The Australian Competition and Consumer Commission has issued a draft determination that proposes to deny authorisation to the Australian Cotton Shippers Association (Cotton Shippers) for coordination between its merchant members to change the way the industry classes cotton for contracts between growers and merchants.

“The ACCC is not satisfied that the Cotton Shippers’ proposal is likely to result in a public benefit that would outweigh the anti-competitive detriment from the major merchants collectively refusing to contract with growers unless their cotton has been machine classed,” ACCC Commissioner Dr Jill Walker said.

Cotton Shippers members represent the vast majority of merchants buying Australian cotton, most of which is exported. Cotton is classed according to five attributes and current practice in Australia is for two of these attributes—the colour and leaf (or trash content)—to be classed visually, while the other three attributes are classed by machine.

The merchants want full machine classing and are seeking authorisation from the ACCC to refuse to deal with growers unless this condition is met. There is no proposal to coordinate on the prices offered. While some growers support full machine testing, others oppose this move and are concerned that it would result in them receiving less for their cotton.

“The ACCC does not accept Cotton Shippers’ argument that there is a market failure which justifies coordinated conduct by the merchants. While there may be benefits in moving to full machine classing, individual merchants are free to move to a machine classing system at any time in order to realise the claimed benefits,” Dr Walker said.

“If, as the applicants claim, moving to machine classing will be mutually beneficial to both merchants and growers, it is not clear why merchants need to impose machine classing on growers.”

“The ACCC is concerned that the proposed conduct could result in a loss of competition between merchants. Competition should allow any benefits of full machine classing to be shared between merchants and growers and should ensure that the move will occur if it is in the interests of the industry as a whole,” Dr Walker said.

The ACCC is now seeking submissions from Cotton Shippers and interested parties in relation to its draft determination, before making a final decision in December 2015.

Further information, including a copy of the draft decision, is available from the ACCC public register.

Authorisation provides immunity from court action for conduct that might otherwise raise concerns under the competition provisions of the Competition and Consumer Act 2010.