Opinion of the European Economic and Social Committee on the ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions — Food prices in Europe’

On 9 December 2008, the Commission decided to consult the European Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – Food prices in Europe

The Section for Agriculture, Rural Development and the Environment, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 2 September 2009.

At its 457th plenary session, held on 4 and 5 November 2009 (meeting of 5 November), the European Economic and Social Committee adopted the following opinion by 75 to 5 with 3 abstentions.

1.1. Work to improve the food supply chain and make it more efficient and competitive should not be aimed at achieving low food prices. Doing so would keep the food chain on the wrong track, as it is today. We need to ensure that the price/value ratio remains at a realistic level. Anticipation of low prices in the production chain ultimately restricts the investment and innovation capacity of agro-food suppliers as well as consumer choice, and the Commission must take these factors and their side effects into account in the medium- and long-term and abandon its exclusive focus on the immediate benefits of low prices. It would be wrong to assert that low food prices are in consumers' interest; rather, consumers benefit from realistic prices ensuring the quality, quantity and service which they expect. However, an approach which aims to reduce the amplitude of volatility of prices is an appropriate one, enabling greater reliability and predictability in the food supply chain.

1.2. The European Union has an interest in ensuring that, in the long term, consumers enjoy the benefits of safe foodstuffs. For this to happen, a high degree of self-sufficiency is necessary. In turn, sustainable agriculture can only be ensured by means of research and development, innovation, and technological development, and for this to happen, CAP resources are essential. However, access to such resources must be organised in such a way as to encourage adaptation to market conditions, while making it obligatory to provide information and cooperate, and taking rural development issues into detailed consideration.

1.3. The scope of action can only be expanded if social consultation takes place on the broadest possible basis. For each of the areas in which action is to be taken, background analyses must be carried out, a precise action plan drawn up, and competences and responsibilities clearly defined. All of this is vital, given that any measure relating to food prices affects a complex interplay of factors. Food is the main force which holds society together; it is of strategic importance, and enjoys considerable consumer trust. In view of this, production conditions must be organised in such a way so as not to threaten long-term sustainability.

1.4. It is not possible to restrict investments in basic commodities, which usually take place via stock exchanges. However, a means must be found of mitigating the effects of factors which do not reflect actual demand, as these disrupt supply chains of agricultural products. Although the EU is aware of its responsibilities with regard to food supplies to developing countries, it must not forget that its main task is to ensure supplies to its citizens of a full range of safe foodstuffs, by reducing dependence on world markets, and preserving autonomy.

1.5. The EESC supports the initiative of setting up the High Level Group (HLG) on the Competitiveness of the Agro-Food Industry which was set up by Commission Decision of 28 April 2008 (2008/359/EC). The EESC looks forward to the results of the work of the HLG. To achieve as much as possible stability of agro-food markets should be one of the most important objectives of the work of the HLG.

2.1. Due to faster rises in the prices of agricultural products in the second half of 2007, food retail prices also increased significantly. The Commission responded with its Communication on ‘Tackling the challenge of rising food prices – Directions for EU action’ (COM(2008) 321 final).

2.2. The Commission feels that identifying and resolving regulatory and competition-related problems in the functioning of the food supply chain is key to achieving this objective. The Communication, which comprises five chapters, analyses the situation and recommends measures to solve the problems.

2.3. According to the Communication, higher agricultural commodity prices resulted from a combination of structural and temporary factors. Structural factors such as global population growth, rising incomes in emerging economies and the development of new market outlets have strengthened world demand.

2.4. ‘From August 2007 until July 2008 food price inflation (excluding alcohol and tobacco) accounted for around 1,0 percentage points (pp.) of total inflation.’ Price trends were characterised by, among other things, differences between rises in the prices of processed and unprocessed foods, due to the ‘composition’ effect.

2.5. The Commission predicts that food price inflation and the contribution of food prices to headline inflation will decline over the next two years.

2.6. The Commission feels that restrictions on agricultural exports imposed by some countries last year did more harm than good because they cut off market signals.

2.7. Since the beginning of 2006 there has been a surge in investment flows into these markets, as reflected in the total number of outstanding futures contracts held by market participants.

2.8. The Communication includes a table summarising practices giving rise to competition concerns, as follows:

2.9. Based on its analysis, the Commission proposes a roadmap to improve the functioning of the food supply chain, consisting of four main components.

2.10. The Commission hopes that the recommendations from the High Level Group on the Competitiveness of the Agro-Food Industry set up in spring 2008 should help the food supply chain to improve its competitiveness.

2.11. In order to address potential anti-competitive practices identified as concerns in Chapter 4, the Commission will in the context of the European Competition Network continue dialogue with national competition authorities, so as to ensure coherent and well-coordinated enforcement of competition rules throughout the EU, to the benefit of European consumers.

2.12. In connection with reviewing at national and/or EU level regulations which are potentially problematic for the functioning of the food supply chain, the Communication mentions the following rules and practices:

2.13. The Commission will examine, together with the regulators of commodity markets and in close contact with other non-EU regulatory authorities (in particular the US where the most important exchanges are located), what measures contributing to a reduction in price volatility in agricultural commodity markets could be taken.

2.14. On the basis of this work programme and related measures, the Commission will examine the possibility of taking further action and proposes that the European Council revisit this matter in December 2009.

3.1. The structural factors which caused the rise in prices of agricultural products will remain in place over the medium term; however, fluctuations over the past two years suggest that the market for agricultural products will have to come to terms with increasingly volatile prices. The current economic crisis has merely dented the growth in demand on global markets, and as a result we could see a repeat of the processes which started in mid-2007 at any time, making agricultural markets even less predictable. Besides, adjusting to the demand caused by speculative manipulation of prices – which does not reflect real demand – is impossible, as this would require a degree of flexibility incompatible with the characteristics and potential of agricultural production.

3.2. The European Union is aware that fluctuations in agricultural prices affect not only the entire agricultural sector, but also – via food prices – all consumers. Abrupt and major fluctuations mean that we need to rethink the position of the EU's agricultural sector. The High Level Group on the Competitiveness of the Agro-Food Industry is an appropriate forum for this. In this context, we need to clarify: (1) the EU's agricultural future; (2) the future position of agriculture in EU policies; we also need to consider (3) how to deal with the consequences of opening up markets; and (4) how to correct imbalances in the relations within the food supply chain.

3.3. Although no progress has been made on developing the territorial specialisation within the EU since the CAP was launched, there are clear signs of this phenomenon on international markets. Due to the gradual opening of EU markets to goods from third countries, EU agricultural producers are being forced to compete on a playing field which is not level. As a result, European producers are losing ground on markets. In the medium turn, this development could seriously threaten rural economy in Europe. In view of this, the EU can only pursue an open trading policy if various forms of financial support for agricultural producers remain in place and provide sufficient incentives to maintain production levels.

4.1.1. In the post-crisis period the growth in demand for agricultural products will probably overtake growth in supply once again. As a result, these products are once again likely to prove more attractive for venture capital. This could result in fluctuations similar to those experienced over the past two years, if variations in agricultural prices generate higher yields than those offered by other financial market constructions. Given post-crisis economic conditions, the chances of this happening are less than in 2007. Nevertheless, in the medium term we need to prepare for continuing volatility of prices.

4.1.2. As the European Parliament has emphasised in a Resolution of 26 March 2009 (2008/2175(INI)), an ever smaller share of retail food prices goes to agricultural producers and food processors. In view of this, it is clear that price fluctuations at the beginning of the supply chain will only have a limited and delayed impact on retail prices.

The rise in retail food prices particularly affects those who spend a large part of their income on food. This phenomenon is closely correlated to the level of economic development in a given country, which is why rising food prices had the greatest impact on inflation in the EU's new Member States. In these lower-income countries, food can account for up to 40-50 % of total household expenditure.

4.1.3. Over the next few years, food prices are likely to remain above the average for the 2002-2006 period, but below late-2007 levels. At the same time, prices will remain extremely volatile. One of the unwelcome changes resulting from the past two years is that prices have become more sensitive to market information. Given that we are likely to see a growth of information on both supply-side and demand-side factors, prices will continue to fluctuate. The media have an important role to play here too, as effective media give markets instant information on everything which happens in the world.

4.1.4. EU agricultural producers must prepare to meet a constantly growing demand for food. Both the quantity and quality of EU agricultural production must be improved. However, the CAP bears a significant responsibility for ensuring that the gradual opening up of EU markets does not undermine the competitiveness of European agro-food sectors. The EU needs a long-term strategy for agriculture, defining the extent to which the Community should aim for self-sufficiency in supplies of various products. However, we need to accept that in the medium term, the EU will need to import numerous products.

4.2.1. The amount of capital from various pension, investment and sovereign wealth funds on international financial markets is constantly growing, by means of swaps, banks and multinational conglomerates. Given their size, the latter exert a considerable influence on the markets where they operate. Having failed to achieve satisfactory yields on conventional investments, they have turned to commodity markets.

4.2.2. Given the speculative nature of high-risk investments, they have an impact on prices over short term but not in the long term. Agriculture needs to consider this development as well as developments on financial markets in general. Products on financial markets which result in significant fluctuations in agricultural product prices and do not reflect actual product flows have an unfavourable influence on price movements in the physical markets.

4.3.1. As the Commission also points out in its Working Document on the subject (SEC(2008) 2972), there is a close correlation between events on agricultural markets over the past two years and disruptions to the functioning of the food supply chain. The distribution of agricultural product prices over the supply chain closely reflects the capacity of each link in the chain to defend its own interests.

4.3.2. Competition authorities intending to evaluate the anti-competitive effect of the consolidation process in the food supply chain could find themselves in quite a difficult position. It is important to tackle the anticompetitive practices and competition-related problems highlighted by the Commission that occur between agro-food suppliers and the trading stage of the production chain, in order to adapt conditions to the actual economic and market situation. As the Commission notes, it is important that competition rules are enforced in a coherent and well-coordinated way across the EU. The food supply chain is sufficiently fragmented to ensure that individual transactions do not appear to have an anti-competitive impact from the perspective of the single market. The practices discussed in the document show that, for a particular country and product, a given degree of concentration can have a seriously anti-competitive effect. The emergence of processing capacities which can, given economies of scale, achieve a dominant position on a particular product market, could reduce consumer choice and push small and medium enterprises out of the market. This has become all the more so since private label brands began to exert a significant influence. At the same time, the current dominance of price competitiveness in companies' commercial policies can result in products of lower nutritional value. Although the level of food safety is growing, the substitution of natural ingredients by artificial ones of lower nutritional value means that foodstuffs are increasingly unable to meet consumers' needs for high-quality nutrition.

4.3.3. We would suggest that reimbursement methods used by large retailers should be added to the list of anti-competitive practices set out in Table 1. Such methods make it possible to decouple, on the one hand, suppliers' prices and real costs, and on the other prices paid by retailers and consumers. As a result, reference prices are established at unrealistically low levels, well below what could be achieved through increased efficiency. Anticompetitive practices such as cartels and exclusive supply agreements are clearly unacceptable, as is use of a dominant position to unilaterally impose conditions on suppliers. At the same time, this double profit margin technique - retailers enjoy considerable profit margins not only on shoppers but also on suppliers, due to refunds - obscures commercial profit margins, and helps to distort the distribution of income from the food supply chain. This is an anti-competitive practice in that it requires suppliers to adapt to a price which bears little relation to the costs of production.

4.3.4. The EESC fully agrees with the concerns expressed by the Commission concerning some anticompetitive practices that can alter the functioning of the food chain. In this connection, it seems clear that the imbalance of power between producers, processors and retailers needs more attention. The concentration of power downstream puts retailers in a dominant position vis-à-vis producers and processors, allowing undesirable abusive practices. In view of this, our approach to consumer welfare should not only focus on achieving lower prices in the short term, but also on the long term, while taking into account both direct and indirect effects, in order to prevent financial difficulties for suppliers, a lack of innovation, reduced choice, and even – in the long terms – higher prices.

Ensuring an appropriate distribution of remuneration at each stage within the supply chain is a very complex task, various aspects of which require extensive interference in market processes. However, such measures are indispensable in enabling European foodstuffs to improve their competitiveness on a real basis.

5.1.1. The EESC welcomes the Commission’s efforts to bring transparency to the market. A better understanding of how the market works and the role played by the different links of the chain will always be useful. It is very important for a detailed analysis of this chain to be carried out so that authorities can take appropriate measures where necessary if there are flaws or disruptions in the chain. The EESC therefore absolutely supports the course of action proposed by the Commission in its communication and will cooperate fully in its implementation.

Nevertheless, the Commission should bear in mind that conditions vary from one sector or even country to another, and therefore the factors determining prices differ, and are dynamic rather than static.

All the efforts made by the Commission to design and set up a permanent tool to monitor food prices and income distribution across the chain should be based on these facts, and its results should viewed as a reference rather than infallible truth.

5.1.2. The food supply chain can only be made more competitive if there is significantly closer cooperation within the chain. Indeed, the very term ‘chain’ suggests that each link only cooperates with directly neighbouring links, whereas true efficiency can only be ensured if all work together in the common interest. If we really believe that consumers' needs should, via products, determine the conditions under which the food supply chain functions, those within the chain need to engage in serious thought.

5.1.3. The European Union must accept the fact that many of the factors discussed in the Commission's Communication cannot be dealt with by competition policy measures. Harmonisation of competition legislation and cooperation between competition authorities are only effective in dealing with conventional cases of anti-competitive practices (such as cartels and misleading adverts). Experience shows that competition law is not a suitable means of dealing with the situations listed in Table 1, due to the complex interdependence of those involved. The influence of certain retail chains on the market does not justify a response by competition authorities at Community level; however, it is significant that from a supplier's perspective, dependence on individual retailers and purchasing centres has become a decisive factor in their survival on the market. As a result, cooperation between retailers and suppliers has become one-sided in nature.

At the same time, heavier sanctions under competition law could effectively discourage practices which involve misleading consumers.

Over the next few years, work on revising consumer protection will continue. This has to do with the quality of foodstuffs arriving in the single market from third countries due to more open markets, and with the conditions under which such foodstuffs are produced. Among other things, the growth in imports reflects a focus on prices and on paying less for food. However, this goes hand-in-hand with increased risks in terms of lower food safety and consumer protection, given that many imports come from regions where food production culture is at a much lower level than in Europe.

5.1.4. There is not much scope for interference in retailers' commercial policies. Nevertheless, we should identify all possible steps enabling a shift in the focus of large retailers' commercial policies away from cutting prices (or in some cases, achieving the lowest price). This focus has to answer for the currently unbalanced distribution of income within the food supply chain, and it also affects consumer attitudes.

5.1.5. The European Union can only act effectively to correct malfunctions in the food supply chain and make it more efficient if it can draw on the requisite information. Another important task of the EU is to raise awareness among European consumers so that they can make more informed decisions. Consumers are the key to the survival and sustainable development of European agriculture and the food industry. Consumer awareness in Europe could help to put into practice one of the Community's fundamental principles, preference for Community products – a principle which has inevitably been sidelined during GATT and WTO negotiations.

When developing a monitoring instrument, we must incorporate incentives for market operators to provide reliable information into the system. For example, this could involve tax inspections, tax breaks and subsidies. Ensuring transparency on a voluntary basis is not a real option.

5.1.6. In order to mitigate the negative effects of speculation, we should consider the possibility of regulatory steps to ensure that only transactions on stock markets which are backed by actual guarantees in goods are permitted, in contrast to current market practices which allow very limited flows of goods to exert a considerable influence on market prices, which in turn translates to price fluctuations on the physical market.

Reducing the number of intermediaries between agricultural producers and consumers could help the chain to function more effectively. Following the example of programmes to distribute milk and fruit to schoolchildren, direct relations between producers and consumers should be encouraged. One of the most obvious ways of doing this is to encourage traditional farmers' markets. This would help to preserve rural lifestyles and to keep small and medium farms in business, besides delivering numerous other benefits.

Brussels, 5 November 2009.

The President of the European Economic and Social Committee

Mario SEPI