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Afgri Operations Ltd and Natal Agricultural Co-Operative Ltd (17/LM/Mar04) [2004] ZACT 42; [2004] 2 CPLR 265 (CT) (6 July 2004)

78 Reportability
Competition Law
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Brief Summary

Competition — Merger Control — Approval of merger between Afgri Operations Ltd and Natal Agricultural Co-Operative Ltd — Afgri acquiring all shares and members’ funds of Natalagri — Commission's assessment of market shares in financial services, agricultural commodities, and other sectors — Concerns regarding potential foreclosure in seed markets — Tribunal finds merger unlikely to substantially prevent or lessen competition — Merger approved.

Comprehensive Summary

Summary of Judgment


1. Introduction


These were large merger proceedings before the Competition Tribunal of South Africa concerning the acquisition of control by Afgri Operations Ltd (“Afgri”) over Natal Agricultural Co-Operative Ltd (“Natalagri”). The proceedings culminated in the Tribunal’s approval of the merger on 4 June 2004, with written reasons subsequently issued on 6 July 2004 under Case no. 17/LM/Mar04.


The transaction was implemented by way of a scheme of arrangement in terms of which Afgri would acquire all the shares in the issued share capital of Natalagri and all members’ funds, subject to specified exclusions for shares held by, and funds attributable to, Afgri and Laeveld. On implementation, Afgri would obtain control of Natalagri.


The general subject-matter of the dispute concerned whether the merger was likely to substantially prevent or lessen competition in markets in which the merging parties both operated, and whether any public interest considerations arose. While the Competition Commission’s investigation focused strongly on potential vertical foreclosure risks in the seeds value chain, the Tribunal’s reasons reflect a broader concern with the acquisition of grain handling and storage (silo) assets, and with the potential competitive consequences of concentration and pricing in that segment and related markets.


2. Material Facts


Natalagri had experienced cash flow problems in the years preceding the transaction, partly attributed to an unsuccessful acquisition. Under pressure from its funders, Natalagri’s management recommended to members that the business be sold. A sale process followed in which invitations to bidders were issued and three offers were received; the board accepted Afgri’s offer.


Afgri’s rationale for the transaction was to pursue further acquisitions to expand its geographic footprint and increase its customer base. Natalagri also owned assets regarded by Afgri as strategically important, particularly its silo infrastructure, described as well located for the export market.


The Competition Commission identified several areas of product and service overlap between the firms, including the provision of agricultural financial services (credit facilities and brokering of crop and life insurance), trading of agricultural commodities (including grain and maize traded on Safex), handling and storage facilities (grain/maize storage in silos prior to delivery), animal feed manufacture and distribution, operation of retail outlets selling a range of agricultural and related products, marketing of farming equipment, and sale and distribution of crop care products (fertilisers and chemicals). The Commission’s factual conclusions included that, assessed on the bases it adopted, the merger was unlikely to raise horizontal competition concerns in these segments.


The Tribunal accepted, on the information before it, that the geographic dimension of commercial silo services was local because farmers’ willingness to travel to deliver grain was limited by transport costs, with distances discussed in the range of 40 to 60 kilometres. On that approach, the merging parties and the Commission contended that there were no geographic overlaps between Afgri’s and Natalagri’s silos sufficient to generate competitive constraint. The Tribunal sought further information about proximity and found that Afgri had the nearest silo to two of Natalagri’s eight silos, but that the distances involved (approximately 140 km and 170 km) were sufficiently great that Afgri’s silo would not be a substitute for a competitively significant number of farmers in those areas.


At the same time, additional factual material before the Tribunal suggested that silo pricing exhibited nationally similar tariff structures across major operators, notwithstanding the local character of silo catchment areas. The Tribunal recorded that tariff similarity was explicable because Safex provides a recommended tariff, determined annually after negotiations between millers and silo owners through a body described as the Grain Industry Committee. The Safex tariff was said to be non-binding, but influential in practice.


A material factual feature was that Natalagri’s tariffs were lower than those of other commercial silo operators, which prompted the Tribunal to question whether Natalagri’s prices would increase under Afgri’s control. In response, the Tribunal recorded two principal constraints advanced by Afgri. First, Afgri had undertaken in the sale agreement not to raise prices in the first year above CPI, and this undertaking was later strengthened following consultation with Natalagri members, with Afgri agreeing to make the CPI-linked undertaking indefinite. Second, the Tribunal recorded commercial explanations specific to KwaZulu-Natal said to maintain competitive pressure on pricing, including smaller farm sizes (lower cost of on-farm storage substitution), closer proximity of farmers to millers (reduced need for third-party storage), and KwaZulu-Natal’s position as a net grain importer (less grain waiting in provincial silos), together contributing to underutilisation of Natalagri’s silo capacity.


The Tribunal also recorded, as context for the competitive assessment of silos, that Natalagri owned approximately 360 000 tons of silo capacity across eight sites in KwaZulu-Natal and that these silos represented about 85% of commercially available silo capacity in that province. Nationally, the Tribunal noted high concentration in silo ownership, with the top three firms (Senwes, Afgri and Noordwes) estimated to hold 70–72% of capacity. Afgri’s national share was recorded as 23% pre-merger, with the merger adding a further 2.3%, described as a de minimis increment.


On public interest, the Tribunal accepted that the merger would not lead to a loss of employment and did not implicate other public interest concerns on the record.


3. Legal Issues


The central legal question was whether the merger was likely to lead to a substantial prevention or lessening of competition in any relevant market(s), and if so whether any conditions were required to address the identified risks. The inquiry required the Tribunal to evaluate issues of market characterisation and competitive effects, including the proper framing of relevant markets, the competitive significance of overlaps, and the likelihood of foreclosure or market power effects.


The dispute primarily concerned the application of competition law principles to the factual record, including the delineation of relevant markets (particularly the geographic scope of silo services), the assessment of horizontal effects (including in grain trading and silo services), and vertical effects (particularly in seeds through financing and retail channels). It also involved an evaluative component regarding whether various asserted constraints (including alternative financing, alternative distribution channels, and substitution possibilities) were likely to be effective in practice, and whether pricing undertakings reduced the probability of harm.


A further legal issue, treated as part of the overall merger assessment, was whether any public interest considerations warranted a different outcome even if competitive harm was not established.


4. Court’s Reasoning


The Tribunal recorded that it viewed the case “quite differently” from the Commission in terms of emphasis. While it did not disagree with the Commission’s conclusion that vertical foreclosure in the seeds context was remote, it considered that the Commission’s approach of analysing each product/service overlap discretely might be open to doubt in this sector. The Tribunal suggested that firms such as Afgri and Natalagri could instead be viewed as providers of a package of services to an agricultural customer base, drawing an analogy to competitive assessment in supermarkets. It cautioned that an overly unbundled approach could create a risk of overstating substitution possibilities where customers may prefer bundled procurement due to convenience and loyalty incentives.


In relation to the first concern it identified—whether the merger could exclude rivals by tying up customers through loyalty schemes—the Tribunal considered the evidence and concluded that there was no exclusivity binding customers to Afgri. Although a loyalty scheme could disincentivise shopping around, the Tribunal was not persuaded on the record that adding Natalagri’s approximately 1 000 customers would be likely to have an exclusionary effect sufficient to raise a competition concern.


The Tribunal’s most sustained analysis concerned the market for the handling and storage of grain, focusing on silos. It placed the silo industry in historical context, noting the sector’s prior regulation and local monopoly structure, and observing that deregulation cannot alter geographic realities. It accepted that commercial silos tend to remain regional monopolies absent new entry, and it considered that entry was unlikely given high investment requirements and apparent underutilisation of existing capacity.


On market definition and overlap, the Tribunal tested the proposition that silo markets are local by requesting details of the nearest competing silos to Natalagri’s sites. It found that the nearest Afgri silo to two Natalagri silos was far enough away that it would not be a meaningful substitute for many farmers, supporting the conclusion that the parties’ silo operations did not materially overlap in the relevant local markets.


However, the Tribunal also identified a more complex dimension: the pricing evidence showed similarities across firms consistent with a nationally influential reference tariff. The Tribunal accepted that the Safex recommended tariff influenced pricing structures. Because Natalagri priced below others, the Tribunal considered whether the change in control might lead to price increases toward the Safex benchmark. The Tribunal then evaluated the assurances advanced by Afgri and recorded, as significant, the legal undertaking constraining price increases to CPI, strengthened from a limited duration to an indefinite commitment after engagement with Natalagri’s members. It also accepted the commercial explanations that were said to make KwaZulu-Natal pricing more competitive than the Safex level. Taking these considerations together, the Tribunal concluded that Afgri would be constrained from raising storage tariffs beyond CPI in the near future, and it therefore considered it unnecessary to impose a merger condition on this issue.


The Tribunal then turned to potential effects in markets related to silo ownership, including the possibility that increased concentration in silo ownership might affect grain trading or grain prices. It noted that silo ownership was highly concentrated nationally, but emphasised that the increment attributable to this merger was de minimis. It referred to academic concerns suggesting a relationship between silo concentration and wheat prices, and concerns about oligopoly conditions and collusion risks in maize markets. The Tribunal recorded the parties’ response that grain trading is separated from silo ownership through a certificate system whereby stored grain is represented by tradable certificates, which may change hands multiple times before redemption. The Tribunal acknowledged that certain authors nonetheless regarded silos as potentially pivotal market actors (including through posting prices and information-sharing), but it ultimately treated these concerns as not requiring determination in this case given the limited incremental change in concentration produced by the merger. It added, as an evaluative observation, that the complexity of these interrelationships might have warranted further investigation by the Commission, particularly given the potential relevance of agricultural markets to food prices, while also indicating that this did not imply that the outcome would necessarily have differed.


On public interest, the Tribunal found that there would be no employment losses and that none of the other public interest factors affected the outcome on the record.


5. Outcome and Relief


The Competition Tribunal found that there was no evidence on the present record to suggest that the merger would lead to a substantial prevention or lessening of competition, and that public interest considerations did not justify a different conclusion.


The Tribunal therefore approved the merger without conditions. The reasons do not record any separate costs order.


Cases Cited


Boart Longyear and Huddy Rock Tools (Large Merger), Competition Tribunal Case no. 41/LM/Aug03.


The Competition Commission v Patensie Sitrus Beherend, Competition Tribunal Case No 37/CR/Jun01.


SA Fruit Terminals (Pty) Ltd v Portnet and Others, Competition Tribunal Case No: 52/IR/Sep01.


Legislation Cited


No legislation is expressly cited in the text of the reasons provided.


Rules of Court Cited


No rules of court are expressly cited in the text of the reasons provided.


Held


The Tribunal held that the merger between Afgri Operations Ltd and Natal Agricultural Co-Operative Ltd was not shown, on the record before it, to be likely to substantially prevent or lessen competition in any relevant market, including markets for bundled co-operative services, grain handling and storage (silos), or related markets such as grain trading. It further held that the merger raised no public interest concerns on the evidence, including no anticipated job losses. The merger was accordingly approved without conditions.


LEGAL PRINCIPLES


The decision applied the principle that merger analysis should assess whether a transaction is likely to result in a substantial prevention or lessening of competition on the evidentiary record, including both horizontal and vertical dimensions where relevant, and should take into account the actual competitive constraints demonstrated by the facts rather than assumptions.


The Tribunal emphasised that the framing of relevant markets is an evaluative exercise and indicated that, in sectors where firms compete by offering a bundle or package of products and services to a customer base, an overly atomised market-by-market analysis may risk overstating substitution and understating customer “stickiness” associated with convenience and loyalty arrangements. The Tribunal nonetheless approached the case pragmatically, noting that it was unnecessary to determine precise geographic market boundaries where, on the available evidence, overlaps or increments were not competitively significant.


In relation to local monopoly infrastructure such as silos, the Tribunal accepted that deregulation does not necessarily eliminate geographic barriers and that substantial sunk costs and demand conditions may limit entry. However, it treated local market structure, actual substitutability, and credible constraints (including contractual pricing undertakings and commercial features affecting demand and substitution) as central to assessing the likelihood of post-merger price effects.


The Tribunal also reflected the principle that potential competitive concerns in related markets and complex interrelationships (such as between silo ownership and grain trading) may warrant scrutiny, but that where the merger causes only a de minimis increment in concentration or market power, such concerns may not require definitive resolution in that case, particularly absent evidence demonstrating likely harm.

COMPETITION TRIBUNAL 
REPUBLIC OF SOUTH AFRICA
        Case no.: 17/LM/Mar04
In the large merger between: 
Afgri Operations Ltd
 and 
Natal Agricultural Co­Operative Ltd 
______________________________________________________________
Reasons
______________________________________________________________
Introduction
On 4 June 2004 the Competition Tribunal approved the merger between Afgri  
Operations Ltd (“Afgri”) and Natal Agricultural Co­Operative Ltd (“Natalagri”).  
The reasons are set out below.
Description of merger
Afgri is acquiring all the shares in the issued share capital of Natalagri and all  
the members’ funds, other than shares held by and the funds attributable to  
Afgri and Laeveld, by way of a scheme of arrangement. On implementation of  
the merger Afgri will control Natalagri.
Rationale 
Natalagri has in recent years been experiencing cash flow problems in part  
due to an unsuccessful acquisition. Placed under pressure by its funders, the  
co­operative's   management   recommended   to   members   that   they   sell   the  
business. Invitations to bidders were submitted and three offers were made.  
The offer from Afgri was the one accepted by the board.
For its part Afgri has been keen to maker further acquisitions both to expand  
its geographic footprint and to increase its customer base. Natalagri also  
1

owns assets that Afgri is keen to control including its silos, which are well  
located for the export market. 1
Products and services supplied by the merging parties
The Commission identified the following markets in which both parties provide  
products and services:
• Financial   services   products   These   involve   the   provision   of   credit  
facilities and the brokering of crop and life insurance. The market is  
considered to be national.
The merged entity’s market share in the provision of credit facilities will be  
6.8%. Its main rivals are Absa Bank, with 18% of the market, and the  
Landbank with 26%. With regard to insurance products there are large firms  
such as Absa Insurance brokers, FNB Insurance brokers and Senwes who  
compete with the merged entity. The Commission believes that the  
transaction is thus unlikely to substantially prevent or lessen competition in  
the national market. 
• Trading of agricultural commodities   Agricultural commodities such  
as   grain   and   maize   are   traded   on   Safex   (South   African   Futures  
Exchange) and according to the Commission the market is therefore  
national. 
The combined market share of the merged entity is 18.2%. The competitors  
are Seaboard with a market share of 41.8%, Cargill with 20% and Senwes  
14%. The Commission believes that the transaction will thus not lead to a  
substantial lessening of competition in the market. We comment on this more  
fully below.
• Handling   and   storage   facilities   This   product   market   refers   to   the  
storing of grain or maize in silo complexes prior to delivery to millers.  
According to the Commission the geographic markets for silos are local  
and farmers generally travel no more than 40km to the nearest silo to  
store their crop. According to the Commission’s analysis there are no  
product   overlaps   in   the   relevant   geographic   markets.   Again   we  
comment on this more fully below.
• Manufacture and distribution of animal feeds  Animal feeds are sold

• Manufacture and distribution of animal feeds  Animal feeds are sold  
in  bulk   and  bagged  forms.   The  Commission  submits  that   bulk  sales  
have an average geographic reach of approximately 150km from the  
manufacturing   plant.   Natalagri   supplies   animal   feed   mainly   in   the  
northern and central KwaZulu Natal areas and Afgri does not compete  
1  See pages 369 and 379 of the Record.
2

in these. 
• Operating   retail   outlets   Both   parties   sell   a   wide   range   of   products  
including fuels and lubricants, hardware, tyres and batteries, veterinary  
medicines, spare parts, etc. The market is local and both parties have  
outlets in Bethlehem, Ermelo, Kroonstad, Senekal.
Although no market share data is available the Commission found that  
there is competition from other co­operatives such as Senwes, VKB,  
Boeredienste,   BKB   and   TWK   in   the   particular   geographic   markets.  
Moreover barriers to entry are low as minimal capital expenditure and  
expertise are required. For this reason the Commission considers that  
the transaction would not lessen competition in these areas.
• Marketing   of   farming   equipment   This   includes  equipment  such   as  
tractors, combine harvesters, balers, planters etc. The merging parties  
have   concluded   certain   exclusive   agreements   for   certain   geographic  
locations. However farmers are not confined to buying equipment in a  
particular region. 
The   Commission   found   that   if   the   market   was   regional   then   the  
merging parties did not compete and that if it was national their market  
shares would be less than 7%, hence raising no concerns.
• Sale and distribution of crop care products  Crop care products are  
fertilizers and chemicals and are sold in a national market. 
The Commission found that not only are there various competitors in these  
markets, but also that farmers can buy directly from the manufacturers and  
hence this market raises no competition concerns. 
The Commission also investigated the effect of the merger on vertical  
integration in the seeds market. Afgri operates both a seed manufacturing  
division, and a financing and a retail division, and is thus vertically integrated  
in the seeds market. By acquiring Natalagri, which is involved in the financing  
and retailing of seeds, Agfri will extend its vertical integration into KwaZulu­

and retailing of seeds, Agfri will extend its vertical integration into KwaZulu­
Natal. The Commission identified two areas where foreclosure could arise,  
namely 1) Afgri could refuse to finance seeds sales made by rival seed  
companies, 2) Afgri may foreclose rival seed companies from selling its seeds  
in Natalagri retail outlets.
With regard to the first concern the Commission found that alternative finance  
options are available through various banks as well as seed companies that  
are prepared to finance their own sales to farmers. Regarding the second  
concern, the Commission found that there is no incentive for Afgri to refuse to  
stock rivals’ seeds as it would compromise the levels of service in Afgri’s  
3

outlets if they did not provide a full range of product to the farmer. Moreover,  
should foreclosure take place, seed manufacturers do have alternative  
channels such as hardware stores to sell their seeds. The Commission  
therefore found that from a vertical perspective the merger did not raise any  
competition concerns.  
Analysis
We have seen this merger quite differently to the Commission. The  
Commission was most concerned with examining the possibility of vertical  
foreclosure in the seed markets. Ultimately, and we have no quibble with this,  
it concluded that the likelihood of foreclosure in this market was remote. We  
also have no criticism with its analysis of the remaining product services  
where there were overlaps and its conclusion that none of these raised  
concerns as any increment in market share when viewed nationally was de  
minimus and if viewed regionally was unlikely to give rise to overlaps at all.  
We do not for this reason need to determine the precise boundaries of the  
geographic markets. 
Whether   the   Commission   and   the   merging   parties   are   right   to   regard   the  
markets as separate and discrete issues for individual analysis may be open  
to some doubt. It may be better to view firms such as Afgri and Natalagri as  
providers of a package of services to a client base. They compete with one  
another   for   this   client   base   Just   as   we   approach   competition   between  
supermarkets on  the basis of competitors selling a package  of products  to  
consumers, rather than breaking down a competition analysis in respect of  
each item in the package, so it might be better to consider this type of merger  
in future in the same way i.e. a merger between firms that sell a package of  
products   and   services   to   a   customer   base.   This   approach   also   seems   to  
accord with how the parties view themselves and their competitors. 2
For instance, in the report prepared for the Afgri acquisition committee,

For instance, in the report prepared for the Afgri acquisition committee,  
motivating the merger, it is noted that:
“Three   Co­operatives   (TWK,   VKB,   and   CFC)   are   operational   and  
active in the existing Natalagri area. 
The expectation is that, as is the case in other parts of the country,  
these   Co­operatives   will   continue   to   attempt   to   build   their   customer  
base in the KwaZulu Natal region.”   3
2  In the  Boart Longyear and Huddy Rock Tools  large merger, Tribunal Case no.  
41/LM/Aug03, the Tribunal dealt with the tendency to break down the relevant market into  
minute categories and pointed out that: “  there are a range of factors at play in this  
determination ( of the relevant market)  of which functional inter­changeability is but one, albeit  
important, consideration ”.
3  See Record page 378. Note that further in its Annual Report Afgri refers to the fact that its  
4

That Afgri regards the expansion of its customer base as a strategic issue is  
not only clear from this extract, but also the fact that it operates a loyalty  
scheme with other firms known as the Agri Bonus scheme. Customers who  
purchase from firms who are part of the scheme receive credits that can be  
redeemed in the form of bonus payments back to them. 4 This suggests that  
firms like Afgri compete for the retention of a repeat customer base by offering  
loyalty incentives to retain customers and disincentivises them from going to  
rivals. By concentrating only on the services by unbundling them as the  
Commission has done there is a danger of identifying more substitutes than in  
reality exist for a customer, who may prefer, partly owing to convenience and  
partly through the operation of loyalty incentive schemes, to buy a package  
from one supplier.
What received little emphasis in the Commission’s report was the acquisition  
of Natalagri’s silos. Natalagri owns approximately 360 000 tons of silo  
capacity in KZN, at eight different sites. These silos represent 85% of the silo  
capacity available commercially in that province. Insight into the due diligence  
indicates that the silos were the target firm’s most valuable assets, not only  
because their replacement value was enormous, but also because they enjoy  
a local monopoly. 
Flowing from these observations in our view the merger should have been  
analysed in relation to the following concerns:
1) Could it lead to exclusion of rivals of Afgri by tying up an additional  
customer base through the use of loyalty schemes?
2) Will the merger lead to an increase in the prices for grain storage  
and handling? 
3) Will   the  merger,   by  virtue  of  the  increase  in  concentration  in  the  
grain handling and storage market, lead to the merged firm gaining  
market   power   in   the   related   grain   trading   market   or   over   grain  
prices?
 
We will now deal with these concerns separately.
The market for co­operative services

We will now deal with these concerns separately.
The market for co­operative services 
It seems from the evidence that there is no exclusivity between Afgri and its  
customers who would be free to procure from a rival firm. Although the  
vision and purpose is to provide a  “ world class full spectrum service to targeted customers.”  
(Record page 102)  Afgri talks in its material of its footprint being expanded to different client  
bases. (Record page 117) 
4  Natalagri was also a member of the scheme but appears not to have rolled it out because of  
the pending merger. (Record page 30) 
5

existence of the loyalty scheme usually disincentivises customers from  
shopping around it is unlikely that the addition of Natalagri’s 1000 customer  
base is likely to have this effect. 
Market for the handling and storage of grain
Like its acquirer, Natalagri is a product of a highly regulated agricultural sector  
where   co­operatives   were   organised   as   local   monopolies   bolstered   by  
elaborate and complex marketing schemes, which were designed to protect  
producers, and those down the production chain from the inconvenience of  
competition.   The   post   1994   de­regulation   of   this   sector,   which   we   have  
alluded to in some of our earlier decisions (See  The Competition Commission  
v   Patensie   Sitrus   Beherend ,   Tribunal   Case   No   37/CR/Jun01   and   SA   Fruit 
Terminals   (Pty)   Ltd   v   Portnet   and   others ,   Tribunal   Case   No:   52/IR/Sep01)  
sought to introduce competition into the sector. Yet as the situation with silos  
illustrates, eradicating the regulations and arrangements is one thing, undoing  
geography is another. Short  of  new  entry into  the silo markets commercial  
silos are likely to continue as regional monopolies. The investment required to  
erect new silos does not justify this, and as its silos appear to be operating  
below full capacity, nor does the demand. 
The merging parties allege that there is a form of substitution in that farmers  
often erect their own silos. 5  Whilst this may be correct it is unlikely to be the  
preferred form of substitution for many farmers but this is not an issue that we  
have to decide.
Both  Afgri   and  Natalagri   offer  commercial   silo  services  or  what  the  parties  
referred to as the market for the handling and storage of grain. Afgri’s silos  
have a capacity for storage of 3 600 727 tonnes, making it the second largest  
in   the   market   after   Senwes,   who   have   a   capacity   of   4   585   794   tonnes.

Natalagri   has   a   capacity   of   359   154   tonnes,   putting   it   sixth   on   the   list   in  
respect of grain storage capacity. But the party’s argue that silo markets are  
local. Due to high transport costs there is a limit to how far farmers are willing  
to travel to deliver their grain before the transport costs become prohibitive.  
Although   between   the   parties   and   the   Commission’s   informants   this   figure  
was not consistent, it varied between 40 and 60 kilometres.
On   that   basis   no   Afgri   silo   was,   argued   the   merging   parties   and   the  
Commission, sufficiently close to one of Natalagri’s for them to be considered  
by any customers as an alternative. We asked the parties to provide us with  
details of the nearest silo to all those of Natalagri including who owned the  
silos and the distance that they were apart
5   Mr De Lange says there is already a capacity of 990 000 on the farms  
(Page 13 of the Transcript) yet this figure is not significant in relation to the  
total silo capacity of the commercial silo operatives, which is 15 million tons.
6

From this information it emerges that Afgri has the nearest silo to two of the  
eight   Natalagri   silos;   Natalagri’s   silo   at   Bergville   is   140   km   from   Afgri’s  
Harrismith silo and Natalagri’s Winterton silo is 170 km from Afgri’s Harrismith  
Silo.6   However the Afgri silo is sufficiently far away for it not to be regarded  
as a substitute for a competitively significant number of farmers. 
Thus, on the face of it, the parties’ contention, which the Commission  
accepted, that the geographic markets were separate and thus the merging  
firms grain storage and handling activities did not overlap, appears correct.  
However, further information supplied prior to and during the hearing presents  
a more complex picture.
The parties provided us with a price list for the past three years of the tariffs  
charged for storage by five of the firms that provide commercial silo facilities,  
including the merging firms. 7
This table demonstrates various features:
1. all the firms charge differentiated tariffs depending on the nature  
of the product being stored. (i.e. maize, soya bean or wheat)
2. firms appear to charge a national rather than a regional tariff
3. firms provide tariffs in relation to the time period over which the  
grain is stored. Typically they provide a yearly, daily and some a  
monthly   tariff.   For   daily   storage   a   separate   handling   tariff   is  
charged although this handling tariff is built into the annual tariff  
in respect of Afgri and therefore not charged for separately.
4. The tariffs for the three largest firms appear remarkably similar  
while   Natalagri’s   tariff   appears,   in   most   respects,   to   be   lower  
than any of the others.
5. Afgri itself in the figures provided seems to charge the highest  
annual tariff.
6. According Mr De Lange most grain is stored in accordance with  
the   annual   tariff   and   the   average   period   of   storage   is   4.6  
months. When grain is stored for less than a year the annual fee  
is pro­rated.

months. When grain is stored for less than a year the annual fee  
is pro­rated.
Was there anything in the similarity of tariffs and fee structures we asked? It  
then emerged that there was. We were advised that Safex 8 provides a  
recommended tariff. This tariff is calculated annually after negotiations that  
take place between the millers and the silo owners in a committee known as  
6  Interestingly the two firms that have the nearest silos to the remaining six were both bidders  
for Natalafgri but were unsuccessful.
7  The firms are Afgri, VKB, Natalagri, TWK and Senwes.
8  Safex is the acronym for the South African Futures Exchange a registered exchange that  
inter alia serves as a market for the trading of grain futures.
7

the Grain Industry Committee. The price arrived at by this committee then  
becomes the Safex tariff. The Safex tariff while non­binding in nature does  
appear to influence the manner in which firms price their handling tariffs and  
hence the degree of similarity contained in the price lists is now explicable
Now, as we noted before, Natalagri prices below the other commercial silo  
operators and this feature was confirmed in evidence during the hearing. 9 We  
asked the merging parties if there was any reason why Natalagri under Afgri  
control would not raise prices at least up to the Safex tariff. We were advised  
that this would not happen for two reason one legal and one commercial
The legal reason is that Afgri in terms of the sale agreement had undertaken  
that it would not during the first year of operation raise prices above CPI. This  
legal undertaking has since been strengthened as a result of consultation that  
took place between Afgri and members of Natalagri. The latter were  
concerned about the short duration of the undertaking and Afgri have agreed  
to make the undertaking in respect of price increases indefinite.
The commercial reason is that the economics of silo tariffs works differently in  
KZN than it does in other local markets and this ensures that pricing remains  
more competitive than the Safex tariff. Farms in KZN are on the whole smaller  
than in other parts of the country because the land is hilly. Having a smaller  
crop means that for a smaller amount of expenditure a farmer can erect silo  
capacity on the farm as a substitute if storage prices increase. Secondly  
farmers are located closer to the millers who are their customers and hence  
have less need to use third party storage facilities. Thirdly KZN consumes  
more grain than it produces which means it is a net importer and this  
apparently means less grain lies waiting in the province’s silos. These three  
factors have meant that Natalagri has not optimally utilised its silo capacity,

factors have meant that Natalagri has not optimally utilised its silo capacity,  
and hence this has kept prices down. We are advised that the merger will not  
lead to a change in these factors.
Given these assurances ­ in particular the undertakings that Afgri has given to  
the members ­ we are satisfied that Afgri will be constrained from raising  
storage tariffs beyond CPI in the near future and it is therefore not necessary  
to consider a condition in this respect.
Effect on markets related to the market for the handling and storage of  
grain
We must now consider whether Afgri’s increased ownership of silos will result  
in anti­competitive effects in related markets.
Nationally the ownership of silos is highly concentrated. The share of the top  
9  See page 5 of the transcript .
8

three firms, Senwes, Afgri and Noordwes is estimated to range between 70 –  
72%. Pre­merger, Afgri has 23% of the market and post merger it will acquire  
a further 2,3%. From this perspective the increment is de minimus.  
Nevertheless one cannot ignore concerns that have been expressed by some  
academic writers that the increased concentration of silo ownership may have  
a bearing on prices in related markets. In the related market for grain trading,  
four major players, one of which is Afgri, dominate the market. 
Two economists who have written recently on these markets have expressed  
the view that there is a relationship between concentration in the silo market  
and wheat prices. In the one paper prepared for the Competition Commission  
during its investigation into food prices, Professor Herman van Schalkwyk  
from the University of the Free State quotes the National Agricultural  
Marketing Council, which believes that:
  “ the current level of geographic concentration is unhealthy and given  
the   pivotal   position   of   the   bulk   silo   infrastructure   in   the   deregulated  
markets for maize and wheat it would be preferable for government to  
be pro­active rather than reactive in the situation”.“ 10
Professor Van Schalkwyk believes that operators could capitalise on the  
geographical concentration and act in a way that could restrict competition in  
the market.  11
The second paper written by Neo Chabane of the University of Witwatersrand,  
expresses the concern that:
“A recent trend in the agricultural sector has been increasing economies of  
scale. At the same time, the ownership of silos has become more  
concentrated. The buying up of small farms and silos has lead to a situation  
where oligopoly conditions exist in the maize market. These conditions may  
enable collusion.” 12
The parties’ response at the hearing was to de­link the silo market from  
trading. The parties suggested that what goes on in the trading market is

trading. The parties suggested that what goes on in the trading market is  
unrelated to who owns the means of storing grain. Once grain is stored in a  
silo the owner is issued with a certificate in respect of that quantity. These  
certificates, like share certificates, are tradable commodities. According to Mr  
Smith, a single certificate may be traded over 10 times before it is redeemed.  
10  See report entitled  Competition Issues in the South African Agricultural Sector , by The  
Chair in International Agricultural Marketing & Development, page188 
11  See supra page 188.
12  See Neo Chabane:  Markets, efficiency and public policy – an evaluation of recent  
influences on price in the maize market and government responses , CSID Research Project  
University of Witwatersrand page 13
9

Once the buyer collects the grain the certificate is redeemed.
This system, the parties argue, separates the market for grain prices from that  
for the ownership of silos. 
Chabane who acknowledges this separation nevertheless remains concerned:
“It is important to recognise, however, that the firms operating the silos  
do   not   necessarily   own   the   grain   which   is   stored.   Owners,   whether  
farmers or traders, pay fees for grain storage. But, the silos do have a  
very important role as market makers, posting prices for the purchase  
of   grain.   This   function   and   the   way   in   which   information   is   shared  
amongst them requires further investigation. As already noted, it is also  
the vertical integration and the combination of related activities which  
makes the silos so pivotal in the market.” 13
This is not an issue we have to decide in this case, given the de minimus  
increment in concentration brought about by the merger. But it does illustrate  
that these are complex interrelationships, which should have been further  
investigated by the Commission, given that these are agricultural markets that  
may affect the price of foodstuffs purchased by the most vulnerable  
consumers. This is not to suggest that the outcome would have been different  
if the investigation had been more thorough, but it would have been more  
comforting to be sure about that fact than to speculate upon it.
Public interest
The merger will not lead to a loss of employment nor does it implicate any of  
the other public interest concerns
Conclusion
We find then that there is no evidence on the present record to suggest that  
the merger will lead to a substantial prevention or lessening of competition.  
The public interest does not lead to any other conclusion and therefore we  
approve the merger without conditions.
 
13  Chabane op cit page 14.
10

____________ 06 July  2004
N. Manoim Date
Concurring: D. Lewis, U Bhoola
For Afgri:  Johan Brink and Alisen de Villiers from Brink Co 
and Le Roux.
For Natal Agri:  Johan Smith and Mark Stockhile
For the Commission:   Maarten van Hoven and Seema Nunkoo 
11

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