European Scrutiny Committee Contents


7 Food prices in Europe

(30279) 17380/08 + ADDS 1-3 COM(08) 821 Commission Communication: Food prices in Europe

Legal base
Document originated9 December 2008
Deposited in Parliament18 December 2008
DepartmentEnvironment, Food and Rural Affairs
Basis of considerationEM of 18 February 2008
Previous Committee ReportNone, but see footnotes 35 and 36
To be discussed in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionCleared

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

36   (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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