Is Food Still Too Expensive for the Commission’s Taste?
Food Price Developments Raise Serious Concerns about the Functioning of the Food Supply Chain in Europe
It appears from a recent European Commission Communication that free market forces constrained by a proper application of the competition rules may be insufficient to ensure a proper functioning of food markets. The Commission has proposed initiatives which will be of interest to all operators in the food chain: agricultural producers, food processors, wholesalers, retail distribution chains and traders, including commodity derivatives traders.
From a study of food prices in Europe over the past couple of years, the Commission observes that many agricultural commodities experienced a sharp decline in price, while consumer food prices continued to increase. Moreover, even when consumer prices started to decrease, this was at a low rate compared with the fall in agricultural commodity prices. The Commission is concerned that this discrepancy between commodity and consumer food price movements has negative consequences for the food supply chain because it prevents consumers from benefiting from lower commodity prices. This reduces the demand for food products, which in turn curtails recovery in agricultural commodity markets.
To respond to these concerns, on 28 October 2009 the Commission published a communication which identifies several areas for action summarised in four points below.
- The Commission notes that significant imbalances in bargaining power between actors in the food supply chain may lead to unfair trading practices such as late payments, unilateral changes in contracts, requests for payment of upfront “entry fees” prior to negotiations, etc. The Commission suggests that a better awareness of contractual rights and stronger action against unfair contractual practices could contribute to preventing these drawbacks. Ideas put forward include an exchange of information on contractual practices between the Commission and EU Member States, the launch of awareness campaigns to inform stakeholders of their contractual rights and potentially unfair practices, and the preparation of standard contracts.
- The Commission also observes that some suppliers and/or buyers have the ability to exercise their market power in a manner that distorts competition in food markets. Joint commercialisation agreements, tying and bundling, joint purchasing agreements and the increasing use of private labels, in addition to classic cartels and price maintenance are all mentioned by the Commission as deserving special attention. The Commission therefore proposes to continue working within the European Competition Network of Member State Competition Authorities in the analysis of specific practices which may be critical for the proper functioning of the food supply chain.
- The Commission is concerned that lack of transparency in agricultural commodity and food markets leads to speculation with consequential price volatility and proposes to address this concern in proposed legislation on agricultural commodity derivatives markets. In addition, at the same time as publishing its Communication, the Commission launched the first edition of its European Food Prices Monitoring tool, and also recommends that Member States have web-based and easily accessible food retail price comparison services.
- Last of all, origin labelling schemes and other hindrances to parallel trade impede the integration of food supply markets across the European Union. Retailers from one Member State are usually “forced” to source locally when dealing with multinational suppliers, thus raising obstacles to cross-border trade. To remove these obstacles, the Commission will assess measures to address territorial supply constraints, selected environmental standards and origin labelling schemes that may impede cross-border trade. The Commission also urges the Council and the European Parliament to adopt rapidly the Commission’s proposal for the revision of legislation on labelling rules.
The tone of the Commission’s Communication is one of urgency. It recognises that agricultural commodity prices may increase rapidly as the world climbs out of recession leading to another disproportionate increase in consumer food prices, unless the problem of market malfunctioning is addressed soon.
This is therefore an area to be monitored closely by operators in agricultural commodity and food markets.