Supermarket chains are to be pulled into the Competition Commission’s investigation into collusion in the milk industry, following a complaint by dairy farmers.
Milk prices, along with other basic food products, have increased drastically in the past year, hitting consumers who have to fork out R6,31 for a litre of full-cream milk — 37% more than it was in January last year.
Competition Commission head Shan Ramburuth says it is still busy investigating a complaint laid by the Milk Producers’ Organisation of South Africa (MPOSA), which claims retailers are using their dominant position to squeeze the margins of farmers down through the chain.
“The producers claim that the supermarkets are getting milk dirt cheap because of their negotiating power,” says Ramburuth.
This follows the Competition Tribunal’s pre-hearing into alleged collusion by eight dairy processors held in February this year. The processors stand accused of operating a cartel aimed at fixing prices for raw and retail milk and manipulating trading conditions in the respective markets.
Some of these processors are accused of colluding to control the flow of excess milk supply so that they could stifle competition and artificially maintain high prices.
The accused processors are Clover Industries, Clover South Africa, Parmalat, Ladismith Cheese, Woodlands Dairy, Nestlé, Lancewood and Milkwood Dairy. However, Clover Industries has been granted indemnity for providing information about the alleged cartel’s activities under the commission’s corporate leniency policy.
If found guilty, the dairy processors could face a fine of up to 10% of their annual turnover, which for a company as big as Clover South Africa, with a turnover last year of R4,48-billion, could be as much as R448-million.
The tribunal hearings are expected to begin in late September and should be concluded some time in February next year.
Ramburuth says it is possible that market power abuse is happening at two levels in the chain, not just at the processor level, and the commission will be investigating the entire value chain and will be looking at the influence and market power of all stakeholders.
“However, let’s not forget that we have found collusion by the processors,” he says. “A lot of this has to do with who in the chain is taking the biggest cut. We are doing this in a number of different food markets, not just dairy.”
Ramburuth told the Mail & Guardian that the commission has set up a research project that will analyse all levels of supply chains for various food groups.
A number of analysts who gave presentations at the Dairy Industry Seminar held in Stellenbosch last week have told the M&G that the supermarket retailers have significant market power in the supply chain, which feeds downwards towards the farmers.
Professor Johann Kirsten from the University of Pretoria says that retailers have to be included in the Competition Commission investigation. “It’s time the Competition Commission investigates the power of the retailers and how that affects power relationships down the chain. The dairy producers are at the mercy of supermarket buyers and they are not friendly people.”
He says he has collected anecdotal evidence from CEOs of medium to large dairy processors who have told him that negotiations with supermarket chains are very awkward. “The negotiations are not cordial.”
Dr Nicola Theron from the University of Stellenbosch’s economics department says that if the Competition Commission is going to investigate abuse of market power, it has to be at every level of the chain.
“We just don’t know if the retailers have significant market power,” says Theron. “We don’t know what their margins are.”
Kirsten says getting information about margins from any of the players in the chain is very difficult, because it is mostly confidential and it is difficult to know where the profit distribution lies.
Agri South Africa executive director Hans van der Merwe says the retail sector should also be investigated, because it has significant market power in the supply chain. “All role players should expect that their behaviour will be under scrutiny.”
However, he says it is important to acknowledge that increases in food prices are a result of global shortages and it would not be right to try to solve all of these problems through competition law.
Theron says in the past two years South Africa has seen an increase in dairy product demand because of higher disposable income levels and the rise of the black middle class, and this has affected milk prices.
She says South Africa has had a milk production deficit since 2000 but with recent increases in global demand it is more difficult to meet this deficit through imports, and therefore there has been an increase locally in milk prices.
In January this year, milk producers were receiving close to R3,20 per litre, which is an increase of R1,20 on the price of more than R2,00 per litre that they received in January last year.
In the year from January 2007 to January 2008, South Africa has seen a 37% increase in the retail price of a litre of full-cream milk, from R4,60 to R6,31 and a 32,03% increase for a litre of low-fat milk, from R4,85 to R6,41.
The dairy industry has also become more concentrated with the number of milk farmers shrinking by almost half from 7Â 077 to 3Â 665 between 1998 and 2008.
However, this has not led to a reduction in milk production in the country because the remaining farms have increased the size of their production.
Van der Merwe says there has been concentration in the dairy market, but it would be wrong to conclude that because of concentration there is collusion.
Pick n Pay food merchandise director Paul Connellan says the company has not been contacted by any investigators about the Competition Commission investigation.
He says Pick n Pay makes very low margins on basic food items such as milk and bread.
“In addition, Pick n Pay will for at least the next year be selling four basic foodstuffs at cost price every month, of which milk will obviously be one such product,” says Connellan.
Shoprite Group’s chief executive, Whitey Basson, says that the supermarket group would welcome any investigation that will reduce costs in the supply chain and result in a cheaper product to the consumer.
“It is the policy of our company to always try to offer the cheapest prices to all our consumers. South Africa has a free market system that compares with the best in the world and we try and maintain that at all times,” he says.