this increased concentration are the farmers and the consumers.
... the two major supermarket chains, Coles and Woolworths, sell about half the drinking milk sold to consumers, and over half of this is in the form of generic milk. Both these proportions appear to be increasing, with attendant risks to competition.
Possible policy responses
Removing this anti-competitive impetus requires reducing the dominance of the large supermarkets and/or reducing their use of generic milk and its impact on processors.
In Australia mergers which would lead to a 'substantial lessening of competition' are (supposed to be) prohibited by section 50 of the Trade Practices Act. This has not, however, prevented mergers such as the National Foods takeover of Dairy Farmers which, the Committee heard evidence, had substantially affected the competitive dynamics of the Tasmanian dairy market.
This is because the courts have adopted a very demanding test of what constitutes a 'substantial lessening of competition', effectively requiring that after a merger the new company must be almost a monopoly. Associate Professor Zumbo submitted:
The "substantial lessening of competition" test requires that in order for the merger or acquisition to be considered in breach of the test, the merged entity must have the ability to raise prices without losing business to rivals. [Note: this substantially overstates the position]
Given the test is so demanding, it is unsurprising that the ACCC approves over 95 per cent of proposed mergers and acquisitions which it considers. [note, at around the same time in relation to a separate inquiry the Senate Economics Committee concluded that this statistic was 'misleading']
... preventing a substantial lessening of competition does nothing to deal with an existing state of inadequate competition. For this additional measures are required.
The most most direct approach would be 'trust busting' – requiring divestiture by chains that have an 'excessive' market share or market power.
I think Senator Xenophon suggested they split the two majors into four - bloody good idea! [footnote omitted - Mr Harris was the witness)
Associate Professor Frank Zumbo would like to:
…amend the Trade Practices Act to provide for a general divestiture power whereby a Court can, on the application of the ACCC, order the break up of companies (i) having substantial market share; and (ii) where either the characteristics of the market prevent, restrict or distort competition; or the companies have engaged in patterns of conduct that are detrimental to competition and consumers. [footnote omitted] [Note, Zumbo makes repeated reference to substantial market share which he clearly sees as a direct and meaningful substitute for market power. One does not equal the other and international best practice requires that these concepts not be confused; in particular, that market share not be used as a proxy for market power]
Unlike the United Kingdom or the United States, Australia does not provide for a general divestiture power to deal with highly concentrated markets having characteristics that prevent, restrict or distort competition in those markets. In the United Kingdom a very sophisticated framework has been enacted to allow for highly concentrated markets to be reviewed with the purpose of assessing the level of competition in a market and for taking steps to remedy market distortions having a detrimental impact on competition and consumers. [footnote omitted] [Note: perhaps a different spin might have been placed on the international comparisons if Zumbo had illuminated how they actually operate in practice in the jurisdictions to which he refers; he does not elaborate in his submission]
One way in which the major supermarkets increase their market share is through 'creeping acquisitions'; a series of takeovers, each of which is individually too small to 'substantially lessen competition' but which cumulatively may do so.
A new investigation of creeping acquisitions is now being conducted by the Senate Economics Legislation Committee as part of its inquiry into the Trade Practices Amendment (Material Lessening of Competition-Richmond Amendment) Bill 2009. [footnote omitted] [note, this bill was drafted by Zumbo and has about the same economic credibility as the Birdsville amendment] This bill would amend section 50 of the TPA such that a corporation which already has a substantial share of a market must not directly or indirectly merge with or acquire shares or an asset which would have the effect of lessening competition in the market. [Note: a separate Senate Committee report rejected this bill]
Relating to misuse of market power and price discrimination
[note, all footnotes omitted]
Section 46 of the TPA aims to promote competition by preventing corporations who have substantial market power from abusing that power and specifically prohibiting those entities from using their market power to eliminate or damage a competitor, prevent entry of others into the market or prevent or deter others from engaging in competitive conduct in a market.
... the processors provide milk at a lower price to the large supermarket chains than to smaller supermarkets. To some extent, this reflects economies of scale in dealing with the larger chains. It may also, however, reflect the market power of the large chains.
Similarly, the processors charge a lower price to the major supermarkets than they do to vendors who on-sell milk to small retailers such as milk bars, take-away food outlets and other small stores to whom milk is an ancillary line of business. ...
There are suggestions that the Trade Practices Act should be strengthened to prevent such price discrimination: [Note, it is not surprising to learn that it is Frank Zumbo that is the key proponent of such legislation - the following quote comes from his submission. It is a pity that he does not acknowledge that the key international precedent he relies on - the Robinson-Patman Act - has been repeatedly criticised in the US and is not relied on by the FTC - price discrimination is only prosecuted by the FTC where it also falls within s 2 of the Sherman Act as part of an attempt to monopolise (our s 46 equivalent).]
With smaller retailers at a substantial competitive disadvantage because of the higher prices they pay for branded milk, Coles and Woolworths need not compete as aggressively on price as they would have to if the smaller retailers were able to provide a stronger competitive constraint on Coles and Woolworths… Where anti-competitive price discrimination is present, it should be dealt with under the Trade Practices Act. Given the continued ineffectiveness of s 46 it is appropriate to amend the Trade Practices Act to deal specifically with anticompetitive price discrimination. A number of international precedents are available including the United States Robinson-Patman Act of 1936 and s 18 of the United Kingdom Competition Act 1998.
[reference is then made to the former s 49 which prohibited price discrimination. The Committee does at least acknowledge that its repeal (in 1995) had been 'recommended by the Swanson Committee (1976), the Blunt Committee (1979) and the Hilmer Committee (1995)' and that in 2003 'the Dawson Review recommended that the effect of price discrimination on competition be considered on a case-by-case basis, arguing that section 46 is the most appropriate means to tackle anti-competitive price discrimination'. That Review also 'considered that there are reasons for differences in wholesale prices in the grocery industry which do not involve anti-competitive practices'. However, this does not satisfy the Committee ...
The restoration of an explicit provision against price discrimination in the TPA would empower the ACCC to act and the Australian Competition Tribunal to review. [note: yes it would, but this says nothing about whether that is desirable ...]
From evidence taken during the course of its inquiry the Committee takes the view that the current operation of section 46 is inadequate and is not providing protection against price discrimination. The major supermarkets appear to be using their dominant market positions to drive down the farmgate price through the sale of generic products which puts pressure on processors who are forced to compete with their own products.
The Committee takes the view that this will negatively affect competition and therefore consumers as it will lead to less product choice and fears that the current interpretation of section 46 will enable these large players to escape allegations of misusing their market power. [Note: the committee fails to observe that there were changes to s 46 made in 2007 designed to make it easier to demonstrate that a company had substantial market power - these have yet to be tested]
The Committee considers that this situation needs to be addressed to ensure the long term viability of Australia's dairy industry. [Note: yes, an industry specific 'solution']
The precursor to the Committee has weighed the advantages and disadvantages of using market share as a proxy measure of market power in an earlier report, concluding that it was justified. [citing Senate Standing Committee on Economics, Trade Practices Legislation Amendment Bill 2008 [Provisions], August 2008, pp 4–6.]
[Note: this was the bill in which the Government sought to amend the Birdsville amendment by, amongst other things, removing the flawed reference to 'market share' and replacing it with 'market power'. This attempt was blocked by the Senate (where the Government lacked a majority). It was an ugly report which concluded at 2.23: "The committee believes that the term 'market share', as currently legislated in section 46(1AA) of the TPA, is a better defined and more readily measurable term than 'market power'. Moreover, it is concerned that the High Court's definition of 'market power' in the Boral ruling has set the threshold for predatory pricing cases far too high. The best evidence of this is that the ACCC has not brought a predatory pricing case before the High Court since the Boral ruling." - actually it has and it succeeded - the case was ACCC v Eurong Beach Resort ltd  FCA 1900 and liability was admitted]
It is a matter for judgement what market share might be regarded as raising potential concerns about market power. The European Commission takes the view that a firm would generally have a dominant position once it reaches a market share of 40-45 per cent and may achieve a dominant position in the region of 20-40 per cent [Note, of course in the EU market share is just one element to consider, not the definer ... The report goes on to indicate we would not be inconsistent with countries like Bulgaria, Croatia, Estonia, Lithuania, Poland and Malta. In most cases market share in those countries is still only 'indicative' of dominance; it is not the sole requirement]
At para 4.41 the Committee refers to US DOJ's benchmark for challenging mergers - they are referring to the HHI index used to calculate market concentration (not share) and it is indicative only, not determinative. It is entirely different from what the Committee is proposing - they didn't seem to grasp that.
On contracts for generic milk
The Greens believe there is a strong case for banning large supermarket chains from selling generic milk (and other generic products). ... [I'm not joking; that's what it says in the report]
The knee-jerk reaction to such a proposition is that it would be denying consumers access to the cheaper products. But this would only be an immediate reaction. Over time, the same price discrimination tactics applied by the supermarkets would be applied by (some) processors with some milk being packaged in a 'cheap and tatty' way and sold at a lower price and more prestigious brands (even if they are actually the same milk) being sold at a higher price. ...
The Committee is concerned by the growing market share being acquired by supermarkets through the sale of their own brand generic products. The Committee recognises that this trend is occurring across the majority of grocery items, not just drinking milk, and given the evidence it has heard from dairy farmers throughout this inquiry believes the effect this practice is having on other primary industries should be thoroughly investigated.
Competition in the market for raw milk
... the number of processors has reduced over time. ...
Some of those who criticise the National Foods takeover of Dairy Farmers want legislative changes that would prevent any such mergers in the future. Associate Professor Frank Zumbo recommends amending the TPA so that instead of preventing takeovers which substantially lessen competition, the bar be lowered to preventing mergers which materially lessen competition. [Note: fortunately even the Senate Economics Committee had the good sense to reject that proposal, which found it's way in the Trade Practices Amendment (Material Lessening of Competition-Richmond Amendment) Bill 2009]
A problem identified in the operation of the ACCC is that it is both umpire and player. It approves a merger and then assesses whether competition is adequate after the merger ... [Note: it's not clear what they are talking about. Anybody can do a post-merger assessment. This is not actually the ACCC's role. It challenges mergers that may contravene the Act. Period. The ACCC responded (sensibly), but apparently nobody was listening ...]
The ACCC replied:
We would not see such a conflict of roles…In most competition law enforcement authorities there is a combination of a merger function and an enforcement function. They are necessarily different because one is forward looking and one is backwards looking. But they are two tools to achieve essentially the same goal, which is to enhance the welfare of Australian consumers. So, rather than being in conflict, they complement each other. I should say that the staff who conduct the merger reviews are wholly separate to the staff who conduct the enforcement activities of the commission. They sit in separate divisions.
The Committee expresses grave concerns about claims of anti-competitive conduct by supermarkets. In particular, it appears that the growing dominance of generic products in the retail market is having detrimental effects on both consumers and farmers.
A combination of narrow interpretations by the courts of expressions in the Trade Practices Act 1974 and the repeal of section 49 mean that the Act fails to provide adequate protection against excessive market concentration and abuse of market power. There is inadequate assessment of whether markets have become excessively concentrated because the agency assessing this (the ACCC) is the same agency that approved the mergers leading to the high degree of concentration. The Committee is also concerned that the 'public interest' which the ACCC seeks to protect appears to be restricted to consumers and it does not pay sufficient attention to ensuring that farmers get a fair deal.