Categories: Global Farming

What about collusion in the retail sector?

Large supermarket chains hold more than 70% of the market share nationally. They thus have the buying power to control…

The feedlot industry is the latest in a series of agricultural industries to be investigated by the Competition Commission (CompCom).

The CompCom started its work in 1998, and soon started to focus on the agriculture and food value chains.

This despite the Vink and Kirsten report to National Treasury in 2002, and the findings of the Food Price Monitoring Committee in 2003, both of which showed no profiteering on basic foodstuffs.

Instead, in a 2008 newsletter, Maphelo Rakhudu of the CompCom’s Enforcement Division said that, despite the far-reaching liberalisation of agricultural value chains, these appear to be “still largely characterised by anti-competitive outcomes”.

To date, the CompCom has investigated collusive behaviour in the bread, milling, dairy and poultry sectors. In many cases, stiff penalties were imposed on companies either found guilty or confessing and asking for leniency.

However, as farmers are the ultimate price-takers in the agricultural value chains, they are actually the group ‘paying’ the fines. And the market for farm produce is probably no more competitive than before the investigations.

The Competition Act No. 89 of 1998 specifies a number of practices that are prohibited. For example, companies may not enter into horizontal agreements that can result in fixing a purchase or selling price.

Agreements between companies in a vertical relationship are prohibited if these result in less competition.

The Act also prohibits the abuse of a firm’s dominant position by charging excessive prices, limiting access to its facilities for competitors, or engaging in any exclusionary acts.

Little done
A dominant firm is defined as one with a 45% market share or a 35% market share and market power. A company with a smaller market share, but with market power, can also be regarded as a dominant player.

After the Kirsten report was published, an investigation into the retail sector was announced, but in time, this died a silent death. Currently, there is an investigation into the role of the retail sector, but focusing more on the access of smaller firms to shopping malls, and less on the retail chains’ alleged misuse of their dominant position.

But the South African supermarket industry is highly concentrated, with the larger chains holding more than 70% of the national market share. They thus have the buying power to control pricing and trading conditions.

A recent study done by the University of Johannesburg found suppliers have to pay listing fees of between R4 500 and R45 000 a year for a single product.

A range of other fees is also levied on suppliers; these can add 10% to 15% to the price of a product sold to supermarkets. To date, the CompCom has done very little to address these issues.

Investigation into feedlots
The Competition Commission may or may not find evidence of collusion between the different feedlots. Whatever the case, the effect on farmers who produce and sell weaner calves will be the same.

The prices of calves will still differ very slightly between the different feedlots.

This is not necessarily proof of collusion, as all the major feedlots probably use similar models based on feed and meat prices to determine the maximum price they can pay for calves.

If the CompCom finds that some or all of the feedlots did contravene the Act, they will be fined, and the fines can be as high as 10% of the specific turnover. Again, because they are price-takers, chances are farmers will, in the end, pay the fine in terms of lower prices received.

The Competition Commission will do well to look into the role the major retail chains play in the SA agricultural and food value chains, rather than target other role players in the value chain.

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