Price Determination in the Australian Food Industry A Report

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6. Issues for consideration ISSUES FOR CONSIDERATION Purpose The project brief requires an analysis of a number of matters which arise from the study of prices. The subject Issues for consideration Conclusion/comment Competition and market power • What does the evidence from this study indicate regarding the effects of market power in the food sector? • Is there leverage available to producers to resist strong market power beyond the farmgate? See figure 123. One of the major determinants as to whether there is abuse of market power is whether super-normal profits can be sustained over time. The competitive nature of retail markets and the level of returns being earned in the Australian food sector (per section 4) do not indicate that there is major abuse of market power to the detriment of food product suppliers. Producer integration in cooperatives is discussed on page 124. Price Determination in the Australian Food Industry A Report Transparency and visibility in the value chain Value-adding in the food sector Adjustment • What has the study indicated regarding the transparency in food value chains? • What has the study told us about the incentive for and returns from valueadding activities? • What impact is adjustment having on prices and costs in certain sectors of the food industry? There is decreasing transparency in several food industry sectors in view of the concentration in food processing and marketing, and the consequential sensitivity to movement in margins. Retailers are vigilant for opportunities to reduce costs due to the pressure on major companies to offer increasing shareholder wealth. That issue is quite distinct from a lack of visibility which hampers the effectiveness of fresh food markets. The major value-adding activities have been identified and discussed in relation to a number of the sectors covered in the study. In this section we distinguish the main types of valueadding activities in food products and likely future directions of product and market development in food retail and food service markets. Pages 131–135 identify specific adjustment factors in the industry sectors analysed and their relevance to the study of food pricing. 122
COMPETITION AND MARKET POWER Is there a problem? There have been a number of studies undertaken in recent years to determine whether or not there is a problem with concentration of market power in the food industry and, if so, its impact on competition and pricing. This study has gained some insights into issues that influence that discussion. However it has not been undertaken specifically to address the question of market power as a primary objective. The observations from this work include: • A key defence used by major retailers to the charge that they command excessive market power is that they each face strong competition from more than direct retail competitors (large and small) but also from different food retailing formats in the growing food service sector. • Retailers contend that despite the costs of doing business in this food market, prices at retail are not rising excessively and businesses are not making super profits by international standards. • In most of the food lines studied in the project, there is significant direct and indirect competition at retail level. • There are a number of product lines where trade affects an early supply-chain price and the retail margin fluctuates as such prices are driven by different factors and accountabilities. • There are a number of instances where those with a command of better market intelligence take advantage of those without. Whether this creates a market failure condition is discussed later but it is the responsibility of relevant industries to ensure that sellers are aware of the commercial realities of the modern retail value chain. What determines market power? Market power provides a business with the ability to behave differently from the way it would in a competitive market – it can reduce input prices and raise selling prices, deter other participants from entry, take excessive margins for itself and do so over a considerable time. From the work done, it is apparent that there are a number of determinants of market power. Concentration of buying and selling. Higher concentration provides scope for a major buyer to exert force in negotiations due to their dominance of purchases. Specificity of the product – the degree to which A supplier has greater leverage if they product attributes can be specified for quality perform to specifications in the context of and performance. contractual arrangements. Perishability/storability of the produce. Highly perishable lines place the supplier at risk of being left with product losses. Levels of sunk cost in production. Large sunk costs will tend to make the supplier more risk-averse. Options open to buyer and seller at the time of With multiple options, a supplier or buyer committing to production by the seller and at the has greater power to choose. time of sale. Degree of vertical integration that exists in a Greater integration may provide a supplier or value chain – which may be in the form of direct a buyer with greater ability to control costs – ownership or through the existence of and therefore better options in pricing co-dependent alliances. particular items. Degree of transparency – the key issue being the Greater transparency provides a supplier or accuracy or extent to which the available buyer with greater understanding of market information reflects levels of supply and demand conditions and options. at the time of sale. Ability to command a super profit in on-selling. This would require a condition of limited retail competition in short and medium-term time frames. Whether the position of dominance is sustainable over time. Price Determination in the Australian Food Industry A Report 123
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Price Determination in the Australi
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© Commonwealth of Australia 2004 T
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FOOD AND AGRICULTURE BUSINESS GROUP
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FIGURES Price Determination in the
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• The current focus of retail cha
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• assertions as to market power i
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Overview - main drivers of prices i
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Food lines The analysis of food pro
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Figure 1. Overview of the approach
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Figure 2. Corporate profitability I
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Figure 4. Major drivers of prices a
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5.3 The greater influence of prevai
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DAIRY - PACKAGED MILK Overview of t
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Figure 10. Whole milk, 2 litre, sup
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Prices through the chain Our analys
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Figure 16. Natural cheddar cheese:
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Farmgate prices Farmgate prices are
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DAIRY - ANALYSIS OF PRICING OF DAIR
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Figure 25. Dairy butter and blend s
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‘Step-ups’ are paid by several
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THE MEAT SECTOR Analysis of the det
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The approach taken The pricing anal
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The changing value chains - various
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The approach taken Assumptions used
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Figure 39. Lamb market sales, ’00
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Figure 41. Lamb: Major drivers of p
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Observations The price comparison s
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Figure 46. Pork products, supply ch
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Figure 48. Value and cost-adding fr
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Supply chain management Wholesale m
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Figure 51. Fresh vegetables: Major
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FRESH HORTICULTURE - WHOLESALE MARK
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FRESH HORTICULTURE - ANALYSIS OF PR
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market access - in the United State
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The industry’s product mix The ke
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PROCESSED FRUIT AND VEGETABLES Anal
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Figure 69. Frozen vegetables, peas,
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PROCESSED PINEAPPLES - ANALYSIS OF
Page 84 and 85: Figure 75. Fresh fruit, with juice,
Page 86 and 87: GRAIN AND OILSEED PRODUCTS Analysis
Page 88 and 89: Figure 79. Flour, 1kg, supply chain
Page 90 and 91: Figure 82. Share of retail price of
Page 92 and 93: OILSEEDS - OVERVIEW Background The
Page 94 and 95: Figure 87. Oils and fats, supply ch
Page 96 and 97: The amount represented by the retai
Page 98 and 99: Industry risks The key area of risk
Page 100 and 101: • The major cost faced by egg pro
Page 102 and 103: Figure 96. Consumer price index, fo
Page 104 and 105: • Many such operators have indica
Page 106 and 107: SUGAR PRODUCTS Analysis of the dete
Page 108 and 109: Figure 103. White sugar, 2kg, suppl
Page 110 and 111: Projected export returns for the co
Page 112 and 113: • Export prices are driven by glo
Page 114 and 115: Retail prices • The average retai
Page 116 and 117: Industry risk • The overall retur
Page 118 and 119: 4. The performance of Australian fo
Page 120 and 121: THE PERFORMANCE OF AUSTRALIAN VERSU
Page 122 and 123: THE PERFORMANCE OF GLOBAL BRAND MAN
Page 124 and 125: THE PERFORMANCE OF PRIMARY MANUFACT
Page 126 and 127: Our purpose in preparing this secti
Page 128 and 129: GROCERY RETAIL - WHAT DETERMINES PR
Page 130 and 131: The consumer trend towards eating o
Page 132 and 133: GROCERY RETAIL - PERFORMANCE OF GRO
Page 136 and 137: PRODUCER INTEGRATION Does integrati
Page 138 and 139: Industries have in several cases ta
Page 140 and 141: Examples include: • 1 litre milk
Page 142 and 143: Figure 132. Targeting the stomach H
Page 144 and 145: MAJOR ADJUSTMENT - WHAT’S HAPPENI
Page 146 and 147: THE IMPACT OF DROUGHT The sector Di
Page 148 and 149: Price Determination in the Australi
Page 150 and 151: Oczkowski, E, Murphy, T 1999, Influ
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Price Determination in the Australian Food Industry A Report

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