Towards a fair and efficient economy for all

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Competition challenges in food and
agro-processing Presentation to Parliaments
Portfolio Committee on Economic
Development Shan Ramburuth Commissioner,
Competition Commission 10 November 2009
Towards a fair and efficient economy for all
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Overview

• Background
• High food prices
• Structure of the food market
• Commissions interventions
• Major cases
• Role of the state

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Background

• Regulation Agricultural marketing boards,
  co-ops
• Liberalisation in 1996, tariff reform trade
  agreements
• Effects of liberalisation since after 1996
• closing down of boards
• market concentration
• dominant private companies and co-ops
• surge in imports in processed foods
• SAFEX established
• cartels replaced public regulation

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High food prices contributory factors

• Availability of grains worldwide
• Increasing demand including from economic growth
  and biofuels
• Unfavorable climatic conditions
• Increasing energy and fuel costs transport
• Anti-competitive conduct in the agro-food chain
  including inputs

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The structure of food markets

• Historical oligopolies and virtual monopolies
• Increasing vertical integration and horizontal
  concentration
• Limited new entrants due to barriers such as
  access to capital and competing against
  established brands
• Transformation at the level of ownership in the
  established firms
• Incumbent firms leverage historical positions to
  extract profits and impose standards

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Commissions interventions

• Within mandate of the Competition Act
• Enforcement and exemptions, merger analysis,
  advocacy and market inquiries
• Prioritisation of the food value chain
• Impact on low income consumers
• A number of complaints
• Government interventions monitoring prices, task
  teams, industrial policy
• Research and scoping exercises show strong
  indications of anti-competitive conduct

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Major cases

• Fertilizer
• Tinplate and other inputs
• Bread and milling
• Grain storage and trading
• Dairy
• Poultry
• Fish
• Fats and Oils
• Food retail

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Fertilizer

• High levels of concentration in inputs to farming
• Fertilizer is the single largest input cost in
  production of crops such as maize, wheat
• Long-running cartel
• Foskor applied for leniency
• Sasol reached settlement with Commission, penalty
  of R250m
• Case proceeding against Omnia and Kynoch/Yara
• Local monopolies in main inputs (abuse of
  dominance )
• Ammonia production- Sasol charges inland import
  parity prices
• Phosphate rock- Foskor is settling

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Tinplate and other inputs

• Tinplate
• Tinplate is major cost in canned foods for local
  and export markets
• Tinplate pricing impacts heavily on
• local production by farmers e.g. in tinned
  tomatoes competing with imports, and canned fruit
  in export markets
• consumer prices of canned foods
• Sole local producer, ArcelorMittal SA, increased
  tinplate prices by around 70 in April 2009
  Commission investigation underway
• Other inputs to agricultural production being
  investigated
• Diesel
• Fencing wire
• Plastic irrigation piping

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Bread and milling

• CC initiated received a complaint
• Blue Ribbon (Premier), Albany (Tiger), Sasko
  (Pioneer), Sunbake (Foodcorp)
• Price fixing market allocation Western Cape
  national
• Progress
• Premier leniency in terms of CLP
• Tiger penalty of R98.8 m
• Foodcorp penalty of R45.4 m
• Pioneer defending case, closing arguments were
  heard in Sept. 2009
• Research findings that margins increased at
  processing and retail of milled products
• Initiated investigation in milling of wheat and
  maize, leniency application received,
  investigations being concluded

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Bread, flour and wheat prices, Rand per 700g
brown loaf
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Grain storage and trading

• Complaint received by trader against Senwes
• Abuse of dominance in the storage handling of
  grain linked with virtual monopoly positions of
  privatised co-ops
• Tribunal found exclusionary conduct related to
  independent traders of grain
• Tribunal decision being appealed at CAC
  awaiting CAC decision
• Other cases in grain storage under investigation
• Setting of storage prices for futures contracts
  in the industry association (GSI)
• RMB and Noordwes Kooperasie (alleged market
  allocation and price fixing)

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Dairy

• Commission referred complaint -Dec 2006
• Collusion abuse of dominance by processors
  (Clover, Parmalat, Lancewood, Woodlands, Nestle,
  Milkwood)
• Appear to have regulated the markets themselves
  following governments de-regulation
• Suppressing raw milk prices, raising barriers to
  entry through exclusive arrangements
• Case is currently tied up in legal processes

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Poultry

• Poultry industry main source of protein for
  majority
• Commission referred case against Astral and Elite
  in 2008
• Abuse of dominance, especially in breeding by
  engaging in exclusionary conduct
• Following extensive background research,
  investigations into different levels of the
  market including feed, breeding stock, broiler
  production, and poultry products

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Fish

• Pelagic fish historical single marketing
  channel in the 1990s known as Federal Marine.
  Deregulation led to competitors allocating brands
  through auction
• Initiation into pelagic fish at different levels
  of the market fishing, processing and retail
• Key concerns include exclusive agreements and
  alleged collusion
• Investigating allegation of export cartel in hake

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Edible vegetable fats and oils

• Initiated investigation against Unilever and 14
  others
• Retail price of cooking oil increased by 116
  between 2006 and 2008
• Allegations of collusion in vegetable oil
• Allegations of Unilever abusing dominance in
  margarine

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Supermarkets

• Public outcry about high food prices
• Complaint from Milk Producers Organisation
• Preliminary study
• Initiated complaint against major retail stores
  including Pick n Pay, Shoprite Checkers Spar
• Buyer Power Rebates listing costs
• Long term lease agreements raising entry
  barriers
• Category Management facilitating collusion
• Information Exchange role of market intelligence
  consultants

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Progress on major cases

Inputs Animal feed Poultry feed Yeast Tin plate Diesel Fertilizer Wire fencing Plastic irrigation piping Fertilizer
Production Poultry Milling Poultry
Storage/ Trading Grain Grain Grain
Processing Bread Fish Fats and oils Bread Dairy Bread Dairy Dairy
Retailing Fish Dairy Supermarkets Fats and oils
Investigation Hearing Settlement Decision Appeal/Review
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Commissions work

• High concentration levels prevail, barriers to
  entry, poor competitive outcomes
• Need to
• undermine cartels, opportunities for new entry
• examine the role of industry associations
• increase agricultural production by addressing
  effects of anti-competitive conduct on costs
• improve understanding across govt and relevant
  public institutions

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The role of the state

• Commission investigations uncover past conduct
  and its consequences
• Proactive measures required to increase
  competition and change outcomes
• This requires coordination on the part of
  government and public institutions, including
• Development finance to support new entry
• Leveraging government shareholding and support to
  encourage competitive conduct
• Supportive government interventions in economic
  infrastructure, RD, and skills development
• Procurement to support new entry
• Industrial and trade policy and regulation

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• Thank you!
• Tel [phone]
• Fax [phone]
• email shanr_at_compcom.co.za

Towards a fair and efficient economy for all