Crying over spilt milk
We’ve all grown up hearing the saying: “there’s no point crying over spilt milk.” And in general the expression holds true. It does not pay to let life’s small upsets get you down – you need instead to let things go and focus on the challenges that lie ah
Price collusion is unacceptable
The reason these company executives should be concerned is that the Competition Commission has accused their companies of fixing the price of milk. The list of accused reads like a who’s who of South African dairy producers and includes Clover SA, Clover Industries, Parmalat, Ladismith Cheese, Woodlands Dairy, Lancewood, Nestle SA and Milkwood Dairy. It seems Clover Industries has cleverly dodged the Commission’s full wrath by offering to assist with investigations into the rest of the cartel.
The investigation into collusive pricing practices started in February 2005. Now, after a two year delay the parties will meet in February this year to set dates for the trial. Initial reports suggest there are two main practices that have caught the Commission’s eye. A number of dairies allegedly shared sensitive information regarding the pricing of raw milk. This enabled them to ‘set’ the price at which they purchased raw milk from producers.
Another concern is that a number of dairies entered into cooperative arrangements whereby surplus milk was sold to dairies with shortages rather than being discounted to retailers. In other words, the dairies colluded to the detriment of both milk suppliers and consumers. Our guess is the milk suppliers were probably most affected. Being at the bottom of a chain handling a product with a short shelf life they are easily held to ransom. Retailers can simply pass any unforeseen price increases directly to the end consumer.
This prosecution is a setback in a difficult industry
Milk producers have a hard time of things. We remember being in the UK at a time when dairy farmers in that country were simply dumping thousands of litres of milk in their fields. The reason – UK supermarkets were flooded with cheap milk imports from heavily subsidised European producers. It would have cost the UK based farmers more to transport their milk to the supermarkets than the supermarkets were willing to pay.
The problem we have with the Competition Commission is that there is often a fine line between collusion and price fixing on the one hand and sensible business practice on the other. It would be business suicide for dairies competing in a particular area not to discuss some aspects of pricing and product supply with each other. And the problem is exacerbated in industries where government regulators have their beady eyes on private commerce.
A perfect example is the medical schemes industry where government is intent on setting fixed prices for a basket of medical cover while the Competition Commission is trying to stop the industry from creating standard tariffs. Government has also heavily regulated the pharmaceutical industry. Both these cases seem to contradict the free market approach the Competition Commission is trying to enforce.
The wheel turns
Another issue the Competition Commission ignores at its own peril is the effectiveness of controlled exit prices. Setting standard prices and weights for white and brown loaves was long seen as a measure to help the poorest of the poor.
Although the Commissions intentions are good we cannot help wondering what happens if it successfully fines the seven companies mentioned earlier. Profits and margins in the dairy industry are tight enough without the additional burden of punitive fines. We would be surprised if a round of ‘fines’ is not immediately met with a round of price hikes. Tiger Brands’ bakeries upped the price of bread by 40c per loaf shortly after receiving their fine. And they had no difficulty in motivating the increase. Remember, they are not allowed to collude with other bakeries on the exit price of their product; but they are free to pass on operating cost increases.
Many of the production inputs at bakeries and dairies are escalating at a rate way in excess of the official inflation rate. Petrol and diesel prices are much higher than six months ago – and electricity (when you can get it) will be hiked 14.4% this year. The Competition Commission’s action provides a perfect example of the ‘catch 22’ principle. They protect consumers by fining companies for employing unfair price practices – which then raise prices with fair motivation – and then pass those increases back to the consumer who is left worse off than before.
Editor’s thoughts:
We applied our mind to the problem of price fixing and collusion across a number of industries. So far the Commission is intent on tackling the low margin producers of essential consumer goods like bread and milk. But what about the ‘big fish’ the Commission is ignoring. How about investigating the Vodacom, MTN, Cell-C price fixing scandal? And what about the banks who avoid ‘fixing’ scandals by employing confusing billing practices. Who would you like the Commission to tackle next – banks or cellular operators? Add you comment below, or send an email to gareth@fanews.co.za
