Wholesale fresh produce in ‘concerning state,’ finds the Competition Commission SA

The Fresh Produce Market Inquiry (FPMI) provisional report release was held on Tuesday 18 June. The inquiry was initiated on 31 March 2023, according to the Competition Act 89 of 1999 (the Act). It is considering if adverse effects are present in the fresh produce value chain arising from any feature or combination of features that may impede, restrict or distort competition.

Scope of the inquiry 

The report mainly looks at five fruits; apples, citrus, bananas, pears and grapes, as well as six vegetables; potatoes, cabbage, spinach, onions, carrots and tomatoes. The inquiry assessed the fresh produce value chain from input level to wholesale and retail.

The assessment looked at the efficiency of the value chain, with an emphasis on the dynamics around fresh produce market facilities; market dynamics of key inputs and its impact on producers and; barriers to entry, expansion, and participation.

The retail and wholesale market is estimated to be worth over R53-billion annually, with about R21-billion sold through the national fresh produce markets, and formal retail worth R32-billion, explains Chairperson of the Fresh Produce Market Inquiry, Deputy Commissioner of the Competition Commission, Hardin Ratshisusu at the media briefing.

It is worth noting that the market size estimate of the fresh produce markets excludes sales from farm to informal channels that are not through national fresh produce markets or formal retail. Although the size of the market is relatively big, the share of black-owned farms or market agents, or even small-scale farmers in general, is negligible, says the press release.

Wholesale

“The inquiry found that the state of the national fresh produce market's infrastructure is in a concerning state,” says Ratshisusu.

The inquiry found that though national fresh produce markets (NFPMs) generate enough revenue to sustain themselves, profits made are not ringfenced enough to cater for current and future capital expenditures. These assessments were for the top four NFPMs; Johannesburg, Cape Town, Tshwane, and Durban, but are prevalent in other areas.

The inquiry also found inconsistencies in national fresh produce markets bylaws, which is a particular concern to smallholder or SME farmers who may be required to comply with different rules across various NFPMs.

Different operating hours may imply certain farmers are not able to access their ideal markets and may be forced to sell through markets closer to them. This therefore may lead to distorted competition between farmers.

“The inquiry also found that SME farmers, particularly [High Density Produce] HDP farmers, find it difficult to sell their produce in the national fresh produce markets. Despite being the least costly road to market, it has been estimated that less than 1% of gross value of sales in NFPMs come from smallholder or SME farmers.”

The inquiry also found high levels of concentration with respect to the market agencies operating at the NFPMs, raising concern about structural linkages with market agents having the effect of killing competition between market agencies in a highly concentrated market.

Some questionable practices of the market agents were also uncovered. The report said the practices have the likely effect of distorting market outcomes where they are practised. In order to resolve instances of practices such as stock reservation and credit sales, industry regulators, together with NFPMs, need to play an active oversight role.

Retail sector

“In relation to retail prices for fresh produce under consideration, the inquiry found some instances of high markups that retailers are able to sustain over a period of time…a good indicator of lack of competition,” said Ratshisusu.

Following the disbandment of exclusive leases, the inquiry also found there have not been new entries to challenge the top four retailers in shopping centres. The major retailers account for a substantial share of the national grocery retail market.

The inquiry further found that prices of fresh produce are not transparent enough to allow consumers to reasonably compare prices in-store and across retailers. This is because pricing fresh produce is not on a per kg basis, but per unit basis.

“What we are picking up is [there is] quite a challenge for consumers to compare prices…Consumers should be able to compare prices…When we put this to retailers, they are opposed to this…they say it is costly. We are not convinced by this… We think transparency will take us a long way,” said Ratshisusu in response to a question about price transparency during the media briefing.  

Lastly, there is still slow progress in integrating SMEs, particularly those owned by HDPs, into various retailers’ supply chains.

Input level of the value chain 

The inquiry found that for fertilisers and agrochemicals, the country largely relies on imports, and this means South Africa is “exposed to global risks” as seen with Covid-19 and the war in Ukraine.

While the industry is moderately concentrated with both domestic and global players, the major active ingredients are still imported from abroad. The inquiry found that firms may distort competition.

With the seeds industry, the inquiry found instances where a firm appears to be involved in charging farmers at “what could be characterised as exploitative prices. The inquiry noted that price increases for certain seeds, where this firm has very high market shares, have been sustained over a period of time. In addition, access issues have also been uncovered in relation to potato seeds”.

The access issue with potato seeds related to early termination of a particular seed variety before expiry of its plant breeders’ rights, to ensure competitors do not get hold of it before it expires. So, while the company may not actually use the potato seed, they keep the intellectual rights until the genetic material is no longer usable.

“The inquiry also considered the usage of Plant Breeders Rights in relation to Simba, a subsidiary of PepsiCo. The inquiry noted an apparent strategy by Simba, who develops its own varieties, and discontinues use of a closed variety before expiry of its Plant Breeders’ Right. It seemingly replaces that variety with its new (fully protected) variety. This strategy means that access to a variety (which will imminently be open) may be limited through the removal of the genetic material.

“The inquiry engaged Simba, which denied that it stops a variety before the expiry of PBR. The inquiry considered Simba’s submission but remains unconvinced, particularly because as it stands, there is no access to this cultivar even if farmers may try to obtain it. In light of this, the inquiry makes a provisional finding that Simba’s decision to discontinue the FL2006 without making this cultivar available to the market distorts competition. This is mainly because the competitors of Simba or new entrants will not have access to this variety,” explains Ratshisusu.

“Linked to this is the challenge where the Agricultural Research Council is facing funding challenges following withdrawal of some industry associations who previously played a key role in funding the organisation, particularly with the potato gene bank,” highlights Ratshisusu.

The inquiry says the defunding of the Agricultural Research Council has “wider implications”.

In relation to other seeds, the inquiry found instances of high mark-ups for Starke Ayres. The inquiry also found that in the recent past, prices for certain seeds supplied by this company, such as tomatoes, spinach and cabbage experienced high price increases.

The inquiry also found high barriers to entry in the value chain with access to funding. Funding is interdependent on access to water, as banks indicated they would not give financing unless farmers have water rights.

The inquiry has also made 29 reasonable and practical recommendations, with nine remedial actions and 21 recommendations. You can find the full provisional report here. DM