1. Towards a fair and efficient economy for all Competition challenges in food and agro-processing Presentation to Parliament’s Portfolio Committee on Economic Development Shan Ramburuth Commissioner, Competition Commission 10 November 2009

2. Overview Background High food prices Structure of the food market Commission’s interventions Major cases Role of the state Towards a fair and efficient economy for all

3. Background Regulation – Agricultural marketing boards, co-ops Liberalisation in 1996, tariff reform & trade agreements Effects of liberalisation since after 1996:  closing down of boards  market concentration  dominant private companies and co-ops  surge in imports in processed foods  SAFEX established  cartels replaced public regulation Towards a fair and efficient economy for all

4. High food prices – contributory factors Availability of grains worldwide Increasing demand including from economic growth and biofuels Unfavorable climatic conditions Increasing energy and fuel costs – transport Anti-competitive conduct in the agro-food chain including inputs Towards a fair and efficient economy for all

5. The structure of food markets Towards a fair and efficient economy for all Historical oligopolies and virtual monopolies Increasing vertical integration and horizontal concentration Limited new entrants due to barriers such as access to capital and competing against established brands Transformation at the level of ownership in the established firms Incumbent firms leverage historical positions to extract profits and impose standards

6. Commission’s interventions Within mandate of the Competition Act Enforcement and exemptions, merger analysis, advocacy and market inquiries Prioritisation of the food value chain  Impact on low income consumers  A number of complaints  Government interventions: monitoring prices, task teams, industrial policy  Research and scoping exercises show strong indications of anti- competitive conduct Towards a fair and efficient economy for all

7. Major cases Fertilizer Tinplate and other inputs Bread and milling Grain storage and trading Dairy Poultry Fish Fats and Oils Food retail Towards a fair and efficient economy for all

8. Fertilizer High levels of concentration in inputs to farming Fertilizer is the single largest input cost in production of crops such as maize, wheat Long-running cartel:  Foskor applied for leniency;  Sasol reached settlement with Commission, penalty of R250m;  Case proceeding against Omnia and Kynoch/Yara Local monopolies in main inputs (abuse of dominance ):  Ammonia production- Sasol charges inland import parity prices  Phosphate rock- Foskor is settling Towards a fair and efficient economy for all

9. Tinplate and other inputs Tinplate Tinplate is major cost in canned foods for local and export markets Tinplate pricing impacts heavily on:  local production by farmers e.g. in tinned tomatoes competing with imports, and canned fruit in export markets  consumer prices of canned foods Sole local producer, ArcelorMittal SA, increased tinplate prices by around 70% in April 2009; Commission investigation underway Other inputs to agricultural production being investigated Diesel Fencing wire Plastic irrigation piping Towards a fair and efficient economy for all

10. Bread and milling CC initiated & received a complaint Blue Ribbon (Premier), Albany (Tiger), Sasko (Pioneer), Sunbake (Foodcorp) Price fixing & market allocation –Western Cape & national Progress:  Premier: leniency in terms of CLP  Tiger: penalty of R98.8 m  Foodcorp: penalty of R45.4 m  Pioneer: defending case, closing arguments were heard in Sept. 2009 Research findings that margins increased at processing and retail of milled products Initiated investigation in milling of wheat and maize, leniency application received, investigations being concluded Towards a fair and efficient economy for all

11. Bread, flour and wheat prices, Rand per 700g brown loaf Towards a fair and efficient economy for all

12. Grain storage and trading Complaint received by trader against Senwes Abuse of dominance in the storage & handling of grain linked with virtual monopoly positions of privatised co-ops Tribunal found exclusionary conduct related to independent traders of grain Tribunal decision being appealed at CAC – awaiting CAC decision Other cases in grain storage under investigation  Setting of storage prices for futures contracts in the industry association (GSI)  RMB and Noordwes Kooperasie (alleged market allocation and price fixing) Towards a fair and efficient economy for all

13. Dairy Commission referred complaint -Dec 2006 Collusion & abuse of dominance by processors: (Clover, Parmalat, Lancewood, Woodlands, Nestle, Milkwood) Appear to have regulated the markets themselves following governments de-regulation Suppressing raw milk prices, raising barriers to entry through exclusive arrangements Case is currently tied up in legal processes Towards a fair and efficient economy for all

14. Poultry Poultry industry main source of protein for majority Commission referred case against Astral and Elite in 2008 Abuse of dominance, especially in breeding by engaging in exclusionary conduct Following extensive background research, investigations into different levels of the market including feed, breeding stock, broiler production, and poultry products Towards a fair and efficient economy for all

15. Fish Pelagic fish – historical single marketing channel in the 1990’s known as Federal Marine. Deregulation led to competitors allocating brands through auction Initiation into pelagic fish at different levels of the market – fishing, processing and retail Key concerns include exclusive agreements and alleged collusion Investigating allegation of export cartel in hake Towards a fair and efficient economy for all

16. Edible vegetable fats and oils Initiated investigation against Unilever and 14 others Retail price of cooking oil increased by 116% between 2006 and 2008 Allegations of collusion in vegetable oil Allegations of Unilever abusing dominance in margarine Towards a fair and efficient economy for all

17. Supermarkets Public outcry about high food prices Complaint from Milk Producers Organisation Preliminary study Initiated complaint against major retail stores: including Pick ‘n Pay, Shoprite Checkers & Spar Buyer Power: Rebates & listing costs Long term lease agreements: raising entry barriers Category Management: facilitating collusion Information Exchange: role of market intelligence consultants Towards a fair and efficient economy for all

18. Progress on major cases Towards a fair and efficient economy for all Inputs Animal feed Poultry feed Yeast Tin plate Diesel Fertilizer Wire fencing Plastic irrigation piping Fertilizer ProductionPoultry Milling Poultry Storage/ Trading Grain ProcessingBread Fish Fats and oils Bread Dairy Bread Dairy RetailingFish Dairy Supermarkets Fats and oils InvestigationHearingSettlementDecisionAppeal/Review

19. Commission’s work High concentration levels prevail, barriers to entry, poor competitive outcomes Need to:  undermine cartels, opportunities for new entry  examine the role of industry associations  increase agricultural production by addressing effects of anti- competitive conduct on costs  improve understanding across govt and relevant public institutions Towards a fair and efficient economy for all

20. The role of the state Towards a fair and efficient economy for all Commission investigations uncover past conduct and its consequences Proactive measures required to increase competition and change outcomes This requires coordination on the part of government and public institutions, including:  Development finance to support new entry  Leveraging government shareholding and support to encourage competitive conduct  Supportive government interventions in economic infrastructure, R&D, and skills development  Procurement to support new entry  Industrial and trade policy; and regulation

21. Thank you! Tel: 012 394 3332 Fax:012 394 4332 email: shanr@compcom.co.zashanr@compcom.co.za Towards a fair and efficient economy for all