European Scrutiny Committee Contents


11 Functioning of the food supply chain

(31095)

15330/09

+ ADDs 1-6

COM(09) 591

Commission Communication: A better functioning food supply chain in Europe

Legal base
Document originated28 October 2009
Deposited in Parliament6 November 2009
DepartmentEnvironment, Food and Rural Affairs
Basis of considerationEM of 24 November 2009
Previous Committee ReportNone, but see footnotes 38 and 39
To be discussed in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionCleared

Background

11.1 In June 2008, we drew to the attention of the House a Communication[38] 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, and outline a Community response. The latter included investigating the functioning of the food chain, and the European Council in June 2008 asked the Commission to report further on this (and other issues) before the end of the year.

11.2 The Commission duly produced in December 2008 a further Communication[39] in response to that request. This noted that, although global supply and demand had been one of the main factors determining food prices, problems in the functioning of the food chain had also played an important part. It pointed out that three economically important sectors were involved — agriculture, food processing and distribution — and that, given the various interactions between them, any problems can have significant repercussions. It also noted that the increases in agricultural commodity prices had been absorbed differently between Member States, indicating that the Community market for food products was still fragmented, and that other relevant factors included differences in the regulatory framework and the competitive environment, notably the bargaining power of the different sectors.

11.3 In particular, the Commission pointed out that the weak bargaining power of the agricultural sector had put pressure on producer margins, leading to the formation of producer groups and cooperatives and the development of high value added products, and it also commented on the consolidation taking place throughout the food supply chain, observing that, although this can lead to efficiency gains, competition authorities must ensure that the process does not create problems elsewhere, and that a closer look needed to be taken at such operations as cartels, "buying alliances", resale price maintenance, single branding obligations, and exclusive supply agreements. The Communication concluded by setting out a roadmap to improve the functioning of the food supply chain, comprising five main components — promoting competitiveness, enforcement of competition and consumer protection rules, a review of problematic regulations, permanent European monitoring of food prices and the supply chain, and discouraging detrimental speculation.

The current document

11.4 The Commission has now sought in this latest Communication to present concrete policy initiatives along the lines set out in the roadmap, and has done so under two main headings — the link between commodity and food prices, and the main challenges faced by the food chain, together with the steps needed to address these.

RECENT PRICE DEVELOPMENTS

11.5 The Commission recalls that agricultural commodity prices rose sharply during the second half of 2007 and early 2008, and that, although food prices then started to rise as well, they did so more slowly because processors and distributors absorbed part of the increase. It then points out that, whilst commodity prices have been plummeting since the second quarter of 2008, food producer prices continued to rise until the fourth quarter of the year, whilst those for consumers did not come down until recently: and it adds that the rates of decline have been low compared with the drop in commodity prices. As a result, it says consumers have not benefited, and the resultant reduction in demand has in turn curtailed the recovery of commodity prices.

11.6 The Commission goes on to suggest that these discrepancies arise in part from structural weaknesses, such as the number of intermediaries along the chain and the competitive structure at certain steps. It also says that the "pervasive inequalities" in the bargaining power of the contracting parties has contributed to reducing both the speed and magnitude of price transmission. It considers that this has prolonged market inefficiencies and exacerbated price volatility, and that there is thus an urgent need to implement policy initiatives along the direction identified in the December 2008 roadmap.

OVERCOMING MAJOR CHALLENGES FACING THE FOOD SUPPLY CHAIN

11.7 The Commission comments that, in some respects, the food supply chain performs well — for example, by delivering high quality produce at affordable prices, ensuring safety and traceability, and providing an ample supply of highly competitive, innovative and traditional products. However, it also suggests that its competitiveness has under-performed that of the overall Community economy since 1995, and that certain sectors are facing increased international competition. It says that, although the food chain is very heterogeneous, it has identified the following three cross-cutting priorities.

Sustainable and market-based relationships between stakeholders

11.8 The Commission points out the widely diverse nature of the food chain, and the need to draw a distinction between concerns about potentially unfair trading practices and those about anti-competitive practices. In the former case, it notes the significant imbalances in bargaining power between small farms and buyers or between processors and retailers, and the temptation for larger operators to impose contractual arrangements advantageous to themselves, for example relating to late or upfront payments. It says that this has a negative impact on the competitiveness of the supply chain, in that it can limit the profitability of those who are efficient but lack bargaining power, and that this could be addressed by better awareness of contractual rights and stronger action against unfair practices (although it recognises that many may hesitate to contest contract clauses for fear of losing business).

11.9 In the case of anti-competitive practices, the Commission says that the ability to exercise market power depends upon the type of supply chain and local market conditions, and that, since food markets are often national in scope, it has worked closely with national competition authorities within the framework of the European Competition Network. As a result, it suggests that national competition authorities have granted due priority to case by case investigations, which have considerably improved the understanding of the functioning of the sector, as well as identifying a number of serious infringements, such as cartels and resale price maintenance, which have been tackled through orders and (where necessary) fines. However, it says that a careful balance needs to be struck between enhancing efficiency and potentially anti-competitive effects, and that no generalisations can be made.

11.10 The Commission says that, in order to address unfair contractual practices, it will work with Member States to put contractual relations on a more secure footing, and that this will entail an exchange of information on such practices, an exchange of best practices on their notification, and the launch of awareness campaigns, whilst at Community level it will work together with stakeholders in the chain to prepare sets of standard contracts, and propose any measures needed to address unfair contractual practices in the internal market. In addition, it will work with the European Competition Network to develop a common approach to relevant competition issues, creating joint working teams to analyse specific practices and markets critical to the functioning of the chain.

Increasing transparency

11.11 The Commission comments that markets along the chain suffer from a lack of price transparency and predictability, and that derivatives are an important tool to cope with the volatility of commodity prices. However, it also says that it is essential that derivatives should keep serving their initial purpose of price discovery and hedging, and that, in order to tackle "excessive speculation", it is necessary to improve overall transparency in the Community for derivatives on agricultural commodities, including over the counter markets, with a better overview of the activity of different types of market participant being particularly needed.

11.12 It goes on to recall that its earlier roadmap proposed the creation of a European food prices monitoring tool to improve transparency in downstream markets of the chain, and it proposes the first version of such a tool, which would (i) track consumer price levels of comparable products across Member States to assess price dispersion and integration of the retail internal market for food, and (ii) track price developments in Member States at each step of the chain for a selection of specific products. It suggests that this will contribute to increasing the pressure on stakeholders to speed up price transmission, and that it can be further developed to improve the link between food consumer, producer and commodity prices and to increase the coverage of products monitored.

11.13 The Commission says that it will make proposals to improve the oversight and overall transparency of agricultural commodity derivatives markets, and it recommends that all Member States should have web-based and easily accessible food retail price comparison services.

Integration and competitiveness of the supply chain across Member States

11.14 As regards integration, the Commission recalls that, the food supply chain is highly fragmented between Member States, and that there are important differences both in terms of price levels and developments between different commodities. It says that some of these differences can be explained by national factors, such as household incomes, taste preferences, tax differences, but that other factors related to market dynamics, business practices, and the regulatory framework play a role as well. As regards competitiveness, it notes on the one hand the highly fragmented nature of the agricultural sector, and on the other the significant contribution made by the agro-food industry to value added growth, but it also comments on the extent to which the Community industry is now losing its share of the world market. It adds that the High Level Group on the Competitiveness of the Agro-Food Industry has identified the main issues, and has proposed 30 concrete recommendations, and that it has acknowledged the lack of transparency in price formation and imbalances between the various parts of the food chain as being major concerns. Finally, the Commission points out that, despite its dramatic transformation over the last decade or so, the retail sector also faces competitive challenges.

11.15 In light of this analysis, the Commission says that it will assess measures to address territorial supply chain constraints which create economic inefficiencies and contradict internal market principles; urge the Council and European Parliament to rapidly adopt its proposal for the revision of legislation on labelling rules; review selected environmental standards and origin labelling schemes which may impede cross-border trade, and work with Member States the industry towards better harmonising the implementation of Community food safety standards; promote and facilitate the restructuring and consolidation of the agricultural sector; and bring forward those proposals of the High Level Group aimed at improving the competitiveness of the agro-food sector, and at fostering innovation and exports.

The Government's view

11.16 In his Explanatory Memorandum of 24 November 2009, the Minister of State at the Department for Environment, Food and Rural Affairs (Jim Fitzpatrick) notes that, although the Communication does not contain any legislative proposals, it does set out policy initiatives likely to impact the UK's food supply chain. As regards the specific measures proposed by the Commission, he says that:

  • On the promotion of sustainable and market-based relationships between those in the food supply chain, the UK welcomes initiatives to improve the balance of bargaining power (for example, through co-operatives or greater collaboration within the supply chain), and would also encourage better and more transparent contracts in line with the UK Competition Commission's views on the supplier-supermarket relationship. However, it believes that contractual arrangements are a matter for commercial entities to agree, provided competition law (with regards to such areas as market concentration and cartel behaviour) is complied with.
  • The UK generally welcomes proposals to improve transparency in the food supply chain, but would caution against hasty intervention intended to curb or limit market activity, such as enabling regulators to set limits on speculative positions. He comments that, for a number of reasons, it is impossible to be absolutely definitive on the extent to which speculation contributed to the recent food price spikes, and that the Commission's analysis was inconclusive, suggesting that their proposals are more pre-emptive than evidence-based. He also points out that speculation provides liquidity to international agricultural futures and options markets, and plays an important role in facilitating price discovery and management of price risk by agricultural producers and processors.
  • The UK supports greater market transparency, but does not support the Commission's call on Member States to develop food retail price comparison services, particularly in view of the similar systems already available. It also has concerns about the associated cost and administrative burdens which price monitoring might entail, and would therefore like to see further justification for this, including a thorough cost benefit analysis.

11.17 The Minister adds that the UK broadly supports moves to free the EU (and global) food supply chain from any trade distorting effects, including subsidies and import tariffs, thus freeing producers to produce what consumers want. Also, it is receptive to Commission proposals to promote and facilitate restructuring and consolidation of the agricultural sector, and welcomes the proposal to broaden the scope and mandate of the High Level Group (HLG) on Competitiveness in the Agro-food industry and to bring forward the Group's proposals.

Conclusion

11.18 As we have noted, this Communication provides a more detailed analysis of the concerns expressed earlier about the functioning of the food supply chain, and the ways in which these might be addressed. As such, it seeks to take forward discussion, but does not itself make any specific legislative proposals, and nor, in our view, does it contain any particularly novel or contentious thoughts requiring further consideration by the House. Consequently, although we think it right to draw both the document, and the Government's comments on it, to the attention of the House, we see no reason to withhold clearance.


38   (29708) 9923/08: see HC 16-xxv (2007-08), chapter 2 (25 June 2008). Back

39   (30279) 17380/08: see HC 19-ix (2008-09), chapter 7 (4 March 2009). Back


 
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