A new study from the Kiel University, Germany, takes a clear cut conclusion on the effect of F2F on the agricultural sector in the UE. And while the US tires to create a coalition that would oppose the agri-food strategy, Vice-President Timmermans called on world leader to be inspired by the same strategy so to […]
Agriculture and agri-food constitute, together, one of the European Union’s main economic strengths. With a total turnover of €1 350 billion per year and 14 million jobs, agriculture and agri-food are not only one of Europe’s leading business sectors, but also one of its principal sources of employment. It is second only to the metal industry and accounts for 16% of total European industrial turnover
- The agricultural sector has an annual turnover of €394 billion, is made up of 12 million agricultural holdings and provides full-time employment to 10 million people.
- The agricultural base in Europe is the mainstay and lifeblood for 310 000 agri-food businesses (99% of which are Small and Medium Enterprises), which generate an annual turnover of €956,2 billion and sustain 4,1 million direct jobs in Europe. 3 000 of these agri-food businesses generate 50 % of the total turnover.
- Regarding the distribution of food products, it needs to be underlined that beyond the large number of small distribution enterprises in each of the EU Member States, 5 distribution groups represent between 43% and 69% of national sales, depending on the specific country.
- An additional element of on-going evolutions in the food chain lies in the significant development of away-from-home catering during the past two decades, which increased the weight of the “distribution” pole in the chain, notably through centralised global purchasing. However, it can also represent an element of balance in cases of local supply and food services, although this occurs a lot less frequently.
While the distribution of the margins in the food chain has been generally maintained between farmers, processors and distributors, increased price volatility since 2007 has fundamentally changed the rules of the game, due to the impact of harsh global price movements on the different actors in the food chain.
- During periods of falling prices, farmers represent the main shock absorber for the entire industry and see their margins shrink rapidly, which undermines their already fragile economic balances.
- Price declines are rarely passed on to consumers in the EU market, except in the cases of highly perishable products such as fresh fruits and vegetables. The couple processors and distributors thus benefits from a minimal shock absorbing effect, and can even benefit from some improvement of the margins for processed products on the EU market.
- When prices are rising, the ability of farmers to benefit from these surges depends on the nature of their agricultural products, and more precisely on whether they can be sold directly on the market or not. As such, when agricultural products need a stage of processing (f.e. sugar) or processing and packaging before they can be sold on the markets (f.e. milk), the capacity of farms to pass these price increases upwards in the food chain seems limited, or involves long periods of delay. The distribution sector prioritises defending the interests of consumers and blocks any movement in this regard, despite the factors mentioned in the previous paragraph.
In other words, in a context of upwards fragmentation of the agricultural sector and a limited and very partial access for farmers to relevant information on market trends and the value of products, the three pillars of the food chain do not act collectively:
- The distribution one builds on general competition rules to prioritise the protection of consumers. There is no (or only little) transmission of price increases, and there are large time delays when there is so. However, transmission of price decreases to consumers are as well very limited.
- The processing sector defends its margins and market share in an environment of competition and bargaining power deficits towards the downstream sectors (2nd processors and distributors)
- Farmers: the final link of the chain, for which the legal provisions exempting them from general competitions rules are not fully enforced. As such, the farmer has become the main shock absorber in case of price drops. This disadvantage is coupled to a slowness in benefitting from price increases, especially for products that can only be consumed after processing or packaging.
Thus, taking into account the globalisation of markets and the need for a renewed competitiveness of the European agri-food sector, policymakers need to make it an ambition to foster the responsible, competitive and sustainable growth of this economic sector at the heart of European policies.
Research underlines that the growth and competitiveness of the processing food sector is correlated to the growth of the related agricultural sector. There is proof that short term strategies aiming at increasing the profits of one part of the chain are detrimental for sure for the viability of the other part but as well on a longer term for the viability of both parts of the chain agriculture and processing sector.
The general framework for competition in the EU, concerning agreements between undertakings, is based on TFEU Article 101, which prohibits “as incompatible with the common market all agreements which may affect trade between Member States and which have as their objective or effect the prevention, restriction or distortion of competition within the internal market.”
Article 42 establishes that “the provisions of the Chapter relating to rules on competition (including the aforementioned Article 101 TFEU) shall apply to production and trade in agricultural products only to the extent determined by the European Parliament and the Council and within the framework of Article 43.2” which calls upon the EP and the Council to establish the common organisation of agricultural markets in order to achieve the objectives of the CAP.
If competition law would have applied by principle to the agricultural sector, Article 101 would have been sufficient and Article 42 would not have been necessary. By consequence, under the TFUE, competition law would apply only by exception to the agricultural sector.
At the same time, Article 39 TFEU establishes the goals of the Common Agricultural Policy, which are “to increase agricultural productivity, to ensure a fair standard of living for the agricultural community, to stabilise markets, to assure the availability of supplies, and to ensure that supplies reach consumers at reasonable prices”.
According to the Court of Justice – judgment in Maizena, 139/79, paragraph 39 – Article 39 recognises the precedence of the objectives of the Common Agricultural Policy over the aims of the Treaty in relation to competition.
It has to be noted that there is one exemption for all sectors: agreements reached between independent producers on quantities and sales can be exempted from competition rules under the general provision of Article 101.3 of the TFUE. Such kind of agreements need to be indispensable to create efficiencies (e.g. in terms of the distribution of the product), they should not eliminate competition and these agreements need to allow consumers a fair share of the resulting benefits. So, specialisation agreements can be exempted according to the so–called Specialisation Block Exemption Regulation (SBER) – Article 2 Regulation 1218/2010.
These Treaty provisions have been implemented through the CMO Regulation 1308 of 2013.
Under the CMO Regulation, we can differentiate two kinds of derogations to the general competition rules :
- Derogations applied to severe market imbalances (Article 222). During this period, the Commission may adopt implementing acts to the effect that Article 101.1 TFEU is not to be applied to agreements and decisions to recognised interbranch organisations, provided that such agreements and decisions do not undermine the proper functioning of the internal market, strictly aim to stabilise the concerned sector and fall under one or more of the following categories:
a) market withdrawal for free distribution,
c) storage by private operators,
d) joint promotion measures,
e) agreements on quality requirements,
f) joint purchasing of inputs,
g) temporary planning of production. This article establishes severe conditions in terms of substance, geographical scope, and time.
Derogations applied to any market situation, which can be general or specific, are laid out in Articles 206 to 218, which foresee different degrees of product specific derogations for the dairy, ham, fruits and vegetables, beef and veal, pig, olive, wine, sugar, cereal and arable crops sectors.
It is crystal clear that the legal framework is complex to understand and complex to implement, with many particular provisions and case-by-case solutions. In some cases it has not been applied, so there is no legal certainty as to know what can be done, such as for the Delegated Act of the 2016 Milk Package.
It is also worth mentioning that there is a sort of ambiguous reading of both the TFEU and the CMO Regulation. While in the TFEU the rule is that competition principles are not applied to agriculture, in the CMO Regulation the rule is the application, with explicit derogations.
In terms of collective bargaining, there is a case pending at the European Court of Justice concerning the French producers of endives, that was promoted after a resolution of the French competition authority and will shed light on the issue (in 2018?).
This brings us to another point, which is the role of national competition authorities. In many cases, there are no common criteria in their resolutions and they differ so much that they make the scenario even worse.
In general terms, the CMO Regulation has brought more market orientation for the CAP. Some sector have or are going to dismantle quotas and other traditional mechanisms that make the negative effects of volatility, market crisis and the asymmetric bargaining power of the different actors of the chain more obvious.
If we do not want to fuel those market disturbances, we need to explore a new and clear set of rules to adjust and rebalance the relationship between producers and buyers, especially in order to avoid abuses of dominant positions.
Take the case of sugar, for example. Today, the CMO allows for interbranch agreements, including price repartition between growers and factories, at a national level. From October 2017, this relationship will be allowed between the sellers and a sugar company.
Sugar beet is a perishable, barely transportable and non-storable product whose production implies important and specific investments. On even more volatile markets, it happens that there is a need to negotiate the delivering conditions, including the price, in a balanced way and in advance. This is the reason why a delegated act (2016/1166) has been issued to authorise collective price negotiation at a company level (and not at a national level). This authorisation is not an obligation, and may not happen in Member States where sugar undertakings refuse it.
Similar situations can be found in other sectors, like milk, meat and horticulture, where production is as perishable as sugar beets. The milk sector itself, despite the milk package and related decisions entailed in the last CAP reform, seems not to have overcome the challenges of balanced negotiation powers within the sector.
The point is how we can overcome these challenges? At the same time, we are facing a lack of valid rules and clarity and new market conditions that can alter competition – while the original objective is to protect it.
Do we need common rules applied horizontally to all sectors in certain conditions (particularly concerning perishable, barely transportable and non-storable products), or specific ones depending on the sector involved?
What lessons can be learnt from the implementation of the milk package and its mixed success and from past sectorial legislation (sugar, olive, fruits and vegetables) both in terms of fair competition and increased balanced competitiveness?
What is the room for manoeuvre that we have under the existing legislation, and what are the changes to be made?
Recommendations for regulatory actions at the EU level
- Reaffirm the primacy of the CAP on EU competition law, with a uniform and compulsory application by all national competition authorities.
- Transparency of the markets:
- Improve the quality of the data that is collected, so that all stakeholders have a clear overview of the markets and their evolution. As such, compulsory collections need to be carried out by all Member Status, not only on the prices and volumes for regular farm output, but also on prices and volumes for the first processing industries and the following links of the food chain, all the way up to the prices on consumer markets. These price collections should be undertaken regularly and with a sufficient frequency, and need to be refined according to the type of markets and products.
- Quality of the data: the frequency of data collection must not be higher than today, aiming at collection on a weekly basis? Outdated statistics are irrelevant. Their provision to economic actors in the sector should also be undertaken within tight time frameworks. On rapidly evolving markets, data on periods of 2, 3 or 6 months hardly have any value other than historical information.
- In parallel, regular prospective analyses (on a monthly basis) should be developed with the economic actors and the European Commission, on a sector-by-sector basis, in order to provide and distribute dynamic analyses on the likely short-term market developments.
- Currently, the CAP gives Member States the possibility to make contracts compulsory between agricultural producers and their first buyers. Yet few Member States have made use of this provision up to now, even if all analyses underline the weak capacity of farmers to request a contract within the current regulatory framework.
- Henceforth, it would be appropriate to foresee having a contract as a right for farmers, thus enabling them to require a contract dealing with the volume and price components, without the buyer being able to refuse it.
- Collective bargaining:
- Collective bargaining by Producer Organisations or Associations of Producer organisations on behalf of their member farmers must be authorised and not seen as a cartel, which is the case today in certain Member States.
- In this context, the limits on a dominant position should be determined at the European level, but also adjusted to the relevant markets. These markets are regional, national or European, depending on the products. It seems, in the light of the evolution of consumer markets and the concentration of the processing and distribution sectors, that the relevant markets in this regard are becoming more and more European. It cannot be accepted anymore that the relevant market is almost always quasi-automatically considered to be the national one, at best, by the competition authorities. A provision should be included in the Community legislation for the agricultural sectors, stating that the relevant market is in principle the European market, except if it can be demonstrated otherwise by the national competition authorities.
- Maintaining the authorisation of cartels for a given time period, as provided in the current CAP, to deal with events of crisis.
- Negotiations of volumes and prices:
- A key problem with the distribution of the added value in the food chain lies in the management of large and rapid price declines and the transmission of price increases.
- Balanced contractual relationships between farmers and processors should be encouraged.
- This involves providing an explicit authorisation for negotiations in each sector on the distribution of added value in rising prices and on sharing the burdens in case of falling prices, which is to be defined at a consistent level and should at least take into account the experiences with these decisions for the beet and sugar industry.
- Unfair trading practices: effectively articulate regulatory requirements and guidelines for good practices.
The actions undertaken in Finland, England and Spain tend to demonstrate that the proper functioning of guidelines for good practices presupposes a binding basic regulatory framework. It is therefore necessary to provide:
- A basic regulation at the EU level, which explicitly provides a list of prohibited practices and makes it obligatory that dissuasive sanctions should be applied (in and by the Member States)
- The ability, at Member State level, for complainants to do so collectively and while maintaining the confidentiality of the complainant’s identity.