Mick Keogh, Australian Competition & Consumer Commission: Improving the competitiveness of the Australian cattle and beef industry
MICK KEOGH: Australian agricultural sectors have undergone a great deal of change over the last couple of decades. Markets have deregulated. Infrastructure and services have been privatised. Farm input sectors and commodity markets have become more concentrated and globalised.
Whenever a sector goes through a significant change, issues arise about the level of competition and the resulting distribution of benefits to different participants within that sector. These are issues that the Australian Competition and Consumer Commission has a role in determining. And most recently, this has involved the ACCC conducting a detailed market study into the Australian cattle and beef sector.
Before discussing the results of that study, I want to first clarify what is meant by the term "competition" and why it's important. There are different concepts of competition. An obvious one that comes to mind is a football game, as Ralph has been alluding to, where two teams compete to score the most points by the end of the game.
For consumers, competition means having options. Different products to buy, suppliers to supply them, and different features and prices to select from. This applies equally to farmers who want options when purchasing inputs or when selling farm products. Both these examples involve rivalry, where market participants use various methods and tactics to get a win. Whether it's points on a score board, or sales, or a higher price, the rivalry forces competitors to find better ways of doing things.
Without rivalry, we would end up like the early buyers of cars in the USA, when a Model T Ford was the only one available. In response to questions about colour options, Henry Ford is reputed to have said, "They can have any colour car they like as long as it's black."
In reality, the difference in performance between modern motor cars and a Model T Ford is all due to the rivalry that is inevitable with competition. In markets where competition is poor and rivalry limited, then consumers, including farmers, will have less choice.
Conversely, in markets where there is a high level of competition, the reverse is true. So what does a competitive market look like? A good example might be a [? winner ?] cattle sale, which has multiple sellers and multiple buyers. The sellers are rivals and know they have to present good, quality stock in order to attract higher prices, while the buyers are also rivals and know they have to offer competitive prices in order to buy the better animals.
In markets like this, no one seller or buyer has what is referred to as market power, which is the ability to demand higher prices or to pay less than the prevailing market price. In reality, few markets are structured the way that [? winner ?] cattle sale is. And for that reason, governments have implemented competition policies to protect and improve the competitiveness of markets. These involve a range of different policy instruments that extend from regulated pricing and access arrangements in monopoly markets such as railways and ports, through to measures such as price monitoring and information transparency in markets where competition is stronger, although still limited.
However, it's important to remember that competition policy is not about the pursuit of competition for its own sake. And the aims of improving competition are to achieve greater economic efficiency and growth. And that applies at a national level or within a sector.
Against that background, I want to turn to the ACCC market study into the beef and cattle industry. Market studies are an important part of the ACCC's work. The cattle and beef market study is the first of what we anticipate will be a number conducted across the agricultural sector.
ACCC commenced the cattle and beef market study in response to a combination of issues, including those raised through the 2015 Senate inquiry into the red meat processing sector as well as the ACCC's own work. We examined competition, efficiency, transparency, and trading issues throughout the supply chain. We relied on the voluntary provision of information.
While I was happy with the level of engagement from the industry, we did not receive sufficient data, for example, to analyse in detailed nature the profits and margins along the supply chain. This might disappoint some people, but there are plenty other issues we had to look into.
In general, the beef cattle market in Australia operates well. Though, a range of concerns became evident throughout the course of the study.
Lack of transparency in pricing. While the market reporting system for major sale yards is comprehensive and timely, over the hooks and paddock sale prices are not reported in an adequate manner. Over the hooks price reports are essentially indicative quotes provided by processes that are aggregated by state on a weekly basis and are not actual prices paid. In the case of paddock sales, and virtually all sales in the live export market, for example, there is almost no market reporting at all. The lack of transparency in these markets is a significant weakness from a competitive perspective.
In many instances, there are just two or three buyers operating in a region. Yet, upwards of 90% of cattle sold for slaughter are sold over the hooks and almost all live export cattle are sold via paddock sales.
Pricing complexity. The prices that processes offer cattle producers are made available in the forms of pricing grids, which identify a matrix of prices that vary by weight and a range of other characteristics. Those are often quite complex and difficult to actually translate into prices for livestock. The complexity of pricing grids rises two issues relevant to competition.
The first is the extent to which cattle producers can access these and use them to make meaningful comparisons between prices on offer from different processes. And the second is the ability of cattle producers to reconcile the prices they receive with the prices offered on the grids.
Even the operators of large-scale beef enterprises commented to us on the challenges created by the complex price grids and feedback sheets. And this has the potential to lessen competition in these markets.
Conflicts of interest in grading and pricing. Carcass grading for the purpose of determining prices for over the hook sales is carried out by processor employees, who have an inherent conflict of interest. We note that the system currently has comprehensive oversight by AUS-MEAT. Although, cattle producers do not understand the system well, and many lack confidence in the objectivity and fairness of the grading system.
Lack of formal dispute resolution processes. In situations where disputes arise about over the hook sales or, indeed, other selling methods, including online sales, the ACCC found that while there are some companies that have dispute resolution procedures in place, many do not. And none involve independent arbitration processes. This has the potential to create situations where anti-competitive behaviour can occur and lead to perceptions of an unfair market.
Conflict of interest for livestock agents. In some instances, we found that livestock agents act for both the seller and the buyer of cattle simultaneously. In such a situation, the agent is inherently conflicted, especially if either or both buyer and seller are unaware of the situation. Again, this has the potential to result in anti-competitive behaviour, and to undermine seller's confidence in the market.
Conflicts of interest for commission buyers. Despite reassurances from commission buyers that they do not purchase for overlapping orders at sale yards, analysis of a small sample of transactions at a major sale yard showed that this, in fact, may be quite common. While commissioned buyers enable greater efficiency in cattle procurement, especially at smaller sale yards, these practises have the potential to reduce competition to the disadvantage of cattle producers.
Anti-competitive behaviour in the sale yards. Throughout the course of the market study, the ACCC was informed of instances of alleged anti-competitive behaviour. And the ACCC is currently considering a number of these as part of an investigatory process.
So in summary, Australian cattle beef and cattle and beef markets were found to be generally competitive. Although, this varies by region and by market segment. The issues and practises our study identified, however, have the potential to reduce competition in the industry and require some attention.
A failure to adequately tackle instances of anti-competitive behaviour will place the reputation of the entire industry at risk as the Australian banking sector is currently discovering. The ACCC has formulated 15 recommendations arising from the study that we believe will help address the issues identified. And I want to talk about a few of them now.
Pricing grids being made publicly available. Some processes are currently making their pricing grids available and easy to access. Others requires you to contact a buyer or go through an agent. We reached a conclusion that all processes and other made major purchases of prime cattle should make their price grids publicly available in a timely manner so that they're easy to access for producers. This will certainly increase producer's ability to access and compare prices, will increase price discovery, and the ability of producers to negotiate and make informed and timely decisions about who to sell their cattle to.
Related to that recommendation is one that considers that pricing grids should be made more simple and easy to interpret. And certainly, that was a common issue that was raised by a lot of people that the complexity of pricing grids created that uncertainty about what the actual return from stock might be. And it was very difficult to interpret whether, in fact, the price received coincided with what the grid provided.
We believe that these improvements will improve transparency and the ability of producers to negotiate and make informed choices about who to sell their cattle to. Related to those recommendations are recommendations around the improvement of market reporting.
In particular, the report or the-- review recommended that the reporting of cattle prices across sales channels on the same basis should occur so that indicative prices for each channel are easily comparable. So what we mean by that is at the present time, the reporting classes for, for example, auction sales and over the hook sales are different. So you can't necessarily compare like for like in different sales channels. We believe that that should be addressed.
And there is also the opportunity to improve reporting through the supply chain, including at wholesale, retail, and export level. MLA's ability to improve market reporting will depend on the quality of information provided to it by other industry participants, such as live exporters, processes, and retailers.
The ACCC welcomes progress made on some of these measures as recommended in its interim report. These include improvements made by MLA to the market reports and prices section of its website.
We still believe there is additional market reporting needed in relation to paddock sales, over the hook sales, and cattle sold to the live export market. We did not go down the track of recommending mandatory price reporting as is the case in the US market for a number of reasons.
The principal one being that the market reports in the US refer to a much narrower range of stock than would be the case in Australia. Essentially, their market reporting refers to full-weight stock being sold out of feed lots for slaughter. Whereas, the Australian market is obviously a lot more complex. And that raises questions about the costs and benefits associated with mandatory reporting.
Objective carcass measurement should be prioritised. The introduction of objective carcass measurement technology should be prioritised by the industry and adopted by all processes in a consistent manner as soon as possible. Objective carcass measurement technology will increase accuracy and transparency of value assessments, and appropriate auditing and verification systems will we needed to support the technology.
The ACCC notes the moves made by MLA to introduce objective carcass measured technology throughout the industry as recommended in our report. Related to that, the recommendation from the ACCC is that objective carcass measurement data should be able to be shared. Measurement data produced as a result of objective carcass measurement should be shared for the benefit of the industry. The data produced as a result of objective carcass grading will be of wider benefit to the industry if aggregated and shared.
For example, producers would be able to measure their own performance against the rest of the industry, and to make any production adjustments necessary to achieve higher cattle grades and prices. They would also be able to obtain comparable carcass performance data, even for stock sold to different processes.
Uniform dispute resolution system. The recommendation made by the ACCC is the Red Meat Advisory Council should develop a uniform an independent complaints and dispute resolution process. An independent system, in addition to processes and systems, would provide an additional and independent dispute resolution option for the industry.
The independent system should apply to all purchasers and sellers of cattle, including for over the hooks and electronic cattle sales. The Red Meat Advisory Council, AUS-MEAT, and buyers should provide information about how parties can use the independent process as part of their information to the industry.
Carcass grading audits. The review team spent a lot of time going into detail about AUS-MEAT audit systems and how they operated, including spending quite a bit of time within a processing works with the AUS-MEAT auditors. I think the conclusion reached from that was, in fact, the audit system is pretty robust when it comes to assessing the skill of the carcass assessor. What it doesn't necessarily do is provide a complete picture on the performance of that assessor in a commercial environment.
Bearing that in mind, the recommendation is that increased communication and education about the process by AUS-MEAT auditors and the process is needed. We still see room for increasing the number of random AUS-MEAT audits of the grading system and standard trim. And we think publication of audit results relating to grading and standard trim would also benefit the industry.
We made a number of recommendations about carcass feedback and simplification of that. When it came to the sale yards, a couple of the matters I think are worth talking about.
We recognised the importance of commission buyers to the operations of sale yards, but also recognised the potential for anti-competitive outcomes arising from their activities. So the recommendation that we came up with was for a mandatory buyer's register that should be available prior to the commencement of all physical livestock options. A buyer's register will increase transparency at sale yards and reduce the risks of conflict of interest.
This register should include details of commissioned buyers and livestock agents intending to be at the sale, and the principles that those commissioned buyers will be acting for. And we recommend the agency organisations take steps to implement that.
And coupled with that, we recommended more detail reporting of sale yard purchases. So sale yards, commissioned buyers, auctioneers, and agents should provide MLA with information that enables regular standardised market reports for each reported sale yard, which includes information about the identity of buyers and the proportion of stock purchased by each buyer. This will increase transparency at the sale yards and reduce the likelihood of conflicts of interest occurring. It will also allow principals and producers to make informed decisions about the commissioned buyers or sale yards that they use for cattle transactions.
The issue of the performance of livestock agents and the potential conflicts of interest came up on a regular basis. The recommendation arrived at on that matter was that legislation should be introduced requiring standardised national licencing of livestock agents, professional buyers, and livestock auctioneers. This has been attempted by the industry, and I would give credit to the agents in relation to this. They've certainly sought some standardised national accreditation for participants like that in the industry.
We believe if the recommendation was adopted, it would raise the levels of competition, compliance, and general professionalism within the industry. And as noted, we understand there has been unsuccessful attempts to achieve that in the past.
Finally, our concern was that in handing down this report, whilst we can make recommendations, the ACCC isn't really in a position to implement those recommendations. So in regard to that, we've made a recommendation that the Red Meat Advisory Council should have prime responsibility for overseeing the implementation and for monitoring compliance with these. And to that end, we recommended the Read Meat Advisory Council should report progress annually to state and territory federal ministers. We feel this will ensure that the recommendations are progressed, given divergent industry interests.