Australia’s small-scale farmers are ‘meat in a market concentration sandwich’

We hear a lot about consumers being screwed by the Australian supermarket duopoly, but how do you think farmers feel?

Andrew Leigh, the Assistant Minister for Competition, says this country’s small-scale farmers are being hit by concentrated markets on “both sides”, at numerous points in the agricultural supply chain.

Farmers ‘often caught in the middle’

Dr. Leigh is speaking today at the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES).

The title of his talk is Caught in the Middle: How Market Concentration Hurts Farmers.

He has done a lot of academic and political work on the problem of climate change market concentration in Australiaand today’s speech is part of that project.

Leigh says if you apply the rule of thumb that a market is ‘concentrated’ if the four largest companies control a third of the market or more, more than half of the industries in the Australian economy are concentrated markets.

He says market concentration is causing problems for our farmers, with IBIS World data on market concentration in the agricultural supply chain showing that farmers are ‘often caught in the middle’.

Upstream, farmers face concentrated markets for their inputs:

“The four largest fertilizer manufacturing companies in Australia have a combined market share of 62 per cent,” he says.

‘The largest four in the retail trade in hardware and building materials control approximately 49 percent of the market.

“And the garden supply retail market share is about 33 percent for the four largest companies.”

Downstream they face concentrated markets for processing, freight and retail:

“According to industry reports from IBIS World, there is concentration in fruit and vegetable processing, with the four largest companies holding approximately 34 percent of the market.

“For meat processing, the market share of the four largest companies is 44 percent, with JBS Australia, Thomas Food International and Teys Australia being the dominant players.

“For rail freight, the four largest, including Aurizon and Pacific International, have a combined market share of 64 percent.

“For freight shipping in Australia, the market share of two companies – ANL and Maersk – is approximately 85 percent.”

Leigh says the data shows our agricultural supply chain is highly concentrated at a national level.

But for many farmers, he says, their options are even more limited than the numbers suggest, as transportation costs and risk of spoilage further limit the commercially viable options available to them.

What are some examples?

Start upstream.

Leigh says agricultural equipment and machinery represents a significant capital investment, involving both upfront and ongoing costs.

But many farmers “feel like they have no real choice or ability to shop around.”

He says the Australian Competition and Consumer Commission (ACCC) discovered that a few years ago agricultural machinery markets are concentrated at the manufacturer and dealership level.

“Compared to automakers, agricultural equipment manufacturers have a greater ability to leverage their market share in new sales to reduce competition in the maintenance, repairs and parts markets,” he says.

“Warranties limit the buyer to one authorized dealer for maintenance and repairs.

“And technical limitations mean that independent repairers or farmers don’t have access to the parts, manuals and diagnostic software they need to make repairs.

“In short, farmers have little choice in purchasing equipment, but even less choice in maintaining or repairing that equipment.”

Leigh says he has long advocated the need to share service and repair information with independent repairers, and that includes the agricultural sector.

‘In July 2022, I launched Australia’s first right to reparation, the Arrangement for sharing information on motor vehicle service and repair,” he says.

“The Government is currently monitoring how this scheme functions for the benefit of independent repairers and consumers.

“I am pleased that there have been negotiations between Australian farmers and the agricultural machinery industry to consider introducing voluntary repair schemes for the sector.

“I encourage parties to continue these negotiations as voluntary arrangements are a great opportunity to promote cooperation and flexibility and can often lead to innovative and effective outcomes,” he said.

A beef with competition

Or look at how market concentration plays out in other areas of farm life.

In December last year, the National Farmers’ Federation (NFF) released a discussion paper criticizing the lack of transparency and competition in agricultural supply chains.

“As market concentration in Australia has increased, farmers have had fewer places to buy inputs and fewer places to sell their products,” argued the NFF.

“Businesses benefit from this with higher input prices, lower output prices, higher compliance costs, shifting the burden of risk to farms and increasing uncertainty for farmers.

“Reduced competition in the agricultural supply chain means that farmers are not receiving the incomes they should receive in an otherwise competitive market. This has direct implications for their competitiveness, profitability and long-term economic and environmental sustainability.”

Leigh says the concerns in that NFF article mirrored those of the ACCC market study for cattle and beef from 2017.

“That research shows that conflicts of interest frequently arise in auction transactions, where buyers bid for livestock on behalf of multiple clients, and when agents represent both a livestock seller and a livestock buyer in the same transaction,” says Leigh.

“The report pointed out that livestock auctions have features that make it easier for cartels to develop, including repeated interactions with the same auctioneers, who are often linked by social networks that make it easier to ‘punish’ auctioneers who break agreements anti-legislation. competitive bidding practices.

“Other problematic behavior included the exclusion of rival agents and a lack of transparency around point-of-sale weighing protocols.”

Leigh says beef and cattle farmers also face opportunistic behavior from some companies during periods of extreme stress.

Unfair contract terms

Leigh says unfair contract terms are another problem farmers face.

He says contract terms can be very lopsided, for example when they allow a more powerful party to unilaterally change prices or cancel a contract.

According to him, there is still a lot of room for improvement in this area.

“Last year the ACCC investigated complaints about fertilizer companies using contracts that could disadvantage farmers,” he says.

“Contract terms would have given major suppliers the right to unilaterally vary the quantity supplied or to terminate the agreement, preventing buyers from raising concerns about defects.

“Fertilizer suppliers cooperated and changed the terms to address the ACCC’s concerns,” he said.

In another example, he says in 2019 the federal court declared that Mitolo Group, Australia’s largest potato wholesaler, used unfair terms in contracts with growers.

He says the court invalidated contract terms that allowed Mitolo to unilaterally fix or vary the price paid to growers.

It also declared invalid conditions that prevented growers from selling potatoes to other buyers, and conditions that prevented farmers from selling their properties unless the buyer entered into a contract with Mitolo.

He says the Albanian government has tried to address this problem.

“In 2022, we delivered on our promise to strengthen legislation on unfair contract terms,” he said. “We have introduced civil penalty provisions that prohibit the use of and reliance on unfair terms in standard form contracts. And we have expanded the coverage of protections.”

Economic damage from concentrated markets

Leigh says it’s an ongoing battle.

He says merger regulation is one of the “key pillars” of competition law, but the Competition Taskforce recently found that Australia’s “ad hoc” merger process is unsuitable for a modern economy.

“In response, we have announced the most significant merger reforms in almost fifty years.”

He says national competition policy needs to be revived to take into account the changes in the economy that have occurred since the 1990s. These changes include digitalization and the net-zero transformation.

Overall, he says competitive markets are important in all parts of the Australian economy, “but especially in the agricultural sector.”

“As Mick Keogh of the ACCC puts it succinctly: ‘There are lots of farmers, but few processors or wholesalers, and even fewer big retailers,’” says Leigh.

‘As my analysis of IBIS World data shows, small-scale farmers are often the meat in a market concentration sandwich.

“Upstream there is often no choice when it comes to dealing with large-scale input suppliers. Downstream, there is often no choice when it comes to negotiating with larger processors and retailers.

“Higher prices for inputs. Less choice for repairs. Power imbalance in negotiating contracts. A lack of transparency around prices. And potentially unfair contract terms,” ​​he says.

And don’t forget the Australian supermarket reality.

“Coles and Woolworths account for around 67 per cent of national retail sales,” says Leigh.

“Only two OECD countries – New Zealand and Norway – have a larger sales market share controlled by two supermarkets.”