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18/02/2009
CIAA comments and reaction on the European Commission’s Communication “Food Prices in Europe”
Main Comments
The European Commission’s Communication on Food Prices in Europe is a welcome response to the Council’s call for an assessment of the difficult situation experienced by the entire European food chain throughout 2008. CIAA considers it is important that the issue has been given particular attention.
Overall, the Communication’s balanced approach acknowledges the complexity of the problems that need to be tackled. These issues cannot fully be addressed within such a short assessment period and without comprehensive stakeholder consultation. The Roadmap with a proposed set of measures provides room for improving the overall understanding of the problems and to review possible actions.
CIAA appreciates that the Communication specifically focuses on price developments in food. CIAA would like to emphasize, however, that certain measures and practices could also have a negative impact on other aspects, such as quality and services related to the supply of food and drink products. This should not be ignored when monitoring the food chain.
Development in Agricultural Commodity and Food Prices
CIAA welcomes the fact that the different factors influencing production costs are taken into account; in particular CIAA fully recognises the importance of energy in food production.
The 10% cost share of raw materials contained in bread represents the lower extreme of the band. In some countries this percentage is as high as 30% according to CIAA information. Using a reference value of 10% for the share of raw materials in all types of bread would therefore not be representative. Depending on the sector and the product - which can be more or less labour or capital intensive, and require more or less energy - the cost of raw material as compared to total production costs varies considerably. The stage of processing plays an equal role (whether agricultural raw materials are used or whether already manufactured goods are further processed). In addition, cost variations between EU Member States, notably in terms of labour, energy and increased market volatility, play a role in the proportion of agricultural commodities in the overall production cost of food.
The research should include a more in-depth analysis of the reasons, and of the impact of price developments of agricultural raw materials throughout the food processing industry.
The functioning of the food supply chain
The European Commission needs to focus on the functioning of the food supply chain, including the degree of competition, the commercial relations, the use of negotiating power and the impact of EU regulations.
CIAA shares the Commission’s concerns about the alleged abusive practices of retailers. Indeed we believe the list of abusive practices on page 10) could be extended to a number of other claims, such as chronically late payments, unreasonably long payment periods for suppliers, payment of services not rendered, blind electronic bids, “forced” discounts by suppliers to reach buyer’s selling objectives, and “forced” contributions to finance mergers & acquisitions.
Experience has shown, however, that competition law may not address all the relevant issues faced by food manufacturers, especially SMEs, in their relationship with retailers, and may not take into account other criteria such as quality and service. One reason for this may be the difficulty to take action as long as retailers’ market shares remain below traditional dominance levels (as typically defined by competition authorities) of 40%-50%(1).
More importantly, competition law results in ex-post reaction to “problematic” behaviour. Furthermore, the steady increase of private label shares (40% in certain countries) means retailers are becoming competitors to food manufacturers, which gives them additional powers in the supply chain.
Finally, a point that has not been mentioned in the Communication is the fact that the retail sector is increasingly extending its operation in non-food areas such as banking, travel or insurances. This strengthens their negotiating position even further.
The proposed Commission roadmap to improve the functioning of the food supply chain
CIAA welcomes the proposed ‘Roadmap’ as a joint effort from the EU Commission and National Authorities to improve the functioning of the food supply chain. It is clearly understood that food prices are the result of various elements of the supply chain. For this reason CIAA believes that the functioning of the food supply chain should be improved further in order to improve the competitiveness along the chain and to ensure fair and market-based prices.
1. Promote the competitiveness of the food-supply chain
CIAA welcomes the work of the High Level Group on the competitiveness of the agro-food industry towards reducing certain market malfunctions(2).
Improved competitiveness of the food chain, combined with a well functioning internal market and effective competition between grocery retailers is the best way to ensure that the effect of higher commodity prices on consumer prices (as set by retailers) is minimized and that consumers are provided with a wide choice of products.
2. Ensure that competition and consumer protection rules are enforced vigorously and coherently in the food supply markets by the European Commission and National Competition and Consumer Authorities.
The concentration of retailers in Europe arguably implies a special need for the protection of the food and drink industry, particularly SMEs. CIAA calls on the Commission and National Competition Authorities to carefully examine:
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The definition of “dominance” when applied to retailer positions in procurement markets;
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The way retailers apply their market power in day-to-day commercial practice (e.g. unilateral and/or retrospective adaptation of commercial terms);
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The position of retailer-buying alliances.
Retailers may derive unfair advantages from being both the customer and the competitor. This specific position in which retailers find themselves -- from a competition law standpoint -- by virtue of the fact that they own the private label and have a very thorough knowledge of price structures, needs to be taken into account. At the same time they continually negotiate with all major suppliers and have detailed knowledge of their commercial terms and plans to introduce new products.
3. Review at national or EU level, as appropriate, regulations that have been identified as potentially problematic for the functioning of the food supply chain.
CIAA notes the reference to reviewing legislation that is considered “problematic”, such as sales-below-cost and shop opening hours.
CIAA would like to stress that it does not seem consistent to use antidumping provisions when they apply to imported products, while refusing the same principles for the Internal Market.
At the moment, total liberalisation of shop opening hours is a seriously controversial issue at national level. There is no clear evidence that it would help the functioning of the food supply chain.
Non-harmonised national regulations and the different ways in which EU Directives are sometimes transposed into national law can pose a problem. Any difference in national requirements prevents the proper functioning of the internal market and has a negative impact on the competitiveness of the EU food and drink industry.
Directive 35/2000 has helped address late payments, but has not eliminated this practice in a number of EU countries. The attempt to address “grossly unfair provisions” in this Directive has proven insufficient to provide a framework for business relations between industry and retail. Companies producing for retailers’ private labels are facing particular pressure and many complain about the absence of brand visibility towards the consumer. Therefore, CIAA welcomes the scheduled review of the Directive 35/2000. This should improve the late payment provisions with a view, amongst other things, to: set a harmonised payment period; set an automatic and fixed late payment fee, which would act as a better deterrent than the current compensation through interest rates; ensure that representative organisations can legitimately file a complaint on behalf of their members.
4. Provide better information to consumers, public authorities and market operators by setting up a permanent European monitoring system for the food supply chain
The food and drink industry concerns in relation to quality, quantity and price of available agricultural raw materials, notably EU produced, are particularly prominent. As agricultural raw materials are an important input factor for the food and drink sector, the price of agricultural raw materials determines many business decisions. Therefore, a good insight into the pricing of agricultural raw material is crucial.
CIAA is in favour of increasing price transparency throughout the food supply chain. However, any official monitoring exercise should not interfere with commercial contracts between suppliers and consumers. The goal of such a price monitoring exercises should be to analyse market developments, the differences between Member States and sub-sectors, and the impact of regulations on the various actors in the chain.
5. Examine measures to discourage speculation to the detriment of commercial operators in agricultural commodity markets.
CIAA shares the Commission’s concerns about speculation, which is developing to the detriment of commercial operators in agricultural commodity markets. Further attention (including regulatory action) should be devoted to this issue if evidence shows that financial players are capable of influencing the markets to such an extent that volatility becomes damaging for the processing industry.
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(1) It is worth noting in this respect that the UK Competition Commission has proposed that the new strengthened and extended Groceries Supply Code of Practice is to cover all retailers with annual turnover greater than 1 billion GBP. This is recognition that buyer power can be reflected by the size and scale of purchase as well as by market share.
(2) It should be noted that whereas the productivity of EU food and drink industry remains much below the equivalent figure from US industry, the productivity growth of EU industry is higher than that of the US industry.
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