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Review of the authorisation for chicken meat industry collective

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Public Benefit Test report

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Review of the authorisation for chicken meat industry collective negotiations in Queensland

Public Benefit Test report 2

CS0417 05/11

© The State of Queensland, Department of Employment, Economic Development and Innovation, 2011.

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Contents

1 Background 4

2 Impact assessment 5

2.1 Assessment of the industry with collective bargaining 5 2.1.1 National market characteristics 5 2.1.2 Queensland market characteristics 6 2.1.3 Summary 8 2.2 Assessment of the industry without collective bargaining 8 2.2.1 Market characteristics 8 2.2.2 Summary 10 2.3 Public consultation 10 2.4 Conclusion—assessment of ‘with’ and ‘without’ cases 10

3 Authorisations in other states 12

3.1 New South Wales 12 3.2 Victoria 13 3.3 South Australia 15 3.4 Tasmania 16 3.5 Western Australia 17 3.6 Summary 18

4 Findings and recommendation 19

References 20

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1 Background In 1995, the Queensland Government and other Australian governments endorsed a suite of legislative and administrative arrangements to implement the National Competition Policy (NCP). At the Council of Australian Governments (COAG) meeting in February 2006, these governments reaffirmed their commitment to NCP, including the principles contained in the Competition Principles Agreement (CPA). In accordance with the CPA, governments must systematically review legislation that restricts competition at least once every 10 years to ensure it remains consistent with the guiding principle that legislation should not restrict competition unless it can be demonstrated that:

• the benefits of the restriction to the community as a whole outweigh the costs, and • the objectives of the legislation can only be achieved by restricting competition.

The Public Benefit Test (PBT) is the mechanism for conducting this review process. A PBT has been undertaken as part of the review of the Chicken Meat Industry Committee Act 1976 (CMIC Act). The CMIC Act contains a statutory authorisation for anti-competitive conduct that might otherwise be in breach of the Commonwealth’s Competition and Consumer Act 2010 (CCA). The authorisation provides for collective negotiations within the Queensland chicken meat industry. Collective bargaining refers to an arrangement under which two or more competitors in an industry come together to negotiate terms and conditions (which can include price) with a supplier or customer. The PBT examines the impacts of the collective-bargaining provisions and the likely impacts that would result if this conduct was no longer authorised for the purposes of the CCA. Ownership of Queensland’s chicken meat processing sector is highly concentrated. In Queensland there are just three major processing companies. About 93 farms in Queensland supply meat chickens to processors on a contract basis. Participants along and through the chicken meat supply chain include chicken meat processors, chicken meat growers, retailers and consumers of chicken meat, the financial sector and other supporting industries. A key characteristic of the chicken meat industry is that growers (apart from company farm operators) are, in the main, suppliers of technical on-farm services under contract to a processor. The processor remains in ownership or control of large and vital parts of the production process. The Queensland chicken meat industry has operated under the CMIC Act since 1976. The objectives of the CMIC Act include the stabilisation of the chicken meat industry and the establishment of the Chicken Meat Industry Committee (CMIC). The primary function of the CMIC is to facilitate collective negotiations for agreements. The CMIC itself does not engage in negotiations between groups of growers and a processor, nor does it determine growing fees. The CMIC Act was last reviewed in 1997–98. One of the conclusions from that review was that there was a net public benefit from allowing collective negotiations between a chicken meat processor and a group of growers to continue in Queensland. At that time, ownership of the chicken meat processing sector was highly concentrated. Processors held considerable market power, therefore countervailing measures were justified.

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2 Impact assessment

2.1 Assessment of the industry with collective bargaining In Queensland, chicken meat processors may only receive or purchase chickens from a chicken meat grower under a written agreement and growers may only sell or supply chickens to a processor under a written agreement. Growers may collectively negotiate with processors on the terms and conditions of growing contracts (written agreements). The collective-bargaining authorisation does not oblige growers to participate in collective negotiations. A grower can choose to initiate negotiations with a processor on an individual basis or to opt out of a collective agreement to undertake negotiations with a processor on an individual basis. Also, a processor may choose not to participate in negotiations with a collective group. The CMIC Act, under section 22, states:

The following are specifically authorised for the competition legislation—

(a) collective negotiations for making a negotiated agreement, or making a negotiated agreement, or giving effect to a provision of a negotiated agreement, that has the purpose of, or would have or be likely to have the effect of, substantially lessening competition;

(b) collective negotiations for making a negotiated agreement, or making a negotiated agreement, or giving effect to a provision of a negotiated agreement, to the extent it has the purpose, or has or is likely to have the effect of, fixing, controlling or maintaining or providing for the fixing, controlling or maintaining of, the price for, or a discount, allowance, rebate or credit for, the supply or acquisition of broiler chickens.

2.1.1 National market characteristics

During the last decade there was significant consolidation of ownership in the processing sector. This has put 63% of total market share in the hands of the industry’s two largest processors, Baiada Poultry and Inghams Enterprises. Consequently, industry ownership is highly concentrated at the processing sector level. The process of consolidation saw Bartter Holdings acquire 50% of Steggles from Goodman Fielder in 1999; in 2006, Bartter obtained the remaining 50% from OSI International Foods. Also in 2006, Baiada successfully acquired Marven Poultry and Eatmore Poultry. In July 2009, Baiada (the third largest industry player at that time) acquired Bartter Holdings (the second largest). This acquisition resulted in Baiada becoming the largest industry processor, a position previously enjoyed by Inghams. However, the Australian Competition and Consumer Commission (ACCC) imposed a condition on the Baiada acquisition. This was that it excluded Bartter’s Victorian processing operations, and so these were acquired by La Ionica. The ownership concentration of the largest processors in the industry suggests that considerable market power resides with these major industry players and that therefore they have considerable bargaining power relative to contract chicken growers. Baiada and Inghams are national processors with operations in New South Wales, Queensland, Victoria, South Australia and Western Australia. Together they produce more than 80% of Australia’s chicken meat. National processors are able to source product from other regions if required.

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The processor business involves more than owning a processing plant. It relies on hatcheries being close enough to deliver day-old chicks to grower farms. Also, slaughter weight chickens must be delivered from the farms to the processing plant. Processors provide all the feed inputs and veterinary supplies needed in the growing process and they own the chickens. In contrast, contract growers own the farms and provide the labour, sheds, utilities and management skills for chicken growing. In contrast to the market for chicken meat, which is national, the market for contract grower services is limited to a specific geographic location. Further, at the individual operator level, contract growers are effectively tied to one processor at a time, or at least for the life of a contract. Ideally, grower regions should be close to processing facilities. This will:

• limit transport costs (e.g. transporting chicks from the hatcheries to the farms, feed from the mills to the farms and mature broilers from the farms to the processing facilities)

• facilitate the management of logistics/turnaround times for picking up and processing the broilers

• help meet animal welfare requirements in relation to transport of live birds. The Australian chicken meat industry may be best classified as comprising many separate regional monopsonies. A monopsony is a market characterised by a large number of sellers (i.e. chicken growers) selling to a single buyer (i.e. the processor company to which the growers are contracted to provide ‘growing’ services). The total investment by contract growers in Australia is estimated at about 40% of total industry investment. However, individual contract chicken growers do not have the financial resources of the major processor businesses, as they are predominantly family-owned and family-operated businesses. Capital costs in the industry are high. The establishment cost for a chicken meat processing plant is likely to be $50–$60 million. The establishment of a tunnel ventilated shed with an annual throughput of 200 000 birds may cost up to $600 000, not including land costs. Chicken growers who have invested in three to five sheds may need a long-term commercial relationship with a processor to meet their financial obligations, and such a period would exceed the term of a typical grower–processor agreement. In 2009, the national annual per capita consumption of poultry meat was 37.4 kilograms. This consumption was greater than consumption of any other meat protein. Comparatively high per capita consumption is associated with high and consistent quality and lower price. Over the last decade there has been decrease in the real price paid by consumers for chicken meat.

2.1.2 Queensland market characteristics

The market characteristics of the Queensland chicken processing operations and contract grower services sector are virtually identical to those of the national chicken meat industry. Ownership of Queensland’s chicken meat processing sector is also highly concentrated. In Queensland there are just three major processing companies: Inghams, Baiada and Golden Cockerel (comprising Darwalla Milling Co. and Woodlands Enterprises). These are all located in south-eastern Queensland. Golden Cockerel relies mainly on company farms and as such is not a significant user of contract grower services.

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About 93 chicken growing farms supply Queensland’s chicken meat processors (mainly Inghams and Baiada). Growers provide services to one processor at a time and are bound by contract. They operate in a monopsony market environment. Each processor is generally buying grower services from many growers at the same time, but individual growers are tied by contract to trading with only one processor. Competition among processors for the acquisition of chicken grower services is minimal in Queensland. Processors are able to increase growing capacity in the following ways:

• ‘Borrow’ or inherit growers from another processor who has or is about to lose a customer contract, or trade with other processors for live and processed broilers.

• Reallocate inputs from the supply of one customer segment to another. • Arrange for growers to increase the shedding on their existing farms. • Engage new growers and farms. Growers are unlikely to switch from one processor to another until their contract has expired. This implies that there is a higher level of financial risk for growers than there is for processors in terms of holding and renewing contracts. Simply put, growers have little or no realistic opportunity of switching and selling their services to a different processor. An important characteristic of the market for contract chicken grower services is that there are very few examples of growers changing processors or of processors enticing growers to switch processors. The nature of the farm infrastructure and its specific purpose constrains growers from exiting the grower services sector and using their farm assets in alternative agricultural enterprises. These constraints allow growers little flexibility to bargain on terms and conditions of agreements with their processors. In contrast, the major processor operations have many suppliers of grower services and therefore an ability to vary their demand for individual grower services. In Queensland, there has been significant capital investment by processors in processing capacity and new technology. For example, in 2008 Inghams increased production at their East Brisbane plant with a $13 million expansion, creating 210 new jobs. Excessive use of processor bargaining power does not generally occur in Queensland. The CMIC Act requires that there be written agreements for the receipt of meat chickens in Queensland; this promotes responsible corporate behaviour. Also, there is now a long history of growers and processors working under the collective-bargaining process, which provides a countervailing measure. Under the CMIC Act, contact chicken meat growers may collectively negotiate with processors on the terms and conditions of growing contracts or they may opt out of collective agreements to undertake negotiations with processors on an individual basis. In addition, negotiating groups operate independently of each other, and are aligned to the processor that they supply. It is generally believed that the CMIC Act, including the collective-negotiation arrangements, has facilitated a higher level of interdependence and goodwill between growers and processors. The evidence for this is the stability and growth in the Queensland industry.

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Over the last 10 years, the poultry meat industry has grown at a rate of around 7% per annum. This rate of growth is predicted to continue over the next 10 years, based on continued population growth and consumer preference. It is estimated that to supply this forecast growth in demand for chicken meat, about eleven new sheds (or two new farms) per year will be needed in Queensland. The buyers of processed chicken meat can be classified into the following broad categories:

• supermarkets • quick-service restaurants • the food service industry • wholesale distributors and deboning rooms • butchers, delicatessens and specialty poultry retail shops.

The last CMIC Act review concluded that growing cost represented 21% of live bird meat cost and 14% of total delivered meat costs. This was equivalent to around 10% of the retail price of chicken meat. Therefore, the restrictive impact of collective bargaining over processor–grower agreements on the retail price of chicken meat would be minimal.

2.1.3 Summary

There has been increasing concentration of ownership by chicken meat processors in the national market. The ACCC has put conditions on recent corporate mergers. The large chicken meat processors operate in a national market. Contract chicken meat growers are physically constrained to smaller regions and do not influence the national market for chicken meat. The market for chicken grower services is a monopsony. Very few chicken meat growers switch between processors. Under the existing Queensland arrangements, participation in collective-negotiation arrangements is voluntary. There has been continual investment in new technology, resulting in increased industry productivity. The industry continues to grow in response to increased consumer demand for chicken meat. Real prices paid by consumers for chicken meat have decreased over the last 10 years.

2.2 Assessment of the industry without collective bargaining This section considers the likely structure of the chicken meat industry in Queensland if there is no authorisation for collective bargaining.

2.2.1 Market characteristics

Prior to the introduction of the CMIC Act in 1976, Queensland’s chicken meat industry was characterised by continual disagreement between growers and processors. Specifically, this disagreement was over what constituted a fair and equitable return to growers (including the growing fee paid for broiler chickens) and the terms and renewal of formal growing agreements. Importantly, there are fewer participants in the industry now than there were in the 1970s. Also, there is a high level of interdependence, and there has been an evolution in grower–processor relationships. Generally today, industry participants operate at a larger throughput and, consequently, have significantly greater capital investment.

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It is unlikely that the industry would return to the high level of disputes that existed prior to 1976. However, the nature of the business is unchanged and there is a risk that instability could return to the industry if countervailing mechanisms were not in place. It could be argued that the current commercial goodwill between growers and processors has been generated because of the increase in demand for chicken meat to the extent there is potential for undersupply in the market. However, if the market entered a period of oversupply, this commercial goodwill could diminish and processors could choose to exercise their market power. The current concentration of processor ownership means that the market power in the processing sector is greater than it was in the past. Processor bargaining power is increased further by the fact that a grower has significant switching costs when changing to another processor. These costs are generally borne by the grower. If there was no collective bargaining for chicken growers, there would be an imbalance in bargaining power in favour of processors. This may result in processors offering standard contracts to growers with little input from growers into the terms and conditions. If a grower was not happy with the terms and conditions of contract offered by their processor, they would have little capacity to refuse the offer. This is because their assets are specific to chicken growing and the cost of adapting them for an alternative use is high. Failure to negotiate a mutually satisfactory agreement would not place a processor’s business at the same commercial risk as it would a grower’s. Processors are large, well-resourced businesses with significant commercial and negotiating expertise. In comparison, grower businesses are relatively small and have limited access to resources. It is expected that, in general, individual growers would be less effective in negotiating with processors than a grower group would be. If chicken growers do not have an authorisation to collective bargain, they are likely be affected by:

• changes in arrangements in negotiating terms and conditions with their processors • increased transaction costs • adjustment costs • risk of industry instability. Without the authorisation to form negotiation groups and collectively negotiate terms and conditions of growing contracts, the individual transaction costs of contract growers will increase. Processors may incur higher individual transaction costs because they are negotiating one-on-one contracts. They would be negotiating with a large number of individuals, which is likely to result in higher transaction costs and loss of efficiency in the process. Also, it is likely that there would be costs associated with structural change as the industry adjusts to an operating environment without collective negotiation. There would be few or no opportunities for growers to adjust because their operations are limited to their geographical markets. In contrast, processors would have more adjustment options open to them. For example, processors will be able to adjust processing capacity. This opportunity would be greatest for the large processors, who could vary processing capacity across all their facilities and then transport fresh and frozen product around the country to fill gaps in supply.

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2.2.2 Summary

The current concentration of processor ownership means that the market power in the processing sector is greater than it was in the past. The large chicken meat processors operate in a national market. Contract growers are physically constrained to regions and do not influence the national market for chicken meat; the market for chicken grower services is a monopsony. From a historical perspective, a chicken meat industry without collective-bargaining arrangements creates greater uncertainty for contract growers. Therefore, there is less incentive for existing growers to expand/invest/innovate. If there was no collective bargaining in Queensland for chicken growers, there would be an imbalance in bargaining power in favour of processors. The individual transaction costs of contract growers would be higher as they negotiate individual agreements; this increases the aggregate cost of business. Processors may incur higher individual transaction costs because they are negotiating one-on-one contracts.

2.3 Public consultation In conjunction with a wider review of the CMIC Act, stakeholders were asked to submit their views on the continuing need for an authorisation for voluntary collective negotiations between chicken meat growers and processors. All submissions to the review argued that industry has benefited from the statutory authorisation and functions of the CMIC established by the CMIC Act. The general conclusion was that transaction efficiencies are being achieved through the collective negotiation of contracts, and that there has been an evolution of goodwill in grower–processor relationships under the existing arrangements. The CMIC is a statutory committee with an independent chair and an equal number of grower and processor representatives. In its submission to the review, the CMIC acknowledged that there is a significant imbalance in the bargaining power of processors and growers. Also, the CMIC supported the retention of the statutory collective-bargaining authorisation as an effective mechanism to manage this imbalance. The consensus of the major processors was included in the CMIC submission. Grower submissions concurred that collective bargaining under a statutory authorisation has contributed to industry stability and that the mechanism was supported by the legislative requirement for written contracts. The grower submissions in particular maintained that there are specific structural characteristics associated with the chicken meat grower services sector that resulted in individual growers having less bargaining power than processors.

2.4 Conclusion—assessment of ‘with’ and ‘without’ cases The key characteristic of the industry is the imbalance in bargaining power in favour of chicken meat processors over growers. This imbalance is further magnified because the growers are only suppliers of a growing service and have little influence in the supply chain. Growers are vulnerable

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because they have invested in significant assets that cannot easily be used for purposes other than chicken growing. If the imbalance in bargaining powers between processors and growers is left unaddressed, there will be a high risk of industry instability and of prolonged and costly legal disputes in the future. Collective bargaining provides an efficient and effective countervailing mechanism to address the imbalance in market powers. There is a weight of historical evidence indicating that the authorisation for chicken meat growers and processors to collectively negotiate in Queensland has provided an efficient and effective mechanism to address the imbalance in market powers. There are no negative impacts on consumers when the chicken meat industry operates with an authorisation to collectively negotiate. Any increase in grower fees that may arise as a result of collective negotiations is outweighed by the efficiencies gained in having collective negotiations. These efficiencies result from reduced transaction costs and reduced likelihood of disputes. There is no evidence of any detriment to consumer choice arising from collective bargaining between chicken meat growers and processors. In Queensland, a move to a situation without authorisation to collectively bargain would increase costs for the chicken meat industry. In addition, there would be greater uncertainty for contract growers, which would reduce their incentive to expand and innovate. There is no public detriment associated with authorised collective bargaining in the chicken meat industry in Queensland.

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3 Authorisations in other states Over the last 40 years, all Australian state jurisdictions have considered, at different times, the question of the imbalance in bargaining power between chicken meat processors and growers, and what approach, if any, should be used as a countervailing measure.

3.1 New South Wales In New South Wales, the Poultry Meat Industry Act 1986 (PMI Act) regulates the relationship between chicken meat growers and processors. New South Wales has about five significant processors and 285 independent poultry growers. Growers generally bargain collectively with their processor along regional lines. It is typical for a grower to remain with the same processor for the life of their farm. Since its commencement, the PMI Act has been reviewed four times: in 1999, 2001, 2004 and 2010. The 1999 review was undertaken to fulfil the New South Wales Government’s commitments under the NCP. The review recommended that the Act be retained. The review in 2001 resulted in amendments modifying but not abolishing price setting and the determination of base rates. A significant change was the commencement of statutory authorisation provisions for collective negotiations between chicken meat growers and processors. This authorisation applied to the negotiation of standard growing agreements (including the agreement of a common fee) in accordance with a code of practice and minimum contract guidelines. However, an application (A90800) for collective-bargaining authorisation was made to the ACCC in September 2001 by Inghams on behalf of itself and seven other chicken meat processing companies operating in New South Wales. The application was expressed to also cover all current and future growers contracted to Inghams and was requested for a period of 5 years. The ACCC dismissed this application on the grounds that the industry would still operate under the arrangements contained in the PMI Act and that the granting of the authorisation would not result in the expected public benefits. In 2004 a further review was undertaken with a view to changing the PMI Act to meet the state’s obligations under the CPA. The review found that poultry growers remained in a weak bargaining position relative to processors in relation to the negotiation of prices and terms and conditions of supply. The PMI Act requires the notification of grower agreements and their registration with the Director-General of the New South Wales Department of Agriculture within 1 month of being finalised. Registration attracts a notification fee, which is paid into the state consolidated revenue fund. Amendments in 2005 included the requirement for the Poultry Meat Industry Committee (PMIC) to establish a code of practice for use in the conduct of negotiations between processors and growers. Standard provisions for poultry-growing agreements are outlined in the state’s Poultry Meat Industry Regulation 2008. A code of practice and accompanying guidelines were finalised in 2008i. Another review of the PMI Act was undertaken in 2010. It considered keeping the existing legislation or repealing it. In the latter it would either:

i www.dpi.nsw.gov.au

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• establish an industry body to provide services to the industry to assist with the transition to a deregulated market coupled with self-regulation (e.g. a voluntary code of practice), or

• utilise protections provided under the federal system through the ACCC. It is understood that the 2010 review report was provided to the relevant New South Wales minister, who has asked for an internal review of some further matters. However, this process was interrupted by the 2011 state election.

3.2 Victoria In 1999, an NCP review of the Victorian Broiler Chicken Industry Act 1978 (BCI Act) recommended that the legislation be repealed. This NCP review also suggested that the legislated arrangements may be in breach of the anti-competitive provisions of the Competition and Consumer Act. The Victorian Government considered the NCP review recommendations and expressed its preference for ACCC authorisation to allow collective negotiation at a processor enterprise level. In anticipation of industry deregulation, Marven Poultry lodged an application on behalf of itself and the five other chicken meat processing companies operating in Victoria as well as their respective growers who chose to operate under the proposed arrangements. The ACCC considered that while the proposed collective-negotiation arrangements may reduce the scope for competition over rates of payment and other terms and conditions between growers, the nature of the arrangements and industry structure would limit the anti-competitive detriment. While collective negotiations would have the potential to limit competition among each individual processor’s growers, the authorisation would allow for greater competition between processors than was the case under the BCI Act and Victorian Broiler Industry Negotiation Committee. The committee was responsible for making recommendations about the terms of agreements, handling disputes and determining a ‘standard price’ (i.e. growing fee) for chickens. On 29 June 2001, the ACCC granted authorisation for 5 years to allow collective negotiations between Victorian growers and their individual processors, subject to certain conditions, including that the proposed code of conduct be amended to clarify rights of growers to form negotiation groups. The code outlined minimum contract standards and dispute-resolution procedures to ensure that any imbalance in bargaining power would be addressed. Not complying with the code would remove the protection given by the ACCC authorisation for the party concerned. On 23 July 2001, the Victorian Farmers Federation (VFF) Chicken Meat Group lodged with the Federal Court an application for order of review of the ACCC’s 29 June 2001 decision. The VFF claimed that Marven was not legally able to apply for authorisation and that the ACCC had therefore not properly applied its powers in granting the authorisation. On 27 August 2002, the Federal Court dismissed the VFF claim and ruled that Marven was able to apply for authorisation for itself, and on behalf of the other processors, and have the benefits of the authorisation extended to current and future growers. The court further noted that the authorisation did not compel any party to engage in the authorised conduct (i.e. no party was required to comply with the authorisation if they did not wish to do so). The authorisation remained in place. In December 2003, applications were lodged with the ACCC by Bartter (A90904), La Ionica (A90902), Hazeldene Chicken Farm (A90903), Baiada (A90905) and Inghams (A90904) for authorisation of two types of agreements:

1. An initial agreement (or an arrangement of understanding) between growers on price and other terms collectively agreed to by growers alone. These agreements were to be solely

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between growers to engage in collective negotiation in the first instance and were to determine the contract terms they wished to achieve through such negotiations. They were referred to as ‘agreements between growers alone’.

2. An agreement between the processor and those growers who elect to negotiate collectively. These agreements involved negotiating and entering into a growing contract or contracts. They were referred to as ‘agreements between the processor and growers’.

In May 2004, the VFF lodged an application (A40093) on behalf of its chicken meat grower groups for those groups to collectively negotiate ‘agreements between growers alone’ (including collective boycott if necessary). The aim of this application was to protect growers from legal action under the CCA. In considering the processors’ application for authorisation, the ACCC noted that the processors did not, for the most part, have the support of their contract growers. This meant that while any authorisation granted would protect the processors’ conduct in collective negotiations, it would not, where there is no grower consent, protect the conduct of growers. On 9 June 2004, the ACCC granted interim authorisation for Bartter, La Ionica, Hazeldene, Baiada and Inghams to cover contracts negotiated under previous authorised arrangements and to negotiate future contracts. Also, the ACCC granted interim authorisation to the VFF’s application to the extent that it related to collective bargaining. The ACCC was to fully consider the VFF’s application for the right to collectively boycott when it was making its draft determination a few months later. The ACCC noted that growers wanted to establish a prescribed time frame for negotiations that would be enforceable by having the option to collectively boycott processors if negotiations were not finalised by the due date. The growers proposed that this right be exercised only after a 7-month negotiating period. On 3 March 2005, the ACCC issued a determination granting VFF member chicken growers authorisation to collectively bargain the terms and conditions of growing contracts with their processors. The ACCC also authorised those VFF member growers to, under certain circumstances, collectively refuse to accept new batches of chicks. The ACCC was satisfied that the likelihood of any industry-wide boycott was reduced by separating bargaining groups according to their processor and requiring a 6-month bargaining period and a 28-day mediation period prior to any boycott action. This decreased the potential for disruption to the supply of chicken meat to retailers and ultimately consumers. The ACCC was also satisfied that growers who rely almost entirely on processors for their income would only consider boycott action as a last resort, and that any boycott would be extremely damaging to their business. To ensure that the industry will be better able to deal with any disruption, the ACCC also required that chicken meat growers notify their processors 21 days prior to any collective boycott action. The ACCC considered this notice period would allow processors to take steps to lessen any impact of boycott action on consumers. The ACCC has authorised the arrangements for a period of 5 years (from 3 March 2005). On 3 March 2005, the ACCC also made its final determination granting authorisation to Bartter to collectively negotiate contracts with some of its growers. Authorisation was granted to some contracts collectively negotiated under previously authorised arrangements. The other processors’ applications were denied because of a lack of support from their growers.

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The ACCC considered that the restricted conditions were sufficient to safeguard against public detriment and that the collective-boycott arrangements for VFF grower groups could result in benefits to the public. However, Victorian processors were not convinced and asked the Australian Competition Tribunal (ACT) to make its own assessment of the VFF’s application for collective-boycott arrangements. The ACT recognised the market power of chicken meat processors and the effect that this would be likely to have on contract negotiations. However, it was nonetheless concerned that the outcome of a collective boycott, in particular its potential to inflict harm, was too uncertain to be able to say whether that outcome could be in the public interest. Consequently, the ACT denied authorisation for VFF chicken grower groups to collectively boycott their processors. The ACT's decision on collective-boycotting arrangements was based on concerns of many market participants that collective boycotts, even when subject to a number of constraints, have the potential to significantly damage the target of the boycott, its employees, consumers and also the boycotters themselves. The ACT also believed that the threat of a boycott, even without it ultimately being carried out, is likely to be a high cost to society. On 18 February 2010, the VFF (on behalf of its member chicken meat grower groups) applied to the ACCC for revocation and substitution of authorisation of the existing collective-bargaining arrangement. The ACCC issued a draft decision in 23 March 2010 proposing to reauthorise the collective bargaining arrangements for a further 5 years. The ACCC made its final determination on 21 April 2010 and granted the revocation and substitution of authorisation. The arrangements only cover VFF grower member groups who form bargaining groups according to the processor they supply (Baiada, Inghams, Hazeldene Chicken Farm or Turi Foods).

3.3 South Australia In South Australia, the Chicken Meat Industry Act 2003 (CMI Act) was the relevant legislation until it was repealed on 21 August 2009. The CMI Act established the contractual relationship between growers and processors and regulated the chicken meat industry. The industry had been regulated by legislation since 1969, when the Poultry Meat Industry Act 1969 was introduced to control entry into the industry and the subsequent conduct of industry members. After South Australia adopted the NCP in 1995, the government ceased establishing committees and the Poultry Meat Industry Act was no longer used. This began a period between 1997 and 2003 when the state did not facilitate collective negotiations. The South Australian industry relied on applying to the ACCC for authorisation of collective negotiations between processors and grower bodies. The South Australian Government subsequently decided to introduce new chicken meat industry legislation, the CMI Act. This was because of concerns that ACCC authorisations were insufficient to regulate the industry and guarantee industry stability. The justification for having new legislation was that state government intervention was needed to provide the authorisation for collective bargaining and to take account of factors unique to the chicken meat growing market. These factors included:

• the significant investment made by chicken growers (a large financial commitment compared to many other types of contracting enterprises)

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• contractual practices and other commercial factors restricting growers to exclusive dealings with processors

• other commercial factors restricting growers to exclusive dealings with processors. A review of the CMI Act in 2009 by Brown and Baldock found that a significant proportion of chicken growers continued to rely on the ACCC rather than the CMI Act for collective-bargaining arrangements. The review did not say if this was because ACCC arrangements better suited processors; however, it did say that stakeholders had had little recourse to various provisions of the CMI Act. The review concluded that the South Australian industry had become self-regulating with regard to other provisions in the CMI Act and that the role of the Registrar was not understood by growers and processors. The appointment of the Registrar was intended to facilitate negotiations, to gather, maintain and publish information on growing costs, and to maintain a register of growing agreements. The functions performed by the Registrar are needed for negotiations, but it appears that the industry stakeholders are able to undertake these functions by themselves. The CMI Act expired on 21 August 2009 and has not been replaced.

3.4 Tasmania There is no statutory authorisation for collective bargaining in the Tasmanian chicken meat industry. The industry relies on the ACCC for collective bargaining arrangements. Recent examples of this are:

• On 8 December 2003, Inghams lodged an application for revocation of A90659 and substitution by A90888, and a request for interim authorisation on behalf of itself and consenting growers in Tasmania.

• Interim authorisation was granted on 17 December 2003 while the ACCC considered the merits of the substantive application.

• On 19 May 2004, the ACCC granted authorisation (A90888) for 6 years (to expire on 9 June 2010).

• On 22 April 2010, the Tasmanian Chicken Growers Association (TCGA) lodged notification CB00142 with the ACCC. This notification was to collectively negotiate the terms and conditions of grower contracts, including grower fees, with Inghams.

• On 6 May 2010, the ACCC granted immunity conferred by the TCGA notification (CB00142). The ACCC considered the benefits, costs and anti-competitive detriment of the revocation of A90659 and its substitution by A90888 for a period of 6 years. These included:

• the effect of individual growers having the option to opt out of collective negotiation and negotiate individual contracts

• increasing competition from mainland states • the growing fee constituting only a small percentage of the total retail price • the pressure from downstream purchases mitigating the potential anti-competitive effects of

collectively negotiated terms and conditions, including fees.

In addition, the ACCC considered that the lack of bargaining power of individual growers means that competition between them is not vigorous, even without the proposed arrangements.

The ACCC found that there are likely to be public benefits arising from the proposed arrangements. In particular, the ACCC found that the arrangements provided a public benefit by

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facilitating a reduction in transaction costs compared to a situation where growers individually negotiated a contract. The ACCC found that these cost savings are likely to be passed on to consumers, at least in part, given the competitive pressures to which Inghams and its growers are subject from retailers and fast-food chains. Consequently, the ACCC concluded that the public benefits likely to result from the arrangements will outweigh the anti-competitive detriment.

3.5 Western Australia Until December 2010, the relevant legislation in Western Australia was the Chicken Meat Industry Act 1977 (WA CMI Act). This legislation did not provide a statutory authorisation as such but rather regulated overall market conditions in the state and made determinations on the terms and conditions for prescribed agreements between chicken meat growers and processors. The WA CMI Act allowed growers to opt out of prescribed agreements with processors. However, growers that did opt out were not allowed to enter into individual contracts if the other growers in their processor group were against it. During 2010, the WA CMI Act was reviewed by the Economic Regulatory Authority of Western Australia to determine its effectiveness and whether its continuation was justified. The review found that some serious problems in the Western Australian chicken meat industry were attributed to the legislation regulating the industry. These problems were most evident in:

• the breakdown of relationships between growers and processors, with processors abstaining from the determination of an average fee

• the detriment to industry expansion—industry output had not grown relative to the growth in consumption of chicken meat in Western Australia, and imports of chicken meat from South Australia were needed to fill the gap.

The review concluded that there are factors in the chicken meat industry that can create an imbalance in negotiating powers in favour of processors, including the limited opportunity for growers to switch to another processor or to convert their significant capital investment to another use. However, the extent that processors are able to apply their bargaining power is limited by their need to maintain reliable supplies of chicken meat (i.e. their dependence on growers). The review considered that, because of previous decisions, it was likely that growers would be granted authorisation for collective bargaining by the ACCC if they were to seek it. The review recommended that the WA CMI Act be repealed, and this recommendation was accepted by the Western Australian Minister for Agriculture and Food. Consequently, the WA CMI Act was allowed to expire on 31 December 2010. In the absence of a committee to determine the terms and conditions of grower agreements, the Western Australian Broiler Growers Association applied (A91262) to the ACCC for collective-bargaining authorisations on behalf of its member grower groups on 8 February 2011. The ACCC was advised that the Western Australian growers intended to:

• form bargaining groups based on the processors they supply, with collective bargaining to occur on a processor-by-processor basis

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• not participate in or advise any grower bargaining group other than their own (e.g. not share knowledge about the bargaining process or outcomes and/or provide any other assistance in relation to contract negotiations).

Also, they proposed that the contract-negotiation process and details about contract terms and conditions would be indicative only; that is, the manner in which collective bargaining would be undertaken and the form of any contracts would be open to negotiation between the parties and would not be mandatory. The ACCC decided to grant interim authorisation on 25 February 2011. This allowed Western Australian chicken growers to collectively bargain with the chicken processors they supply, namely Inghams, Baiada and Finesse Fine Foods. The ACCC considered that granting interim authorisation will provide a mechanism for growers and processors to negotiate contract terms and conditions in the newly deregulated environment while the ACCC considers the substantive application. At time of writing, the ACCC was preparing its draft determination.

3.6 Summary The ownership concentration of the largest processors in the national industry suggests that considerable market power resides with these major industry players and therefore that they would have considerable bargaining power relative to contract chicken growers. The market characteristics of the Queensland chicken processing operations and contract grower services sector are virtually identical to those of the national chicken meat industry. All jurisdictions have (in some form) authorisations for chicken meat processors and growers to collectively negotiate. New South Wales and Queensland have statutory collective-bargaining authorisations for their chicken meat growers. However, in the other states, the industry uses the ACCC mechanism to seek authorisation for collective negotiations. The assessment of authorisations to allow collective bargaining in other jurisdictions has found such arrangements to be in the public interest.

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4 Findings and recommendation The purpose of this report is to provide a PBT of an authorisation to collectively bargain within the Queensland chicken meat industry, and to review Queensland’s statutory authorisation in section 22 of the CMIC Act, in accordance with the CPA. The existing authorisation in the CMIC Act will continue unless the relevant provision is repealed. The growing fee is only around 10% of the retail price of chicken meat. Therefore, the restrictive impact of collective bargaining over processor–grower agreements on the retail price for chicken meat is minimal. Any increase in grower fees that may arise as a result of collective negotiations is outweighed by the efficiencies gained in having collective negotiations. These efficiencies result from reduced transaction costs and reduced likelihood of disputes. There is no evidence of any detriment to consumer choice arising from collective bargaining between chicken meat growers and processors. Given that grower services are contracted, collective bargaining is more likely to generate an average price rather than spikes in prices. Therefore, it is likely that collective bargaining would have a neutral or downward impact on chicken meat prices for consumers. In fact, the real prices paid by consumers for chicken meat have decreased over the last 10 years. There are no negative impacts on consumers and there is no public detriment associated with an authorisation to collectively bargain in the chicken meat industry in Queensland. Substantial evidence indicates that the authorisation for chicken meat growers and processors to collectively negotiate provides a countervailing mechanism to address the imbalance in market power. This review of the authorisation for collective negotiations in the chicken meat industry in Queensland has shown that the benefits of the restriction to the community as a whole outweigh the costs. Removal of the restriction is unlikely to deliver the objective of the CMIC Act, which is the stability of the Queensland chicken meat industry. Continued authorisation for collective bargaining in the chicken meat industry in Queensland will underpin future innovation and investment in this highly valued industry.

RECOMMENDATION

That an authorisation to allow collective negotiations between chicken meat growers and processors be provided.

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References Australian Competition and Consumer Commission 2002, ‘Determination, application for authorisation A90800’ (lodged by Inghams Enterprises Pty Ltd for itself and on behalf of NSW poultry meat processors in respect of collective negotiations involving contract growers and their respective processors for standard growing agreements in accordance with a code of practice and minimum contract guidelines), ACCC, Canberra, October. Australian Competition and Consumer Commission 2004, ‘Determination, application for revocation of A90659 and its substitution by A90888’ (lodged by Inghams Enterprises Pty Ltd on its own behalf and on behalf of Tasmanian chicken growers in relation to the collective negotiation of chicken growers’ contracts in Tasmania), authorisation no. A90888, ACCC, Canberra, May. Australian Competition and Consumer Commission 2009, ‘Decision in respect of a collective bargaining notification lodged by the South Australian Farmers Federation on behalf of eighteen South Australian chicken growers’, notification no. CB00070, ACCC, Canberra, March. Australian Competition and Consumer Commission 2009, ‘South Australian Farmers Federation—collective bargaining notification—CB00070’, ACCC, Canberra, March. Australian Competition and Consumer Commission 2010, ‘Determination, application for revocation and substitution for authorisation A40093’ (lodged by the Victorian Farmers Federation on behalf of its member chicken meat grower groups in respect of collective bargaining by chicken meat grower groups with their nominated processors in Victoria), authorisation no. A91214, ACCC, Canberra, April. Australian Competition and Consumer Commission 2010, ‘Victorian Farmers Federation—revocation and substitution—A91214’, ACCC, Canberra, April. Australian Competition and Consumer Commission 2011, Guide to authorisation, ACCC, Canberra, January. Australian Competition and Consumer Commission 2011, ‘Western Australian chicken growers—application for authorisation A91262, request for interim authorisation’, ACCC, Canberra, February. Australian Competition and Consumer Commission 2011, ACCC, Canberra, <http://www.accc.gov.au/content/index.phtml/tag/AuthorisationsRegister/>, viewed March 2011. Barrett, RW and Barrett, RG 2010, Review of the Chicken Meat Industry Committee Act, Redland Bay. Chicken Meat Industry Committee 2010, Annual report 2009–10, CMIC, Brisbane. Chicken Meat Industry Committee 2010, ‘Submission to the review of the Chicken Meat Industry Committee Act, CMIC, Brisbane. Clark, EA 2010, ‘Submission to the CMIC review’, Blenheim. Economic Regulation Authority 2010, ‘Final report: Inquiry into the Chicken Meat Industry Act 1977’, Perth. Economic Regulation Authority 2010, ‘Issues paper: Inquiry into the Chicken Meat Industry Act 1977’, Perth.

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IBISWorld 2009, ‘Poultry processing in Australia’, Industry report C2112, IBISWorld, Melbourne. IBISWorld 2010, ‘Poultry meat farming in Australia’, Industry report A0141, IBISWorld, Melbourne. Logan, RJ 2010, ‘Review of the Chicken Meat Industry Committee Act’. Matarazzo, F 2010, ‘Submission to the review of the Chicken Meat Industry Committee Act 1976 (CMIC)’, Brisbane. Merlehan, J 2010, ‘Submission to the CMIC review’, Harrisville. Porter, A 2010, ‘Submission to review of the CMIC Act 1976’, Brisbane. Queensland Chicken Growers Association 2010, ‘Submission to the review of the Chicken Meat Industry Committee Act’, Brisbane. Queensland Treasury 1999, Public benefit test guidelines: approach to taking public benefit test assessments for legislative reviews under National Competition Policy, Queensland Government, Brisbane.