Affected market: Animal feed fats
The OFT's decision on reference under section 33 given on 10 September
Advanced Feed Fats Limited (AFF) is a joint venture between the ED&F
Man Holdings Limited Group and the Feed Oil Company. AFF undertakes feed
fat blending and trading. John Wyatt Limited (Wyatt) is a privately held
company that is involved in animal feed fat trading and blending as well
The proposed joint venture combines the activities of AFF with the oil
and fat blending and trading operations of Wyatt. It is expected that
the transaction will involve the formation of a new company which will
sell feed fats produced by AFF and Wyatt. The transaction was notified
to the OFT as an informal submission. The administrative deadline for a
decision is 11 September 2003.
As a result of this transaction AFF and Wyatt will cease to be distinct.
The parties overlap in the supply of fats to the animal feed industry
and would hold a combined share of supply of approximately 55 per cent
in the UK. Therefore, the share of supply test in section 23 of the
Enterprise Act 2002 is met. A relevant merger situation has been
Animal feed compounders purchase feed fats from the parties and mix them
with other ingredients such as cereals, grains and vegetable matter to
make a compound feed that is sold to farmers. Blended feed fats are
currently made up of around 50 per cent used cooking oil (UCO) and 50
per cent other straight fats such as soya acid oil, mixed acid oil and
palm fatty acid distillate (PFAD). From 1 November 2004, the use of UCO
in animal feed will be banned (see [note 1]).
The parties supply blended feed fats and straight fats. Straight fats
are a commodity that compounders purchase from a number of potential
suppliers. The parties supplied less than 10 per cent of the straight
fats for the UK animal feed industry in 2002 and no concerns were raised
regarding the supply of straight fats. For these reasons the supply of
straight fats is not considered further.
In order to assist in the analysis
of demand side issues, a critical loss calculation was undertaken. It
was found that prior to the ban on the use of UCO in animal feeds, the
critical loss associated with a 5-10 per cent price rise by a
hypothetical monopolist of blended feed fats is around 28 per cent to 44
per cent of sales. Compounders said that they would reduce their demand
for blended feed fats by more than this percentage if price was raised
5-10 per cent, by replacing it with straight fats (see [note
Following the ban on the use of UCO in animal feeds in November 2004,
which itself is likely to lead to an increase in the price of blended
feed fats, it is unclear by how much demand for blended feed fats would
decrease following an additional 5-10 per cent price rise. Most
customers said there was a minimal level of blended feed fats that they
would need to include in their feeds. As the demand for blended feed
fats approached this minimum level, the effect of a price rise on demand
for blended feed fats would be reduced. Given the uncertainty on the
reaction of customers to a price rise following the ban, it is possible
that a hypothetical monopolist might be able to increase the price of
blended feed fats by 5-10 per cent.
It is entirely possible that a customer receiving a lower price for
blended feed fats than another would be able to make a profit by selling
on the feed fats to other customers, as long as the price difference was
not cost related. Customers supported this view. It would therefore not
be possible for the parties to price discriminate between customers, and
investigation showed that the parties do not currently charge
substantially different prices to different customers.
Blended feed fats are currently
not imported to mainland UK (see [note 3]) in large
quantities. Currently the price of imported blended feed fats is about
the same as feed fats blended in mainland UK, therefore a price increase
of 5-10 per cent would result in imports being cheaper than the domestic
product. However, customers submitted that this is unlikely to lead them
to switch to imports before the ban on the use of UCO in animal feeds
takes effect in the UK, as the blended feed fat imports would be of a
lower quality. Currently, imports do not contain UCO, which has a
higher nutritional content, as the ban has already been implemented on
the continent. There would also be a slightly increased risk that the
product will not be delivered on time.
After 1 November 2004, the required standards of blended feed fats will
be the same across the EU and customers in mainland UK will be able to
source feed fats from importers or direct from blenders
abroad. Compounders indicated that, following the ban taking effect, if
prices were 5-10 per cent higher in the UK than abroad, they would
purchase feed fats from abroad. Blended feed fats are already exported
from Holland to Germany, France and Belgium. Firms in Holland have
indicated that they expect to be able to export blended feed fats to
mainland UK after 1 November 2004 and do not appear to be capacity
constrained. Indeed, straight fats are currently imported to mainland UK
from Holland in significant quantities.
Currently the price of blended feed fats from the continent is around
£260 to £280 per tonne. The price of blended feed fats in the UK is
expected to rise to around £305-£325 per tonne after 1 November
2004. Based on this information, a price rise of 5 per cent to 10 per
cent in the UK would clearly make imports more than 10 per cent cheaper
than domestic blended feed fat.
Prior to 1 November 2004, the parties' combined share of supply of all
feed fats (blended and straight) in the UK and Holland is around 17 per
cent (increment 8 per cent) with several other competitors and brokers
supplying between 6-8 per cent each.
After 1 November 2004, the parties' estimated combined share of supply
of blended feed fats in mainland UK and Holland will be around 34 per
cent (increment 17 per cent). Their competitors in mainland UK will be
PDM and importers. There are also a number of large blending firms in
Holland, several of which have indicated that they expect to be able to
export to the UK after 1 November 2004.
Barriers to entry and expansion
The parties submit that the sourcing of UCO and its testing has been the most
significant barrier to entry. To use UCO in blended feed fats each 25
tonne load of UCO must be individually tested as each batch might be
different. Following the ban on the use of UCO in animal feeds, fats
will be purchased in larger quantities and so, for example, a single
shipment of 5,000 tonnes of palm oil would only need to be tested once.
Additional necessary equipment such as tanks for storing and blending
fats and transportation can all be hired, reducing the total cost
necessary for entry. The parties estimate that the sunk cost required
would be minimal. Third parties estimate that if all facilities are
hired, the cost of starting up the business would be between £250,000
and £1 million. It may also be necessary to have around £1 million to
purchase raw materials. Existing feed fat blenders can easily expand
their output with little investment. They would simply need to arrange
for more haulage and purchase more raw materials.
Overall, the investigation into this merger has not revealed any
substantial barriers to new entry or expansion.
The parties' largest five customers
purchase a significant proportion of the parties' total supply of feed
fats. While they still have a choice of alternative suppliers these five
are likely to have a degree of buyer power as losing their business will
have a significant impact on the parties profitability. Larger customers
have commented that due to their size they hope to be able to maintain
competitive pressure on the parties. The parties inability to price
discriminate (discussed above) means that smaller firms would also
benefit from this buyer power.
The parties submit that their larger customers could start blending feed
fats themselves after the ban on the use of UCO in animal feeds. Some of
those customers have commented that they could undertake their own
blending, but some investment would be necessary.
No vertical issues arise from this transaction.
THIRD PARTY VIEWS
Customers had some concerns about losing one of the three potential
suppliers of blended feed fats in mainland UK but considered that there
is likely to be an increase in imports after the merger. Some customers
considered that they held buyer power through their size and/or their
ability to blend feed fats themselves.
Competitors were not concerned as they saw this as an opportunity to
increase their business, at the expense of the merging parties. Firms in
Holland saw the ban on the use of UCO in animal feeds as an opportunity
to export to mainland UK.
Prior to 1 November 2004, customers could switch from using blended feed
fats to straight fats if the price of blended feed fats rose. However,
there is a limit to which customers can reduce their use of blended feed
fats. Following the introduction of the ban on the use of UCO in animal
feed in 2004, imports from Holland will become viable as the product
will meet the same standards and it is likely to be slightly cheaper to
import than it will be to blend feed fats in mainland UK.
The potential for firms to switch to using other straight fats or
imported feed fats, the low cost of new entry, and buyer power of large
customers together provide a significant competitive constraint on the
parties post merger.
The merger does not appear to result in a substantial lessening of
competition within a market or markets in the United Kingdom for goods
This merger will therefore not be referred to the Competition Commission
under section 33(1) of the Act.
- The ban on the use of UCO is in The Animal By-Products Regulations
2003 (which enforce Regulation (EC) No 1774/2002 of the European
Parliament and of the Council laying down health rules concerning animal
by-products not intended for human consumption).
- The critical loss analysis is based on a number of assumptions and
therefore is only an approximation. However, based on third party
responses, it seems likely that the actual loss in sales following a
5-10 per cent price rise would be much higher than any critical loss
- Feed fats are not supplied from mainland UK to Northern Ireland. As
straight fats supplied to the UK are often sourced in the Netherlands,
it is much cheaper to transport fats directly from the Netherlands and
blend with locally sourced UCO.