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FOOD CHAIN - 2 October 2018

A NEED OF BALANCED, COMMON APPROACH TACKLING UTPs

by Farm Europe

Discussions about the need to rebalance the food chain relationship are not new at the European level. All the institutions have participated in several attempts urged by different stakeholders, but in the end no concrete action was taken until this year.

In 2013, seven European Associations motivated by the former Commissioner Verheugen launched the Supply Chain Initiative (SCI) as a voluntary, private-led action in order to increase fairness in commercial relations along the food supply chain.

Since then, some advances have been achieved in promoting cultural changes and improving business ethics, but a set of important shortcomings have also been highlighted in the analysis of its effective application. Weakness in governance, limitations in transparency, no enforcement measures or penalties, a lack of effective deterrents against UTP and not allowing individuals to make anonymous complaints by potential victims, no own–initiative investigations by an independent body and under-representation of SMEs and farmers are the most important ones. [1]

The primary concerns on the issue were born at the MS level, and 20 of them have been – in one way or another – actively looking for remedies. If we summarize what is going on in the different Member States, several distinctions can be made:

  • There are some MS with specific measures for the food chain (i.e. Spain, UK, Italy…), and others refer directly to horizontal legislation (Germany, France,.. ).
  • Four main types of models coexist: regulated in detail (UK, Spain,Italy..), self-regulated (Belgium), mixed model (Spain, UK) , horizontal regulation and countries with no specific UTP´s regulation (Denmark, Sweden, Luxembourg,..).
  • When there is a regulatory framework and control authorities, they can be either the Ministry of Finance (France), Competition Authorities (Germany), Food Safety and Economy (Portugal) or Agriculture (Spain).[2]

Nevertheless, it is crystal clear that despite the efforts made, self-regulation or voluntary approaches are not enough to solve the present imbalances in the food chain, and disparities between national systems in place do not help to keep a level-playing field and ensure the proper functioning of the Internal market, while at the same time the fragmented nature of the markets expose supply chain operators to different conditions, regulatory uncertainty and inefficiencies.

Taking into account these facts, Commissioner Hogan instigated in 2016 the Agricultural Markets Task Force (AMTF), which examined the position of the farmer in the supply chain, and proposed a number of recommendations on different issues, amongst them trading practices in agricultural markets and contractualisation.

The Report was deeply debated in the Agri Council, whose Conclusions of December 2016 on “Strengthening Farmers´ Position in the Food Supply Chain and Tackling Unfair Trading Practices” made clear that imbalances in the bargaining positions often lead to unfair trading practices (UTPs), as well as to the need for a level-playing field for all actors in the chain.

The AMTF was not the only initiative around the issue of how to improve the functioning of the European food chain. The European Parliament has also been very active, and its last positioning was adopted in June 2016 with the adoption of a new Resolution on “Unfair Trading Practices in the Food Supply Chain”, in which it openly pledges for a framework legislation at EU level in order to tackle UTPs. This pledge was renewed at many occasions in various EP’s resolutions (2016 and 20117 Annual EU Competition policy reports), while an amendment setting a mandatory deadline for proposing a legislation to the Commission was defended by the Parliament in the framework of the Omnibus regulation negociation.

Along the same line, the European Economic and Social Committee supported the European Parliament´s Resolution in its Opinion adopted at the plenary in October 2016 (“A Fairer Agro-Food Supply Chain”) and highlighted the need for a framework legislation at the European level as well as to take swift action to prevent UTP´s.

In this context, the Commission came in 2018 with a legislative proposal to to address UTPs and rebalance the relationship between the different links of the food chain.

NEED OF A SET OF CONCRETE MEASURES.

If Europe wants a strong and balanced food chain, able to share all the value added generated across it under fair conditions, able to reinforce the position of producers as the most vulnerable link, and generate wealth up to the consumer, a minimum set of issues has to be tackled.

These core issues are the following:

  1. A set of guiding principles for the commercial relationships in the food chain. There are three kind of relations in the food chain: 1) producer – industry, 2) producer – retail , 3) industry – retail. For all cases, the relation shall be governed by the principles of balance and fair reciprocity between parties, freedom to enter into agreements, goodwill, mutual interest, equitable sharing of risks and responsibilities, cooperation, transparency and respect of free market competition.
  2. Identification of the unfair practices to be relegated from commercial practice.There is a vast literature about UTPs , and in general terms they can be described as all kind of practices imposed to the supplier that do not respect fairness in the contractual relation, passing on inefficiencies or risks without any compensation.          Under this broad description we should include:
    • Unilateral or retroactive changes to the agreed terms (concerning volumes, quality standards, prices),
    • Unforeseen commercial payments,
    • Charges of fictitious services,
    • Transfer of charges in promotions to the supplier with no negotiation and participation of the buyer,
    • Imposing unconditional return of unsold merchandise,
    • Non-compliance with payment delays as established in Directive 2011/7/EU,
    • Sudden and unjustified cancellation of a contract,
    • Non-transparent, discriminatory electronic auctions.
    • No request for upfront payments to secure or retain contracts.
  3. Written contracts. Modern commercial relations imply taking into account a set of complex issues – quality, quantity, price, discounts, logistics and transportation, terms of delivery,…- that cannot be left to uncertainty. Moreover, clear conditions mean secure and stable relationships, as well as less legal controversies. We propose as a general rule the need for written contracts along the chain, with a minimum set of criteria, conditions that should be compulsory when requested by the supplier. In the case of agri producers, Producers’ Organizations could play a relevant role in this issue and negotiate on their behalf while Interbranch Organizations could set standard written contracts.
  4. Effective enforcement of rules. Experience shows us the shortcomings and limits of voluntary, non-binding models of enforcement. The most effective way is the supervision and control by an independent authority, granted with public powers, in order to ensure the effective application of the proposed set of rules.
  5. Fear factor avoidance. Enforcement should be possible either through independent authorities’ own initiative, or by operators and their organizations. It is crucial in this sense to establish an effective complaints lodge system that secures anonymity .
  6. Sanctions and name-and-shame. Non-compliance with the proposed set of rules should be subject to sanctions, with dissuasive character, and include “Name and shame” provisions.

All these proposals should be part of a common European framework.

This should be complemented at the national level by the effective participation of stakeholders through codes of conduct / voluntary agreements, as a way to better implement a comprehensive system.

COMMISSION’S PROPOSAL FOR A DIRECTIVE ON UNFAIR TRADING PRACTICES IN BUSINESS-TO-BUSINESS RELATIONSHIPS IN THE FOOD SUPPLY CHAIN.

(from committee on agriculture and rural development draft report on the proposal for a directive of the european parliament and of the council on unfair trading practices in business-to-business relationships in the food supply chain
(com(2018)0173 – c8-0139/2018 – 2018/0082(cod)) rapporteur: paolo de castro 2018/0082(cod))

« The absence, so far, of a common UTP framework stands in contrast to other areas which the CAP governs, and which have direct relevance for operators, such as competition rules, state aid rules and marketing standards. In these areas, the common market organisation (Regulation (EU) No 1308/2013) lays down common rules relevant to the market conditions operators face in the EU so as to contribute to economic and social cohesion, as well as to a level playing field in the single market.

The present proposal for a Directive aims at reducing the occurrence of UTPs in the food supply chain by introducing a minimum common standard of protection across the EU that consists of a short list of specific prohibited UTPs. The protection covers suppliers in the food supply chain insofar as they sell food products to buyers who are not small and medium-sized. This scope aims at contributing to a fair standard of living for the agricultural community, an objective of the CAP under Article 39 TFEU.

Article 43 TFEU, being the principal CAP legal basis, serves as the Commission proposal’s unique legal basis. The measures foreseen in the proposal concern UTPs occurring in the agricultural and food supply chain in relation to the trade of products originating with agricultural producers. It should be noted that, according to Article 38(2) and (3) TFEU, the CAP primarily covers the agricultural products listed in Annex 1 to the TFEU. However, the European Court of Justice has explicitly confirmed that food products not listed in Annex I TFEU (Annex I products are deemed “agricultural products” under the Treaty) can also be covered by acts adopted under Article 43 TFEU if this contributes to the achievement of one or more of the CAP objectives and agricultural products are principally covered.1

Moreover, an approach which protects agricultural producers and their associations (cooperatives and other producer organisations) must also take into account indirect negative effects they may suffer through UTPs occurring downstream in the food supply chain, i.e. by operators who are not farmers but whose weak bargaining position in the downstream chain makes them vulnerable to UTPs. Protection against UTPs applying to downstream suppliers prevents unintended consequences for farmers due to trade being diverted to their investor- owned competitors – for example at the processing stage – which would not enjoy protection (e.g. less legal risk for buyers to be confronted with UTP accusations).

Furthermore, the Commission points out that the proposed measures are complementary to measures existing in Member States and the code of conduct of the SCI.

EP RAPPORTEUR’S POSITION AND AMENDMENTS PROPOSED

The rapporteur supports the Commission proposal as a long expected legislative instrument to defend agricultural producers’ bargaining position in the agricultural and food supply chain; an instrument which can finally complement the measures introduced via Regulation (EU) 2017/2393, the so-called Omnibus Regulation, aiming at reinforcing the negotiating prerogatives of farmers in the EU. It should be reminded that the belief in the necessity of such an instrument was backed up by the conclusions of the Agricultural Markets Task Force issued in November 2016, and it was shared by Parliament in its resolution adopted on 7 June 2016, as well as by the EU Agriculture Ministers who adopted unanimous conclusions in this respect at their Informal Council meeting of 12-13 December 2016 in Bratislava.

The rapporteur underlines that completing the legislative procedure on the UTPs proposal before the end of the present parliamentary term, thus making this new legislation a concrete “deliverable” for European farmers, is both an important and realistic objective for this Parliament. On the side of the other co-legislator, the Austrian Presidency has clearly indicated its intention to give top priority to the UTPs proposal, as indicated in a letter of 4 June 2018 by the Austrian Minister for Sustainability and Tourism, Elisabeth Köstinger, to the Chair of the AGRI Committee. The letter indicated the UTPs proposal as one of the main priorities for the Austrian Presidency and reminded that both Parliament and the Council had asked repeatedly for legislation to protect farmers who are the weakest link in the supply chain, before concluding that “the time has come to harmonise twenty different national regulations and to set minimum standards for all Member States” so as to “solve the problems of farmers treated unfairly by other, more powerful partners in the supply chain”.

Amendments proposed by the rapporteur

While widely supporting the proposal, the rapporteur proposes nevertheless a number of amendments to improve its efficiency. These are the following:

  • 􏱲Extension of the scope to suppliers in the food supply chain which are not SMEs, in order to include farmers’ organizations and avoid possible trade diversions away from SMEs;
  • 􏱲Extension of the scope to all agricultural products, i.e. not only to food products, in order to include the horticultural sector, feed industry, and other agricultural sectors not falling under food production;
  • 􏱲Extension of the “buyer’s” definition to include those operators that, though established outside the EU, buy and sell products in the EU market. The aim is to avoid that a buyer can escape the provisions of the Directive by simply moving its place of establishment outside the EU;
  • 􏱲Again as regards the definition of the “buyer”, the provision of related services should be included into the scope, together with processing, distribution or retail of agricultural and food products;
  • 􏱲Inclusion of a definition of “unfair trading practice” (in the sense of an overarching principle), along the lines of the definition given by the Council Conclusions of 12 December 2016, which is reflected in recital 1 of the proposed Directive;
  • 􏱲Inclusion of a definition of “economic dependence” as a power relationship between a supplier and a buyer;
  • 􏱲Introduction of a payment term for non-perishable products at 60 days from the receipt of the invoice, as also provided for in Directive 2011/7/EU on late payment;
  • 􏱲Exemption from the provisions on payment terms for all contributions from farmers to their producer organisations and cooperatives, as well as for agreements of inter- branch organisations where those agreements concern quality products;
  • 􏱲Definition of the notion of “short notice” (when a buyer cancels orders of perishable food products) with a fixed time-limit (60 days);
  • 􏱲Improvement of the introductory sentence in paragraph 2 of Article 3 (so-called “grey UTPs”) through including the concept of “economic dependence” to take into consideration the imbalance in market power between actors, that can be used and abused by some buyers to impose unilaterally their terms to weaker suppliers;
  • 􏱲Introduction of the possibility for Member States to prohibit any other unfair trading practice (i.e. going beyond the prohibitions of Article 3), based on the definition of “unfair trading practice” added into Article 2;
  • 􏱲Inclusion of mandatory written contracts upon request of a supplier, as laid down – through the “Omnibus Regulation”- in Article 168 of the Single CMO, and of the possibility for Member States to encourage an increased contractualization between different actors in the supply chain;
  • 􏱲Inclusion of the possibility for complainants to lodge a complaint to foreign authorities through their own national authorities;
  • 􏱲Extension to representative associations of the right to lodge a complaint on behalf of one or more of their members;
  • 􏱲Inclusion of the obligation for the enforcement authority to start an investigation within 60 days from the date on which the complaint has been lodged, and to conclude it within 6 months. In duly justified cases, the 6 months can be extended by another 6 months (thus, the whole investigation has to be concluded within 14 months from the complaint); 
         􏱲 Inclusion of the obligation for the enforcement authority, in case an infringement has been established, to require the buyer to terminate the prohibited trading practice;
  • 􏱲Introduction of the possibility for Member States to promote the use of mediation or an alternative dispute resolution mechanism;

􏱲 Introduction of the obligation for Member States to include in their annual report to the Commission of an evaluation on the effectiveness of the implemented measures in order to ban UTPs ».

[1]EP Resolution of 7 June 2016 on unfair trading practices in the food supply chain.

[2]more detailed information in the study commissioned by the Spanish Agency for Food Information and Control (AICA) ,” Informe sobre la aplicacion de la regulacion de practicas comerciales en los paises UE” 2016. www.aica.gob.es

Written by Farm Europe