Regulation of Agriculture

The inquiry was announced by the Hon Scott Morrison MP and the Hon Barnaby Joyce MP on 20 November 2015 with the release of the terms of reference.

• View media release
• View terms of reference

The media release stated:

Today the Turnbull Government has released the terms of reference for the Productivity Commission’s inquiry into regulation of the Australian agricultural sector, with the inquiry to commence immediately.

Regulation has important objectives including protecting consumers from unsafe food, protecting the environment and supporting the export of goods. However poorly implemented and administered regulation and the cumulative impact of regulation can have adverse effects on farm businesses.

The inquiry will focus on regulation with a material impact on domestic and international competitiveness of farm businesses and the productivity of Australian agriculture. It will define priority areas for removing or reducing unnecessary regulatory burdens where doing so contributes to improved productivity for farm businesses as well as the wider economy. It will also take into account regulation in key supply chains.

The Productivity Commission will consult broadly with government and non-government stakeholders in developing its recommendations, and will examine submissions made to the Agricultural Competitiveness White Paper and the White Paper on Developing Northern Australia and other relevant material in the public domain.

The Agricultural Competitiveness White Paper was a key Coalition election commitment to the farm sector, and the Productivity Commission inquiry is a much anticipated initiative of the white paper.

The Productivity Commission is due to report within nine months.

...

The scope of inquiry is set out in the terms of reference

Terms of reference

I, Scott Morrison, Treasurer, pursuant to Parts 2 and 3 of the Productivity Commission Act 1998, hereby request that the Productivity Commission undertake an inquiry into the regulatory burden imposed on Australian farm businesses.

Background

The Australian Government has identified the agriculture sector as one of the five pillars of the economy. It is promoting the economic potential of the sector by removing unnecessary regulatory burdens and promoting improved productivity and global competitiveness.

The Australian Government's deregulation agenda has focussed on reducing Commonwealth red tape. As part of its deregulation agenda, the Government is implementing reforms in agricultural and veterinary chemicals, biosecurity and export certification. However, there is an opportunity for better national outcomes for the agriculture sector by considering regulation at all levels of government.

This is particularly applicable in the areas of transport, environmental protection, native vegetation management, land tenure, animal welfare and food safety in which the states and territories have significant responsibility.

While regulation targets valid objectives, such as protecting consumers from unsafe food, protecting the environment or supporting the export of goods, poorly implemented and administered regulation and the cumulative impact of regulation can have adverse effects on farm businesses. It can unnecessarily restrict farm management decisions and reduce investment.

Inconsistent and overlapping regulations between jurisdictions can also create adverse effects and raise costs for farm businesses.

Scope of the inquiry

The inquiry will focus on regulation with a material impact on domestic and international competitiveness of farm businesses and the productivity of Australian agriculture. The inquiry will define priority areas for removing or reducing unnecessary regulatory burdens where doing so will/can contribute to improved productivity for farm businesses as well as the wider economy.

The inquiry will also review regulation of farm businesses to identify unnecessary restrictions on competition.

While focussed on the impact of regulation on farm businesses, the inquiry should also consider the material impact arising from regulation imposed along the supply chain such as regulations introduced to meet the requirements of international markets.

Consistent with its legislative remit, the Commission is to have particular regard to:

• areas of regulation that directly affect farm businesses, including those identified as areas of concern through the white papers on agricultural competitiveness and northern Australia. This includes regulatory arrangements affecting access to new technologies, investment opportunities, land tenure, relevant environmental protection and native vegetation laws, animal welfare and the Exporter Supply Chain Assurance System
• areas where there is greatest scope to reduce unnecessary regulatory burden and pursue regulatory objectives in more efficient (least cost) ways
• whether the current level at which matters are regulated (national, State and local) is appropriate and whether there is scope for better coordinated action across governments to reduce unnecessary overlap
• whether Australia's farm export competitiveness can be improved by minimising duplication between domestic regulation and importing country requirements
• relevant regulatory approaches adopted in other countries.

Specific requirements

In undertaking the inquiry, the Commission should:

• identify specific areas of regulation that are unnecessarily burdensome, complex or redundant
• identify priority areas for regulatory reform
• provide recommendations to alleviate regulatory burden identified.

For the purposes of this inquiry, the regulatory issues affecting:

• marine fisheries and aquaculture industries will be investigated as part of a separate Productivity Commission inquiry into the Regulation of Australian Marine Fisheries and Aquaculture Sectors.

Process

The Commission is to advertise nationally, consult with key interest groups and affected parties, hold hearings, invite public submissions and release a draft report to the public.

To expedite the review the Commission should consider relevant submissions to the white papers on agricultural competitiveness and Northern Australia and other relevant material in the public domain.

The final report should be provided within nine months of the receipt of these Terms of Reference.

Scott Morrison
Treasurer
[Received 20 November 2015]

The Issues Paper was released on 22 December 2015

• View issues paper

The draft report was released on 21 July 2016.

• View Draft Report

Chapter 11 deals with competition regulation. Briefly, the draft report concludes that:

'Competition is a key driver of innovation, productivity and competitiveness in agriculture. However, there are longstanding concerns about small farm businesses being subject to anticompetitive behaviour from dominant market players in the supply chain....' (p 28)

'The existing competition regulation and oversight is adequate for managing concerns about abuse of market power by supermarkets and traders engaging with farm businesses. The current focus on the potential for the misuse of market power by wholesale merchants and supermarkets engaging with farmers is not well supported by evidence.' (p 29)

'Suggestions to amend section 45 of the Competition and Consumer Act 2010 (Cwlth) are unlikely to increase the adoption of collective bargaining because they do not address significant economic disincentives and a cultural aversion in the agricultural sector to participating in cooperatives. Introducing an ‘effects’ test to section 46 of the Act is also unlikely to shield farm businesses from intense competition in retail food markets.' (p 29)

Draft finding 11.2 states (p 438):

DRAFT FINDING 11.2
Existing competition regulation and oversight is adequate for managing the risk of supermarkets abusing market power in their dealings with farm businesses and wholesale merchants.

Suggestions to amend exemptions that allow collective bargaining under section 45 of the Competition and Consumer Act 2010 (Cwlth) are unlikely to increase collective bargaining by farm businesses.

The report also considered various aspects of regulation within the agricultural sector, particularly relating to potato prices and re-regulation of the sugar industry in Queensland. Industry codes were also considered. See generally ch 11 from p 409.

Australia’s core competition law provisions are contained in the Competition and Consumer Act 2010 (Cwlth) (CCA). The objective of the CCA is to ‘enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection’. The Australian Competition and Consumer Commission (ACCC) is responsible for ensuring compliance with, and enforcement of, the CCA.

Competition law can increase economic efficiency by discouraging firms from interfering with the competitive process. It can also provide a degree of certainty about whether certain types of practices are acceptable.

As discussed earlier, farm businesses continue to be concerned about an imbalance in bargaining power and inefficient or unfair commercial outcomes. For example, the NSW Farmers’ Association said that:

In the case of agriculture, there is an existing imbalance between participants in the supply chain. (sub. 72, p. 39)

The NSW Farmers’ Association also indicated that the consolidation of the red meat processing, grain transport and horticultural industries have made farm businesses in these markets particularly susceptible to the misuse of market power.

The Australian Dairy Farmers expressed similar concerns in the context of dairy farm businesses.

Fluctuations in input costs, the impact of climatic variations, limitations in infrastructure and the perishable nature of produce leave some farmers in an economically vulnerable position operating under extremely tight margins. These market factors result in imbalances between participants in the supply chain. (sub. 63, p. 9)

In general, section 45 of the CCA prohibits arrangements that substantially lessen competition. However, it also authorises exemptions that allow small businesses to bargain collectively with larger businesses and to strategically use boycotts as part of these negotiations (box 11.2).

Box 11.2 Collective bargaining and boycotts

Collective bargaining is an agreement by two or more competitors to negotiate with a supplier or a customer over terms, conditions and prices. A group of businesses may sometimes appoint a representative, such as an industry association, to act on its behalf in the negotiations.

A collective boycott occurs when a group of competitors agree not to acquire goods or services from, or not to supply goods or services to, a business with whom the group is negotiating, unless the business accepts the terms and conditions offered by the group.

Exemptions - in some circumstances, allowing collective arrangements may be in the public interest. The Act allows protection from legal action to be granted to parties to engage in anti-competitive conduct, including collective bargaining and boycotts, when there are public benefits that would outweigh the detriments to competition.

There are two ways that businesses can obtain an exemption from the competition provisions of the Act for collective arrangements - authorisation and notification.

Source: ACCC (2011).

As noted by the ACCC:

… small businesses are often more likely to be heard on terms and conditions if they join with other small businesses to collectively negotiate with a larger business, rather than one-on-one. However, negotiating collectively may breach the [CCA]. (2011, p. i)

The ACCC (2014b) also said that collective bargaining can provide benefits by overcoming information asymmetries, reducing the time and transaction costs associated with establishing supply agreements, and strengthening bargaining power.

To take advantage of these benefits, small businesses can apply to the ACCC for an exemption to engage in collective bargaining and/or collective boycotts through the authorisation or notification provisions of the CCA. For most sectors, collective bargaining is allowed if the annual value of transactions affected is less than $3 million.

Adoption is low among farm businesses

A number of participants said that collective bargaining is an important tool for addressing bargaining power imbalances (Australian Dairy Farmers, sub. 63; AgForce, sub. 17; NFF, sub. 61). Canegrowers (sub. 22), for example, reported that collective bargaining is used in the sugar industry to negotiate the terms of cane supply to the mills. However, the ACCC’s ‘authorisations & notifications’ register reveals that exemptions to section 45 have only been approved eight times for five small groups of farmers in the citrus, chicken and dairy industries (ACCC 2016b).

The low adoption of exemption provisions is probably not surprising as there are only a limited group of farmers that operate with similar conditions and levels of productivity and profitability. And it is under these conditions that there will be an incentive for them to bargain collectively.

However, some participants argued that amendments could be made to section 45 of the CCA to improve competition. The NFF, for example, said that:

… there are opportunities to amend certain regulations placed on collective bargaining, which in doing so will enhance competition within the market place. (sub. 61, p. 28)

The Australian Chicken Growers’ Council (sub. 51) noted that under the current arrangements there is no requirement for either party to engage in the negotiation process, and a group of growers cannot compel the processor to enter into negotiations. The Council recommended a provision in the authorisation process that requires all parties to participate in collective negotiation.

Calls for section 45 of the CCA to be amended, based on the low adoption of collective bargaining by small businesses, are not new. In 2007, the Australian Government increased the threshold for the primary production industry to $5 million (ACCC 2011).

In its submission to the Competition Policy Review (the Harper Review), the ACCC said that ‘deficiencies in the current collective boycott notification provisions may be deterring bargaining groups from seeking an exemption for efficiency-enhancing conduct’ (2014b, p. 109). It recommended amendments that would provide the ACCC with more flexibility in the way it assesses proposals for boycotts, and that would provide bargaining groups with more flexibility in submitting proposals.

The Harper Review found a low level of awareness of the collective bargaining provisions and recommended that the notification process for collective bargaining be enhanced to improve small business awareness, and that the CCA be reformed to introduce greater flexibility in the notification process for collective bargaining. The Harper Review also recommended that the current maximum value thresholds for a party to notify a collective bargaining arrangement be reviewed to ensure that they are high enough to include typical small business transactions (Harper et al. 2015).

The Agricultural Competitiveness White Paper also partly attributed low adoption to low levels of awareness of the collective bargaining provisions among small businesses. The Agriculture Competitiveness White Paper, for example, said that:

Farmers are asking for more information about cooperatives and other innovative business models to assist them to strengthen their financial position, be more attractive to investors, improve their bargaining position and operate beyond the farm gate. (Australian Government 2015a, p. 31)

The Australian Government supported the Harper Review’s recommendation of raising awareness by committing $13.8 million to a two-year pilot program to provide farmers with knowledge and materials on collective bargaining, cooperatives and innovative business models. The Agriculture Competitiveness White Paper stated that the ‘information will help to counter-balance retailer and processor market power and achieve fairer farm gate prices’ (Australian Government 2015a, p. 31).

Why is there low adoption of collective bargaining by farm businesses?

A challenge for all industries, including agriculture, is that larger, more efficient businesses have an incentive to negotiate more favourable terms than the ‘pooled’ average returns achieved by collective bargaining (Lewis 1967). Low adoption of collective bargaining provisions may not mean that there are barriers to the use of exemption provisions. It could simply reflect that the economic incentives for collective bargaining are more than offset by incentives for larger and more efficient businesses to negotiate their own terms. Dealing with fewer, larger farm business may also improve the ability of wholesale merchants and retailers to meet consumer preferences for consistent and timely supply, resulting in benefits to consumers (Baker and Graber-Lützhøf 2007).

Whether or not amending section 45 will promote the adoption of collective bargaining in the agricultural sector also depends on the predisposition of Australian farmers to participate in cooperatives and other commercial corporate entities. Keogh (2013) noted that one of the interesting features of Australian agriculture is the limited presence of farmer-owned cooperatives in the agribusiness environment in Australia compared to other countries. Keogh reviewed a range of theories that have been put forward to explain this, including:

• Australian farm businesses bear more financial risk due to lower levels of government subsidies and are therefore less willing to share profits through cooperatives [fn 54 omitted]
• Australian farm businesses require more capital to bear the high risk associated with exposure to export markets, and therefore are less willing to contribute capital to cooperatives
• Australian farmers tend to live on large and sometimes remote farms, rather than living in villages and travelling out to their farm each day (attracting more self-sufficient people who are less comfortable in a cooperative structure)
• a long history of statutory marketing arrangements makes Australian farmers less willing to participate in cooperatives.

Regardless of the merit of each theory, there appears to be a cultural aversion in Australia to participating in cooperatives, and this may reduce the adoption of collective bargaining in the agricultural sector.

The Commission questions whether the suggested amendments to section 45 of the CCA will result in more farm businesses engaging in collective bargaining. Overall, the evidence suggests that the exemptions in section 45 allowing collective bargaining are only likely to benefit small groups of farm businesses with similar characteristics. The current use of these exemptions by small groups of farm businesses in the citrus, chicken, and dairy industries may therefore indicate that these provisions are working reasonably well in the agricultural sector.

The Draft specifically addresses this issue in some depth (pages 430-433):

Section 46 of the CCA prohibits corporations that have a substantial degree of market power from taking advantage of that power for the purpose of eliminating or substantially damaging a competitor, preventing the entry of a person into a market, or deterring or preventing a person from engaging in competitive conduct.

Section 46 defines conduct as a misuse of market power if it satisfied two legal tests:

• First, the conduct must have involved taking advantage of the firm’s market power.
• Second, the conduct must have been undertaken for the purpose of eliminating or substantially damaging a competitor, preventing the entry of a person into a market, or deterring or preventing a person from engaging in competitive conduct.

The Harper Review recommended that section 46 of the CCA be amended to target anticompetitive conduct that has the effect of damaging competitive processes. A key recommendation was to amend the CCA to include an effects test to:

… prohibit a corporation that has a substantial degree of power in a market from engaging in conduct if the proposed conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market (Harper et al. 2015, p. 348).

In March 2016 the Australian Government announced its intention to amend section 46 by replacing the ‘purpose’ test with an ‘effects’ test (Turnbull, Morrison and O’Dwyer 2016).

Competition is for the benefit of consumers

The Harper Review (2015) stated that regulations that deal with anticompetitive conduct are a necessary part of competition law, particularly given that the small size of the Australian economy often leads to concentrated markets. The purpose of section 46 is to protect against conduct that damages competitive processes in markets, rather than to protect competitors from the effects of competition:

… competition law is not concerned with harm to individual competitors. Indeed, harm to competitors is an expected outcome of vigorous competition. Competition law is concerned with harm to competition itself — that is, the competitive process … It would not be sound policy to prohibit unilateral conduct that had the effect of damaging individual competitors. (Harper et al. 2015, p. 339)

The ACCC also stated that section 46 of the CCA ‘is a crucial component of Australia’s competition law’, noting that the High Court of Australia ‘has described the object of section 46 as being to protect the interests of consumers and that competition is a means to that end’ (2014b, p. 76).

The NFF also acknowledged that the provisions should not be about protecting individual competitors:

Reforming misuse of market power provisions should be about protecting the competitive process, rather than protecting individual competitors. A truly competitive market, where companies succeed and fail as a result of merit, not as a consequence of dominant companies misusing market power, will best foster innovation and growth. Such innovation and growth will ultimately best serve the interests of the community. (sub. 61, p. 29)

In agricultural markets, consumer interests are served by competitive forces that improve the quality and lower the cost of food. An inquiry by the ACCC (2008) found that there was intense competition between supermarkets in retail grocery markets. The Harper Review (2015) found that this competition had intensified in recent years.

Farm businesses are largely input suppliers to wholesale merchants and supermarkets, rather than competitors in retail grocery markets. Intense competition in retail markets makes the productivity and profitability of wholesale merchants and supermarkets critically co-dependent on the productivity and profitability of input suppliers throughout the value chain, especially farm businesses. This co-dependence means that the competitiveness of wholesale merchants and supermarkets depends on their ability to pass on the competitive pressures that drive innovation, productivity and cost savings to farm businesses.

Some competition law experts argue that pressure to amend

section 46 is based partly on wanting to shield small businesses from competition. For example: Section 46 is designed to ensure those with market power don’t use it to insulate themselves from competitive pressure; but s46 shouldn’t be used to insulate small business … (Trindade, Merrett and Smith 2013, p. 6)

The introduction of an ‘effects’ test to section 46 is unlikely to shield farm businesses from intense competition in retail grocery markets. Shielding farm businesses from competition would also not be in the interest of consumers.

Evidentiary burden of the purpose test

Some have argued that the evidentiary burden of the purpose test is too high. The ACCC, for example, in its submission to the Harper Review argued that section 46 ‘is of limited utility in prohibiting conduct by firms with substantial market power which has a detrimental impact on competition’ (ACCC 2014b, p. 76). This was partly attributed to the burden of evidence necessary to prove that the intention or purpose of the commercial conduct in question was to lessen competition (ACCC 2014b).

The Harper Review concluded that section 46 could be reframed to ‘improve its effectiveness in targeting anti-competitive unilateral conduct and focus it more clearly on the long-term interests of consumers’ (Harper et al. 2015, p. 61). The review found that the ‘take advantage’ limb of section 46 is not a useful test by which to distinguish between competitive and anti-competitive unilateral conduct and noted that:

The test has given rise to substantial difficulties of interpretation, which have been revealed in the decided cases, undermining confidence in the effectiveness of the law. (Harper et al. 2015, p. 338)

A number of participants indicated that they supported replacing the existing purpose test with an effects test. The NFF said it would ‘shift the onus of consideration from what a company’s purpose of conduct was, to what effect that conduct had on any given marketplace’ (sub. 61, p. 29). Similarly, Canegrowers supported an effects test for section 46 on the basis that it shifts the burden of evidence from proving the intended purpose of anticompetitive behaviour to its impact on markets. Canegrowers suggested that giving the ACCC greater power to regulate anticompetitive behaviour would:

… shift the decisions framework from the judicial system to a regulatory system, making it more accessible to small producers facing large multinational adversaries. (sub. 22, p. 9)

Canegrowers comments were directed at the relationship between sugarcane farms and sugar mills, and the potential for sugar mills to take advantage of their regional milling monopsony power to eliminate or substantially damage Queensland Sugar Limited.

… the provisions of section 46 do not adequately deal with cases where there are significant imbalances in market power between different segments of a supply chain as occurs between sugarcane growers and the mill they supply and where the use of that market power has the likely effect of substantially lessening competition. (sub. 22, pp. 9–10)

It also said that there is a:

… role for government … to restore balance in the market for sugarcane and to establish a regulatory structure that prevents the misuse of market power, addresses market failure, and ensures cane growers are not disadvantaged by the mills they supply. (sub. 22, p. 10)

The NSW Farmers’ Association supported the introduction of an effects test to address an imbalance of market power between participants in the supply chain.

In the case of agriculture, there is an existing imbalance between participants in the supply chain. When parties with market power engage in unilateral conduct that discriminates against their competitors, the discrimination may be subtle and difficult to clearly distinguish from legitimate business conduct; however, due to the structure of the market, the conduct would still have a substantial impact on competition. (sub. 72, p. 39)

In contrast, the Pastoralists and Graziers Association of WA noted that:

… markets can be tough, unpleasant and difficult places in which to operate. Competition should be judged on the bases of efficiencies and capacity, and a failure to compete should not be protected by legislation. … Legislative protection should only be invoked when companies (or individuals) are using their market power to engage in malicious activities that are anti-competitive. (sub. 70, p. 10)

Co-operative Bulk Handling Limited (CBH) suggested that the proposed changes to section 46 could increase uncertainty and the cost of operating cooperative bulk handling of grain in Western Australia.

There is a risk that CBH’s efficiency enhancing behaviours, for the benefit of increasing growers’ export capacity and competitiveness in the global market, are likely to be captured as unintended consequences. (sub. 36, p. 11)

As a result, it contended that:

… there are existing measures that could be utilised before there is a requirement for change in section 46. However, if changes are required to be implemented then care must be taken to ensure efficiency driven behaviours such as those implemented by CBH in the best interest of growers in Australia are not penalised as an unintended consequence. (sub. 36, p. 11)

And competition law experts have raised concerns that an effects test would not be any more objective and therefore easier to prove than a purpose test because:

Observing injury to competitors in the marketplace tells you nothing about whether this has occurred as a result of competition that will ultimately benefit consumers or because there has been a misuse of market power that will harm consumers. (Trindade, Merrett and Smith 2013, p. 6)

The Commission has previously noted that a high evidentiary burden is not sufficient to justify amending section 46 (PC 2014f). Further, amending the regulation to include an effects test may itself bring regulatory risks, particularly if the threshold invoking the test was set too low.

The wrong focus?

Competition policy reform has contributed significantly to agricultural productivity in Australia by enabling the reallocation of land, labour and capital to their highest value uses both within and between farm businesses (Gray, Oss-Emer and Sheng 2014). The current debate about imbalances in bargaining power overlooks the co-dependence of businesses along agricultural value chains. There are potential benefits from shifting the focus from potential misuse of market power by wholesale merchants and supermarkets to innovations that develop new commercial arrangements and enable farm businesses to participate profitably in globalised value chains.

The Final Report was originally expected within nine months of commencement of the review.

As a result of the 2016 election an extension of time was granted and the final report was released on 15 November 2016. View final report.

See Productivity Commission submissions page for details.

Commentary

Michelle Grattan, 'Productivity Commission attacks competition ‘effects test’ and farm foreign investment rules' (The Conversation, 21 July 2016)

Media

'The bold new face of the National Party', RN Breakfast, 21 July 2016 (Interview with Senator Fiona Nash)

Phillip Coorey, 'Productivity Commission takes aim at rural protectionism' (AFR, 20 July 2016)

Jacob Greber, 'Productivity Commission joins fight against 'effects test'' (AFR, 21 July 2016)

Jared Owens, 'Fiona Nash rejects Productivity Commission on foreign investment, regulations' (The Australian, 21 July 2016).

David Uren, 'No logic to red tape hobbling farms: Productivity Commission' (The Australian, 21 July 2016)