In the United States poultry farmers are offered contracts of company design, have no say in what is included in the contract and have the choice of signing it or no chickens. Not much choice there. Most poultry meat farmers are so deep in debt from mortgages on their poultry farms and constant demands from integrators (processors) of new equipment that they have to sign whatever is offered because they need chickens on the farm.
The newest thing in contracts in the US is binding legislation. This takes away the growers right to our judicial system and the grower cannot sue the integrator in a court of law. The abuse of the American poultry farmer is unbelievable. Most growers don’t speak out for fear of losing their contracts.
At the present time there is no government agency watching over the integrators like they should be watched. Our government is aware of the abuse of the farmer but does not seem to care. Money runs the show and the integrators have plenty of it. They basically run like a pack of dogs and do whatever they want.
An American poultry farmer’s view of the unregulated market for contract chicken meat growing in the United States, 1996
Passage of the Chicken Meat Industry (CMI) Bill in the South Australian Parliament on 16 July, 2003, its Royal assent on 24 July (to become the CMI Act) and its proclamation on 21 August, 2003, establishes a new standard of legislation in Australian primary industries to address the issue of market power concentration at the processor/grower functional level, and the consequent imbalance in bargaining power between processors and contracted growers. Outlined in this paper is the economic contribution and structure of the chicken meat industry in South Australia, the background to and aims of the legislation and the new choices and potential consequences for growers and processors that accompany the legislation.
Primary Industries and Resources SA Industry Scorecard calculates that the value of the South Australian chicken meat industry in 2001-02 at grower farm-gate was $70 million; value at processing plants was $174 million and retail value was $210 million. South Australia exported about $66 million of chicken meat interstate and imported about $36 million in that period; a net contribution of $30 million from interstate trade. In the absence of any significant overseas trade in chicken meat the industry contribution to Gross and Net State Food Revenue was $280 million (PIRSA, 2003).
The South Australian industry comprises around fifty growers, supplying growing services on contract to three processors – Inghams Enterprises (about 32 growers), Adelaide Poultry (about 18 growers) and Gourmet Poultry (about 5 growers). There are several hundred employees at the three plants in Adelaide.
Compared to the processor/grower functional level, there is fierce competition at the wholesale/distribution level. This has led to significant restructuring within the South Australian industry during the past 18 months. Early in 2002 Bartters ceased to process chickens in South Australia, but continue to supply South Australia from their upgraded plant at Geelong in Victoria. Late in 2002 Joe’s Poultry fell into administration and was purchased earlier this year by Adelaide Poultry. New South Wales headquartered Baiada Poultry have increased supply into the Adelaide market from recently acquired plants in Victoria.
Adelaide-based Gourmet Poultry have switched their supply of chickens from Inghams to direct contract with a cluster of growers in the McLaren Vale area. Inghams are midstream in restructuring their grower base towards fewer, larger growing farms. These changes are indicative of the fiercely competitive national market for chicken meat. Due to the increasing oversupply of available shedding, some chicken meat growers are being left without contracts, without an income from chicken growing and with redundant assets. The current rationalisation of supply contracts is expected to continue, with many smaller enterprises lacking development options for a range of reasons, including having farms located in rural city and peri-urban water catchment areas.
The occurrence of ‘stranded assets’ in the chicken meat industry is an international phenomenon where the pace of change, the business of contracting, and the imbalance in processor/grower power can combine to produce harsh, and in some cases terminal, outcomes for individual grower enterprises (Skully, 1998; Harl, 2000).
It is recognised that the South Australian grower base has lagged in its adjustment to ‘national best practice’. Shedding floor space per farm in South Australia is about 5000 square metres, compared to more than 8,500 square metres per farm in Western Australia. Other states also lag behind the scale of enterprises in Western Australia. However, the authors are not aware of any independently validated research trials about optimal growing operations, whether of farm size or growing technology, addressing issues such as, inter alia, transport economics, biosecurity and efficient farm management. Amongst growers, there is often debate and disagreement as to the benefit-cost of new technology, particularly shedding ventilation systems.
Chicken meat is Australia’s second most popular meat, with consumption around 32 kilograms per head per year. Market growth is grounded in meat quality consistency, high feed to meat conversion efficiency, economies of scale at grower and processor level and the need for on-going restructuring to take advantage of these economies. The chicken meat industry is dynamic and competitive at a national level, though starting to raise some concerns about market concentration. Although spared competition from imports, processors in particular are alert to the possibility of change in chicken meat import risk assessment, currently under review.
The Chicken Meat Industry Act 2003 does not extend its interest to processor concern about the concentration of supermarket retail power in Australia. Its focus is on the monopsonistic nature of the market for chicken meat growing services.
The Chicken Meat Industry Act 2003 introduces a new legislative scheme to address an old problem in an innovative way. It repeals the Poultry Meat Industry Act 1969, with its anti-competitive, centralised control by an industry Committee over new grower entrants and the terms of growing agreements, and addresses the long-standing market circumstance of bargaining power imbalance between processors and growers in the concentrating market for growing services. This is a market where growers provide specialised and valuable shedding with no alternative use, and may have only one purchaser in their region for their services. This is regional monopsony. It is a type of market where market failure in the form of abuse of market power can and does occur. The Hansard record of the debates on the Second Reading of the Bill in the South Australian Legislative Assembly (evening of 16 July, 2003) provides some examples of this conduct (Hansard, 2003).
A majority of grower submissions and the SAFF submission to the Review Panel during the consultation about the draft Chicken Meat Industry Bill in South Australia indicated experience of harm, commercial cost and fear of retribution during the de facto deregulation period, 1997-2002 (Review Panel, 2002; SAFF, 2002). This was a period when Australian Competition and Consumer Commission (ACCC) authorisations for collective negotiation were in place with the two major companies in the State.
The conclusions drawn from the ACCC authorisation experience are:
The challenge in drafting legislation became the striking of a balance between the imperative of allowing market-driven change on the one hand and providing effective checks against harsh and unreasonable treatment of growers in an imperfect market on the other. This had to be provided against the background of a scheme that enabled an effective section 51 Trade Practices Act exemption, such that the exempted conduct, including the identification of the collective negotiation parties, was specifically identified.
Contrary to some interpretations, the South Australian Government did not deregulate the chicken meat industry during the 1990s. Around 1996 the Poultry Meat Industry Committee decided that the Poultry Meat Industry Act contravened the Trade Practices Act and, of its own accord, and despite clearly expressed concerns by the contract growers ceased to function. An attempt in 1997 to deregulate the industry by the then Liberal Government failed in the Legislative Council. Growers were then promised new legislation. The previous Government commenced the present legislative process in 2000.
Collective bargaining has been justified by the ACCC approval during the past six years of several applications from national processing companies (eg Inghams, Bartters) for the authorisation of collective negotiation by growers with their processor, on the basis of the net public benefit flowing from addressing the imbalance in bargaining power. In 1997, this was approved on the basis of an actual imbalance, not a perceived imbalance, as then Commissioner, Mr Alan Fels, told Inghams Enterprises, Australia’s largest chicken meat processing company, in rebutting their proposition that the imbalance was merely perceived. The ACCC renewed the authorisation to Inghams in 2003.
Collective bargaining by small businesses has been an issue of considerable discussion since the 1989 Bedall Inquiry into Small Business. It was the only issue addressed in the SA Government submission to the Dawson Committee Review of the Trade Practices Act 1974, which commenced in 2001. In its April 2003 report the Dawson Committee acknowledged that small businesses are often at a disadvantage when negotiating with larger businesses. The Committee recommended that where collective bargaining may do little or no harm to the competitive process, and may generate public benefit, the authorisation process should be speeded up. The Committee proposed that groups of small businesses be permitted to notify proposed collective negotiations to the ACCC. Immunity would come into effect after 14 days and would remain unless revoked by the ACCC on public interest grounds. The Committee also agreed that the authorisation process has been too long in some cases and that the period for consideration be reduced to a maximum of six months (Corrs et al, 2003; Dawson et al; 2003; Pengilly, 2003). The Dawson Report was silent on the outcomes of ACCC collective negotiation authorisations; that is, whether authorisations actually provided sufficient countervailing power to achieve genuine negotiation between the authorised small and large businesses and whether allegations of harmful and unreasonable behaviour were satisfactorily resolved.
Industry experience in South Australia is that ACCC authorisations to collectively negotiate have been insufficient to achieving two-way negotiation and have not been an effective check to forceful behaviour. A similar conclusion about the value of an ACCC authorisation to collectively negotiate was reached in Victoria. The Victorian Farmers’ Federation successfully appealed to the Federal Court against an ACCC authorisation to processors for collective negotiation with growers. The judgement of 5 August, 2003, was that an authorisation is only valid where both parties agree to the authorisation. Growers were of the opinion that the authorisation was unwelcome as it would favour processors and not correct the bargaining imbalance (VFF, 2003; Skulley, 2003).
The CMI Act follows the ACCC justification of collective bargaining, and incorporates the extra disciplines of compulsory mediation and arbitration to increase the prospect of genuine negotiation occurring. Mediation and arbitration are appropriate alternatives to expensive court litigation where parties with a mutual interest in growing/processing chickens are reluctant court protagonists. Access to mediation and arbitration under ACCC authorisation requires both parties to agree to the pathway, which is unrealistic and has not occurred.
The Act is pro-negotiation. The principal aim of compulsory mediation and arbitration is not to have a preponderance of mediation and arbitration, rather to provide the critical missing factor enabling better-balanced bargaining. It is the ‘circuit-breaker’ for disputes, and ensures that one party’s view cannot be forced on the other party, without there being at least an outcome of mutual advantage or a convincing argument as to why that outcome is necessary. An industry shift from mutual mistrust and forced contract outcomes towards mutual interest, greater cooperativeness and trust will hopefully head off entry down the mediation and arbitration pathway. The prospect of cost recovery of arbitration expenses against the unsuccessful party should act as a discipline to discourage inappropriate access to arbitration.
The Act is also pro-competitive. Importantly, chicken meat growers can opt out of the scheme to negotiate their own contracts and manage their own disputes. The Government responded to National Competition Council concerns and amended the Bill in certain areas during its consideration. This included removal of the exclusionary conduct exemption, removal of the cap on contract length and introduction of a six-year sunset clause (thus leaving the decision as to the renewal of the Act to Parliament, after a review of the operation of the Act).
The Act joins the industry to commercial arbitration law. A Registrar, a public servant to be appointed by the Minister for Agriculture, Food and Fisheries, will:
As indicated previously, the progress of the CMI Act has been accompanied by structural change. Processors have been making new assessments of farm biosecurity risk and responding to new transport and farm technologies and market forces by restructuring their growing contracts in favour of larger farms. The fact that the Act was not enacted prior to the expiry of most five year written contracts in September 2002, has left some growers growing chickens on a ‘course of action’ basis rather than under written contract at proclamation date, when the transition provisions became effective. On 21 August, 2003, all contracted, registered growers were embraced by the new scheme, at least until they are deemed ineligible to stay in (probationary growers) or elect to opt-out. Staying in the scheme does not override terms and conditions of any current written contracts, but does provide access to the scheme’s dispute resolution processes. Growers may opt out of the scheme at any time to manage their own negotiations directly with their processor, but cannot opt back in until expiry of their current contract.
The Act is quite explicit in its desire to maintain a dynamic and competitive chicken meat industry in South Australia; dispute resolution must take account of economic and efficiency imperatives mandated by the Act, as well as the equity requirement. Viability and competitiveness are driving grower enterprises from an average shed space per farm of around 5000 square metres towards current national best practice approaching 10,000 square metres per farm. The Act does not include a shed expansion scheme, which is an important feature of industry arrangements in Western Australia, facilitating adjustment in the face of peri-urban expansion. Nor does the Act protect growers from the need to adjust in a dynamic industry. However, it has the power to provide a check upon harsh contractual terms and unreasonable behaviour, including unreasonable exclusion of growers in renewal of contracts.
The Federal–State Governments’ Competition Principles Agreement (CPA) necessitated the review of the previous legislation and its repeal, based on its anticompetitive effects without a counter-balancing public benefit. However, the current assessment by the SA Government is that total deregulation would involve substantial social detriment and is not appropriate in South Australia at present.
The issues addressed by the Act are not confined to South Australia; they are national issues. Given the presence in all States of market failure, evident as market power problems, in the market for chicken meat growing services it would be desirable for all States to have similar or matching legislation for a consistent check to the imbalance of bargaining power and its harmful consequences for growers. The market power problems that merited the 1960s genre of countervailing power legislation in the industry, ipso facto confirmed to persist to the present by dint of ACCC authorisations, are not in prospect of dissipating. This was the grist of written grower submissions during consultation about the draft CMI Bill in South Australia in 2002.
Importantly, the Act presents no threat to processing companies conducting business on a fair and reasonable basis. The best-case scenario for the industry in South Australia will be one where the Act is largely silent; negotiation is experienced by both parties and is successful in contract formation and dispute resolution, and little or no arbitration is needed. The fact that arbitration is not costless should stifle trivial disputation; the fact that the Act requires arbitration to consider industry competitiveness will avoid malalignment of the local industry in its national context.
It is quite possible that with the restructuring occurring in the South Australian industry more growers will opt for individual contracts. So long as no coercion accompanies that choice the outcome will not be inconsistent with the equity objectives of the CMI Act. The fact of choice is fundamental to the CPA.
The Chicken Meat Industry Act 2003 is an innovative connection of an important primary industry in Australia to commercial arbitration law. It levers off ACCC support for collective negotiation in circumstances where countervailing power for small businesses bargaining with a larger business may do little harm to the competitive process and may not be detrimental to competition. While the Dawson Committee Review of The Trade Practices Act supported a speedier notification system for collective negotiation as an alternative to protracted authorisations, neither the ACCC nor the Dawson report have a satisfactory response to the persistence of unconscionable conduct in the presence of an authorisation or a notification.
The unsatisfactory experience of ACCC authorisations to chicken meat processors to collectively bargain with their growers in South Australia has led to the Chicken Meat Industry Act 2003. In Victoria, the Federal Court decided on appeal in favour of growers (Victorian Farmers Federation v ACCC), that collective negotiation should not be authorised. Growers opposed the authorisation as an unsatisfactory substitute for appropriate legislation.
In principle, collective negotiation by chicken meat processors with growers is a remedy to bargaining imbalance, is not a significant detriment to competition and therefore has merit. In six years of practice in South Australia ACCC authorised collective negotiation failed to yield genuine negotiation for chicken meat growers. South Australia’s Chicken Meat Industry Act 2003 and the August, 2003, Federal Court judgement in Victoria are aligned in rejecting ACCC collective negotiation authorisations as a sufficient remedy to the market failure of benefit to growers.
The Chicken Meat Industry Act 2003 is a discipline to fair dealing in the industry. In contrast to an earlier generation of legislation that it replaces, and in an endeavour to comply with National Competition Policy, the Act provides the opportunity for growers to opt-out of the scheme to individually negotiate contracts, with the possibility of a better deal and the risks and responsibility of resolving disputes that may arise individually or by recourse to litigation. Its innovation is the installation of access to compulsory arbitration as a discipline to genuine negotiation. Drafting and amending the CMI Bill required balancing contemporary policy bias for deregulation with local industry experience that a harmful and unreasonable commercial culture can develop and persist where no ‘third-party’ checks exist. In South Australia, processors and growers have changed circumstances to consider. Growers have some new choices where there were none; processors have the same choices with some new potential consequences.
Although the market for contract-growing services in the chicken meat industry has unique features, and its connection in South Australia to commercial arbitration law is novel, it may not be the only primary industry to make the connection if present trends in market concentration reveal similar adverse economic and social impacts elsewhere in contract agriculture.
The experience gained in achieving the CMI Act in South Australia suggests that it may be useful for additional research of ‘triple bottom line’ construction to be conducted in the chicken meat industry. The research would be relevant to overcoming institutional scepticism about the presence and significance of socio-economic detriments in the industry, leading to implementation of remedies more effective than the present type of ACCC authorisations and national consistency.
Corrs, Chambers and Westgarth, 2003, The Dawson Committee Report on the Trade Practices Act, Corrs in Brief, April, pp 1-4.
Dawson et al; 2003, Review of the Trade Practices Act, Treasury, Commonwealth of Australia.
Hansard, 2002, Second Reading Speech, Legislative Council, Hansard, South Australian Parliament,, 4 December.
http://www.parliament.sa.gov.au/catalog/hansard/2002/lc/wh041202.lc.htm
Hansard, 2003, Second Reading Speeches, House of Assembly, Hansard, South Australian Parliament, 16 July.
http://www.parliament.sa.gov.au/catalog/hansard/2003/ha/wh160703.ha.htm
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Review Panel, 2002, National Competition Policy Legislative Review, Chicken Meat Industry Bill, Primary Industries and Resources South Australia, November.
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South Australian Chicken Meat Sector Analysis 2001-02, Scorecard Group, Corporate Strategy and Policy, Primary Industries and Resources South Australia.
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Skulley M, 2003, AWU and VFF talking turkey, The Australian Financial Review, 12 August, p 3.
Skully D, Opposition to Contract Production: Self-Selection, Status and Stranded Assets. Contributed paper to American Agricultural Economics Association, Salt Lake City, Utah, United States, 1998.
Victorian Farmers Federation, Chook farmers’ court win ruffles ACCC’s feathers, Media Release, 7 August.
[1] Developed from a paper presented to the Meat Industry Development Board, Primary Industries and Resources South Australia, 12 August, 2003. Acknowledgements to Ms Laura Fell, Chair, Chicken Meat Group, South Australian Farmers’ Federation and Dr Tim Ryan , Consultant to SA Processors, for constructive dialogue throughout the progress of the legislation.
[2] Glenn Ronan is Principal Strategy Consultant, Corporate Strategy and Policy, Primary Industries and Resources South Australia
[3] Greg Cox is Managing Solicitor, Business and Competition, Crown Solicitors Office, Attorney Generals Department, South Australia.