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The media loves to paint a picture of farmers as very conservative, traditional and unchanging, wearing old-fashioned clothes and speaking very slowly. If you need a prime example of this, just look at the promotion that the AFL has been using for its “Rural Round” – all big hats, hay bales, checked shirts, and blokes cracking whips.
However, in reality the business environment in which Australian farmers and agribusinesses currently operate has undergone an enormous amount of change in the last couple of decades, and would be almost unrecognisable to someone who operated a farm just a generation ago.
Agricultural markets have been deregulated, infrastructure and services have been privatised, and farm input sectors and commodity markets have become more concentrated and globalised.
Australian farmers these days have to negotiate almost on a daily basis with multinational corporations for their farm inputs; are fully exposed to the whims of global markets and international currency exchange rates when it comes to marketing farm products; and receive the lowest level of government support of virtually any farmers on earth when mother nature decides not to cooperate.
Whenever a sector goes through significant change – as has been the case for Australian agriculture over the past few decades - issues arise about the level of competition and whether the changes have delivered benefits to different participants within that sector.
Indeed, the theme of today’s forum – the impact of consolidation on agriculture – is very apt since I am speaking with you with my ACCC Commissioner hat on.
The ACCC regularly has to consider merger proposals that will result in further market consolidation, or market behaviour by consolidated corporate entities, and to determine the impact of those proposals or actions on competition, and as a consequence on those businesses or consumers involved in relevant markets.
We have to make these judgments and then consider them in relation to the relevant provisions of the Australian Competition and Consumer Act, which is the legislation that aims to maintain healthy competition in the Australian economy, and through that to maintain and improve national economic wellbeing.
In my talk today I will discuss the impact of consolidation on competition in the agricultural sector, and in particular the impact on the farm sector. I will also share some thoughts about future developments, and the issues that all of us are going to need to confront in the not too distant future.
Competition reform in Australia
The implementation of Australia’s National Competition Policy (the “Hilmer reforms”) over the period from 1994 to 2004 fundamentally changed Australian agriculture.
Prior to the reform program, many agricultural commodity markets in Australia were managed by either Australian or State Government statutory marketing bodies.
At a national level, statutory marketing arrangements were in place for the wool, dairy, sugar, tobacco, dried vine fruits and wheat sectors.
At the state level, more than fifty statutory marketing or single desk marketing systems operated for a range of different commodities.
All these were subject to review as part of the National Competition reform process in the decade between 1994 and 2004, and were ultimately dismantled, with the exception of vesting powers in NSW for the rice industry.
The objective of these reforms was to increase the level of competition in these sectors, to foster innovation, farm productivity growth, processor efficiency and ultimately community well-being.
It was generally accepted that previous arrangements such as mandating a minimum price for a commodity, or requiring all farmers of a particular commodity to pool their production and receive an average price, reduced the level of competition between farmers, and hence the incentive to increase productivity through innovation.
Statutory marketing arrangements also had the potential to distort market signals received by farmers, increasing the risk that farm products would be less suited to market needs, or that an over or under supply would occur, with consequent negative impacts on farmers and consumers.
In 2005 the Productivity Commission’s review of Competition Policy reforms found that benefits of competition reform for the agriculture sector included increased innovation as demonstrated by new goods and services introduced into markets, increased farm productivity, lower consumer prices and increased growth in exports.
The Productivity Commission found there were also some negative impacts, including accelerated reductions in the number of farms, reduced rural employment, and related population reductions in some rural areas.
However, it is also important to recognise that the agriculture sector was not alone in undergoing major change as a result of the National Competition Policy reforms.
A key part of this policy was the introduction of incentives for state governments to reform their state-owned enterprises through a range of measures.
These included deregulation, privatisation, and exposing government-owned businesses to normal competition laws.
Regulatory arrangements were also put in place to ensure third-party access to infrastructure services, many of which are used by the farm sector.
A decade and a half after these reforms were implemented, there has certainly been plenty of consolidation in the farm sector, with the number of farm businesses declining by an average of one and a half percent per year over this period.
There has also been consolidation in the pre and post farm sectors, which I will discuss in a minute.
Making a judgment about whether these reforms and the resultant consolidation that has occurred have been beneficial or not for the farm sector is a complex matter.
Indicators such as average farm income and profitability declined or were static during the period from 2000 to 2010, but persistent droughts were experienced for much of that period, which reduced farm output.
Since 2010 farm income, profitability and productivity have all generally increased significantly in real terms.
The value of gross farm output in 2016 was an all-time record, as was the value of farm exports.
It is also noteworthy that many farm inputs, including transport, telecommunications, fuel, fertiliser and chemicals, now cost less in real terms than they did a decade ago.
ABARES Farmers Terms of Trade Index, which provides an aggregated measure of the ratio of farm returns to farm costs, has been flat or moved in favour of farmers since about 2004.
This is in marked contrast to the trend over the period from 1970 to 2000, when the movement in this index was very strongly negative for farmers.
More generally, the economic reforms that Australia undertook during the 1980s and 1990s are now considered to be a key factor which contributed to the Australian economy recently achieving 104 consecutive quarters of economic growth, the longest period achieved by any nation.
This national economic growth has indirectly benefited the farm sector, with increased consumer spending power translating into more valuable market opportunities for Australian farm products in the domestic market.
Industry consolidation
NCP fundamentally altered Australian industries’ degree of exposure to competition, in that it opened up the playing field to allow competition from within and outside of Australia.
This has increased the amount of competitive pressure within Australian industry, and promoted more efficient production practices, and the supply of goods and services that better reflected the needs of users.
Liberalised markets and Australian agriculture’s high exposure to export markets means that our firms are driven to find scale efficiencies that allow them to compete globally, so there is an understandable impetus for firms to consolidate.
There have been significant structural changes in agricultural commodity markets.
In virtually every post-farm sector, there has been market consolidation, and a reduction in the number of companies competing to purchase farm products.
For example, there has been significant consolidation in grain marketing, and some of the major bulk-handling companies now have monopolies over grain storage and handling within their respective markets, and the number of competing exporters has declined.
Similar changes have occurred in the red meat, dairy, horticulture and intensive livestock sectors, and Australia’s retail food sector has also experienced significant consolidation.
There has also been consolidation amongst the providers of services and inputs beyond the farm gate.
Machinery, agrichemical and farm service agencies have undergone consolidation, and many of these markets are now dominated by a relatively small number of large-scale organisations.
However, there is a need to recognise that these changes are not necessarily a direct result of the deregulation I spoke about earlier.
In the USA, for example, available data highlights that similar levels of consolidation have occurred across the entire agriculture sector.
A recent report by a senior USDA economist[1] identified that the four-firm concentration ratio (the proportion of each market held by the four largest participants) in a wide range of different pre and post farm sectors in the USA had increased from an average of 46% in 1977 to 69% in 2012, and in some sectors was now as high as 90%.
Similar figures are not readily available for Australia, but it would not surprise me if the concentration figures here were similar or even higher.
The challenge for the farm sector and for policymakers is to determine whether some of the developments noted above are negating some of the benefits anticipated as a consequence of competition reforms.
Continuous vigilance is needed to prevent industries from becoming uncompetitive, whether through increased market concentration from mergers, persistent barriers to new entry, unilateral conduct of firms which have enough power in a market to dictate who plays in it, or anticompetitive agreements and collusion.
The Competition and Consumer Act 2010 equips the ACCC with a range of tools to do this, primarily through the competition laws. These include:
- The merger laws (s50)
These require the ACCC to determine whether a proposed merger will result in a substantial lessening of competition in a market. This is an very active area and the ACCC’s merger reviews have canvassed the gamut of agricultural industry supply chains: we have looked at mergers among buyers of primary produce, between processors and input suppliers, and vertical integration by infrastructure owners. - The misuse of market power laws (s46)
- The law prohibiting agreements between competitors which substantially lessen competition (s45)
- Law which prohibits exclusive dealing arrangements (s47), and
- Laws which prohibit collusion and cartels.
In addition to the competition laws, the ACCC administers the national access regime (Part IIIA) of the Competition and Consumer Act which seeks to promote competition in markets which rely on critical infrastructure as well as efficient investment in infrastructure.
Australian Consumer Laws, which are an important element of the Competition and Consumer Act are emerging as an important instrument in agriculture and related markets:
The laws against misleading and deceptive conduct not only protect consumers but help to ensure that primary producers’ efforts are not undermined by other traders’ misleading claims about similar products.
Industry codes of conduct, and the laws prohibiting unfair contract terms and unconscionable conduct both aim to promote transparency and fairness in transactions where there is a significant imbalance of bargaining power between parties.
Ultimately, this helps to ensure that correct market signals are transmitted between buyers and sellers and facilitates efficiency.
All these have been instrumental in recent and current legal proceedings initiated by the ACCC against major retailers and agricultural processors.
Market studies have also been increasingly used by the ACCC is situations where there are systemic concerns about competition throughout an industry. We recently completed a market study into the Cattle and Beef industry, and currently have a major study underway into the dairy industry.
These can be a very important means of more closely examining the effects of consolidation or other changes in an industry, and developing longer term policy responses when necessary.
There is continuing debate in the community about the adequacy of some of these laws, as has been evident in the recent debate surrounding proposed changes to Section 46 – the so-called effects test.
An important point for the agriculture sector is that in this deregulated market era, these laws now govern competition and behaviour in agricultural markets which were previously exempt from them.
The provisions of the Australian Competition and Consumer Act now matter just as much to small and medium agricultural and farm businesses as they do to big business.
Future challenges
The digital revolution that we have all experienced and participated in over the past decade is rapidly emerging as the next major challenge for competition policymakers and regulators alike, and the agriculture sector is at the forefront of this issue.
Some sense of the significance of the digital revolution can be gained from the fact that in the second quarter 2017 Financial Times list of the largest global companies, the top four companies by value (Apple, Alphabet (Google), Microsoft and Amazon) were all data-dependent technology companies, and there are also two others (Facebook and Tencent, Asia’s largest internet company) in the top ten.
Digitally enabled technology is emerging in every facet of our lives and businesses, and rights over access to the resulting data and the purposes it can be used for is becoming a major battleground for businesses and governments.
The concerns for policymakers and regulators are whether control over access to data will become the new way to reduce competition, or to prevent new competition emerging in markets.
It is not hard to envisage a situation whereby a dominant market participant could become almost unassailable as a consequence of the market data that can now be collected from customers.
Barriers to competition can also emerge as market participants become more and more invested in a particular digital technology system associated with a specific piece of equipment or consumer good, and the cost of changing to a competitor product effectively increases as the amount of data accumulated increases.
There have been some very relevant examples in recent years in the agriculture sector that highlight these issues.
Agricultural machinery companies have augmented their equipment with digital technologies to the extent that they have extensive data collection capabilities, their performance can be monitored in real time via the internet, and everything from routine scheduling of maintenance to complete immobilisation can be initiated remotely.
In effect, many farm machines have become farm data harvesters.
But the proprietary design of many of the digital systems meant that the longer a farmer used a particular machinery brand, the more it cost in terms of loss of data value to switch to another machinery brand.
This can have the effect of locking farm businesses into one machinery brand, essentially creating a monopoly farm by farm.
If a company knows that once it gets a set of wheels on the land they have locked the farmer in, then there is less incentive to be competitive in pricing associated equipment.
Loss-leading with one key piece of machinery could very lucrative in the long term if a customer can be locked in to a specific machinery brand for generations.
The ACCC is presently thinking about similar issues in our new car retailing market study.
Our consultations have revealed widespread concern among independent repairers about access to the diagnostic and scanning tools needed to read fault codes from the on-board diagnostic system of a car, or to upload software updates and enter re-initialisation codes.
Independent repairers also raised concerns about whether car manufacturers could restrict third party diagnostic tools from being used with new cars.
It isn’t hard to imagine these issues becoming more common in agricultural situations – and acting as a further impediment to competition, especially in relatively small markets such as Australia.
The issue of rights to access digital information and potential impacts on competition have recently been considered by the Productivity Commission.
They concluded that this is an issue requiring urgent attention by governments to maximise the economic gains potentially available from emerging digital technologies, and to reduce the risk of damage to competition and the economy they create.
They have proposed a range of measures including a new comprehensive data right for consumers and small businesses.
If implemented, this would mean that consumers and small businesses would have a right to check or retrieve any data held about them, and to have greater control over the uses to which that data could be put.
This could mean, for example, that in deciding to change machinery brands, a farmer would have a right to retrieve all their own data and have a third party convert it into a compatible format suitable for use in a new machine of a different brand.
This could significantly reduce the risk to competition posed by digital technologies, while still allowing all market participants to generate value from data.
There is obviously a lot of debate that will need to occur in relation to this issue, and protagonists are already getting organised and developing their arguments.
The Productivity Commission has recognised there will be a need to consider the issues on an industry-by-industry basis.
This has direct relevance to the agriculture sector, for the reasons I have outlined earlier.
In many ways, I personally think the debate about data rights and use is more important at present than debates about market consolidation.
I say this not to downplay the effect that market consolidation can have on competition and ultimately on national economic growth.
Rather, it is in recognition of the fact that data is rapidly becoming a critical element that can either be used to accelerate industry consolidation and the harmful effects that can have on competition, or to limit the potential anti-competitive effects of market consolidation.
Even a company with near-monopoly market power is much less likely to engage in anti-competitive behaviour if industry participants have open access to transparent market data.
Conclusion
Earlier in my talk I discussed the amount of change that has been experienced in the Australian agricultural sector over the last two decades, and some of the impacts of that change.
For those of you hoping that the rate of change might slow down, I’m afraid you are going to be disappointed.
Some are already referring to the digital revolution we are seeing emerge in agriculture as the third great agricultural revolution, following on from the mechanical and scientific revolutions experienced last century.
It has the potential to bring about as much change as these two previous revolutions did.
Given this projection, I think it is fair to say that data policy will be just as important and disruptive to the nation’s economic future and the agriculture sector, as competition policy was two decades ago.
[1] Mcdonald, A 2016. Competition law and policy and the food value chain. Concurrences No. 1, 2016.