Sustainability and competition in agri-food Pricing, competition law and transparency Frank Bunte
Contents Reasons for study Context Price transparency Evaluation framework
Reason for the study Ministry of EL&I Purpose: sustainability of Dutch agriculture within 15 years Strategy: initiative by and agreements among businesses Government role: conditions for competition Agribusiness No scope for investments and agreements
Reason for the study Potential bottlenecks Competition SER study: competition law is not an impediment for sustainability Case study shrimps Competition law is not transparent for businesses Transparency Differences in price development within and among national supply chains Price monitor at EU level
Context Investment and income in in agriculture 2009 NMa study Competition cases
Context Investment Dutch agriculture 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2003 2004 2005 2006 2007 2008 2009 Investment Investment in sustainable assets
Context Farm income 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Farm households, income from farming All households Entrepreneurs Farm households, total income Employees
Context Income and investment in dairy farming 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009-50 Farm income Investment
Context Income and investment in pork production 500 400 300 200 100 0-100 -200-300 2003 2004 2005 2006 2007 2008 2009 Farm income Investment
Context Income and investment in poultry production 600 500 400 300 200 100 0-100 -200-300 2003 2004 2005 2006 2007 2008 2009 Investment Farm income poultry meat production Farm income egg production
Context Income and investment in greenhouse horticulture 300 200 100 0-100 -200-300 -400 2003 2004 2005 2006 2007 2008 2009 Investment Farm income
Context Summary Farm income constant Investment in sustainable assets grows, but investments required are substantial There is a weak negative relation between farm income and investment Investment probably depends on fiscal measures and subsidies
Context 2009 NMa study on food supply chain Price transmission in Dutch food supply chain Consumer prices are made up of costs of the respective links in the supply chain Concentration is substantial throughout the chain No profits due to concentration or price asymmetry
Context Competition cases Shrimp quota FMD Compensation for milk producers Anaesthetics of pigs before castration Supply chain quality scheme for milk
Context Competition cases Horizontal agreements (price, quota) Foreclosure Lack of evidence of sustainability achievements Competition law is no sustainability law
Context Competition cases Reservations in informal statements may give rise to liability issues There are public solutions, but Ministry is looking for private solutions Free rider and external effects
Context Counterexamples Certified and branded products Organic produce One star concept for meat Volwaard chicken Rondeel eggs
Price transparency Theory Pricing in agri & food Cases Sustainability
Price transparency Search costs Exploiting asymmetric information Less transactions, possibly no market Low prices for suppliers, high prices for consumers Price distribution
Price transparency Strategic behaviour Collusion Pricing and information Price mechanisms (auctions) Role of market
Price transparency Hypotheses Suppliers with high search costs receive relatively low prices When markets are not intransparent, the price distribution is wide Transparency may be beneficial, but also detrimental for competition Price mechanisms may achieve efficient price solutions in markets with a lack of transparency The winner of a tender may be expected to make a loss Differences in prices are an indispensable element of the market process
Price transparency Why are transaction costs high for farmers? Price volatility Small amount of produce transacted per transaction Lack of knowledge about pricing Perishability Solution: use of intermediaries (cooperative, PO, wholesale trader)
Price transparency: Pricing in agri & food Frequency Amount of produce per delivery Involvement producer organisation Price mechanism Arable products Once a year Entire harvest Yes Tendering by PO Apples & Pears Once a year Entire harvest Yes Tendering by PO Vegetables Continuous Once a year Small amount Entire harvest Yes No Tendering by PO Contracts Dairy Continuous Small amount Yes Tendering by PO Eggs Continuous Small amount No Bargaining Pigs Regular Small numbers No Bargaining Poultry A few times Large numbers No Contracts Veal A few times Large numbers No Contracts Other cattle Regular Small numbers No Bargaining Fish Regular Small amount No Dutch auction Cut flowers Continuous Small amount No Dutch auction
Price transparency Changes in price mechanisms Demise of Dutch auction in fruits and vegetables Rules of game are determined by customers Principal-Agent-Relation between grower and PO Demise of cattle markets (sustainability) Less public price information Demand for price information DCA Fruit
Price difference between clock and contract prices (gld. cents per kilo) Price transparency Contract versus spot market prices for chicory 1.50 1.00 0.50 0.00-0.50-1.00-1.50 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% % Contract sales
Price difference between clock and contract prices (gld. cents per kilo) Price transparency Contract versus spot market prices for chicory 2.00 1.50 1.00 0.50 0.00-0.50-1.00-1.50 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% % Contract sales
Price transparency More price information in Canadian food retail More price information on food prices in Ottawa Comparison with control city Winnipeg Results for Ottawa Prices fall Less variation in prices More consumers switching from one retailer to another Growth of market share of Top 4 supermarket chains Growth of market share of discounters
Price transparency More price information in Canadian food retail
Price transparency Collusion: British tractor case UK Agricultural Tractor Registration Exchange Information shared on name of producer, brand, series number, agent, location of buyer Ability to monitor all imports and individual sales in the UK Little scope to deviate from cartel rules Classical cartel case
Price transparency The Greenery A dominant firm in a transparent world Dominant firm: 80% market share in 1995 Minimum prices for a week Excess supply The Greenery was undercut by its rivals The burden of excess supply was for The Greenery Difference in average returns and grower prices Transparency Competition knew The Greenery s prices Principal-Agent-Problem with own growers
Price transparency Auctions Incentive to indicate willingness-to-pay Bids are used to influence Probability that one wins the bid The price to be paid You can design an auction such that Bidders indicate willingness-to-pay / willingness-to-sell; Allocation is efficient; and/or Revenues are maximized / Purchases are minimized Pricing can be efficient, even if there is a lack of transparency
Pricing and sustainability Willingness-to-pay for red sweet pepper (70mm, 2007, German wholesale) 500 450 400 350 300 250 200 150 100 50 0 1 6 11 16 21 26 31 36 41 46 51 Netherlands Spain
Evaluation framework Issues to be addressed
Evaluation framework Evaluation framework Is there a lack of transparency? What is the nature of the transparency problem? What measures might for the government take?
Evaluation framework Is there a lack of price transparency? Complaints EC: Differences in price reactions throughout EU Search costs Market characteristics Tied-up suppliers Switching costs: in theory, relation-specific investments Reputation: herhaalopdrachten
Evaluation framework What is the nature of the transparancy problem? Access Understanding Reliability Comparability
Conclusion Wageningen UR