Competition Law

Australian Competition Law and Policy Discussion

Posts Tagged ‘milk wars’

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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Milk inquiry interim report released

Posted by Julie Clarke on 20 April 2011

The Senate has released its interim report on the infamous ‘milk wars’.

It recommends as follows

The Committee calls on the Government to table a formal response to the Committee’s report Milking it for all it’s worth—competition and pricing in the Australian dairy industry by 13 May 2011, which will be a year after it was tabled.

Yes, that is it – I kid you not – in this much anticipated report which is a whole two pages long (this is after they asked for and received an extension on the report date).  Pretty exciting stuff.  I’m glad I didn’t hold my breath.  The Senate blames Coles (and the government for not responding to a previous inquiry).  Who is surprised?

A further interim report is promised by 10 May and final report by 1 October.  I can’t wait.

View more information about the inquiry here.

Regards

Julie

(I can’t update my web site because I’m sitting in an airport lounge – but will do so when I return from leave on 2 May 2011)

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Milk, beer and the political hijacking of competition policy in Australia

Posted by Julie Clarke on 3 April 2011

First the milk wars.  Now the beer wars.  Never before have we been so concerned about cheap drinks.  Normally the complaint is quite the reverse.

Over the last few years we have been pestered repeatedly with little reactive and industry-specific inquiries (normally by the Senate) which propose fundamental changes to competition policy for the purpose of satisfying a perceived industry-specific issue.  We have also seen unprecedented political interference in the application of competition policy (not policy on its merits – but its effectiveness in certain isolated cases).  We saw it with the ill-conceived Senate Inquiry into the ACCC’s Metcash decision (something the Senate quickly backed away from when it realised the matter was going to be litigated), the ill-considered proposals presented for the introduction of industry-specific price signalling laws (which, unfortunately, are likely to pass), the multiple inquiries into the milk industry and most recently the media furor over Foster’s decision to withhold supply of beer for fear that it would be sold cheaply.  The discussion has been highly politicised and is far removed from the independent inquiry process we would hope preceded any significant change to competition policy.

Let’s focus on the Senate’s obsession with milk.  In 2010 we had an inquiry into milk – the Senate Economics Reference Committee – Milking it for all it’s worth – competition and pricing in the Australian dairy industry. The Senate Committee made a number of bizarre recommendations which are now being re-“investigated” by the current Senate inquiry desperate to protect the dairy farmers.  And it masquerades as an inquiry into the competition laws.  Some of the terms of reference point directly to competition policy reform – the first is TOR (c) whether such a price reduction is anti-competitive; TOR  (d) the recommendations of the previous milk inquiry and (e) whether there is need for legislative reform.  The rest relate more specifically to aspects of the dairy industry.  Yet most attention seems to have focused on the alleged ‘anti-competitive’ nature of Coles’ discounting, with various accusations being made – typically from Senators Xenophon and Heffernan – about the ACCC’s ‘weakness’ in this area.  Indeed, the ACCC was attacked relentlessly (and unfairly) when it appeared before the Senate – and repeatedly it had to remind the Senators that much of what they were getting upset about had little or nothing to do with competition policy and at the very least didn’t raise any concerns about contraventions of the Act.  Independent experts were also not spared – unless of course they shared the same obvious pre-conceived views about the inquiry as the most vocal Senators (Senator Heffernan felt free – has he has on many occasions – to slander certain witnesses with the benefit of parliamentary ‘privilege’).  View some extracts from the Senate Committee Hansard here.

The biggest buzz term has been “predatory pricing”, a practice which has a unique meaning in Australia because of the embarrassing Birdsville Amendment introduced a few years which makes sustained below cost pricing by anyone with substantial market ‘share’ illegal if it can be established that they had one of three prohibited purposes (harming competitors etc).  It’s not matched by any credible regime around the world – they are more concerned with the economics of predatory pricing and it’s likely impact on competition than prohibiting low cost pricing which is generally what we hope competitive markets can deliver.  Predatory pricing becomes a concern if the company involve succeeds in eliminating all competition with the result that it can subsequently charge much higher prices for those goods to recoup sustained losses.  But it’s unlikely to occur here.  Even if it could be demonstrated Coles was ‘below cost’ pricing – whatever that means (the Act doesn’t care to define it for us),  Woollies will match them.  So will some others.  And not everyone is switching to homebrand or avoiding convenience stores (which are, after all, used for their convenience, rather than their competitive pricing).  Aldi’s not likely to go out of business because of the price of milk.

Ultimately if there is demonstrable evidence that the dairy industry would be harmed as a result (and by this I mean a net loss of farming and output, not the impact on any individual farmer) then it will be for the government to determine if they should interfere rather than let the market sort it out.  It’s unlikely less milk will be produced – given demand will remain high it’s not in the interests of the retailers to reduce supply which will increase their purchase costs, at least in the medium to long term, as well as upset their customers.  But some farmers may be hurt and the milk processors will lose out if demand for branded milk declines.   This is a normal consequence of a free market – even one in which two retailers hold a significant chunk of the market share – and any interference should be targeted and industry specific and should not masquerade as competition policy.  It should be labeled what it is, protection and/or subsidy for the dairy industry.  Then we can have an honest debate about whether or not that is desirable and, perhaps, why the dairy industry is more deserving of protection than many others that have had to survive tough competitive conditions.

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