Re VFF Chicken Meat Growers' Boycott Authorisation
[2006] ACompT 2
•21 April 2006
AUSTRALIAN COMPETITION TRIBUNAL
Re VFF Chicken Meat Growers’ Boycott Authorisation [2006] ACompT 2
TRADE PRACTICES – authorisation of collective boycotts – comparison of benefits and detriments – whether confined to anti-competitive detriments
Trade Practices Act 1974(Cth) s 90(8)
Jones v Australian Competition and Consumer Commission (2003) 200 ALR 234 cited
Media Council of Australia (No 2) (1987) ATPR 40-774 at 48,406 not followed
7-Eleven Stores Pty Ltd (1994) ATPR 41-357 at 42,654 not followed
EFTPOS Interchange Fee Agreement (2004) ATPR 41-999 at [25] cited
QANTAS Airways Limited (2005)ATPR 41-985 at [144]-[149 cited
Australian Association of Pathology Services Practices Inc (2004) ATPR 41-985 at [93]-[94] followed
Scott v Commercial Hotel Merbein Pty Ltd [1930] VLR 75 citedPearce and Geddes, Statutory Interpretation in Australia, 5th ed, 91.
RE: VFF CHICKEN MEAT GROWERS’ BOYCOTT AUTHORISATION
JUSTICE HEEREY (DEPUTY PRESIDENT)
DR W J BEERWORTH (MEMBER)
PROFESSOR C WALSH (MEMBER)
21 APRIL 2006
MELBOURNE
IN THE AUSTRALIAN COMPETITION TRIBUNAL
File No 2 of 2005 RE: VFF CHICKEN MEAT GROWERS’ BOYCOTT AUTHORISATION
TRIBUNAL:
JUSTICE HEEREY (DEPUTY PRESIDENT)
DR W J BEERWORTH (MEMBER)
PROFESSOR C WALSH (MEMBER)DATE OF DETERMINATION:
21 APRIL 2006
WHERE MADE:
MELBOURNE
THE TRIBUNAL DETERMINES THAT:
Australian Competition and Consumer Commission authorisation A90931 is set aside.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
File No. 2 of 2005 RE: VFF CHICKEN MEAT GROWERS’ BOYCOTT AUTHORISATION
TRIBUNAL:
JUSTICE HEEREY (DEPUTY PRESIDENT)
DR W J BEERWORTH (MEMBER
PROFESSOR C WALSH (MEMBER)DATE OF DETERMINATION:
21 APRIL 2006
WHERE MADE:
MELBOURNE
REASONS FOR DETERMINATION
THE TRIBUNAL:
CONTENTS
Par
1.0 INTRODUCTION [1]
2.0 THE ISSUES [10]
3.0 THE RELEVANT MARKETS
3.1 The markets for chicken growing services in Victoria [14]
3.2 The wholesale processed chicken meat market [17]
4.0 CHICKEN GROWING SERVICES
4.1 Growers’ role [24]
4.2 Contractual performance incentives for Growers [31]
4.3 Density, batch rates and turnaround [34]
4.4 Tunnel ventilation [35]
4.5 Contractual terms [38]
4.6 Capacity [39]
5.0 THE CHICKEN MEAT PRODUCTION PROCESS [41]
6.0 DEREGULATION OF THE CHICKEN MEAT INDUSTRY [49]
7.0 SOME RECENT DEVELOPMENTS [55]
7.1 The South West Productivity (SWP) Group [56]
7.2 Rural Funds Management (RFM) [58]
8.0 ECONOMIC EXPERTS: AREAS OF AGREEMENT [59]
9.0 LEGAL ISSUES
9.1 The test under s 90(8) [63]
9.2 Whether exclusionary arrangement [71]
10.0 APPLYING THE STATUTORY TEST
10.1 Background [73]
10.2 The future with and without test. [79]
11.0 THE COUNTERFACTUAL
11.1 Introduction [85]11.2Do Processors have market power in the markets
for chicken growing services?
11.2.1Grower’s case [89]
11.2.2Processors’ case [93]
11.2.3ACCC’s case [101]
11.2.4Tribunal’s view [105]
11.3Are Processors exercising market power in the markets
for chicken growing services?
11.3.1Growers’ case [127]
11.3.2Processors’ case [136]
11.3.3ACCC’s case [140]
11.3.4Tribunal’s view [149]
11.4What implications follow for the counterfactual if Processors
exercise market power in the markets for chicken growing services?
11.4.1Growers’ case [170]
11.4.2Processor’s case [175]
11.4.3 ACCC’s case [176]
11.4.4Tribunal’s view [178]
11.4.4.1Monopsonistic behaviour [179]
11.4.4.2Opportunistic behaviour [190]
11.4.4.3Overall conclusions about the counterfactual [198]
12.0THE FACTUAL: LIKELY OUTCOMES WITH A BOYCOTT
AUTHORISATION [203]
12.1 Expected outcomes in the factual [205]
12.1.1 Under what circumstances would the threat of a collective boycott be credible?
12.1.1.1Processors’ case [207]
12.1.1.2ACCC’s case [209]
12.1.1.3Tribunal’s view [210]
12.1.2Would the parties be likely to “game” the collective
boycott authorisation?
12.1.2.1Processors’ case [215]
12.1.2.2Growers’ case [220]
12.1.2.4Tribunal’s view [221]
12.1.3What other factors might influence the exercise of a
collective boycott power?
12.1.3.1Growers’ case [240]
12.1.3.2Processors’ case [250]
12.1.3.3ACCC’s case [251]
12.1.3.4Tribunal’s view [252]
12.1.3.4.1Factors that constrain the extent of
Growers demands [254]
12.1.3.4.2The length of any proposed boycott [259]
12.1.3.4.3Processors’ responses to minimise
the effect of a collective boycott [261]
12.1.4Likely impact of a collective boycott authorisation on
contract negotiations between Processors and Growers
12.1.4.1Growers’ case [267]
12.1.4.2Processors’ case [280]
12.1.4.3ACCC’s case [286]
12.1.4.4Tribunal’s view [287]
12.1.4.4.1Would a Growers’ threat of boycott
be credible? [289]
12.1.4.4.2Is a boycott likely to occur? [292]
12.1.4.4.3Will authorisation lead to a change
in market outcomes? [296]
12.1.5Implications for various market participants
12.1.5.1Processors’ case [308]
12.1.5.2Growers’ case [311]
12.1.5.3Tribunal’s view [317]
12.2Benefits from a collective boycott
12.2.1Growers’ case [325]
12.2.2Processors’ case [333]
12.2.3ACCC’s case [337]
12.2.4Tribunal’s view [339]
12.3Detriments from a collective boycott [358]
12.3.1 Anti-competitive detriments
12.3.1.1Processors’ case [360]
12.3.1.2Growers’ case [370]
12.3.1.3ACCC’s case [376]
12.3.1.4Tribunal’s view [379]
12.3.2Animal welfare detriments
12.3.2.1Processors’ case [396]
12.3.2.2Growers’ case [397]
12.3.2.3ACCC’s case [400]
12.3.2.4Tribunal’s view [401]
13.0COMPARING THE COUNTERFACTUAL WITH THE FACTUAL [404]
13.1Sources of market power [407]
13.2The role of monopsony power [410]
13.3The role of sunk relationship-specific costs [427]
13.4Overall conclusions [433]
14.0SUMMARY [441]
15.0ACKNOWLEDGEMENTS [455]
1.0 INTRODUCTION
In Victoria, as elsewhere in Australia, chicken meat processors deliver day old chicks to growers and collect the grown chickens after about five to eight weeks. The processors provide feed and veterinary requirements but otherwise the growers care for the chickens and manage their growth. Processors and growers enter into contracts under which growers’ services are supplied. Each processor deals with a particular group of growers who are located in the same region of Victoria as the processor’s plant.
During 2004, the Victorian Farmers Federation (VFF), on behalf of its chicken meat grower members (hereafter called “the Growers” – there are other Victorian growers who are not members of the VFF), lodged with the Australian Competition and Consumer Commission (ACCC) two applications for authorisation under Pt VII of the Trade Practices Act 1974 (Cth) (the Act).
On 2 March 2005, the ACCC granted both authorisations for a period of five years. The first (A40093), authorises VFF Grower groups to bargain collectively with their respective processors (the Processors), subject to conditions that:
“1.All those matters described in annexure C to the VFF’s application will be open to negotiation between the parties and will not be mandatory;
2.Grower groups may only comprise growers supplying or proposing to supply growing services to the processor affiliated with their grower group;
3.Grower groups must not use common representatives or representation.”
This authorisation is not disputed. What is disputed is authorisation A90931 which authorises VFF Grower groups to collectively boycott their respective Processors. The authorisation provides that:
“In the context of collectively bargaining new chicken growing contracts, growers may collectively agree to withdraw supply of their growing services (collectively boycott) from the processor affiliated with their grower group subject to the grower group complying with the following conditions:
4.The grower group must contact their processor and advise them that they wish to begin collective bargaining new chicken growing contracts.
5.No sooner than six months after complying with the requirement described in condition 4 of this determination, the grower group must, before they will have protection under the TPA to engage in a collective boycott, invite their processor to participate in mediation with a suitably qualified and independent mediator.
6.The grower groups must, before they will have protection under the TPA to engage in a collective boycott, provide a notice (“notice of intention to boycott”) in writing to their processor a minimum of 21 calendar days prior to any grower in that group refusing to receive the supply of day-old chickens from their processor. Such a notice of intention to boycott must include the names of those growers who intend to refuse supply and, as best as possible, the date on which they first intend to refuse supply. The notice of intention to boycott may only be issued a minimum of 7 days after complying with the requirement described in condition 5 of this determination.
7.Any aspects of annexure B not encompassed by conditions 4, 5 and 6 of this determination will be open to the parties to negotiate.
8.A party authorised by this determination to participate in a collective boycott cannot do so if they have an existing chicken growing contract under which they are obliged to provide growing services.
9.The growing of any batch of chickens held by a party authorised by this determination to participate in a collective boycott, at the time a boycott becomes available to them will be completed in accordance with the terms of their growing contract.”
The annexure C referred to in [3] condition 1 above and the annexure B referred to in [4] condition 7 above were specific negotiating procedures proposed by the VFF.
The Processors have applied to this Tribunal under Pt IX of the Act for a review of the ACCC’s boycott determination. They are:
La Ionica Farming Operations Pty Ltd (La Ionica)
Bartter Enterprises Pty Ltd (Bartter)
Hazeldene Chicken Farm Pty Ltd (Hazeldene)
Inghams Farming Enterprises Pty Ltd (Inghams)
Baiada Poultry Pty Ltd (Baiada)If a collective boycott would or might be an “exclusionary provision” (ss 45(2) and 4D), the Tribunal must be satisfied that “in all the circumstances the provision would result or be likely to result in such a benefit to the public that (it) should be allowed”: s 90(8). Notwithstanding the submissions of the VFF to the contrary, we are satisfied that in the circumstances of this case, a collective boycott would be an exclusionary provision and thus s 90(8) applies.
The nature of the test under s 90(8) and its relationship with that under s 90(6) is discussed further below.
The Tribunal has to assess the future with the proposed boycott authorisation (the factual) as compared with the future without it (the counterfactual). Both scenarios include the undisputed collective bargaining authorisation.
2.0 THE ISSUES
The ACCC’s position, which we did not understand the VFF to dispute, is that a collective boycott is inherently anti-competitive and should be authorised only in exceptional circumstances. In the present case, in the ACCC’s submission, the proposed authorisation “just gets over the line”. Its counsel contends that it is the conditions attached to the boycott authorisation which make the critical difference
The ACCC submits that, in the circumstances of the present case, the questions for the Tribunal are:
·is the market for chicken growing services workably competitive and efficient?
·if not, would the proposed collective boycott, or threat thereof, in addition to collective negotiation, result in a more competitive and efficient market?
·does the proposed collective boycott have sufficient ameliorating conditions to prevent excessive damage to Processors or other detriments to the public?
The VFF contends that provision for a boycott is necessary to better ensure for Growers some level of countervailing bargaining power in negotiations conducted by authorised collective bargaining.
As the hearing progressed a paradox emerged. In a negotiating context, a party threatening a boycott (whether or not lawful) will talk up the baneful effect of a boycott on the other party. Conversely, the other party will put on a brave front and minimize its potential effect. Yet, in the present case, the positions were reversed. The VFF contended that Processors would be able to make arrangements for alternative supplies and carry on pretty much as usual. Processors, on the other hand, predicted the most dire consequences. For the VFF, this is something of a diminishing return. The more readily ameliorated a boycott, the less effective the threat thereof to a point where the question arises whether there is much point in its authorisation at all.
3.0 THE RELEVANT MARKETS
3.1 The markets for chicken growing services in Victoria
The parties accept that there are three regional markets for chicken growing services in Victoria. They are areas centred on Melbourne, Geelong and Bendigo respectively.
Details of the various Processors and their Growers are as follows.
TABLE 1
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Processor
Location
All growers/non-VFF growers
Weekly production (’000)1
Processor Owned Farms2
Victorian market share (per cent)
National market share (per cent)3
Inghams
Mornington Peninsula &West Gippsland
44/3
533
No
21
5.88
Baiada
Outer Melbourne
103/4
813
No
32
8.96
Bartter
Geelong
27/10
508
No
20
5.60
La Ionica
Thomastown
22/3
356
Yes (13 %)
14
3.92
Hazeldene
Bendigo
9/2
330
Yes (50 %)
13
3.64
TOTAL
n/a
205/22
2,540
n/a
100
28
1 Production figures are calculated on the Processor’s market share and the average Victorian weekly production of 2.54 million birds.
2 The percentage of processor-owned farms is calculated with reference to the number of farms.
3 Calculated as the Processor’s Victorian market share (i.e. column (vi)) multiplied by the Victorian share of overall chicken meat production in Australia (28 per cent). It is noted that Inghams, Bartter and Baiada also have interstate chicken meat processing facilities that supply processed chicken meat into the national market for this service. The figures in this table do not capture the contributions of the interstate facilities of these Processors, and therefore only represent the share of the national market supplied by the Victorian arms of these Processors.
Consolidation has occurred in the processing sector over the last several years with Marven and Eatmore being taken over by Baiada in 2001 and 2002 respectively. The three national integrated processors, Baiada, Bartters and Inghams, account for over 70 per cent of the Victorian poultry industry. They operate in Victoria along with the two State-based integrated processors, La Ionica and Hazeldene. Other small, non-integrated, processors such as Limnos, Crystal, and Camorotto process live birds provided by the integrated processors. This production is not included in the table above.
3.2The wholesale processed chicken meat market
While most chicken meat produced in Victoria is consumed in the State, the wholesale market for chicken meat in Australia has been moving from State based markets towards a national market. A number of features are significant in this trend, including:
· three Processors (Baiada, Bartter, and Inghams) have processing and distribution facilities in most States;
· advancements in transport technology allows chicken meat to be shipped safely anywhere in Eastern Australia within 24 hours; and
· the major acquirers of processed chicken meat are large national supermarket and fast food chains which purchase on a national level.
Thus the parties accept that the relevant market for chicken meat is the national wholesale chicken meat market.
In 2002-03 the Australian processed chicken meat industry produced 723,000 tonnes (35 kg per person) of chicken meat with total retail sales in excess of $2.8 billion. Exports accounted for a further 21,000 tonnes. In the period 1999 to 2003, national production of chicken meat rose by 19 per cent while Victorian production rose by 26 per cent to 201,222 tonnes or about 28 per cent of the total Australian production. Currently, around 2.54 million birds per week are processed (132 million annually) in Victoria. Amongst meat industries, poultry now ranks second to beef in terms of kilograms of consumed meat.
The industry is concentrated in various outer metropolitan areas and rural and regional Australia. Production has increased significantly over the past thirty years with annual growth of approximately three to four per cent over the past few years. Similar levels of growth are expected for the next two to three years.
Fresh chicken meat accounts for over 96 per cent of the market. It has a shelf life of between five to seven days. The retailing sector and the fast food industry are the major market outlets for the industry. Approximately 75 per cent of chicken meat is sold through the former.
Supermarkets dominate the retail sector. There are no written supply or price contracts with supermarkets. Arrangements are on a supply to order basis. Typically a supermarket would have three to four suppliers of house brands. Prices are determined continually and when a supplier offers a better price, others must meet that price or the supplies taken from them are cut back or dropped altogether. Supermarkets periodically demand product at prices that they can put on special.
The Australian processed chicken meat industry has three large vertically integrated companies, Baiada, Bartter and Inghams, which own breeding farms, multiplication farms, hatcheries, feed mills, some growing farms and processing plants. These companies account for approximately 70-80 per cent of chicken meat production in Australia. Vertical integration allows processors to better manage costs and the timing of all operations in the supply chain. Nevertheless, in Australia 80-90 per cent of chickens are grown by contract growers. As already mentioned, some Processors (La Ionica and Hazeldene) also grow some of their chickens on their own farms.
4.0 CHICKEN GROWING SERVICES
4.1 Growers’ role
The Processors and Growers enter into contracts. Under these contracts, Growers are independent contractors, not employees of the Processor, and they receive a fee for their services. The contracts usually provide for incentive schemes based on the performance of the Grower.
Growers supply the growing facilities, the necessary infrastructure to hold and distribute the stockfeed and water consumed by the birds, the gas and electricity, management, labour, machinery such as backup generators, tractors etc, and the bedding material (litter) placed on the floors of sheds prior to placement of day old chicks.
The average contract farm consists of three to four growing sheds each with a floor area of 1200 square metres and with a replacement cost including all internal equipment of $200-300 per square metre. Each shed, therefore, has a replacement cost of $240,000-360,000. The growing sheds do not have alternative uses outside of the chicken growing industry. An average grower could have facilities with a replacement value of between $1-1.4 million in use, quite apart from the land and other infrastructure dedicated to chicken growing.
Historically, Growers have received a per bird growing fee for providing their capital and services. Grower fees account for around 20 per cent of live bird costs to the Processor, and around six per cent of the retail price of fresh chicken.
The mortality rate of the number of day old chicks placed on farms usually varies between two to eight per cent, with an average of approximately four to five per cent. A grower operating a 100,000 bird farm will on average need to dispose of 4,000 to 5,000 dead chickens each batch.
Growers share with Processors the environmental risks associated with the growing of chickens. These risks include:
·problems associated with the growing operation impacting on the amenity of neighbouring residents and communities;
·difficulties associated with the disposal of waste generated by the growing operation; and
·ensuring that off site impacts meet appropriate community standards.
The ability for Growers to manage these environmental risks in some respects is dependent on what is supplied by Processors, and in particular the day old chicks and their feed rations.
4.2 Contractual performance incentives for Growers
Processors have some, but limited, capacity to engage in monitoring of Growers’ day-to-day operational performance. They apparently are able to electronically track shed temperatures and Processor representatives make site visits from time to time. The principal form of monitoring, however, is through assessments of outcomes in terms of various bird growing performance criteria. The actual fee a grower receives varies according to performance incentive mechanisms that are usual in the growing agreements. As already mentioned, growers have no control over the quality of inputs provided to them by processors.
The performance incentives are most often determined by growers being grouped into pools according to breed, feed source and time of placement. Growers are paid according to their position in the pool as determined by feed conversion ratios (FCR) (and, in some cases, by mortality rates), with the better performing Growers receiving a higher per bird fee. Some Processors operate “closed pools”. That is, the pool of money available for distribution is fixed at the number of birds grown times the agreed standard growing fee per bird. In this case, above average payments to some Growers for superior performance necessarily results in other growers receiving payments less than the standard fee per bird. Actual fees paid per bird to different Growers can range between 15-25 per cent above or below the standard fee.
An alternative “open pool” arrangement varies the per bird fee according to performance benchmarks established by reference to group performance. With this system, the total monies paid out by the Processor, as well as each Grower’s share of them, will vary depending on actual performance. Bartter Growers are contracted in this way. Growers on individual contracts agree on performance benchmarks (or they are determined by reference to the performance of other Growers) and on incentives rates, with the Processor.
4.3 Density, batch rates and turnaround
The density figure is the area of shedding space per bird. The batch rate is the number of batches per year. These figures affect capacity. The higher the density and the higher the batch rate, the greater the throughput of birds at a given farm per year. The turnaround is the time between the Processor’s collection of a batch and the delivery of a new batch. This time can vary from 7 to 21 days. Contracts between Processors and Growers may contain provisions which vary the Grower’s fee if there are variations in batch rates or densities beyond agreed tolerances.
4.4 Tunnel ventilation
Chicken growth and mortality levels can be influenced by air temperature levels within growing sheds. Birds subject to higher temperatures may be associated with reduced feed consumption and growth. Higher temperatures can also lead to higher bird mortality rates.
Tunnel ventilation can help reduce temperature levels within chicken growing sheds. It involves installing exhaust fans at one end of a chicken growing shed and providing for large air inlets at the other end of the shed. The exhaust fans act to pump air out of the shed. This, in turn, reduces air pressure within the shed, thereby forcing air into the shed via the large air inlets. Given the location of the exhaust fans and the air vents, tunnel ventilation ensures air enters a shed at one end and moves through the shed until it is exhausted at the other as if it were travelling through a tunnel.
Not all chicken growers have installed tunnel ventilation in their sheds. Confidential evidence provided in relation to the pool scheme operated by Baiada for its Growers also indicates that tunnel ventilation alone does not ensure chicken growers will better achieve chicken growing productivity targets. The Growers contend that some Processors are applying pressure for them to invest in (and bear the cost of) tunnel ventilation irrespective of whether Growers believe this is a good investment.
4.5 Contractual terms
Contracts between Processors and Growers, like those in other States, typically cover the following items, amongst others:
·Term of the contract;
·Inputs to be provided by Growers and their responsibilities;
·Inputs to be provided by Processors and their responsibilities;
·Terms of payment;
·Guidelines for measuring grower efficiency and performance;
·Agreement to negotiate on the apportionment of any government compensation monies;
·Dispute resolution procedures;
·Force majeure provisions;
·Rights of assignment; and
·Contract default and termination provisions.
4.6 Capacity
Some Processors import significant volumes of processed chickens from interstate. As at October 2005, Bartter was importing up to 100,000 birds per week from sister plants in New South Wales, and was anticipating doing so for at least another six months. Inghams has been importing approximately 20,000 to 30,000 processed birds per week into Victoria from South Australia to meet customer requirements.
The ACCC and the Processors were divided as to whether importing processed chicken from interstate led to a conclusion that there was unused (or underused) growing capacity in relevant regions of Victoria.
5.0 THE CHICKEN MEAT PRODUCTION PROCESS
The process for the production of fresh chicken meat is broadly as follows. Breeder farms supply eggs to hatcheries for producing day old chicks. Breeder birds are kept for 62 weeks and commence laying eggs after 24 weeks. Fertilized eggs may be transported over distance to hatcheries in temperature controlled trucks holding 100,000 eggs.
At the hatcheries, eggs are ideally held for four to ten days, although this period may vary. They are then placed in setters and held for 18 days, then transferred to hatchers for 3 days. At day 21, the day olds are produced and vaccinated and delivered, usually within 6 hours, to growing farms. However, some are transported over longer periods. (The Code for the Land Transport of Poultry allows up to 60 hours, but the Code does not reflect industry practice). Some day old chicks are placed from South Australian hatcheries. Delivery is in specialised controlled environment trucks of a capacity sufficient to meet the normal delivery requirements based on distance to growing farms and throughput. Hatcheries typically produce day old chicks on four days per week. With 2.54 million birds produced per week, on average over 500,000 are placed per placement day. (Placement days per week may vary from four to six days depending on Processor). Day olds are placed on grow out farms in heated sheds (300 C) with the temperature gradually reduced to 220 after 25-28 days.
Harvesting of grown birds usually occurs from five to eight weeks depending on the size requirements of the Processor. The larger Processors each deal with more than 140,000 birds daily during peak production periods. Growing farms preferred by Processors are usually located within 1½ hours journey from the processing plant thus minimising transportation costs of feed and birds. Delivery times up to 2½ hours however do occur. Typically birds are processed six hours after pick up. Baiada has transported live birds from Victoria to Sydney for processing and from South Australia to Victoria for processing although less than two per cent of live birds grown for Baiada are shipped interstate.
Hygiene and disease controls are a major concern for Processors and Growers. Breeder farms ideally are located in areas away from growing farms. Processor required bio-security standards apply to all facilities, and movement of vehicles between farms is strictly limited. With broiler farms, there is usually a 7-14 day break between grow outs (batches). However, Processors may require shorter breaks between batches (as little as two days to five days) when production is being pushed.
In Victoria, the Spring racing season and Christmas summer holidays are periods of high demand. Production is ramped up along the production chain over the preceding periods to meet the demand at these times of the year.
There are some 210 growing farms (virtually all contract growers and some with more than one farm) in Victoria. The average farm would be approximately 100,000 birds, but farms range in size from 25,000 to 400,000 birds. New sheds are normally constructed to hold 40,000 to 50,000 birds and new farms would be 200,000 to 300,000 birds. Based on 5.4 batches per year, throughput of birds per annum would be 540,000, with 1,620,000 for the newer, larger farms.
Processors and Growers are dealing with live biological materials, eggs and birds. They must plan and arrange services, inputs, logistics and physical capacities to ensure growth and health of the birds.
Processors from time to time make commercial arrangements amongst themselves. Examples of such arrangements are that, at times, live birds and fertile eggs are sold between Processors; Inghams will sell feed from its mill to another Processor. On occasions, a Grower’s production capacity is lent to another Processor.
6.0 DEREGULATION OF THE CHICKEN MEAT INDUSTRY
In 1974, following a period of instability in the chicken meat industry, the Australian Agricultural Council proposed that model legislation should be drafted for all States. As a result, all States, except Tasmania, enacted chicken meat industry legislation which provided for the establishment of central negotiating committees comprising of an equal number of representatives from the growing and processing sectors along with independents and an independent chairman. The committees generally established guidelines or outlines for the drawing up of contracts. They had the power to set fees – which they did periodically, normally every six months. These fees were generally based on a model farm (cost of production type model) approach with a single fee applying across a State, although in some instances small variations were allowed to account for local conditions. The committees had the powers to assist and in some cases arbitrate in disputes.
In Victoria, the Victorian Broiler Industry Negotiating Committee (VBINC) was established by the Broiler Chicken Industry Act 1978 (Vic) (the Broiler Act). Under the Broiler Act and the Broiler Chicken Industry Regulations 1992 (Vic) (the Regulations), the VBINC set a standard growing fee for the industry and prescribed contract terms and conditions. The contract period was set for three years. The standard growing fee was determined through a model based on a model farm. The fee paid to growers was varied from this standard fee depending on batch rates, density and mortality – with batch rates and density at the discretion of processors. The Broiler Act required that contracts roll over to the next three year period automatically unless notification was given, prior to the end of the previous period, that a contract would not be renewed.
Since 2001, as part of the implementation of the National Competition Policy, there has been a deregulation of the chicken meat industry in Victoria as in other States. Victoria’s Broiler Act has not been repealed, but the VBINC has ceased to operate and the legislation is effectively a dead letter. The Regulations sunsetted in 2002.
A majority of Growers have not entered into contracts replacing their old VBINC contracts. The positions taken by Processors vary. For example, Inghams treat the VBINC contracts as having expired in 2002 and have notified their Growers that chickens are being placed on a batch-by-batch basis. Bartter, on the other hand, has treated the old contracts as subsisting and given notice of termination when each three year rollover approached. The VFF has asserted that the old VBINC contracts are no longer operative or enforceable as such.
After deregulation, Processors submitted an application for authorisation of collective bargaining. The application purported to be on behalf of Growers as well as Processors but, in fact, the Growers did not consent. The ACCC granted authorisation A90750 on 28 June 2001 subject to certain conditions, not including a boycott (which had not been sought).
The VFF sought judicial review of the ACCC’s determination. In August 2002, the VFF’s application was dismissed by a judge of the Federal Court. However, an appeal was successful and, in August 2003, the Full Court of the Federal Court set aside the ACCC’s determination on the ground that the Processors had no statutory basis to apply for authorisation: Jones v Australian Competition and Consumer Commission (2003) 200 ALR 234. The current authorisations have already been referred to.
7.0 SOME RECENT DEVELOPMENTS
Submissions and evidence drew the Tribunal’s attention to a number of recent developments in the market for chicken growing services. Most of these we refer to and draw on in our assessments of the counterfactual and the factual in later sections. However, two of the developments, pertaining to recently agreed or prospective contract terms, are particularly pertinent and are presented in summary form below.
7.1 The South West Productivity (SWP) Group
In 1996 some of Bartter’s Growers formed a discussion group which called itself the South West Productivity (SWP) Group. The SWP Group presented itself to Bartter’s as a group of Growers keen to develop wider relations with Bartter that would ultimately see its members better rewarded for their chicken growing performance.
When the Marven ACCC authorisation was determined in 2001, the members of the SWP Group had all left the VFF, and managed to negotiate a contract based on those Bartter had at that time with its Growers in Queensland. A significant feature of the contract negotiated between the SWP Group and Bartter was the change from a “closed” pool payments scheme to an “open” pool payment scheme. The SWP Group was also able to include terms and conditions relevant to its group such as farm size, variable cost review and contract length. Subsequent to the Marven authorisation being overturned in December 2004, the SWP Group jointly with Bartter applied to the ACCC for authorisation of its existing contracts and for future contracts to be negotiated collectively. The final determination granting authorisation was provided in March 2005. Some members of the SWP Group subsequently negotiated a new five year contract in June 2005.
7.2 Rural Funds Management (RFM)
Rural Funds Management (RFM) is a specialist agriculture funds management company that provides, amongst other services across a range of agricultural industries, chicken growing services for Bartter in Griffith, New South Wales. RFM has also made an application for a permit that would enable it to establish seven farms, each with five sheds, to provide chicken growing services for Bartter in Victoria. Further, RFM has submitted an application for another five farms, each with five sheds, to provide chicken growing services for Bartter in Lethbridge, Victoria. While some details of negotiations between Bartter and RFM in relation to the terms and conditions upon which chicken growing services would be provided in Victoria were provided to the Tribunal on a confidential basis, we note that publicly available information indicates, inter alia, that RFM’s New South Wales activities involve:
·Income from chicken growing activities being secured by 20-year chicken growing contracts;
·A minimum fee (indexed at 2.25 per cent per annum for the life of the contract) which compensates RFM as though all of its farms are fully utilized for the period of the contract (so that RFM bears no “throughput” or “batch rate” risk); and
·Receipt of six grower payments per contract per annum.
8.0 ECONOMIC EXPERTS: AREAS OF AGREEMENT
Both the Processors and the Growers submitted statements prepared by economic experts and called them to give evidence at the hearing. For the Processors, Professor Joshua Gans provided statements and evidence. For the Growers, Mrs Rhonda Smith and Dr Astrid Jung did likewise.
Inevitably, the positions taken by the expert witnesses on outcomes likely in both the counterfactual and the factual differed in a number of important respects. Those differences are identified, as they pertain to particular issues, in later sections concerning matters pertinent to both counterfactual and the factual.
However, the statement of outcome of the experts’ conference between Mrs Smith and Professor Gans indicated that they agreed on a number of issues, including that:
·the relevant downstream market is the market for the supply of chicken meat to end consumers and that this market is likely Australia-wide, but there may possibly be close substitutability between chicken meat and other meat;
·the relevant upstream market is the market for the supply of chicken growing services;
·the upstream market’s geographic extent depends upon where processors are able to source/substitute chicken growing services supplied by growers;
·Processors do not have a significant degree of market power in the downstream market;
·individual Growers do not have a significant degree of market power in the upstream market;
·a Processor may have some degree of monopsony power in the upstream market (Mrs Smith noted she believed Processors actually do have monopsony power in these markets);
·a group of Growers in a region may have some degree of market power as a group in the upstream market, although Mrs Smith noted she believed that as a group they have more power than as individuals;
·collective negotiations may improve the efficiency of relations even if there is no change in the division of returns between suppliers and buyers (Mrs Smith qualified this by indicating she agreed to this as a theoretical proposition);
·collective negotiations, even in the absence of a collective boycott, may lead to higher prices paid to suppliers (Mrs Smith qualified this by indicating she agreed to this as a theoretical proposition);
·a collective boycott may increase the bargaining position of suppliers;
·for a collective boycott to increase the bargaining position of suppliers, the threat to boycott must be credible;
·in economic terms, a threat is considered credible if (a) the expected benefits to the supplier from the claim outweigh the costs to the supplier of carrying out the threat and (b) the expected cost from the threat to the buyer outweighs the costs associated with acceding to the suppliers’ claims;
·if carried out, a collective boycott imposes costs on suppliers;
·a credible threat of a collective boycott is likely to permit suppliers to negotiate higher prices and/or more favourable supply terms;
·Processors will likely take actions to mitigate the potential harm from a collective boycott (Professor Gans noted that these actions themselves involve costs); and
·a collective boycott provision may increase the returns Growers receive on their investments (Professor Gans indicated he believed these returns may be dissipated in the long-run).
The experts both disagreed with the proposition that for a collective boycott to increase the bargaining position of suppliers, the boycott must actually take place.
Similarly, Professor Gans and Dr Jung reached agreement on a small number of issues at their experts’ conference. In this regard, they agreed with the following propositions:
·the effect of permitting a collective boycott provision may be to cause an increase in Grower fee of five per cent or more (although Dr Jung noted this is assumed in her consideration of the counterfactual); and
·one form of opportunism on the part of Processors means that they do not commit to Grower fees that generate adequate investment returns for Growers (Professor Gans noted this was agreed as a definition).
9.0 LEGAL ISSUES
9.1 The test under s 90(8)
The test to be applied under s 90(8) is that the proposed conduct would result in such a benefit to the public that it should be allowed to take place. The VFF submits that this is the same as that under s 90(6) – that the conduct would result in a benefit to the public and that benefit would outweigh the detriment to the public constituted by any lessening of competition that would result if the conduct were engaged in.
The point arises because the Processors have adduced evidence that day old chicks not accepted by boycotting Growers will have to be slaughtered in inhumane circumstances. The VFF submits that this will not in fact occur, but that, in any event, the circumstances of such slaughtering are unrelated to competition and thus the evidence is irrelevant.
Some earlier decisions of the Tribunal and its predecessor lend support to the VFF’s argument, in particular Re Media Council of Australia (No 2) (1987) ATPR 40-774 at 48,406, cited with approval in Re 7-Eleven Stores Pty Ltd (1994) ATPR 41-357 at 42,654. The point has been left open in Re EFTPOS Interchange Fee Agreement (2004) ATPR 41-999 at [25] and Re QANTAS Airways Limited (2005)ATPR 41-985 at [144]-[149]. However, in Re Australian Association of Pathology Services Practices Inc (2004) ATPR 41-985 at [93]-[94] the Tribunal said:
“93. Re Rural Traders [(1979)ATPR 40-110] and subsequent cases have proceeded upon the basis that where the phrase `such a benefit to the public' is used in s 90, the reference is to a net benefit even though the subsection does not specifically designate a weighing of benefit and detriment. We agree with that view. But it does not follow, with respect, that the two tests are precisely the same. That is because s 90(6) limits the consideration of detriment to `the detriment to the public constituted by any lessening of competition' resulting from the relevant conduct, whereas no such limitation is to be found in s 90(8).
94. In the present case, the AAPP relies upon alleged detriments to the public which arise from the arrangements or conduct for which authorisation is sought arising otherwise than by a lessening of competition. If those detriments are established, then in our view, they should be taken into account in determining pursuant to s 90(8) whether the proposed conduct is likely to result in such a benefit to the public that the proposed conduct should be allowed to take place. The cases to which we have referred do not decide otherwise, as they do not directly address the question. Rather, they were cases in which the relevant detriment was constituted by a lessening of competition, and for that reason it was correct to say that in the particular circumstances of those cases, there was no significant difference between the practical effect of subs 90(6) and subs 90(8): cf Re Obadiah Pty Ltd (The Locksmith's Case) (1980) ATPR 40-176 at 42,431.”
We think the view taken in Pathology is correct. It is supported by the structure and text of the Act.
Section 88 confers powers on the ACCC (exercisable on review by the Tribunal: s 102(1)) to grant authorisations for:
·arrangements etc containing an exclusionary provision, or a provision which has the purpose or effect of substantially lessening competition (hereafter “SLC”), and giving effect to such provisions: subs (1);
·SLC covenants in a market: subs (5);
·conduct constituting exclusive dealing: subs (8).
Section 90 deals with the exercise of the authorisation powers. It includes procedural matters, e.g. reasons to be given in writing (subs (4)) and draft determinations and conference thereon (subs (5)). It also provides for the criteria that are to be applied in relation to the various categories of otherwise contravening arrangements, conduct etc:
·proposed provisions within s 88(1),(5) or (8) not being exclusionary provisions: subs (6);
·provisions within s 88(1) or (5), (ie existing, not proposed provisions), not being exclusionary provisions: subs (7);
·exclusionary provisions: subs (8).
As Pathology notes, s 90(8), in defining the criterion for authorisation for the subject matter with which it deals, uses different language from s 90(6). The usual rule of statutory interpretation is that when different language is used in the same statute, the more likely inference is that the drafters intended to convey different meanings: Scott v Commercial Hotel Merbein Pty Ltd [1930] VLR 75, Pearce and Geddes, Statutory Interpretation in Australia, 5th ed, 91. Moreover, in the present instance there is the structure of s 90 - a complicated piece of drafting even by the standards of the Trade Practices Act - which distinguishes between contraventions which involve exclusionary provisions and those which do not. To track through the Act the provisions which govern the authorisation powers, one commences with 45(2) which prohibits both exclusionary provisions and SLC provisions. Then it is seen that s 88(1) confers power to authorise both kinds of contravention. Yet s 90(6) and s 90(8) provide for differently worded criteria for authorisation for SLC provisions on the one hand and exclusionary provisions on the other. Had the drafters’ intention been that the same criteria for authorisation should apply both to and SLC and exclusionary provisions, the simple and obvious course would have been to provide the one set of criteria.
The distinction is rational. With SLC provisions there is reason to look at the actual detriment caused by the lessening of competition in the instant case because that is the only kind of detriment which makes the conduct unlawful in the first place. Exclusionary provisions, however, are unlawful per se. No assessment of effect on competition is called for. Accordingly the test is one of public benefit (or net public benefit) not confined to competition issues.
9.2 Whether an exclusionary arrangement
The VFF submitted that the proposed boycott arrangement would not be an exclusionary provision because, following the collective negotiation authorisation, the Growers are not competitive with one another within the meaning of s 4D(1)(a). Of course, if this argument is correct, no collective boycott authorisation would be necessary. However, the power of authorisation extends to provisions which “would be, or might be, an exclusionary provision”: s 88(1)(a).
In any event, the Growers remain in competition with each other. In another context the VFF relies, as what is said to be one of the ameliorating aspects of any boycott, on the fact that any Grower could unilaterally withdraw from the boycott at any time and reach a separate agreement with the Processor. Whether or not any Grower would be likely to do so, there would be nothing legally stopping him from doing so. Hence they remain in competition with each other.
10.0 APPLYING THE STATUTORY TEST
10.1 Background
As we noted earlier, the statutory test (in s 90(8) of the Act) relevant to whether a collective boycott authorisation should be granted requires that there be “such a benefit to the public…”, appropriately to be regarded as meaning a net benefit to the public - that is, benefits to the public sufficient to outweigh any detriments to the public from granting an authorisation.
The Tribunal previously has adopted an expansive view of what constitute benefits and detriments. That is, they have been taken to include anything which either increases or decreases, respectively, the well-being of members of society which would or might arise as a consequence of, for example, authorising particular commercial arrangements (in the current matter, authorising collective boycotts). Particular emphasis is placed on positive or negative consequences for the achievement of the goal of maximising economic efficiency (including dynamic efficiency leading to economic progress). The Tribunal also has adopted a definition of “the public” which would include all members of society in all their roles - for example, as investors, shareholders or workers as well as consumers, and also as people incidentally affected by market outcomes. Moreover, it also has taken the view that, by and large, there should be no differences in the weight attached to benefits or costs, irrespective of who are the beneficiaries or who bear the detriments. We accept and adopt all of those perspectives.
Not surprisingly, since we are dealing with an aspect of competition law, most of the issues raised in submissions and evidence in the matter before us in one way or another concerned whether:
·absent authorisation of use of collective boycotts by Growers, market outcomes would be likely to be different from those expected in efficient (competitive) markets for Grower services; and
·authorising use by Growers of collective boycotts (with conditions) would, at least to some extent, reduce the inefficiencies likely to exist and persist without it.
In the language of economists adopted by the Tribunal, inefficiencies in market outcomes, if they are likely to exist, could involve:
·productive inefficiencies (more resources are used than the minimum necessary);
·allocative inefficiencies (market–determined investments and/or outputs differ from those that would maximise (net) benefits to society); or
·dynamic inefficiencies (incentives to create or adopt product or process innovations, or adapt to changes in market conditions, would be lower than in efficient markets).
In relation to the likely consequences for the efficiency of market outcomes in the present matter, the Tribunal’s task is to assess whether any inefficiencies are likely to exist and persist in the markets for chicken growing services absent a collective boycott authorisation and whether authorising use of a collective boycott would be likely to reduce them to the benefit of the public without resulting costs (detriments) to the public that would be likely to more than offset prospective benefits.
However, while the matters that come before the Tribunal invariably arise from concerns about the effects on the efficiency of market outcomes of proposed commercial arrangements, the potential benefits and detriments that appropriately should be taken into account are not limited to those that involve direct implications of, or consequences for, the efficiency of market outcomes. In the present matter, the most obviously “incidental” effect argued to be relevant to the Tribunal’s assessment was the possibility that animal welfare detriments might arise in the event of a collective boycott actually being implemented. The Tribunal also notes that, in relation to the current matter, the commercial damage that might be inflicted on its target and on upstream and downstream business as a result of a boycott being implemented would be relevant to its assessment of possible detriments even if the Tribunal concluded that authorising the use of collective boycotts was likely to enhance the efficiency of market outcomes, at least to some extent, in the long-term.
10.2 The future with and without test
To identify and weigh public benefits and detriments, the Tribunal applies the “future with and without” test.
In relation to this application, the “future with” (referred to as the factual) involves identifying what future outcomes would be likely in the market for chicken growing services, and what public benefits and detriments consequently would arise, if Growers are authorised to use collective boycotts.
The “future without” (referred to as the counterfactual) involves a similar assessment of likely future outcomes if the use of collective boycotts is not authorised. The conclusion about whether or not the authorisation (with conditions) given to the Growers by the ACCC should be allowed to stand is derived from a comparison of the outcomes likely in the factual with those likely in the counterfactual.
The Tribunal, in numerous previous matters that have come before it, has explained in some detail the meaning of the “future with or without” test. We note, in particular, that the Tribunal has previously concluded that, for a likely public benefit or detriment to be taken into account, there must be a real chance that it will eventuate, rather than merely being “possible” or even “more probable than not”.
In relation to the particular matter before us, the authorisation of the use of collective bargaining by the VFF Grower groups (A40093) is not in dispute and, therefore, not part of the issue to be determined by the Tribunal. However, the Tribunal’s assessment of the likely future outcomes with and without a collective boycott authorisation necessarily involves it forming a judgment about the likely effects on future outcomes of the use of the collective bargaining authorisation because the potential effects of that authorisation now are part of the future we must project. By doing so we are not revisiting the question of whether the net benefits of the collective bargaining authorisation meet the statutory test, but, rather, assessing what its likely effects will be on market outcomes.
We begin our assessment with the counterfactual (likely future outcomes without a collective boycott authorisation) and then turn to the factual (likely future outcomes with the use of collective boycotts (with conditions) being available to Growers).
11.0 THE COUNTERFACTUAL
11.1 Introduction
In this section, we undertake our assessment of the counterfactual: that is, the future outcomes likely in the market for chicken growing services, and any likely implications for outcomes in the national market for chicken meat, if VFF Grower groups are not authorised to use collective boycotts in the context of negotiating the terms and conditions on which they supply their growing services to Processors.
Although the counterfactual is, in effect, a prediction of the future, it is a future which has the same market features that have existed in the period since de-regulation, with the important exception that it includes the potential effects of the not-disputed collective negotiation authorisation.
Drawing on the evidence and submissions offered to us, our assessment of the counterfactual proceeds by asking and answering three questions. The first is whether Processors have the potential to exercise market power in the market for chicken-growing services. The second is whether they actually do exercise, at least to some degree, any potential market power that they have. And the third is what the likely future outcomes for the chicken growing and wholesale processed chicken meat markets would be likely to be if Processors can and do use their potential market power. In providing our answers to each of these questions, we first set out the contentions of the parties and then the Tribunal’s conclusions.
At the outset, we should indicate that we accept the force of the Processors’ submissions, appropriately interpreted, that Processors need Growers as much as Growers need Processors. Indeed, this is an indisputable fact, as it is in any purchaser-supplier relationship. A central consideration is how and to what extent the mutual dependence constrains the potential for either or both of the parties to influence market outcomes relative to those that would be expected in efficient markets.
11.2 Do Processors have market power in the markets for chicken growing services?
11.2.1 Growers’ case
The Growers submit that Processors have market power in the markets for chicken growing services. They argue that the Processors are monopsonists (or, in the case of the Melbourne regional market for grower services, oligopsonists) in their respective markets for chicken growing services. Further, they argue that Processors do not compete against each other for grower services, and note, in particular, the evidence that Inghams’ company management has, in the past, never sought to “poach” another Processor’s Growers as it has wished to avoid starting a “range war”.
The Growers also contend that the Processors have market power in the markets for chicken growing services because they are at a significant bargaining disadvantage compared to the Processors due to a range of factors, including:
·the large sunk costs faced by Growers who have invested in growing facilities;
·the inability of Growers to substitute other forms of production for the growing of chickens;
·the necessity for Growers to derive some return from their investment in existing shedding;
·the reliance, by each Grower, on a particular Processor as the main, or sole, source of its income;
·the comparative financial positions of Growers and Processors, with Processors typically being financially stronger;
·the personal and financial attachments to family homes required to be co-located on the growing property as part of the growing operation;
·the dependence of Growers and their families on growing facilities for employment and family income;
·the limited bargaining experience of Growers;
·Growers’ limited access to market information; and
·the differences in supply and demand elasticities for grower services in Victoria.
The Growers submit that, in the absence of an ability to collectively boycott, the Processors will be able to use their stronger bargaining position to secure terms and conditions for chicken growing services that are less favourable (for Growers) than those expected in competitive markets for chicken growing services.
In relation to the implications of large investments and associated sunk costs, the Growers note the evidence of Mrs Smith which suggested that Growers may invest in upgrades to their shedding even if they believe that the return that they would receive on this investment would be inadequate. She indicated that, while Growers would not normally invest under these circumstances, they may do so if failure to do so would prevent them receiving a chicken growing contract. This is because failure to secure a contract might adversely affect the value of existing assets. Accordingly, it is argued that large investments in relationship-specific sunk assets reduce the bargaining power of Growers: that is, they will be prepared to agree to terms and conditions less favourable than those they would normally accept, in order to protect previous investments made in chicken growing assets.
11.2.2 Processors’ case
The Processors, on the other hand, contend that they do not have market power in the markets for chicken growing services. The Processors agree that there are three regional markets for chicken growing services (two of which contain a single Processor/purchaser). However, they believe that any position of strength they may appear to enjoy by virtue of their small numbers in each regional market is constrained by:
·the intensity of competition in the wholesale market for chicken meat; and
·planning restrictions that have the effect of constraining the amount of land available for providing chicken growing services.
In relation to constraints generated by competition in the wholesale market for chicken meat, the Processors submit that they face intense competition in this market, such that they are each price takers. They contend this prevents them from earning more than a normal return across their business. It is implicit in their arguments that they are unable to extract and/or retain economic rents as a result of the terms and conditions they agree to for the receipt of chicken growing services.
The Processors also submit that competition in the wholesale market imposes competitive forces in the markets for chicken growing services as a result of the interdependence between Processors and their Growers. As already noted, the Processors argue that the parties are interdependent because Processors need Growers in order to produce grown birds, while Growers need Processors as a source of demand for their growing services. The Processors therefore argue that any loss in sales in the wholesale market for chicken meat will necessarily lead to a reduction in the demand for chicken growing services. Accordingly, the Processors argue that the Grower groups are effectively in competition with each other, such that the Processor/Grower teams that can produce chicken meat at the lowest cost will gain sales from other, less efficient, Processor/Grower teams.
Further, the Processors suggest that if one Processor’s Growers introduce a change to their production methods that improves their efficiency, this will place pressure on other Processors and their Growers to also adopt production methods that will improve their efficiency. The Processors therefore say that the conduct of a given Processor’s Grower group will constrain the behaviour of other Processors and their Grower groups. They contend that this is why Processors encourage their Growers to adopt newer more efficient technology (such as tunnel ventilation) and provide incentives for them to do so via pooling and other performance management schemes.
In relation to Grower supply constraints, the Processors submit that expanding growing capacity is nearly impossible in some geographic areas (especially in the Mornington Peninsula). They argue this is partly a result of planning restrictions – such as the Broiler Code – which limit the extent to which chicken growing services can be expanded in areas proximate to processing plants and hatcheries. Proximity is important in order to ensure chicks are delivered to Growers on the same day that they hatch and to minimise transit stress when grown birds are transported from Grower to Processor.
The Processors contend, therefore, that planning restrictions, such as those created by the Broiler Code, create a barrier to entry for new Growers which can operate to enhance the bargaining position of Growers. This is because they deprive Processors of the ability to commission new chicken growing farms and lock them into using existing growers.
The Processors also submit that if they do have to pay a premium to attract new entry into chicken growing markets – as it is alleged they do for RFM – then this is indicative of them not having market power in the market for chicken growing services. They argue the need to pay a premium results from the need to attract new entrants to overcome capacity shortages in certain areas.
Finally, the Processors appear to dispute the Growers’ argument that they are unable to move between Processors. They argue that, allowing for geographic considerations, most of the Grower witnesses have switched processor at some point (some having done so several times).
11.2.3 ACCC’s case
The ACCC submits that the limited distance that live birds can be transported, the consequent need to locate Growers near processing plants, and evidence that Processors do not appear to compete for the services of Growers linked to other Processors (but rather, on occasions, exchange Growers between themselves, without consulting the Growers) are key factors leading to the current markets for the supply of chicken growing services in Victoria being inefficient.
The ACCC also contends that the large amount of sunk capital that Growers must invest in their farms, when combined with a lack of alternative uses of that capital for Growers, has led to a “hold up problem” in markets for chicken growing services. In this regard, the ACCC defines a hold up problem as:
“… a contracting problem that can arise where (a) incomplete or otherwise limited contracts exist between two or more parties who can engage in a mutually beneficial activity, and (b) prior to the parties engaging in the mutually beneficial activity, one of the parties must make an investment that is substantially sunk and, as such, the recoverable value of the investment for the investor is significantly below the initial investment cost. ‘Hold up’ occurs in this situation when the party making the relevant investment cannot, through the contracting process and prior to making his or her investment, be guaranteed to receive an adequate share of the returns from the mutually beneficial activity after the investment is made and the activity occurs. As a consequence of the expectation that he or she will be ‘held up’ after making the investment, the relevant party will either invest a smaller amount or not invest at all. In the extreme this will make the mutually beneficial activity unviable.”
With respect to investments in chicken growing services, the ACCC considers that investment is sunk at the time it is made, although a loss is not realised if a chicken farm can be sold as a going concern. That said, the ACCC notes that the absence of an ongoing contract would affect a Grower’s ability to sell his or her farm as a going concern. The ACCC contends that this current state of affairs is delivering significant bargaining power to Processors and leading to terms and conditions that depart from those that would be expected in a competitive market for chicken growing services.
The ACCC agrees that Growers have limited means by which to influence the terms on which growing services are provided to Processors in the absence of a collective boycott authorisation. The ACCC submits that this is a consequence of:
·the considerable capital investments previously made by existing growers in the context of a regulated environment;
·the de-regulation of the industry in 2001;
·capital investment made in chicken growing which can only be utilised in chicken growing;
·Growers being restricted, other than in exceptional circumstances, to grow for only one Processor; and
·Growers generally being unable to create competitive tension between Processors for their services.
11.2.4 Tribunal’s view
The parties agree with the ACCC’s view that the nature of chicken growing services is such that there are practical limitations on the extent to which Growers can provide services, and to whom they can provide those services. For example, a Processor’s capacity to deliver a batch of live day-old chickens and collect those chickens once they are fully grown is limited by the transportability of both the chicks and particularly of full grown chickens to a processing facility.
As a consequence, Processors are limited to acquiring growing services from Growers within a certain geographic area of their processing plant and, conversely, Growers are limited in the number of Processors to whom they can supply their services. This means that for any particular Grower, there may be only a limited number of Processors to whom they can provide chicken growing services. In turn, this will limit the geographic boundaries of the markets into which individual Growers can supply their services.
As already noted, the parties agree that there are three separate regional markets for chicken growing services in Victoria. These markets are centred around Bendigo, Geelong and Melbourne.
It also is agreed that Growers who are limited to being able to supply into the regional markets in Bendigo and Geelong have only one Processor to whom they can provide chicken growing services (Hazeldene and Bartter respectively). Table 1 at [14] of this Determination indicates there are respectively seven and 17 VFF Growers that supply into each of these markets. On the basis of these facts, the Tribunal concludes that the Bendigo and Geelong markets for chicken growing services both consist of a monopsony purchaser and a significant number of VFF Grower suppliers.
The Tribunal believes that this market structure delivers to the Processors in these two regional markets the potential for significant market power. In a competitive market, a supplier of services would normally face a number of potential purchasers of its product. This would enable the supplier to solicit offers from a range of potential purchasers, and chose to supply to that purchaser willing to pay the greatest amount. This opportunity is denied in a monopsonistic market, where suppliers have only one potential purchaser of their product.
With respect to the Melbourne regional market, there are three Processors to which Growers are able to supply their services (Inghams, Baiada and La Ionica).
Table 1 indicates that, at present, 39, 99 and 19 VFF Growers respectively supply chicken growing services to each of these Processors. The Tribunal believes this gives rise to the potential for this market to be characterised as an oligopsonistic market.
In oligopsonistic circumstances, a supplier can still try to elicit some level of competition with respect to purchase of its services. This is because it may be able to seek offers from a range (albeit small) of potential purchasers, and chose to supply that purchaser that offers it the highest price. Such an outcome does not appear, however, to have traditionally been available to Growers in the Melbourne regional market for chicken growing services. In this regard, the evidence suggests that each individual Grower is tied to a particular Processor. The evidence also suggests that Processors are not receptive to “poaching” Growers away from other Processors. The Tribunal believes these circumstances could potentially provide Processors with market power in this market.
While there is some evidence that individual Growers have worked for more than one Processor, we do not believe the evidence shows that Processors have actually competed with each other for individual Growers. Where Growers have changed Processor, the evidence suggests this is due to the initial Processor having its business bought out by a new Processor; the initial Processor ‘lending’ out a Grower to another Processor; or the initial Processor letting the Grower move to another Processor because it is about to wind down its operations in a given area. The Tribunal does not believe any of these instances represent evidence of Processors competing for individual Growers.
With respect to the further argument that Growers face large sunk costs, in the present context the most pertinent concept of sunk costs refers to the unavoidable (fixed) costs that Growers face once they have made their investments and are operating their growing facilities. The most significant of these are the opportunity costs of the capital that they have invested: that is, the returns they could have been earning if they had invested in the best alternative opportunity available to them. Growers cannot avoid these costs in the short term (until they can sell out or convert their property to an alternative use) even if they were to shut down their growing operations. As a result, they will keep on providing growing services as long as at least their avoidable (variable) costs are covered by the fees they receive.
Clearly, the size of the investments required to enter the market as a Grower is a significant determinant of the opportunity costs of capital. So, too, are capital gains that Growers potentially are able to make in the event of on-selling their property because their opportunity costs would then include the returns they could make on alternative investments of the capital gain as well as their original outlay (and vice versa for capital losses). The fact that, as has occurred on a number of occasions, chicken growing farms have been sold at a price which represented a premium over the residual value of chicken growing-specific facilities on them does not of itself deny that investments in those facilities involved sunk costs in the sense we have indicated.
The combination of the large amount of capital investment required and also the limited alternative uses to which investments in chicken growing facilities can be put, means a potential investor would require some degree of certainty that it would continue to be able to sell chicken growing services at a reasonable return for a number of years after its investment in chicken growing facilities was made. Alternatively, a potential grower would require a reasonable risk premium to be attached to the fees it would receive if a shorter contract were offered.
While new entrants into the chicken growing market may be in a position to insist on a long term contract (or a short-term contract with a sufficient risk premium attached to it) in order to entice them to enter the market, existing Growers are not in this position. Many existing Growers would have made their investment during the previous period of regulation of this industry which would have provided them with an alternative form of security to support their investment decision. That is, the model used by the VBINC (or arbitrators) to determine fees ensured that Growers’ full long-run opportunity costs generally were covered and other terms and conditions protected them from unilateral decisions by Processors concerning, for example, the risks they bore or investment upgrades they were required to make. Post deregulation of this industry, however, existing Growers are now having to negotiate contracts from a position of a sunk investment in chicken growing facilities. Under these circumstances, they do not have the choice of refraining from investing in chicken growing facilities if they fail to secure a suitable contract from a Processor. The Tribunal believes that this is likely to deprive them of some bargaining power in their negotiations over chicken growing contracts with Processors.
The Tribunal has considered whether the contention that Growers have countervailing bargaining power on account of supply constraints in certain geographic areas is supported by the evidence. In particular, the Tribunal has considered whether the Broiler Code establishes a barrier to entry that limits the amount of land available to provide chicken growing services and thereby limits Processors in their ability to secure chicken growing services from potential new entrants into the industry.
While it notes the contentions of the Processors in relation to this issue, it also notes the Growers’ submissions that, inter alia:
·the capacity constraint argument constructed by the Processors is almost entirely based on observations concerning Inghams’ position on the Mornington Peninsula (and its decision to import chicken meat from South Australia);
·Inghams is not subject to capacity constraints as there are vast areas of land available at broad acre farm prices within one hour’s drive of its Somerville plant that could be used to provide chicken growing services to it, provided Inghams offered sufficient fees to generate additional investment;
·Inghams contemplates that acceptance of travelling time of up to two hours between a processing plant and a chicken growing farm will become more usual in the future – thus expanding the areas of land available to provide chicken growing services within reach of its processing plant;
·all Processors are in a position where there is broad acre farming land available that can be used to establish shedding and which is sufficiently close to their processing plants to be suitable for providing chicken growing services;
·existing Growers are prepared to invest in additional shedding on their existing farms, and also in new farms, if they can be assured of contractual certainty and a reasonable return;
·new entrants may enter the industry without significant barriers to entry (but subject to the usual planning requirements) and there is evidence of some being offered favourable terms by Processors to do so (for instance, RFM);
·there is no evidence that all the shedding permitted under existing permits has been filled; and
·the evidence does not suggest that Growers have enjoyed any benefits of the alleged enhanced bargaining power, as they were unable to negotiate contract terms with Inghams over a period of more than three years from 2002.
The Tribunal believes it has not been provided with sufficient information to determine whether (or the extent to which) there is land available within suitable proximity to each Processor’s plant that would be available to provide additional chicken growing services. It also does not believe it has been provided with sufficient evidence to determine whether there are permits that have been issued (but not acted upon) that would provide sufficient supply opportunities to overcome any alleged shortage of chicken growing capacity.
However, it seems likely that at least one Processor (Bartter) will be able to attract new entry (via RFM) by offering terms and conditions apparently better than those currently offered to its Growers. In this particular instance, therefore, it appears that Bartter’s Growers have not had the bargaining power to enable them to secure improved terms and conditions as a result of land supply shortages. The Tribunal also notes that no Growers (with the exception of the SWP Group) appear to have been able to finalise contract negotiations with respect to the terms and conditions for providing chicken growing services in the post regulation era. The Tribunal is not convinced, therefore, that whatever supply constraints may exist have provided Growers with sufficient countervailing bargaining power to enable them to secure contracts with highly favourable terms and conditions.
The Tribunal has also had regard to whether the strength of competition in the wholesale market for chicken meat and the interdependence of Processors and Growers dilutes any market power Processors might have in the market for chicken growing services. The Tribunal notes from the statement of agreed facts that:
·approximately 75 per cent of chicken meat is sold through retail outlets with the remainder sold through the food services industry (fast foods, restaurants etc);
·the supermarkets dominate the retail sector and a supermarket would typically have three to four suppliers of house brands;
·prices are determined continually and when a supplier offers a better price, others must meet that price or the supplies taken from them are cut back or dropped altogether; and
·supermarkets periodically demand product at prices that they can put on special.
The Tribunal considers these characteristics lend weight to the view that Processors are subject to vigorous competition when they supply processed product into the wholesale chicken meat market. To the extent this is the case, it is likely that individual Processors are price takers in the wholesale chicken meat market.
The Tribunal also accepts that an individual Processor’s ability to compete in the wholesale chicken meat market will depend, to some extent, on the efficiency of the Growers from whom it secures chicken growing services. It also accepts there is some degree of interdependence between Processors and Growers, and that this applies pressure on Growers of each Processor to make sure they are at least as efficient as other Processors’ Growers.
While the Tribunal acknowledges the validity of the Processors’ contention that, appropriately interpreted, Processors need their Growers as much as Growers need their Processors, we accept the force of much of the evidence and submissions offered to us by the Growers, supported by the ACCC, that the Processors have significant market power vis-à-vis their Grower groups in the markets for chicken growing services in Victoria. The central question we face is whether, and to what extent, the now authorised ability of each VFF Grower group to collectively negotiate augmented with an authorisation that also would empower them (with conditions attached) to collectively boycott its Processor would be needed, or at least would help, to redress the imbalance in market power. The possibility that a collective boycott authorisation could give Grower groups excessive countervailing power also is an important consideration.
We believe that the relative market power that the Processors possess derives from two principal sources:
· the first is that the Processors appear to be monopsonistic purchasers in two of the regional markets for chicken growing services in Victoria, and do not appear to compete with each other to purchase chicken growing services in the other (i.e. Melbourne-based) regional market.
· the second is that the Growers face significant sunk costs (in the sense of being fixed or unavoidable) when they invest in chicken growing facilities and begin operating them as a business, and that the investments that they make in this regard are highly relationship-specific.
In providing our assessment of whether or not a collective boycott authorisation is likely to result in a net benefit to the public we:
· first, take each of these sources of market power separately and compare the likely consequences for future market (and other) outcomes with and without a collective boycott authorisation; and
· then bring the two strands together to form our overall assessment.
13.2 The role of monopsony power
The Tribunal believes that evidence and submissions support the view that Victoria’s Processors are monopsonists in more than just name – that is, that they can and do exercise monopsonistic (or oligopsonistic) market power. The principal consequence of the Processors exercising monopsony power would be that they would be likely to demand a lower level of chicken growing capacity (investment in facilities) and, correspondingly, supply a lower level of output of processed chicken meat into the wholesale market, than would be expected were there to be efficient (competitive) markets for grower services. There is a possibility that this also might lead to the prices paid, nationally, by final consumers of chicken meat being somewhat higher than otherwise, given the significance of the aggregate supply of chicken meat into the national market by Victoria’s Processors.
A further consequence is that Growers will be likely to receive fees lower than they would if the demand for their services was higher – i.e. at the level of demand for their services that would be likely in efficient markets. This outcome is intrinsic to the exercise of monopsony power: it would occur whether or not Processors also behaved opportunistically in setting fees (and other conditions).
The Tribunal considers that, absent a boycott authorisation, the inefficiencies arising from monopsonistic behaviour by Processors are unlikely to be reduced in the future by the (now authorised) use of collective negotiations (with conditions) on behalf of each of the VFF Grower groups, whatever other effects that authorisation might have (e.g. on negotiating costs or on opportunistic behaviour by Processors). Indeed, we believe that the Processors will continue to be able to act as monopsonists as long as they are not compelled to, and do not, compete with one another for the services of chicken growers
This is likely to be the case (at least) for so long as new Processors do not (threaten to) enter the regional markets for chicken growing services in Victoria and that constraints on the distance that live grown chickens can be transported without excessive bird-stress or mortality rates continue to limit the geographic boundaries of the regional chicken growing markets. There was no evidence offered to the Tribunal to suggest that new Processors are looking to enter the markets for chicken growing services in Victoria. In fact, if anything, the evidence suggests that consolidation of processing capacity has been the dominant trend in recent years. On the other hand, however, the evidence does suggest that there is some likelihood that the geographic boundaries of chicken growing markets will expand in the future. This likelihood might, but is not certain to, lead to greater competition between Processors for growers in the future. We say only might because each Processor will be likely to recognise that it is in the self-interest of all of the Processors to refrain from competing for each other’s growers: to do otherwise would lead to an end of their capacity to exercise monopsony powers.
The fact that VFF Grower groups now have an authorisation to collectively negotiate with their Processors probably has equipped Growers with a degree of countervailing market power. However, we consider it unlikely that the ability of VFF Grower groups to collectively negotiate with their respective Processors will result in them being able to restrict the capacity of Processors to behave monopsonistically. At best, it might result in grower-fees and other terms and conditions more closely reflecting the long-run opportunity costs of Growers’ investments in growing capacity at whatever level of demand for growing services (and hence output of processed chicken meat) the Processors chose as maximizing their potential economic profits. Processors likely will retain the capacity to more-or-less unilaterally determine the level of investment in growing capacity and, as a result, the output of processed meat in Victoria. As monopsonists, they will continue to restrict investment in growing capacity and output of chicken meat below the allocatively efficient levels that would be expected in competitive markets for growing services.
Adding a collective boycott authorisation to the collective negotiation authorisation, however, is likely to result in changes to the approach taken by both Grower groups and their monopsonistic Processors to commercial negotiations over the terms and conditions on which chicken growing services are supplied.
In the first place, we believe that both parties will be likely to engage in gaming activities which seek to ensure that the outcomes of commercial negotiations advance their objectives to the maximum feasible extent. In the case of Growers, such activities might involve strategically timing notification of a proposed boycott so that its implications would have the potential to generate greater costs for their Processors. In so doing, they would increase the likelihood of Processors acceding to their demands. Processors, on the other hand, would be likely to seek ways to reduce the costs to them of a collective boycott both for their own sake and in order to decrease the extent to which they would be likely to find it best suited their interests to accede to Grower demands (and to do so in ways that make this fact apparent to Growers).
Whatever probability the Processors might attach to a boycott being threatened and a threatened boycott actually being implemented, there would be likely to be a detriment to society (of uncertain magnitude) arising from the fact that Processors would be likely to expend resources in developing and implementing boycott-proofing strategies.
While the extent of gaming activity is hard to predict, we believe that it is likely that Grower groups will, at some point, threaten to collectively boycott their respective Processors. This is because the potential damage a collective boycott could inflict on a Processor’s commercial interests would be a significant bargaining tool that Growers could use to extract improved terms and conditions of service from their Processor. We also believe that, in many cases, the threat of a boycott is likely to be sufficient for Growers to achieve improved terms and conditions of service in the factual without the need for them to actually implement it. Nonetheless, there is a not insignificant probability, in our estimation, that at least one Grower group actually will implement a collective boycott on its Processor in order to test out its consequences. While we do not believe it necessarily follows that all Grower groups and their Processors will become enmeshed in collective boycotts, or that periodic collective boycotts will occur well into the future, we do believe that there is a real chance, post-authorisation, of at least one collective boycott occurring. Were one or more collective boycotts to occur, a public detriment (of uncertain size) would follow.
The Growers went to substantial lengths to try to establish that, in the event of a collective boycott actually occurring, the damage (detriments) to Processors (and, by implication, other businesses, employees, contractors and consumers) could be moderated through strategies which Processors could implement. The Growers’ arguments, however, are a two edged sword: the greater the potential for Processors to minimise the costs to them of a boycott if one was actually implemented, the lower the credibility of a threat by Growers to implement a boycott. Equally importantly, any actions taken by Processors to mitigate the effects of a boycott, should one occur, will involve costs which must also be considered when assessing the extent of public detriment that would follow from authorisation, whatever probability Processors attach to a collective boycott actually occurring. In any case, a collective boycott, even of short duration, would generate some disruption and costs to the businesses of both the Processor and Growers involved, and probably other related businesses, which should be considered as public detriments.
While it is uncertain whether or not a boycott would be likely to be implemented by each Grower group against its Processor, we believe that a collective boycott authorisation would be likely to result in changes to outcomes in all markets for chicken growing services in Victoria. In particular, there is a real chance that Growers will be able to negotiate higher fees – fees above their long-run opportunity costs at existing levels of investment in chicken growing services. The extent to which this is likely to be so will depend on the level of the credibility of Growers threatening to use their boycott power and also on other external constraints that might moderate their demands (such as the threat of losing business to non-VFF growers, new entrants or interstate growers if they demand excessively high fees).
The consequences for the efficiency of market outcomes (a potential for there to be benefits to the public) from authorising collective boycotts as a means of reducing monopsony-related inefficiencies in market outcomes (i.e. those that result from lower investment in growing facilities and lower Processor output of chicken meat than in efficient markets) depends largely on whether Processors’ demand for chicken growing services would be likely to increase to more closely reflect efficient levels in the factual.
The evidence and submissions relevant to this question differed significantly. Our review of the evidence and our understanding of the standard economic analysis of such situations has led us to believe that a number of possible outcomes are more-or-less equally plausible. This is because a situation of “bilateral monopoly”, in which both Processors as purchasers and Growers as sellers have some market power – that is, have the capacity, to some extent, to act as price-makers, rather than simply as price-takers – inevitably involves a high degree of uncertainty about likely outcomes because both parties are able, and likely, to behave strategically.
Adopting the standard assumption utilised by economists that the decisions of businesses are likely to be shaped by a desire to maximise economic profit can take us only so far. It would result in a prediction that the level of demand for investment in grower services which maximised joint (industry) profits would be preferred by both parties. In principle, the outcome in terms of demand for growing services under joint profit-maximising behaviour would be that expected in competitive markets. However, to achieve this outcome would require that both parties have complete information about one another’s cost and revenue functions and that negotiation costs be low.
In practice, incomplete information available to both parties, and significant costs associated with prolonged rounds of negotiations, would be likely to result in outcomes different from those which would maximise joint profits. Depending on the strategies chosen by the parties, many different outcomes are possible and plausible. This would be true, a fortiori, for any other motivation that Growers, equipped with a boycott power, might bring to the bargaining table.
Our conclusion, so far as monopsony behaviour by Processors is concerned, is that there is insufficient weight of evidence to enable the Tribunal to conclude that there is a real chance that authorisation of collective boycotts by Growers would be likely to result in levels of investment in chicken growing facilities and output of chicken meat in Victoria that more nearly replicate those expected in efficient markets.
There is, however, a real chance that the authorisation of collective boycotts, notwithstanding the conditions proposed to be applied, would give rise to detriments – in the form of the harm (however limited) that would be caused by the likelihood of at least one boycott actually occurring in the early periods following authorisation and the likelihood that Processors would, in any event, begin to take actions, at a cost, to limit the potential impact on them of a boycott occurring.
13.3 The Role of sunk, relationship-specific, costs
The Growers and the ACCC made much of the fact that Growers face significant sunk costs when they invest in chicken growing facilities with limited alternative uses. The most pertinent sense in which this is so is that Growers face substantial unavoidable (fixed) costs once their facilities are in operation. These costs especially involve the significant opportunity costs of the capital which Growers have invested in their properties which they cannot avoid even if they shut down their growing operations, at least until they could on-sell their property, either to another owner-manager or to an alternative use.
The magnitude of these unavoidable costs and the relationship-specific nature of investments in chicken growing facilities make Growers especially vulnerable to Processors setting fees and/or other terms that give some Growers returns less than their full long-run opportunity costs. During the years when the relationship between Growers and Processors was regulated, Growers were more-or-less guaranteed that their full costs (unavoidable as well as avoidable) would be covered by the growing fees that they received. Since deregulation in 2001, however, existing Growers have become vulnerable to Processors behaving opportunistically and the evidence suggests that Processors have done so, at least to an extent (e.g. delaying settling contract terms; setting new fees at levels that don’t compensate Growers for unavoidable real cost increases; risk shifting and the like).
In the preceding regulated environment, at least while it was expected to be sustained, Growers would have felt confident that they would receive adequate returns from investing in upgrades to their facilities or an expansion of them. Likewise for potential new investors. Processors’ behaviour since deregulation is likely to have had some effect in deterring existing Growers from expanding their capacity to provide chicken growing services or to upgrade their facilities and to have caused potential new investors to hesitate more than usually.
However, given that the demand for chicken meat is expected to continue to grow at a healthy rate, Processors are likely to want to attract new investment in growing facilities and would not want to lose existing growing capacity. To attract new investment, Processors will have to offer fees and other terms and conditions that give investors adequate returns and also comfort that they won’t be subject to opportunistic behaviour in the future. To retain existing growing capacity, we believe that Processors would be limited in the extent to which they can act opportunistically towards existing Growers to that which ensures no Grower would be likely to find it more profitable to convert their property to another use. Indeed, the Processors would be likely to recognise that if any existing Grower chose to try to sell their property as a going-concern, potential purchasers would require more favourable terms and conditions. Processors could refuse to negotiate such a contract, but would risk Growers selling, albeit at a lower price, to an investor who would put the property to another use. This suggests that, eventually, Processors might be willing to improve the terms for existing Growers towards those that a potential purchaser of existing facilities would demand. In other words, we believe that the apparently opportunistic behaviour by Processors, which has resulted in terms and conditions to existing Growers inferior to those that would be expected in efficient markets, is likely to be limited and transitory.
Collective bargaining, already authorised, might speed-up the transition from a regulated to a deregulated environment and give new investors a degree of confidence that when their initial contracts expire there will be a mechanism in place to assist them in renegotiating contracts. It also might (probably will) reduce the costs to Processors as well as to Growers of contract negotiations, increase the capacity of Growers to have enhanced input into contract terms and facilitate an improved flow of commercially relevant information from Processors to Grower groups. It is likely, however, that market pressures – in particular, Processors’ need to attract additional growing-capacity in the face of continued expected growth in demand for processed chicken meat – will act as an effective circuit-breaker to continued opportunistic behaviour by Processors with or without a collective negotiation authorisation.
Augmenting a negotiation authorisation with a boycott authorisation might speed-up the transition: it might result in more speedy resolution of contract terms and on more favourable terms for existing Growers than otherwise. How quickly, and how much more favourably, depends on the credibility of the threat by Growers that they might actually use their boycott power. As noted in relation to the role of monopsony power, however, such a measure to overcome opportunistic behaviour is likely to bring with it a real chance of significant detriments. There is no guarantee that Growers will seek to use the power to collectively boycott only to overcome opportunistic behaviour by their Processors. Depending on their objectives, Growers may use the power to collectively boycott to seek terms and conditions that, overall, push chicken growing markets towards outcomes that are even less efficient than those likely to occur in the counterfactual. In other words, providing Growers with countervailing market power may lead to outcomes where the positive benefits from overcoming opportunistic behaviour by Processors are outweighed by the detriments caused by outcomes involving even more inefficient levels of investment in growing facilities and outputs of processed chicken meat.
13.4 Overall Conclusions
In the Tribunal’s view, the strongest case for believing that a boycott authorisation might generate a benefit to the public lies in its potential to more rapidly eliminate the opportunistic behaviour that Processors appear to have engaged in during the post-deregulation period. The emphasis on “more rapidly” is important – market pressures are likely to erode Processors’ capacity to behave in this way over time in any event.
More significant, however, is the fact that Processors act monopsonistically in the markets for chicken growing services. Even if Processors were not behaving opportunistically in setting contract terms, there likely are on-going material detriments to the public resulting from the exercise of monopsony power by the Processors. Whether or not the power for Growers to engage in collective boycotts would be likely to reduce the degree of inefficiency that would result from monopsonistic behaviour by Processors is highly uncertain.
Equipping Growers with the ability to collectively boycott will provide them with significant countervailing bargaining power in the markets for chicken growing services. Where two parties to commercial negotiations both have significant bargaining power – that is, a situation akin to bilateral monopoly - the outcomes of negotiations are unpredictable. While a collective boycott authorisation would be likely to enable Growers to prevent Processors acting opportunistically towards them in negotiations over terms and conditions of service, it cannot be guaranteed that Processors and Growers will eventually settle on terms and conditions that ensure more efficient market outcomes than those that would exist in the counterfactual. That is, while it is possible that more efficient market outcomes in terms of levels of investment in growing facilities and output of chicken meat will be generated in the markets for chicken growing services in the factual, it is also possible they will not. Applying the Tribunal’s criterion that there must be a real chance that there are likely to be public benefits, there does not appear to be a sustainable case for authorising the use of collective boycotts by Growers as a means of overcoming the inefficiencies associated with Processors exercising monopsony power.
In addition to not being convinced that there is a real chance of public benefits arising, in total, in the factual, the Tribunal does believe that some public detriments (of uncertain magnitude) are likely to occur. As indicated earlier, these come in the form of the harm that would be caused in the (likely) event of at least one collective boycott actually occurring and the likelihood that Processors, in any event, will implement boycott-proofing strategies and actions, at a cost, to limit the impact on them if a collective boycott were to occur.
There is no empirical evidence of the effect of collective boycotts authorised under the Act for the simple reason that in the thirty-two years of the Act’s life there have not been any – perhaps in itself a significant fact. Historical experience of boycotts in other contexts, in particular in labour markets, suggests that boycotts can be unpredictable in their consequences and sometimes turn out to be disastrous for the boycotters. The very notion of boycott involves collective sacrifice for some perceived common objective. But emotion-charged notices of solidarity might sometimes overwhelm.
On balance, therefore, we do not believe that a sufficiently strong case has been made that authorisation of the use of collective boycotts (with conditions) would be likely to generate such a benefit to the public that the ACCC’s authorisation (A90931) should be allowed to stand.
Although it is open to the Tribunal to authorise collective boycotts with variations in the conditions proposed by the ACCC, and it is possible that there might be some alternative conditions that might moderate some of the likely detriments (e.g. variations in conditions attached to the notice period), we consider that the benefits which have a real chance of eventuating are unproven so as to support an authorisation with any variations in the conditions proposed that the parties or the Tribunal could identify.
All that said, the Tribunal acknowledges that the structure of the market for chicken-growing services, and the apparent conduct of participants in it, makes it more than usually possible that augmenting a collective negotiation authorisation with a collective boycott authorisation might do more good than harm in terms of the efficiency of likely market outcomes. Our decision to set aside the ACCC’s Determination (A90931) reflects our view that the case for authorisation of collective boycotts in this instance is not sufficiently strong.
14.0 SUMMARY
In the thirty-two years of the life of the Act, the ACCC and its predecessor have never before authorised a collective boycott. Collective boycotts have the capacity to inflict great damage not only on the targets but also on employees, related businesses, consumers and the boycotters themselves. If a market was workably competitive to begin with, it is highly unlikely that providing suppliers with the ability to collectively boycott their customers could be shown to produce benefits to outweigh the quantum of these likely detriments.
What distinguishes the markets for chicken growing services in Victoria, however, is the likelihood that Processors in these markets have significant market power that they can bring to bear in negotiations with their Growers. There are two sources of this market power:
·First, Processors are monopsonistic purchasers in at least two of the regional markets for chicken growing in Victoria, and do not appear to compete with each other for grower services in the third; and
·Second, Growers that have previously invested in chicken growing facilities face significant sunk costs (in the sense of being fixed and unavoidable) in relation to previous investments made in facilities. Further, these investments are highly specific to providing chicken growing services and cannot be easily put to alternative uses.
The effect of the first factor, in our assessment, is likely to give Processors the ability and incentive to set terms and conditions for chicken growing services that involve investment in (and output from) chicken growing facilities, as well as Grower fees, lower than those which would be expected in efficient (competitive) markets for chicken growing services.
The effect of the second source of market power is to provide Processors with the ability to act opportunistically in their negotiations with Growers who have previously invested in chicken growing facilities, but who do not have a contract to cover their future provision of chicken growing services. Evidence before the Tribunal indicates Processors have delayed settling contract terms with their Growers; set new fees at levels that do not compensate Growers for unavoidable real cost increases; and shifted the burden of risks onto Growers without compensation.
In combination, we believe these two sources of market power are likely to lead to outcomes in the markets for chicken growing services that would not replicate those expected in workably competitive markets for these services. In turn, this is likely to generate inefficiencies one would not expect in competitive markets. This situation will continue to persist in the absence of an authorisation that provided Growers with the ability to collectively boycott.
However, the ability of Processors to act opportunistically in their negotiations with Growers is likely to be transitory and will likely be mitigated by growth in the demand for chicken meat (and hence chicken growing services) in the future. Such growth would have the effect of encouraging Processors to act less opportunistically towards Growers in their negotiations, for fear these Growers may ultimately leave the industry. Further, where Processors need to entice new investment in chicken growing facilities in order to meet future growth in demand for processed chicken meat, it is unlikely they will be able to act opportunistically in negotiations with new entrants. This is because potential new entrants will likely demand secure contracts before they invest that will ensure Processors are not able to act opportunistically towards them after they have made investments in the specific assets necessary to provide chicken growing services. If they do not secure such contracts, they would be less likely to invest in chicken growing services, which would not be in the interests of Processors.
While we consider that the second source of market power enjoyed by Processors is likely to subside over time even in the absence of authorisation, we believe the first source is likely to persist for so long as Processors either face no competition, or chose not to compete with each other for the purchase (including from potential new entrants) of chicken growing services from individual Growers.
The question therefore is whether authorising Growers to be able to collectively boycott their Processors (subject to conditions) would be likely to generate “such a public benefit” in these circumstances; that is to say a benefit that would outweigh any public detriment that might result from authorising the proposed conduct.
The main effect of authorising Growers to collectively boycott (with conditions) is that it will give Growers some countervailing bargaining power in their negotiations with Processors. It should enable them to overcome, more quickly, the ability of Processors to act opportunistically towards them in negotiations over terms and conditions of supply of the service. In turn, this should ensure that they are able to secure improved terms and conditions when providing chicken growing services. While we believe the extent to which terms and conditions will improve will be likely to be constrained by certain market factors (such as competition from potential new entrants and non-VFF and interstate growers), we are nonetheless confident Growers equipped with authorised boycott powers will be able to secure improved terms and conditions.
However, just how Growers would seek to exercise the power to boycott in their negotiations with Processors is highly uncertain. While we are confident they will be able to use the power to overcome opportunistic behaviour by their Processors, we are not confident they will have the incentive to use it only in ways that will lead to more efficient market outcomes. An authorised boycott power will not, by its nature, subject both Processors and Growers to competitive disciplines such that outcomes consistent with those expected in competitive markets would necessarily arise. Put simply, two wrongs (in the sense of the combination of monopoly power on the seller side and monopsony power on the buyer side) do not necessarily make a right (i.e. a competitive market outcome). Where markets are characterised by both buyers and sellers having market power, standard economic analysis suggests market outcomes are highly unpredictable. While it is possible some outcomes might emerge that improve the efficiency of chicken growing markets, it is also possible other outcomes might arise that reduce it. On balance, we believe the evidence and submissions provided to us during this matter has been unable to convince us that there is a real chance that improved market outcomes will occur.
Against this, there is a real chance that public detriments will arise if Growers are authorised to collectively boycott. These detriments come in two forms:
·Detriments that would arise as a result of boycotts actually occurring. These detriments would come in the form of lost production and damage to both Processors and Growers and third parties such as employees and suppliers, as well as the possibility of temporary price spikes for consumers. While we believe that a succession of long-lasting boycotts is unlikely, we do believe there is a not insignificant probability that at least one boycott will occur as Growers and Processors try to better understand the ramifications of the authorisation; and
·Disruptions to the business of Processors who would seek to find ways to boycott-proof their operations in case a boycott actually did occur. These costs will be incurred irrespective of whether a boycott occurs or not.
On balance, therefore, we are not convinced there is a real chance that net public benefits will arise as a result of a collective boycott authorisation, even with the conditions. In the ACCC’s submission, it is the conditions which just get the authorisation over the line. But for the reasons given earlier, the protection given by the conditions may be illusory.
While collective boycotts will enable Growers to overcome, to some extent, opportunistic behaviour by Processors, we believe demand growth would, over time, be likely to achieve this in the absence of authorisation. Further, it is possible Growers might use their enhanced bargaining power to achieve market outcomes that more than offset any gains that may result from more rapidly overcoming opportunistic behaviour by Processors. Weighed against this, we believe there is a real chance that public detriments will arise.
Accordingly, we have decided to set aside the ACCC’s authorisation enabling Growers to collective boycott (with conditions).
15.0 ACKNOWLEDGEMENTS
The Tribunal gratefully acknowledges the assistance of Mr Richard York, Economic Analyst on the staff of the Tribunal, and Mrs Judith Dikstaal, Executive Assistant to the Deputy President.
I certify that the preceding four hundred and fifty six (456) numbered paragraphs are a true copy of the Determination herein of the Tribunal. Associate:
Dated:
Counsel for the Victorian Farmers Federation: J E Middleton QC and P Fox Solicitors for the Victorian Farmers Federation: Nevett Ford Counsel for the Processors: C A Sweeney QC Solicitors for the Processors: Spier Consulting Pty Ltd Counsel for the Australian Competition and Consumer Commission D Star Solicitors for the Australian Competition and Consumer Commission Australian Government Solicitor Dates of Hearing: 21, 22, 23, 24, 25 November 2005 Date of Judgment: 21 April 2006
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