Chapter 2

Reasons for the introduction of the Bill

2.1 Questions about the difference between the prices paid to farmers for their products and the retail prices charged to consumers have been raised by primary producers, the community and politicians for some time.

2.2 Such issues are not restricted to fresh fruit and vegetables. Recently it has become a major concern in relation to dairy products, as reflected in the 10 February 2011 decision of the Senate to refer the impacts of supermarket price decisions on the dairy industry to the Senate Economics References Committee for inquiry and report. The committee tabled its report on 3 November 2011.[1]

2.3 Those concerns lie behind the introduction of this Bill by its proponents and have been reflected in comments in the media and other forums.

Media statements before the introduction of the Bill

2.4 In the lead up to the introduction of the Constitutional Corporations (Farm Gate to Plate) Bill 2011 [No. 2], its proponents, Senator Nick Xenophon and
the Hon. Bob Katter MP, spoke to the media about the reasons they believe such legislation is required.

2.5 In a newspaper article published on 14 August 2011, Senator Xenophon was quoted as stating:

Paddock-to-plate transparency is long overdue and if Coles and Woolies believe they are paying fair prices to farmers, I challenge them to embrace this labelling system and let the consumer decide.[2]

2.6 In the same article, Mr Katter is quoted as expressing the following rationale for the Bill:

The first thing is to expose the fact Australians pay the highest price for food in the world and our farmers are the lowest paid.

2.7 The article goes on to state that he said that 'Coles and Woolworths had too much market power, which they used to cut prices paid to farmers'.

2.8 In another article Senator Xenophon is quoted as saying:

I was talking to a small fruit and vegetable seller who said they cannot compete with the purchasing power of Coles and Woolworths and a paddock-to-plate pricing mechanism will help sort that out...Coles have said to us that this is not practical and they will give 100 reasons why it can't be done, but if we start a national conversation about the prices our farmers receive, it will be a good starting point.[3]

Statements about the reasons for introduction of the Bill

2.9 In his Second Reading speech introducing the Bill into the Senate, Senator Xenophon gave the following reasons for its introduction:

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.

These margins seem pretty unfair.

...

The aim of this Bill is to require grocery retailers to display the farm gate price of fresh produce next to the retail price, so that consumers can see how much profit each retailer earns for each product.

...

These measures will increase transparency in the industry, and empower consumers with this level of information.[4]

2.10 When an identical Bill[5] was introduced into the Lower House Mr Katter, speaking on its First Reading, stated:

In this case, the village is paying twice what they should be paying for their fruit and vegetables in Australia and the farmer is getting half. In other words, the people in the middle are getting 400 per cent more than they should be getting.[6]

Other statements on price differences

2.11 Statements expressing concern about the difference between the price farmers receive for their products and the retail price paid by consumers have been made in other forums.

2.12 In 2009 the issue was raised at a Senate Economics Legislation Committee hearing on the Trade Practices Amendment (Guaranteed Lowest Prices—Blacktown Amendment) Bill 2009:

Senator JOYCE: Are the farmers getting a better price because inflation is going up in Australia?

Mr Kelly:...You can do the sums for commodity to commodity and see that there is a massive and complete disconnect between the farm gate prices and the prices items are selling for at retail shops.[7]

2.13 On 10 October 2009, the media reported statements by Professor Phillip O'Neill of the University of Western Sydney that middlemen and retailers were 'price gouging' and that there is no transparency in who was profiting from fresh food prices:

Look at apples. They range from $1 to $1.80 [a kilogram] on the wholesale market. You go to $2 for some premium fruit. That is what the grower is receiving. If the quality is down, it could be 60 cents a kilo...The retailer is charging a minimum of $3.99 – and $7.99 in some areas.[8]

2.14 On 25 August 2011, Associate Professor Frank Zumbo, from the University of New South Wales, was quoted as stating:

The greater dominance of Coles and Woolworths means they can dictate oppressive terms to suppliers and farmers.[9]

2.15 A survey conducted by the Brisbane Sunday Mail and Channel Nine showed that 92 per cent of Queenslanders believed farmers were not getting fair prices for their produce and that 96 per cent believed supermarkets controlled the price farmers receive for their produce.[10] While this survey could not be considered evidence that producers are being underpaid, it does illustrate community sentiment on the issue.

2.16 The Senate Economics References Committee recently completed its inquiry into the impact of supermarket price decisions on the dairy industry. One of the terms of reference of that inquiry was:

The impact on the Australian dairy industry supply chain of the recent decision by Coles supermarket (followed by Woolworths, Aldi and Franklins) to heavily discount the price of milk (to $1 per litre) and other dairy products on the Australian dairy industry, with particular reference to:

(a) farm gate, wholesale and retail milk prices.[11]

2.17 Although the Bill does not apply to the dairy industry, the reference is illustrative of the concern about the pricing policies of the major supermarkets and their effect on primary producers.

Statements in evidence obtained by the committee

2.18 A number of submissions received by the committee and statements by witnesses at the hearing on 15 November 2011, including some which were critical of the Bill, expressed concern about the equity of prices received by farmers and touched on the need for greater transparency about the prices being paid to producers by major retailers.

2.19 Some of those statements in submissions included:

Australian Food and Grocery Council:

AFGC shares, however, the concerns that asymmetry in the market power of large supermarket chains and their suppliers coupled with the aggressive retail pricing of the major market players and the aggressive trading terms they extract is squeezing the margins of businesses up the supply chain and threatening their viability. Food manufacturers are being forced to shut business, or relocate off shore which in turn is disadvantaging their regular, long terms suppliers of fresh produce.[12]

South Australian Farmers Federation:

Even though consumers are paying more, the number of primary producers in Australia is declining. While there a number of reasons for this, one of the main reasons is that often the cost of production is higher than the prices paid to producers, and hence farmers going out of business.[13]

NSW Farmers' Federation:

NSW Farmers welcomes the intent behind the Bill, in that any policy that has the desired effect of benefiting farmers through more equitable pricing arrangements, is worthy of serious consideration.

...

Supermarket power and the effect it has on producers and consumers is a prevalent and pressing issue in present day society.[14]

Tasmanian Farmers & Graziers Association:

...farmers have no way of determining whether the returns they receive for their produce are fair and reasonable. This enables price gouging and other forms of unfair activity to flourish.[15]

Statements questioning the need for the Bill

2.20 On the other hand, the committee has received evidence that questioned whether the difference between producer prices and retail prices is the fault of the retailer. This was put clearly in evidence from the Citrus Growers of South Australia Inc (CGSA):

The farm gate to plate Bill seems to have come from the concern that in Australia consumers are paying more for their fresh produce and that farmers are struggling. Yes, the farmers are struggling, yet is it because retailers are ripping them off? Has the price of fresh produce really increased so significantly? This year oranges were possibly at their lowest. Premium fruit was being sold at less than $1 a kilo and therefore anything that was not premium was almost being given away. As with any other commodity, input costs such as fuel for the tractors, transportation, fertilisers, wages, taxes and costs of processing have increased dramatically. This has had a large effect on the cost of the produce on the shelf, but the actual increase in the sale price has not kept up with these rising costs, and these increases in costs are always passed on to the grower, the lowest point in the chain. This is why the grower is struggling.

Retailers do not dictate the price they pay for produce; supply and demand, market conditions and the people selling the produce dictate the price. Marketing plays a major role in determining the farm gate price paid to the grower. Citrus, for example, relies on a number of markets to return a good farm gate price to the grower. Australian retailers normally ask for the premium size and quality, and therefore, when selling to the supermarket, marketers ask for a premium price. Export has a major influence, yet export sale prices have been significantly affected by increased competition from other citrus-producing countries, who can sell for much less due to much lower production costs, and, especially over the last few years, by the high Australian dollar.[16]

2.21 In their submissions to the committee, Woolworths and the Australian National Retailers' Association (ANRA), the peak representative group for the major supermarkets, referred to the findings of the ACCC Report (considered in more detail below), that retail prices were not rising out of proportion to farm gate prices and that retailers are not dictating farm gate prices.[17]

ACCC inquiry into grocery prices

2.22 As part of its wider public inquiry into retail prices for standard groceries, the ACCC examined whether retail prices were rising faster than farm gate prices. Its report concluded that:

...there is no across-the-board evidence to suggest that retail prices for fresh products are going up by a greater percentage than farm-gate prices. The gross margins of Coles, Woolworths and Metcash in fresh products have as a whole not increased significantly in recent years. There are some minor examples of relatively minor increases, as well as examples of falls. It is certainly the case that the large price increases in many fresh items over recent years cannot simply be attributed to the retailers.[18]

2.23 In relation to the role of the major retailers in pricing, the ACCC Report went on to state:

The bargaining power of Coles and Woolworths in dealings with providers of fresh products will be strong in some cases. However, for a good proportion of fresh products, farmers have the option of selling to export markets or wholesale markets (which in turn supply independent supermarkets, butchers and greengrocers). This lowers the bargaining power of Coles and Woolworths. As stated earlier, Coles and Woolworths supermarkets account for approximately 50 per cent of fresh produce sold in Australia, which is a significantly lower percentage than for packaged groceries.

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.[19]

2.24 In considering the causes of the gap between the grocery and farm gate prices, the ACCC concluded that it 'is determined by the relative contribution' of the following factors:

'the costs associated with turning the "raw" product into the product found on supermarket shelves';
the cost of getting the product to the shelves, such as transport, storage, handling, distribution, retailing and spoilage; and
'the mark-up applied by each party along the supply chain'.[20]

2.25 The ACCC did comment that, in relation to fresh fruit and vegetables in particular, the relationship between farm gate and retail 'is more observable' than for other goods as there is 'minimal processing of the final product'.[21]

2.26 In fact, the ACCC did not reach a conclusion as to whether the difference between the producer price and the retail price for fresh produce is too great and whether the producer should receive a great percentage of the retail price.

2.27 Its conclusion that farm gate and retail prices have risen in proportion is not the same as saying that retail prices are or are not excessive when compared to farm gate prices. As such, the ACCC Report does not support claims that the Bill is unnecessary, nor claims that it is necessary.

Committee view

2.28 The committee believes that the fact the ACCC did not say whether the gap between the two was excessive suggests that it, in turn, must be careful not to jump to simple conclusions about price equity based almost solely on the fact of that difference.

2.29 Of more relevance to the committee's inquiry are the conclusions by the ACCC that the major retailers' market power is not the cause of any low prices being received by farmers and that the main dictating factor in farm gate prices is the export price of their produce. In this regard the ACCC quoted with approval the conclusion stated in the Whitehall Associates Report:

Agricultural goods which are non-perishable, undifferentiated and internationally traded have their prices effectively determined by international markets irrespective of domestic post-farmgate production and competition factors. In such cases, the return to the farmer is essentially governed by the price point at which a domestic manufacturer or processor could attract product away from the export market or compete with an imported item. What happens beyond the farmgate is essentially irrelevant to a farmer’s ability to extract price gains.[22]

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