Documents considered by the Committee on 2 February 2011 - European Scrutiny Committee Contents


1   Contractual relations in the milk sector


(32337)

17582/10

COM(10) 728

Draft Regulation amending Regulation (EC) No 1234/2007 as regards contractual relations in the milk and milk products sector

Legal baseArticles 42 and 43(2) TFEU; co-decision; QMV
Document originated9 December 2010
Deposited in Parliament14 December 2010
DepartmentEnvironment, Food & Rural Affairs
Basis of considerationEM of 28 January 2011
Previous Committee ReportNone but see footnotes
To be discussed in Council17 March 2011
Committee's assessmentLegally and politically important
Committee's decisionFor debate in European Committee A

Background

1.1  The Commission recalls that, after the decisions taken on the CAP Health Check in November 2008, the milk sector went through a deep crisis due to a shift away from dairy products following exceptionally high prices in 2007. As our predecessors noted in their Report of 28 October 2009,[1] this led to the creation of a High Level Experts Group to work on a regulatory framework for the medium and long term to contribute to stabilising the market and producers' incomes, and the Commission says that the Group produced its report in June 2010, accompanied by seven recommendations. These were considered by the Council in September 2010, when it asked the Commission to respond by the end of the year to the first three recommendations (covering contractual relations, the bargaining power of producers, and inter-branch organisations).

The current document

1.2  In putting forward this draft Regulation, the Commission notes that the High Level Group identified a number of issues across the EU which the proposal is designed to address, namely:

  • that, whilst there are significant differences between each Member State, there is in many cases an imbalance in bargaining power in the supply chain, with farmers weaker than processors;
  • that there is a problem with poor transmission of market signals and price through the chain (so that, for example, the supply of milk during 2009 did not fall in response to reduced demand);
  • that the use of formalised, written contracts is not widespread, which weakens the position of many producers vis-a-vis processors, and prevents a fairer distribution of value and risk along the supply chain;
  • that bargaining power would be rebalanced if producer organisations constituted by dairy farmers (or their associations) were able to negotiate contract terms — including price — jointly for some or all of their members' production with a dairy, subject to appropriate quantitative limits in order to maintain effective competition;
  • that inter-branch organisations (comprising, not just farmers, but those involved in processing and disitribution) can play a useful role in promoting best practice and market transparency;
  • that the EU rules currently governing the application of those organisations in sectors such as fruit and vegetables should equally be applied in the milk and milk products sector, along with provisions clarifying their position under competition law, and ensuring that they do not distort competition or the internal market or affect the good functioning of the common market organisation; and
  • that, in order to follow developments in the market, the Commission needs timely information on volumes of raw milk delivered to processors on a regular basis.

1.3  In order to address these issues, the proposed Regulation would amend in the following four respects Council Regulation 1234/2007 establishing a single common organisation of agricultural markets:

  • Bargaining power of producers

The Commission has proposed an exemption from competition law applying specifically to the dairy sector, allowing producers to collaborate and set up producer organisations, which would be able to negotiate prices with processors for up to 33% of national production as long as the negotiation did not exceed 3.5% of EU production.

The proposals would also allow national competition authorities to prevent an individual producer organisation (even if it was below these size limits) from engaging in contract negotiation where competition may be excluded, or in order to avoid serious prejudice to small and medium sized processors. In addition, the Commission would have the power to act in cases of negotiations spanning more than one Member State.

  • Contractual arrangements

Member States would be able (but not required) to make written contracts for delivery of raw milk between producers and processors compulsory. Such contracts would have to be made in advance, and cover price (which would be static or vary only on the basis of factors set out in the contract); volume and timing of delivery; and the duration (which might be indefinite).

  • Inter-branch organisations

Members States would be able to officially recognise inter-branch organisations to improve transparency and integration within the dairy supply chain, subject to certain conditions to avoid concerted practices which distort competition.

  • Transparency

Processors of raw milk would be required to declare to the competent national authority the quantity of raw milk delivered to them each month.

1.4  The measures set out in the proposed Regulation would apply until at least 2020 to maintain the so called "soft landing" for the dairy sector (before and after the abolition of milk quotas in 2015) and to allow the measures to have full effect. However, they would be subject to review through Commission reports on the development of the milk market, and covering potential incentives to encourage farmers to enter into joint production agreements, with such reports and any proposals to be submitted by 30 June 2014 and 31 December 2018.

1.5  In order to guarantee a uniform application of these measures in all Member States, the Commission would have the power to adopt delegated acts in accordance with Article 290 TFEU in order to supplement or amend certain non-essential elements of measures set out in the proposal, as well as a number of implementing act powers.

The Government's view

1.6  In his Explanatory Memorandum of 28 January 2011, the Minister of State for Agriculture and Food at the Department for Environment, Food & Rural Affairs (Mr Jim Paice) says that the Common Agricultural Policy is an area of shared competence, and notes that this proposal would give Member States discretion as to whether or not to require compulsory written contracts and to recognise inter-branch organisations within their territory. He therefore considers that the principle of subsidiarity is appropriately respected in relation to these aspects of the proposal. In the case of the role of the national competition authorities, the Government considers it important that they should retain the power to prohibit a producer organisation from negotiating within their own Member State, even when below the limit in the proposal, if it would otherwise exclude competition, and that affected Member States should be involved in decisions on cross-border price negotiations.

1.7  More generally, the Minister observes that there has been a substantial improvement in the profitability of the EU dairy sector since 2009, demonstrating that it is more resilient than many other Member States had argued, and he points out that the UK industry is relatively efficient and should be in a good position to meet the challenges of a freer market following the abolition of quotas. However, he also says that this proposal could in theory allow one single producer organisation covering just over 40% of production in Great Britain, and that, whilst the Government agrees that some rebalancing of negotiating power in the sector could be welcome, it would prefer to see measures based on providing greater clarity on the application of existing competition law to what producers may do collectively, based on the concept of a relevant market, rather than exemption from competition law and limits based upon national milk production. It would also prefer the threshold to be 25% of the relevant market, in line with EU merger regulations, suggesting that this would improve producers' bargaining power within the existing law, and it would like Member States to be involved in Commission decisions on cross-border price negotiations.

1.8  As regards other aspects of the proposal, the Minister says that the Government can accept the proposition on contracts as long as Member States are free to decide whether to make them compulsory, and that, if contracts were to become compulsory, it would want to make sure that the framework did not unduly constrain contractual conditions. He says that the Government can accept the proposal on inter-branch organisations, but will want to ensure that a level playing field is maintained for UK exporters, and that it will oppose any suggestion of additional funding to set them up. It can also accept the proposal on transparency, which the Minister notes would add no new burden on processors compared with existing requirements to provide information on throughput.

1.9  Finally, he says that the UK is considering whether the delegated and implementing powers proposed for the Commission are appropriate, and that, as the Commission has not produced an impact assessment, the UK will be pushing for this to be provided.

Conclusion

1.10  Although certain aspects of this proposal — notably the possibility of compulsory contracts and the role of inter-branch organisations — would be optional so far as individual Member States are concerned, it would nevertheless introduce some potentially significant changes into the application of competition law to a sector of considerable economic and political importance, not just for the EU as a whole, but for the UK as well. Also, the setting up of the High Level Group was in response to the severe problems facing the milk industry at that time: and, although what is said in this document, and in the Commission's Communication[2] on the evolution of the dairy market, suggests that the immediate market outlook is reasonably reassuring (not least in relation to a "soft landing" following the end of milk quotas), the projections in that Communication do depend heavily on a number of underlying assumptions.

1.11  In short, we believe there are sufficiently important issues arising on this proposal to warrant a debate in European Committee. In making this recommendation, we also note that the Environment, Food and Rural Affairs Committee has just announced that it will be examining the UK dairy industry, with particular reference to the potential impact of this proposal and of the Communication on the dairy market.



1   (30825) 12289/09: see HC 19-xxix (2008-09), chapter 1 (28 October 2009). Back

2   (32331) 17243/10: see chapter 8. Back


 
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