Thursday, April 11, 2013

A Monopoly on top of Monopolies

Is this a tale of chicken success for a young entrepreneur, or a tale of woe for the Canadian public who want and need affordable, high quality chicken?
In 1994, a 27 yr old was interested in changing careers by becoming a chicken farmer. This wanna-be farmer eventually spoke with a large, successful feed mill who happens to sell chicken feed as one of its products. An employee of that feed mill advised the budding farmer that a current customer of the feed mill was interested in selling their chicken quota for $175,000
 Not having that kind of money to buy quota, and only able to borrow enough for land, barns, and equipment, the budding farmer, like many others would-be farmers, was in an impossible situation. The feed mill was interested in higher profits through continuing to sell its chicken feed, and also wanted to reduce competition that kept their feed prices low and competitive.

"What could be done?", thought the owner of the feed mill.

 The feed mill came up with a scheme that seemed in everybody's best interest. The budding farmer put up 10% of the purchase price for the chicken quota. The feed dealer offered to loan 90% of the chicken quota purchase price to the new farmer, provided they sign a promissory note in favour of the feed dealer, and that this new farmer must buy all of their chicken feed from this feed dealer.

 The deal was done. The farmer purchased the chicken quota with only 10% down, bought the land, built the barns, became a new chicken farmer, and slowly paid off the loan from the feed mill. The retiring farmer got his financial nest egg from selling his quota (most likely it was gifted to him by CFO for free). The feed dealer got a guaranteed customer for its chicken feed for more than 11 years with no competition, no matter what price those pesky competitors could offer.

All well that ends well?  Maybe.

I'm not inclined to throw gasoline onto a bonfire, but here goes.

Perhaps somebody should complain to the Competition Bureau.  Perhaps not just one, but many feed mill in Ontario are doing prohibited acts, contrary to Canada's Competition Act, Section 77(2) for tied-selling or exclusive dealing, and Section 79 for anti-competitive acts.

Canada's Competition Act
 (1) For the purposes of this section,
“exclusive dealing”
« exclusivité »
“exclusive dealing” means
  • (a) any practice whereby a supplier of a product, as a condition of supplying the product to a customer, requires that customer to
    • (i) deal only or primarily in products supplied by or designated by the supplier or the supplier’s nominee, or
    • (ii) refrain from dealing in a specified class or kind of product except as supplied by the supplier or the nominee, and
  • (b) any practice whereby a supplier of a product induces a customer to meet a condition set out in subparagraph (a)(i) or (ii) by offering to supply the product to the customer on more favourable terms or conditions if the customer agrees to meet the condition set out in either of those subparagraphs;

When you have an exclusive agreement, you aren't under the market pressures to keep prices low, and service high.  Therefore the feed prices tend to be higher in a monopoly, than in a competitive marketplace.

Remember, CFO uses feed prices to compute the "fair & reasonable" selling prices for live chicken.  Feed prices represent about 60% of the cost to produce chicken.  If those feed prices are artificially boosted, then 100% of the chicken sold in Ontario suffer an unjustified price increase.

Maybe the feed mills think, "The chicken farmers have a monopoly, as do the dairy and the egg producers.  All of our customers have a monopoly.  We should have a monopoly for ourselves, too."  So they create a monopoly for themselves.

I have also heard that feed mills are one of the first ones who learn that quota might be for sale.  That could be considered "inside information".  They then use that inside information to extract an unfair advantage by purchasing the quota before anybody else has a chance to even know it is for sale. Next, the feed mill re-sell the quota to new customers at elevated prices and under exclusive dealing contracts, building themselves a monopoly step-by-step.

Canada’s Competition Act sets out a number of prohibited business practices such as cartels, monopolies, undue market influence, abuse of market dominance, and similar acts.  All of these prohibited trade practices abuse the the customer-supplier relationship, or the public in general; all of which cause higher prices, less selection, and other negative aspects for competitors and/or the public.  The 1986 amendments to the Competition Act were to infuse Canadian competition law with a market-oriented focus, and to shift the remedial approach from punishing “illegal” conduct to correcting market distortions.

The Competition Bureau investigates complaints of prohibited trade practices, and if they feel a strong enough case exists, will refer the case to the Competition Tribunal.  Private enforcement under the Competition Act is not permitted (ie. John Q. Public can't start a Court Proceeding under the Competition Act, only the government can do that). 

The  Competition Tribunal is a quasi-judicial administrative body with jurisdiction to hear complaints, producing verdicts and fines. The responsibility for investigating cases and bringing proceedings under the new provisions remained that of the Competition Bureau.  Unfortunately, almost all cases end in mutually agreed plea bargaining.

There has been an ongoing struggle over the application of competition law to regulated markets in Canada (eg. trucking, telecommunications, Farm Supply Management, etc.). The current Commissioner of Competition has made regulated markets one of their top priorities, and has restated on several occasions the bureau’s position that regulation should oust competition law in only very limited circumstances.

Some feel that when regulations and regulatory bodies collide with the Competition Act, a broader “public interest” review should be performed, rather than just looking at the undue effect on competition.

Millionaire monopolists like to point out the good thinks that happen in the economy when they spend their millions (ie. land speculation, building million dollar mansions with pools & tennis courts, yachts, sports cars, summer castles, expensive parties, diamonds & jewellery, the list goes on).

For more information on this unfair trade practice disclosed by Ontario Court records, see:

Olszowka v. Olszowka, 2012 ONSC 5564,, 2012/10/05

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