Chapter 3

Understanding the fresh produce supply chain and factors affecting price

3.1        This chapter examines the supply chain for fresh produce from the producer to the consumer and outlines some of the factors that have been identified as affecting the retail price of fresh fruit and vegetables. An understanding of the supply chain and cost factors are necessary to forming a picture of how the Bill might operate, if passed into law.

The supply chain

3.2        Most submissions to the committee support the intention of the Bill but expressed concerns that, in practice, it will not be able to operate or at least be difficult to implement. A typical comment is:

CGSA believes that the 'Farm Gate to Plate' Bill has been put forward with the best of intentions to assist and protect Australian farmers and growers however we feel it will not be totally clear or have complete transparency and could have a negative affect as a result.[1]

3.3        In order to consider how the Bill might work, it is necessary to understand how farm gate prices are set. That, in turn, requires an understanding of the supply chain for fresh produce from producer to consumer.

3.4        The most recent detailed examination of the fresh produce supply chain was by the ACCC during its 2007 inquiry into retail prices for standard groceries.

3.5        The ACCC's analysis indicates that the producer to consumer supply chain is complex and varies considerably depending on the producer, the produce, the retailer and the consumer. Indeed, it can vary for the same retailer depending on when they are acquiring produce and why.

3.6        The ACCC identified the following characteristics of the fresh produce supply chain:

• there are many small-sized producers, mostly concentrating on one product;
• different regions of Australia produce different fruit and vegetables, as a result of which there is a significant transport of produce around the country to markets;
• with the exception of independent stores, most produce passes directly from the producer to the retailer;
• independent stores generally obtain produce through wholesalers;
• significant quantities of fresh produce are imported and exported; 
• there are low barriers to entry for producers;
• producers are essentially price takers;
• there are far fewer wholesalers than producers; 
• prices in the wholesale market appear to be set by supply and demand; and
• the major supermarkets account for 50 per cent of the fresh fruit and vegetables sold to consumers, however, there is a wider market for produce that includes the food service sector, processors and the export market, which makes the major retailers' share of the market for fresh produce less than 50 percent.[2]  

3.7        The ACCC used apples as an example of produce supply chains. Chart 3.1 sets out the apple supply chain, as assessed by the ACCC:

Chart 3.1: Diagram of the apple supply chain, Source: Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008, p. 248.

3.8        In short, the ACCC found that the price inputs for apple producers are:

• labour;  
• water;
• fuel, fertiliser and transport;
• packaging requirements; and
• grading requirements.

3.9        Evidence provided to the ACCC was that Coles and Woolworths had introduced a 'one-touch packaging' system, whereby apples are packed into crates which they can place directly onto their shelves. This system can result in increased costs for producers, both when the apples are packed for the retailer and again, if produce is rejected by the retailer, when it has to be repacked. The ACCC also heard evidence that producers stockpile packing crates to avoid shortages, again increasing costs.

3.10      The ACCC Report stated that it 'understands that the increased cost to growers has not been reflected in the prices paid by either MSC (major supermarket chain) for the produce'.[3]

3.11      Farmers have a number of outlets for their produce. They can:

• sell directly to a retailer;
• sell directly to consumers and small retailers through wholesale markets;
• use a third party consolidator to sell to retailers, at market or to consumers (for a fee); or
• export their produce.

3.12      It is noted that this analysis does not include the use of farmers' markets by some producers, which appears to be an increasing means of selling fruit and vegetables, though in small quantities.[4]

3.13      The ACCC found that farmers' decisions about how to sell their produce is usually determined by the size of their operation and how they manage their business.[5] 

3.14      The major retailers, it found, follow a similar process to source fresh apples:

• they make an annual forecast of their requirements for the season, then hold weekly meetings with producers to discuss price and volume required for that week; 
• the apples are packed and transported to a distribution centre; 
• the retailer takes title at that point, on the condition that the apples meet their quality specifications;
• they also obtain stock directly from some producers, to ensure that sufficient stock is maintained in store on a daily basis; and
• supplies are also topped up from wholesale markets.[6]

3.15      The ACCC found that 'the balance of bargaining power in negotiations between the MSCs and growers will generally rest with the MSC', as producers have few alternatives other than to sell to the major retailers, whereas the major retailers have a greater range of options to obtain supply.[7] 

3.16      Evidence was put before the ACCC that:

...it is not uncommon practice for the MSCs to ask suppliers to reduce a negotiated price so that an MSC can match a competing retailer’s offer. Some industry participants contended that while the suggestion is made in the form of a request, it is more of a demand, where the implication of not agreeing to change the price is that the volume of orders could be reduced the following week.[8]

It should be noted that retailers denied the threat level in such requests.

3.17      Further, complaints to the ACCC alleged that retailers will reject apples if they find the same quality is available at wholesale markets more cheaply, though the ACCC Report stated that these claims were not supported by evidence.[9]  

3.18      Overall, the ACCC found that prices received by apple growers in wholesale markets generally reflect supply and demand and the prices paid by major retailers generally reflect the top wholesale price. However, it was the purchasing power of the retailers that exerted 'a strong influence over the wholesale price', rather than the other way around.[10]

3.19      If they are running specials on apples, retailers 'can pay significantly less than the market wholesale price', though specials are often initiated by growers to deal with an oversupply.[11]

3.20      The ACCC also heard evidence from Coles that it seeks a higher target margin on fresh produce than dry groceries because of:

• the higher rates of spoilage, wastage and shrinkage;
• greater labour costs in the preparation of produce for sale;
• the need to maintain a higher level of customer service and replenishment of stock;
• a requirement to maintain cold storage up to the display and sale of produce; and
• stringent regulatory requirements on the sale of fresh produce.

Whitehall Associates Report

3.21      In its report for the Department of Agriculture, Fisheries and Forestry, Whitehall Associates suggested a simpler supply chain than that envisaged by the ACCC:

Chart 3.2: Diagram of the apple supply chain, Source: Whitehall Associates, Price determination in the Australian food industry: A report, 2003, p. 57.

3.22      Whitehall Associates believe that the main drivers of price through the chain include:

• supply factors, such as seasonal crop variations, which in turn can be caused by changes in climate, natural events or the need to clear produce, which is exacerbated by asymmetrical information about the market (see below);
• consumer spending levels;
• retailers' target margins, which are designed to both reach their desired profit targets and cover spoilage costs, clearance discounts and the costs of displaying fresh produce;  
• fresh wholesale market prices, located mainly in capital cities and some major urban areas, which still set prices charged on direct sales to retailers; 
• asymmetrical information in relation to the market, in favour of agents and the major supermarkets. As a result, producers have incomplete information about the market at any point in time, whilst agents and major retailers are able to manipulate the price of produce; and
• more organised categories of fresh produce, resulting in participants having better information on crop forecasts, market conditions and product availability.[12]

Supply chain described in submissions

3.23      A number of the submissions made to the committee referred to the complexity of the supply chain. The Australian Food and Grocery Council (AFGC), for example, states that the supply chain is made complex because of variations in:

• the distance some produce has to travel to reach the consumer;
• the number of parties within the supply chain, including the local producer, wholesalers and transporters before reaching the retailer;
• storage and handling conditions necessitated by the seasonality of produce or the need for special packaging; and
• the availability and quality of produce, as a result of factors such as weather.[13]

3.24      ANRA's submission refers to the variety of sources of produce sold by supermarkets:

ANRA's supermarket members typically source fruit and vegetable supplies from a variety of providers; including farmers’ co-operatives, wholesalers and produce markets – where produce is consolidated, graded, packed etc before purchase by retailers.[14]

3.25      The most detailed delineation of the supply chain is by Woolworths.
Figure IV of its submission shows that its supply chain is notably less complex than that set out in either the ACCC Report or the Whitehall Associates Report.[15]

Chart 3.3: Woolworths Supply Chain

3.26      It also lists the range of processes undertaken at each stage of the supply chain, that add to the cost of produce:

Grower	Packing Shed	Distribution Centre – Wholesaler	Distribution Centre – Retailer	Retail Store
Packing Ripening Transport Labelling	Maturity tests Waxing Cleaning Ripening Labelling Grading Chemical treatment Storage Quality control Transport Receival and dispatch	Storage Quality control Transport Chemical treatment Ripening Maturity tests Receival and dispatch	Storage Ripening Packaging Transport Quality control Receival and dispatch	Packaging Quality control Stocking shelves Labelling

3.27      In contrast to Figure IV, Figures I and II in Woolworth's submission sets out
a breakdown of the supply chain for Australian grown carrots and tomatoes.[16] They show that Woolworths sources 73.5 per cent of its carrots and 73.3 per cent of its tomatoes directly from producers.

3.28      The committee notes that Woolworths' submission is different to the evidence it provided to the ACCC inquiry. That evidence indicated that, at least in 2007, Woolworths obtained the bulk of its produce directly from the grower, but supplemented that with produce obtained from wholesalers at local markets. Woolworths' submission, it should be noted, is supported by evidence obtained from producers. CGSA, for example, stated in its evidence to the committee that its fruit was sold through packing sheds and that 'it is an extremely hard job to sell all your citrus...for one grower to do their own [marketing] and sell it to any sort of retailer – you just physically could not do it'.[17]

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