Trading Laws Need Tune-Up

I was in Mareeba recently talking to growers about the difficult market structure they faced.  I asked: "Why don't you get together and collectively bargain so that you can counterbalance the power of buyers?"  The growers said to me they tried that a few years ago.  Three big growers had had enough: they all agreed not to supply the Cairns market the next Saturday.  The next Saturday came, and the grower who left at 5.30 in the morning passed the other two who were already on their way back from Cairns.

This is a perennial problem for farming. There are always a lot of farmers but not many buyers.  There is almost perfect competition between farmers but only imperfect amounts of it between buyers of farming products.  It's why JFK's quip still rings true: "Farming is the only business that pays retail, sells at wholesale and pays the freight in both directions."

 Changes in the agricultural marketplace in the past few decades have reduced the bargaining power of farmers.  Single desks have been deregulated, farm price supports have been removed and many farmer cooperatives were sold to private companies.

 The reason for the changes is less important now than their effect; and their effect has been to reduce the bargaining position of the agricultural sector.  Perhaps in earlier times farmer cooperatives and single desks provided a countervailing force against the power of large buyers of produce.  But that is changing as farming has become more competitive and food processing has become more concentrated.  This process is playing out starkly in the sugar and beef industries in Queensland. 

 A large multinational is proposing that canegrowers should no longer have ownership or direct control over the marketing of the sugar they grow.  Sugar mills are in a unique buying position.  Most canegrowers can only economically supply one mill.  Sugar degrades in quality in the field so they cannot store sugar the way you can store grain, during a contractual dispute.  In other words, sugar mills have them by the proverbials. 

 Meat is a different game. There are more options for sale and storage but the processing sector is becoming more concentrated nonetheless.  Last week's announcement that JBS is set to purchase small goods producer Primo continues a trend to more concentration, and now about half of Australian beef is processed by just two companies.  Our beef sector is approaching levels of concentration seen in our Colworths-dominated retail sector.

 Our response to these changes should be the same.  If the laws and policies we have no longer suit the market, then those laws and policies should change.  The competition laws we made for a sector with more farmer cooperation may not suit our more concentrated, modern agricultural market. 

 That is why many in the sugar industry have put forward suggestions for stronger state laws or a code of conduct under the federal Competition and Consumer Act 2010.  The federal government recently established a code of conduct for grains. This was done because grain growers can only export through a limited number of bulk export terminals.  The code gives grain growers rights to access these infrastructure bottlenecks so they cannot be locked out of international markets.

 In the beef sector, many have suggested the need for greater transparency on pricing and quality downgrades.  In the US, there is greater transparency through the Packers and Stockyards Act.  The Aus-Meat standards applied in Australian meatworks are applied inconsistently and temperamentally.  They desperately need an overhaul. 

 More generally, Australia's competition laws should be strengthened, such as through an effects test and divestiture powers, to reflect a more concentrated marketplace.  Next year, the government will respond to the Harper Review of Australia's competition laws.  John Kenneth Galbraith observed that ownership of land was for centuries the symbol of power when food production was a larger share of production.  But in the past 200 years the owners of capital have supplanted the role of the owners of land.

Originally published in Queensland Country Life on 4 December 2014

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