ACCC Deputy Chair, Mick Keogh, delivers a keynote address to the International Farm Management Conference, where he talks about the challenges and opportunities of premium markets in agriculture.
Check against delivery
When discussing the future of global agriculture, it is always tempting to trot out the United Nations forecast of a “70% increase in global food demand by 2050”.
From a farmer’s perspective, this paints a pretty positive picture.
However, those of you who keep a close eye on developments in global agricultural commodity markets will be well aware that the greatest challenge for farmers over recent decades, and even at present, is low prices associated with the global over-supply of key agricultural commodities.
We have seen it in particular in dairy, sugar and wine over recent years, and were it not for the drought in eastern Australia recently, the same would apply to grains. Despite increasing global demand, it seems that in the long term, real international prices for globally traded agricultural commodities continue to decline.
For the farming sector, in a nation such as Australia which has some of the lowest agricultural trade barriers and farm subsidies in the world, this should mean that the only way to grow the value of agriculture is to increase the volume of farm output.
A close look at available statistics indicates this has occurred over the last 30 years, with the volume of annual agricultural output increasing by about 25 per cent over this period. But surprisingly, the annual nominal value of agricultural output has increased by 105 per cent over this same period and, even when adjusted for inflation, the growth in value far outstrips the growth in volume.
What these figures show is that there has been a major shift in the agriculture sector in Australia over the last two decades. And it is a shift that has far-reaching consequences for all involved its future.
I will explore some of those changes today, talk a little about the work we’re doing at the ACCC, and close with my observations about what needs to be done to enhance future opportunities to further increase the value of Australian agriculture.
Current state of the market
The projection of a 70 per cent growth in global demand by 2050 may sound substantial, but when we break down the figures, achieving that target is actually quite viable. It equates to a target of 1.3 per cent growth in annual global food output, which is well below current levels of 2.2 per cent pa.
And while it is often claimed that this level of output growth cannot be sustained due to limits on available resources such as land and water, it is notable that most of the output growth over the past two decades was due to productivity growth, rather than an expansion in the amount of land and water used for agriculture.
In fact, in many developed nations, including Australia, the amount of land and water used for agriculture has declined significantly while output growth has persisted.
A key factor in the growth of global agricultural output over recent years has been the continuing development of the agricultural sectors of Eastern Europe, South America and Asia.
Farmers in these regions are now highly competitive in global agricultural commodity markets. This is due to factors such as low costs, abundant natural resources and rapidly improving productivity.
This means that, despite the positive future demand growth projections, agricultural producers in developed nations should anticipate a continuation of the long-term trend of declining real commodity prices, interrupted only occasionally by periods of higher prices, for instance when seasons or trade disruptions upset global markets.
Given the above global trends, and recognising that Australian agriculture is fully exposed to global competition in both domestic and export markets, it could be anticipated that Australian farmers would be experiencing low and declining commodity prices, given our relatively high costs.
There is some evidence of this in sectors such as dairy and sugar, but the general picture for agricultural commodity prices received by farmers in Australia is actually quite positive, as the graph I showed earlier highlights.
This reason for this is that Australian farmers and processors have increasingly altered their production and processing systems to target higher value or premium markets, rather than just continuing to attempt to compete on a least-cost basis.
This change is very much in evidence in the livestock sectors, the horticulture sector, in both the cotton and wool sectors, and to a lesser extent in the grains and oilseed sectors.
And more generally, Australia has managed to retain and even enhance its reputation as a reliable supplier of high quality and safe agricultural produce, meaning that even in generic commodity markets, there is often an “Australian” premium.
Anyone needing evidence of this need look no further than the aisles of Australian supermarkets, where limits have had to be applied to purchases of Australian baby formula by overseas visitors, to ensure availability for domestic customers.
Increasing consumer demand for premium produce
The Australian agriculture sector in general is now servicing markets in which relatively wealthy consumers are spending a decreasing proportion of their disposable income on food, and they therefore can afford to be quite selective about which food they purchase.
They are no longer content to purchase whatever is available, and are becoming more and more selective. They want quality, safety, integrity, and they want to know about the production systems and input use that comes with the food they purchase.
Wealthier consumers also tend to be more aware of and prepared to act on issues such as the environment, animal and worker welfare, and reflect these preferences in their purchases.
In response, retailers and processors are taking action to ensure their ‘brand’ and the products on their shelves meet the perceived needs of premium consumers. Indeed some are doing so by transferring additional product and compliance requirements on to their farmer-suppliers.
At the same time, farmers are also responding to the opportunities created by premium markets. They are choosing to change production and management practices to improve quality and safety, and they are choosing to meet provenance, credence, integrity and traceability requirements.
However, many of the product characteristics consumers are prepared to pay a premium for cannot be determined just by looking at the product.
For example, an organic lamb cutlet usually looks the same as a conventional lamb cutlet. Wool from unmulesed sheep looks the same as wool from mulesed sheep. And Australian baby formula looks no different to baby formula from another nation, once out of the can.
This means that critical to continuing success in these premium markets, and indeed the “Australian premium”, is the level of trust consumers have in the information they are provided with about the products they are contemplating purchasing.
Consequently, farmers and processors no longer just send produce on a truck or in a container. They now send that produce with a package of information.
For a farmer, that information might be a vendor declaration, or an animal health statement, or details of organic or environmental accreditation, or information in compliance with processor or retailer standards.
For a processor or exporter that information will invariably include details of compliance with relevant safety and other standards, as well as confirmation of its Australian origin.
In some cases, that package of information more than doubles the value of the product. For example, a major retailer currently sells cage eggs for $3.00 dozen, and free range organic eggs for $8 per dozen. Given that most people cannot visually distinguish between organic free-range eggs and cage eggs, the consumer trust in the ‘information package’ associated with the organic free-range eggs is worth $5 dozen – more than the full cost of the cage eggs.
There are two major implications of this change.
The first is that the integrity of the ‘information package’ associated with agricultural products is rapidly increasing in importance, and there is a need for all involved in the sector to ponder whether current systems are robust enough to sustain that integrity.
A second, and related issue, is the consequent change that has occurred in agricultural marketing systems in order to enable processors and retailers to better meet specific consumer needs.
Processors and retailers are increasingly dealing directly with farmers to ensure consistent supply of higher value products, and bypassing the more traditional agricultural markets and the public price discovery systems associated with those. In doing so they are using more and more complex pricing systems that target very specific product qualities and characteristics.
By way of example, during the ACCC’s recent inquiry into the dairy industry, we encountered 12different factors incorporated into milk supply agreements that impacted on the actual price received by farmers.
The result is that, while many farmers are benefitting from their direct dealings with processors and retailers, price transparency is decreasing and pricing complexity is increasing, both of which mean that farmers cannot easily compare offers from different processors, and are therefore in a weakened bargaining position in their price negotiations.
These are both issues in relation to which the ACCC has responsibilities under Australian law, and which I believe need some careful consideration and policy decisions, in order to ensure Australian farmers can continue to successfully meet the changing requirements of premium markets.
Maintaining consumer trust in product claims
The ACCC has several areas of responsibility that have an impact on the level of trust that consumers have in the information they are provided about the foods they purchase.
One of our roles is to enforce the laws which make it an offence to engage in misleading and deceptive conduct, or conduct that is likely to mislead or deceive, in relation to labelling claims. Another of our roles is to oversee laws which govern the use of Country of Origin labelling – specifically the green and yellow kangaroo label – to ensure this label is appropriately used, and consumer trust in it is maintained.
Two examples in the past where the ACCC has taken enforcement action in relation to misleading and deceptive claims about food are:
- In July 2017, in an action taken by the ACCC, the Federal Court ordered Snowdale Holdings Pty Ltd to pay penalties totalling $750,000 for making false or misleading representations that its eggs were ‘free range’.
- In 2012 the ACCC was successful in the Federal Court in prosecuting Peninsula Meats, which was fined $50,000 after it admitted that it had engaged in misleading and deceptive conduct by falsely claiming that the meat it offered for sale was sourced from King Island.
An important point that arises from both these cases is that the Courts relied on what is termed the ‘reasonable person’ test when assessing whether or not the claim is misleading or deceptive.
In the Snowdale case, in particular, the fact that the birds did have some access to an outside range, and the farm may have technically met a definition of free-range was not a sufficient defence, as it was found that most of the birds did not go outside on most days. The actual conditions in the shed were also in stark contrast to what was depicted on the label of the egg packaging, which had hens walking through green grass.
Consequently, the Court found that a ‘reasonable person’, prepared to pay a premium for eggs in the belief that the hens that laid them were able to roam freely in a grassy paddock, would have been deceived by the free-range claim and the imagery on the label.
While these two examples should remind anyone making these sorts of claims about the need for some care, not every situation is as clear cut.
Allegations of false claims about organic status, for example, are quite difficult to take action on, as even very detailed analytical testing may not provide conclusive proof, and there are a multiplicity of different standards for organic farming. It is also the case that a farm does not need to have organic certification in order to be able to claim organic status in domestic markets.
A similar situation applies in relation to claims made about farming management systems (for example pasture fed or grain fed), and to claims about product origins (for example Tasmanian grown or Gippsland grown). The latter is particularly problematic for processed products such as meat and milk, which may be transported a considerable distance from farm to processor – and even shipped across Bass Strait. As an example, should beef from cattle that originated in Victoria that were processed in Tasmania be labelled Tasmanian beef?
These issues are complicated by the fact that even when sectors (such as the red meat industry) have agreed on the definition and standards associated with the use of particular terms, (such as are contained in the AUS-Meat language standard), there is nothing to prevent the use of these terms in domestic markets for products that have not been produced strictly according to those standards, unless the use of those descriptors could be considered misleading.
To illustrate this point, while the beef industry has developed a minimum standard for ‘pasture-fed’ claims under the Pasturefed Cattle Accreditation System (PCAS), it would difficult to prosecute someone for misleading and deceptive conduct who used the term pasture-fed to describe beef from cattle that were substantially fed on pasture, but did not completely comply with the PCAS.
In response to concerns about the misuse of free-range claims for eggs, the relevant state and federal ministers agreed on a National Information Standard, which was adopted and came into effect in April 2018.
This standard details certain minimum requirements for those wishing to claim that their eggs are free range. Associated with this information standard, a ‘safe harbour’ defence has been introduced into the Australian Consumer Law, which means that if an egg producer can demonstrate it has complied with the standard, it will have protection from court proceedings alleging misleading and deceptive conduct.
There is some merit in the agriculture sector examining this model and considering whether it could be more widely adopted in order to better protect the credibility of industry-agreed standards in domestic markets, and at the same time avoid consumer confusion.
As I noted earlier, a second issue that emerges as a consequence of the change towards premium markets is more complex and less transparent pricing systems, sometimes referred to as opaque pricing. These often transfer greater risk to farmers, and also make it more difficult for farmers to compare prices they are being offered.
This obviously has the potential to reduce competition between processors, especially in situations where there are only two or three processors competing in a market.
The problem of ‘opaque pricing’ is not confined to the agriculture sector. It is also something competition regulators are grappling with in a range of other markets, including energy, telecommunications, banking and insurance.
For example, the ACCC recently completed a major inquiry into Australian retail electricity markets. One of the findings of that inquiry was that consumers have great difficulty in comparing offers from different electricity retailers, because of the opaque pricing practices employed by retailers.
These include advertising prices in terms of large discounts, without specifying what the discount is referenced to, and also by making the discounts highly conditional through fine print.
As the ACCC report noted:
These practices create significant confusion, causing some consumers to make decisions based on simple indicators (such as which headline discount is largest), to use third party comparator services (which add costs to the supply chain through the commissions they charge to retailers) or to disengage altogether.
The same problem has emerged in relatively concentrated agricultural markets, such as beef and dairy, where pricing grids typically incorporate a large number of premium and discount factors, which make a headline price almost meaningless.
In dairy in particular, there is no readily available reference or indicator price for farmers to make comparisons with, and while beef cattle saleyard prices do add to market transparency, as more and more cattle are consigned directly to processors, the relevance of saleyard indicator prices declines.
Opaque pricing has the effect of reducing competition in markets, and arises because dominant firms can make more profits by ‘sharing the market’, rather than competing fiercely on price for every consumer or farmer.
As mentioned earlier, complex and opaque pricing also enables a significant amount of risk to be transferred from the processor to the farmer, something that was very evident in events in the dairy industry in April 2016.
Opaque pricing also exacerbates the problem that economists refer to as ‘asynchronous information’. Processors have much better information about supply and demand conditions in markets, which means that farmers are always at a disadvantage in negotiating prices. This imbalance is made worse when pricing systems are complex and non-transparent.
Developing good policy responses to this problem is a real challenge. There is no doubt that direct supply arrangements between farmers and processors can result in improved supply chain efficiencies, from which both can benefit.
Care needs to be taken that any policy response to address opaque pricing does not reduce supply chain efficiency.
A number of different policy responses have been adopted internationally. These include:
- mandatory public price reporting (in the US beef sector);
- detailed price monitoring and reporting by government (as occurs in the EU)
- reference pricing (involving the development of one or a number of ‘model’ supplier profiles, which are used to calculate and compare prices offered by competing processors);
- default prices, which processors in a market are required to publish and make available to all their suppliers as a starting point for price negotiations;
- the development of mandatory industry codes, which usually specify minimum standards for contracts between processors and farmers and establish dispute resolution processes; and
- a requirement to offer a pool option which producers can opt into to share risk and even out returns.
All of these have advantages and disadvantages, which vary depending on the specific nature and structure of the market in question.
The ACCC, through its agriculture unit, has been heavily involved in investigations and analysis to better understand these changes, and to assist in the development of appropriate policy responses.
Our beef and cattle market inquiry identified opaque pricing as a growing threat to competition in Australian cattle markets, and made a number of recommendations about pricing transparency and market reporting to try and address this.
A number of these have been adopted by industry or are under consideration by government, while others have been strongly resisted. Further progress to improve competition will require strong support from cattle farmers.
The ACCC’s recent dairy market inquiry found opaque pricing and associated unfair contracting practices to be a major factor limiting competition for farmer’s milk in Australia. Our inquiry recommended, among other measures, the adoption of a mandatory code requiring minimum standards in contracting, and the development of reference pricing to assist farmers to compare price offers from processors.
The ACCC has also reviewed terms in the contracts offered by all major dairy processors in Australia, and taken action to have unfair terms removed from those contracts.
In addition, the ACCC has successfully taken court action against senior executives of Murray Goulburn in response to actions taken by that organisation in April 2016.
The horticulture sector has had a mandatory code in place for over five years, aimed primarily at addressing unfair practices in major produce markets. This code has recently been reviewed and improved, including with the addition of penalties for breaches of the code.
The ACCC has recently taken action and imposed penalties on fresh produce traders for breaches of the horticulture code, and has other investigations underway.
In addition to these specific responsibilities, the ACCC also regularly undertakes reviews of mergers in various different sectors of agriculture, including between processors and farm input suppliers.
During recent times this has involved the Saputo takeover of Murray Goulburn (where we required the divestment by Saputo of the Koroit processing plant to maintain competition in that region) and the mergers of major multinational agricultural companies (where we determined there would be minimal adverse competition effects in Australia).
In concluding, it is important to be aware that the agriculture sector in Australia, and in many overseas locations, is undergoing significant change as the sector adjusts to the increasing specificity of consumer requirements in domestic and global markets.
As consumer wealth increases and food purchases account for a decreasing proportion of disposable income, consumers have demonstrated a willingness to pay premium prices for specific food characteristics, with this willingness to pay based on the level of trust they have in the information associated with the food they purchase.
There are weaknesses in the information systems that currently operate to inform consumers about the characteristics of the food they are purchasing, and these weaknesses have the potential to harm consumers and farmers, unless they are addressed.
Given the significance of premium food markets in the recent growth in the value of output of Australian agriculture, the sector can ill-afford to ignore this issue. If consumer trust is damaged, their willingness to pay premium prices will diminish very rapidly.
At the same time, changes in agricultural commodity markets associated with higher value and premium markets – in particular the development of more closely integrated supply chains linking farmers and processors – have resulted in weakened competition at the farm gate due to opaque pricing and reduced price transparency. Concentrated effort is required by farmers to develop and implement measures aimed at addressing this weakening of competition, otherwise a fair share of the benefits associated with premium markets will not be captured by farmers.