Thursday, 26 March 2015

Playing monopoly

Monopoly is in the air. The kiwi fruit people want more of it: the Herald's coverage of their recent industry poll is here - where I learned that the polite word for "monopoly" these days in kiwifruit circles is "single point of entry" - and the meat industry would like some, too.

That's one of the core recommendations in a recent report by Meat Industry Excellence (and I should tip a hat in the direction of John Small's website, where I first saw mention of it). They're a ginger group who describe themselves as "passionate farmers and industry supporters who can clearly see the opportunities (and the barriers to progress) for our red meat sector. They are a diverse group who are prepared to stand up, collaborate and work with farmers and industry to create sustainable profitability for all players".

Fair enough, and actually I have some sympathy for their diagnosis of what ails the meat industry and for their vision of creating and capturing high value add through a focus on the end consumer (though if you can also hear the hoofbeats of a "But" galloping towards us, you're right). Stock numbers have dropped sharply, stranding processing assets, which means that a deadly game of musical chairs is underway. Processors are playing over the odds to get stock through their plant rather than the other fellow's, adding to the financial costs of carrying the surplus capacity, and leaving nothing over to pay for the marketing and innovation that would raise industry incomes all along the value chain (there's an argument that that the processors were never that good at the marketing end even in better times, but that's for another day).

Their suggested ways forward are some combination of industry aggregation (to something like a Fonterra-sized processor), a collective approach to rationalisation of the spare capacity including a cunning plan, 'chain licensing', which would cap capacity, and a collective or coordinated approach to export marketing, perhaps along Zespri lines. That's my potted summary: Rod Oram's got one here, and Lincoln's Agribusiness and Economics Research Unit have a rather longer one here.

What bothers me about this is the strong lean towards monopoly market solutions at the expense of competitive market solutions. It's not universal:  the draft paper on the chain licensing says, for example, that
Competition and choice at the farm gate must remain. Animosity by some processors against competition is misplaced.
Competition is essential for the Industry. It is overcapacity and lower livestock numbers which has led to the low plant utilization within the Industry...Marginal pricing, refusal to close plants because of high redundancy costs, focus on throughput and fixed cost amortization, excessive use of third party buying agents, and adding extra capacity are all competitive responses that are rational within the current structure of so much additional capacity. They result not from the principle of competition but from overcapacity
But otherwise it's pretty much pervasive among those casting around for potential ways forward to reach for Fonterra and/or Zespri as proven models from other industries. Fortunately, some of these ideas are non-starters. Animosities and incompatibilities among the processors likely put the kibosh on all the grander schemes of agglomeration, as would the Commerce Commission, since I don't see the required authorisation as likely to be forthcoming: orchestrated stitch-ups to create monopsony power against suppliers and monopoly power against consumers rarely get the nod, and for good reason. And the chain licensing idea would also need some get of jail free card, as it too looks bang to rights under the Commerce Act. But even if they were enabled through the meat industry equivalent of the legislation that created Fonterra, they look to me to be the wrong approach, for two reasons.

One is that there are, in fact, good working examples of thriving, competition-based, agricultural export industries, with the outstanding example being our own wine industry (and arguably another in the making, in the craft beer trade). And the French wine and cheese trades successfully get their Cotes du Rhone and Roquefort to me using exactly that model of large numbers of French companies competing against each other for the same overseas customers that is supposedly the "problem" that the Zespri route is meant to "solve". So it's by no means a given that Fonterra-style or Zespri-style models beat market models, where competing companies are forced to add value and to innovate to succeed. And  it is worth remembering that the Commerce Commission, when the original Fonterra idea came through their door in 1999 before the thing got its own legislation, found that "the Commission has reached the preliminary view that it cannot be satisfied that the public benefits of the proposed merger are likely to outweigh the competitive detriments".

And the other is that chain of links that goes: create a monopoly, generate more profit, use the money to fund product and market development. You can certainly do the first two, but the third leg looks highly suspect. A monopoly is just about the last organisational form you would expect to be highly consumer-focussed and highly innovative. We've got the magnificent diversity of our premium wine offerings, very largely driven by micro, small and medium-sized companies, all jostling with their ideas in the marketplace: does anyone seriously believe a Wine Export Board would have achieved a tenth of that success?


  1. This comment has been removed by the author.

  2. As Adam Smith put it,

    "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary"

    On behalf of the public the question I find myself asking when I see proposals like this is, What will it do for the consumer? The answer I come up with is, not much. Most of these ideas amount to a way of getting the government to transfer welfare from consumers to producers.

    1. I also could have added that (a) we don't know the counterfactual to Fonterra, though I;d guess there was a highly realistic chance of creating several successful vertically integrated companies and not just one, and (b) Fonterra's "success" (and I'm not knocking its management etc, I'm perfectly prepared to believe it's well run of its kind) has come against the background of what may have been the greatest empowerment of middle-class purchasing power, in China, that economic history has ever seen. Anyone, monopoly or not, selling shovels in a gold rush will do well

  3. A comment so good, it was worth posting twice!