Competition Law

Australian Competition Law and Policy Discussion

Milk inquiry second interim report released

Posted by Julie Clarke on 10 May 2011

The Senate has released its 98 page second interim report on ‘The impacts of supermarket price decisions on the dairy industry‘.

Committee comments

The committee notes that many of the issues raised by the inquiry ‘require scrutiny over a longer period of time’.  Accordingly, it concludes that ‘it is not able to draw final conclusions or make recommendations at this stage’. Recommendations will be made in the final report to be released in October.

The report is divided into five chapters.  The first is introductory, discussing the referral of the inquiry, the conduct of the inquiry and an outline of the report.  Chapter 2 deals with the supermarkets’ recent pricing decisions, chapter 3 with the Australian dairy industry, chapter 4 with prices and profitability in the supply chain and chapter 5 with the supplier-purchaser relationships.

In chapter 3 they make the important point that only about 25 per cent of Australian milk production is used for drinking milk and only about 13 per cent of national milk production is sold in supermarkets as drinking milk.  Coles estimates its share of this ‘drinking milk market’ to be approximately 17 per cent (total sales accounting for only four per cent of the national milk production) (p 33) – this gives a perspective rarely reported.

In concluding comments the report observes (at p 64):

While the committee is mindful of the  many submissions outlining the potential impacts of lower supermarket milk prices on the dairy industry, it is equally cognisant of the benefits to consumers from sustained lower prices.  As a general rule, lower  pries are good for consumers. …

They reserve final conclusions until they know the duration of the ‘Down Down’ campaign and the ‘outcome of renegotiated contracts with the processors and impact on farmgate prices’.  Further submissions are invited regarding these two matters to help inform the final report and recommendations to be released by 1 October.

Then there are two sets of Additional Comments.

Additional Comments by Xenophon, Heffernan, Williams and Milne

The first ‘Additional Comments’ are by a group Senators comprising Nick Xenophon, Bill Heffernan, John Williams and Christine Milne.  Of this group only Senator Xenophon is a member of the Committee; the others are participating members in the inquiry.

The Comments by this group are entirely predictable.  They’re not happy with the Government and they’re not happy with the ACCC, for whom they reserve their most vicious attack.  Their comments start with a lengthy and emotive extract from a letter by a dairy farmer worried about the future of the industry.  More comments from dairy framers follow.  They conclude (without any apparent justification) that the ‘benefits of the milk price war will inevitably be short lived’ and could result in higher future prices and ‘irrevocable damage to Australia’s dairy industry’ (p 66).

They then refer to the 2009/2010 milk inquiry resulting in the report: ‘Milking it for all it’s worth‘.  The Government (to the relief of many) has not acted on this report which included, among its 16 recommendations, that anti-price discrimination provisions be enacted and that a specific market share be presumed to constitute market power.  The Senators claim that had the recommendations been adopted the ‘current difficulties being felt by the dairy industry could have been ameliorated’ (they do not explain how) (p 67).

Then they turn their attention to the ACCC’s role (or, as they claim ‘lack thereof’).  They claim the ACCC’s evidence to the inquiry has been ‘less than satisfactory’ and that they have taken a ‘wait and see’ approach to the  milk price war which is unsatisfactory ‘given the statutory powers and enforcement mechanisms available to it’ (p 68).  They  note that the ACCC told the Committeee that it has to have ‘reason to believe that there may’ be a ‘breach of the law or predation’ before acting.  The Senators dismiss this as only the ‘ACCC’s interpretation of the Act’ (p 69).  They rely on evidence from highly self interested parties (Woolworths and processors) to claim that there is sufficient evidence of future harm (p 69) and further cirticise the Treasurer for also adopting an apparent ‘wait and see’ approach.

The Senators then turn their attention to claims of misleading conduct – in particular, they claim Coles’ Down Down campaign is misleading.  They criticise the ACCC for not taking pre-emptive action for misleading and deceptive conduct:

[p 70]: … the ACCC again advised that it cannot investigate any misleading or deceptive conduct around this claim until the conduct has occurred.  This sort of reactive approach is a fundamental flaw in the role, the operations and the attitude of the ACCC

How odd that a regulatory body should not be able to sue someone for a crime or regulatory breach before it has occurred!  So apparently they wish Coles to be sued for misleading conduct without any evidence of that breach on the off-chance their statements may prove to be misleading in the future … clearly the Senators don’t bother reading the act or understanding the policy behind it.

Then we turn to the infamous Birdsville Amendment and to nobody’s surprise they rely on evidence from Frank Zumbo, drafter of the bill, whose obsession with it is legend.  It was enacted in 2007; the Government has sought to amend it to remove its most offensive aspects but has been prevented by a hostile Senate; an OECD report has recommended that it be repealed.  Yet Zumbo and these Senators press on, criticising the ACCC for not having tested the provision and claiming that the ‘ACCC should pursue this matter as a test case to see how the courts will rule on this key predatory pricing provision’.

They claim the ‘inaction of the ACCC … is extraordinary’ (at p 73) and claim there has been an ‘apparent lack of enforcement of current competition laws’. Clearly they suggest that the only conduct on the ACCC’s part that would be considered ‘action’ involves suing Coles, as the ACCC has given an abundance of evidence that it has been monitoring the pricing situation.

They further claim that divestiture powers should be introduced (their targets are clearly Coles and Woolworths), claiming (falsely) that the US use these powers to break up companies that become too large (while certain divestiture powers do exist the US takes a very hostile approach to just breaking up companies which succeed in acquiring market power/share)

They also recommend that unfair contract terms provisions under the Australian Consumer Law be extended (it’s an amendment smorgasbord that’s proposed).

Finally they claim that ‘a floor price should be implemented for domestic drinking milk supply as an urgent interim measure’ (p 73) – this is highlighted in a media article by Julian Drape in the SMH yesterday (‘Dairy farmers need floor price: Xenophon‘)

Additional Comments by Senator Scott Ryan

Fortunately Senator Scott Ryan, who provided the voice of reason in the Senate hearings, has provided an equally well reasoned ‘Additional Comment’ of his own beginning p 74, which points out some of the flaws in the Additional Comments by the other group of senators.  He first sets out the purpose of competition and competition policy, noting, in particular, that

‘competition policy is not designed to protect particular players, institutions or firms.  To do so at the expense of consumers would be a retrograde step, and represent a significant regression of the reform agenda of the last two decades.’

He also observes that while there have been many submissions to the inquiries from those in the industry, the inquiries do not ‘hear from the great mass of consumers. Consumer preferences are expressed and revealed through their spending’ (p 75).

He also notes the important point that supermarkets do not source their drinking milk directly from farmers, but rather from processors who have the contractual relationship with the dairy farmers.  In this respect, he observes that some of ‘the most concerned witnesses and submissions about the retail price cuts were the milk processors’.  He notes that a decline in the value of processor-owned brands through exercise of consumer preference to generics ‘is not something that should be discouraged by public policy’, pointing out that in other areas – such as medicines, the government encourages the use of generic brands.  He observed (at p 77) that there was unchallenged evidence before the committee that current milk competition was saving consumers $1m per week.  It should, he claimed, be acknolwedged ‘that consumers are experiencing an improvement in their welfare through lower prices’.

He further notes – sensibly – that, contrary to what certain Senators seem to believe,

‘Supermarket chains should not be forced to defend themselves in the first instance for behaviour thatthe market itself encourages and which we generally desire – in this case lowering prices.

Allegations of predatory behaviour or misleading conduct are serious and should be investigated – but they need to be proven.’

He notes that the recent milk competition has illustrated ‘the competitiveness of the supermarket retailing sector, at least at the moment and in this instance’ (pp 77-78) and this should be considered a positive outcome.

Senator Ryan then turned (briefly) to the ACCC.  He noted that many years ago Parliament had made a decision to create an ‘independent’ body to make determinations regarding the operation of markets which would be free from the interests of politics and politicians.  He did, however, acknowledge concerns about enforcement by the ACCC, attributing some concern to lack of public awareness about ACCC activity; in this respect he suggested providing greater public information about ACCC activities to build public confidence and knowledge, thereby increasing accountability.

The well reasoned and sensible approach taken by Senator Ryan in his remarks is in stark contrast to the reactive and emotional rant evident in the Additional Comments by the other group of Senators; one can only hope that the final report will follow Senator Ryan’s approach.

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