EU Competition Policy in the agriculture sector

Publication | December 2017

Introduction

Continuing economic pressure on farmers has recently focused intense attention on the extent to which farmers can cooperate with one another consistent with EU competition rules. There are about 11 million farms in the European Union (EU) and 44 million people employed in the EU food supply chain. According to the EU Commission (the Commission), as the EU common agricultural policy (CAP) has become more market-oriented and European agriculture is increasingly integrated in global markets, farmers are exposed to greater market uncertainties and price volatility. Farmers often work independently, with little collective bargaining power to defend their interests against food processors and retailers. 

As a result, EU legislation provides for certain exemptions to allow farmers to cooperate in ways that might otherwise be prohibited by EU competition rules. However, the Commission, Council and Parliament are all looking at expanding the existing antitrust exemptions and taking other steps to counter imbalances in information and negotiating power. In 2016, the Commission created an Agricultural Markets Task Force, which in November 2016 adopted a final report recommending expanding and “reviving” existing agricultural exemptions. In August 2017, the Commission launched a consultation on improving the food supply chain, including by expanding an existing exemption for so-called “value sharing agreements.” The Commission’s 2018 work programme envisages proposed legislative changes in early 2018.  Meanwhile, however, the European Council and Parliament are not waiting; in October 2017 they agreed in the context of their annual budget negotiations to revise the existing agricultural antitrust exemptions.

Most recently, the European Court of Justice (ECJ) issued a preliminary ruling on November 14 in a case involving the relationship between EU and French competition rules and EU agricultural policy (Belgian Endives),  agreeing with French endive producers that conduct necessary to achieving authorized objectives of a recognised producer organisation (PO), association of POs (APO) or “interbranch organisation” is exempt from EU antitrust rules even if the conduct is not covered by an express exemption. Belgian Endives is the most significant judgment in this complex area since the ECJ’s 2003 judgment in Milk Marque

Together, the EU legislator and courts are reshaping the legal framework for the application of EU competition rules to cooperation in the agricultural sector. Although political pressures have prompted quick action by the Council and Parliament, in the long term the most significant development expanding EU farmers’ ability to increase their bargaining power by cooperating with one another may prove to be the Belgian Endives judgment.

Background

EU competition law in the agricultural sector is a complex patchwork of general EU competition rules and highly technical sector-specific rules. Article 42 of the Treaty on the Functioning of the European Union (TFEU) provides that EU competition rules apply to the production of and trade in agricultural products only to the extent determined by EU regulations adopted under the CAP. These regulations do extend EU competition rules to the agriculture sector, but they also provide for certain exemptions for POs, APOs and so-called “inter-branch organisations,” self-organised, vertically integrated entities created by different branches of the agri-food chain, including producers and at least one partner from another part of the supply chain, e.g. manufacturers, processors, trade and retailers.

The current legal framework is set out in Regulation 1308/2013 (the CMO Regulation), which replaced Regulation 1234/2007. Article 206 CMO Regulation provides that EU competition rules apply to all agreements, decisions and practices relating to the production of, or trade in, agricultural products, subject to certain derogations. These derogations include general derogations that largely reproduced exemptions in Regulation 1234/2007 and prior regulations, as well as a number of sector-specific derogations introduced by the CMO Regulation to enhance farmers’ bargaining power.

The general derogations are set out in Articles 209 and 210 CMO Regulation. Article 209(1) exempts (i) agreements, decisions and practices “necessary for the attainment of the objectives” of the CAP and (ii) agreements, decisions and practices of farmers, farmers’ associations, or associations of such associations, or recognized producer organisations or associations of producer organisations, unless the agreement, decision or practice entails an obligation to charge an “identical price” or “excludes competition.” The counterparts of these articles in Regulation 1234/2007, the main focus of Belgian Endives, were Articles 176 and 176a.

Article 210(1) CMO Regulation provides that Article 101(1) TFEU shall not apply to agreements, decisions and concerted practices of recognized inter-branch organizations with the object of carrying out permitted activities. Article 210(2) CMO Regulation provides that the derogation for inter-branch organizations only applies where the relevant agreement, decision or practice has been notified to the Commission and the Commission has not found that it is incompatible with Union rules within two months. 

In addition, Articles 169-171 CMO Regulation set out derogations for the olive oil, beef and veal products and certain arable crops sectors. Under these articles, joint sales and agreements on quantities are allowed provided that (i) producers integrate in POs, (ii) these POs carry out activities other than joint-selling that create efficiencies (such as joint procurement, joint distribution, joint storage, etc.) and (iii) the POs’ sales do not exceed certain share thresholds.  In addition to these three sector-specific derogations, the CMO Regulation sets out special rules for the dairy, ham and sugar, fruit and vegetables and wine sectors. 

The rules allowing value-sharing agreements in the sugar beet sector are set out in Article 125 CMO Regulation, as implemented by Commission Regulation 2016/1166. Special rules for the sugar beet sector were considered necessary to address challenges stemming from the end of the sugar beet quota system in October 2017, which would otherwise compromise the position of beet growers. Commission Regulation 2016/1166 authorised the continued negotiation of value-sharing agreements between individual growers (not POs or APOs) and their current and potential suppliers to secure their supplies on pre-defined purchase terms, sharing the profits and costs generated by the supply chain to the benefit of the beet growers.

The CMO Regulation’s antitrust exemptions are highly technical, and they have been narrowly interpreted by the Commission and the European Courts. The CMO Regulation also eliminated a prior system of notification to the Commission, creating legal uncertainty by requiring POs and APOs (but not interbranch organisations) to rely on their own assessment of whether a proposed agreement complied with one of the available exemptions.  As a result, the Agricultural Task Force described the exemption system as “dormant” and overly complex.  

The Commission, Parliament and Council initiatives discussed below are designed to simplify and expand the current exemptions. In Belgian Endives, the ECJ took a different approach, considering whether agreements, decisions and concerted practices that are necessary and proportionate to achieving the objectives of POs and APOs are exempt from EU competition rules without the need to satisfy all the conditions of the general derogations in the CMO Regulation’s predecessor.

EU Commission Consultation

In its fall 2017 consultation, the Commission sought input on three main topics addressed in the Agricultural Task Force’s report: potentially unfair trading practices in the food supply chain; the possible need for increased market transparency in the food supply chain; and the advisability of extending the existing exemption for value-sharing agreements in the sugar beet sector to other agricultural products. Notably, the Commission’s consultation did not address the advisability of expanding other CMO Regulation antitrust exemptions.

As noted, under existing rules, beet growers and sugar processors can agree to secure their supplies on pre-defined purchase terms with the certainty of sharing the profits and costs generated along the supply chain. For example, some of the agreements on value sharing link the price paid to farmers for sugar beets to the market price of sugar. Value sharing agreements are voluntary and are only allowed between one sugar processor and its current or potential supplying beet growers.

In its consultation, the Commission asked for input on whether the possibility to enter into value-sharing agreements in the sugar sector can also be of interest to farmers in other sectors. Although the consultation only closed on November 17, as noted, the Commission’s 2018 work programme foresees that the Commission will propose legislation in this area in the first quarter. As discussed below, however, the Commission’s proposals in relation to value-sharing agreements (though not other aspects of the consultation) may become superfluous in light of amendments to the CMO Regulation already agreed by the Council and the Parliament.

Agricultural exemptions and the Omnibus Regulation

As mentioned, without waiting for the Commission’s proposals, the Council and the Parliament agreed to make a number of changes to CAP regulations, including the antitrust exemptions discussed above, in the context of their negotiations on the so-called “Omnibus Regulation” on the financial rules applicable to the EU budget. The so-called compromise text published by the European Parliament indeed includes a number of significant changes. Parliament is likely to approve the final text, separately from the rest of the Omnibus Regulation, by the end of 2017. 

As proposed in the Commission consultation, the possibility to collectively negotiate value sharing terms in contracts will be extended to sectors other than sugar. A new Article 172a CMO Regulation will provide that, “[w]ithout prejudice to any specific value sharing clauses in the sugar sector, farmers, including associations of farmers, and their first purchaser may agree on value sharing clauses, including market bonuses and losses, determining how any evolution of relevant market prices or other commodity markets is to be allocated between them.” Establishing standard value-sharing clauses will be added to the list of permitted objectives for POs and inter-branch organisations.

Similarly, the exemptions for planning production, optimising production costs, placing on the market and negotiating contracts for the supply of agricultural products in the olive oil, beef and veal and certain arable crops sectors will be eliminated. Instead, the permitted activities of POs and APOs will be revised to include the possibility to carry out production planning, cost optimisation, placing members' products on the market and conducting contractual negotiations, and references to these objectives added to the general derogations for POs, APOs and inter-branch organisations in Articles 209 and 210 CMO Regulation. 

Strict conditions, however, will continue to apply to the use of the Article 209 antitrust exemption. In particular, the amendments do not change a key limitation to the Article 209(1) exemption, i.e. that it does not apply to “agreements, decisions and concerted practices which entail an obligation to charge an identical price or by which competition is excluded.” This broad exclusion may create uncertainty about whether the exemption applies to a proposed agreement, decision or practice. However, without reinstating the notification requirement under Regulation 1234/2007, farmers, farmers’ associations, associations of such associations, POs and APOs will have the right to request the Commission’s opinion on the application of Article 209 to their agreements, decisions and concerted practices, and the Commission will have to reply within four months.

Member State competition authorities may require forward-looking changes to practices justified under Article 209 CMO Regulation (but not impose sanctions on past practices) in their Member States. The Commission will have parallel powers in the context of negotiations involving more than one Member State.

The revisions agreed by the Council and Parliament will simplify and expand the existing antitrust exemptions, in particular by allowing recognized POs and APOs to conduct collective negotiations on behalf of their members in all agricultural products and to allow individual growers to negotiate value-sharing agreements with current and potential customers. Thus, while these changes will be welcomed by growers in sectors that do not currently benefit from the current sector-specific exemptions in the CMO Regulation, it is not clear that they will fundamentally change the application of EU competition rules in the agricultural sector.

Belgian Endives

The decision that gave rise to the Belgian Endives judgment was the French Competition Authority’s decision of March 6, 2012 fining a large number of organizations involved in the cultivation and sale of Belgian endives for participation in a complex and continuous cartel consisting of (i) an agreement on the price of endives through different mechanisms — such as disseminating a minimum price on a weekly basis, setting a “cours pivot” (central rate), establishing a trading exchange, setting a “prix cliquet” (reserve price) and misusing the withdrawal price mechanism; (ii) collusion on the quantities of endives placed on the market; and (iii) a system for the exchange of strategic information used for the purpose of price maintenance, with the aim of collectively fixing a minimum producer price for endives. According to the decision, this conduct allowed producers and several professional POs to maintain minimum sale prices between 1998 and 2012.

The producers argued that their conduct should be regarded as necessary for the attainment of the objectives of the CAP, but the French Competition Authority found that the specific derogations in Regulation 1234/2007 did not apply. The producers appealed to the  Cour d’appel de Paris, which found for the producers, holding that the French Competition Authority had not established that the dissemination of minimum price instructions was necessarily and definitively prohibited, so that it had not been indisputably established that the producers had exceeded their authority as regards price stabilisation.

The French Competition Authority, supported by the EU Commission, appealed to the Cour de Cassation, which requested an ECJ ruling  on whether conduct otherwise caught by Article 101 TFEU can be exempted if it is linked to responsibilities assigned to national agricultural organisations, even if the conduct was not specifically covered by an antitrust exemption; and if so, whether collectively fixing minimum prices, concerting on quantities placed on the market or exchanging strategic information could be exempted if they aim at achieving the EU policy objectives of stabilising producer prices and adjusting production to demand.

The ECJ interpreted the CAP exemptions from EU antitrust rules more broadly than in past judgments, The ECJ noted that a PO or APO may have recourse to certain forms of coordination and concertation to achieve the objectives of ensuring that production is planned and adjusted to demand, particularly in terms of quality and quantity; concentrating supply and placing on the market the products produced by its members; and optimising production costs and stabilising producer prices. According to the ECJ, practices necessary to achieve one or more of those objectives must also be exempt from Article 101(1) TFEU. In other words, the phrase “save as otherwise provided” in the article extending EU competition rules to the agricultural sector is not limited to the express derogations in Articles 176 and 176a of Regulation No 1234/2007 (now Articles 209 and 210 CMO Regulation).

On the other hand, the ECJ noted that the scope of the regulation’s antitrust exemptions is to be construed strictly, citing Milk Marque for the proposition that “the common organisations of the markets in agricultural products are not a competition-free zone. On the contrary, the maintenance of effective competition on the markets for agricultural products is one of the objectives of the common agricultural policy and of the common organisation of the markets”. In accordance with the principle of proportionality, moreover, the practices in question may not go beyond what is strictly necessary to achieve objectives assigned to the PO or APO at issue under the rules governing the common organisation of the market concerned.

The ECJ proceeded to discuss whether POs, APOs and professional organisations’ practices of intervening in the endive sector to collectively fix minimum sale prices, concert on the quantities placed on the market and exchange strategic information are exempt from Article 101(1) TFEU. The ECJ noted that Member States are required to recognise POs and APOs that specifically take responsibility for one of the objectives defined by CAP regulations. To be considered exempt from EU competition rules on the basis that it is necessary to achieve one or more CAP objectives, the ECJ said, a practice must have been implemented by an entity that is actually entitled to do so under the applicable CAP rules. An entity not recognised by a Member State as responsible for these objectives cannot benefit from exemption from Article 101(1) TFEU. That was likely to be the case for a number of professional organisations covered by the French Competition Authority’s decision, which did not appear to be recognised POs or APOs.

To be exempted, moreover, any such practices must remain within a single PO or APO. Indeed, the responsibilities for production planning, concentrating supply and placing on the market, optimising production costs and stabilising producer prices, which may be assigned to a PO or an APO, may relate solely to the production and marketing of that PO’s or APO’s members.  Accordingly, agreements or concerted practices between POs or APOs go beyond what is necessary in order to fulfil those responsibilities and could not be exempt from Article 101(1) TFEU. 

Concerning practices between their members, recognised POs and APOs must be responsible specifically for at least one of the recognised objectives. The ECJ noted that the objectives of ensuring that production is planned and adjusted to demand, concentrating supply and placing on the market the products produced by members, and stabilising producer prices necessarily entail the exchange of strategic information between individual members of the PO or APO concerned. Therefore, exchanges of strategic information between producers within the same PO or APO are liable to be proportionate if they are made for purposes of an objective assigned to that PO or APO and limited to information that is strictly necessary.

The objective of stabilising producer prices to ensure a fair standard of living may also justify coordination between producers in the same PO or APO with regard to the quantities of products put on the market. The objective of concentrating supply to strengthen the position of producers may also justify coordination of pricing policies, particularly where the PO or APO concerned has been assigned the responsibility for marketing all its members’ products.

By contrast, the collective fixing of minimum sale prices within a PO or an APO may not be considered necessary to fulfil the responsibilities assigned to them. Where it does not allow producers selling their own products themselves to sell at a price below those minimum prices, the ECJ said, this practice is not proportionate to the objectives of stabilising prices and concentrating supply, since it has the effect of further reducing the already low level of competition in the markets for agricultural products resulting from the formation of POs and APOs to concentrate supply.

Conclusion

The disparity in the number and size of EU farmers and their suppliers and customers has long created tensions between the objectives of the CAP and EU competition policy. For decades, CAP regulations have provided for derogations from EU competition rules to allow farmers to cooperate through POs, APOs and inter-branch organisations in ways that might otherwise fall afoul of EU competition rules. These derogations, however, are highly technical and have been interpreted so narrowly that the Agricultural Task Force described them as “dormant.” In the 2013 revamp of the CAP regulation, new exemptions were added to encourage collective negotiation by growers in certain sectors and vertical value-sharing agreements between growers and customers in the sugar beet sector. 

While the Commission has been considering changes to expand and simplify these exemptions (among other steps to improve the food supply chain), the Council and Parliament have raced ahead to extend the recent sector-specific exemptions across all agricultural sectors. While these changes will be welcomed by many EU farmers, these exemptions will likely remain complex and be interpreted narrowly. Thus, it is questionable whether they will result in fundamental changes to the food supply chain.

The ECJ’s judgment in Belgian Endives takes a very different approach. Rather than addressing the limitations of the express antitrust exemptions in the CAP regulations, the ECJ held that conduct that is necessary and proportionate to the authorised objectives of a recognised PO or APO is automatically exempt from EU competition rules, regardless of whether the criteria in the predecessor of Article 209 CMO Regulation were satisfied. This implied exemption extends even to exchanges of strategic information, coordination on the quantities of products placed on the market and coordination of pricing policy (though apparently not minimum prices to be charged by farmers marketing their own products). The broad, principles-based approach of Belgian Endives may prove more helpful to farmers than the forthcoming amendments to the CAP’s antitrust exemptions, which are expected to extend the current sector-specific exemption for joint selling under Articles 169-171 CMO Regulation to all agricultural products, but which will likely remain subject to detailed and complex conditions.

On the other hand, the ECJ’s approach applies only to activities of farmers within recognised POs and APOs, not to more complex vertical cooperation agreements among farmers and different parts of the value chain. Article 210 CMO Regulation allows for cooperation among farmers and downstream participants in the supply chain, but it applies only to recognized inter-branch organizations and to agreements that have been notified to (and not prohibited by) the Commission. The exemption for value-sharing agreements outside the sugar-beet sector will apply only to agreements negotiated through POs or APOs by with individual buyers, not more complex agreements including other downstream levels of the value chain. Notably, neither the existing derogations for POs, APOs and inter-branch organisations or the soon-to-be-extended derogations for joint selling activities cover cooperation by farmers vis-à-vis upstream participants in the value chain, such as suppliers of seeds and pesticides.  

In summary, in Belgian Endives, the ECJ applied a broad, principles-based test with the potential to simplify and expand the usage of the CMO Regulation’s antitrust exemptions. Nonetheless, the ECJ’s approach would not exempt a broad range of activities between or among more than one PO or APO, or cooperation between different parts of the value chain. Meanwhile, upcoming changes to the CMO Regulation will expand a number of sector-specific derogations without apparently eliminating their complexity. As a result, the relationship between EU competition policy and the CAP will continue to be fraught, and complex, for the foreseeable future.


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Jay Modrall

Jay Modrall

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