A — 

On 5 September 1978 the plaintiff in these preliminary ruling proceedings, on which I am to give my Opinion today, applied for the release into free circulation of a consignment of whole-milk powder with a fat content of 24.5% imported from France (and classified under subheading 04.02 A II (b) 2 of the Common Customs Tariff). Monetary compensatory amounts were payable on that consignment at the rate laid down in Annex 1 to Regulation (EEC) No 1036/78 (Official Journal 1978, L 133, p. 1), namely DM 16, plus DM 0.65 for each 1% of fat content, per 100 kg.

It should immediately be stated that, as whole-milk powder is not a product covered by intervention arrangements within the meaning of Article 1 (2) (a) of Regulation (EEC) No 974/71 (Official Journal, English Special Edition, 1971 (I), p. 257) adopted in connection with the common organization of the agricultural markets, those charges were determined on the basis of the assumption that the price of whole-milk powder depends, according to Article 1 (2) (b) of Regulation No 974/71, on the price of skimmed-milk powder and butter (products which, in addition to certain types of cheese, are not covered by intervention arrangements. under the organization of the market for milk and milk products). In such cases, Article 2 (2) of Regulation No.974/71 provides that the compensatory amounts are to be equal to the incidence, on the prices of the product concerned, of the application of the compensatory amount to the prices of the product referred to in paragraph 1 (that is to say, products covered by intervention arrangements) on which they depend. Moreover, it should be mentioned in that connection that, as a result of the adoption of Regulation (EEC) No 1824/77, 50% of the processing costs incurred in the manufacture of skimmed-milk powder and butter were to be taken into account (in proportion in the case of each product to the fat content and other components of the whole-milk powder); those costs were originally taken into account in full but the proportion was subsequently reduced to 25% by Regulation No 1245/83 and, since the adoption of Regulation (EEC) No 900/84, they have not been taken into account at all.

The plaintiff considers that the fixing of monetary compensatory amounts for whole-milk powder is fundamentally incompatible with the abovementioned provisions of Regulation No 974/71 (namely Article 1 (2) (b) and Article 2 (2)) and also with Article 1 (3) of that regulation (as amended by Regulation (EEC) No 2746/72, Official Journal, English Special Edition 1972 (28-30 December), p. 64) which reads as follows:

‘Paragraph 1 shall not apply where application of the monetary measures referred to in that paragraph would lead to disturbances in trade in agricultural products.’

In the plaintiffs view, there is no competitive relationship between whole-milk powder and skimmed-milk powder and that is the decisive factor according to the rules and the relevant case-law. The price of whole-milk powder does not in fact depend on the price of skimmed-milk powder, just as, in the case of the milk-fat content of whole-milk powder, there is no price dependence on butter. Instead, it should properly be recognized, according to the plaintiff, that whole-milk powder and its components (skimmed-milk powder and fat) have different markets and that their respective prices are determined by different factors. Alternatively, the plaintiff argues that it is on no account permissible in calculating the monetary compensatory amounts for whole-milk powder to take into account the processing costs arising in the manufacture of skimmed-milk powder and butter. It maintains that since, as is clear from the sixth recital in the preamble to Regulation No 974/71, the compensatory amounts should be limited to the amounts strictly necessary to compensate for the incidence of the monetary measures on the prices of basic products coverd by intervention arrangements, the incidence within the meaning of Article 2 (2) of that regulation can be measured only by reference to the effects of the compensatory amount on the price of the raw material.

However, those arguments did not prevail in the proceedings instituted by the plaintiff before the Finanzgericht [Finance Court] Baden-Württemberg. Accordingly, it lodged an appeal on a point of law to the Bundesfinanzhof [Federal Finance Court] against the lower court's decision.

The Bundesfinanzhof considers that doubts may legitimately be raised with regard to the validity of Regulation No 1036/78, particularly because in its view it is questionable whether the price of whole-milk powder is actually dependent on the price of skimmed-milk powder and butter (the only two products which are relevant in this connection and which are covered by intervention arrangements under the common organization of the market in milk and milk products — Regulation (EEC) No 804/68, Official Journal, English Special Edition, 1968 (I), p. 176). Therefore, by order of 11 December 1984, the Bundesfinanzhof stayed the proceedings and referred the following questions to the Court of Justice for a preliminary ruling under Article 177 of the EEC Treaty:

B — 

My opinion on those questions, in the light of all the information at the Court's disposal, is as follows:

(a)

With regard to the first of the requirements mentioned earlier, namely that the price of whole-milk powder should depend on the prices applicable to products covered by intervention arrangements, it must be acknowledged — and the plaintiff has laid particular emphasis on this point — that, on account of the diverse uses to which they can be put, there is no direct competitive relationship between whole-milk powder, on the one hand, and products covered by intervention arrangements, in particular skimmed-milk powder, on the other. That was established by the Court, in connection with a similar statement made by the Commission in Case 28/76, ( 1 ) in paragraph 26 of its judgment in Case 8/78: ( 2 )

‘As to the complaint of the plaintiff in the main action concerning the substitution of skimmed-milk powder supplemented by butterfat for whole-milk powder, it is to be noted that the argument concerning “substitution’ confirms the Commission's statement that they are two different products which are not usually in competition with one another.’

However, that is not the only decisive factor in this case. That may be inferred from the judgment in Case 95/80 ( 3 ) in which the Court stated that price dependence for the purposes of Regulation No 974/71 may result from, inter alia, a relationship of competition between a given product and other products forming part of the same organization of the market (paragraph 9 of the decision). Yet it is very evident — as the Commission has noted — that there is an unmistakable parallel trend in prices for whole-milk powder and in prices for skimmed-milk powder, which points to the existence of price dependence, as opposed to a clear divergence between the curves (see Case 131/77 ( 4 ) where such divergence was treated as evidence that there was no price dependence between the products). That is clear from the tables submitted by the Commission which relate to the years 1976 to 1983. The same conclusion can be drawn from the graphs submitted by the plaintiff which cover the period from 1973 to 1976 and which show the trend in prices in certain Community countries and on the world market; the plaintiff can hardly dismiss that trend merely with the explanation that an increase in the price level as a whole is often followed by an increase in the price of whole-milk powder.

There is, of course, another consideration which is even more important, not least because the plaintiff has complained that the Commission has merely shown the price trends at certain times and has failed to give a comprehensive picture.

A particular feature of the organization of the market in milk and milk products is that the basic product, whole milk, does not lend itself to intervention arrangements. Accordingly, milk producers are assured of a reasonable income through intervention arrangements mainly for butter and skimmed-milk powder. The purpose of such arrangements, as was expressly stated by the Court in its judgments in Cases 28/76 ( 1 ) and 8/78, ( 2 ) is to contribute towards the attainment of the target price for milk. It may be said, therefore, that the price of whole milk depends on the prices of the abovementioned products covered by intervention arrangements (skimmed-milk powder and butter) and is largely influenced by those prices even though there is still scope for the operation of market forces which, as the plaintiff has pointed out, results in fluctuations, even on a regional basis, of the price actually paid out for milk. Likewise, it may also be said, however, that the price of whole-milk powder is strongly influenced by the price of milk. It can scarcely be otherwise, in view of the fact that the price of milk represents a substantial part of the costs inherent in the manufacture of whole-milk powder (FF 805 out of FF 1035 = approximately 80% — see in that connection the calculation on page 19 of the plaintiffs observations), as the plaintiff itself concedes even though it goes on to emphasize that the price of whole-milk powder is also influenced by other factors (such as packaging, conditions of payment, marketing costs and growing demand either in the autumn or for export purposes). It is undeniable, therefore, that the price of whole-milk powder is at least, as it were, indirectly dependent on the prices of products covered by intervention arrangements (in particular skimmed-milk powder). However, it cannot be considered contrary to the system to take such interrelationships within the market into account for the purposes of Regulation No 974/71.1 share the Commission's impression that this is permitted by the case-law. In that regard I would refer, in particular, to paragraph 9 of the Court's judgment in Case 95/80: ( 3 )

‘The concept of dependence to which Regulation No 974/71 makes reference describes not only the direct derivation of the price of a given product from that of a product subject to intervention arrangements but also the dependence of the price of a product on prices which prevail as a whole on the market concerned and of which the level is sustained by the various intervention arrangements.’

(b)

Since it can scarcely be denied that the requirement laid down by Article 1 (2) (b) of Regulation No 974/71 has been fulfilled, the following remarks must be made with regard to the risk of disturbances referred to in Article 1 (3):

It is important to note first that the Commission enjoys a wider discretion in this regard since an assessment of complex economic factors is involved. Accordingly, it is necessary to ascertain only whether there has been a manifest error or misuse of a discretionary power or whether the bounds of that discretion have manifestly been exceeded (see the judgments in Cases 29/77 ( 5 ) and 12/78). ( 6 ) Moreover, account is taken not only of disturbances in the intervention system, which therefore affect products covered by intervention arrangements (and on which particular emphasis was initially laid when monetary compensatory amounts were created). Now account is taken of disturbances in intra-Community trade and of the risk of shifts in the pattern of trade generally (as in the two cases referred to earlier). The focal point in that respect is the market in the products for which monetary compenstory amounts are fixed and, at times, the market in competing products (judgment in Case 95/80). ( 2 )

Against that background, it is not possible to dismiss as manifestly misplaced and irrelevant the Commission's fear that if monetary compensatory amounts had not been applied to whole-milk powder, disturbances would have occurred on the market for milk and milk products because whole-milk powder can be turned into milk and, subsequently, other milk products. It is not enough merely to refer to the rules in force in certain Member States which prohibit the manufacture of milk and milk product surrogates (as seems to be the case in France, the Federal Republic of Germany and Luxembourg) since, quite apart from the fact that such rules can be infringed, it is evidently uncertain whether they also cover processes such as those referred to above. Similarly, the reference to the costs of such operations which circumvent the rules is not decisive. In fact, the cost of processing milk powder into whole milk cannot be very high and further processing into other products could certainly be profitable once the divergence in prices between different Member States resulting from the application of monetary measures reaches a certain level.

The fear that the absence of monetary compensatory amounts would lead to shifts in the pattern of trade and disturbances on the market in whole-milk powder is also justified. In that regard, a number of calculations were submitted in the proceedings, as the Court will recall, first by the plaintiff (who wished to show that disturbances are created precisely by monetary compensatory amounts), subsequently by the Commission (with corrections as regards prices of whole-milk powder in France) and again by the plaintiff, who challenged the accuracy of some of the French market prices referred to by the Commission and complained that the Commission had failed to take account of transport costs and importers' margins in its calculations. If, in this respect, the lastmentioned calculations of the plaintiff are taken as a basis (they now, more accurately, omit the specific manufacturing costs of a French supplier, which were originally included, and are based simply on market prices), they show that — after excluding the monetary compensatory amounts — the prices of French competitors on the German market on the dates referred to, namely June 1978, September 1978 and May 1979, were quite considerably lower than the prices obtaining there. ( 7 ) That no doubt confirms that without monetary compensatory amounts for whole-milk powder disturbances would have occurred on the market.

However, although the calculations submitted by the plaintiff reveal that French manufacturers suffered from certain disadvantages as a result of the application of monetary compensatory amounts, that is insufficient — and this is the point — to call in question the legality of the system. Even though there may be some ‘overcompensation’ for differences in prices as a result of the application of monetary compensatory amounts, the extent of such overcompensation, even according to the plaintiff's own calculations (which did not have to be checked in detail since they were not at issue in these proceedings), is at most some DM 20 per 100 kg. Thus, in terms of the market value of the goods, there was a negative difference of less than 5% which is therefore within the margin which in other cases concerning the correct calculation of monetary compensatory amounts in complex economic situations was considered acceptable (see for example, the judgments in Cases 39/84 ( 8 ) and 46/84 ( 9 ) which were concerned with situations in which the monetary compensatory amounts for processed products were respectively 5.9% and 4.3% lower than the monetary compensatory amounts fixed for the basic products).

(c)

Accordingly, as the Commission has suggested, Question 1 can be answered in the affirmative, that is to say there is no fundamental objection to the fixing of monetary compensatory amounts for wholemlk powder in 1978.

(a)

To begin with, reference must be made to two conclusions which may be drawn from the case-law.

In the first place it is significant that, in determining the ‘incidence’ within the meaning of Article 2 (2) of Regulation No 974/71, the Commission enjoys a broad discretion (as was emphasized, for instance, in Case 4/79). ( 10 ) In that regard it could be deemed justifiable, amongst other things, that in the circumstances with which the Court was confronted in Cases 39/84 and 46/84 no mathematically precise balance was achieved between the incidence of the monetary measures on a basic product and their incidence on derived products. Secondly, the mere fact that the Commission gradually excluded from the calculation of the monetary compensatory amounts for whole-milk powder the processing costs inherent in the manufacture of products covered by intervention arrangements certainly does not support the conclusion that it was unlawful to take those costs into account at first. In that regard, reference may be made to the judgment in Joined Cases 71 and 72/84 ( 11 ) in which the Court stated that the adoption of a new method of calculating monetary compensatory amounts and the consequent reduction of those amounts may not serve to cast doubt on earlier decisions (paragraph 38 of the decision).

(b)

The system established by Article 2 of Regulation No 974/71 viewed in conjunction with the fact that, under the organization of the market in milk, the basic product is not covered by intervention arrangements, while it is sought to achieve the objectives of Article 39 of the EEC Treaty by means of intervention arrangements for processed products, is undoubtedly essential for the purposes of the answer to the fundamental question which has been raised. Article 2 of that regulation clearly makes intervention prices the standard basis for the fixing of monetary compensatory amounts. If, however, the prices of butter and skimmed-milk powder, which are processed products, are central to the organization of the market in milk and such prices may in principle be taken as the basis for the calculation of monetary compensatory amounts for other products covered by that market organization, the objection clearly cannot be raised that the processing costs incorporated in the prices of products covered by intervention arrangements affect the monetary compensation. If, in introducing monetary compensatory amounts for whole-milk powder, the Commission proceeded in accordance with the system in that way, it certainly remained within the limits of the discretion which the rules evidently confer upon it, whilst it is difficult to draw any decisive indications from the recital referred to earlier since it naturally envisages only the standard case in which at the centre of the organization of a market there are basic products covered by intervention arrangements. Moreover, it must be acknowledged that at the time there might have been grounds for fearing that, if processing costs were taken into account only in the case of products covered by intervention arrangements but not in the case of other products, like whole-milk powder, at a comparable stage of processing, it would lead to distortions between individual products and to shifts in the pattern of trade in milk products. Only when it became clear, after the market had been closely monitored over a long period, that that fear was unfounded was an adjustment called for (and even though at the first stage 50% of the processing costs were excluded from the calculation, there was no significant reduction in absolute terms).

(c)

Accordingly, I am of the opinion that Question 2 should also be answered in the affirmative. It follows therefore, all things considered, that there are no grounds for calling in question the validity of Regulation No 1036/78. There is thus also no need to consider the further question raised by the plaintiff concerning the consequences of a declaration of invalidity and, in particular whether, and if so in what manner, the second paragraph of Article 174 of the EEC Treaty would be applicable.

C —

In the light of all the foregoing considerations, I suggest that the answer to the questions submitted by the Bundesfinanzhof should be that the proceedings have disclosed no factor of such a kind as to call in question the validity of Regulation No 1036/78 in so far as Annex I to the regulation fixes the monetary compensatory amounts for whole-milk powder classified under subheading 04.02 A II (b) 2 of the Common Customs Tariff.