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
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| Legal base | — |
| Document originated | 28 October 2009
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| Deposited in Parliament | 6 November 2009
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| Department | Environment, Food and Rural Affairs
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| Basis of consideration | EM of 24 November 2009
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| Previous Committee Report | None, but see footnotes 38 and 39
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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
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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