Summary
The EC is currently undertaking consultations on new proposals to reduce unfair trading practices (UTPs), to which farmers are seen as being particularly vulnerable. UTPs are seen as stifling innovation and undermining on-farm investment through reducing the commercial viability of farming activities. The envisaged regulations aim to ensure a fairer distribution of value along agricultural supply chains, and increase both farm incomes and on-farm investment.
There is an urgent need to extend EU regulations on UTPs to ACP-EU supply chains since in some major sectors abuses of the weak market position of smallholder producers are endemic. Investments in poverty focused export orientated smallholder production will be undermined unless issues of UTPs along ACP-EU supply chains are addressed.
The EC has posted an inception impact assessment on its proposed initiative to improve the food supply chain which focusses in part on policy changes to address unfair trading practices (UTPs) along EU agro-food sector supply chains. This is based on the findings that ‘value in the food supply chain is not adequately distributed across all levels due … to differences in bargaining power between smaller and thus more vulnerable commercial operators, including farmers and their economically stronger and highly concentrated commercial partners downstream’(1).
An independent assessment by the high level Agricultural Markets Task Force (AMTF) suggested regulatory changes in three policy areas to address the consequences of inequality in bargaining powder along supply chains: unfair trading practices; market transparency and farmer cooperation (see companion article ‘EU Task Force calls for more action to strength the position of farmers in supply chains’, 13 March 2017) (1).
In June 2016 the European Parliament gained strong support for its calls for the EC to act on UTPs and in December 2016 the EU Council invited the EC to undertaken ‘an impact assessment with a view to proposing an EU legislative framework or other non-legislative measures to address UTPs’. The EC defines UTPs ‘as practices which grossly deviate from good commercial conduct, are contrary to good faith and fair dealing and are unilaterally imposed by one trading partner on its counterparty’
The EC recognizes there is general public support in the EU for improving the position of farmers in the value chain, as an integral part of the common agricultural policy. The EU has committed to taking on board the work of the AMTF ‘to improve the position of farmers in the food supply chain.
The EC believes ‘UTPs may be at odds with efficient markets’ and may ‘weaken the overall efficiency of the supply chain’. This can then ‘negatively affect operators who would otherwise be commercially viable’. It may also create barriers to market entry, ‘generate uncertainty, stifle innovation and cause underinvestment in the food supply chain’(1)
The EC maintains ‘consultations have shown that the food supply chain is particularly prone to trading practices that deviate from fair commercial conduct’, with smaller operators having little bargaining power and hence being likely to fall victim to unfair trading practices (1).
Legislation dealing with UTPs has been ‘introduced in more than 20 EU member states as well as various voluntary initiatives at national and European level (e.g. the Supply Chain Initiative)’. Currently ‘rules governing UTPs in the food supply chain at business-to-business level are currently limited to the possibility for Member States to introduce an obligation of written contracts between producers and processors and cover the required contents of such contracts …and payment deadline rules in business-to-business transactions’ (1).
The EC is considering extending legislation applicable in the sugar sector ‘which allows voluntary value sharing agreements negotiated by groups of agricultural producers’ in order to promote more stability in the market position of agricultural producers, to other sectors. ‘These mechanisms aim to better link producer prices to the prices downstream in the food supply chain and can cover both potential profits and losses downstream (1).
National initiatives on unfair trading practices vary considerably. Some establish ‘specific business-to-business rules, complementing their national competition law, and extending the application of the EU Unfair Commercial Practices Directive to business-to-business relations’. Other national initiatives allow ‘judicial redress on the basis of contract law, actions by competition authorities regarding fair trading or economic dependency, administrative redress or ombudsman-based systems’. These national legislative initiatives may also be complemented by voluntary codes (1).
However these different national approaches ‘imply that different rules are applied to operators in the single market’. This lack of common rules and enforcement arrangements ‘translates into dissimilar conditions for business’. Given the intensity of intra-EU trade in agro-food products, UTPs thus have a transnational dimension, which would appear to require some form of common EU regulatory framework (1).
The EC maintains a common EU framework would:
- facilitate ‘the exchange of information and cooperation among Member States’ enforcement authorities, enabling them for instance to share best practices in addressing UTPs’;
- encourage stakeholders to ‘buy in’ to voluntary initiatives;
- bring benefits to farmers and small scale operators along the agro-food supply chain by minimizing UTP (1).
Overall according to the EC the objective of regulatory initiatives on UTPs would be to ‘strengthen governance of the food supply chain by preventing undue pressure on weaker operators in the chain including farmers that could affect their commercial viability’. According to the EC the options available include:
- maintaining the status quo of varying national legislation and regulation;
- the establishment of ‘EU-wide non-legislative guidelines and recommendations to member states on how to tackle UTPs’;
- the introduction of framework legislation to ‘protect weaker operators in the food supply chain including farmers’. This envisages specific manifestly unfair trading practices being prohibited and common minimum enforcement standards being introduced at EU level to ‘complement national legislation and the Supply Chain Initiative’;
- introduction of ‘minimum framework legislation for the whole food supply chain’ establishing ‘common general criteria for what is to be considered a UTP in the food supply chain’ and helping ‘stakeholders draw up a ‘code of conduct’ and make the compliance with this code mandatory’. This approach which would seek to combine ‘self-regulation with a regulatory element could make it more likely that all concerned stakeholders would participate in the dialogue and could help build the trust needed between the actors in the chain’(1).
Overall the EC believes a regulatory initiative on UTPs, market transparency and farmer cooperation would ‘help strengthen the economic position of farmers and SME processors in the food supply chain in the EU’, improving their ability to defend themselves against UTPs and enhancing their resilience to ‘difficult market conditions’. It is hoped regulatory initiatives would:
- put ‘the food supply chain on a fairer, sounder and more transparent footing’;
- help ‘increase disposable farm income and investment possibilities’;
- make the agricultural sector ‘more resilient to price volatility’;
- strengthen the position of farmers in the supply chain and make farming more attractive and more viable;
- ensure a fairer distribution of value added generated by the supply chain (1).
The EC now envisages a public online consultation in the 3rd quarter of 2017 on UTPs and market transparency and specifically the value added of EU action (1).
In response to the EC inception impact assessment the EU farmers organisation Copa-Cogeca has called on the EC and EU ministers to endorse the option of the introduction of framework legislation to ‘protect weaker operators in the food supply chain including farmers’ with specific manifestly unfair trading practices being prohibited and common minimum enforcement standards being introduced at the EU level (2).
Copa-Cocega Secretary General Pekka Pesonen gave the example of a lettuce producer who agrees with a supermarket to supply 20,000 lettuces at the start of the season but then ‘the supermarket representative turns round at the last minute and cuts the order by half stating that consumers are eating less than expected’. According to Pesonen ‘this leaves the farmer in a very difficult position ….and there is nothing he can do about it’. The problem of late payment was also highlighted, with farmers often being obliged to provide de facto three months credit to supermarkets whose financial position is much stronger. he maintained legislation as required because voluntary schemes simply don’t work as a result of the huge imbalance in power distribution along agricultural supply chains (3).
| Comment and Analysis
The aim of the EU’s proposed regulatory initiative is to put ‘the food supply chain on a fairer, sounder and more transparent footing’, help ‘increase disposable farm income and investment possibilities’ and make the agricultural sector ‘more resilient to price volatility’. These objectives would appear to be equally relevant, if not even more relevant, to the functioning of ACP-EU agricultural supply chains, where the inequality in market power between smallholder farmers and EU importers is even more acute than within the EU. New EU regulations on UTPs would appear to be particularly relevant to ACP-EU horticulture, sugar, banana and cocoa supply chains, where smallholder farmers are extensively involved in basic agricultural production. Submissions to the UK Groceries Code Adjudicator (GCA) Review by the UK NGO Traidcraft, suggest UTPs are common along ACP-EU agricultural supply chains and can result in major financial deductions from agreed payments made to ACP suppliers (see companion article, ‘Role of UK Groceries Code Adjudicator could be extended’, 17 July 2017). In the case of the Kenyan horticulture sector a confidential annex submitted to the GCA review suggested UTPs can result in losses of up to 79% of the initially agreed price as a result of deductions which would be seen as contrary to the principles of fair trading practices enshrined in EU domestic codes of practice. Alternatively it can lead to non-purchase of products on the day scheduled for export, leaving farmers with unsold produce and significant financial losses, which undermine future farm level investments. The challenges faced along sugar supply chains would also appear to be increasingly acute, given the deregulation of the EU sugar regime and the changes in corporate ownership in EU sugar supply chains since 2005. These changes in corporate ownership have seen an expansion of intra-corporate trading of sugar from ACP countries to the EU. This creates a situation where the basis for the formulation of the raw sugar purchase price within these supply chains is far from transparent. This is an important issue, since the sale price of raw sugar is the critical determinant of the price paid for sugar cane supplied by smallholder farmers across a range of ACP sugar exporting sectors. There would also appear to significant challenges in the banana sector, given the existing supermarket pricing practices in some EU member states (notably the UK). Extending the EC’s UTP policy initiative to ACP-EU supply chains could substantially increase the financial returns to ACP producers on existing products exported to the EU and could greatly stimulate local investment in small holder based production systems (since smallholder producers are most vulnerable to UTPs). Unfortunately, despite pressure from EU development NGOs to extend EU policies on UTPs to EU supply chains involving developing country suppliers, the EC’s proposed legislation on UTPs would only apply to internal EU supply chains. This issue of the extension of the EU’s current UTP policy initiative to ACP-EU supply chains could potentially be taken up by ACP countries as part of the trade component of the post-Cotonou negotiations, with this forming an integral part of wider efforts to make investment in smallholder farming more commercially viable. However if this issue is to be taken up in the context of the post-Cotonou negotiations then some initial engagement with the EC’s regulatory proposals on UTPs and the UK review of the role of the Groceries Code Adjudicator would appear to be essential. |
Sources:
(1) EC, ‘Inception impact assessment : Initiative to improve the food supply chain’, 25 July 2017
file:///C:/Users/GDC%20Partners/Downloads/PART-2017-328951V1.pdf
(2) Copa-Cogeca press release, ‘Copa Cogeca demand EU legislation to stop unfair trading practices (UTPs) in food supply chain in formal reaction to EU Commission inception impact assessment’, 22 August 2017
http://www.copa-cogeca.be/Main.aspx?page=HomePage
(3) Freshfruitportal.com, ‘Copa Cogeca calls for EU law to curb unfair trading practices’, 24 August 2017
https://www.freshfruitportal.com/news/2017/08/24/copa-cogeca-calls-eu-law-curb-unfair-trading-practices
| Key words: Unfair trading practices (UTPs), sugar, bananas, horticulture, cocoa, post-Cotonou, GCA Area for Posting: CAP, post Cotonou, horticulture, sugar |