The merger of Kaupfélag Skagfirðinga (KS) and Mjólka is anti-competitive, but the Agricultural Produce Act prevents the Competition Authority from taking action. The merger has created a monopoly in the dairy industry under the protection of the Agricultural Produce Act.KS's purchase of Mjólku
On 18 September 2009, the merger of KS and Mjólka was announced. In the decision of the Competition Authority No. 40/2009, The merger of Kaupfélag Skagfirðinga svf. and Mjólku ehf./Eyjabús ehf. has been found to be anti-competitive and contrary to the objectives of competition law. No. 44/2005. However, the Competition Authority lacked the legal authority to eliminate the competition restrictions arising from the merger due to specific provisions in the Agricultural Produce Act.
Following amendments to the Agricultural Produce Act in 2004, dairy processing plants were granted permission to merge without the intervention of the competition authorities. An exemption was also granted from the ban on anti-competitive collusion. As a result, there has been a massive concentration of the market, and this legal provision has now led to a situation where there is no longer any competition in the dairy industry, an industry in which companies operate with turnovers of tens of billions of króna each year.
Since 2005, Mjólka has provided competitive restraint to the larger players, and the company's operations resulted in a higher price for farmers and a lower price for consumers. With the merger, that restraint disappears, and a monopoly position has now been created in the market. The existing companies, Mjólkursamsalan and KS, cannot be considered competitors, as they have close ownership, management and consultation ties.
The Competition Authority directs the Minister for Agriculture to take immediate action.
Due to the serious situation in this important consumer market, the Competition Authority has today issued a special opinion to the Minister of Agriculture. The opinion recommends that the Minister of Agriculture take immediate and necessary action to limit, as far as possible, the damage to Icelandic consumers and farmers resulting from the aforementioned monopoly.
The Competition Authority's recommendations to the Minister of Agriculture concern exploring ways to establish competition in this sector, including, for example, by introducing a legal provision for the divestment of dairy processing plants and correspondingly removing the barriers to competition that new entrants face when attempting to start operations in this sector. It is also directed to the Minister of Agriculture to take immediate action to have the exemption of the dairy industry from the prohibition on anti-competitive agreements and the merger rules of competition law repealed, so that the normal rules of competition apply to these companies like any other Icelandic companies. Icelandic companies.
In view of the circumstances, the minister is also urged to ensure that equality of treatment is upheld during the preparation of draft bills and government regulations, so that all market stakeholders have an equal opportunity to present their views. There has been a serious failure in this regard.
The opinion also recommends that relevant stakeholders, such as the Consumers' Association and the Icelandic Federation of Trade Unions, closely monitor price developments in dairy products, particularly those products previously considered competitive, in order to provide a check and balance.
The opinion can be downloaded here. (PDF document – Opens in a new window)
Further information is provided by Páll Gunnar Pálsson, Director-General of the Competition Authority.
Background information:
The Competition Authority's opinion outlines how competition in the dairy industry has disappeared following a 2004 amendment to the Agricultural Produce Act, which permitted dairy processors to collude, an act considered a serious legal offence in other industries. and allowed them to merge without the intervention of competition authorities. In 2005, there were nine dairy cooperatives operating which were responsible for the processing and distribution of dairy products. Six of the cooperatives were run by the merged company Mjólkursamsalan in Reykjavík and Mjólkurbús Flóamanna. Other dairy cooperatives were Norðurmjólk in Akureyri, Mjólkursamlag KS and Mjólkursamlagið á Ísafirði.
According to general economic reasoning, it follows from the nature of the matter that companies which do not operate under effective competition have no incentive to keep costs down or to streamline their operations. The competitive discipline that Mjólka has provided in the Icelandic dairy market since 2005 will therefore no longer be present. The Competition Authority therefore has legitimate cause to fear that dairy products will now increase in wholesale and, consequently, retail prices, at least those dairy products that were previously considered competitive. Likewise, large buyers of dairy products on the market will likely find it difficult to secure equally favourable terms for dairy products, and competition from Mjólku will be lacking. The negotiating position of Icelandic dairy farmers will then worsen considerably.
The opinion draws attention to the fact that dairy products are a significant part of the food market. Of the individual production sectors in the food industry, the production of milk and dairy products is the most prominent, and it is safe to conclude that around 15-20% of food-related consumer expenditure in this country is spent on the purchase of milk and dairy products.
The Competition Authority's opinion also makes serious observations regarding the Ministry of Agriculture's procedures for preparing draft bills, as there are examples of draft bills which were intended to exclude specific competition from the market, have been drafted in consultation with one competitor without the involvement of the party who would have been harmed by the changes. A recent example of this is cited. In the opinion of the Competition Authority, such practices are unacceptable from the standpoint of the objectives of competition law.
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