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 cited
Pearce 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
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IN THE AUSTRALIAN COMPETITION TRIBUNAL |
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File No 2 of 2005 |
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RE: VFF CHICKEN MEAT GROWERS’ BOYCOTT AUTHORISATION
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JUSTICE HEEREY (DEPUTY PRESIDENT) DR W J BEERWORTH (MEMBER) PROFESSOR C WALSH (MEMBER) |
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DATE OF DETERMINATION: |
21 APRIL 2006 |
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WHERE MADE: |
MELBOURNE |
THE TRIBUNAL DETERMINES THAT:
Australian Competition and Consumer Commission authorisation A90931 is set aside.
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IN THE AUSTRALIAN COMPETITION TRIBUNAL |
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File No. 2 of 2005 |
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RE: VFF CHICKEN MEAT GROWERS’ BOYCOTT AUTHORISATION
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TRIBUNAL: |
JUSTICE HEEREY (DEPUTY PRESIDENT) DR W J BEERWORTH (MEMBER PROFESSOR C WALSH (MEMBER) |
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DATE OF DETERMINATION: |
21 APRIL 2006 |
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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]
11.2 Do Processors have market power in the markets
for chicken growing services?
11.2.1 Grower’s case [89]
11.2.2 Processors’ case [93]
11.2.3 ACCC’s case [101]
11.2.4 Tribunal’s view [105]
11.3 Are Processors exercising market power in the markets
for chicken growing services?
11.3.1 Growers’ case [127]
11.3.2 Processors’ case [136]
11.3.3 ACCC’s case [140]
11.3.4 Tribunal’s view [149]
11.4 What implications follow for the counterfactual if Processors
exercise market power in the markets for chicken growing services?
11.4.1 Growers’ case [170]
11.4.2 Processor’s case [175]
11.4.3 ACCC’s case [176]
11.4.4 Tribunal’s view [178]
11.4.4.1 Monopsonistic behaviour [179]
11.4.4.2 Opportunistic behaviour [190]
11.4.4.3 Overall conclusions about the counterfactual [198]
12.0 THE 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?
12.1.1.1 Processors’ case [207]
12.1.1.2 ACCC’s case [209]
12.1.1.3 Tribunal’s view [210]
12.1.2 Would the parties be likely to “game” the collective
boycott authorisation?
12.1.2.1 Processors’ case [215]
12.1.2.2 Growers’ case [220]
12.1.2.4 Tribunal’s view [221]
12.1.3 What other factors might influence the exercise of a
collective boycott power?
12.1.3.1 Growers’ case [240]
12.1.3.2 Processors’ case [250]
12.1.3.3 ACCC’s case [251]
12.1.3.4 Tribunal’s view [252]
12.1.3.4.1 Factors that constrain the extent of
Growers demands [254]
12.1.3.4.2 The length of any proposed boycott [259]
12.1.3.4.3 Processors’ responses to minimise
the effect of a collective boycott [261]
12.1.4 Likely impact of a collective boycott authorisation on
contract negotiations between Processors and Growers
12.1.4.1 Growers’ case [267]
12.1.4.2 Processors’ case [280]
12.1.4.3 ACCC’s case [286]
12.1.4.4 Tribunal’s view [287]
12.1.4.4.1 Would a Growers’ threat of boycott
be credible? [289]
12.1.4.4.2 Is a boycott likely to occur? [292]
12.1.4.4.3 Will authorisation lead to a change
in market outcomes? [296]
12.1.5 Implications for various market participants
12.1.5.1 Processors’ case [308]
12.1.5.2 Growers’ case [311]
12.1.5.3 Tribunal’s view [317]
12.2 Benefits from a collective boycott
12.2.1 Growers’ case [325]
12.2.2 Processors’ case [333]
12.2.3 ACCC’s case [337]
12.2.4 Tribunal’s view [339]
12.3 Detriments from a collective boycott [358]
12.3.1 Anti-competitive detriments
12.3.1.1 Processors’ case [360]
12.3.1.2 Growers’ case [370]
12.3.1.3 ACCC’s case [376]
12.3.1.4 Tribunal’s view [379]
12.3.2 Animal welfare detriments
12.3.2.1 Processors’ case [396]
12.3.2.2 Growers’ case [397]
12.3.2.3 ACCC’s case [400]
12.3.2.4 Tribunal’s view [401]
13.0 COMPARING THE COUNTERFACTUAL WITH THE FACTUAL [404]
13.1 Sources of market power [407]
13.2 The role of monopsony power [410]
13.3 The role of sunk relationship-specific costs [427]
13.4 Overall conclusions [433]
14.0 SUMMARY [441]
15.0 ACKNOWLEDGEMENTS [455]
1.0 Introduction
1 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.
2 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).
3 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.”
4 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.”
5 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.
6 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)
7 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.
8 The nature of the test under s 90(8) and its relationship with that under s 90(6) is discussed further below.
9 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
10 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
11 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?
12 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.
13 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
14 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.
15 Details of the various Processors and their Growers are as follows.
TABLE 1
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(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.
2The 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.
16 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.
3.2 The wholesale processed chicken meat market
17 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.
18 Thus the parties accept that the relevant market for chicken meat is the national wholesale chicken meat market.
19 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.
20 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.
21 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.
22 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.
23 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
24 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.
25 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.
26 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.
27 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.
28 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.
29 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.
30 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
31 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.
32 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.
33 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
34 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
35 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.
36 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.
37 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
38 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
39 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.
40 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
41 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.
42 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.
43 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.
44 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.
45 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.
46 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.
47 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.
48 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
49 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.
50 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.
51 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.
52 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.
53 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).
54 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
55 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
56 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.
57 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)
58 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
59 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.
60 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.
61 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:
· therelevant 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).
62 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.
63 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)
64 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.
65 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.
66 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.”
67 We think the view taken in Pathology is correct. It is supported by the structure and text of the Act.
68 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).
69 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).
70 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.
71 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
72 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).
73 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
74 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 netbenefit to the public - that is, benefits to the public sufficient to outweigh any detriments to the public from granting an authorisation.
75 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.
76 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.
77 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).
78 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.
79 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
80 To identify and weigh public benefits and detriments, the Tribunal applies the “future with and without” test.
81 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.
82 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.
83 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”.
84 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.
85 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
86 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.
87 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.
88 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.
89 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
90 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”.
91 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.
92 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.
93 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
94 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.
95 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.
96 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.
97 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.
98 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.
99 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.
100 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.
101 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
102 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.
103 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.”
104 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.
105 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
106 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.
107 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.
108 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.
109 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.
110 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.
111 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).
112 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.
113 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.
114 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.
115 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.
116 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.
117 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.
118 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.
119 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.
120 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.
121 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.
122 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.
123 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.
124 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.
125 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.
126 The Tribunal is not convinced, however, that such competitive forces will constrain the market power Processors may enjoy as a result of being monopsony or oligopsony purchasers in their respective markets for chicken growing services. Indeed, the Tribunal believes that competitive forces in the wholesale chicken meat market are more likely to provide Processors with an incentive to exercise any market power they may have in order to secure chicken growing services at the lowest cost possible so as to either maintain their level of competitiveness in the wholesale chicken meat market, or to secure the greatest amount of economic profit given the prices they face in the wholesale market for chicken meat. This is particularly the case in the Bendigo and Geelong markets where the monopsony Processors do not face any competition to secure chicken growing services in their region.
127 It could be argued that Processors operating in an oligopsonistic market (such as the Melbourne regional market) might be constrained in their ability to exercise market power if any or all of them sought to poach more efficient Growers from each other in order to improve their competitiveness in the wholesale chicken meat market. This could be argued to have the effect of bidding up the fees paid to efficient Growers as Processors in these markets seek to lure more efficient Growers to their “stable”. However, as indicated above, the evidence does not support any finding that Processors in the Melbourne regional market have sought to compete for Growers in this way.
128 On balance, the Tribunal believes that it is likely that Processors have market power in the regional markets for chicken growing services. In this regard, it believes that the monopsony position of two Processors, in Geelong and Bendigo respectively, and the apparent absence of willingness of the three Processors in Melbourne to compete for each other’s Growers, is likely to confer some market power on Processors in the regional markets for chicken growing services. The Tribunal believes this market power is enhanced by the vulnerability existing Growers face as a result of trying to secure new contracts in the post regulation era with respect to facilities in which they have previously invested large sums of capital. The Tribunal does not believe this market power is diluted to any significant extent by competitive pressures Processors are subject to in the wholesale market for chicken meat. The Tribunal also does not believe it has been provided with sufficient evidence to reach a view that Growers have countervailing bargaining power on account of any alleged land supply constraints in any regional markets for chicken growing services.
11.3 Are Processors exercising market power in the markets for chicken growing services?
11.3.1 Growers’ case
129 The Growers contend that, in the absence of an authorised collective boycott, Processors will utilise their market power in the markets for chicken growing services to impose terms and conditions on Growers that are inconsistent with those one would expect in competitive markets for these services. They further submit that the history of outcomes in the markets for chicken growing services since deregulation of the industry supports this conclusion. In particular, they contend that Processors have been able to use their bargaining power to keep growing fees down simply by delaying contract negotiations or by failing to reach agreement on revised terms and conditions (including price) for the long term supply of grower services. In this regard, the Growers note that Inghams, Hazeldene, Baiada and La Ionica have not reached new agreements on all terms and conditions of supply with their VFF Grower groups. The Growers note that it is important that agreement be reached on all essential terms (including price, density, batch rates and the performance scheme that will apply) in order to provide a high degree of certainty to Growers as to the revenue they will receive under agreed terms and conditions for the supply of chicken growing services.
130 The Growers also note that during the period since deregulation, only nine non-VFF Bartter Growers have been successful in obtaining a new collectively negotiated contract. They argue this is despite a history of various attempts by Processors and Growers to acquire collective negotiation authorisations. They also note that VFF Growers, since de-regulation, have provided their Grower services on a batch by batch basis, and with no assurance of long-term supply. The Growers do note, however, that since the collective negotiation and collective boycott authorisations were made by the ACCC, some progress has been made towards finalising chicken growing contracts. The parties were divided, however, as to whether outcomes during the period since the authorisations were made represent outcomes one would expect under the factual or counterfactual scenarios.
131 The Growers note that the expert evidence provided by Mrs Smith suggests that the market power of Processors enables them to transfer costs and risks to Growers, especially with respect to shedding conversions and upgrades insisted on by Processors but at Growers’ cost. In this regard, the Growers contend that Processors have required Growers to bear greater risks, including bird mortality risks which depend, in part, on the inputs from Processors.
132 Further, the Growers note that there are environmental risks associated with chicken growing, including:
· problems associated with growing operations 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.
133 The Growers contend that Processors are able to shift responsibility for these risks by contracting out chicken growing to Growers. The Growers argue, however, that the ability of Growers to manage these risks is dependant on factors controlled by Processors. If, however, Processors have greater bargaining power as a result of their market power, Growers will have little input into contractual terms that could compensate them for the environmental risks associated with providing chicken growing services.
134 While the Growers appear to accept that it is more efficient for Processors to determine batch rates, they submit that arrangements that do not recognise the risks Growers face as a result of variability in batch rates are not consistent with outcomes one would expect in efficient markets for chicken growing services. In this regard, the Growers argue that their income is a function of a combination of the fee per bird, the number of batches of birds they receive each year (i.e. the batch rate) and density levels they maintain within their sheds. Accordingly, any drop in batch rates will reduce the number of birds they are contracted to grow and hence their income. At issue, therefore, is whether they should be required to bear the full risk of reductions in batch rates when demand in the wholesale market necessitates such a reduction. In this regard, they note that the previous VBINC system required that Processors pay a higher fee if batch rates dropped, but within limitations of plus or minus three per cent. This ensured Growers were partially insured against the risk of reductions in demand for their Processor’s final product flowing through in the form of reductions in batch rates. The Growers also note that:
“… the terms and conditions finalized by Bartter and its growers include a mechanism which builds an adjustment based on the number of days since the last batch, and in the publicly available information in relation to the RFM contract it appears there is a similar mechanism, but in that case … there are intervening payments on account to ensure the grower has continuing cash flow.”
135 The Growers contend, however, that presently Processors are resisting compensation for risks in batch rate variability.
136 The Growers also contend that Processors use their market power to unilaterally determine terms and conditions relating to the supply of chicken growing services that they would not be able to insist upon in a competitive market for chicken growing services. In this regard, they refer to the policies of some Processors that require their Growers to install tunnel shedding – at their own cost – in the belief that it will lead to better chicken growing results. This is despite evidence provided during the hearings which suggested there was a lack of relationship between the installation of tunnel shedding and best performance (and therefore higher Grower fees) under the Bartter pool scheme. Hence, the Growers submit that they are, in some cases, being forced to make investments at their own cost when most of the alleged benefits of tunnel shedding are to the advantage of Processors, unrelated to Grower performance and hence to better returns for Growers.
137 Finally, the Growers contend that better terms and conditions that have been offered by Processors to new entrants (e.g. RFM) have not flowed through to existing Growers.
11.3.2 Processors’ case
138 As indicated earlier, the Processors contend that they do not have market power in the markets for chicken growing services. Accordingly, they say the outcomes observable in these markets are consistent with those one would expect in competitive markets for this service. In this regard, they submit that the agreements reached between Bartter and the SWP Group are reflective of the efficient market outcomes one can expect to emerge in the absence of a collective boycott authorisation. The Processors note that the SWP Group has been able to negotiate an agreement that involves inter alia:
· higher fees being paid to SWP Group growers than those received by Growers under the previous VBINC arrangements;
· the application of an “open pool” performance incentive scheme which enables Growers as a group to increase the total level of payments they receive from Processors if their productivity is sufficiently high;
· an incentive payment for adopting tunnel ventilation shedding; and
· a re-negotiated contract of five years duration (which was negotiated two years prior to the expiration of current contracts).
139 The Processors contend that the SWP Group has been able to obtain better terms and conditions than the VFF Growers because it has been willing to offer its Processor greater flexibility and greater adaptation to its needs.
140 More generally, the Processors submit that a number of advantages will flow as a result of Processors and their Growers exploring ways to improve their competitiveness in the deregulated era. They submit, however, that the period since deregulation has not been long enough to gain a full appreciation of the competitive relationships that will emerge in the counterfactual.
11.3.3 ACCC’s case
141 The ACCC contends that the evidence suggests that the fees paid to Growers have remained static, or declined, in real terms since deregulation of the chicken growing market. In this regard, the ACCC notes that the fee carried over from the regulated system was, in the case of Inghams Growers, 51.39 cents per bird (cpb) in 2000. The ACCC compares this with the most recent fee offered by Inghams on 1 July 2005 of 58 cpb. The ACCC believes this fee increase only just kept pace with inflation as compared to the 51.39 cpb fee set in 2000. However, it notes that the Growers claim their costs have risen in real terms in the five year period between 2000 and 2005. Hence, whilst fees offered to Growers have only remained constant in real terms, costs have risen such that the ACCC believes returns have fallen in real terms.
142 The ACCC submits that as a result of the significant capital investments needed by Growers to provide chicken growing services, a new entrant into the chicken growing industry would require a high level of certainty about the income stream that would follow such investment. This could be in the form of a long-term contract. If investors could secure only short-term contracts, there would be the risk that the contracts may not be renewed and, accordingly, there would be less certainty that future income streams would recover the high initial capital investment. By implication, the ACCC’s contentions suggest that shorter-term contracts would include some level of risk premium to compensate the new entrant for undertaking this risk.
143 The ACCC contends, however, that since the industry was deregulated, there is significant concern that the terms offered by Processors do not provide Growers with a level of certainty consistent with the level of risk associated with investment in chicken growing facilities. In this regard, the ACCC notes the incentive scheme proposed by Bartter can lead to a Grower’s contract being terminated, irrespective of a Processor’s contribution to the poor results. The ACCC argues that this could potentially wipe-out most of the value of the investment made by a Grower in chicken growing facilities due to the reduced value of a chicken growing farm without a chicken growing contract. The ACCC submits that in an efficient market, a Processor offering such terms and conditions would be expected to pay a significant risk premium to encourage a Grower to accept such an arrangement. The ACCC contends, however, that the evidence does not indicate a risk premium is being paid to Growers in exchange for accepting such substantial levels of risk. In particular, the ACCC notes that the terms and conditions offered by Bartter to RFM – a potential new entrant into the chicken growing industry – are substantially better than those associated with the short-term contracts existing growers in Victoria are being asked to accept. Accordingly, the ACCC argues the evidence suggests that new entrants are not willing, nor are they expected, to accept the risks associated with short-term contracts that current Growers in Victoria are expected to accept. The ACCC also notes that a comparison of the batch rates between different Processors and their Grower groups shows that the “RFM is to have a high fixed batch rate together with other price and non-price terms that are better than those of existing Victorian growers”.
144 The ACCC also submits that in an efficient market, risk would be allocated to the party best able to bear it. In the case of chicken mortality, it argues that if chickens can die as a result of poor quality feed provided by Processors to Growers, Growers should not be required to bear the costs of this risk if they have no control over the quality of feed provided to them. In this regard, the ACCC notes it is an agreed fact that Growers have no control over the quality of inputs provided to them by Processors. However, the ACCC further notes that, since deregulation, Baiada has imposed contractual terms that expressly enable it to unilaterally allocate bird mortality risks to Growers. Under these arrangements, the ACCC contends a Grower will risk the loss of income when a chicken dies under its care and be obliged to compensate Baiada for all of its input costs.
145 The ACCC also contends that whether a chicken grower shifts to tunnel shedding is a matter which should be determined by the party who makes the capital commitment. It argues that, if failure to invest in tunnel ventilation were to lead to cost penalties to the Processor (presumably in the form of a lack of competitiveness in the market for wholesale chicken meat), this should be reflected in price incentives that reward those Growers that invest in tunnel ventilation over those Growers that do not. The ACCC submits that
“in an efficient market, the Commission is of the view that the Processors would use appropriate price signals to ensure that Growers faced the incentives and capital was efficiently allocated. The return on growing would determine whether or not it was economic for a Grower to make a higher capital investment.”
146 The ACCC notes, however, that the evidence of the Growers indicates there have been some attempts by Processors (who are not responsible for the cost of capital investment in tunnel shedding) to dictate investment decisions by Growers. This is done by offering shorter contracts or reduced terms (such as reduced batch rates) to those Growers that do not invest in tunnel shedding. The ACCC contends that this is not reflective of the terms which would prevail in an efficient market as this behaviour distorts economic incentives with respect to the question of whether a Grower should shift to tunnel ventilation as the party dictating the investment does not bear the cost if it turns out the investment does not, in fact, generate productive efficiencies and greater returns.
147 Further, the ACCC submits that there is evidence before the Tribunal of at least two major Processors (Bartter and Inghams) importing processed chicken meat from interstate into Victoria. The ACCC notes that this is happening at the same time as Processors are trying to induce further investment in growing in Victoria. The ACCC contends that these observations are inconsistent with oversupply of chicken growing induced by previous regulation of the chicken growing industry. Hence, the ACCC submits, excess supply can not be used to explain its belief that the real terms that have been offered to Growers have declined in the post regulation era.
148 Finally, the ACCC contends that the evidence supports a finding that these imports from interstate are occurring at a time when there is additional and unused (or underused) capacity to grow chickens in relevant regions of Victoria. The ACCC submits that this is because Processors are able to increase chicken growing capacity above existing levels by decreasing turn around times, decreasing density rates, and/or increasing batch rates. The ACCC believes that observations of unused (or underused) capacity would be consistent with Processors exercising monopsony power if it could be shown that the price for chicken growing services in these relevant regions was below the import equivalent price of these services. While the ACCC does not define “import equivalent price”, we have taken this to mean the price paid for chicken meat imported from interstate, minus transport and processing costs involved with imported chickens. In relation to imports from interstate by the Bartter group, the ACCC contends that there is evidence to suggest that the import equivalent price is above that being paid to Growers in this region because:
· Bartter intends to replace the imports from interstate with chicken growing services provided by RFM in Victoria;
· the Processors’ expert, Professor Gans, accepted that the RFM terms for Victoria must be more favourable to Processors than the costs of importing chickens;
· the evidence indicates that the terms to be offered to RFM are superior to those being offered to existing Growers; and
· there is no evidence that existing Growers in Victoria have been offered terms similar to those currently in negotiation between Bartter and RFM in order to induce existing Growers to stay in the industry or expand capacity.
149 In relation to Inghams, the ACCC notes that Inghams regards it as more efficient to meet demand from Victoria than importing from South Australia.
11.3.4 Tribunal’s view
150 The Tribunal accepts that some of the current outcomes in the markets for chicken growing services are not consistent with those that would be expected in competitive markets for this service. In the first instance, the Tribunal notes the lengthy periods of delay that continue to occur in finalising the terms and conditions on which chicken growing services will be provided in the regional markets for growing services. Such delays are not consistent with contract negotiations one would expect in competitive markets. A purchaser would be disinclined to delay settling terms and conditions for the acquisition of services in a competitive market for fear that a rival purchaser would move in quickly and reach agreement with the potential seller. This especially would be the case in an industry such as chicken growing where high levels of capital investment would emphasise the importance of income certainty for growers.
151 The Tribunal believes that delays in resolving the terms and conditions on which chicken growing services are provided works to the benefit of Processors. This is because the real value of certain terms – such as growing fees – declines over time. Hence, the longer a Processor can continue to pay a Grower the same fee, the less that fee will become worth in real terms.
152 The Tribunal notes the argument of the Processors that past practice indicates delay should be of no concern to Growers because finalised agreements tend to be backdated. While backdating agreements can compensate a party in the event of delayed resolution of contract terms, such compensation can be only be complete if interest is calculated on the backdated earnings to make up for the lost opportunity to use those funds in alternative income earning activities.
153 The Tribunal agrees with the ACCC that evidence of importing from interstate at prices effectively greater than those being paid to Victorian Growers would be inconsistent with outcomes that would be expected in competitive markets for chicken growing services. This especially would be the case where there was unused (or underused) capacity to provide chicken growing services in Victoria at lower prices than the import equivalent price. This is because the Tribunal expects that in a competitive market the price paid to Victorian Growers would be bid up to the price effectively paid to interstate Growers (inclusive of transport and other costs necessary to import services from interstate). To the extent there was a difference between the price offered by a Processor to its Victorian Growers and interstate Growers, a competitor to the Processor would be able to poach the Processor’s Victorian Growers and remain competitive. It could do this by offering a higher fee than they currently receive from their Processor, but one that is just below that offered to the interstate Growers. If a number of competitive Processors adopted this approach to poaching Victorian Growers, their fee would be bid up to equal that offered to interstate Growers. The Tribunal believes that this would occur even if there was an absolute supply constraint preventing Victoria’s Growers from expanding their capacity beyond existing levels.
154 To the extent that Processors are effectively paying higher fees for chickens grown interstate, the Tribunal considers that this may reflect profit-increasing price discrimination behaviour by Processors. In a competitive market, with significant numbers of both buyers and sellers of homogenous products, a price would be struck in equilibrium that would be received by all providers of the service. That is, if Growers were able to move freely from one Processor to another, they would not sell their services to a Processor that paid substantially less than others. Accordingly, the ability to move between Processors would ensure that the fee paid for chicken growing services would be bid up to an equilibrium level that was received equally by all homogenous suppliers of such services. As a result, an increase in the fee paid to one supplier would flow through to increase the fee paid to all other suppliers. It is for this reason that the additional (or marginal) cost incurred by a Processor prepared to pay a higher fee for an extra unit of output of chicken-growing services will equal not just the price of that additional unit of output, but also the incremental increase in price that must be paid to all other existing (or inframarginal) units of output provided by Growers. It is this increase in marginal cost over the price of the extra unit purchased that leads a profit-maximising monopsonist to restrict demand to levels below those that would be expected to occur in competitive markets and, correspondingly, pay lower growing fees than those that would be expected in efficient markets.
155 If, however, a monopsonist is able to segment demand such that it is able to pay an increased price to one group of its suppliers without needing to increase the price paid to other suppliers, the monopsonist can increase its access to growing services without needing to incur the additional cost of a fee increase paid to existing (or inframarginal) suppliers. To the extent that such market segmentation and price discrimination is occurring, however, the Tribunal notes two points. First, a Processor could not engage in such price discrimination unless it had market power. In a competitive market for chicken growing services, a Processor would be unable to segment suppliers of homogenous products and pay different amounts to different classes of suppliers. Second, however, while such price discrimination may be inconsistent with outcomes one would expect in a competitive market, it is likely to push market outcomes closer to those expected in efficient markets (as compared to the scenario that would occur with a monopsonist setting one price for all suppliers). This is because it will increase demand for (and output of) chicken growing services towards levels more consistent with those expected in competitive markets for this service. If price discrimination were perfect, it is possible that the level of output in the market would be consistent with that found in competitive markets for this service. The key difference, as compared to a competitive market outcome, however, is that Processors with market power would set different prices for incremental units of output so that they are able fully to extract any surplus that could potentially be earned by the Growers had competitive market conditions existed.
156 The Tribunal does not agree, therefore, that higher prices paid to one group of providers of chicken growing services would be consistent with outcomes that would occur in competitive markets for these services. Rather, it believes that it is more likely that this type of behaviour would be the result of the exercise of market power that it believes Processors are likely to have in the regional markets for chicken growing services in Victoria.
157 At issue, however, is whether the evidence supports a view that Victoria’s Growers are being offered a price lower than that offered to interstate Growers (and, prospectively, to RFM). There are two factors that complicate consideration of this issue. First, the Tribunal notes that Bartter and Inghams are not directly purchasing chicken growing services from interstate. The evidence indicates that both Processors are importing processed chicken meat from interstate, rather than live grown chickens.
158 Second, the Tribunal has not been provided with direct evidence of the fees paid by Bartter and Inghams to interstate producers for the products they import. Rather, the ACCC has sought to demonstrate Bartter Growers are being paid less than the “import equivalent price” of grown chickens from interstate by reference to the terms Bartter is negotiating with RFM. Noting that chickens grown by RFM would replace chickens imported by Bartter from interstate, the ACCC infers that the price paid to source chickens from interstate is greater than that to be offered to RFM. Given that the ACCC believes that the terms and conditions offered to RFM are superior to those offered to Bartter’s Victorian Growers, it concludes that the price offered to Victorian Growers is less than the import equivalent price paid to interstate producers.
159 The analysis conducted by the ACCC comparing prices paid for imported produce, prospective prices that are being negotiated with RFM and prices currently being paid to VFF Growers is necessarily complicated because the ACCC is not comparing the price of like-for-like products. In particular, we believe that the price paid for processed chicken meat imported from interstate would naturally be inflated above that paid to Victorian Growers to account for the additional processing costs incurred by interstate providers of processed chickens. However, to the extent that the cost to Bartter of processing chickens grown in Victoria by RFM is equivalent to the implicit price paid by Bartter for processing imported chickens interstate (and transportation costs are not excessively high), it could be assumed that the price paid for chickens grown by RFM is likely to be less than the effective price paid for the growing component of chickens imported from interstate. However, the lack of direct evidence and the need for assumptions underpinning this contention mean that it is far from certain.
160 To the extent that existing Growers and RFM would be providing largely homogenous services, the Tribunal believes that there would be sufficient evidence to support the view that existing Growers are being offered terms and conditions that are inferior to those offered to RFM. It also believes that it is possible, although not certain, that existing Growers are providing chicken growing services on terms and conditions inferior to those implicitly forming the basis of the conditions governing the supply of the chicken growing component of Bartter’s imports of chicken meat from interstate. The Tribunal has considered arguments raised by the Processors, however, that one should take care when comparing the terms offered to RFM and those currently received by Bartter Growers. The Processors argue that this is because, inter alia, the facilities being considered by RFM are state of the art, thereby enabling them to command a premium growing fee. Further, the Processors argue that the length of the RFM contract under consideration offers benefits to Bartter in the form of transaction cost savings (due to less need for contract re-negotiations) and planning advantages (given Bartter has surety over the way in which chicken growing services will be provided to it in the long-term). While RFM may be willing to invest in improved facilities such that it will not provide chicken growing services that are homogenous with those offered by existing Growers, the Tribunal would be surprised if RFM’s facilities were so superior as to attract a premium of the nature made apparent during Bartter’s current negotiations with RFM and existing Growers. Further, whilst a longer contract may provide some benefits to Bartter, it is also arguable it may involve some detriments as it could deprive Bartter of some flexibility in the way chicken growing services are provided to it in future years. In normal circumstances, longer-term contracts would tend to involve a lower fee as the provider of services is afforded greater certainty and security that its services will continue to be purchased into the future.
161 The Tribunal has also considered whether pressure from Processors for Growers to install tunnel ventilation at their own cost is indicative of them exercising market power. The Tribunal accepts that a Processor may encourage its Growers to make such installations because it believes this will make them more efficient, and thereby increase the competitiveness of the Processor in the wholesale market for chicken meat. The Tribunal also believes, however, that the additional cost of such investment would need to be recovered by Growers, and that this would normally be achieved via increased fees for chicken growing services (or via some other compensatory term or condition in arrangements struck between the parties).
162 While the Tribunal believes Processors should be entitled to expect that growing services will be provided to them in a particular way (including via the use of production methods such as tunnel ventilation), it also believes that they should be prepared to pay for any additional costs of doing so as part of the growing fee. To the extent that they are not prepared to do this, and that Growers are being forced to install tunnel ventilation without any corresponding compensatory fee increase, the Tribunal believes that this outcome would not be consistent with what would be expected in a competitive market for chicken growing services. Rather, the Tribunal would consider this more likely to be consistent with Processors exploiting their market power to require Growers to accept inferior terms and conditions of supply.
163 The evidence presented to the Tribunal suggests, however, that Bartter, at least, has, in effect, offered improved terms and conditions to Growers that adopt tunnel ventilation shedding. In this regard, the evidence of James Clarke – a Bartter Grower – suggests that Bartter was willing to reward him if he invested in tunnel ventilation shedding by offering greater throughput of birds through his farm. This would be achieved by offering a higher bird density ratio for sheds that had tunnel ventilation such that more birds would be grown in these sheds per batch. In turn, a greater throughput of birds would ensure that he would receive greater income. Accordingly, the Tribunal does not believe the evidence supports a view that the conduct of Processors with regard to tunnel ventilation shedding is consistent with them acting opportunistically in relation to this particular aspect of their negotiations with Growers.
164 In relation to the allocation of risk, the Tribunal believes that a supplier of a service would not normally be expected to bear the consequences of risks for which the purchaser was responsible for. Hence, to the extent that Processors have control over some factors that give rise to bird mortality risk (such as the quality of feed provided to Growers), the Tribunal would not expect Growers to be fully responsible for bearing bird mortality risk. For instance, if Growers were required to compensate fully Processors for bird loss when it was unclear whether that loss resulted from poor quality inputs or some other factor, the Tribunal would not think this an outcome consistent with that which it would expect in competitive markets for this service.
165 With regard to batch risk, the Tribunal accepts that it is efficient for Processors to determine batch rates as they are more likely to be aware of market demand for processed chicken meat (and hence the overall derived demand for chicken growing services). The Tribunal also believes there are risks associated with any business venture, including that demand may not materialise as forecast to justify investments made in production activities. Where a potential producer is considering making an investment in certain production facilities, it would normally seek to ensure that its risk-adjusted expected revenues in future years would be likely to be sufficient to justify the expense of this investment. One way it can seek to do this is by entering a supply contract that provides it with some certainty of income for a specified period. Where terms and conditions in that contract still contain sources of uncertainty, a potential supplier would seek to extract a sufficient fee to ensure its risk-adjusted expected revenues cover its investment costs before committing to such an investment. Similarly, where the contract offered to it is insufficiently long to provide guaranteed income to cover investment costs, the supplier may seek a premium to compensate it for the risk that it may not be able to secure future contracts to cover its investment costs.
166 The Tribunal believes it likely that the terms and conditions offered to RFM include a risk/return pay-off that a new entrant would require in order to make investments in chicken growing facilities. In this regard, it notes that the terms and conditions apparently specify a fixed annual batch rate, and a set fee for a lengthy period. Hence, the terms and conditions agreed provide a level of income certainty that should provide RFM with sufficient comfort to undertake the risk of investing in state of the art facilities necessary to provide superior chicken growing services. By contrast, the terms and conditions received by existing Growers involve a lower fee per bird, no guarantee over batch rates and the overall contract is shorter in duration.
167 The Tribunal believes these terms and conditions for existing Growers involve significantly less income certainty and therefore a higher degree of risk. They also involve significantly lower risk-adjusted returns for existing Growers. There is no evidence before the Tribunal that Processors are willing to offer terms and conditions to existing Growers the equal of those offered to RFM in the absence of a collective boycott authorisation. The Tribunal believes Processors will be unlikely to be willing to offer such terms and conditions to Growers in the short to medium term because their superior bargaining strength means they do not need to do so. As indicated earlier, this results from the fact that many existing Growers have previously made their investment during a period of regulated returns to the industry. In this environment, the Tribunal believes it likely that regulation provided a degree of income certainty to Growers (and likely protection from exploitation by Processors) such that they did not require the same degree of contract certainty that new entrants such as RFM now demand. However, in a post deregulation environment where Growers have already made their capital investment in the facilities needed to provide chicken growing services, Processors do not need to offer the same level of income certainty in the terms and conditions upon which chicken growing services are to be provided in order to entice Growers to enter the industry. This is because the Growers have already made their capital investment. Whether or not this situation will continue in the longer term, however, is less certain. This is discussed in more detail in section 11.4.4.2 below.
168 Finally, the Tribunal has considered whether the agreement reached between SWP and Bartter represents competitive outcomes one would expect to occur in the absence of a collective boycott authorisation. The Tribunal believes the agreement reached between Bartter and SWP is likely to reflect the type of outcome one would expect in the counterfactual. While it notes the argument of Growers that completion of this contract was only possible as a result of the “shadow” of boycott authorisation, it believes both parties would have been aware that the collective boycott authorisation was under challenge in the Tribunal at the time the contract was finalised. The Tribunal believes the impact of such challenge is likely to have been balanced in negotiations. That is, the prospect of the authorisation being set aside would theoretically be a reason for the SWP Group accepting a lower price for chicken growing services just as much as the prospect of it being upheld would be a reason for Bartter offering a higher price. The Tribunal believes, therefore, that the possibilities cancel each other out. It also believes that the SWP agreement suggests that negotiations can be completed in the absence of authorisation of a collective boycott.
169 At issue, however, is not whether agreements can be reached, but rather whether the terms and conditions contained within those agreements are consistent with those that would be expected in competitive markets for chicken growing services. That is, the Tribunal notes that the existence of an agreement between one group of Growers and their Processor does not, of necessity, mean that the terms and conditions contained within that agreement reflect those that would arise in a competitive market. Further, the existence of an agreement does not, of itself, mean that a Processor has been unable to exercise market power in its negotiations with its Growers. In this regard, the Tribunal notes the different views of the parties on this issue. Based on the evidence provided by the ACCC, the details of which are confidential, the Tribunal considers the terms and conditions agreed between Bartter and the SWP Group appear to be better than those offered to VFF Growers, but significantly inferior to those currently under negotiation between Bartter and RFM. To the extent that agreements between the SWP Group and Bartter are indicative of those agreements likely to emerge in the counterfactual, the Tribunal believes this indicates that existing Growers will, in the short-term at least, be unable to secure terms and conditions for growing services that a new corporate investor in the market would be able to negotiate. The implications of this are discussed more fully below.
170 Overall, the Tribunal believes that there is substantive evidence of Processors exercising market power to behave both monopsonistically and opportunistically. The full implications are considered in the next section, where, inter alia, the Tribunal presents its overall assessment of likely outcomes in the counterfactual.
11.4 What implications follow for the counterfactual if Processors exercise market power in the markets for chicken growing services?
11.4.1 Growers’ case
171 The evidence of Dr Jung outlines consequences that might be expected to follow from Processors having market power in the markets for chicken growing services. She also discusses the consequences that would follow from Processors having the capacity to engage in opportunistic behaviour as a result of the bargaining power they have over Growers facing large capital investments to enter the chicken growing industry. In relation to the consequences that follow from Processors having market power, Dr Jung relies on standard economic analysis to describe how monopsonists and oligopsonists will find it profit enhancing to restrict prices and output to levels below those one would expect in competitive markets.
172 With respect to the consequences of Processors having the ability to engage in opportunistic behaviour, Dr Jung describes how the potential for a firm to engage in opportunistic behaviour can lead suppliers to seek a risk premium in the price they receive for services before committing to investing in the infrastructure needed to provide these services. She describes how this increases the cost a purchaser faces above the underlying cost of providing the service, thereby leading to further reductions in demand below competitive levels (and, consequently, further reductions in social surplus).
173 As previously mentioned, the Growers contend that Processors have sought to act opportunistically in their negotiations over the terms and conditions of supply of growing services since deregulation of the industry. The Growers argue that this reduces their willingness to invest in new shedding. However, they feel compelled to do so – at their own cost and risk – in order to be eligible for the growing contracts on which their livelihood and the value of their farm depends.
174 Mrs Smith also suggested that Growers might invest in upgrades to their shedding, even if they believed the return they would get was inadequate. She indicated that while one would think Growers would not normally invest under these circumstances, they might do so if failure to do so would prevent them receiving a chicken growing contract. This is because failure to secure a contract might be thought to adversely affect the value of existing assets previously invested in.
175 Finally, the Growers contend that if terms and conditions offered to them are less than those that would be expected in an efficient market for chicken growing services, there will be a reduced incentive for Growers to maintain capital expenditure, and Growers will seek to reduce operating costs. In turn, the Growers submit that this may lead to increased risk of disease outbreaks on Grower farms, with serious consequences for the industry and the public.
11.4.2 Processors’ case
176 As indicated above, the Processors contend they do not have market power, and that those outcomes currently observable in the markets for chicken growing services in Victoria are consistent with those one would expect in competitive markets for these services. Implicitly, their arguments in relation to the counterfactual suggest that they believe that, in the absence of authorisation, agreements will be reached between Processors and their Growers which ensure Growers receive a fair and competitive return on their investments in chicken growing facilities, and also enable Processors to compete effectively in the downstream market for chicken meat.
11.4.3 ACCC’s case
177 As indicated above, the ACCC also considers that the Grower’s large sunk capital and lack of alternative uses for this capital outside of providing chicken growing services has led to a “hold-up” problem for Growers.
178 With respect to investments in chicken growing services, the ACCC contends 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/her farm as a going concern. The ACCC submits that this current state of affairs is delivering significant bargaining power to Processors and leading to terms and conditions that depart from those one would expect in a competitive market for chicken growing services.
11.4.4 Tribunal’s view
179 As indicated above, the Tribunal believes that Processors have and exercise market power in the regional markets for chicken growing services. It also believes that Processors have enhanced bargaining power on account of the deregulation of the relationship between Growers and Processors after many existing Growers made large capital investments in chicken growing facilities. In this section, the Tribunal considers what implications each of those is likely to have for future market outcomes in the absence of authorisation of a collective boycott (i.e. in the counterfactual).
11.4.4.1 Monopsonistic Behaviour
180 In the first place, the Tribunal believes that, as standard economic analysis would predict, Processors exercising monopsony (or oligopsony) power are likely to demand lower levels of chicken growing services and set lower Grower fees than would be the case if the market for chicken growing services was competitive: by doing so, they can earn, in economic terms, above-normal profits, notwithstanding that they are price-takers in the wholesale market for chicken meat. As a consequence, investment in chicken growing facilities in Victoria is likely to be less than if the markets for growing services were more competitive. Relatedly, given the significance of Victoria’s supply of chicken meat into the national wholesale market, it is possible that exercise of monopsony power by Victoria’s Processors also results in somewhat higher prices for final consumers of chicken meat nation-wide than otherwise would be the case. On either or both of these accounts, there is likely to be a loss of potential benefits to the public (as consumers or suppliers) compared to what would be expected if the markets for grower services were efficient. This would be true, we emphasise, whether or not Processors also were engaging in opportunistic fee-setting behaviour.
181 The Tribunal believes that both a source and a consequence of this first level of market inefficiency is the lack of competition among Processors for the services of Growers. It is the small number of Processors in each market for growing services (and the absence of a willingness to compete for Growers in that market where there is more than one Processor) which gives rise to this situation. The Tribunal does not believe that this source of market inefficiency is likely to be alleviated by the collective negotiation authorisation. While there may be other benefits that might result from that authorisation (such as reductions in negotiating costs and increased grower input into contract terms), the Tribunal does not see how the collective negotiation authorisation alone can help to generate competition between Processors for chicken growing services.
182 Important to understanding this assessment is the fact that the lower Grower fees likely to result from the exercise of monopsony power by Processors reflects the lower demand for grower services compared to the outcomes likely in efficient markets for growing services. The lower fees would be likely to arise, even in the absence of opportunistic fee-setting behaviour by Processors, because lower levels of investment in growing facilities are likely to involve lower long-run opportunity costs faced by marginal investors and, absent a collective boycott authorisation, Processors have no incentive to offer growing fees higher than marginal Growers’ opportunity costs. Collective negotiations might help the parties to “discover” and agree on what those costs are, but they would not equip Growers with the power, nor provide Processors with the incentive, to set fees higher than Growers’ long-run opportunity costs at the margin. A collective negotiation authorisation, in other words, is likely to be a blunt instrument for attempting to achieve Grower fees comparable to those likely if the market for Grower services was (more) competitive when the reason for lower fees is lower demand for growing services.
183 All this said, there are two other issues relevant to the Tribunal’s assessment of the counterfactual. The first concerns the effect on likely market outcomes of the likelihood that there will be continued growth in the demand for chicken meat in the foreseeable future. The second concerns the effect that the existence of non-VFF growers, and the fact that VFF Growers can “opt-out”, might have on potential market outcomes.
184 The demand for chicken meat has grown substantially over the last twenty years (at three per cent to four per cent per annum) and is expected to do so at similar growth rates over at least the next few years. This will lead to a demand for additional growing capacity for some time to come. Indeed, some Processors, Bartter and Ingham especially, already are importing processed chickens from interstate and want additional growing capacity in Victoria to reduce the need to import, as well as to meet expected future needs. However, the expansion in output of chicken meat and investment in growing capacity that is expected to occur on this account would not signify a likely reduction in the divergence of actual outcomes from those that would be expected in efficient markets for grower services. The levels of output of chicken meat and investment in growing capacity that would be expected in efficient markets would be increasing to a similar extent as the demand for chicken meat grows.
185 What might make some difference is the emergence of potential corporate investors in growing facilities, such as RFM. The fact that Bartter is willing to bring in RFM on terms apparently more favourable than those available to its existing growers suggests that Bartter is able to practise a degree of price discrimination (fee differentiation) between existing growers and this class of potential new corporate suppliers of growing services. They would retain the profits earned at existing levels of output of chickens grown by existing growers at the existing level of growing fees, but can earn additional profit on output from the new capacity, despite paying higher fees to the new class of investors (alone) to secure that new capacity, provided that they can sustain the differentiation in fees paid.
186 As indicated above, we believe this constitutes evidence that Processors are able to actually exercise monopsony power: it would not be sustainable in a competitive market for chicken growing services. But it also would result in a total output of chicken meat and investment in growing capacity closer to those expected in efficient markets, once the new capacity is in operation. At present, this potential efficiency-enhancing development, which is essentially incidental to Bartter’s recognition that it can increase profits by attracting a new class of investor, seemingly is limited to Bartter. In the context of a likely future demand for additional growing capacity by all Processors, it is possible (likely perhaps, but not certain) that other Processors, especially the larger ones, will endeavour to follow Bartter’s lead. To the extent that this is so, one potentially significant consequence of the likelihood of continued growth in demand for chicken meat by final consumers, which the Tribunal must include in its assessment of the counterfactual, could be a reduction in the degree of divergence between likely actual market outcomes and those likely in competitive markets for growing services. How significant this potential future development is likely to be is difficult to predict. But, at most, it is likely to result in only a partial alleviation of the inefficiencies that otherwise would be likely to result from the exercise of monopsony power by Processors. And, importantly, whatever outcomes eventuate, they would be a consequence of Processors seeking to meet their needs for higher levels of growing capacity in the most profitable way possible, rather than a consequence of Growers being equipped with an authorisation to collectively negotiate with their Processors.
187 In fact, once Bartter’s additional growing capacity to be supplied by RFM comes into operation, it might, for a time, work to the disadvantage of Bartter’s existing growers – including their VFF-Growers despite authorisation of their use of collective negotiations. It is likely that the new capacity sought by Bartter from RFM will contain, at least to some extent, some growing capacity in excess of that required to meet Bartter’s current excess demand for chickens grown in Victoria, in anticipation of continued growth in demand for chicken meat. To the extent that this is so, and given that RFM appears likely to be given terms which include guarantees about the income they will earn irrespective of the actual throughput of chickens, Bartter might find it cost-minimising to, at least temporarily, reduce the throughput of chickens by existing Growers (e.g. by reducing the batch-rate and/or by reducing batch sizes).
188 The possibility that there might be some (temporary) under-utilisation of some growing capacity however, is likely to be a fact of life, given that investments in new growing capacity are inevitably lumpy and need to be induced by Processors in advance of expected future growth in demand for chicken meat. The potential consequences for existing growers – at least temporarily reduced throughput and incomes – would not necessarily signify avoidable inefficiencies in the level of investment in growing facilities.
189 The consequences for existing Growers, moreover, might be reduced to the extent that any temporary excess growing capacity by one Processor could be “sold” to other Processors with excess demand for growing capacity. This possibility might be a significant part of the explanation why Processors are observed (as agreed by all parties) to lend one another Growers from time to time but not compete for the services of one another’s Growers.
190 Finally in our assessment of likely future market outcomes absent a collective boycott authorisation, we also need to consider the influence that the existence of non-VFF growers, and the capacity of individual VFF Growers to opt-out of collective negotiations, might have on the extent to which Processors can offer fees below those expected in efficient markets. At this point, our concern is still with the consequences of the exercise of monopsony power by Processors, separately from Processors’ potential ability to engage in opportunistic fee-setting behaviour. Briefly stated, our assessment is that there are likely to be few, and none of great significance. We already have observed that Processors have no incentive, under collective negotiations alone, to concede fees to Growers above their long-run opportunity costs. It is not obvious why, in the absence of overt opportunistic behaviour by Processors, non-VFF Growers would settle for lower fees than VFF Growers or why any VFF Grower would opt-out of negotiations which would be likely to result in fees no lower, and possibly higher, than they would be likely to achieve by going-it alone. In all likelihood, non-VFF growers would wait to see what sort of terms the VFF Grower negotiators appear likely to achieve before settling on terms of their own, but would not affect the likely outcomes.
11.4.4.2 Opportunistic behaviour
191 Turning now to a second source of potential inefficiencies in market outcomes, the evidence suggests that in recent years Processors have taken advantage of their capacity to behave “opportunistically”: for example, delaying completion of the negotiation of new contracts for existing Growers; adjusting fees in the interim to an extent that fails to compensate Growers for unavoidable real increases in their growing costs; and inefficiently shifting risks relating to chicken mortality to Growers where the quality of feed and medications are in the hands of Processors.
192 This behaviour by Processors has been an apparent feature of the markets for chicken-growing services following deregulation of the relationship between Growers and Processors in 2001. During the period of regulation, the way that terms and conditions of Grower contracts, including fees, were determined (through the VBINC and associated arbitration procedures) essentially guaranteed that Growers would receive growing fees that (at least) covered their full long-run opportunity costs – including, importantly, the opportunity costs of their substantial capital investments in relationship-specific growing facilities. Following deregulation, Growers who invested with the “guarantees” in place have become vulnerable to the possibility that Processors might impose fees and other terms which fail to cover (all of) their fixed – i.e. sunk or unavoidable costs: that is, costs that they can not avoid, at least for a time, even in the event of shutting-down their growing operations (refusing to accept batches of chickens), of which the opportunity costs of their investment outlays are by far the largest part. The potential for Processors to have behaved opportunistically in this sense (and, relatedly, to have engaged in risk-shifting and hold-up in relation to new investments) is indisputable. The evidence provided to the Tribunal indicates that they actually have done so, at least to some extent.
193 The Tribunal believes that such opportunistic behaviour by Processors is likely to be transitory and, in any event, limited to existing Growers. This is because in order to encourage the expansion of growing capacity needed to meet the expected continuation of the growth of demand for chicken meat, Processors will be more or less obliged to offer contract terms (including a risk premium in the agreed fees, in all likelihood) which give comfort to investors in new growing capacity that they will not be subject to hold-up or other forms of opportunistic behaviour once they have made their investments and hence locked themselves in. This reality is likely to be part of the reason why Bartter apparently is willing to offer superior terms for investments by RFM in chicken-growing facilities in Victoria compared to those available to its existing Growers. But it is likely to be the case also for Processors seeking to expand chicken growing capacity by attracting more owner-manager investors like those they already have, although this class of potential new Growers may not be able to extract as favourable terms as can large-scale corporate investors like RFM.
194 In short, for investments in new growing capacity, it seems likely that terms and conditions more like those expected in efficient markets will emerge.
195 Whether existing Growers also would be likely to be able to negotiate terms more like those of new entrants is less certain, even given that they are now authorised to collectively negotiate. Since the most likely trend for several years is that Processors will want more growing-capacity available to them, not less, they are not likely to want to lose any of the existing growing capacity available to them. That is, expected market trends would appear likely to limit the degree of opportunism Processors could continue to employ with existing Growers to that which ensures that no Grower would find it more profitable to convert their property to another use. Indeed, 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 not only a contract but also one which offered more favourable terms and conditions. Processors could refuse to negotiate such a contract, but would risk existing 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. Collective negotiations, to an extent, might facilitate this happening, including by allowing Processors to judge what terms would be good enough to discourage decisions to sell, especially where the sale would result in a loss of growing capacity.
196 The possibility that existing Growers might gain terms more like those of new investors would be greater to the extent that existing Growers could more rapidly and cheaply expand available growing-capacity than potential new investors could as demand for capacity increases. If it is true, the suggestion that as yet unused planning permits for capacity expansion exist, and are held primarily by existing Growers, would indicate that this would be a distinct possibility. As noted earlier, the evidence made available to the Tribunal does not allow us to be sure whether this suggestion is, in fact, true. If it were the case, however, it too would be likely to result in improved terms and conditions (ie more like those in competitive markets) for existing Growers – but essentially because of expected growth in demand for chicken meat, not the collective negotiation authorisation per se.
197 Furthermore, in relation to opportunistic behaviour by Processors, it is not obvious to us that non-VFF Growers (and individual VFF Growers able to opt out) would have an incentive to undercut attempts by VFF Growers to secure fees that cover long-run opportunity costs, even in an attempt to settle more quickly. What they might (probably would) do is undermine any attempt by VFF Growers to achieve fees above long-run opportunity costs by settling at lower fees more quickly. They might hold-out for a time to see what VFF Growers actually can achieve, but once the (ultimately irresistible) capacity of Processors (absent a collective boycott authorisation) to refuse to settle at fees above Grower’s opportunity costs becomes clear, they will settle at a fee that covers their costs. There is a possibility that Processors might reward “early settlers”, which might help to speed-up settlement with the VFF Growers-groups, but not alter the terms of settlement to any substantive extent.
198 The Tribunal’s conclusion concerning the inefficiencies associated with opportunistic behaviour by Processors towards growers is that they may diminish over time for existing Growers, and are very likely to do so for new investors, given the expectation, agreed by all parties, that the demand for chicken meat is likely to continue to grow for at least the next few years. The existence of the collective negotiation authorisation may facilitate these potential improvements in terms and conditions towards those expected in efficient markets to some extent, but do not appear likely to be a potent source of improvements in terms and conditions in the absence of likely market growth. The arguments that have led us to this conclusion also imply that, even if opportunistic behaviour concerning terms and conditions for existing Growers was to persist for some time, this would not lead to a diminution in the level of investment in growing-capacity from that we already have suggested is likely as a result of the exercise of monopsony power by Processors, given the (agreed) expectation that the demand for chicken meat will continue to grow for some time.
11.4.4.3 Overall conclusions about the counterfactual
199 The Tribunal’s overall assessment of the counterfactual is as follows. First, Processors have, and appear to exercise, monopsonistic power in their relationship with suppliers to them of chicken growing services and are likely to be able to continue to exercise that power in the future with the not-disputed collective negotiation authorisation. Second, since deregulation of the way in which terms and conditions of chicken growing services are determined, Processors – in setting fees and other terms – have been able to use their market power to behave opportunistically towards Growers who invested prior to deregulation and appear to have done so. But Processors will not be likely to be able to do so for new investors in growing services they want to attract and may not be able to continue doing so for existing Growers, even in a future without a collective boycott authorisation.
200 Several different factors play a role in leading the Tribunal to this overall assessment.
201 One important influence is the (agreed) fact that the demand for chicken meat, nation-wide, is likely to continue growing for some years to come. This will require Processors to be able to attract additional investment in growing facilities and they will be able to do so only by “future-proofing” contract terms for new investors or investments against hold-up or other forms of opportunistic behaviour. What this implies for existing Growers is not as certain as it is for new investors or investments, but there is a real chance that it will force the pace of transition from a regulated to a deregulated environment for existing Growers; that is, that it will result in improved terms and conditions for existing Growers more rapidly than otherwise. The fact that (all) Growers – existing and potential new entrants – will have a collective negotiation vehicle available to them might assist the transition, but its effects are likely to be facilitating rather than central or essential.
202 As far as the consequences of the exercise of monopsonistic power by Processors is concerned, the likelihood that the demand for chicken meat will continue to grow has no direct (inevitable) implications. Other things equal, monopsony power and its implications for the efficiency of market outcomes compared to those if the market for grower services was more competitive, would not be likely to be diminished by demand growth per se. What might make a difference, however, is the possibility that Processors might (as in the case of Bartter with RFM) chose to expand investment in growing capacity with a new class of (corporate) investors that could be offered superior terms which would not flow-on to existing Growers. In that event, market outcomes (especially investment in chicken growing facilities and output of chicken meat) might be less inefficient that otherwise, but not likely to be fully-efficient. It is not obvious that the possession by Growers of a collective negotiation authorisation would have any bearing on whether, or to what extent, this possibility will eventuate.
203 Conditions applied to the collective negotiation authorisation that allow VFF Growers to opt-out of collective negotiations, or for non-VFF growers to go their own way, do not seem likely to affect the ultimately likely outcomes. They might affect the way, including the speed, with which collective negotiations occur, but not their substantive outcomes.
12.0 The factual: likely outcomes with a boycott
authorisation
204 In order to determine the likely effects – benefits and detriments – of a collective boycott authorisation, the Tribunal must now assess the market outcomes likely to follow from such an authorisation (i.e. those it believes are likely to occur in the factual) in order to be able to compare them with those it believes are likely to occur in the absence of authorisation of a collective boycott (i.e. in the counterfactual, analysed above).
205 Section 12.1 outlines the market outcomes that the Tribunal expects are likely to follow from a collective boycott authorisation (subject to the conditions contained in the original ACCC authorisation) in this particular matter. Sections 12.2 and 12.3 assess, respectively, the benefits and the detriments the Tribunal considers are likely to result from changes in market outcomes resulting from a collective boycott authorisation.
12.1 Expected outcomes in the factual
206 In forming its assessment of the outcomes likely to follow from authorisation of collective boycotts in this particular instance, the Tribunal has found it helpful to address five key questions:
(i) Under what circumstances would the threat of a collective boycott be credible;
(ii) Would the parties be likely to game the collective boycott authorisation in order to influence whether (and/or the extent to which) the threat of a boycott would be credible;
(iii) What other factors might influence the exercise of a collective boycott power;
(iv) What would be the likely impact of a collective boycott authorisation on contract negotiations between Processors and Growers; and
(v) What implications would this have for various market participants?
207 The cases put by the parties and the Tribunal’s views are presented, in turn, for each of these issues.
12.1.1 Under what circumstances would the threat of a collective boycott be credible?
12.1.1.1 Processors
208 The Processors called Professor Joshua Gans, who is a Professor of Management (Information Economics) at the Melbourne Business School. Professor Gans indicated that in order for a collective boycott power to influence commercial negotiations, it must provide the possessor of it with the ability to make a “credible threat” against the other party to negotiations. In this regard, Professor Gans defined a threat as a claim by one party that it can take an action that would harm the other. He considered the threat to be credible if the threatening party has an incentive to take such an action should it not obtain what it wants. Conversely, a threat would not be considered credible if the threatening party faces costs of enacting the threat which are large relative to the benefits they potentially could receive. Professor Gans indicated that the other party to negotiations would give credence to credible threats and little to non-credible threats in deciding what offers to make and what demands to accede to in negotiations. Further, he indicated that if a threat by suppliers is credible, buyers are more likely to offer higher prices or accept terms involving higher prices than if the threat was not credible.
209 In relation to the power to engage in a collective boycott, Professor Gans indicated two conditions must hold in order for a collective boycott to represent a credible threat that would enable Growers to have their demands met. First, the benefit Growers potentially could gain from a given demand in contract negotiations (such as higher growing fees, sharing of certain costs with the Processor etc) exceeds the costs to them of a collective boycott of a given duration. Second, the cost to Processors of acceding to the Growers demands must be less than the cost to them of a collective boycott of the given duration threatened by the Growers. It follows from this that combinations of demands by Growers and threats of collective boycotts of particular durations that met these requirements would be likely to generate a credible threat that would lead Processors to accede to the demands made by Growers.
12.1.1.2 ACCC’S case
210 The ACCC submitted that it does not believe that a threat of a boycott can only have a role in influencing outcomes where substantial damage can be inflicted by the boycotting party. Rather, the ACCC believes the threat of a boycott can have a more subtle effect on the negotiating process. Whether it can have an effect or not will depend on the costs of the relative demands of the parties and each party’s assessment of the costs of a boycott weighed against the costs of accepting the other’s demands.
12.1.1.2 Tribunal’s view
211 We accept the framework proposed by Professor Gans for determining whether the threat of a collective boycott is likely to be credible. That is, in deciding whether a threat is credible, a Processor will assess whether it believes its Grower group will gain more from the Processor acceding to its request than the group would lose from engaging in a collective boycott. To the extent this is true, Growers could potentially gain from a boycott, despite the cost to them from engaging in one, as long as the Processor acceded to their demands. The extent to which a Processor is actually likely to accede to Growers’ demands made under the threat of a collective boycott will depend on whether the cost to the Processor of acceding to the request is less than the possible loss it would incur if the boycott went ahead.
212 The Tribunal also notes that the greater is the demand by a Grower group in its negotiations with its Processor, the more likely it is that a boycott potentially will be worthwhile for the Growers. However, the greater the Grower demand, the greater the Processor resistance because of the perception that the cost of accession may exceed the cost of a boycott.
213 Similarly, while the threat of a longer boycott would increase the possibility of a Processor acceding to a given demand made by its Grower group (as a result of it increasing the cost to a Processor of a boycott), a lengthier boycott will also reduce the extent to which a given boycott threat would be credible. That is, for a given demand, the greater is the length
of a boycott, the greater will be the cost to Growers of engaging in it on account of lost earnings.
214 Hence, the extent to which a boycott threat will be likely to be credible and acceded to by a Processor will depend on a number of factors, including the demand made by Growers, the length of any threatened collective boycott and the damage such a boycott would inflict on both Processors and Growers. Moreover, at the stage where a boycott is threatened it is inherently unlikely that a term will be stipulated – rather, Growers would threaten to delay services until Processors agreed to their demands.
215 We agree with the ACCC that the threat of a boycott can have a role in influencing outcomes even if the cost to Processors of a boycott were to be small. However, were this to be the case, it would need to be that Grower demands were also small relative to the potential cost that meeting these demands could impose on the Processor. What also is possible, however, is that the threat of a long boycott (that could be used to inflict substantial damage on a Processor) could be used to credibly support a demand by a Grower group for significantly improved terms and conditions of providing chicken growing services. That is, it should not be assumed that a collective boycott power would only be used to attempt to generate subtle changes in the markets for chicken growing services.
12.1.2 Would the parties be likely to “game” the collective boycott authorisation?
12.1.2.1 Processors’ Case
216 The Processors contend that it is foreseeable that Growers will have an incentive to “game” the use of a collective boycott such that it would be applied at a time of highest annual demand. They also contend that Growers, subject to the ACCC’s conditions, might game their communications with Processors by giving notice of an intention to boycott and then waiting to see how the Processor responds. If the Processor takes actions to ameliorate the potential effects of a boycott, the Grower might chose not to actually implement a boycott immediately after expiration of the notice period. However, if the Processor had not taken action to ameliorate these effects, the boycott could be imposed.
217 The Processors also submit that, once a boycott is triggered, the Growers will have an incentive to delay concluding negotiations as long as what they are demanding makes the period of delay worthwhile.
12.1.2.2 Growers’ case
218 In response to the Processors’ view that the ability to boycott may be “gamed” so that the threat of a boycott is timed at periods that will inflict the greatest damage, the Growers submit that while Processors lift production over Christmas, production is otherwise fairly constant throughout the year.
219 Further, in response to arguments that Growers will (having given notification of an intention to boycott) keep the threat of a boycott alive for protracted periods in order to achieve the maximum threat, the Growers note that this must be balanced against the realisation that delays in determining terms and conditions erode their financial position as well.
220 The Growers reject the notion that they might utilise condition 8 of the conditions attached to the ACCC’s collective boycott authorisation to implement a rolling boycott on a given Processor. Condition 8 specifies that ‘a party authorised … 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.’ In this context, it is arguable that a Grower group might keep a boycott notification alive and progressively add new Growers to it as they progressively come out of contract with their Processor. However, the Growers contend that, on their understanding, no VFF Grower is currently subject to an existing VBINC contract such that they would be coming ‘off-contract’ at different dates.
12.1.2.3 ACCC’s case
221 The ACCC submits that it is possible that Growers will seek to game the boycott power even with the presence of the existing conditions. However, they argue any such incentive is mitigated by the interdependence of Growers and Processors such that Growers will not seek to push up the costs faced by their Processors too far.
12.1.2.4 Tribunal’s view
222 The Tribunal believes that, if authorised, both parties will seek to find ways to respond to the ability of Growers to collectively boycott which will best promote their bargaining position, and thereby maximise their expected gains and/or minimise their expected costs. It would be irrational for them to do otherwise.
223 In this regard, we would expect Growers to seek to find ways to reduce their own costs of participating in a collective boycott, while finding ways to increase the expected costs a Processor would face if it did not accede to their demands for improved terms and conditions. In doing so, Growers will be able to increase the extent to which a threat of a collective boycott would be credible and increase the likelihood that Processors will meet their demands for more favourable terms and conditions.
224 Conversely, the Tribunal would expect Processors to seek out methods to reduce the potential cost of a boycott. That said, Processors will need to consider whether the costs of such mitigating measures would outweigh any reduction in the expected cost of a boycott.
225 The Tribunal also believes that the extent to which parties can engage in behaviour that will alter the expected benefits and costs of a collective boycott will be limited by other constraining factors present in the markets for chicken growing services and wholesale chicken meat supply. These are discussed in more detail in section 12.1.3 below.
226 We believe that the ACCC is correct in identifying the conditions as critical. Without conditions, an authorisation would be unthinkable.
227 No variations in the conditions have been seriously raised, with the possible exception of arbitration. Arbitration in the sense of an arbitration clause for fee fixation in a negotiated contract is unexceptionable, but would not need authorisation. However, arbitration in the sense of the contract itself being written by the arbitrator would probably infringe National Competition Policy. It would be a kind of de facto regulated regime.
228 The policies behind the conditions appear to be to (i) extend the time for negotiation and mediation in the hope that agreement will be reached, thus obviating the need for boycott, (ii) ensure that existing contracts are performed and (iii) enable harm-minimising action to be taken by Processors.
229 The second is perhaps superfluous. Ordinary remedies for breach of contract would be available. However, it is to be noted that there is substantial confusion as to just what is the contractual situation following the demise of the VBINC. The VFF stand is that, for most Growers, there are no effective contracts in place. If that is so, Growers’ obligations would be limited to the batch currently on their farm and thus the boycott-delaying efficacy would be minimal.
230 The relevant conditions are set out above. It will be seen that condition 5 provides that “the grower groups” must provide a written “notice of intention to boycott” to their Processor a minimum of 21 days prior to any Grower in that group refusing to receive supply. The notice of intention to boycott may only be issued a minimum of seven days “after complying with the requirement described in condition 5 of this determination” (i.e. after the invitation to mediate).
231 We note that there is nothing in condition 4 which requires the group to wait until the expiration of existing contracts before “contact(ing) their processor” (if the VFF is correct, there are no existing contracts anyway). In the normal course of things, negotiations between parties for a new contract will commence well before the expiry of an existing contract. It can safely be assumed that well-advised Growers will make the necessary “contact” at least six months before the expiry of existing contracts.
232 Because the timetable (six months + seven days + twenty-one days) is triggered by the “contact” of condition 4, and there is nothing to fix that date at the termination of an existing contract, or at any particular time within that contract’s currency, the boycott can be ready to roll the moment the contract expires.
233 As a means of delaying determined boycotters the conditions are likely to be quite ineffective.
234 Because of the timing flexibility explained above, there is also a risk of gaming, as the Processors contend.
235 In relation to arguments that Growers will seek to game their power to boycott specifically by threatening to boycott at times of greatest annual demand for chicken meat products, we believe that any attempt to do so would have the effect of increasing the cost to a Processor of a boycott. In turn, this would increase the likelihood that a Processor would give in to Grower demands made under these circumstances. Against this, however, the Tribunal notes that any boycott that occurs during such a period may reduce the extent to which the threat would be credible. This is because boycotts during periods of high demand will also increase the cost to Growers of a boycott because periods of high demand for chicken products would also be associated with periods of high throughput of chickens through Grower farms. Further, we note the contention of Growers that, with the exception of the Christmas period, the demand for chicken products is fairly constant throughout the year.
236 We believe this example highlights a significant point in relation to the extent to which gaming would be likely to occur in the factual. That is, any attempt to increase the costs of one party during negotiations may also increase the costs of the other. Hence, gaming activity will only be successful provided it meets both conditions outlined in section 12.1.1 for a boycott threat to be credible and likely to be acceded to by a Processor.
237 We believe this also will be true of any decision by Growers as to the length of a boycott once triggered. That is, while delaying negotiations will increase the cost to a Processor of an on-going boycott, it also will increase the cost to Growers of participating in it. While this will create incentives for Growers to increase their demands in order to make the on-going boycott worthwhile, increases in Grower demands also will decrease the extent to which a Processor is likely to accede to the Growers’ demands as it will increase the cost to Processors of doing so.
238 In relation to whether Growers would be likely to engage in rolling boycotts, we note that even if Growers are not subject to VBINC contracts, this does not mean that they will all be able to enter a boycott at the same time. Many Growers currently are operating on a batch-to-batch arrangement with their Processor. Processors time the placement of batches so that they are provided sequentially with different Growers. In turn, this means grown chickens are collected from Growers at different times. Batch-to-batch arrangements would be covered under condition 9 of the ACCC authorisation so that not all Growers would be able to enter into a collective boycott at the same time. Were a boycott to be triggered, we believe the extent to which Processors would be likely to accede to Grower demands would be increased as more Growers entered the boycotting collective. The incentive for Growers to extend a boycott so that more Growers could enter into it would, however, increase the costs to them of participating in a boycott by lengthening the period over which they are earning no income from chicken growing. This would particularly be the case for those Growers that implemented a boycott first and would incur the longest period without income as additional Growers entered the boycott. The Tribunal notes that this could be one factor that reduces the incentive of individual Growers to join in a boycott threat. There would certainly be limited incentive for a Grower to be the first in its group to trigger the boycott.
239 Finally, it is possible that Growers might seek to withhold their decision to implement a boycott (once they have provided notice that they intend to do so) until such time as they can determine what steps a Processor has taken to ameliorate the costs to it of a boycott.
240 Overall, therefore, we believe that the incentives that will be created by the power to collectively boycott will give rise to complex decisions for both Growers and Processors in relation to how best to game the likelihood of a boycott threat being credible and an associated demand being acceded to by a Processor. While the Tribunal can not be sure what combinations of threats and demands will meet the necessary conditions for a boycott threat to be credible and likely to be acceded to by a Processor, it believes that it is likely that both parties will seek to game the extent to which such combinations would be likely.
12.1.3 What other factors might influence the exercise of a collective boycott power?
12.1.3.1 Growers’ Case
241 The Growers submit that there are a number of constraints that can be inferred from the evidence that will prevent them exploiting a boycott. These include:
· interstate competition gaining new or existing growing capacity and being able to transport the live product back to the Processor once grown;
· re-establishment of a company farm regime (i.e. vertical integration);
· Processors encouraging new corporate entries;
· Processors encouraging surplus shedding capacity over time;
· Processors relocating processing plants intra or interstate;
· the potential breakdown of Grower solidarity if Processors offer attractive one-on-one contracts to individual Growers;
· the risk that Growers participating in a boycott will fracture their long-term relationship with their Processor;
· Growers needing to service their debts (and hence being unable to withstand prolonged periods of boycott activity that would prevent them earning income to finance such debts); and
· The risk that Growers will find their banks calling in loans or increasing risk margins (or demanding additional security) if they participate in boycotts.
242 The Growers also submit that they will be constrained in their ability to push for fees greater than those they could achieve in a competitive market. This is because any increase in fees achieved by one Grower group – relative to those received by other Grower groups – will make its Processor less competitive in the downstream market for wholesale chicken meat. Any consequent loss in sales for that Processor will flow through as reduced demand for its Growers’ services. The Growers contend that this imposes a real constraint on the demands of a particular Grower group and on the use of any right to boycott by a particular group of Growers.
243 The Growers further submit that Processors will be in a position to mitigate the impacts of a boycott given the conditions stipulated by the ACCC in its authorisation. They contend that the Processors will:
· have ample time to manage the effects of a boycott;
· have, or will develop, business plans that will allow them to manage the effects of any boycott;
· seek, and probably receive (out of self-interest), the assistance of other Processors to weather the effects of any boycott, including gaining access to spare growing capacity and acquiring product from them, as they have done in the past; and
· be able to rely on interstate facilities (where Processors have them) to provide external support during any boycott.
244 In relation to the length of time that Processors would have to manage the potential effects of a threatened boycott, the Growers observe that the conditions ensure that any chicks placed with a Grower prior to the boycott coming into effect must be grown. Given that batches of chicks are placed with Growers sequentially over a number of weeks – rather than placed with all Growers on the same day – this means that it will take about eight weeks to fully implement a boycott from the day it commences. Combined with the 21 day notice period required for any boycott, this means it will be about 11 weeks before all boycotting Growers have ceased production. This is in addition to the six month period Growers must negotiate with Processors and then the required invitation to Processors to participate in mediation before Growers can give notice of an intention to boycott.
245 With respect to managing the effect of a boycott, the Growers also contend that Processors, individually and collectively, have significant scope to increase production to compensate for any supply shock resulting from a Grower boycott. At an individual level, the Growers submit that a boycotted Processor could:
· increase production in other states (if able);
· seek to place eggs with other Processors for hatching (and possibly growing) to maintain production in Victoria;
· increase production prior to an anticipated boycott. They could then freeze and store product to ensure supply will continue during a boycott (in addition to that which would continue for a time as a result of the length of the growing cycle which means it would be some 11 weeks before a boycott would fully come into effect);
· seek to contract individually with Growers proposing to boycott; and
· seek to recruit Growers who are supplying other Processors but who are not under contract to those Processors.
246 The Growers also note that according to the Processors’ own submission, Processors are able to adjust production significantly (including the number of grown chickens) in response to changes in demand for chicken meat. In this respect, Growers note that the Processors submit that it is not unusual for them to increase production by over 20 per cent to meet seasonal demand variations.
247 The Growers submit that, collectively, Processors can increase production levels by shortening turn around times between batches of chicks provided to Growers. In this regard, the Growers note that while the industry prefers turnaround times of between 10 and 14 days between batches being placed with a given Grower, Processors have sometimes required Growers to accept turnaround times of as little as two days. The Growers contend that shortening turnaround times in this manner can increase production by over 10 per cent nationally. They argue this would have the effect, in the case of a boycott of a particular Processor, of enabling the non-boycotted Processors to fill the gap in supply of processed chicken meat caused by the boycott by shortening their Growers turnaround times.
248 Not only do the Growers contend that other Processors collectively can increase production levels to mitigate against the effects of a boycott on a particular Processor, they also argue that Processors have historically co-operated with each other in a number of ways including:
· lending Growers to each other by requiring their contracted Growers to provide services to another Processor;
· supplying live birds to a Processor whose production has been affected by disease or other supply shocks;
· trading fertile eggs between themselves;
· trading fully grown live birds with each other; and
· purchasing day old chicks from each other.
249 The Growers believe this history of co-operation, combined with the ACCC conditions that provide Processors with ample time to plan for the impact of a boycott, should help to minimize the impacts of a boycott on a given Processor.
12.1.3.2 Processors
250 In response to the Growers arguments that Processors can manage the effects of a boycott by adjusting turnaround times, the Processors contend that existing preferred turnaround times are carefully chosen in order to best meet demand from the downstream wholesale meat market and to minimise bio-security risks.
251 In response to measures which the Growers suggest Processors could take in order to minimise the effect of a collective boycott, the Processors question whether spare hatchery and/or growing capacity would always be available interstate or from other Processors in Victoria.
12.1.3.3 ACCC’s case
252 While the ACCC believes that authorisation of a collective boycott is likely to produce outcomes which would more closely approximate those one would expect in efficient markets, it does not believe the Growers will demand a price for grower services above that one would expect in an efficient market. This is because it believes Growers will be constrained by:
· Processors continuing to retain a strong bargaining position;
· some Processors appearing to have the ability to integrate growing (or further growing) capacity into their operation as an alternative to the use of Grower services;
· Processors having the ability or potential to induce outside investment into the industry, if necessary;
· Processors having access to non-VFF growers outside the collective bargaining groups (and not all VFF Growers will necessarily engage in a collective boycott); and
· the interdependence of Growers and Processors meaning that a Grower group will need to moderate its demands in order to not damage its Processor’s competitiveness in the wholesale market for chicken meat (and hence the derived demand for – and consequent income from – its members’ growing services).
12.1.3.4 Tribunal’s view
253 We believe that there are three key factors (other than gaming) that might further influence the extent to which a collective boycott power would be effective in influencing market outcomes. These are:
· factors that will constrain the extent of any demand that could be made by Growers;
· the length of any proposed boycott; and
· responses Processors can take to minimise the cost to them of a boycott.
254 Each of these factors is discussed in turn below.
12.1.3.4.1 Factors that constrain the extent of Grower demands
255 With regard to factors that constrain the extent of any demand made by a Grower group, we note that anything which limits the demands a Grower group can make will both:
· decrease the likelihood of a boycott threat being credible (as it will decrease the potential benefits Growers could receive from a boycott relative to the cost they will incur); and
· increase the likelihood that Processors will accede to the Grower’s request (as it decreases the cost to them of doing so relative to the cost of a boycott).
256 We believe that there are a number of factors that will limit the demands a Grower group can make of its Processor. At the extreme, we believe that it is unlikely that Growers will seek fee increases greater (or non-price terms and conditions more favourable) than those that would enable their Processor to earn a normal return on its investments in chicken processing. This is because fees above these levels would threaten the long-term viability of a Grower group’s Processor in the downstream wholesale market for chicken meat, thereby threatening future levels of demand for the Grower group’s services. We note, however, that the extent of this constraint on Grower demands depends on the level of information Growers have about their Processor’s business. That is, if Growers do not have perfect information about their Processor’s business, there is some prospect that they might inadvertently seek terms and conditions that would harm their Processor’s competitiveness in the wholesale market for chicken meat.
257 While a Grower group is unlikely to have an incentive to seek fees at any given level of output that would be so high as to threaten the long-term sustainability of its Processor’s business, we do believe it is possible a Grower group would have an incentive to seek fees greater than those they would expect to receive in competitive markets for chicken growing services. That is, to the extent that the demand for chicken growing services by Processors decreases as grower fees rise, Growers (like any other suppliers of a service) would find they maximised their profits from providing their services if they were able to restrict output levels below, and set prices for this output at levels above, those expected in competitive markets.
258 One factor that we believe is more likely to constrain Grower demands for terms and conditions to levels no more favourable than they would expect to receive in efficient (competitive) markets is competition for Grower services from outside the Grower group. In this regard, we note that some Processors have already found it profitable to seek supply of chickens from interstate and to attempt to contract with new corporate entrants such as RFM. The Tribunal does not believe it would be profitable for Processors to receive chicken growing services from these alternative sources of supply if they were being provided on terms and conditions (from the Processor’s perspective) less favourable than those expected in efficient markets for chicken growing services. Further, it may be possible for non-VFF growers to expand their ability to provide chicken growing services to Processors.
259 Where Processors have alternative sources of supply actually or potentially available to them, this would tend to constrain the ability of Growers to seek terms and conditions better than those for which potential competitors would settle.
12.1.3.4.2 The length of a proposed collective boycott
260 As indicated above, factors that will constrain the length of any proposed boycott will also have a two-fold impact on the likelihood of a collective boycott threat leading to Growers attaining improved terms and conditions of supply. On the one hand, a shorter boycott would increase the credibility of a Grower threat because it would reduce the cost to a Grower of a boycott relative to the benefits it would enjoy from obtaining a given demand. On the other hand, however, a shorter boycott would decrease the likelihood of Processors acceding to a given Grower demand, as it will decrease the cost to them of a boycott relative to the cost of giving in to the Grower request. But as we have already noted, the threat of a boycott, at the time it is made, is unlikely to stipulate any fixed duration of the boycott. The whole point of a boycott is a threat to impose pain on the party being boycotted until the latter gives in.
261 As indicated at paragraph 237 above, we believe that it is possible that condition 9 of the ACCC authorisation will make it more difficult for VFF Grower groups to organise a credible boycott threat across all members of their individual groups. This is because the sequential placement of batches across different Growers in a group will mean that individual Growers will commence their participation in a collective boycott at different times. This would mean the effect of a boycott on individual Growers will be different, with those initially joining the boycott losing more than those who join later. It may also mean that while the threat of a boycott is credible for those Growers joining the boycott last, it may be less credible for those commencing the boycott. Given condition 6 of the ACCC authorisation implies individual Growers are able to opt out of a collective boycott, the differential impact of a boycott on individual Growers may have the effect of breaking down Grower solidarity, making it more difficult for a Grower group to initiate a boycott.
12.1.3.4.3 Processor responses to minimise the effect of a collective boycott
262 Measures Processors can take to ameliorate the effects of a boycott (and the costs of doing so) also are relevant to the discussion in section 12.3 of this Determination of detriments that are likely to occur in the factual. However, we believe it is also important to discuss them when predicting expected outcomes in the factual, as any measures Processors can take to reduce the costs of a boycott will influence whether Processors are likely to accede to a given grower demand. That is, the less is the cost to a Processor of a given boycott, the less likely it will be to give in to requests made of it by its Grower group.
263 We accept that Processors, potentially, have a number of measures available to them to decrease the cost to them of a collective boycott. These include measures:
· to manage hatching of chicks;
· to place hatched chicks with non-boycotting Growers (either within their geographic market, with another Processor in the same or another Victorian market, or interstate); and
· to ensure chickens grown by non-boycotting Growers are transported back to the boycotted Processor.
264 Clearly, any measures Processors take will influence the detriments of a collective boycott authorisation. On the one hand, they will minimise, to some extent, the disruption of a collective boycott to the chicken industry. On the other hand, however, such ameliorating actions will come at a cost to themselves as they will alter chicken growing practices. To the extent that existing practices are efficient, such changes will lessen the efficiency of chicken growing practices. While some of these measures will only occur in the event of a boycott actually occurring (for example, the extra transport costs associated with moving chickens to and from non-boycotting Growers), others will be incurred irrespective of whether a boycott actually occurs (for example, the costs of time spent developing contingency plans and the costs associated with building up and freezing spare supply to cover the event of a boycott occurring).
265 While the Tribunal believes Processors will seek to reduce the cost of a boycott made against them, there will be limits on the extent to which Processors will be able to do this. For instance, many of the measures suggested by Growers (such as growing chickens at other farms and transporting them back to the boycotted Processor) will, as discussed above, come at a cost. This will include increased transportation costs (including the possible cost of configuring or importing vehicles to meet necessary transportation requirements) and likely higher growing fees being paid to other non-boycotting growers. To the extent that this cost exceeds the mitigated costs from boycott activity, the Processors will not find such measures to be worthwhile.
266 Further, some of the measures proposed by the Growers rely on the availability of spare capacity at the farms of non-boycotting growers. While such capacity may be available, this can not be guaranteed. This especially would be the case in the event of more than one Processor being subject to a collective boycott by its Grower group at the same time.
267 Overall, therefore, there are many factors that will constrain and influence the behaviour of Growers and Processors in the event of an authorisation of a collective boycott power (with conditions). Further, the extent to which such factors influence behaviour by Processors and Grower groups is likely to vary from one Grower group and its Processor to the next. The Tribunal believes that this makes it very hard to predict, with certainty, what actions Growers and Processors will be likely to take in the factual. It also makes it difficult to predict the extent to which particular boycott threats will be credible and whether Processors will accede to them. These themes are picked up further when discussing likely outcomes from negotiations in the factual in section 12.1.4 below, and the benefits and detriments that would be expected to follow in sections 12.2 and 12.3.
12.1.4 Likely impact of a collective boycott authorisation on contract negotiations between Processors and Growers
12.1.4.1. Growers’ case
Growers
268 The Growers contend that they will not automatically force boycotts in order to exploit their Processors. They argue that this is because not all Growers will want to participate in a boycott and because a Grower faces substantial risks itself when participating in a boycott. These risks include significant financial losses while the boycott persists; the threat of losing contracts on an on-going basis; and the threat that a Processor would respond by transferring all, or a significant proportion, of Victorian production to other states or growers. Accordingly, the Growers submit that they will:
· seek to finalise contract negotiations as quickly as possible during the contract negotiating period;
· accept any fair contract offered by Processors; and
· seriously consider favourable terms offered on an individual basis either prior to or during a boycott.
269 Further, the Growers contend that Processors will not simply cave in to Grower demands if the ability to collectively boycott is authorised. This is because they believe Processors will continue to wield significant power over Growers and because there is no compulsion on Growers to participate in a boycott. Further, the Growers believe it is not the case that a person receiving a boycott threat would simply give in to the demands of the person issuing it if the cost of doing so was less than the cost of the boycott. They argue that this is because one must also factor in the costs of possible increases in future boycott activity that might follow if they simply give in to initial boycotts. They do believe, however, that the ability to collectively boycott will provide some incentive for a Processor to enter into fairer contractual arrangements with its Growers.
270 The Growers contend that these factors, in addition to the market factors that generally weaken their bargaining position:
· substantially reduce the likelihood of any boycott occurring and the likely duration of any such boycott; and
· leave it open to the Processor to reduce the impact of a boycott by offering favourable terms to individual Growers in the Grower group concerned.
271 The Growers also submit that in the event of a boycott, they will seek to resolve any dispute as quickly as possible. They also believe non-boycotting Growers will seek to maximise their own income by increasing batch rates where Processors give them the opportunity to do so.
272 That said, the Growers contend that the threat of a collective boycott would be credible in this particular instance. In support of this view, they note that new agreements in relation to Grower fees were entered into by Bartter and Inghams with their respective Growers in the period following the ACCC boycott authorisation. This contrasts with the lengthy period prior to the authorisation during which there was an absence of agreements between Processors and their respective Grower groups.
273 With regard to specific outcomes that will arise under authorisation in the markets for chicken growing services, the Growers contend that the ability to engage in a collective boycott (irrespective of whether one actually occurs or not) will be likely to help overcome the imbalance in bargaining power they face due to the market features outlined in section 11. Accordingly, they believe it will enable them to achieve more favourable terms and conditions for the provision of chicken growing services which will also be more consistent with those one would expect in competitive markets for these services. In particular, they contend that it will enable them to achieve increased growing fees and/or other non-price terms and conditions more consistent with competitive markets (such as a more efficient allocation of risk between Processors and Growers, and longer-term contracts that provide them with greater income certainty).
274 To illustrate the impacts of increased grower fees in the markets for chicken growing services, the Growers called on Dr Jung. In her evidence, Dr Jung seeks to provide a model that estimates the benefits that will follow from a collective boycott authorisation being provided to the Growers. In order to do this, she compares the efficiency implications of the outcomes she expects will occur in the absence of authorisation with outcomes she is asked to assume will occur in the presence of an authorisation.
275 In relation to the outcomes she expects will occur in the absence of authorisation, Dr Jung notes that the assumptions she has been provided with suggest that Processors may potentially exert market power in relation to Growers in two conceptually different ways:
· the first source of market power is concentration in each of the geographic markets for purchase of growing services.
· the second source of market power that Processors may have is the potential for opportunistic behaviour such as ‘hold-up’.
276 The Tribunal notes that these assumptions are consistent with conclusions it has made about likely circumstances that currently exist in the markets for chicken growing services in section 11 of this Determination, and which it believes will continue to exist (at least in the short term) in the counterfactual. Based on these assumptions, Dr Jung indicates that one would expect each Processor, in the absence of a collective boycott authorisation, to maximise profits by determining a combination of price and output for chicken growing services that would be less than that one would expect in competitive markets for chicken growing services. These outcomes are consistent with those standard economic analysis would suggest would occur in the presence of Processors having monopsony power and the ability to act opportunistically in negotiations with Growers.
277 With regard to outcomes that would be expected to occur in the factual, Dr Jung notes that she has been asked to assume growing fees will be agreed by Growers and Processors that will fall within the range recently agreed by Bartter and Inghams with their respective Growers. According to her model, such a range of fees (and the Grower revenue such fees imply) lies above those that would be expected to maximise each Processors’ profits in the respective markets for chicken growing services within which they operate.
278 Dr Jung’s analysis effectively proceeds on the basis that Processors will treat the range of fees she has been asked to assume will occur as being akin to a minimum level (or price floor) below which Grower fees cannot fall. Given this, she demonstrates how Processors will have an incentive to expand their demand for chicken growing services. So long as the minimum fee for chicken growing services that will result in the factual does not exceed that which would be expected in competitive markets for these services, she demonstrates how this expansion in demand would move the outcomes in these markets closer to those that would be expected in competitive markets.
279 Significantly, however, Dr Jung’s evidence does not specify why commercial negotiations in the factual would proceed on the basis of a minimum fee being set for chicken growing services (nor what factors would define what this minimum fee would be). Rather, she notes that she has been asked to assume a range of minimum fees would arise in the factual, and modeled outcomes on that basis.
280 The Growers contend that the range of fees used by Dr Jung in her model to represent outcomes that will occur in the presence of a collective boycott are reasonable given that they represent recently agreed growing fees between Inghams and Bartter with their respective Grower groups. The Growers contend that these fees were negotiated in ‘the shadow of authorisation’ and are, therefore, appropriately considered to be characteristic of outcomes that will occur in the factual. They also believe that the range assumed by Dr Jung is indicative of the fees necessary to cover the long-term incremental costs of providing chicken growing services in Victoria at current levels of investment in chicken growing facilities.
12.1.4.2 Processors’ case
281 The evidence of the Processors’ expert witness, Professor Gans, indicates that he believes that the threat of a collective boycott would be credible for each of the Grower groups in the factual. In this regard, he finds that “the evidence suggests that a collective boycott is credible in that processors will likely accede to grower demands and growers would engage in a boycott in order to ensure those demands are met (para 43)”.
282 With regard to whether a boycott would actually need to occur before Processors would accede to Grower demands, Professor Gans notes that if a threat is credible and a Processor believes the threat will be exercised if its Growers’ terms are not met, it will be likely to meet those terms to avoid the costs of a boycott. That said, he believes that if a Processor is unsure whether a boycott threat will be exercised if Grower terms are not met, then Growers may exercise a collective boycott to demonstrate their resolve. He also notes a Processor may choose to weather a collective boycott to demonstrate its resolve.
283 Irrespective of whether a boycott will occur, the Processors contend that a collective boycott power will enable those Growers possessing it to improve the price and/or other terms and conditions of supply for chicken growing services. They also note that, during cross-examination, Mrs Smith was not able to estimate how much higher the price demanded by Growers would be if they were authorised to collectively boycott.
284 That said, the Processors disagree with the Growers’ contention that certain outcomes reached since the ACCC authorised Growers to collectively boycott are likely to reflect those that one would be expected in the factual. Rather, they contend that no negotiations successfully completed before the Tribunal’s decision on this matter can be said to belong to the factual because, at present, a boycott threat is not credible or even possible.
285 With respect to the level of Grower fees and investment that could be expected to occur in the factual, Professor Gans notes that Dr Jung’s model relies heavily on the fees that she has been asked to assume will arise following a collective boycott authorisation. In the first instance, Professor Gans argues it would be more appropriate to assume the outcomes of negotiations between Inghams and Bartter with their respective Grower groups reflect those one would expect in the counterfactual (rather than the factual). This is because he believes the agreed outcomes (especially as they relate to volume) would involve a certain level of investment in the capacity to provide chicken growing and processing services by the parties. Professor Gans believes these investments in capacity would be based on ‘expectations of arrangements prior to authorisation of collective boycott provisions and would not have adjusted – as Dr Jung apparently assumes – upwards to anticipate that authorisation’. (JSG-2, para 19)
286 More fundamentally, Professor Gans raises concerns that the modeling work conducted by Dr Jung simply assumes the outcome in the factual (as she was asked to do) without making an attempt to consider whether the assumed outcome represents a reasonable way to model the implications of a collective boycott authorisation. In contrast, Professor Gans provides an alternative model that might explain how outcomes would be reached if a collective boycott were authorised. In this regard, he focuses on the possibility that Growers may be able to exploit Processors once they have made investments in chicken processing facilities by threatening to engage in a collective boycott. As a result of this possibility, he suggests Processors may treat an authorisation as if it could force them to pay a premium to Growers above their long-run costs of investment in order to avoid the potential losses associated with a collective boycott. Professor Gans demonstrates how this would have the effect of reducing Processors’ demand for chicken growing services, leading to a reduction in their investment in chicken processing facilities. Professor Gans also demonstrates how this would have the effect of leading market outcomes further away from those that would be expected in competitive markets as compared to the counterfactual. While this would involve Processors paying a higher growing fee, it would also involve lower levels of chicken growing services being bought and sold.
12.1.4.3 ACCC’s case
287 As indicated above, the ACCC submits that authorisation of a collective boycott is likely to produce outcomes which would more closely approximate those one would expect in efficient markets. However, it does not believe the Growers will demand prices for grower services above those one would expect in efficient markets. It does not, however, specify what particular outcome it believes will occur.
12.1.4.2 Tribunal’s view
288 The evidence provided by the parties in relation to likely outcomes that would arise in the markets for chicken growing services in the factual revolved around addressing three key issues:
· whether a threat by Growers to exercise a boycott could be credible;
· whether a credible threat would be sufficient for Processors to accede to Grower demands consistent with such threats, or whether a collective boycott would actually occur; and
· irrespective of whether a boycott actually occurred, the extent to which authorisation would lead to a change in grower fees and investments in (and output from) chicken growing and processing facilities.
289 The Tribunal’s view on each of these issues is outlined, in turn, below.
12.1.4.4.1 Would a Growers’ threat to boycott be credible?
290 Sections 12.1.1 to 12.1.3 have dealt extensively with the conditions under which a boycott threat would be credible and would lead to a Processor acceding to an associated Grower demand. A key conclusion from this analysis is that there are a number of factors that can influence and limit the extent to which Growers’ demands and boycott threats will meet these conditions. The Tribunal also believes these factors will vary from one Processor and its Grower group to the next. This makes it difficult to predict which demands and boycott threats will be likely to be credible and lead Processors to give in to the Growers’ demands.
291 The extent to which a boycott threat would be credible for a given demand, and likely to lead Processors to accede to the demand, is, however, important to an analysis of likely outcomes in the factual. That is, if market conditions and other constraints (including the conditions attached to the collective boycott authorisation by the ACCC) meant a boycott threat could not be credible for any given Grower demand, then authorisation would be unlikely to lead to different market outcomes in the factual. This would be likely to mean that there would be no net public benefit to justify authorisation of a collective boycott power (with conditions).
292 While the Tribunal does not believe it can know, with any degree of certainty, which particular demands would be credible (and likely to be acceded to) when linked with a boycott threat, it does believe that there will be combinations of demands and boycott threats that would be credible and acceded to. The Tribunal also notes that both parties, and the ACCC, believe this to be the case. Hence, it believes authorisation will be likely to change market outcomes.
12.1.4.4.2 Is a boycott likely to occur?
293 Consideration of the likelihood of a boycott actually occurring is crucially important, as it will have implications for expectations about detriments that may occur as a result of authorisation. While the threat of a collective boycott will generate costs for Processors (as a result of taking preparatory boycott-proofing measures to ameliorate the effects of a boycott on it should one actually occur), greater costs (and therefore detriments) can be expected to arise should boycotts actually occur. Hence, consideration of whether a boycott will actually occur has significant ramifications for the analysis in section 12.3 of this Determination.
294 At first blush, it would seem that if both Processors and their Grower groups are well informed as to the costs and potential benefits to both parties of a Grower demand and an associated boycott threat, it would be less likely that there would be a need for a boycott to ever eventuate. That is, if a Processor knows that a boycott threat made by its Grower group is credible and the Grower group knows its Processor would be better off meeting a given Grower demand rather than bearing the costs of a collective boycott, there would seem to be a greater incentive for the Grower group to threaten to boycott and the Processor to accede to the demands made by the Grower group.
295 It cannot be assumed, however, that both parties have perfect information about the potential benefits and costs to each other of a collective boycott. Indeed, it may be in the interests of both parties to shield this information from each other in order to improve likely outcomes in their favour during negotiations. This seems to be implicitly recognized by the Growers when they argue that Processors may not simply “cave in” to Grower demands if the cost of doing so were less than the cost of the boycott. The Growers argue Processors may factor in the costs of possible increases in future boycott activity that might follow if they simply give in to initial boycott threats. This suggests that both parties may have an incentive to try to alter the future expectations of the other party as to their respective costs and benefits of a collective boycott in order to influence future contract negotiations. Such behaviour would be unnecessary if both parties were fully informed about the others costs and benefits of collective boycott activity.
296 Hence, to the extent parties are not fully informed about the costs and benefits to each other of a collective boycott and an associated Grower demand, it is more likely that boycotts will actually proceed. Indeed, engaging in boycotts will be one way both parties can test out, and gain information about, the costs and benefits to each other of collective boycotts. In this regard, we believe that there is a not insignificant probability that a collective boycott is likely to occur in the early periods following authorisation as parties test out and gain information about the potential impacts of a collective boycott authorisation. That said, we do not believe it is necessarily likely that all Grower groups will engage in a collective boycott against their respective Processors, or that there will be persistent instances of collective boycott activity in future periods once Growers and Processors become better aware of the costs and benefits to each other of collective boycotts.
12.1.4.4.3. Will authorisation lead to a change in market outcomes?
297 Irrespective of whether a boycott actually occurs, we believe that there is a non-negligible probability that Grower groups, armed with a collective boycott authorisation (with conditions), will threaten to boycott their Processors. To the extent that such threats are credible, it is likely that they will have some influence in the negotiations that will determine outcomes in the markets for chicken growing services. More specifically, we believe that a collective boycott authorisation will provide Growers with enhanced bargaining power in their negotiations with their Processors sufficient to enable them to negotiate improved terms and conditions for providing chicken growing services. In particular, we believe it to be likely that Growers will be able to extract fees above their long-run opportunity costs from their Processors for providing chicken growing services. However, the extent of any such fee increase, as discussed in sections 12.1.1 to 12.1.3, will be likely to be constrained, to some extent, by a number of factors.
298 Crucially, however, we do not believe that it can be said to be highly likely that such fee increases will necessarily be associated with an increase in the demand for chicken growing services, and hence an increase in investment in growing facilities. This is an important conclusion, and has significant implications for the size of any benefits likely to follow from a collective boycott authorisation. First, however, we need to explain why we have come to this important conclusion.
299 The conventional approach adopted by economists, when seeking to predict the likely outcomes of business behaviour, is to assume that businesses will choose to produce a level of output, and purchase a level and combination of inputs, which will maximise the returns – the economic profit – that they can expect to earn.
300 It is this assumption, in the context of Processors being able to act as monopsonistic purchasers of the services of chicken growers who have no countervailing market power, that led us to accept the submissions of the Growers and the ACCC that, in the counterfactual, the level of demand for chicken growing services is likely to be restricted below that expected in competitive markets. It is this assumption, too, which explains why we would expect that each Processor would refrain from competing for any other Processor’s existing Growers: each Processor would recognize that its capacity to sustain the ability to earn monopsony profits depends on it doing so.
301 The likelihood that a collective boycott authorisation would arm Grower-groups with the capacity to earn at least somewhat higher fees than their minimum long-run opportunity costs, at whatever level of investment in growing capacity is demanded by their Processor, leads to the question of how they would choose to use that power. One assumption would appear to be that, as investors of significant amounts of capital which they alternatively could have chosen to invest in other opportunities available to them, Growers would seek (symmetrically with their Processor) to maximise the returns that they earn from their investments in growing facilities. There would be likely to be limits on the extent to which VFF Grower groups actually could do so – particularly as a consequence of the existence of non-VFF growers and the likelihood that their Processors would call their bluff if their demands, backed by a boycott threat, lacked credibility. However, they are likely to want to obtain higher returns than otherwise, and are likely to be able to do so, to some extent.
302 In this event, the situation in the markets for chicken-growing services could be characterised as one in which there is a degree of bilateral market power: both purchasers (Processors) and suppliers (Growers) would have some market power, even though the balance of market power still might be tilted (towards the Processor(s)). It is a standard conclusion of economic analysis that the outcome which, in principle, would dominate all others in such a context is where the parties agree to a level of demand for, and supply of, growing services which maximises industry profits, shared between them in some way. The latter (the shares of profits likely to be agreed to) is hard to predict, but the former is not: in principle, it would be the level of output of grown chickens (and, correspondingly, the level of investment in growing facilities) likely in competitive markets for growing services. The social surplus foregone when Processors, acting as pure monopsonists, restrict demand for growing services to achieve maximum profits would be captured as additional profit by the two parties, in effect, acting cooperatively to do so.
303 This outcome, while the best feasible for both parties if they act as profit-seekers, is generally regarded as being unlikely to be achieved because to do so would require that the two parties have complete information about each other’s businesses (especially revenue and cost functions) and that the costs of repeated rounds of negotiations be low. With incomplete information and significant bargaining costs, the parties will behave strategically and the likely outcome is highly unpredictable.
304 A further complication is added if one considers that while it is plausible that Growers, equipped with a boycott authorisation, would seek to maximise the returns on their substantial investments, it is by no means certain that this is the objective they actually would pursue in their (collective) negotiations. While a monopolist acting alone may be likely to seek to maximise economic profits, groups of businesses acting collectively may have different objectives. For instance, VFF Grower groups may focus on maximising the profits that can be earned by existing members without having regard to the interests of potential new entrants that might otherwise be required to push investment in (and output from) chicken growing facilities towards those levels expected in competitive markets.
305 Dr Jung, in the model she used to estimate the potential benefits of authorisation of boycotts, adopted an assumption that Growers would demand a specific fee target and, in effect, face Processors with a price floor. As indicated earlier, Dr Jung demonstrates that, so long as this price is above existing levels, Processors would have an incentive to increase their demand for chicken growing services. In this case, a higher fee would move the market outcome closer to that likely in competitive markets for chicken growing services. However, the specific fee level Dr Jung used in her estimations of the benefits to society was specified by the Growers who commissioned her analysis. Further, no compelling explanation of why VFF Grower groups might choose to behave in this way – as opposed to seeking a profit maximising outcome or some other objective – was provided by the Growers or Dr Jung. Accordingly, the Tribunal does not believe it has any reason to believe this will be the dominant strategy chosen by Growers in their negotiations with their respective Processors.
306 Moreover, what Processors perceive to be the likely consequences of the (somewhat) increased market power of the Grower groups is important for determining likely outcomes in the markets for chicken growing services as well. For instance, in response to Dr Jung’s analysis, Professor Gans suggested that Processors might react to the existence of a collective boycott power by perceiving it to mean Growers will simply demand a level of fees above their long-run incremental costs at any given level of demand for their services. This would be consistent, among other possibilities, with the Growers seeking to achieve a “satisfactory” increase in their returns, rather than the maximum feasible increase. The effect of this would be to increase the cost of growing services Processors perceive themselves to face at any given level of supply of chicken growing services. Professor Gans demonstrates how a profit maximising monopsonist would respond, in these circumstances, by reducing its demand for chicken growing services – thus leading to investment levels in chicken growing facilities even further below those expected in competitive markets for chicken growing services.
307 Overall, we believe that many outcomes in the markets for chicken growing services are possible. Those that do emerge in the factual are likely to depend, inter alia, on:
· the strength of the credible threat a collective boycott enables a Grower group to make;
· restrictions on the way in which Growers can collectively boycott;
· the extent of countervailing bargaining power that Processors would continue to hold;
· the way Processors would choose to respond to whatever demand is made by Growers;
· the objectives of Growers when conducting negotiations with Processors (i.e. is their prime objective attaining the best terms possible for existing VFF Growers so that they earn some economic rent on the provision of chicken growing services – even if this may stifle opportunities for new entrants; growing the markets for chicken growing services – even if this might reduce the level of economic rent earned by Growers that do achieve a contract; attaining the highest fee possible for all Growers – both existing and potential future new entrants; maximising the profits of the Grower group as a whole etc); and
· the constraints imposed on Grower demands by non-VFF and interstate Growers, as well as by the interdependence between Growers and their Processors.
308 How all these forces are likely to interact to shape market outcomes involves a high degree of complexity, with the outcomes perhaps likely to vary between different Processors and their respective Grower group. Importantly, we do not believe that we have been presented with a compelling piece of analysis that would lead us to believe that any one possible outcome is significantly more likely than others, let alone that there is a real chance that investment and output levels will be likely to increase in the markets for chicken growing services in the factual. The implications for the specification of likely benefits that will result from authorisation are considered in detail in section 12.2 below.
12.1.5 Implications for various market participants
12.1.5.1 Processors’ case
309 The Processors submit that while they all have a similar interest in resisting authorisation of a collective boycott, the impacts of a boycott on each of them will not be identical. In particular, the Processors express concern that imposition of a collective boycott on a smaller Processor could have the effect of driving it out of business. In this regard, they contend that an extended boycott could ruin Hazeldene and cause serious unemployment in the Bendigo region. The Processors also note that there is a close relationship between Hazeldene and its Growers where both parties understand their dependence on each other.
310 The Processors further contend that the ability of smaller state-based Processors (such as Hazeldene and La Ionica) to manage the effects of a boycott is more limited than that of the national Processors. This is because they do not have interstate resources to offset any production losses resulting from a Grower boycott against them.
311 With respect to the impact of a collective boycott authorisation on consumers of chicken meat products, the Processors note the evidence of Professor Gans who argues that boycotts will likely increase costs for Processors. While Professor Gans notes there is some evidence that the ability for Processors to pass through increased costs to supermarkets and fast food chains is limited, these limitations may not exist for smaller customers such as individual restaurants and smaller fast food and supermarket chains. Professor Gans argues that as the possibility of collective boycotts raises the costs of all Processors, competition between them will not prevent these costs being passed through to smaller customers.
12.1.5.2 Growers’ case
312 The Growers contend that the impact of a boycott would be minimal in the national wholesale chicken meat market. They argue that this would be the case even if there were no effort on the part of the boycotted Processor (or other Processors) to minimise any loss of production. In this regard, they note that even if a large Processor like Inghams was boycotted by all of its Victorian Growers, only six per cent of national production would be lost. Further, for the reasons outlined in paragraph 243 above, they note that it would take approximately two and a half months from the date of notice of an intention to boycott for the full extent of the production loss to be realised.
313 The Growers submit, however, that even this modest impact is likely to overstate the potential impact of a boycott because:
· it assumes all Growers in the relevant Grower group will participate in the boycott;
· Processors will continue to receive supply from non-VFF growers and any VFF Growers who do not participate in the boycott; and
· some Processors – especially La Ionica and Hazeldene – will continue to receive supply from Processor owned or controlled farms.
314 In commenting on the expected impact of a collective boycott on final consumers of chicken meat products, the Growers note the evidence of Mrs Smith who concludes that the impact is likely to be small. In reaching this view, Mrs Smith relies on assumptions that:
· growing fees represent a small proportion of the retail price of chicken meat products (about six to seven per cent);
· there is some substitution between chicken meat and other meat which will impose some constraint on the pass-through of cost increases; and
· wholesale buyers of chicken meat have significant bargaining power in relation to Processors, especially as supply seems not to be on a contractual basis.
315 Mrs Smith also notes that the imposition of a collective boycott would be unlikely to impose much harm on consumers because the boycott would be confined to one Processor such that production by other Processors will not be affected. This effect is further enhanced by the conditions attached to the ACCC’s collective boycott authorisation which require a Processor to be given adequate notice of a boycott. The Growers submit that this should give the Processors ample time to adjust their production activities in response to a boycott. Further, other Processors would be able to increase production rates to cover for any potential shortfall generated by a boycott against a particular Processor.
316 In relation to the impact of a collective boycott on individual Processors, the Growers contend that it is less likely that Hazeldene will be subject to an extended boycott because of the relationship it has with its Growers and the recognition across the industry that Hazeldene is a price follower and not a price setter. That said, they believe Hazeldene will not have an incentive to follow the market price set for growing services if there is no provision for a boycott to be deployed against it. Hence, the Growers submit that Hazeldene should not be excluded from a collective boycott authorisation.
317 The Growers also contend that the impacts of a boycott on smaller Processors such as Hazeldene and La Ionica are, to some extent, mitigated by them having company owned or controlled Grower farms.
12.1.5.3 Tribunal’s view
318 The Tribunal believes that any impacts of a collective boycott in the wholesale market for chicken meat are more likely to result from changes in the output of all Processors following a boycott authorisation rather than any increases in Grower fees. To illustrate, the Tribunal believes that it is likely that Processors currently are using their market power to generate market outcomes that involve Grower fees and output levels below those that would be expected in competitive markets for chicken growing services. This is likely to generate rents for them. While Growers might seek increases to fees such that Processors were no longer able to earn these rents, the Tribunal does not believe they will seek to push fees above those levels that enable their Processor to earn a normal return on its investments in chicken processing activities. This is because any increase in fees above these levels would be likely to require individual Processors to raise their prices in the downstream market for chicken meat services. To the extent the wholesale market for chicken meat is highly competitive, and individual Processors are price takers, any attempt to increase prices for processed chicken meat would be likely to lead to a reduction in sales for such Processors. In turn, this could do substantial damage to a Processor’s business, which would not be in the long-term interests of its Growers. Accordingly, we believe any increase in Grower fees would not be sufficiently high to necessitate Processors seeking to increase their prices for wholesale chicken meat. In turn, this should ensure there is little if any increase in the price of chicken meat for final consumers on account of an increase in Grower fees per se.
319 However, the Tribunal does believe that changes in the quantity of chicken growing services could have some impact on the final price of chicken meat. In this regard, there are two factors that might change the quantity of chicken growing services, and hence supply into the wholesale market for chicken meat. First, if a collective boycott was actually to occur against a Processor, there may be a temporary decrease in the supply of processed chicken meat into the wholesale market for chicken meat while the boycott continues. In turn, this has the potential to generate a short-term spike in the price of chicken meat for final consumers. The extent of any such price increase will, however, depend on a number of factors, including:
· the size of the Processor being boycotted (i.e. a boycott against Hazeldene would clearly lead to a much small reduction of supply into the wholesale market for chicken meat than a boycott against a larger Processor such as Bartter or Inghams, all else being equal);
· whether more than one Processor is being boycotted at any given time;
· the extent of responses Processors (including non-boycotted Processors) undertake that might limit the reduction of supply into the wholesale market for chicken meat; and
· the responsiveness of the demand for chicken meat to changes in the market price.
320 Given the proportion of supply provided into the national market for wholesale chicken meat by individual Victorian Processors, however, we do not expect any price increase that might follow to be significant. Further, to the extent that a collective boycott is only for a limited time, such impacts are likely to be temporary only.
321 Second, to the extent that Growers were correct that an increase in Grower fees would lead to greater investment in chicken shedding (and a consequent increase in the production of chicken growing services) more consistent with that expected in competitive markets for chicken meat, this could lead to an increase in the overall supply of processed chicken meat into the national market for chicken meat. Assuming a downward sloping demand curve in the wholesale market for chicken meat, any such increase in supply could lead to an overall decrease in the wholesale price for chicken meat, and a consequent decrease in the price of chicken for final consumers.
322 Conversely, however, to the extent that the exercise of a collective boycott could lead to a reduction in the level of chicken growing services below that which would otherwise occur, this could lead to a lower level of overall supply into the wholesale market for chicken meat, and a consequent increase in the price in this market. In turn, this could lead to an increase in the final price paid by consumers for chicken meat.
323 The Tribunal notes that any change in the price of chicken meat paid by consumers that might result from changes in the level of investment in chicken growing and processing facilities would be more long-term in nature than those price changes that might result from a collective boycott actually occurring.
324 Ultimately, therefore, the impact of a collective boycott authorisation on the price paid by final consumers of chicken meat is likely to be most significantly influenced by any consequent changes in investment in chicken growing and processing facilities rather than by temporary interruptions to supply in the event that a boycott was actually implemented. However, as indicated above, the Tribunal does not believe it is clear whether investment levels will be likely to increase, decrease or remain constant in the factual (as compared to the counterfactual). Hence, the Tribunal does not believe that it can predict with confidence the likely overall impact on the final price of chicken meat in the factual.
325 As for impacts on smaller Processors, we believe that Growers would have no incentive to use their power to boycott in such a way as to drive their Processor out of business. This seems especially to be the case for Hazeldene, where it is acknowledged by both parties that the Growers and Processors understand their mutual interdependence. That said, Growers may inadvertently cause significant damage to their Processor’s business if they do not have full information about the costs of its business.
12.2 Benefits from a collective boycott
12.2.1 Growers’ case
326 The Growers contend that a collective boycott can increase social welfare (as well as affect the distribution of surplus between Processors and Growers) if, as a result of it, Growers become more efficient and productive. They argue that one way it can do this is if it leads to Growers making further investments in shedding capacity.
327 In this regard, the Growers note the evidence of Dr Jung. As outlined above, Dr Jung constructs an economic model which compares the outcomes she expects will occur in the counterfactual with the outcomes she has been asked to assume will occur in the factual. The outcomes she has been asked to assume will occur in the factual involve a range of Grower fees that reflect those recently agreed between Bartter and its Grower group and Inghams and its Grower group. The outcomes in the factual involve Growers earning higher fees than in the counterfactual. They also involve, as a consequence, Growers investing greater amounts in chicken growing facilities and increasing the level of output of chicken growing services as compared to the counterfactual. Dr Jung demonstrates how the combination of higher fees and output in the factual will lead to outcomes more consistent with those one would expect in efficient markets for chicken growing services. These outcomes involve an increase in the rents (or surplus) enjoyed by Growers that is greater than any decrease in profits Processors may suffer as a result of paying higher fees in the factual. On balance, therefore, a net public benefit would be created. Dr Jung estimates that the size of this net public benefit could be between $2.72 million and $5.45 million per annum, depending on the values assumed for a number of parameters in her model. Further, her model disaggregates how much of this benefit would be attributable to the ability of Growers to overcome opportunistic behaviour by Processors. In this regard, the public benefits would range from $0.108 million to $1.433 million per annum.
328 The Growers also rely on the evidence of Mrs Smith, who, they note, concludes that:
· without the boycott provision, the likely response of Growers to monopsonistic behaviour in relation to fees will be to reduce expenditures and undertake sub-optimal levels of investment; and
· to the extent that collective negotiation and the potential to impose a boycott results in growing fees that are high enough for Growers to maintain current expenditure at a level which will ensure a satisfactory level of productivity, there will be a public benefit due to increased productive and dynamic efficiency.
329 The Growers further note that the evidence of Mrs Smith suggests that, to the extent that collective negotiations and the ability to threaten a collective boycott could result in higher growing fees and greater income certainty for Growers, this is likely to lower barriers to entry into the market for chicken growing services. In turn, this should encourage further entry into this market. The Growers argue that this is in contrast to the current industry environment where the existing ad hoc negotiating framework has led to a decrease in returns to Growers and created an uncertain investment climate, which has led to a number of Growers leaving the industry.
330 The Growers also contend that the ability to collectively boycott is necessary in order to give them countervailing bargaining power in collective negotiations with Processors. They argue that this is necessary because Processors would have greater bargaining power in the counterfactual for the reasons outlined in section 11 of this Determination. They submit that a collective boycott authorisation would help overcome this, as it could have serious consequences for both Processors and Growers if a boycott was applied. The prospect of these consequences would encourage both parties to reach agreement in order to avoid them.
331 The Growers contend that this should lead to more input by Growers into contract outcomes. They argue that this is needed to sustain existing and future investment in chicken growing facilities at a standard necessary to ensure the wholesale chicken meat market remains a disease free and relatively cheap source of protein for families. They argue that it also should ensure:
· contract terms beyond the length of one growing cycle, and growing fees which provide an adequate return on investment for Growers;
· growing fees set at a level that will provide Growers with appropriate incentives to maintain bio-security standards;
· terms and conditions associated with the provision of growing services which appropriately recognise the environmental risks which Growers relieve Processors of as a result of providing chicken growing services; and
· dynamic efficiency gains as a result of Growers being able to counter, to some degree, the monopsony/oligopsony power held by Processors.
332 The Growers also contend that a collective boycott authorisation may encourage Processors to compete with each other for Grower services, which they allege they do not do now. In this regard, they submit that a notice of boycott given to one Processor by Growers would provide a clear opportunity for another Processor to seek the services of these Growers in order to increase market share.
333 Finally, the Growers contend that the threat of a collective boycott could help to reduce the protracted nature of current negotiations between Growers and Processors. In this regard, they note that the ability of Growers to engage in a collective boycott will increase the probability of timely and effective negotiations, and avoid costs suffered through protracted and unsuccessful negotiations.
12.2.2 Processors’ case
334 As indicated above, the Processors do not agree that the outcomes of recent negotiations between Bartter and Inghams and their respective Growers represent outcomes that can be expected in the factual. Further, as outlined above this view was supported by Professor Gans. Accordingly, they contend a fundamental assumption in Dr Jung’s model is incorrect. This would imply that they believe any estimation of public benefits in Dr Jung’s model is unreliable.
335 Professor Gans also notes concerns that estimates of the long-run price elasticity of supply used by Dr Jung in her model are lower than estimates used by the Australian Bureau of Agriculture and Resource Economics (ABARE) in 1994 for the industry. The long-run price elasticity of supply measures the extent to which a change in the price of chicken growing services would lead to a change in supply of this service. Professor Gans contends that using a higher estimate of the long-run price elasticity of supply for chicken growing services would diminish or eliminate estimates of public benefits that might arise in the factual in Dr Jung’s model.
336 More broadly, Professor Gans raised concerns in his evidence that the model developed by Dr Jung relies on a specific assumption about the outcome of commercial negotiations in the factual without analysing why this assumption is reasonable.
337 In relation to the evidence of Dr Jung, the Processors also note that even if one were to ignore their concerns with the assumptions relied upon by her when estimating the size of public benefits, the figures contained within the estimated range of benefits from a collective boycott authorisation are miniscule and do not warrant the risk of anti-competitive detriments arising from allowing a boycott power to be exercised.
12.2.3 ACCC’s case
338 The ACCC submits that collective boycotts can, in limited circumstances, produce public benefits. It believes that this is more likely to be the case where there is a significant disparity in bargaining power between the collective bargaining group and the counter party. It also submits that the case for a collective boycott may be strengthened if it was clear that a failure to collectively negotiate would result in inefficiencies. In this particular instance, the ACCC believes a collective boycott authorisation will result in a public benefit in that it is likely to produce results which more closely reflect the outcomes which would be likely to be produced in an efficient (competitive) market. It does not, however, specify what these outcomes will be.
339 The ACCC also notes that Professor Gans agreed, during cross-examination, that one direct means of mitigating hold-up problems is to find a way of improving the bargaining power of the players making an investment. While Professor Gans indicated there are a number of means by which this could be achieved, he agreed that a collective boycott is one means.
12.2.4 Tribunal’s view
340 As indicated in section 10, the Tribunal has, in past Determinations, adopted an expansive view of what constitute benefits in relation to authorisation considerations under s 90(8) of the Act. That is, they have been taken to include anything that increases the well being of members of society which might arise as a consequence of, for example, authorising particular commercial arrangements. The Tribunal also has adopted a definition of “the public” that would include all members of society in all their roles. Moreover, it has taken the view that, by and large, there should be no differences in the weight attached to benefits, irrespective of who are the beneficiaries.
341 The Growers’ case largely revolves around the contention that authorisation of the ability to collectively boycott (with conditions) will give Growers improved bargaining power which will enable them to overcome, to some extent, the likely consequences of two sources of market inefficiency that are likely to occur and, they argue, persist in the counterfactual. These are:
· the inefficiently low levels of Grower fees, investment and output that result from Processors exercising monopsony power; and
· further departures from efficient outcomes on account of Processors acting opportunistically, following deregulation, to set terms and conditions less favourable for Growers.
342 As indicated in section 11, the Tribunal agrees that both of these sources of market inefficiency will be likely to occur in the counterfactual. However, while it believes the exercise of monopsony power by Processors will continue for so long as they are shielded from competitive forces when negotiating with Growers, it believes Processors will be constrained, to some extent, in their ability to act opportunistically in negotiations with Growers in order to retain existing growing capacity. This is because they will not want to lose existing chicken growing capacity, and will want to encourage further capacity expansions in the future, in order to meet expected growth in the demand for chicken meat. Further, we believe any ability to act opportunistically will be restricted to investments in growing capacity made by existing Growers in the period prior to deregulation. Accordingly, market inefficiencies that might result from Processors acting opportunistically are likely to be more transitory in nature than those resulting from the exercise of monopsony power by Processors.
343 Ultimately, however, the analysis suggests that there will be a failure of Victoria’s chicken growing markets to deliver efficient outcomes in the absence of authorisation of collective boycotts. This suggests that there is the potential for alternative market outcomes to occur that would be closer to those expected in efficient markets which would generate public benefits relevant to the legislative test under s 90(8) of the Act. A key issue for the Tribunal in this matter, therefore, is whether or not there is a real chance that these superior outcomes actually would be likely to occur if it authorised the Growers to collectively boycott (with conditions).
344 At the outset, we should state that we believe that a collective boycott authorisation (with conditions) is likely to give Growers greater bargaining power in their negotiations with their Processors. This increased bargaining power is likely to go some way towards helping to remove the ability of Processors to act opportunistically towards their Growers. That is, it is likely to help ensure that Growers are able to secure terms and conditions that involve higher fees and a more appropriate allocation of risk such that all Growers are able to earn at least normal returns on previous investments made in chicken growing facilities. This, in turn, is also likely to help to ensure Growers sustain appropriate maintenance levels for their facilities. Hence, we believe a collective boycott authorisation is likely, in this way at least, to generate some public benefits.
345 As indicated earlier, however, the Tribunal believes any market inefficiencies that might be resulting from opportunistic behaviour are likely to be limited and transitory. Hence, in considering whether authorisation of the ability to collectively boycott (with conditions) will be likely to generate public benefits in the factual that would not occur in the counterfactual, we need to consider the length of time over which opportunistic behaviour would be likely to continue to occur in the counterfactual. To the extent that this period was short, the size of the public benefits that would result from reductions in opportunistic behaviour would be smaller. Clearly, growth in demand for chicken meat will have some bearing on this effect.
346 We believe that it is hard to quantify the size of the benefits that would be likely to occur from reductions in the ability of Processors to act opportunistically. While Dr Jung’s model can be used to provide a range of estimates of the public benefit from enabling Growers to overcome opportunistic behaviour by Processors, the range her model predicts appears to depend on arbitrary assumptions made in relation to the risk premium Growers would require in the counterfactual to invest in the presence of a risk their Processors would engage in opportunistic behaviour. Accordingly, we do not believe we have any basis upon which to accept the likelihood that the public benefit that will arise from overcoming opportunistic behaviour will lie in the range Dr Jung’s model implies. This appears to be recognized by Dr Jung herself, who notes “alternative assumptions … would have a bearing on the numeric estimates of the benefit that would be foregone in the Counterfactual due to hold-up; however, they would not reverse the welfare effect of hold-up in principle”. While we believe it is hard to quantify the size of the benefits that would occur from reducing the ability of Processors to act opportunistically, we do agree there is a real chance some will occur.
347 While a collective boycott authorisation (with conditions) has the potential to generate public benefits by virtue of its ability to help Growers overcome opportunistic behaviour, we do not believe that it is self-evident that it has the ability to help overcome market failures that result from the exercise of pure monopsony power. Indeed, we believe that it is possible that Growers may use their enhanced bargaining power in ways that will have the effect of generating outcomes that will more than offset the public benefit generated by more quickly overcoming opportunistic behaviour by Processors. Were this to be the case, outcomes would, overall, be less efficient in the factual than in the counterfactual. In effect, this would mean authorisation would generate negative public benefit (a public detriment by another name).
348 The ability to collectively boycott would be likely to provide Growers with a powerful tool that they could use to influence the dynamics of their negotiations with their Processors. In particular, we believe that the ability to collectively boycott (with conditions) will radically alter the structure of the markets for chicken growing services and be likely to mean that Growers will no longer simply be price takers in these markets. Significantly, we believe that the power to collectively boycott (even with conditions) will be used by Growers to try to generate (additional) rents on existing investments in chicken growing services. Indeed, the evidence of both the Growers and Dr Jung suggests Growers will seek to use an authorised boycott power in ways that are likely to ensure improved terms and conditions (including higher Grower fees) than those that would be necessary to ensure existing marginal Growers earned sufficient fees to cover the long-run cost of their investments. This is implicit in the model developed by Dr Jung, which assumes Growers will use the power to collectively boycott in a way that will lead to them demanding Processors pay a minimum fee above that which would be earned by Growers in the counterfactual. While Dr Jung’s model involves marginal Growers only earning a normal return on their investments in chicken growing facilities, it nonetheless involves Growers earning additional rents on those levels of investment that would exist in the counterfactual. Similarly, we note the Growers’ statement, as outlined above, that they believe a collective boycott power will be used to both increase the size of the available surplus as well as itsdistribution. While Growers clearly envisage investment in facilities necessary to provide that chicken growing services will increase in the factual (such that public benefits would be generated), they apparently also expect that the power can be used to generate additional rents on existing investments.
349 In many ways, the situation that is likely to be created in the markets for chicken growing services in the factual will more closely resemble what economists refer to as a ‘bilateral monopoly’ situation than the monopsony or oligopsony situations that would be likely to exist in the counterfactual. That is, the markets for chicken growing services in Victoria will contain a single buyer (or small number of buyers) and a high concentration on the seller side of the market, including a large Grower representative group. While the existence of non-VFF Growers would be likely to help to dilute the degree of concentration on the seller side of the markets, there nevertheless is likely to be highly concentrated levels of sellers as well as buyers in each market.
350 It is clearly recognised in the economics literature that many outcomes are possible in a situation of bilateral monopoly, and that the particular outcomes that arise in such markets will depend on the objectives of the parties involved and the relative bargaining power of each party. Crucially, a situation of bilateral monopoly should be distinguished from a situation one would expect in competitive markets. This is because in competitive markets, both individual buyers and sellers are unable to influence market outcomes on their own. In situations of high concentration on both sides of the market, however, individual buyers and sellers (in this case via their collective negotiating body) are able to influence market outcomes. In turn, this means one cannot assume that outcomes in markets with high levels of concentration on both the buyer and seller side will replicate those likely in competitive markets. As indicated in section 12.1.4.4.3, we believe it is not possible to predict, with any degree of confidence, whether balancing bargaining power by affording Growers the ability to collectively boycott (subject to conditions) will lead to outcomes more consistent with competitive (and hence more efficient) markets.
351 As outlined in section 12.1.4, we believe that it is uncertain how the interaction between Growers and Processors will change if Growers are authorised to collectively boycott (with conditions). In this regard, we believe that outcomes in the markets for chicken growing services are likely to depend on a large number of factors. Of crucial importance amongst them is how Growers are likely to seek to use their bargaining power which, in turn, depends on the objectives they have when entering into commercial negotiations with Processors. Equally important will be the way that Processors perceive the implications of Growers having a collective boycott power, and how Processors will decide to respond to Growers in negotiations over terms and conditions of supply of chicken growing services.
352 Overall, we believe that there are too many variables, and too much uncertainty, about the objectives Grower groups would be likely to take into negotiations now and into the future, and how Processors would be likely to respond to them, to predict what market outcomes are likely. This is particularly the case given the different dynamics that exist in each of the three markets for chicken growing services in Victoria. Accordingly, as indicated in section 12.1.4, we believe that many outcomes are possible, and none is sufficiently more likely than others, to enable the Tribunal to say that there is a real chance that one outcome is the most likely. Further, while some possible outcomes may generate an improvement in the efficiency of market outcomes, others – such as those suggested by Professor Gans – would involve inferior market outcomes.
353 The Tribunal also notes that, to the extent that the long-run incremental cost of providing chicken growing services is rising for additional levels of chicken growing investment and output, outcomes that lead to a given decrease in investment and output will generate a greater detriment than the benefit would be for an equal-sized increase in investment and output. This effect would be even greater were the demand for chicken growing services to be decreasing for additional levels of chicken growing services. In other words, the negative welfare consequences of a given decrease in investment and output will be greater than the positive consequences of an equal-sized increase in investment and output.
354 Since the Tribunal does not feel it can say with any confidence which outcomes are most likely in the markets for chicken growing services in the factual, it does not believe that it can find that there is a real chance that public benefits will follow from authorising Growers to collectively boycott (with conditions). While we agree that an authorisation to collectively boycott will increase the bargaining power of Growers in a way that enables them to overcome short-term opportunistic behaviour by their Processors, we do not believe we can say with sufficient certainty that the powers conferred on Growers by authorisation will not be used in ways that more than offset this benefit and generate outcomes that are likely to be, in sum, inferior to those likely to occur in the counterfactual. On balance, therefore, we do not believe that we can say with any confidence that there is a real chance of a public benefit occurring as a result of authorisation of a power to collective boycott (with conditions).
355 The Tribunal has considered whether outcomes agreed between Inghams and its Grower group, and Bartter and its Grower group, in the period following the ACCC authorisations are likely to reflect those outcomes that will occur in the factual. For the reasons set out in section 11.3.4, the Tribunal believes these agreements are likely to reflect those that would be expected in the counterfactual.
356 Accordingly, while the Tribunal has found the model developed by Dr Jung to be useful for understanding outcomes that would be likely to occur in the counterfactual, it believes that it has been less useful in analysing outcomes most likely to occur in the factual. This is because the model assumes, as Dr Jung was directed to assume, that outcomes recently achieved by Growers with Bartter and Inghams are reflective of outcomes likely to occur in the factual. In turn, we do not believe that we can rely on Dr Jung’s evidence in relation to quantification of public benefits that might arise from authorisation of a power to collectively boycott (with conditions). This is irrespective of any concerns that might otherwise result from a closer inspection of other assumptions such as the own-price elasticity of supply of chicken growing services used by Dr Jung in her evidence.
357 The Tribunal has also considered the Growers’ contention that authorisation would provide Processors with an incentive to compete with each other for Growers’ services. In the first instance, it does not believe this can occur in the short-term in the regional markets in Geelong and Bendigo. This is because the agreed geographic dimensions of the markets mean that, almost by definition, there is only one potential acquirer of chicken growing services in these markets. Hence, to the extent there are narrow geographic boundaries to these markets, authorisation would not be able to create competition for Grower services in Geelong or Bendigo. With respect to the Melbourne market for chicken growing services, the Tribunal does not believe it has been provided with compelling evidence to make it believe that Processors are likely to change their past practice of not competing for other Processors’ Growers in the factual. Indeed, not competing is a necessary condition for them to sustain monopsony power. Moreover, even if authorisation did encourage Processors to compete for each other’s Growers, the Tribunal is not convinced that this would, in combination with the other factors that are likely to influence outcomes, lead to more efficient outcomes in the factual, for reasons we already have explained.
358 Finally, we do not agree that the protracted nature of current contract negotiations between Growers and their Processors inevitably would be reduced in the factual, with a consequent reduction in transaction costs for all parties involved. While authorisation may remove the ability of Processors to act opportunistically in their negotiations with Growers (including via delaying finalisation of agreements), we believe that the power to collectively boycott (subject to conditions) may provide an offsetting incentive for Growers to stall finalisation of contract negotiations with their Processors. This would particularly be likely to be the case if stalling finalisation of contract negotiations enabled Growers to overcome condition 5 of the ACCC authorisation and thereby ‘trigger’ the ability to threaten to collectively boycott. Further, transaction costs may be increased if both parties engage in gaming activities in response to authorisation (as discussed in section 12.1.2 above), as would actions by Processors to “boycott-proof” their operations.
12.3 Detriments from a collective boycott
359 The evidence and submissions principally focused on two types of potential detriments that might follow from authorisation of a collective boycott (with conditions):
· anti-competitive detriments, including damage to the business operations of Processors; and
· animal welfare detriments that may follow if a collective boycott necessitates the destruction of eggs and/or chickens.
360 The views of the parties and the Tribunal are discussed, in turn, for each of these issues.
12.3.1 Anti-competitive detriments
12.3.1.1 Processors’ case
361 The Processors contend that collective boycotts are inherently anti-competitive and that it would not be normal for a competition regulator to use such an intrinsically anti-competitive device to respond to market inefficiencies.
362 The Processors submit that a collective boycott could be anti-competitive in a number of ways in this particular matter. First, they contend that the collective nature of a boycott can tend to protect smaller, less efficient, Growers from competition. The existence of a collective boycott power in favour of a particular Grower group reduces competition between Growers within that group to win the custom of their Processor. This is because it reduces the incentives of individual Growers within the group to seek individual and different rates of payment on the basis of superior efficiency.
363 Similarly, Professor Gans argues that a collective boycott can improve the bargaining position of Growers because it limits the competitive options open to a Processor to play Growers off against one another. He argues that this can also limit the incentives that Growers within a group face to individually compete on quality and cost for the business of Processors.
364 Second, the Processors contend that the conferral of a collective boycott power on a particular Processor’s Growers can increase that Processors costs relative to its rivals in the downstream wholesale market for chicken meat. The Processors argue that this can influence competition in the downstream market and generate lost sales for the Processor whose Growers have been afforded a collective boycott power.
365 Third, the Processors contend that a collective boycott power will favour those Grower groups that are conferred with this power compared to those groups that are not.
366 Fourth, the Processors also contend that a collective boycott can distort competition between groups to attract members. In this respect, they argue that those groups that are able to exercise a collective boycott will have an advantage in attracting members compared to those groups that do not.
367 More broadly, the Processors submit that there will be significant disruptions caused to their operations if Growers engage in a collective boycott. Further, they believe implementation of a collective boycott could cause such substantial damage to a smaller Processor that it was forced out of business.
368 The Processors also contend that even the threat of a boycott could impose significant costs on them, as they would need to commence actions to mitigate the effects of a boycott in case one actually does occur. In this regard, Professor Gans argues that while such actions might serve to mitigate anti-competitive harm to Processors, they would be potentially costly relative to the situation that would exist without collective boycotts. These costs would involve not just the financial cost of such actions, but also lost efficiencies that may result from Processors adopting alternative approaches to sourcing chicken growing services (such as possibly re-integrating more growing back into their business and seeking greater levels of growing from non-VFF Growers) in order to protect themselves from the impact of a potential boycott.
369 As indicated above, Professor Gans also argues that, as the possibility of collective boycotts raises the costs of all Processors, competition in the wholesale market for chicken meat will not prevent these costs being passed through to smaller customers.
370 Finally, Professor Gans argues that if authorisation has the effect of increasing the cost to Processors of conducting their business operations in Victoria relative to other States, this may create an incentive for them to locate their businesses outside Victoria in the longer term. Given that transportation costs, in that event, would have risen for the final product, chicken prices would, under these circumstances, rise for Victorian consumers.
12.3.1.2 Growers’ case
371 In response to the argument that a collective boycott will reduce the extent of competition between Growers within a particular Grower group, the Growers submit that the VFF is not an industrial organisation and does not support inefficient farms. Rather, the VFF has supported VBINC efficiency schemes in the past and the equitable exit of inefficient and/or smaller farms where these have been encroached by urban development.
372 In relation to arguments about a collective boycott against one Processor disadvantaging it against others in the downstream wholesale market for chicken meat, the Growers note that “competition will simply transfer rents extracted from Growers by Processors back to Growers”. They contend that the Processor is unlikely to lose sales unless it attempts to transfer cost increases for chicken growing services into higher prices for its product in the wholesale market for chicken meat.
373 With respect to arguments that the power to engage in a collective boycott will favour those Grower groups that have it over those that do not (such as, for instance, the SWP Group), the Growers argue that it is open to these other groups either to seek an authorisation of their own, or to join the VFF.
374 More broadly, the Growers contend that any harm that Processors might face as a result of authorisation of the use of collective boycotts will be constrained by a number of factors, including:
· the conditions specified by the ACCC;
· the capacity of boycotted parties to withstand the detriment they will suffer as a result of a boycott;
· the means available to a boycotted party to mitigate the impact of a boycott;
· external factors, such as the necessity for Growers to always have a growing contract in place;
· the ability of Processors to introduce external investors, move operations interstate or secure the assistance of other Processors; and
· the impact of a boycott on the on-going relationships which Growers need to maintain with their Processor to ensure the availability of future contracts for the Grower where there is no competition among Processors for Grower services.
375 Further, the Growers also contend that non-boycotted Processors could engage in conduct that would mitigate any public detriment suffered as a result of a boycott, including by:
· increasing production in Victoria and other states in order to meet any expected shortfall in supply;
· seeking to buy eggs from boycotted Processors (if needed) to increase their own production in Victoria and elsewhere; and
· seeking to contract boycotting Growers in order to increase their market share.
376 In addition, the Growers contend that, even if a boycott would result in some harm to boycotting Growers and their Processors, any such harm is necessarily short-term and transitory, and would only occur in limited circumstances.
12.3.1.3 ACCC’s case
377 The ACCC notes that collective boycotts will usually have significant anti-competitive effects and, ordinarily, would raise serious concerns under the Act. The ACCC submits that the right to impose a collective boycott could or will:
· enhance any anti-competitive detriment arising from the collective bargaining arrangements;
· enable a collective bargaining group to inflict significant commercial damage on those with which it negotiates; and
· significantly disrupt downstream and upstream businesses.
378 The ACCC submits, however, that the anti-competitive effects of collective boycott activity are likely to be more limited when:
· businesses of the collective bargaining group are free to choose not to participate in any boycott activity contemplated;
· there are limits on the size, scope and coverage of the collective bargaining group;
· there is a mediation period before a collective boycott can be adopted; and
· there are other restrictions on the application of the collective boycott (such as notice or other requirements).
379 Partly as a result of the conditions placed on the collective boycott authorisation it has given to the Growers, the ACCC appears to suggest each of these factors is present in this matter.
12.3.1.4 Tribunal’s view
380 The Tribunal believes that the likely effect of a collective boycott applied by a group of Growers against a Processor would be to substantially reduce the capacity of the Processor to acquire the supply of growing services needed to enable it to continue to meet its commitments to supply processed chicken meat to wholesale purchasers and to sustain its reputation and position in the wholesale and retail markets.
381 The seriousness of the potential consequences of authorising the use of collective boycotts is beyond doubt: they can result in substantial commercial damage not only to the direct target(s) of them but also to other upstream and downstream businesses and their employees. Consumers might suffer disruption to market supplies and possibly at least temporary price increases. The fact that conditions might be attached to the use of a boycott power might reduce the likelihood of it actually being exercised, or the extent of the damage it could cause, but would not alter its potential to substantially change market outcomes.
382 In many circumstances where authorising collective negotiations is judged to be likely to result in a net benefit to the public, augmenting it with a collective boycott authorisation may be judged to be likely to give the group seeking the authorisation excessive market power. This is especially likely to be so where, for example, sellers of goods or services seeking a collective boycott authorisation face buyers of their goods or services that are fairly competitive with one another for those goods and services. The threat of a boycott against the purchasers, even though one might never actually be implemented, would be likely to empower the suppliers to obtain superior terms and conditions, including prices higher than their long-run opportunity costs (i.e. enable them to earn profits or rents).
383 The net result of these likely consequences of possession of a boycott authorisation would be to distort market outcomes compared with those expected in efficient markets. For example, setting prices higher than long-run opportunity costs for intermediate suppliers of goods and services might lead to lower purchases of those goods or services, and higher prices of final products faced by consumers, than those expected in efficient markets.
384 What distinguishes this particular matter, however, is that authorisation is not being sought by suppliers that currently are operating in competitive markets. As outlined in section 11 of this determination, the Tribunal believes that Processors currently have monopsony power in the markets for chicken growing services in Victoria, and that this will persist in the absence of authorisation of collective boycotts. Further, the Tribunal believes that market outcomes will be unlikely to be allocatively efficient in the counterfactual, as Processors will have an incentive to reduce the price they pay for, and the output they purchase of, chicken growing services below the levels that would be expected in competitive markets. By doing so, they can earn economic profits even though they sell processed chicken meat in a highly competitive wholesale market.
385 In these circumstances, it is possible that alternative market outcomes might arise in the factual that involve outcomes closer to those expected in competitive markets. To the extent that this was the case, a collective boycott authorisation (with conditions) may lead to outcomes more allocatively efficient than those likely to occur in the counterfactual, such that potential public detriments in the form of reduced allocative efficiency may not arise. But, the opposite equally might be the case.
386 As indicated earlier, the Tribunal believes that it cannot say that possession by Grower groups of the power to collectively boycott their monopsonistic Processors is likely to result in levels of investment in chicken growing facilities, and output of chicken meat, in Victoria closer to those likely in efficient markets. Many different outcomes are possible, including some which would be inferior to those likely in the counterfactual (i.e. without a boycott authorisation). None can be said to be so much more likely than others that there is a real chance that a particular outcome would be more likely than not to eventuate. Accordingly, the Tribunal does not believe it can say, with any confidence, whether or not a detriment to the public, in terms of reduced allocative efficiency, is likely to arise in the factual. However, it believes that any public detriment of this type that might result from authorisation of a collective boycott would be likely to be significantly smaller in this instance than that which would arise if the markets for chicken growing services in Victoria were competitive.
387 With regard to the potential for authorisation of collective boycotts to reduce incentives to achieve productive and dynamic efficiency, the Tribunal notes that these incentives may already be reduced in the counterfactual as a result of Growers being authorised to collectively negotiate. That is, to the extent that Growers negotiate collectively with their respective Processors, there is less incentive for them to compete vigorously with each other in order to take market share from each other now and in the future. While this effect may, to some extent, be offset by pressures from the existence of non-VFF growers, these pressures will exist in both the factual and counterfactual. We also note there has been a history of Growers participating in pooling schemes which provide all Growers within a group with an incentive to pursue productive and dynamic efficiencies in order to outperform other members of their group and so earn greater income. We see no reason why such schemes would not continue in both the factual and counterfactual.
388 Overall, therefore, the Tribunal does not believe it can say that it is more likely than not that a collective boycott authorisation – when added to an already authorised ability to collectively negotiate – will generate additional public detriments due to any consequent reduction in competition between Growers for their Processor’s custom.
389 With regard to the Processors’ argument that authorisation of collective boycotts can increase the costs faced by a boycotted Processor relative to their rivals (thereby inhibiting their ability to compete in downstream markets), the Tribunal does not believe this effect would be likely to be significant in the factual. This is because, for the reasons outlined above, the Tribunal does not expect Growers will push for terms and conditions that will prevent their Processor from competing in downstream markets. In this respect, the Tribunal believes that the likely effect of a collective boycott authorisation would be to reduce the extent of economic profits enjoyed by Processors without reducing the likelihood that they would earn at least normal profits from their business operations at the prevailing market price.
390 However, the Tribunal does believe that if a Processor’s ability to earn economic profits is reduced in Victoria, this might create an incentive for it to invest more heavily in processing facilities in other states and to redirect some of its production as exports to Victoria. This especially would be the case for those Processors that currently conduct their operations across a number of states in Australia. The Tribunal also notes, however, that the extent to which the ability to implement a collective boycott might create incentives for Processors to relocate some or all of their production interstate might be another factor (in addition to those outlined above) which would serve to moderate Grower demands in their negotiations with their Processors in the factual.
391 In relation to arguments that a collective boycott authorisation might favour VFF Growers over non-VFF growers, the Tribunal agrees with the Growers that non-Grower groups have the ability to seek an authorisation to collectively boycott of their own if this were to be the case. While each individual authorisation would need to be assessed on its merits, any such application would be strengthened if it could be shown that authorising a non-Grower group would improve competition in the markets for chicken growing services in Victoria.
392 While it is unclear whether a collective boycott authorisation is likely to generate public detriments on account of reductions in the level of competition in various relevant markets, the Tribunal believes that there is the potential for authorisation (with conditions) to significantly increase the cost to Processors of conducting their businesses. These costs can come in two forms. First, if a boycott does occur, this will generate significant costs to Processors and cause significant disruptions to their business and, potentially, the businesses of others. These costs could include, inter alia, any or all of:
· lost revenue from potential sales;
· the costs of taking action to mitigate the effects of a boycott (such as relocating day old chicks with non-boycotting Growers and additional transport costs that might follow from moving chickens to and from non-boycotting growers further distances than would have been necessary in the absence of a boycott); and
· the costs of destroying eggs and/or day old chicks that could not be placed with non-boycotting Growers.
393 The Tribunal accepts that Processors can take a number of actions that would mitigate the costs to them of a collective boycott. As indicated above, however, such actions will, of themselves, generate costs for Processors that they would not face in the absence of a collective boycott authorisation. It is also noted that the ability of Processors to adopt strategies to mitigate the effect of a boycott will be dependent on the extent to which such measures are available to them. For instance, a Processor may be limited in the extent to which it can acquire growing services from non-boycotting growers. This particularly would be the case if more than one Processor was being boycotted by its Growers at the same time.
394 The Tribunal notes that if a boycott never occurs, this first category of costs will not be incurred. As indicated in section 12.1.4, however, we believe there is a not insignificant probability that at least one Grower group and its Processor will become involved in a collective boycott, if only to “test out” and better understand the consequences of a boycott. While we do not believe it necessarily follows that all Grower groups and their Processors will become involved in collective boycott activity, or that periodic collective boycotts will occur well into the future, we nonetheless believe there is a real chance of at least one collective boycott occurring. Were such a boycott to occur, we believe there is a real chance that a public detriment (of uncertain size) would be likely to follow.
395 Irrespective of whether a collective boycott would be likely to occur such that this first category of costs would be incurred, however, we do believe that it is likely that Growers will threaten their Processors with a collective boycott. This brings us to the second form of costs. In response to such threats, we believe that it is likely that Processors will adopt some measures to prepare themselves for the possibility of a boycott actually occurring. Such ‘boycott-proofing’ strategies are, of themselves, likely to generate costs for Processors. These actions might include building up stocks of frozen chicken meat, spending time organising co-operative strategies with other Processors and their Growers, making contingency plans to transport chickens to and from non-boycotting growers etc. While it is hard to specify which particular strategies Processors will undertake and, therefore, the likely costs of such strategies, we believe such actions will not be costless. Ultimately, any actions which Processors take to prepare themselves for the possibility of a boycott represent a distortion (an additional cost) compared to those necessarily incurred in their normal business activities.
396 Any increase in costs that Processors face as a result of preparing for the possibility of a boycott will therefore represent a reduction in productive efficiency compared to the situation that would arise in the counterfactual and therefore would represent a public detriment. Accordingly, we believe that there is a real chance that authorisation of a collective boycott is likely to give rise to some public detriments in the form of the costs Processors incur in preparing themselves for the possibility of a boycott. Any such detriments would be likely to be increased if a boycott actually occurred.
12.3.2 Animal welfare detriments
12.3.2.1 Processors’ case
397 The Processors called on Dr John Barnett, who is a Leading Research Scientist, Animal Welfare Science, in the Department of Primary Industry, Victoria. They note his evidence that “animal welfare is an important societal issue” and that there is no capacity to kill large numbers of day olds in a hatchery and that none of the humane options for killing large numbers of birds would be available at a hatchery. Further, were Processors to destroy unhatched chicks (rather than day olds), this could not be done in the six day period prior to hatching without involving serious welfare issues. Hence, to the extent that the imposition of a collective boycott would leave Processors with large numbers of unhatched or day old chicks that they could not place on a Grower farm, any consequent destruction of these chicks would raise serious animal welfare concerns.
12.3.2.2 Growers’ case
398 The Growers contend, however, that “it is also clear from the cross-examination of Green and of Dr Barnett that processors are perfectly capable of disposing of day old chicks on site if they need to do so and that this can be done humanely”. Further, they note that the conditions attached to the collective boycott authorisation by the ACCC would provide Processors with time to destroy eggs rather than chicks, if any destruction was required, or to re-assign eggs to avoid that being necessary.
399 They also contend, however, that there are a number of actions that a Processor can take, in the face of a collective boycott, to ensure that chicks do not need to be destroyed. These measures include:
· transferring fertile eggs interstate or to another Processor for subsequent hatching and growing. In this regard, the Growers note that the parties agree that fertilised eggs are ideally held for 4 to 10 days and can be transported over distance;
· if chicks are hatched, transporting day old chicks interstate or to another Processor’s Growers for growing. The Growers note that the Code for Land Transport of Poultry allows up to 60 hours between hatching and delivery of day olds – thus providing sufficient time to transport day olds to alternative locations. The Growers also believe that there is ample shedding capacity interstate to enable large numbers of day olds from Victoria to be placed there. To the extent that the ability to do this was hindered by a shortage of suitable transportation vehicles, the Growers rely on the evidence of John Clarke (Clarke) that vehicles capable of transporting day old chicks safely with a modest level of adaptation are readily available. Alternatively, they argue it is possible to increase the number of delivery days per week (from current, typical, levels of four days per week) for existing transport vehicles by storing day-olds for a time;
· being able to transport live, grown, birds back to the boycotted Processor after they have been grown interstate or by another Processor’s Growers. In this regard, the Growers note that Baiada has, at times, taken live birds from Victoria to Sydney. While noting the evidence of Ian Green – who is the State Farming Manager in Victoria for Inghams – that live birds are very susceptible to transit stress, they note he does not seek to quantify the consequent loss.
400 In response to these proposed measures, the Processors:
· question whether spare hatchery and/or growing capacity would always be available interstate or at other Processor’s Growers; and
· believe Clarke abandoned his evidence in relation to modification of transportation vehicles under cross-examination, and that he agreed specialised vehicles were needed (possibly requiring importation).
12.3.2.3 ACCC’s case
401 In its determination, the ACCC indicates that the conditions it attached to its collective boycott authorisation – particularly in relation to the notice period that Growers must provide to their Processor when notifying it of its intention to implement a collective boycott – provide Processors with an opportunity to avoid the loss of day old chicks.
12.3.2.4 Tribunal’s view
402 At the outset, the Tribunal notes that any public detriment that may arise from the necessity to inhumanely destroy eggs and/or chickens would only occur in the event of a boycott actually occurring. As discussed above, the Tribunal believes there is a not insignificant probability that a collective boycott is likely to occur in the early periods following authorisation as parties test out and gain information about the potential impacts of a collective boycott authorisation. Accordingly, the Tribunal believes it is likely that public detriments could result on account of animal welfare considerations.
403 In the event that a collective boycott were to occur, the Tribunal agrees that there are measures Processors can take to attempt to minimise the extent to which eggs and/or chickens need to be inhumanely disposed. The Tribunal agrees that the condition attached to the authorisation that requires Growers to give their Processor 21 days notice of their intention to boycott assists in this regard. As with other measurers Processors might take to mitigate the effects of a collective boycott, however, such actions are unlikely to be costless.
404 Finally, the Tribunal notes that in the event that eggs and/or chickens do need to be disposed of inhumanely in the event of a collective boycott, it would be particularly difficult to measure the extent to which this would generate a public detriment. However, the Tribunal does accept that some public detriment would be likely to be generated in this event.
13.0 Comparing the counterfactual with the factual
405 In this section, the Tribunal brings together and compares its assessments of the future outcomes it believes would be likely in the markets for chicken-growing services in Victoria if the use of collective boycotts by VFF Grower groups was authorised (the factual) against those that would be likely if their use was not authorised (the counterfactual). It is this comparison of likely outcomes in “the future with and without” an authorisation which forms the basis of the Tribunal’s overall conclusions about whether there is likely to be “such a public benefit” that the ACCC’s authorisation (A90931) should be allowed to stand (albeit, possibly, with variations in the conditions attached to it) or should be set aside.
406 The Tribunal already has indicated, especially in sections 9 and 10 above, that potential benefits or detriments to the public that appropriately should be included in its assessment are not limited to those which derive from changes in the efficiency of market outcomes that might be likely in the factual compared to the counterfactual. However, the vast bulk of the evidence and submissions offered to us, in effect, involved contentions and counter-contentions about:
· the degree of market power available to, and likely to be used by, Processors in the absence of Growers possessing a collective boycott authorisation;
· the extent to which authorising Growers to use collective boycotts would give them countervailing power; and
· the consequences for the efficiency of market outcomes of any shift in the balance of market power that might occur if the use of collective boycotts by Growers was authorised.
407 Accordingly, we develop our overall conclusions principally around an assessment of the likely consequences for the efficiency of market outcomes, with and without a boycott authorisation, of the two distinct sources of market power argued by Growers to be possessed by Processors absent a collective boycott authorisation. However, along the way, we also encompass other possible incidental or consequential effects of authorising, in the factual, the use of collective boycotts by chicken growers.
13.1 Sources of market power
408 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.
409 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.
410 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
411 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.
412 A further consequence is that Growers will be likely to receive fees lower than they would if the demandfor 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).
413 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
414 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.
415 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.
416 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.
417 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).
418 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.
419 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.
420 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.
421 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 boycottauthorisation 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).
422 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.
423 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.
424 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.
425 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.
426 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.
427 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
428 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.
429 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).
430 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.
431 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.
432 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.
433 Augmenting a negotiation authorisation with aboycott 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
434 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.
435 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.
436 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.
437 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.
438 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.
439 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.
440 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.
441 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
442 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.
443 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.
444 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.
445 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.
446 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.
447 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.
448 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.
449 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.
450 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.
451 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.
452 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.
453 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.
454 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.
455 Accordingly, we have decided to set aside the ACCC’s authorisation enabling Growers to collective boycott (with conditions).
15.0 ACKNOWLEDGEMENTS
456 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.
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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:
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Counsel for the Victorian Farmers Federation: |
J E Middleton QC and P Fox |
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Solicitors for the Victorian Farmers Federation: |
Nevett Ford |
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Counsel for the Processors: |
C A Sweeney QC |
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Solicitors for the Processors: |
Spier Consulting Pty Ltd |
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Counsel for the Australian Competition and Consumer Commission |
D Star |
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Solicitors for the Australian Competition and Consumer Commission |
Australian Government Solicitor |
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Dates of Hearing: |
21, 22, 23, 24, 25 November 2005 |
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Date of Judgment: |
21 April 2006 |