Australian investment is in a transition from mining to food production, keeping in step with the economic transformation of China (Australia's largest trading partner) from developing to developed nation. There are competition law implications, including food industry consolidation through mergers.
Root and branch review of competition law
December 2013, the Coalition Government issued terms of reference for a root and branch review of Australian competition law. The review will examine current laws and also the broader competition framework.
The root and branch review is the first major review of competition policy since the Hilmer Report was published in 1993. The Hilmer Report was influential and resulted in significant legislative changes. Those changes included the introduction of controversial rules providing for third party access to significant bottleneck infrastructure, important given Australia's reliance on the export of bulk minerals such as iron ore and coal which need such infrastructure.The final report of the root and branch review is due in 12 months. Whatever the report says, we consider it unlikely that the Coalition Government will make major changes to competition law. The Hilmer Report followed close on the heels of an economic recession. There is no such impetus for major changes currently - Australia has not been in recession since the early 1990s.
National third party access regime review
During 2013 Australia's Productivity Commission (PC) reviewed the operation of the third party access provisions in Part IIIA of the Competition and Consumer Act 2010 (CCA). Part IIIA provides for third parties to get access to significant bottleneck infrastructure under certain circumstances. The PC's final report was provided to the government in October 2013. The government is expected to release the report shortly along with its views on which recommendations will be accepted and legislated.
Much of Australia's coal export infrastructure and some of its iron ore export infrastructure is subject to access rules that derive from Part IIIA. During 2004 to 2012, mining majors BHP Billiton and Rio Tinto successfully fought off Fortescue Metals' attempts to bring their Australian iron ore rail infrastructure under Part IIIA.
We consider that the Coalition Government may face some difficult decisions on which of the PC's recommendations to accept. In particular, should third party access be granted because a regulator decides that it would be efficient or because a third party can't profitably provide its own infrastructure? The efficiency approach arguably involves some degree of central planning, the profitability approach suggests cross subsidisation of more marginal firms - neither may be palatable to the Coalition Government which considers itself business friendly.
From mining boom to dining boom
Australian investment is said to be in transition. Much of Australia's economic growth during the last decade stemmed from an expansion of mining, particularly for iron ore and coal. Demand for these minerals was driven primarily by economic growth in China.
Mining investment in Australia is now tapering off, particularly for coal as world prices fall in response to increased global and regional supply. Mining will continue to be important for Australia during 2014 however investors and policy makers are now looking to Australian food production as the next growth industry.
The economic driver for the so called "dining boom' is the increasing demand for quality food products from China's growing middle class. The example is New Zealand which has strong economic growth based on Chinese demand for its milk products. This demand is strengthening the New Zealand dollar which is tipped to reach parity with the weakening Australian dollar in 2014 (for the first time in 40 years).The increased commercial interest in food production is driving the proposed takeover by dairy coop Murray Goulburn of Warrnambool Cheese & Butter (WCB). At time of writing the takeover is due to be assessed under Part VII of the CCA by the Australian Competition Tribunal. A hearing is set down for February 2014. Murray Goulburn will argue that any resulting lessening of competition in the purchase of raw milk from farmers will be offset by public benefits arising from the transaction. If convinced, the Tribunal must authorise the transaction.
Canadian dairy giant Saputo is also bidding for a controlling share of WCB. Saputo does not currently compete with WBC and therefore does not need to get approval under competition law. At time of writing Saputo looks increasing likely to win the bidding contest, in which case the Tribunal hearing would not proceed. Nonetheless, we expect food industry consolidation will continue.
Other food industry happenings in 2014
The owners of wheat port export facilities in Australia are required to grant access to third party wheat exporters. Access is currently granted under an undertaking given by owners of wheat port export facilities to the Australian Competition and Consumer Commission (ACCC) under Part IIIA of the CCA. The Department of Agriculture, Fisheries and Forestry is currently consulting with industry to draft a mandatory code of conduct under Part IVB of the CCA that will govern third party access from October 2014.
