From farm gate to consumer plate: supply chains of the future

Bargaining power: mind the gap 6 min read

Supply chains globally are facing constant disruption, with the impact of COVID-19, digital disruption, pressure to act on environmental concerns, and constantly evolving regulatory landscapes. A future farm's supply chains will need to be responsive, sophisticated, and focused on customer preferences and demands to ensure maximum profitability. Embracing technology will be critical in facilitating this shift, allowing opportunities to leverage data in a way that drives supply chain efficiencies. Australian agricultural businesses will also need to focus on developing their last-mile infrastructure capabilities, with increasing consumer demand for quick and reliable delivery of produce.

Bargaining power: mind the gap

The ACCC, wearing its consumer hat, takes a particularly strong interest in disparities in bargaining power. This has been evident in its recent activity in the agricultural industry, with the regulator conducting a number of market inquiries into dairy, cattle and beef, wine grapes industries and perishable agricultural goods. The ACCC has signalled that it intends to increase its regulatory efforts in relation to imbalances of bargaining power, and regarding conduct it perceives to be 'unfair'. This is likely to have a significant impact on the supply relationships of the future farm.

The ACCC is likely to continue its scrutiny of disparities in bargaining power along the supply chain into the future. In particular, we consider it will have a special focus on disparities in bargaining power and other competitive effects stemming from the accumulation of data at different levels of the supply chain. The Deputy Chair of the ACCC, Mick Keogh, has noted that data issues arise at multiple levels of the supply chain: at the farm level, machine level and through the supply chain. The ACCC may see access to data accruing at each of these levels as potentially contributing to or entrenching market power, and creating information asymmetry against those who do not have similar access.

We foresee this increase in scrutiny manifesting in four main areas: amendment to the unfair contract terms regime, introduction of more codes of conduct, a new prohibition on unfair trading practices, and increased use of the collective bargaining class exemptions.

Unfair contract terms

Agribusinesses will already be aware of the ACCC's recent efforts to regulate unfair contracting practices. In 2017, it conducted a series of standard form contract reviews across the agriculture sector, which resulted in a number of significant contract amendments throughout the industry, including:

• milk supply agreements between dairy processors and dairy farmers;
• grape supply agreements between winemakers and grape growers;
• grain warehousing and grain pooling; and
• horticulture produce agreements between traders and fruit growers.

In the future, however, agribusinesses will likely face even greater regulation and ACCC intervention for 'unfair contract terms'. This is for two reasons.

First, penalties will apply for unfair contract terms. Presently, contract terms that are declared unfair are rendered void only. However, the Federal Government has released draft legislation supporting the ACCC's proposal to make unfair terms unlawful and to give courts the power to impose civil penalties. The proposed penalties for contract terms deemed unlawful are, for each contravention, $500,000 for an individual, or the greater of $10 million, three times the value of the benefit of the unfair contract term, or 10% of annual turnover in the preceding 12-month period.

Second, the regime is likely to be expanded to cover more businesses. The draft legislation proposes to increase the statutory thresholds. If the proposed reforms are passed, the small business threshold will capture all businesses with fewer than 100 employees, or an annual turnover of less than $10 million. Businesses in the agriculture sector that rely on standard form contracts to engage with small trading partners should therefore review their contracts to identify terms that are likely to be unfair. Terms common in the agricultural sector and that are 'high risk' include those that:

• provide businesses with broad rights to reject or downgrade produce;
• limit liability;
• significantly restrict a supplier’s ability to sell produce in excess of the amount committed under a contract; or
• allow for late indicative or variable pricing of produce.

Industry codes of conduct

The ACCC has demonstrated a proclivity to use codes of conduct. It has already implemented a range of agribusiness-specific mandatory codes of conduct where it found systemic conduct that it considered damaging to competition. There are mandatory codes for the dairy, horticulture and sugar industries, as well as a code establishing an access arrangement for exporters of bulk wheat, which applies to port terminal services providers. The ACCC has recommended making the food and grocery code mandatory, and that there be a mandatory code applying to water market intermediaries. It has further indicated it would consider imposing a mandatory code if uptake of the present voluntary code is insufficient. Mandatory codes are administered by the ACCC and can lead to penalties where breached.
Although the codes of conduct are adapted to the specific conditions of the relevant industry, common features include:

• a requirement to include certain contract clauses designed to improve transparency between market participants;
• minimum standards of conduct between market participants (eg to act in good faith, especially where there is an imbalance in bargaining power); and
• dispute resolution procedures.

Codes of conduct provide the ACCC with greater enforcement options, and these are expected only to increase in the future.

Unfair trading practices

The ACCC has strongly advocated for an economy-wide prohibition against unfair trading practices. Key international jurisdictions, including the United States and the European Union, already prohibit unfair trading practices in various forms. While a precise definition of an 'unfair trading practice' has not been put forward in Australia, the prohibition on unfair trading practices is intended to capture behaviour that does not meet the high threshold of unconscionability but causes significant harm to market participants, consumers and efficiency. It is also intended to capture conduct occurring outside of contracts, which the unfair contract terms regime cannot. In a recent roundtable discussion with Allens, Mr Keogh explained why the ACCC considered a new prohibition was necessary:

we identified a bit of a gap… whilst unconscionable conduct is at one end, courts have tended to take a fairly strong view of what constitutes unconscionability. They [the courts] require knowledge, intent and significant harm, to summarise in layman's terms. Bullying, undue coercion around contract renewal time and unwritten terms associated with supplier arrangements really aren't accommodated or prevented by the unconscionability requirements, yet they do cause economic harm, distortions in economic investment decisions and result in misallocation of investment and resources'.  

If adopted, any breaches of the prohibition are likely to attract penalties under the Australian Consumer Law that are considerably higher than those currently issued under mandatory industry codes of conduct.

Collective bargaining

The objective of the new class exemption is to improve the bargaining position of smaller growers and producers. The new class exemption allows small businesses to negotiate collectively with buyers or processors without needing to notify or seek authorisation from the ACCC, from 3 June 2021. While the ACCC already has a long track record of approving collective bargaining proposals by smaller-scale growers and producers across a range of agricultural areas, including dairy, poultry, vegetables and seafood, the new exemption means growers and producers no longer need to demonstrate that the public benefits from collectively bargaining will outweigh any detriment to the public. The exemption applies to businesses and independent contractors that have turnover of less than $10 million, and more than 98% of Australian businesses qualify.

Achieving a common goal: cooperation v competition

Balancing the benefits and risks of coordinating with competitors

There are many advantages to cooperating with other participants in the agriculture supply chain, and in the future this may be even more necessary for certain reasons: including to jointly invest in research and development activities. Producers could collectively bargain to improve their bargaining power, reduce overheads by pooling their resources and share the costs of marketing activities. They could also form co-operatives to purchase expensive farming equipment and machinery, develop new forms of technology that will benefit their members, and address issues affecting their industry in a coordinated and effective way.
However, there is a risk of cartel conduct where such cooperation involves competitors or potential competitors. Businesses further place themselves at risk of contravening the prohibition on concerted practices where, even in the absence of any understanding or agreement between actual or potential competitors, they share competitively sensitive information with the purpose or likely effect of substantially lessening competition in a market. Businesses should therefore be especially careful in interacting with competitors or potential competitors in any forum, as cartel conduct attracts criminal consequences, and conduct forming the basis of a concerted practice includes any form of conduct that substitutes competition for cooperation.

Minimising disruptions to supply chains and supporting the viability of businesses

The ACCC was much more willing to authorise conduct between competitors during the COVID-19 pandemic where it saw there was a net public benefit: eg to support critical supply chains. One key example was the ACCC granting authorisation for supermarket operators to coordinate with each other when working with suppliers, manufacturers and logistics to prevent the collapse of the grocery supply chain, and to ensure consumers continued to have access to food and groceries throughout the pandemic. Another example was the ACCC authorising chicken meat processors to coordinate production, processing and supply of chicken meat products in Victoria in response to restrictions on the workforce of meat processors by the Victorian Government as a result of lockdowns.

While those authorisations have since been scaled back as the immediate effects of COVID-19 on the Australian economy have subsided, the ACCC's rapid response demonstrated its willingness to accommodate coordination between competitors in response to external shocks that would have otherwise significantly disrupted supply chains, potentially caused widespread failure of businesses forreasons unrelated to their competitiveness, and may have led to compromised consumer access to important goods or services. This response by the ACCC signals that it may be inclined to authorise coordination between competitors in response to external shocks in the future. We anticipate this will become increasingly relevant for agricultural industries in responding to the effects of climate change on their supply chains.

Sowing seeds of success: the industry's well placed for carbon abatement projects but there are high barriers to entry

Despite the obvious suitability of farming land for offset projects, policy uncertainty, significant start-up costs and fixed compliance fees (which are payable irrespective of the project's size) can make developing a business case for carbon farming challenging (see Figure 2). In order to undertake a carbon farming project, farmers need to comply with intensive reporting and accounting requirements. For example, to administer a soil sequestration project, they must be able to collect and store field records, soil samples and other data in a structured format in a database allowing for data exchange with third parties.¹⁵

Figure 2: barriers to adopting carbon farming practices as identified by non-adopters, Marit Kragt, Nikki Dumbrell and Louise Blackmore, 'Motivations and barriers for Western Australian broad-acre farmers to adopt carbon farming' (2017) Environmental Science & Policy 73:115.

The Department of Agriculture, Water and the Environment noted (in the context of the Permanent Environmental Plantings of Native Species methodology) that 'there is unlikely to be a business case for any one small landholder to register separately with the [Carbon Farming Initiative], it is probably beneficial to aggregate the interests of many small landholders within a sub-catchment'.¹⁶ This hypothesis has been confirmed in a number of studies that found increased farm size and profitability are associated with an increased uptake of carbon offsetting projects.¹⁷

Part of the explanation for the correlation between farm size and uptake of carbon projects is that increased access to capital allows larger farms to obtain the necessary specialist assistance to roll out large-scale offset projects effectively. As seen in the Sundrop Farm example above, innovation and fossil fuel reduction projects often involve significant capital investment. We expect that the trend towards larger, more commercialised farming, coupled with increasing demand for carbon offsets, is likely to drive further investment in carbon offsetting in the agricultural sector.

Over the past year, Australia has seen a sharp increase in institutional and private capital investing in the agricultural industry.¹⁸ For example, in May 2021, funds manager Capital Airport Group invested in a herd management project being run by Packhorse Pastoral Company. This increased interest from private equity suggests that the business case for agricultural offsets projects exists and the barriers to entry are becoming increasingly manageable.

Ensuring the agricultural sector reaps the benefits

Demand for offsets is principally driven by the need to fulfil offset requirements in individual project approvals, as well as the Federal Government's Safeguard Mechanism and voluntary corporate commitments. These factors primarily affect the electricity generation, mining, oil and gas extraction, manufacturing, transport and waste sectors. Naturally, offtakers of agricultural offsets are principally found among these sectors.

A risk individual farmers must consider is how they will meet their own offset needs when agricultural emissions ultimately become regulated as Australia moves towards net zero emissions.

This risk is exacerbated by the fact that the general trend is for the price of ACCUs to increase. Currently, the price of Australian carbon credits is relatively low compared with global standards, with the EU carbon price being more than triple the price of Australia's.¹⁹ Nonetheless, the increase in carbon abatement projects is being reflected in the market and this upward trend is expected to continue. Prices for Australian carbon credits have very recently broken through the $20 per tonne mark, and are expected to double by 2030.²⁰

Strategies to mitigate the sector's price exposure could include negotiating put options with offtakers for a portion of a farming enterprise's carbon portfolio as a hedge, similar to the 'optional delivery' contracts currently accepted by the Clean Energy Regulator under the Carbon Solutions Fund auction scheme.

Looking forward

Carbon abatement projects are becoming increasingly prevalent in the agricultural industry. This change is in part being driven by decreased barriers to entry, as larger farms access additional capital and employ economies of scale to implement offset projects. With the price of carbon credits expected to double over the next decade, agricultural enterprises would be well advised to develop contractual strategies that enable them to respond to a scenario where their own emissions are more heavily scrutinised.