Technical Assistance for Development of a Strategy for Alignment with Common Market Organisation (CMO) Requirements TR2014/AG/10-A1-01/001 This Project is co-financed by the European Union and the Republic of Turkey Introduction to CMO contractual relations in the EU Agriculture Miroslav Boi Ankara, 10th May, 2018
CAP Introduction to CMO contractual relations in the EU Agriculture: main topics for discussion I. Contractual relations in Common Market Organisation II. General provisions on contractual relations III.Role of producer organisations IV.Recommendations of AMTF V. Unfair trade practices Contracts in Agriculture For producers contracts can offer increase certainty and provide the possibility to better manage cash flow. Pre-sowing contracts provide for improved planning and risk management.
For processors contracts offer possibility of ensuring supplies and better managing deliveries. Contracts can help improve efficiency for the whole supply chain. Obstacles price volatility, assurance of quality, possible disincentive to efficiency/competition. Purpose of contractual relations in the CMO In general, CAP does not interfere with business decisions of stakeholders in the market Compliance with contract terms is important in order for the participants to have confidence in the system Producers (particularly of perishable products) are ill-equipped to deal with last
minute variations in contract terms. Processors are moving to lean, just-in-time business models that demand certainty of delivery. Farmers have a weaker negotiating position in the food supply chain compared to processing and retail Provisions on contractual relations are aimed at protecting the interests of farmers in their business transactions with processors or traders Closely linked with contractual relations are: provisions on producer organisations the wider issue of unfair trading practices History of contractual relations Contract law, regulating any form of contractual relations between (legal) persons, was not an EU competence
MSs provide for national rules in this field and, consequently, rules and practices differ amongst them Specific provisions have existed in specific sectors in the single CMO Regulation for many years Provisions on contractual relations were originaly introduced in sectors with high concentration in processing (limited choice of partners for farmers): 1968 in the sugar sector (still implemented!) 1970 in the tobbaco sector (abolished in 2007) Hops special case contracts had to be registered (abolished in 2014) 2012 introduced as option for MSs in the milk sector Since 2014 (Regulation 1308/2013) optional implementation in MS possible in all agricultural sectors
The most recent legal basis CMO Regulation No. 1308/2013 Sugar: Article 125 + Annex X Milk: Articles 148 149 Right of POs in contracting: Article 152 Mandatory recognition POs & IBOs: Article 159 Other sectors: Article 168
Value-sharing clause: Article 172a OMNIBUS Regulation No. 2393/2017 Treaty of functioning of the EU The application of competition rules to agriculture (Articles 206 210 ) General provisions on contractual relations in agriculture MSs can decide if for any sector (except sugar) they will make mandatory on their territory either: a written contract between producers of agricultural products and their first purchasers, or that first purchases must make a written offer for a contract for a delivery of agricultural products from producers
MS must notify the European Commission on such a choice and how it will be implemented MS must ensure that contractual relations do not interfere with proper functioning of the market The CMO Regulation stipulates mandatory elements of the contract or offer, but details of the contract are negotiated freely between the parties Mandatory elements of written contracts / written offers The contract or offer for a contract shall: Be made in advance of the delivery Be made in writting
Contain the following elements: The price payable for the delivery The quantity and quality of products and timing of deliveries Duration of the contract Details regarding payment periods and procedures Arrangements for collecting or delivering of products Rules in the case of force majeure
Contractual negotiations Delivery contracts can be negotiated by producer organisations or interbranch organisations on behalf of their members in all sectors To avoid interference with the functioning of the market, limitations exist in terms of concentration of supply: In the milk sector: POs can negotiate deliveries if they cover up to 1/3 of national milk production (up to 45% in MS with production less than 500 thous. tons annually) and up to 3.5% of EU milk production Other specific sectors *: in the olive oil sector: POs can negotiate contracts if they cover up to 20% of national production in the wheat and beef sectors: POs can negotiate contracts if they cover up to 15% of national production
* provisions implemented only for 3 years (between 2014 and 2017) Importance of agricultural cooperation and producer organisations Theoretical framework Long history of successful agricultural cooperation originating in a desire to correct market failure and exert market power but which has shifted from a production orientated focus to a more market orientated one based on quality and product innovation. Based on the research - greater cooperation both horizontally and vertically in the food and farming sector, could improve efficiency, drive competitiveness and lead to faster economic growth. Cooperatives & POs offer smaller scale farms 3 sources of efficiency : economies of scale; vertical integration; and coordination. Scale economies lower unit costs by sharing.
Vertical integration enables members to add value, including participating in the introduction of new products and/or marketing innovations. Coordination facilitates the dissemination of knowledge across members. Role of EU producer organisations (POs) in collective negotiations CAP reform Modification of competition rules in the agricultural sector for POs and Association of POs in December 2017 Article 152 (b) 1.a: By way of derogation from Article 101(1) TFEU, a producer organisation recognised under paragraph 1 of this Article may plan production, optimise the production costs, place on the market and negotiate contracts for the supply of agricultural products , on behalf of its members for all or part of their total production.
The same rule applies to Associations of POs Derogation should only cover producer organisations which genuinely exercise an activity aimed at economic integration and which concentrate supply and place products of their members on the market Until the adoption of the decision of the competition authority, the activities carried out by producer organisations should be considered legal Benefits of producer organisations outweigh drawbecks for members Individual farmers benefit from being a member of a POs. First, by pooling their agricultural output, farmers may strengthen their bargaining power vis--vis potential buyers (downstream) and input suppliers (upstream) Farmers may reduce the risks that are associated with farming activities. This includes the price risk, but also
the risk of a hold-up by a buyer Farmers may gain market access to marketing channels where previously they did not get access to as in some situations (but not in all), buyers prefer to purchase from larger farmers Farmers may be able to benefit from economies of scale EC report on Milk package (2017): The main benefits for farmers belonging to a PO are reported to be the possibility for the collective negotiation of contract terms and the better management of milk volumes. Some POs also mention that better milk prices, business stability, having a single interlocutor vis-avis the processors and better market information Drawbacks for farmers belonging to a PO are less frequently mentioned and include the following: the contributions that have to be paid by PO members, resources (both human and material) required and the limitation to farmers' independence in entrepreneurial decisions Compulsory contracts in milk sector
Written Contracts / Offers compulsory Minimum duration (month; years) Stages to be covered Date of adoption national legislation Source: DG AGRI, 2014 Example: Milk contracting in Croatia Ordinance on regulation of contractual relations in the milk sector firstly adopted in 2013, revised in 2017
Main provisions: contracts mandatory for milk deliveries in Croatia contracts shall be negotiated based on a written offer made by first purchasers delivery contracts shall cover a period of at least 6 months approved POs can negotiate on behalf of milk producers elements of the contract must comply with CMO regulation Key questions in public debate related to contractualisation in agriculture Is the current balance between mandatory and voluntary contracts appropriate? Is there a need to consider mandatory contracts for additional sectors?
Are the terms of the current framework (R1308) for contractualisation sufficient? Should additional provisions be envisaged? If so, what? Should alternative models to contractualisation be considered e.g. codes of good practice? What are considered to be the relative strengths and weaknesses vis--vis voluntary codes and written contracts? Is it considered that POs or IBOs can play a specific role in developing and promoting contractualisation? Main conclusion: Yes, we have a problem! There are imbalances in trade relationships among the food supply chain.
Those imbalances create a lack of transparency and are the main cause of potentially unfair and anticompetitive practices that distort the market and have a negative impact on the entire agri-food sector competitiveness. Recommendations of AMTF on contractual relations Agricultural Markets Task Force (AMTF) was established by the EC in 2016 to analyse the market in EU and provide recommendations for policy measures Report and recommendations of AMTF were published in November 2016 Recommendations on contractual relations: Conclusion of written contracts in agriculture should be
mandatory in EU for all sectors if it will be requested by farmers and if their partner is not an SME Standard contracts should be formulated as a template to facilitate the contractual negotiations Unfair trade practices By concluding written contracts in advance of the delivery of products farmers should be protected from some unfair trading practices (UTPs) UTPs are practices that grossly deviate from good commercial conduct and are contrary to principles of good faith and fair dealing, eg.: unduly late payments unfair shifting of business risk to the other party unilateral or retroactive changes to contracts and unfair termination of contracts
UTPs were identified as a major problem in the food supply chain that mainly affects farmers ! Some MSs regulate the issue at national level; no common EU framework exists yet to limit UTPs EC proposed legal framework on UTPs on 12 April 2018 UTP specific legislation Competition law modifications No dedicated enforcment against UTPs
Voluntary initiatives Evidence of regulatory fragmentation in UTP regulation in the EU-28 Recommendations of AMTF on UTPs Introduce EU framework legislation and a harmonised list of prohibited UTPs Provide efficient enforcement of UTP rules, for which Member States shall establish an independent authority Find solution to overcome the fear factor
Introduce dissuasive sanctions for non-compliance with UTP rules Facilitate exchange of practices at EU level on regulation of UTPs Most common Unfair Trade Practices Directive on unfair trading practices in B2B relationships in the food supply chain (1) EC draft proposal released: April 2018 (brend new!) Objective: to introduce a minimum standard of protection of SMEs from unfair trade practices at EU level; EU rules will be complementary to existing national rules (which can be stricter!) EU action is justified by the need to harmonise with basic CAP objective from TFEU creation of equal rules for all stakeholders on the common market, which is currently not the case for UTPs
Chosen options in the proposed Directive: All stakeholders in the food supply chain covered (farmers, processed industry, trade) Both agricultural and processed products covered Decentralised implementation enforcement by competent national authorities Directive on unfair trading practices in B2B relationships in the food supply chain (2) Prohibited unfair trading practices: Payments for perishable foods later than 30 days Cancelling of orders of perishable foods on very short notice Unilateral and retroactive changes of the supply agreement by the buyer Obligation of supplier to pay for waste of food occured at buyers premises
Additional prohibited practices if they are not regulated by the supply agreement: Buyer returns unsold food to supplier Buyer charges a payment as a condition for the stocking, displaying or listing food products of the supplier Supplier pays for the promotion of food products sold by the buyer Supplier pays for the marketing of food products by the buyer AG Commissioner Hogan explains the need to tackle unfair trading practices: video-utp-rules.mp4 This publication has been produced with the financial assistance of the European Union The contents of this publication is the sole responsibility of NIRAS IC Sp. z o.o. and can in no way be taken to reflect the views of the European Union
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