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 base | Articles 42 and 43(2) TFEU; co-decision; QMV
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| Document originated | 9 December 2010
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| Deposited in Parliament | 14 December 2010
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| Department | Environment, Food & Rural Affairs
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| Basis of consideration | EM of 28 January 2011
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| Previous Committee Report | None but see footnotes
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| To be discussed in Council | 17 March 2011
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| Committee's assessment | Legally and politically important
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| Committee's decision | For debate in European Committee A
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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.
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.
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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