7 Food prices in Europe
| (30279) 17380/08 + ADDS 1-3 COM(08) 821
| Commission Communication: Food prices in Europe
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| Legal base | — |
| Document originated | 9 December 2008
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| Deposited in Parliament | 18 December 2008
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| Department | Environment, Food and Rural Affairs
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| Basis of consideration | EM of 18 February 2008
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| Previous Committee Report | None, but see footnotes 35 and 36
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| To be discussed in Council | No date set
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
7.1 In June 2008, we drew to the attention of the House a Communication[35]
which the Commission had produced in response to the major increase
which had recently taken place in food prices, in which it sought
to analyse the causes, assess the impact (both within the Community,
and at global level), and outline a Community response. The latter
included better monitoring of developments, analysing the effect
of speculation on agricultural and commodity prices, and investigating
the functioning of the food chain. The European Council, in June
2008, asked the Commission to report further on these issues before
the end of the year, this latest Communication has been produced
in response to that request.
The current document
DEVELOPMENTS IN AGRICULTURAL COMMODITY AND FOOD PRICES
7.2 The Commission recalls that the surge last year in the prices
of agricultural products was due to a number of structural factors
(notably global population growth, rising incomes in developing
countries, the development of new market outlets, and increased
production costs, following the increase in energy prices), compounded
by more temporary considerations (such as adverse weather conditions,
trade restrictions, and currency fluctuations). However, it notes
that commodity prices have declined in recent months, and are
now back at level similar to, or even below, those before last
year's increase, due in part to the swift increase in production
in response to the high prices, and to other factors, such as
more favourable weather conditions, the fall in energy prices,
and the lifting of a number of export restrictions.
7.3 The Commission then examines the impact of food
prices on consumer prices. It says that, as agricultural commodities
make up only a small proportion of overall food production costs,
the latter have risen more slowly, but were nevertheless subject
to significant increases in the summer of 2007 and early 2008.
It adds that, together with the increase in oil prices, this has
had a major impact on inflation in the Community over the last
year, equivalent to one percentage point, due in the main to price
developments for processed food. However, it also notes that the
impact of food price inflation has varied as between Member States,
being more pronounced in those which joined most recently.
7.4 As regards the outlook for agricultural markets
and food prices, the Commission suggests that the fall in commodity
prices is likely to lead to a significant decline in the contribution
of food prices to headline inflation (to about 0.6 percentage
points in 2009, and 0.5 in 2010). However, it also believes that
the continuing increase in population, together with a decline
in the growth of productivity, will result in prices holding up
in the medium term, providing incentives to production, including
that in developing countries, but that, because stock levels are
low, there are expected to be greater fluctuations than in the
past. It adds that the steps taken as part of the CAP "Health
Check" to increase market orientation — through the
abolition of arable set-aside, the phasing out of dairy quotas,
and the conversion of intervention into a genuine safety net —
will help Community producers respond to these more volatile conditions.
7.5 The Commission goes on to note the importance
of an open trade policy in re-balancing global supply and demand,
commenting that the export restrictions imposed by some countries
last year did more harm than good, because they cut producers
off from market signals. It observes that the Doha Round of WTO
trade talks promises to open up agricultural markets to developing
countries, and that the Community remains committed to reaching
agreement on an ambitious and balanced outcome. It also points
out that, in order to increase production in developing countries,
it is essential to improve the business environment for farmers,
and investments in rural infrastructure and land management, and
it says that Community development assistance will support such
efforts, and generate a positive supply response. In particular,
it notes that it has recently proposed the establishment of €1
billion rapid response facility[36]
relating to food prices in developing countries.
THE ROLE OF SPECULATION IN FOOD COMMODITY PRICES
7.6 The Commission says that, over the past decade,
there has been an unprecedented growth in the financial markets
for agricultural commodities, coupled with the use of a wider
range of commodity trading strategies and the development of new
derivative products. It suggests that there are two distinct types
of participant —
commercial operators involved in the purchase and sale of physical
positions, and financial investors —
and that the considerable increase in the activities of the latter
in recent years has increased the risk of speculative bubbles.
In particular, it notes that, since the beginning of 2006, there
has been a surge of investment into these markets, as well as
a substantial increase in the (less transparent) over the counter
market. It suggests that this inflow may have reflected investor
withdrawal from other markets, and that a recent sharp outflow
probably reflects the need for investors to secure greater liquidity
in the face of the current financial crisis—though
it comments that the timescales involved are too short to draw
any firm conclusions.
FUNCTIONING OF THE FOOD SUPPLY CHAIN
7.7 The Commission says that, although global supply
and demand have been one of the main factors determining food
prices, problems in the functioning of the food chain have also
played an important part, making it necessary to analyse how this
might be improved. It notes that three economically important
sectors are involved — agriculture,
food processing and distribution — accounting
for 6% of Community added value and 12% of employment, and says
that, given the various inter-actions between them, any problems
can have significant repercussions. It also notes that the increases
in agricultural commodity and energy prices have been absorbed
differently between Member States, indicating that the Community
market for food products is still fragmented: in particular, the
transmission of food price increases to consumer prices has been
faster in the new Member States, suggesting that competitive pressures
in the retail sector of the euro area have absorbed some of the
increase. Other factors include differences in the regulatory
framework (for example, as regards opening hours) and the competitive
environment, including notably the bargaining power of the different
sectors.
7.8 The Commission notes that the weak bargaining
power of the agricultural sector has put pressure on producer
margins, leading to such measures as the formation of producer
groups and cooperatives and the development of high value added
products. It also comments on the consolidation taking place throughout
the food supply chain, and observes that, although this can lead
to efficiency gains, competition authorities must ensure that
the process does not create problems further up or down the supply
chain, adding that a closer look needs to be taken at such operations
as cartels, "buying alliances", resale price maintenance,
single branding obligations, and exclusive supply agreements.
7.9 The Communication concludes by setting out a
roadmap to improve the functioning of the food supply chain, saying
that a joint effort is needed at Community, national and local
levels. The roadmap has the following main components:
Promoting competitiveness
The Commission believes that a pro-active competitiveness
policy would help to improve efficiency, and says that recommendations
from a High Level Group are expected in early 2009, which should
help the food chain improve its overall competitiveness.
Vigorous enforcement of competition and consumer
protection rules
The Commission says that it will continue a "sustained"
dialogue with national authorities, targeting those activities
which have the highest potential to distort competition to the
detriment of consumers. It identifies a particular need, at a
time of fluctuating prices, to tackle misleading price increases,
for example through changes in pack sizes and contents, and for
authorities to pay particular attention to unit pricing.
Review of regulations identified as problematic
for the food supply chain
These include regulations which restrict the entry
of new companies, those which restrict the ability of a business
to compete on price, and practices which distort the relationship
between suppliers and retailers.
Permanent European monitoring of food prices and
the supply chain
The Commission sees this as addressing the lack of
price transparency, and identifying market fragmentation, and
says that a current pilot project by Eurostat and national statistical
offices to collect detailed consumer price data should be evaluated
and developed. In addition, the Commission itself is reviewing
regulations which affect the functioning of retail markets.
Discouraging speculation detrimental to commercial
operators
The Commission believes that the degree of volatility
in recent months benefits neither consumers nor producers, and
that there is a need to avoid the effects of excessive speculation
on food prices. It will therefore examine what measures might
be taken to reduce volatility, and will take into account the
results of an ongoing review of the supervisory and regulatory
framework applied to all significant financial market actors.
The Government's view
7.10 In her Explanatory Memorandum of 18 February
2009, the Minister of State (Farming and the Environment) at the
Department for Environment, Food and Rural Affairs (Jane Kennedy)
notes that this is a non-legislative document, which could however
lead to new policy in relation to competitiveness and speculation
in agricultural commodity markets. On the first of these, she
says that it is too early to draw rigorous conclusions about the
efficiency of price transmission within the Community, given how
quickly commodity prices have risen and fallen, and that the Government
would therefore caution against hasty and premature judgements
on the degree of competition both within and between Member States.
It would like to see further economic modelling, with a particular
focus on recent price reductions and on the impact of exchange
rate changes. Likewise, she says that, until there is sufficient
evidence linking speculation by non-commercial financial investors
to excessive volatility, and a clear proposal on how to address
this, it is difficult to assess what policy implications the Communication
would have within the UK. Finally, she notes that, to the extent
that the Commission's roadmap involves a review of the regulations
which have been identified as causing potential problems for the
food supply chain, there needs to be full and thorough Impact
Assessments, in line with better regulation principles and the
Commission's revised Impact Assessment Guidelines.
7.11 The Minister says that no specific consultation
is planned within the UK on this Communication, but that the Government
is undertaking a number of initiatives in relation to food policy.
These include consultations on the development of a vision for
a sustainable food system (as recommended in last summer's report
Food Matters), and on the risks to UK food security following
her department's discussion paper Ensuring the UK's Food Security
in a Changing World. She also notes that the groceries market
in the UK has recently undergone a two year market investigation
by the Competition Commission, following a referral by the Office
of Fair Trading. This found that competition in the sector is
generally effective, but that several retailers had strong positions
in a number of local markets, and that the transfer of excessive
risk and unexpected costs by retailers to their suppliers through
a variety of supply chain practices would, if unchecked, have
an adverse on investment and innovation (and ultimately on consumers).
Conclusion
7.12 This document deals with a subject of obvious
political and economic significance, and, for that reason, we
are drawing it to the attention of the House. However, as we have
already noted, it follows on from an earlier Communication last
summer on the same subject, which moreover had been produced at
a time when food prices had risen very sharply, whereas the current
document indicates that prices have now fallen to levels similar
to, or even below, those which applied last year.
7.13 In view of this, and the very general nature
of the measures it recommends to improve the functioning of the
food chain, we do not believe that this document requires any
further consideration by the House, bearing in mind also that
the whole issue of food prices received a good airing when the
earlier Communication was debated in European Committee A on 20
October 2008. We are therefore clearing it.
35 (29708) 9923/08: see HC 16-xxv (2007-08), chapter
2 (25 June 2008) Back
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(29865) 11983/08: see HC 16-xxix (2007-08), chapter 4 (10 September
2008), HC 16-xxxiv (2007-08), chapter 5 (5 November 2008) and
HC 19-i (2008-09), chapter 13 (10 December 2008). Back
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