Extending the EU Policy on Strengthening the Functioning of Supply Chains to ACP-EU Trade Relations and Beyond: The Case of the Dairy Sector

Transcription

1 Extending the EU Policy on Strengthening the Functioning of Supply Chains to ACP-EU Trade Relations and Beyond: The Case of the Dairy Sector Policy Coherence and the CAP Series May The evolution of EU policy on the functioning of supply chains The dismantling of administratively determined prices, which insulated the process of EU price formation from global price trends, has revealed inequalities in the distribution of commercial power along food supply chains. It is feared that in an era of heightened price instability, underlying inequalities in power relationships along supply chains could serve to undermine the production base across a range of agricultural sectors in the EU, during the downward cycles in price volatility. This is a particular concern in the dairy sector where problems of price stickiness have been identified during upward cycles of price trends. Indeed price developments in the EU dairy sector in 2009 threw into sharp focus this problem. Against this background the EU launched a review of the functioning of the food supply chain in the EU. This initial review suggested a need for concrete actions to improve (the) functioning of the food supply chain in the EU and improve commercial relationships between actors of the chain, to the ultimate benefit of all concerned. Particular importance was attached to boosting farmers bargaining power in the supply chain. More specifically the EC communication prepared in October 2009 proposed to: promote sustainable and market-based relationships between stakeholders in the food supply chain, by identifying unfair contractual practices stemming from asymmetries in bargaining power, monitoring potential abuses, and where deemed necessary drafting standard contracts with stakeholders from the different sectors ; increase transparency in the food supply chain by establishing a European food prices monitoring tool, improving oversight of agricultural commodity derivatives markets so as to contain volatility and speculation, and establishing price comparison services at the national level to allow consumers to compare prices of different retailers; foster the integration of the internal market for food and the competitiveness of all sectors of the food supply chain by removing measures which impede cross border trade and force retailers to source locally. While a number of these proposals dealt with specifically EC concerns, a number of them have a far wider applicability. 2. The elaboration of the approach in the dairy sector In October 2009 a high level export group on the functioning of the supply chain in the dairy sector was established. Regular monthly meetings were held to review analysis of the functioning of EU dairy supply chains and take submissions from concerned stakeholders. Six months later at the end 1

2 of March 2010 the preliminary findings of the high level expert group were tabled to a conference on the future of EU milk production. These preliminary findings noted that a more market orientated policy framework brings with it price and income volatility, which throws up the challenge of how to avoid an irreversible damaging impact on the EU dairy sector. It pointed out that this threat needed to be seen against the background of the opportunities presented by the underlying trend towards a rapid expansion in global demand for value added dairy products, a long term trend which it was maintained the EU dairy sector needed to prepare itself to capitalise on. In this context it was argued consideration needed to be given to: a) a more transparent and equal sharing of the added value between the market players; b) the use of market management tools to promote a better and more speedy adaptation of raw milk supply to demand ; c) reviewing the contracts between players to ensure greater transparency; d) enhancing the negotiating power of milk producers; e) the introduction of exceptions to competition law for the dairy sector in the context of strengthening producer organisations, so as to allow producers to jointly agree prices for their produce; f) reviewing the nature of the safety nets required to sustain the milk production base in the EU; g) the possible use of risk management tools; h) how to increasingly support innovation and the development of the product range in the dairy sector; j) supporting measures to enhance the quality of dairy products. Following the EC Council meeting at the end of March 2010, Agriculture Commission Ciolos gave some indication as to what the package of measures to be submitted at the end of 2010 might encompass. This included: measures to address such issues as enhancing the negotiating power of dairy producers; a review market mechanisms to make them more efficient ; reviewing the whole issue of the contract system between various players in the supply chain ; addressing the issue of the transparency of price formation. 2

3 Ultimately EC proposals tabled as part of the milk package in December 2010 focused on contractual relations in the milk and milk product sector. These proposals recommended written contracts between milk producers and processors [and] the possibility to negotiate contract terms collectively via producer organisations in order to balance the bargaining power of milk producers relative to major processors. The aim of such written contracts was stated as being to encourage all dairy chain stakeholders to: be more aware of the state of the market ; respond better to signs of changes in the market ; keep wholesale and retail prices more in line with prices paid to farmers ; adapt supply to demand ; and end unfair commercial practices. Overall the proposals are designed to address the important imbalances in the supply chain identified by the High-Level Experts Group on Milk. However the proposals are also seen as an important contribution towards preparing for a soft landing when quotas come to an end in It was proposed that these measures should remain in place until 2020, with two intermediate reviews in 2014 and While this broad approach was endorsed by EU Ministers in mid-december 2010, it was stipulated that the specific proposals should be subject to an in-depth examination by EU Council structures. In 2011 this in-depth examination revealed a lack of consensus amongst EU member states in certain areas. While there was a broad consensus on the importance of promoting increased transparency in price formation, and the underlying supply and demand situation, as well as supporting measures to enhance competitiveness of all the actors involved in dairy supply chains, there was less consensus on the type of policy measures to be used to address price instability and the distribution of revenues along supply chains. 3. The current state of play on strengthening the functioning of EU dairy supply chains At the end of February 2012 the EU Council formally adopted a regulation on improving the functioning of milk supply chains, after consultations with the European Parliament. The main elements of the regulation included: a reinforcement of the bargaining power of milk producers by allowing them to set up producer organisations; the possibility for member states governments to establish an obligation for formal written contracts for the supply of milk and/or an obligation for written offers to be made to producers which they can accept or reject. 1 For more details see Agritrade article EC milk package proposals may hold lessons for other sectors, January

4 Where contracts exist all elements should be freely negotiated, with member states able to set a minimum contract period of at least six months. Measures were also introduced to improve the transparency of EU milk production and the creation of GI protection for cheeses. The decision to leave it to member state governments to determine whether contracts should be made compulsory reflected a lack of consensus in the EU on how far relationships along supply chains should be regulated. Given this lack of consensus, developments at national level with the EU began to take on more significance. In France, according to USDA analysis since January 2011 farmers, dairies and government have been involved in negotiations around milk pricing, reaching agreement on limiting producer price fluctuations within defined limits. Subsequently legislation was adopted which obliges French dairies to draw up raw-milk supply contracts to submit to their farmers. While the intention of the act was to improve the position of farmers vis a vis processors, towards the end of 2011 only 5% of French farmers had signed on, with the contracts offered described as totally unacceptable, given the absence of concrete commitments on price and volumes to be supplied. In response the French Milk Board has now drawn up a model contract, to be used by farmers when negotiating with milk processors, with Ministerial endorsement being sought for use of the model contract. Producers who adopt the contract pass on their right to negotiate with processors to the French Milk Board for a five year period. The model contract specifies the supply volume and stipulates a milk price based on real production costs, verified annually by an independent commission. Similarly in Spain a decree has been adopted regulating the functioning of relations between milk producer organisations and inter professional dairy sector associations. This aimed to promote mandatory raw milk supply contracts, including price and supply stipulations, although these provisions were questioned by the Spanish Competition Authority In April 2011 Scottish farmers tabled a proposal for a new transparent and market-related pricing formula for milk, with the aim of establishing a price which represents the true value of the product 2. Later on in 2011 it became apparent that the establishment of the new policy framework was beginning to impact on the behaviour of some retailers. For example, the Co-op retail group began to offer contracts for the supply of liquid milk which paid a premium for compliance with certain key conditions 3. The European Milk Board (EMB) favours the French approach, calling for production costs plus arrangements. In this context EMB was highly critical of the EU Council s rejection of European Parliament proposals to link milk prices to production costs, an arrangement which already exists within certain supply chains. The EMB has endorsed these proposals given its concern that a mismanaged transition to a quota free system could lead to a collapse of milk prices. Despite the formal adoption of the Milk Package by the EU Council in February 2012 the debate on strengthening the functioning of dairy supply chains is not over. As part of the CAP reform 2 For more details see Agritrade articles, UK dairy farmers take initiatives to improve functioning of dairy supply chain, 10 June 2011 and Elaboration of measures to strengthen the functioning of EU dairy supply chains continue, 18 March For more details see Agritrade article, Moving forward improvements in the functioning of the EU dairy supply chain, 6 October

5 proposals tabled in October 2011, three options were advanced for the operationalization of dairy sector policy measures related to strengthening the functioning of dairy supply chains, namely: flexible cooperation involving widening the range of cooperation allowed to producers and promoting best practice as regards the use of voluntary standards supply contracts; enhanced cooperation involving strengthening inter-branch organisation and producer organisation based on the experience in the fruit and vegetable sector; regulated cooperation involving the establishment of obligations to provide suppliers with written contracts and extending derogations from prohibitions on price fixing. 4. Lessons for ACP dairy sector development Given the role the purchasing policies of locally established dairies play in the development of milk production in ACP countries (i.e. with regard to the balance to be struck between the use of fresh milk and imported skimmed milk powders), lessons could potentially be learnt from current EU efforts to strengthen the functioning of dairy supply chains, in the context of unequal power relationships and heightened global price volatility. Elements of relevance in an ACP context include: providing support to strengthening milk producers organisations and their capacity for collective bargaining; reviewing the regulatory framework for contractual arrangements between milk producers and dairy processing companies, to promote best practices, including through the establishment of model contracts for milk supply arrangements covering price and milk delivery arrangements; promoting industry wide stakeholder consultative structures in support of national dairy sector development. This could potentially constitute an area for intensified cooperation between concerned ACP governments and those EU member states governments most actively involved in developing policies to strengthen the functioning of national dairy supply chains. Essential to this however would be the involvement of dairy farmers from the respective countries. However to be effective ACP-EU collaboration would need to reach beyond measures to strengthen the functioning of dairy supply chains. The EU ACP trade relationship in the dairy sector is complex, with imports being both an essential input to competitive production but also an obstacle to locally integrated milk and dairy supply chains. This appears to require a carefully conceived import management policy linked to clearly articulated dairy sector development strategies. If carefully conceived import management arrangements are not in place, unregulated dairy imports can undermine investor confidence in the returns that can be obtained from investments in developing local dairy supply chains. 5

6 If the potential for poverty reduction through the expansion of local milk production is to be realised, then the relationship between milk producers and dairy processors in ACP countries will need to be developed. This will require not only the strengthening of local milk producers associations and the introduction of policies to strengthen the functioning of dairy supply chains but also a) the mobilization of financial resources for the development of local supply chains, ranging from funds for investment in the breeds of cattle used and feeding regimes applied, to the organisation of milk collection and transportation; b) the active use of trade policy measures to provide a supportive policy framework for the development of dairy processing, into which local milk production is increasingly integrated. Using trade policy measures to provide such a policy framework could lead to issues arising in the ongoing EPA negotiations, given the EC s desire to see an elimination of all non-tariff barriers to trade under EPAs. Any restriction on the use of trade policy tools in the dairy sector (particularly import licensing arrangements linked to sector development programmes that are designed to improve the functioning of local milk supply chains) could seriously undermine investor interest in dairy sector development in countries where EU exports are already entrenched. 6