Bills Digest no. 84 2011–12
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This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Law and Bills Digest Section
5 December 2011
19 September 2011
House: House of Representatives
Portfolio: Private Member’s Bill—Bob Katter, Jnr, MP
Commencement: Sections 1–2 on the day of Royal Assent; Sections 3–14 on the 28th day after the Royal Assent
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.
The purpose of the Constitutional Corporations (Farm Gate to Plate) Bill 2011 (the Bill) is to require grocery retailers which are constitutional corporations to display the average annual farm gate price received by farmers for produce, in close proximity to the selling price for that produce.
On 22 January 2008, the then Assistant Treasurer and Minister for Competition Policy and Consumer Affairs requested the Australian Competition and Consumer Commissioner (ACCC) to hold a public inquiry into the competitiveness of retail prices for standard groceries (ACCC grocery sector inquiry) as authorised by Part VIIA of the Trade Practices Act 1974 (TPA).
The ACCC grocery sector inquiry arose from concerns within the community about whether the gap between farm gate and check-out prices for groceries had been widening, such that farmers and suppliers were getting less, while retailers were getting more. In addition, there were concerns about the long-term future of small family-run independent supermarket operators and smaller retailers such as butchers, bakeries and greengrocers because of their inability to compete with the major supermarket chains—Coles and Woolworths.
Matters that were taken into consideration by the ACCC grocery sector inquiry included, but were not limited to: 
- the structure of the grocery industry at the supply, wholesale and retail levels including mergers and acquisitions by the national retailers
- the nature of competition at the supply, wholesale, and retail levels of the grocery industry
- the competitive position of small and independent retailers
- the pricing practices of the national grocery retailers and the representation of grocery prices to consumers
- factors influencing the pricing of inputs along the supply chain for standard grocery items
- any impediments to efficient pricing of inputs along the supply chain, and
- the effectiveness of the Horticulture Code of Conduct (the Horticulture Code), and whether the inclusion of other major buyers such as retailers would improve the effectiveness of the Horticulture Code.
The ACCC provided its report (the ACCC grocery sector inquiry report) to the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs on 31 July 2008.
The ACCC grocery sector inquiry report is an extensive one. It describes the grocery sector in Australia as follows:
Coles and Woolworths are seen as dominating the grocery sector. Nevertheless, there is a need for some caution when looking at figures used to describe market concentration because a variety of statistics are used. Also, it is clear from the analysis by the ACCC that there are local markets as well as wider regional and national markets.
Statistics analysed by the ACCC suggest that Coles and Woolworths account for approximately 70 per cent of packaged grocery sales in Australia and approximately 50 per cent of fresh product sales, such as meat, fruit and vegetables.
Coles and Woolworths have maintained a fairly consistent share of supermarkets above 1000 square metres over the last 10 years, with each having just over 30 per cent of stores nationally. Coles and Woolworths are much more significant in relation to larger stores, accounting for around 87 per cent of all supermarkets above 2000 square metres.
There is little evidence to suggest that Coles and Woolworths have simply ‘bought out’ the competition.
Millions of Australian consumers shop at Coles and Woolworths in preference or addition to a number of alternatives—the local independent, the specialty bread shop, the Saturday market and/or the corner shop. High concentration levels alone do not dictate the nature of competition. There are other markets internationally that are more concentrated but appear to be more competitive.
The ACCC, having considered the submissions which had been made, formed the view that:
... some industry participants, representative groups and commentators have made unsupported claims to the inquiry and in the media. These claims were based on generalisations and there was a failure to provide facts to support the claims.
Despite this apparent dismissal of some of the claims made to the grocery sector inquiry, the ACCC did make a number of Recommendations including:
- amendments to the Horticulture Code of Conduct
- amendments to state planning laws as they affect the location of supermarkets
- introduction of unit pricing, and
- introduction of a creeping acquisitions law.
In particular, the ACCC grocery sector inquiry report did not accept other suggestions such as placing a cap on the market share of any single retailer or separating the wholesale and retail divisions of Coles and Woolworths on the grounds that such moves would be likely to have adverse efficiency effects leading to an increase in grocery prices for consumers.
The ACCC grocery sector inquiry report noted that the relationship between the farm gate and the check-out is quite direct for fresh products, such as meat, fresh fruit and vegetables. Coles and Woolworths often purchase directly from farmers, bypassing wholesalers, and then organise any necessary further processing themselves.
The ACCC grocery sector inquiry did not find any evidence to suggest that the major supermarket chains were acting in an anti-competitive way in their dealings with suppliers of fresh products. Nor was there evidence to suggest that retail prices for fresh products were going up by a greater percentage than farm-gate prices.
The ACCC grocery sector inquiry report concluded:
The ACCC accepts that many Australian farmers are suffering and low prices for their product may be a significant contributing factor. However, the extent to which the market power of retailers contributes to this problem is limited.
Approximately 12 months later, on 10 September 2009, the Senate Economics Committee was requested to investigate the varying prices being paid to dairy farmers in different Australian states, and report on a range of matters including:
- the economic effect on the dairy industry of announced reductions in prices to be paid to producers by milk processors
- the impact of the concentration of supermarket supply contracts on milk market conditions, and
- whether the TPA is in need of review having regard to market conditions and industry sector concentration in this industry.12]
The Senate Economics Committee report concentrates on the dairy industry—rather than the grocery sector as a whole—describing the circumstances that led to the inquiry as follows:
Since its deregulation in 1999 the Australian dairy industry has evolved from a protected and regulated industry with many small farms, to one based on fewer but larger farms competing both nationally and internationally. During this period significant consolidation has also been occurring at the retail and processor levels, which are now dominated by two supermarket chains and a handful of (now mostly foreign owned) processors, placing the farmers at a competitive disadvantage. These structural changes were masked in the boom years. Indeed in 2007-08 Australia’s dairy farmers were receiving record high farm gate prices for their milk and confidence was high—there was overconfidence in some industry advisors. That changed more or less overnight with a fall in the international commodity price which was followed by processors announcing price step-downs.
In many ways, this statement accords with the earlier ACCC grocery sector inquiry report. However, what was clear to the Senate Economics Committee was that new pricing policies had arisen out of the Global Financial Crisis. The Senate Economics Committee made a number of Recommendations, most particularly that:
- the Government request the ACCC to use its information-gathering powers to provide more accurate estimates of the proportions of the retail price of milk that reflect both the costs and the profits, of farmers, processors and retailers
- the Government request the National Competition Tribunal to review the effectiveness of section 46 of the TPA in preventing price discrimination; and consider reinstating anti-price discrimination provisions into the TPA to protect those parties participating in industries dominated by multinational corporations
- the Government request the ACCC to undertake monitoring of the pricing practices within the dairy chain with a view to establishing whether predatory pricing or misuse of market power is occurring
- the TPA be amended to inhibit firms achieving market power through takeovers or abusing market power and that ‘market power’ be expressly defined so that it is less than market dominance and does not require a firm to have unfettered power to set prices, and
- the ACCC conduct further study into the implications of increasing shares of the grocery market being taken by the generic products of the major supermarket chains.
On 26 January 2011, Coles announced as part of its ‘Down Down’ price promotion campaign that the price of Coles brand regular and low fat milk would be cut by as much as 33 per cent, to $2 for a two litre bottle. Woolworths followed Coles’ price cuts straight away, with other supermarkets such as ALDI, Franklins, some IGA stores and other retailers following soon after.
This caused some concern in the community on two fronts. First, that the price reductions in milk by Coles, and to some extent by Woolworths, were being subsidised by prices of other goods. Second, that continued discounting could ‘trigger the demise of the dairy industry’ as retailers could apply pressure through the supply chain leading to lower farm gate prices being paid to farmers.
The ACCC undertook an examination of Coles’ conduct in relation to the current competition law (ACCC milk pricing inquiry), and concluded that there was no evidence that Coles was engaging in predatory pricing in contravention of the Competition and Consumer Act 2010 (CCA). Rather, the Chairman of the ACCC, Graeme Samuel stated that:
The major impact of the reduction in milk prices since January seems to have been a reduction in the supermarkets’ profit margins on house brand milk. These price reductions have benefited consumers who purchase house brand milk...
As to the relationship between dairy farmers and milk processors, it is the case that some processors pay some farmers a lower farm gate price for milk sold as supermarket house brand milk. However on the evidence we’ve gathered over the last 6 months it seems most milk processors pay the same farm gate price to dairy farmers irrespective of whether it is intended to be sold as branded or house brand milk.
In response to industry concerns about the supermarket price cuts, the Senate resolved, on 10 February 2011, to refer the issue to the Economics References Committee (second Economics Committee) for inquiry and report into the impact on the Australian dairy industry supply chain of Coles discounting of the price of milk.
Clearly, that inquiry was conducted at the same time as the ACCC milk pricing inquiry. Although the subject matter was the same, the terms of reference were not. The second Economics Committee was to consider matters such as, but not limited to:
- farm gate, wholesale and retail milk prices
- whether the price reduction is anti-competitive
- the suitability of the framework contained in the Horticulture Code of Conduct to the Australian dairy industry, and
- the need for any legislative amendments.
The second Economics Committee published its final report entitled: The impacts of supermarket price decisions on the dairy industry (the impacts report), on 3 November 2011. The second Economics Committee did not consider that the specific price discounts by Coles which were the subject of its inquiry, warrant legislative amendments. In fact, it warned that:
care needs to be taken when suggesting amendments to the Competition and Consumer Act based on the experience of one industry (or part of one industry, as is the case with the milk discounts) as they would apply to the entire economy. Even if amendments to Australia's competition law were needed, it is not clear that the amendments proposed during the inquiry would actually provide a 'remedy' to the milk pricing issue.
Having noted comments by the newly appointed Chairman of the ACCC, Rod Sims that some aspects of section 46 of the CCA, which deals with misuses of market power, are ‘worth debating’ the second Economics Committee considered that:
It appears appropriate that, rather than recommending piecemeal amendments, an independent inquiry be formed to fully address any perceived gaps in, or issues with, Australia's competition law.
At the time of writing this Bills Digest, the Government had not formally responded to that Recommendation.
This Bill is sponsored by Independent Senator Nick Xenophon in the Senate. Speaking on behalf of the Bill, Senator Xenophon stated:
Australia has some of the highest grocery prices in the developed world.
In 2009, the OECD reported that grocery prices in Australia had increased by over 40 percent in the last ten year. In comparison, prices in the US rose on 28.4 percent over the same period.
But even though consumers are paying more than ever for fresh produce, more and more farmers and producers are struggling. The gap between what farmers are paid and what shoppers are paying continues to grow. Recent examples include apples, bought from growers at $2 per kilo and sold at $7 per kilo, and oranges, bought for 18 cents a kilo and sold for $3 a kilo.
When it comes to vegetables, things aren’t any better. Growers sell potatoes for about 35 cents a kilo. Shoppers pay around $2 a kilo. And cabbage, which sells for $2.38 a kilo, earns only 55 cents a kilo for growers.
Together, Senator Xenophon and Independent MP Bob Katter have drafted the Bill to ‘force supermarkets to divulge the information on their websites and at the point of sale in the hope of getting farmers a better deal’.
The Bill has been referred to the Senate Economics Committee (Economics Committee) for inquiry and report by 24 November 2011. The Economics Committee published its final report on 25 November 2011 stating that it had ‘reached a very strong view that ... the Bill should not be passed’.
The Economics Committee expressed its concerns about the Bill in relation to a number of matters. First, the Economics Committee was not satisfied that the problem which the Bill seeks to address—that is, to ensure that farmers receive a fair price for their produce—‘either does not exist or is at least extremely contentious’.
Second, the Economics Committee took the viewed that there were difficulties with the method by which the retailer would be required to calculate the producer price, in that it was not clear ‘how the 12-month period is to be determined and how regularly prices are to be updated’.
The Bill has also been referred to the House of Representatives Agriculture, Resources, Fisheries and Forestry Committee (House of Representatives Committee) for inquiry and report by 16 December 2011.
The NSW Farmers Federation has been reported as supporting the Bill on the grounds that it would promote transparency and assist growers struggling because of cheap imports and rising costs. In addition, it would ‘help consumers understand that, when they see high prices on the supermarket shelves, farmers are not receiving any more’.
The comments of other stakeholders are canvassed below under the heading ‘Main issues’.
The Explanatory Memorandum does not address the question of whether the Bill would have financial implications on the Commonwealth. As the Bill would require action to be taken by constitutional corporations which are also grocery retailers, the financial burden would rest with those organisations.
There may be some cost to the Commonwealth as the Bill would add to the regulatory burden of the Australian Competition and Consumer Commission (ACCC).
The Bill defines the ‘producer price’ as the average farm gate price received by farmers for a specific type of produce produced within a specified 12-month period.
The Tasmanian Government’s Submission to the Economics Committee contends that calculating the farm gate price received by farmers is ‘extremely challenging’. This view is based on the following factors:
- the major supermarkets purchase some produce from wholesalers so that the supermarkets may not have knowledge of the price paid further down the supply chain to the producer
- produce is often consolidated, graded, packed or processed by an intermediary which may be sourcing from multiple growers so that it is not possible to ascertain the farm gate price, and
- where major retailers do source produce directly from growers, there may be more than one supplier involved—with the potential that suppliers were paid a different price for the same produce.
This view is echoed by Woolworths. In its submission to the Economics Committee, Woolworths states:
... the actual concept of a farm gate price as described in the Bill simply does not exist in practice. The flat price paid to farmers when they first on-sell their produce will include various levels of value adding that are not separated out from any basic price for harvested produce including transport and packing. In addition, for the most part Woolworths does not see this first buy price for farmers. The majority of our produce is purchased through wholesalers. We only have visibility of the buy price we pay to these intermediaries ...
According to the Citrus Growers of South Australia, a farm gate price would only inform consumers of the price paid to the grower at the point of sale. It would not take into account subsequent costs such as packing, transport, marketing and agent fees, advertising and promotion costs, which all decrease the return to the grower.
Instead, Cathy Lowe, who represents South Australian citrus growers, has suggested that farmers would be better protected if there was better policing of the Government's ‘truth in labelling’ policy which was meant to inform consumers whether they were buying local or imported produce.
The Tasmanian Government also considered that the Bill posed problems in that it does not allow for geographical distance or other cost variation, stating:
Modelling this variation would be extremely complex, if not impossible and this raises the problem about the value of comparison. Across the market, there may be a wide variety in differential pricing that has nothing to do with profit margins and may render the value of the farm gate price invalid as a comparative measure.
Woolworths has questioned the benefits of an average annual price on the grounds that ‘horticulture is a volatile and dynamic industry and prices change on a daily basis’ so that ‘when a customer views an average annual buy price on a product it would have no relation to the price a retailer paid for the product in front of them’.
Finally, it has been said that ‘the cost of providing the farm gate pricing information will not be insignificant’. The Australian Food and Grocery Council has suggested that the costs that are incurred by grocery retailers in verifying the data and displaying it on supermarket signage ‘will almost certainly be extracted from the suppliers by the supermarkets, putting further pressure on their margins’.
This Bill is directed at ‘constitutional corporations’. This term is defined in clause 7 of the Bill as being ‘a corporation to which paragraph 51(xx) of the Constitution applies’.  That paragraph refers to foreign corporations and trading or financial corporations, formed within Australia. Essentially, to be considered a trading or financial corporation, an entity must be first, incorporated and second, engaged in ‘substantial’ trading or financial activities.
Part IVB of the CCA provides for industry codes which can be either mandatory or voluntary. The Unit Pricing Regulations are a mandatory industry code for the retail grocery industry. The purpose of the code is to require large grocery retailers, those grocery retailers that operate online, and those grocery retailers that voluntarily display unit prices, to use unit pricing when selling grocery items to consumers. The Regulations implement one of the Recommendations of the ACCC grocery sector inquiry report.
Clause 7 of this Bill adopts some of the definitions contained in the Trade Practices (Industry Codes—Unit Pricing) Regulations 2009 (Unit Pricing Regulations), in particular:
- floor space
- food-based grocery item
- retail premises, and
- selling price.
The Bill’s definition of ‘grocery retailer’ is based on the definition of ‘store-based grocery retailer’ in the Unit Pricing Regulations—including the requirement that the grocery retailer has more than 1000 square metres of floor space dedicated to the display of grocery items. This will ensure that smaller grocery retailers which may also be constitutional corporations will not be captured by the Bill.
In addition, clause 7 makes clear that the price to be displayed is the average annual price paid to the producer without any reference to the costs of transport, processing, storage, marketing and profit margins.
Subclause 9(1) requires a grocer retailer as defined by the Bill to display the average annual farm gate price (called the ‘producer price’) for all produce sold. The Bill defines ‘produce’ as fresh fruit and vegetable produce. Subclause 9(2) mimics the Unit Pricing Regulations to require that the producer price is displayed prominently and in close proximity to the selling price for the produce. The producer price must be legible and unambiguous.
There is also a requirement in subclause 9(3) that a grocery retailer to whom the Bill applies must publish the producer price on its website.
Where a grocery retailer contravenes any of those requirements, clause 11 deems that Division 5 of Part XI of the CCA—about infringement notices—will apply. Division 5 of Part XI of the CCA permits the ACCC to issue an infringement notice as an alternative to taking proceedings under section 224 of the CCA seeking pecuniary penalties for a breach of relevant consumer protection proceedings. An infringement notice must include:
- the name and address of the person to whom it is issued
- details of the alleged contravention, including the date of the alleged contravention and the particular legislative provision which was contravened
- the maximum pecuniary penalty which the Court could order the person to pay for the alleged contravention
- the penalty which is payable in relation to the alleged contravention, and
- a statement of how payment of the penalty is to be made.
If the person to whom an infringement notice is issued pays the specified penalty, payment is not regarded as admission of a breach and no proceedings may be instituted against the person in relation to the subject matter of the notice. Clause 13 of the Bill sets the penalty to be specified in an infringement notice as 600 penalty units (that is, $66 000) which is consistent with many of the infringement notice penalty amounts which are contained in Division 5 of Part XI of the CCA.
The question which arises from the drafting of this Bill is whether there is any consequence in the event that a constitutional corporation fails to pay the amount specified on the infringement notice. Part VI of the CCA contains the enforcement and remedies provisions. However this Bill does not enliven those provisions. Instead, clause 12 allows the ACCC to issue an infringement notice or to apply to the Federal Court for such order or orders as the ACCC thinks appropriate. It should be noted that generally, it is for the Federal Court, rather than the ACCC, to determine what order would be appropriate.
The stated object of the Bill is to enable consumers to understand the pricing practices of grocery retailers. However, even if consumers are informed of the price paid at the farm gate, and the final price to be paid at the check-out, it remains to be seen whether this information alone will ‘get farmers a better deal’ as the Bill’s sponsors want.
It may be that the Bill, if enacted, gives no more than a pyrrhic victory—if the publication of farm gate pricing information comes at a cost to consumers, or to the very producers that it seeks to assist, as a result of the costs of providing the information being passed through the supply chain to either, or both, of those groups.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2434.
. This followed an earlier report to the Senate by the ACCC dated 30 September 2002 on the prices paid to suppliers by retailers in the grocery industry. Australian Competition and Consumer Commission, Report to the Senate by the Australian Competition and Consumer Commission on prices paid to suppliers by retailers in the Australian grocery industry, Commonwealth of Australia, Canberra, 30 September 2002, viewed on 17 November 2011, http://www.accc.gov.au/content/index.phtml/itemId/307369
. Australian Competition and Consumer Commission, Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, op. cit., p. xv.
. Ibid., p. xxiv. The Government introduced the Competition and Consumer Legislation Amendment Bill 2011 into the House of Representatives on 15 June 2011 for the purpose of clarifying the operation of the mergers and acquisitions provisions of the Competition and Consumer Act 2010 (formerly the TPA). However, at the time of writing this Bills Digest, the Bill had not been considered by the Senate. Details of the Bill and the Explanatory Memorandum can be viewed at the relevant Bill’s home page: http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr4600%22. A discussion of the operation of the Bill is contained in M A Neilsen, Competition and Consumer Legislation Amendment Bill 2011, Bills Digest, no. 149, 2010–11, Parliamentary Library, Canberra, 23 June 2011, viewed 17 November 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2F865926%22
. Department of Economic Development, Tourism and the Arts (Tasmania), op. cit., p. 3.
. Woolworths Limited, op. cit., p. 12.
. The definition is expressed in the same terms as, for example, section 12 of the Fair Work Act 2009.
. Trading refers to the business of buying, selling, exchanging or bartering goods or services, or being engaged in the business of commerce.
. Financial dealings are acts such as borrowing, lending, banking or insurance and the provision of management and advisory services in relation to financial matters.
. Section 134B, Competition and Consumer Act 2010.
. Section 134D, Competition and Consumer Act 2010.
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