I'll try to be quick.
Mr. Chair and members of the committee, thank you for the opportunity to appear before you this morning as part of your study on competitiveness in the agricultural sector.
My name is Adam Fanaki and I am the Acting Senior Deputy Commissioner of Competition for the Competition Bureau's Mergers Branch. I am accompanied by Morgan Currie, who is an Acting Assistant Deputy Commissioner of Competition in the Mergers Branch, and by Denis Corriveau, who is the Senior Competition Law Officer in the Mergers Branch.
We've been invited here today to discuss our analysis of mergers of meat processing and livestock auction facilities in Canada from 2005 to the present. Specifically, I'll be discussing two recent transactions reviewed by the bureau—the 2005 acquisition by Cargill Limited of the Better Beef group of companies, and the 2009 acquisition by XL Foods of Lakeside Packers.
Before I address these transactions, I'd like to provide the committee with a brief overview of Canada's competition framework, including recent amendments to our principal legislation, the Competition Act.
The committee has already identified competitiveness as an issue that is central to the future of agricultural productivity and the future of Canadian producers. We look forward to assisting the committee in its deliberations on this important topic.
In 2007, this committee recommended certain amendments to the Competition Act. We are pleased to note that the government recently enacted significant reforms to the Competition Act that incorporated many of this committee's recommendations and the recommendations of the Competition Policy Review Panel. These changes, along with other amendments to the civil, criminal, and merger provisions of the act, will improve the effectiveness and efficiency of competition law enforcement in Canada.
In respect of the merger review process, acquisitions of shares or assets, like amalgamations that exceed certain financial thresholds, must be reported to the Competition Bureau prior to closing. The bureau reviews these transactions to determine whether the evidence demonstrates that such mergers are likely to substantially lessen or prevent competition in a given market. If the bureau determines that a merger is likely to substantially lessen or prevent competition, the commissioner may seek a remedy either by negotiating with the parties or by litigating the case before the Competition Tribunal. In all cases, the bureau's goal is to preserve competition in the marketplace.
The importance of timely but thorough merger reviews based on sound economic principles and convincing evidence cannot be overstated. In short, getting merger reviews right in respect of determining which transactions should be challenged and which should be allowed to proceed has important consequences for the Canadian economy.
The recent amendments to the act improve the efficiency of the merger review process by establishing a mechanism that enables the bureau to obtain the information required to conduct its review of mergers raising material competition concerns, while reducing the number of mergers for which pre-notification to the Competition Bureau is required. I should emphasize that the amendments relate to the process of merger review. Our substantive approach to merger review remains the same, including the economic analysis applied by the bureau to assess the competitive effects of mergers.
Besides the changes to the merger review process, there were a number of other changes to the Competition Act, including amendments to the conspiracy provision. By increasing penalties for criminal conduct, these amendments create a more effective criminal enforcement regime for the most egregious forms of cartel agreements, without discouraging firms from engaging in potentially beneficial alliances, joint ventures, and other collaborations. One of these amendments, consistent with the recommendation of this committee, allows the Competition Tribunal to award administrative monetary penalties for abuse of dominance. In addition, to provide greater flexibility in innovative pricing strategies and discounting, the criminal offences dealing with pricing practices have been repealed.
I'd like to turn to the specific mergers that the committee has asked us to address today, beginning with the 2005 merger between Cargill and Better Beef. This transaction involved the acquisition by Cargill Ltd.—which owns an integrated beef packing facility in High River, Alberta—of the Better Beef group of companies, an integrated beef packing facility in Guelph, Ontario. As part of our inquiry into this merger, we sought and obtained court orders requiring the production of relevant documents and written returns of information under oath from Cargill and Better Beef, as well as from competing beef packers. We also interviewed, and obtained information from, feedlot owners, farmers, industry associations, cattle brokers, grocery retailers, and officials from the federal and certain provincial governments. To assist in our review of this transaction, we hired two independent experts—a specialist in agricultural economics and a specialist in industrial organization.
The bureau's analysis of the Cargill-Better Beef transaction focused on the potential impact of the merger on competition in three different aspects of the operations of the merging parties: competition in the supply of retail boxed beef; competition in the supply of “case-ready” beef; and competition in respect of the purchase of live cattle.
One of the key issues in our review was defining the relevant geographic market, meaning the relevant area within which products compete. For example, one of the issues considered was whether the relevant market for the supply of boxed beef was limited to all or part of Canada, or whether the relevant market was broader, so that suppliers of beef located in the United States could be considered as competitive alternatives to suppliers located in Canada. This issue fed into our examination of whether the merged entity could be considered to face competition from suppliers in Canada only, or whether Canadian suppliers also faced competition from suppliers in the United States.
With respect to the supply of retail boxed beef, evidence confirmed that when the U.S. border reopened in August 2003 to boneless beef exports from cattle under 30 months of age, a North American market for boxed beef was re-established. In fact, Canadian customers purchasing boxed beef clearly indicated that suppliers located in the United States were competitive alternatives to Canadian suppliers of boxed beef. In the context of such a broad geographic market relating to the sale of boxed beef, we concluded that the acquisition of Better Beef would not raise competition issues in the downstream market for the supply of boxed beef because the merged entity would continue to face competition from suppliers located both in Canada and in the United States.
The bureau also examined the potential competitive impact of the merger on the supply of “case-ready” beef products, or boxed beef that has been further cut, fabricated, and packaged into servings suitable for display and sale in retail stores. On this issue, we concluded that retailers possessed sufficient countervailing power, including the ability to do their own meat cutting, to counter any attempt to exercise market power by the merged entity.
The third principal issue that we considered was whether the merger was likely to significantly lessen or prevent competition in the purchase of cattle. We concentrated our examination on fed cattle under 30 months of age. The test under our law requires us to consider whether, as a result of the transaction, the merged company would have the ability to profitably lower cattle prices to a level below the competitive market price for a significant period of time.
Again, the key issue in analyzing the effect of this merger on cattle procurement lay in determining the relevant geographic market for the purchase of fed cattle. In the context of this case, what mattered was the ability of sellers of cattle to switch their sales of slaughter cattle in sufficient quantity from one location to another in response to changes in relative prices. We examined the issue of where Canadian suppliers of cattle could sell their cattle--for example, whether Canadian cattle suppliers could sell fed cattle to beef packers located in the United States--and we also examined whether the parties to the transaction competed in respect of their purchase of cattle.
Defining the relevant geographic market also required us to determine the extent to which the Better Beef slaughter plant in Guelph purchased fed cattle in western Canada and was able to influence prices in western Canada. Because Better Beef's plant was located in Guelph, particular attention was paid to the potential impact of the merger in Manitoba. To determine this issue, we examined evidence relating to interprovincial and trans-U.S. border cattle flows, source of origin procurement data for major Canadian packers, transportation costs, and pricing data in the pre- and post-BSE periods.
Evidence established that the two beef packing facilities of the parties purchased cattle in separate geographic markets. We found that there were two relevant geographic markets for suppliers of cattle: one market consisting of western Canada, including Manitoba, plus certain U.S. northern plains states, and another market consisting of eastern Canada, plus certain northeastern U.S. states.
I notice that the chair is kindly asking me to limit this. My full comments are before you in our submission, but I'll perhaps move on and just talk briefly about the next merger before I conclude.
