Summary
EU regulations to combat unfair trading practices along agro-food supply chains, including within 3rd country supply chains serving the EU market continue to make progress through the legislative process. It is estimated EU farmers lose some €11 billion because ‘retail chains change contracts after they’ve been agreed upon or cancel orders at short notice’. ACP exporters also suffer from UTPs particularly last minute cancellations of orders and retroactive changes to agreed sales arrangements. The financial consequences of the UTPs can be quite severe, so operationalising the new UTP regulation as it applies to ACP-EU supply chain could lead to immediate improvements in the financial returns to ACP producers, particularly smallholder horticulture producers. This issue could potentially be taken up in the context of the forthcoming ACP-EU post-Cotonou negotiations. This can be seen as an urgent issue since a ‘no-deal’ Brexit could disrupt triangular horticulture supply chains, with any resulting losses being passed down to primary producers in Africa and other ACP regions.
In September 2018 it was reported the EC was facing calls for a more rigorous approach to its policy on the elimination of unfair trading practices (UTPs) along agro-food sector supply chains from the EC’s Special Committee on Agriculture. Two particular sticking points were identified relating to the scope of the regulation and the issue of the burden of proof. The representative of the President in Office of the Council suggested ‘maintaining the current scope, as proposed by the Commission, with the possibility for Member States to maintain or introduce stricter national rules’ (1).
Currently the list of prohibited UTPs is grouped into two categories: practices that are simply unfair and practices that may be acceptable if clear prior agreement is reached.
Category 1 practices which are simply unfair and hence would be prohibited include:
- ‘payment of supplier later than 30 days’;
- where ‘a buyer cancels order for perishable products at short notice;
- where ‘a buyer unilaterally or retroactively changes the term of a supply agreement’;
- where ‘a supplier has to pay for the wastage of food products on the buyer’s premises not caused by the negligence or fault of the supplier’ (1).
Category 2 practices which would require clear prior agreement under the supply agreement include:
- ‘returning unsold food products to the supplier;
- charging the supplier for stocking, displaying or listing their products by the buyer;
- charging the supplier for the promotion of products sold by the buyer;
- charging the supplier for the marketing of products by the buyer’ (1).
Following discussions at the EC’s Special Committee on Agriculture on 1st October 2018 the EU Council reached agreement on a raft of measures which went beyond the EC’s initial proposals. This includes provisions
- extending the scope of the regulation to ‘agricultural products other than food’;
- ‘making it possible for suppliers to lodge a complaint in their own member state’ and
- allowing member states to maintain or introduce’ rules against UTPs that are stricter than those at European level’ (2).
The Minister representing the EU President in Office, Austria’s Federal Minister for Sustainability and Tourism, highlighted how ‘the distribution of value in the food chain has often proved to be unfair in the past, with farmers only getting a small share of the price paid by consumers for food in the supermarket’. Given the inequalities in size and market power between small and medium sized farmers and big retailers and traders it was argued measures were needed to curb UTPs (2).
The EC has estimated that each year farmers lose some €11 billion because ‘retail chains change contracts after they’ve been agreed upon or cancel orders at short notice’ (3).
On 2nd October 2018 the Agriculture Committee in the European Parliament approved new draft rules against unfair trading practices (UTPs). The approved text ensures ‘suppliers outside the EU’ will be included in the scope of the regulation (4). This is in part achieved through the ‘extension of the “buyer’s” definition to include those operators that, though established outside the EU, buy and sell products in the EU market’ (5)
Three important additional modifications would appear to be needed, namely:
- a requirement to conclude ‘mandatory written contracts upon request of a supplier’;
- the ‘inclusion of the obligation for the enforcement authority to start an investigation within 60 days from the date on which the complaint has been lodged, and to conclude it within 6 months’;
- the introduction of the obligation for Member States to include an evaluation of the effectiveness of UTP measures in their annual report to the Commission (5).
The EU retail sector is meanwhile expressing concerns at the final text of the regulation adopted by the European Parliament Agriculture Committee. The large German retailers Rewe and Edeka claim the proposed ban on cooperation between retailers and wholesalers would undermine their business model, since it would ‘ban joint purchasing by wholesalers and retailers’. Both ‘Rewe and Edeka are cooperatives of independent supermarkets’ and the current cooperation between wholesalers and retailers practiced within both Rewe and Edeka allows ‘small grocery traders to compete with the big retail chains’. It is also argued the regulation ‘would give multinational corporations like Nestlé or Unilever the same rights as farmers in their dealings with retailer’ (3).
More broadly ‘EuroCommerce, the body that represents the retail sector in Europe, has described the Unfair Trading Practices directive put forward by the European Parliament’s Agriculture and Rural Development (AGRI) committee as a ‘witch hunt’ against retailers and wholesalers’. This criticism focused on the amendments introduced by the European Parliament to the draft EC regulation approved by the EU Council. EuroCommerce argued ‘the directive will make it more difficult for retailers to negotiate with suppliers, and will do nothing to improve the lot of farmers’. The amendments it is held will simply ‘line the pockets of multinational shareholders and do nothing for farmers’ (6).
| Comment and Analysis Given the requirement which includes non-EU suppliers in the scope of the new regulation on UTPs, a key issue in the coming period will be how, if at all, such provisions on UTPs can be operationalized in trading relations between ACP producers and exporters and EU importers and retailers. This raises important issues of the extra-territorial scope of EU regulations, which is potentially problematical, if specific cooperation arrangements are not set in place. This is an issue which could potentially be taken up in the context of the forthcoming ACP-EU post-Cotonou negotiations, given the EC’s focus on promoting responsible trade and investment engagement of EU enterprises in ACP countries. Beyond this basic issue there is the issue of the non-contractual basis of many supply arrangements along ACP-EU supply chains, particularly in the horticulture sector, where smallholder producers are involved. Against this background a key requirement will be giving equivalent status to that of formal contracts to email communications relating to orders for imports. More generally support needs to be extended to the promotion of formalized written contracts within ACP-EU supply arrangements in order for a solid basis to be created for the application of UTP regulations to ACP-EU agro-food sector supply chains. Of particular concern to ACP exporters are a number of the practices which routinely occur along ACP-EU horticultural supply chains involving smallholder farmers, and which are deemed unfair under the new EU regulation and hence would be banned. These relate to the cancelling or reduction of previously specified orders on the day of export and the retroactive application of deductions from agreed prices for services nominally rendered by the importer. Where last minute cancellation of orders appears to be structural, with EU buyers often over-estimating import requirements to ensure supermarket shelves are stocked and then adjusting actual import levels on the day of shipment. This leaves the exporters holding the unwanted products, which are then returned to producers, sold on the local market or abandoned and left to rot. Under each of these scenarios it is the smallholder producer who bears the financial loss. This is similarly the case for the practice of unilaterally applying retroactive deductions from agreed prices for nominal services, which can amount to up to 80% of the originally agreed price.
This can seriously undermine the viability of smallholder investments in engaging with high value export supply chains and can serve to increase indebtedness and discourage further investment and innovation. This can carry serious long term implications for the structural development of the affected ACP agricultural sectors. Given recent EU commitments to promoting investment and jobs in agriculture in Africa, such commercial practices are in distinct contradiction to broader EU policy objectives, which relate to one of Europe central policy concerns, namely getting to grips with the root causes of migration pressures on the EU. The issue of extending the new EU UTP regulation to ACP-EU28 supply chains is likely to take on particular significance in the context of the potentially trade disruptive effects arising from a ‘no-deal’ Brexit. Of particular relevance in this regard is the requirement that suppliers should not be required to pay for wastage once products have been delivered to the buyer. This would appear to be particularly relevant to the functioning of triangular ACP-EU horticulture supply chains which serve the UK market via EU27 member states or a EU27 member states via the UK (e.g. the Republic of Ireland. Under a ‘no-deal’ Brexit scenario these triangular supply chains could ace particularly serious problems of disruption. This dimension of Brexit would appear to lend importance to the early operationalisation of the external dimension of the new EU UTP regulation. However this is likely to require a specific targeted initiative and at the present time this is likely to be placed in the ‘too hard’ basket by EC officials unless the issue is given a political push by ACP governments in the context of the post-Cotonou negotiations. |
Sources:
(1) foodnavigator.com, ‘Brussels faces pressure for tighter definition of unfair trading practices’, 12 September 2018
https://www.foodnavigator.com/Article/2018/09/12/Brussels-faces-pressure-for-tighter-definition-of-unfair-trading-practices#
(2) wired-gov.net, ‘Better protection for farmers against unfair trading practices: Council agrees its negotiating position’, 2 October 2018
https://www.wired-gov.net/wg/news.nsf/articles/Better+protection+for+farmers+against+unfair+trading+practices+Council+agrees+its+negotiating+position+02102018122500?open
(3) global.handelsblatt.com, ‘Edeka and Rewe object to EU proposal for ‘farmer protection’’, 18 October 2018:
http://www.freshplaza.com/article/9033326/edeka-and-rewe-object-to-eu-proposal-for-farmer-protection/
(4) arc2020.eu, ‘Unfair Trading Practices | Farmers (everywhere) Win in New Draft Rules?’, 2 October, 2018
http://www.arc2020.eu/unfair-trading-practices/
(5) Farm Europe, ‘A need for balanced, common approach tackling UTPS’, 2 October 2018
https://www.farm-europe.eu/travaux/a-need-of-balanced-common-approach-tackling-utps/
(6) ESM, ‘EuroCommerce: UTP Directive A ‘Witch Hunt’ Against Retailers’, 2 October 2018
https://www.esmmagazine.com/eurocommerce-utp-directive-witch-hunt-retailers/65590