Transcript
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One of the most enduring challenges for policymakers globally for centuries has been how to make agricultural markets ‘fair’.
Agricultural markets usually involve many small-scale farmers supplying a small number of very large-scale processors or retailers, and are characterised by a substantial imbalance in bargaining power. If misused, this bargaining power imbalance can have negative long-term economic consequences.
Many governments attempt to address this problem through regulatory intervention. This may involve a combination of statutory marketing arrangements that fix prices, regulating the behaviour of processors and retailers, providing income support to farmers, and measures to address information imbalances.
There have been periods of strong government intervention in Australian agricultural markets mostly arising during the major global conflicts of the twentieth century.
The strong regulatory interventions adopted by overseas governments are not appropriate here in Australia, because from almost the first days of European settlement, Australian agriculture has relied on export markets. Australian policymakers don’t have the luxury of ignoring the impact of any regulatory measures on export competitiveness.
Recognising this, policy reform measures introduced during the 1990s swept away virtually all statutory marketing arrangements in Australian agriculture. While delivering major benefits, these reforms resulted in Australian farmers being more directly exposed to free markets than virtually any other group of farmers in the world.
As a result, Australian farmers rely more directly on the prices they receive than almost any other farmers globally. Government subsidies for the agriculture sector in Australia are amongst the lowest in the OECD. By contrast, EU farmers receive more than 40% of their annual income from Government subsidies.
There are also several other factors that make agricultural markets in Australia different to those operating in many other nations.
Australia is a highly urbanised nation, with significant geographic gaps between food production regions and major domestic markets. This has limited cultural affinity between urban and rural populations, and created the need for extended supply chains even in domestic markets, and these are often dominated by non-farm interests.
This is because we don’t have a strong history of rural cooperatives which are often major players in overseas domestic supply chains, and have the capacity to bargain robustly for their member/suppliers.
In combination, these factors make it very important that close attention is paid to how well competition is operating in Australian agricultural markets.
This is particularly the case in markets for perishable agricultural goods. The more perishable a product, the more vulnerable the farmer is to take-it-or-leave-it terms from buyers.
Against this background, today I want to speak today about the ACCC’s Perishable Agricultural Goods Inquiry (PAG) report and arising from that, the existence and nature of bargaining power imbalances, how they can result in economic harm, and how policymakers should respond.
On 28 August 2020, the Treasurer directed the ACCC to hold an inquiry into markets for the supply of perishable agricultural goods. The three-month inquiry looked at meat products (chicken, pork, beef and lamb), eggs, seafood, dairy products and horticultural goods.
The Terms of Reference included:
- Relationships between suppliers and the effect of bargaining power.
- How features of perishable agricultural markets effect market outcomes.
- The behaviour of participants with bargaining power advantages.
- The scope and ability of the current regulatory framework to deal with these behaviours.
The ACCC received over 80 submissions to the inquiry, from participants and representatives across many perishable goods markets and different levels of supply chains.
Many of these submissions detailed alleged instances of abuse of bargaining power by major supply chain participants. Allegations included:
- Imposing unfair terms and conditions in supply contracts
- Forcing farmers to accept unfair price and volume risk
- Using opaque quality specifications
- Bullying and heavy-handed behaviour, especially during contract negotiations, and
- A lack of information transparency which disadvantages farmers engaging in negotiations.
The ACCC analysed the factors that affect the bargaining power of farmers, processors and retailers of perishable agricultural goods, and identified where this can lead to economic harm.
The inquiry found that a number of features of perishable agricultural goods supply chains can lead to imbalances in bargaining power.
In most perishable agricultural goods markets, there are many farmers, but few processors or wholesalers, and even fewer major retailers. This makes farmers particularly vulnerable to issues stemming from limited competition at the wholesale or retail level.
In addition, the more perishable a product is, the weaker the farmer’s bargaining power often is. Whereas a grain grower may have the option of storing grain until prices increase, a chicken meat producer or fruit or vegetable grower does not.
If bargaining power imbalances result in some of the previously mentioned practices occurring, then it is no surprise farmers are likely to have less confidence in the market. This discourages further investment and in turn, limits future productivity growth.
Bargaining power imbalances are also present at the wholesale level of the supply chains for perishable agricultural goods; and processors and wholesalers also exist in a highly contested, tough bargaining environment.
‘Hard bargaining’ is a feature of these supply chains, and it can drive efficiency and competitiveness.
However, behaviour that goes beyond ‘hard bargaining’ can damage markets through inefficient risk allocation, reduced investment confidence and resource misallocation. Such outcomes impose a cost to the economy.
Market participants holding very strong bargaining power may not be constrained from using this power in a harmful way due to a lack of competition, high barriers to entry, or control over critical inputs or distribution systems.
Potential policy responses
As noted earlier, Governments have adopted many different approaches to attempt to address imbalances in market power, and to improve competition in agricultural markets.
However, imbalances in bargaining power and related weak competition generally does not justify regulatory intervention unless the level of harm arising is significant, and is greater than the likely cost of regulatory intervention.
I should say by way of qualification that there is often confusion between what is ‘fair’ competition, and what is ‘efficient’ competition.
To understand this better, we need to start from the perspective that competition is not an end in itself, but rather a means to an end.
The “end” delivered by efficient competition is greater economic returns from the available resources, leading to higher standards of living and more employment opportunities.
Efficient competition will mean that some market participants will be driven out of the market and have to close down their businesses, while others will find ways to grow their businesses.
Those who face closing their businesses will rarely consider the competition they face was ‘fair’, and will often criticise the market, or seek government intervention.
When harmful practices occur, the Competition and Consumer Act (2010) (CCA) provides a number of legislative provisions to help address these harms. These are sometimes referred to as the ‘Fair Trading’ laws.
These include laws regarding misleading or deceptive conduct, unfair contract terms, and unconscionable conduct. The CCA also provides a framework for the operation of industry codes.
While these fair trading measures provide important protections for supply chain participants facing imbalances in bargaining power, our inquiry also identified some limitations and gaps in current laws. As a result, the ACCC made a number of recommendations to strengthen Australia’s fair trading laws.
One of the issues our inquiry examined was the utility of industry codes of practice as a means of addressing some of the bargaining power imbalances.
Industry codes can play an important role in addressing specific systemic behaviour, but tend to be focused on the issues unique to a particular sector, and have limited utility unless they are mandatory.
For example, our inquiry found that the introduction of the mandatory Dairy Code has increased transparency of prices and contracting arrangements, and reduced barriers that have limited farmers switching between processors. The result is likely to be improved competition for farmers’ milk and farmers being able to make more informed decisions due to increased market transparency.
However, the Food and Grocery Code, despite recent amendments, still has significant shortcomings that could lead to potentially harmful behaviours being under-regulated. Our inquiry recommended the strengthening of the Food and Grocery Code, including by making it mandatory for retailers and wholesalers, and by introducing significant penalties for contraventions.
The recommendations from our PAG Inquiry go beyond individual sector reforms and take a broader approach.
Our final report identifies that certain legal reforms already being considered should address some of the issues raised through the inquiry. These include proposals to strengthen Australia’s small business unfair contract terms law, and the ACCC’s new small business collective bargaining class exemption which came into effect on June 3.
The Government has already agreed to strengthen the business-to-business unfair contract term regime by later this year.
On 9 November 2020 the Government released a Regulation Impact Statement for Decision (RISD), The RISD flagged the following changes to the unfair contract terms (UCT) regime that are likely to benefit agricultural sector small medium enterprises (SMEs):
- Making UCTs unlawful and giving courts the power to impose a civil penalty
- Providing for more flexible remedies by giving courts the power to determine the appropriate remedy, rather than declaring UCTs automatically void
- Replace the 20 person headcount with a 100 person headcount or annual turnover threshold of less than $10 million, and
- Remove the contract value thresholds altogether.
The ACCC expects that expanding the employee headcount threshold and removing the contract value threshold will significantly broaden the protection provided by the unfair contract term regime to agribusinesses. This is especially the case given that many agribusinesses are reliant on casual or seasonal workers and enter into high value standard form contracts.
However, the ACCC considers these upcoming changes alone will not be enough to address all the significantly harmful practices identified in the inquiry.
The current prohibition on unconscionable conduct aims to prevent harmful unfair conduct, however the Courts have applied a high threshold to this law. To breach it, firms must engage in behaviour that is particularly harsh or oppressive. Many of the business practices detailed in submissions to the PAG inquiry would be unlikely to amount to unconscionable conduct.
The ACCC therefore recommended the introduction of an economy-wide unfair trading practices prohibition to address conduct that causes significant harm to businesses, but which does not meet the threshold of unconscionable conduct.
The ACCC considers that an unfair trading practices prohibition would be particularly beneficial to the agricultural sector because it would establish a norm of behaviour that would apply across different sets of circumstances, and for all sector participants.
While Australian Governments have had some discussion about an unfair trading practices prohibition, the policy debate is in its infancy.
Since our PAG report was submitted to government in December last year the ACCC has continued to be active, and there have been some positive results.
Following the inquiry we began investigations into potential unfair contract terms in the chicken meat industry, as well as preparing an audit program to examine whether horticultural wholesalers are trading in breach of the Horticulture Code.
We have begun engaging directly with agricultural industry associations to explain how the ACCC’s new small business collective bargaining class exemption may be beneficial, and how businesses can access the regime.
And in the recent budget the Government announced $5.4m in funding to explore transparency issues in agriculture markets. This follows an ACCC’s recommendation to improve market transparency in the perishable agriculture goods industries in order to increase competition. This work is being progressed by the Department of Agriculture, Water and the Environment.
In Summary
The ACCC is focused on ensuring markets work for all participants, including both producers and consumers.
It would be a major step forward for our economy, for consumers and for agricultural small business if we could address the gaps in our fair trading laws through the introduction of a prohibition on unfair trading practices.
Our need for a strong post-COVID recovery makes this even more important, particularly given the concern that significant disruption often allows the strong to get stronger, to the detriment of our economy and society.
Thank you for your time and the opportunity to speak today.