RURAL AFFAIRS: by Patrick J. ByrneNews Weekly
Farmers hit by supermarket price war
, April 16, 2011
Ballarat farmers blockaded McCain Foods with tractors to get a fair price for their potatoes, while Coles supermarket chain has slashed the price of milk, triggering a Senate inquiry.
Last month, Ballarat potato-farmers blockaded the local McCain Foods processing plant with their tractors after the company cut its offering price to farmers to $25 per tonne less than last year’s.
Gaining national media coverage, with Queensland independent federal MP, Bob Katter, leading the protest, McCain relented and offered a price slightly better than last year.
Local farmers argue that the downward pressure on prices by McCain has seen the number of growers in the region fall from 90 in 1990, to 43 today.
Meanwhile, Coles is using its market power to cut milk prices by up to 33 per cent as part of its “Prices are Down” campaign. Eggs are next on the list.
The outcry over the Coles campaign has resulted in a Senate inquiry.
John Durkan, Coles merchandise director, recently told the inquiry that the price cuts were about “bringing trust back to consumers, to Coles.” (ABC Rural News, March 29, 2011).
However, industry analysts told the Sydney Morning Herald’s Business Day (February 12, 2011) that they believe that Coles aims to extract at least $500 million from its supply network to underwrite the price cuts.
Following the Wesfarmers’ acquisition of Coles in 2007, a British team was brought in to revamp Coles on the advice of Archie Norman, the British supermarket executive accredited with turning around the Asda chain.
The team included Ian McLeod, now Coles chief executive officer.
A former Coles buyer, who has since left the company, told Business Day that if McLeod achieves his target, he could pick up a $38 million bonus at the end of his five-year term as CEO.
He said that McLeod and his team are “24 months away from the biggest pay day of their corporate careers. They have 24 months to turn around the bottom line and collect their bonuses. This is what the price war is about.”
Coles is squeezing food-processors and supply agents at the same time as rising costs of wages, electricity and commodities are erasing the profits of suppliers and farmers.
After a recent heated Senate hearing into dairy price cuts, Senator Nick Xenophon suggested that the near duopoly of Coles and Woolworths should be broken up.
He asked, “Why is it that, in the United States, the law does not permit any player to have more than 20 per cent of the marketplace, [and] we’ve got two here that control 80 per cent?”
Liberal Senator Bill Heffernan also suggested breaking up the two dominant supermarkets.
University of NSW associate professor, Frank Zumbo, told the Senate inquiry that the slashing of milk prices was just a small part of a whole raft of economic problems caused by the inaction of the Australian Competition and Consumer Commission (ACCC).
He said, “There is a common thread in the current problems we face with milk, groceries and banks. It’s a failure by the ACCC to stop increasing consolidation of these markets before they become more concentrated.
“As they become more concentrated, these markets are characterised by oligopolies.”
Dr Zumbo said Coles had discounted 5,000 products, but failed to disclose what price changes it had made to its other 15,000 products.
Meanwhile, an attempt by the Coles Group liquor outlets to sell beer at $28 a slab saw Fosters temporarily refuse to supply the chain. Coles relented almost immediately, then denied there was any such plan.
Fosters supplies around half Australia’s beer. It was able to use its market power to go on “strike” and prevent the price cuts to its brands.
In contrast, most farmers have almost no market power with which to bargain a fair farm-gate price.
Ballarat potato-farmers are locked into low margin contracts to supply a single, patented potato variety to McCain Foods. Further, the price for their crop is negotiated after farmers have committed their farms to producing potatoes for the next season.
Dairy farmers cannot withhold milk supplies. If they stop milking, their cows could die of mastitis.
Having only limited storage capacity on the farm, if farmers stopped supplying the dairy factory, they would have to dump their milk, polluting the land and nearby creeks. The latter could see them liable to prosecution under environmental protection laws.
The last time Victorian dairy farmers went on “strike” in the 1980s, Premier John Cain declared a state of emergency, forcing farmers to supply the cities.
When it comes to most food products, supermarkets hold all the bargaining chips.
Neither the ACCC nor the federal government has done anything to curb these supermarket chains’ market power. At the same time, under national competition policy, it has allowed farmers to be stripped of what little bargaining power they once possessed.
Patrick J. Byrne is vice-president of the National Civic Council.