INCEPTION IMPACT ASSESSMENT

Title of the initiative

Initiative to improve the food supply chain

Lead DG – responsible unit

Associated DGs

DG AGRI

DDG3

G.1 'Governance of the agri-food markets'

SG, LS, DG GROW, DG COMP

Date of Inception Impact Assessment

25 July 2017

Likely Type of initiative

Legislative initiative

Indicative Planning

March 2018

Additional Information

This Inception Impact Assessment aims to inform stakeholders about the Commission's work in order to allow them to provide feedback on the intended initiative. Stakeholders are in particular invited to provide views on the Commission's understanding of the problem and possible solutions and to make available any relevant information that they may have, including on possible impacts of the different options. The Inception Impact Assessment is provided for information purposes only and its content may change. This Inception Impact Assessment does not prejudge the final decision of the Commission on whether this initiative will be pursued or on its final content. 

A. Context, Problem definition and Subsidiarity Check

Context

The food supply chain in the EU comprises all actors and activities from primary agricultural production to food processing, distribution and retailing and consumption. It ensures that food products are delivered to the general public for personal or household consumption. It affects all consumers in the EU on a daily basis and accounts for a large share (~13%) of the average household budget. The food supply chain employs over 44 million people (including non-full time farmers) in the EU and accounts for around 7% of gross value added.

There are indications that the value in the food supply chain is not adequately distributed across all levels due, for instance, 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.

The Agricultural Markets Task Force (AMTF), an independent high-level group reporting to the Commission, composed of 12 independent experts and chaired by former Dutch Minister for Agriculture and university professor Cees Veerman, examined possible ways of improving the position of farmers in the food supply chain. In its November 2016 report, the AMTF suggested that regulatory changes in three policy areas may lead to improvements strengthening the position of farmers in the chain. These areas are:

unfair trading practices;

market transparency; and

possibilities of farmers to cooperate. 1

According to a Eurobarometer survey from October 2015, the two highest priorities for citizens concerning the common agricultural policy (CAP) were investing in rural areas to stimulate economic growth and job creation (47%), and strengthening the farmer’s role in the food chain (45%). In the 2017 public consultation on the future of the common agricultural policy, 96% of the respondents replied that improving farmers’ position in the value chain should be an objective of the CAP.

The Commission Work Programme for 2017 states that the Commission will consider further action as necessary to improve the position of farmers in the food supply chain, in the light of the outcome of the work of the AMTF and the High Level Forum for a Better Functioning of the Food Supply Chain (HLF). 2

Unfair trading practices (UTPs) can be defined 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 occurrence of UTPs in the supply chain as well as possible counter-measures have been discussed at the EU level for a number of years (see the Annex for a list of relevant EU documents since 2009). A Commission report from January 2016 concluded that at that juncture a harmonised regulatory approach under EU law would not add value. 3 Nonetheless, it committed the Commission to re-assessing the need and added value of EU action before the end of its mandate. The HLF discusses UTPs regularly and monitors the developments of the Supply Chain Initiative (a voluntary EU level mechanism set up by operators in the food supply chain to tackle UTPs). 4

In June 2016, a European Parliament resolution, which garnered strong support, called on the Commission to act in the area of UTPs. 5  

In December 2016, the Council of Ministers invited the Commission to undertake, in a timely manner, an impact assessment with a view to proposing an EU legislative framework or other non-legislative measures to address UTPs. 6 The Council also invited the Commission to create legal clarity for a better understanding and use of agriculture-specific derogations from competition law by producer organisations, including cooperatives. Similar requests concerning producer cooperation have been made by the European Parliament (see Annual Competition Report 7 and European Parliament's Omnibus amendment proposals of July 2017). Last but not least, the Council called on the Commission to address, in a reasonable timeframe and in a coordinated way, the issue of lack of transparency and information asymmetry at all levels of the food supply chain.

In order to summarise and assess the available evidence and gather necessary supplementary data and consequently to be able to determine the need for EU action, this initiative will include stakeholder consultations and an impact assessment. The outcome can be presented in early 2018 in the form of a legislative or non-legislative proposal and the said impact assessment. 

Problem the initiative aims to tackle

The initiative aims to address three issues that have a bearing on the functioning of the food supply chain in respect of agri-food products and the bargaining position of operators in the chain:

unfair trading practices;

market transparency; and

one specific possibility for farmers to cooperate.

UTPs may be at odds with efficient markets and workable competition. Some view them as symptoms of market imperfections which are liable to weaken the overall efficiency of the supply chain. UTPs can negatively affect operators who would otherwise be commercially viable.  They may also cause entry barriers to markets 8 and create uncertainty, stifle innovation and cause underinvestment in the food supply chain and damage to consumers in the long run. 9  Weaker operators in the food supply chain, including farmers, are vulnerable due to their resource limitations, asset specificity and high switching costs.

Consultations have shown that the food supply chain is particularly prone to trading practices that deviate from fair commercial conduct. 10  Small operators in the chain, including farmers, usually have little bargaining power and are more likely to be victims of UTPs. Surveys among farmers and other suppliers in the chain suggest that a majority of the respondents had been subject to UTPs. 11

UTPs have given rise to specific legislation – including different enforcement modalities - being 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).

There is EU legislation which addresses unfair practices in relation to business-to-consumer transactions (see Directive 2005/29/EC on unfair commercial practices and Directive 93/13/EEC on unfair terms in consumer contracts). However, this does not cover UTPs in business-to-business transactions. 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 (see Article 168 Common Market Organisation Regulation (EU) No 1308/2013 (CMO regulation)) and payment deadline rules in business-to-business transactions (see Directive 2011/7/EU on combating late payment in commercial transactions).

The level of market transparency along the supply chain is uneven. While price transparency, for example, is high concerning producers’ prices, there is considerably less information available on prices applied at the downstream stages of the supply chain, in particular as regards its middle tier (processing). This creates information asymmetries that contribute to farmers' weak position in the chain and thus to their limited ability to take well-informed production and marketing decisions.

As regards producer cooperation, EU agricultural legislation encourages farmers to cooperate, thereby providing a counterweight to their often concentrated downstream (and upstream) partners. The Treaty on the Functioning of the European Union (TFEU) recognises the specific status of the agricultural sector with regard to the application of competition rules to cooperation among farmers. In this context, there could be a case to extend a provision in the CMO regulation which applies in the sugar sector and which allows voluntary value sharing agreements negotiated by groups of agricultural producers as it can help make them be more sustainable on markets.

Subsidiarity check (and legal basis)

EU Member States addressing UTPs through regulation have chosen a variety of paths. These include establishing 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. Enforcement is also addressed in different ways including through judicial redress on the basis of contract law, actions by competition authorities regarding fair trading or economic dependency, administrative redress or ombudsman-based systems. UTP legislation in Member States is complemented by voluntary codes including resolution mechanisms in particular the Supply Chain Initiative.

The relevant economic conditions for agricultural operators under the CAP are shaped, pursuant to Article 40 TFEU, by the regulation establishing a common European market organisation (CMO regulation). The CMO regulation covers important aspects such as rules on production, trade and competition relevant for agricultural producers. The common organisation shall exclude discrimination between producers pursuant to Article 40 TFEU.

While different national approaches testify to UTPs being widely perceived as an issue they also imply that different rules are applied to operators in the single market. The lack of common rules - including enforcement rules – thus translates into dissimilar conditions for business.

EU cross-border trade is an important characteristic of the food supply chain. 70% of the total annual EU exports of agricultural products are exported to another EU country. For illustration, cross border trade in food and drink (broader than agricultural products) among EU Member States has risen by 72% in value over the last decade, and accounts for about 20% of the total production at EU level. UTPs in the food supply chain therefore have a transnational dimension. Different national rules may encourage practices of choosing the applicable law by a stronger party to the detriment of the weaker operator. They may create disincentives for businesses to engage in cross-border transactions.

The information available on actual enforcement of UTP rules shows that smaller operators who depend on the business relationship (e.g. tend to be in direct and long-standing contractual relationships with their customers) do often not consider submitting complaints to courts as a viable avenue to seek redress against UTPs as they fear retaliation, for instance in the form of the discontinuation of the commercial relationship they depend on (so called ‘fear-factor’).

A common EU framework could also step up the exchange of information and cooperation among Member States' enforcement authorities, enabling them for instance to share best practices in addressing UTPs.

Framework legislation could encourage stakeholders' ‘buy-in’ to voluntary initiatives. For example, farmers do currently not participate in the Supply Chain Initiative due to perceived shortcomings concerning enforcement. Despite this, the Supply Chain Initiative continues to be helpful, and the Commission should oversee and promote its further improvement to enhance its positive impact on the business environment.

Operators in the food supply chain, including farmers, could therefore benefit from common minimum UTP requirements in the EU.

A framework approach could accommodate national differences by giving Member States leeway to make regulatory choices not governed by the framework, provided that these choices are compatible with EU internal market and competition rules.

Member States collect market-relevant data. However, measures aimed at increasing market transparency along the food supply chain presuppose an increased degree of availability of certain data as well as a degree of standardisation across Member States as regards the definition, collection, reporting and presentation of these data.

Rules on producer cooperation and agricultural derogations from competition law are laid down in the CMO regulation. One example is the possibility of entering into value sharing arrangements in the sugar sector. Extending that provision to other agricultural sectors would presuppose a change in the CMO regulation.

The legal basis for measures to tackle UTPs in the food supply chain will ultimately depend on the policy option retained: it will be Article 43 TFEU (‘common agricultural policy’) either alone or, depending on the option chosen, in combination with Article 114 (‘internal market’). The legal basis for measures concerning market transparency will be Article 43 TFEU. The legal basis for the rules on producer organisations that relate to competition law will be Article 43 TFEU in conjunction with Article 42 TFEU.

B. Objectives and policy options

The initiative could cover the following three areas:

unfair trading practices; 

market transparency; and

a specific rule concerning producer cooperation (value sharing agreements).

As regards producer cooperation, at this stage the Commission considers that a broad review of the effectiveness and clarity of producer cooperation rules under EU agricultural and competition law as suggested by the AMTF should be undertaken in the context of the ongoing discussions concerning the CAP after 2020 and not as part of this initiative.

(I) Unfair trading practices

The objective of policy action in the field of 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. Legal certainty would be enhanced.

Option (1)

The baseline option would be to keep the status quo. UTPs would continue to be subject to Member States' varying national legislation – to the extent it exists. The Supply Chain Initiative would continue to operate and be further developed.

Option (2)

EU-wide non-legislative guidelines and recommendations to Member States on how to tackle UTPs in the food supply chain would be issued. This could foster a common understanding of what practices are considered to be unfair and should not be applied.

Guidelines and recommendations could also clarify to Member States the core elements of effective national enforcement mechanisms, and help address the 'fear factor'. Furthermore, they could be used to promote regular exchanges of information and best practices between the national authorities.

Option (3)

EU framework legislation would be introduced to protect weaker operators in the food supply chain including farmers concerning transactions involving agricultural products (listed in Annex I TFEU 12 ). The perishability of products could be one criterion to take into account. Specific manifestly unfair trading practices could be prohibited and common minimum enforcement standards could be introduced at EU level to complement national legislation and the Supply Chain Initiative. The scope of this legislation, both in relation to the UTPs prohibited and minimum enforcement requirements, could be based on the approach outlined in the AMTF's report. The rules would protect individual farmers, SME processors and their associations, also giving them the right to insist on a written contract in transactions with non-SME business partners.

This option could also cover coordination mechanisms for Member States’ enforcement authorities and annual reporting.

Option (4)

Minimum framework legislation for the whole food supply chain would be introduced. It could cover common general criteria for what is to be considered a UTP in the food supply chain and would thus give Member States the leeway to address national differences when applying the general criteria in their national systems. It could require every Member State, on the basis of the general principles, to help stakeholders draw up a 'code of conduct' and make the compliance with this code mandatory. Combining 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.

Legislation could further contain binding minimum criteria for national enforcement as under Option (3).

(II) Producer cooperation

The objective of policy action involving producer cooperation would be to extend the sectoral scope of a tool, which has proved useful in the sugar sector, to all other agricultural sectors, namely the value sharing mechanism. Legal certainty as regards the use of such arrangements would be enhanced.

Value-sharing mechanism

In the sugar sector there is a possibility for operators to incorporate value sharing mechanisms in their ‘agreements within trade’ on a voluntary basis (see Article 125 CMO regulation and Commission Delegated Regulation (EU) 2016/1166 of 17 May 2016). 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.

Option (1)

Maintain current practice, that is to say not extend the relevant rule (baseline scenario).

Option (2)

Allowing farmers to collectively agree, on a voluntary basis, on value sharing mechanisms with a downstream operator in all agricultural sectors, along the same lines as foreseen in the sugar sector.

(III) Market transparency

The objective of action in this area would be to increase market transparency, thereby improving the position of farmers in the food supply chain. Increased market transparency could strengthen farmers’ bargaining power and help them take well-informed production decisions. It could also enable the Commission and Member State authorities to design tools that communicate information on the distribution of the added value generated in the supply chain to consumers.

Option 1

The baseline scenario would consist of keeping the status quo. The Commission already collects and disseminates certain market information (see Commission Regulation (EC) No 792/2009). The communication tools it uses include the market observatories and so-called dashboards which are available online.

Option 2

Provisions would be adopted to enable data on key products to be collected at more levels of the food supply chain. This would shed light on relevant market information at the levels of the supply chain downstream of primary production. For instance, data on the prices at which processors sell certain key products or product groups could increasingly be standardised, collected and disclosed in a duly aggregated format. A useful step in this direction could be to extend the current possibilities for collecting market data in Member States, for example the possibilities provided for under Commission Regulation (EC) No 792/2009 on notifications.

C. Preliminary Assessment of Expected Impacts

Without prejudging the impact assessment and the options eventually retained, the following sections list possible impacts on economic, social and cross-cutting issues of the options other than carrying on with the status-quo.

Likely economic impacts

The initiative is expected to help strengthen the economic position of farmers and SME processors in the food supply chain in the EU. In particular, it should help make them more resilient to difficult market conditions, including stark differences regarding the levels of concentration in the chain. Their ability to defend themselves against UTPs would be enhanced and the information asymmetry in the chain reduced to their advantage. The initiative is expected to improve the efficiency of the whole supply chain by:

helping to combat UTPs which are liable to undermine trust and impair the supply chain’s overall efficiency;

improving market transparency.

It may have the following specific impacts:

putting the food supply chain on a fairer, sounder and more transparent footing.

helping increase disposable farm income and investment possibilities in line with the CAP objectives of Article 39 TFEU, thereby making the sector more resilient to price volatility;

avoiding the chilling effect of UTPs on the investment climate which affects smaller operators in the supply chain;

helping make the farming profession more attractive to newcomers;

facilitating business activities in the EU single market by introducing a UTP (minimum) framework for the food supply chain across Member States;

enhancing a specific producer cooperation possibility (value-sharing) that would strengthen the position of farmers in the food supply chain.

A common element of the measures under consideration is that they do not have significant direct implications for the EU budget as they are rules-based. However, they may imply costs for Member States and operators, for instance due to market transparency-related reporting or enforcement requirements or compliance costs with UTP legislation.

Likely social impacts

The initiative is expected to:

make farming more viable;

boost rural employment and inclusive growth in rural areas;

encourage the territorially balanced development of rural areas of the EU by strengthening the economic fundamentals of the supply chain, in particular farming and small-scale processing of agricultural products, activities which tend to be situated in rural areas and still often provide their socio-economic backbone;

encourage farmers to join the Supply Chain Initiative, thereby increasing its potential for early and non-conflictual dispute resolution, and in general reinforce other possible voluntary initiatives by stakeholders;

help to more fairly distribute the added value generated by the supply chain.

Likely environmental impacts

The planned measures are not expected to have a significant direct impact on the environment. However, farmers who are subject to less pressure from UTPs and who can cooperate to strengthen their standing in the chain would presumably have more margin to produce in sustainable and climate-friendly ways, prevent food losses and food waste and deliver on the CAP’s environmental goals.

Likely impacts on fundamental rights

The planned measures are not expected to have any impact on fundamental rights.

Likely impacts on simplification and/or administrative burden

The initiative may also involve the need - depending on the Member State concerned - to allocate or re-configure the competent authorities’ powers to enforce UTP rules.

Extending market transparency could imply new reporting obligations for certain operators. It could also imply increased data collection demands from Member States’ authorities.

D. Data Collection and Better Regulation Instruments

Impact assessment

An impact assessment will be prepared to support this initiative. This assessment will take account of the data already available and gather new evidence, including through stakeholder consultation. It will include a description of current implementation, its flaws, possible improvements and the EU value-added of this initiative. Economic, social and other impacts of the options will also be assessed.

Data collection

Consultations are foreseen which target a broad range of food supply chain stakeholders across the EU that have an active interest in the functioning of the food supply chain and might be impacted by EU action on UTPs and market transparency. These include: farmers, processors, retailers and consumers, and their respective representative associations, as well as public authorities in Member States.

Different forms of collecting new information are planned, including a public consultation, stakeholder meetings, and expert workshops. Dedicated workshops can be programmed — if needed — to deepen specific issues concerning relevant aspects of the initiative to improve the food supply chain. Questionnaires can be used to consult Member States about aspects that are related to national policies or law. Relevant national authorities, such as national fair trading and competition authorities can also be consulted.

The food supply chain issue was addressed in five questions of the 2017 public consultation on modernisation and simplification of the CAP. More specifically, the Commission asked whether improving farmers’ position in the food supply chain, in particular with regard to UTPs, was a proposition stakeholders would agree with. It also asked about the need for improving transparency in agricultural markets. The AMTF, which worked during 2016 on the question of the position of producers in the food supply chain, carried out an open internet-based consultation on the specific themes it was discussing. This covered UTPs, producer cooperation and market transparency. 13 Over the last couple of years the HLF, established by the Commission in 2010, had extensive exchanges of views on UTPs with all the relevant stakeholders. The HLF is currently overseeing the development of the self-regulatory measures. The 2014 European Commission communication on unfair trading practices in the business-to-business food supply chain was in part based on a survey of legal experts on UTPS in the different Member States. The 2013 Commission Green Paper on unfair trading practices in the business-to-business food and non-food supply chain in Europe gave rise to a public consultation resulting in comprehensive feedback by stakeholders. 14  Under the REFIT programme, a comprehensive evidence–based policy evaluation ('Fitness Check') of Regulation (EC) No 178/2002 on General Food Law is currently carried out covering the entire food chain, including feed. The results obtained can inform the present initiative.

Member States and private studies and experience in particular in the fields of UTPs and market transparency will also be relied on to complete the picture.

Consultation strategy

An open public online consultation will be carried out in the 3rd quarter of 2017. It will focus on obtaining an up-to-date perception of stakeholders as regards UTP governance and market transparency including the possible added value of EU action and the reasons for it. The consultation will be announced on the Public consultation website.

Further consultations focusing on specific themes can take place in the HLF and in the standing civil dialogue groups on the common agricultural policy (including civil society representatives).

Ad hoc meetings with interested parties may be arranged, depending on interest.

Will an implementation plan be established?

Whether an implementation plan will be established depends on the policy options retained. If a legislative approach is taken, an implementation challenge will be the designation of competent authorities in Member States and, where necessary, their training to adjust to any substantive or enforcement changes the EU measures will entail. Also, national competent authorities could be tasked with preparing annual implementation reports (Member State action). Where necessary EU instruments should foresee transition periods and be mindful of the necessary resources at Member State level to be made available for the measures to be effective. Commission accompanying actions could cover the creation of a forum enabling exchange of experience and best practice among national competent authorities in the field of UTPs. An example of the functioning and benefits of such a network in a different area of law is the European Competition Network. 15