The food supply chain is inextricably linked to climate change. On the one hand agriculture significantly contributes to climate change by emitting greenhouse gases, but on the other hand it suffers the negative effects involved. The need to make the agri-food supply chain more sustainable is therefore beyond dispute. This calls for considerable investments on the part of producers. Sufficient investments will be made only if farmers and other food producers are able to recoup them. It is crucial that a fair price and a healthy return are achievable, but producers often do not receive them. Farmers and other food producers often find themselves is a weak position in relation to buyers. The market power of large Dutch and international retailers and the continuous increase in scale are everyday phenomena in the food distribution chain. Retailers strengthen their position by means of mergers and acquisitions, for instance. Since food producers usually produce fresh products with a short shelf life, they will always want to sell their products, even at lower prices or on poorer conditions. Insufficient returns as a result of excessive market power lead to fewer or even no investments being made – even though they are precisely what we need to rapidly achieve sustainability or circular agriculture.
A call for reform based on competition law is frequently heard in this context. The position of food producers is already protected under competition law in Europe and the Netherlands. The question is whether that competition-law protection suffices to strengthen the position of farmers in the chain also in the future. This blog addresses the current legislation in this field in the Netherlands, but also sheds light on the laws and regulations that have been introduced elsewhere in the European Union.
Unfair Commercial Practices in the Agriculture and Food Supply Chain Act
The Wet oneerlijke handelspraktijken in de landbouw- en voedselvoorzieningsketen or Wet OHP (Unfair Commercial Practices in the Agriculture and Food Supply Chain Act – the “UCP Act”) entered into force in the Netherlands on 1 November 2021. The UCP Act contains a black list and a grey list of practices that are either prohibited outright (black list) or prohibited unless concrete agreements have been made beforehand (grey list). The Netherlands Authority for Consumers and Markets (“ACM”) may impose an order subject to a penalty or a fine on a buyer (e.g. a retailer) that acts in breach of the UCP Act. The UCP Act has potential, but it is too early to say whether it will have the intended effect. Moreover, the success of the UCP Act is greatly dependent on the extent to which ACM (proactively) enforces it. ACM announced in May 2021 already that it would actively enforce the UCP Act as of 1 November 2021. It has now published an explanation of the UCP Act on its website, violations can be reported to it online, and it has published Q&A on the UCP Act online. ACM has also given presentations to parties to which the UCP Act is particularly relevant, such as the Dutch Food Retail Association (CBL). Time will tell whether the UCP Act will help control excessive market power. More information on the UCP Act and its enforcement can be found in this article, this blog and this blog.
Abuse of a dominant position: a dead letter?
Certain practices of Dutch and international retailers that are not on the black list or grey list in the Act may nevertheless constitute abuse of a dominant position. The prohibition of abuse of a dominant position is set out in Article 24 of the Competition Act and Article 102 of the Treaty on the Functioning of the European Union (“TFEU”). In order for that prohibition to be breached, a dominant position must first exist. Briefly stated, this first of all means that an undertaking must be sufficiently strong to act to an appreciable extent independently of its competitors and customers and ultimately consumers. Secondly, the undertaking in question must abuse that dominant position.
Although farmers and other food producers report experiencing abuse of a dominant position, to date it has been difficult to prove that a buyer of their products has a dominant position. If the retailer's market share is less than 40-50%, it is usually difficult to prove the existence of a dominant position from a legal perspective. The market shares of, for instance, Albert Heijn (approximately 36%) and Jumbo (approximately 22%) in the Netherlands are currently below that percentage. There has therefore been no civil action in the Netherlands to date in which a retailer was found to have such a dominant position. A retailer that does not have a dominant position cannot abuse that position. That gives rise to the question whether the current statutory prohibition of abuse of a dominant position offers any added value in the purchase of food products from farmers, market gardeners, fishermen and food producers. Abuse of a dominant position is an objective concept and may take various forms. It is usually divided into two broad categories: (i) exploitative abuse of customers or suppliers and (ii) exclusionary abuse aimed at excluding competitors from the market. Competition authorities have traditionally focussed on tackling exclusionary practices of dominant companies. But they may also take action against exploitative practices of a dominant company. The imposition by a dominant company of unfair purchase or selling prices, or other unfair trading conditions, is expressly recognised as a form of exploitative abuse (in Article 102(a) TFEU). Competition authorities are usually reluctant to act as price regulators. Although regulating prices may appear far-fetched, the reluctance is not always justified. Both safeguarding fair trade and ensuring reasonable prices are expressly mentioned as objectives of the European common agricultural policy. The EU competition policy should therefore look beyond the lowest price, according to the Committee on Economic and Monetary Affairs of the European Parliament. The prohibition of abuse of a dominant position may therefore offer a solution if a dominant position exists. That is precisely where the shoe pinches in the Netherlands and various other EU Member States: if the largest retailer in the Netherlands has a market share of less than approximately 40%, it is debatable whether that constitutes abuse of a dominant position (even though the farmer, market gardener or other food producer may subjectively regard such practices as abuse). Various other EU Member States have therefore opted for a different approach, which could also be followed in the Netherlands.
Option 1: sector-specific tightening of the prohibition of abuse of a dominant position
EU Member States may apply a stricter regime than the prohibition of abuse of a dominant position set out in Article 102 TFEU. One of the options available to them is to lower market share thresholds to, for instance, 35% for defining dominance of retailers on the food product market. A statutory prohibition of abuse of economic dependency is also conceivable. Such a prohibition challenges practices of a retailer that imposes disproportionate conditions on a supplier who is known to be greatly dependent on a contract with that retailer (the supplier cannot easily switch to another buyer). The Netherlands has not (yet) introduced such sector-specific prohibitions, but other EU Member States have. To name a few examples:
- Germany has introduced the Anzapfverbot. Companies that have a dominant position, or such a strong position that suppliers are dependent on them, may not demand undue advantages from their suppliers without an objective justification or quid pro quo.
- France and Greece have introduced a similar prohibition of abuse of economic dependency.
- In Finland, a company is deemed to have a dominant position if it has a market share of at least 30% in the Finnish grocery market. The grocery market includes both the retail and the procurement market: companies must therefore comply with the prohibition of abuse of a dominant position in both their sales and their procurement activities.
- In Hungary, a non-rebuttable presumption of dominance has applied since 2016 to retailers with a turnover of more than HUF 100 billion (approximately €264 million on 3 May 2022) in Hungary. This makes it much easier for a supplier to prove abuse of a dominant position in court.
- In Poland, unfair use of contractual advantages in the agriculture and food supply chain has been prohibited since 2017. This includes unreasonably termination (or threat of termination) of a contract if the other party refuses to accept new delivery conditions, granting the right of termination to only one party, or unreasonably extending payment terms.
In all these cases the producer will have to raise the alarm with the competition authorities or apply to the civil court after the fact. But according to several national competition authorities they are nevertheless effectively enforcing these measures. Although there are cases in which these measures have been applied in practice, the question remains to what extent they will be effective where they are needed most, now and in the future. Do these measures also, for instance, increase or broaden the range of sustainable products or production methods? The answer to that questions may be uncertain as yet, but the examples in the countries listed above may nevertheless be relevant to the Netherlands.
Although the Netherlands has not yet introduced stricter prohibitions of abuse in specific sectors in the same manner as the EU Member States referred to above, farmers and other food producers are not always left empty-handed. Although they often run up against the cartel prohibition when they want to work together (whether or not with the retailers), a few important exceptions apply. They may (i) work together in the form of a producer organisation (“PO”) or (ii) since the end of 2021, join forces to achieve certain sustainability goals. These two possibilities are addressed below.
Option 2: Producer organisation
A PO is an association of agricultural producers, which was made possible by the Common Agricultural Policy (“CAP”). One of the objectives of the CAP is to ensure that agricultural producers receive a fair price for their products (Article 39 TFEU). The Regulation establishing a common organisation of the markets in agricultural products (“CMO Regulation”) regulates, among other things, the composition and working method of POs. Article 209 of the CMO Regulation provides that, in principle, a PO that is recognised under the Regulation is not subject to the cartel prohibition, provided that its actions contribute to the attainment of the objectives set out in Article 39 TFEU. The Court of Justice furthermore ruled in 2017 that the cartel prohibition also does not apply if a PO actually and strictly pursues the objectives of the CMO Regulation. The agreements may not go beyond what is strictly necessary. This offers scope for cooperation, but the boundaries are not always clear in practice. The introduction of the Omnibus Regulation (at almost the same time) has also not yet definitively settled the discussion as to when a PO does or does not come under the cartel prohibition. More information on the application of competition law to cooperatives in the agri-food sector and their formation and members can be found here. The CMO Regulation was supplemented at the end of 2021, as explained below, which offers more scope for cooperation in achieving sustainability goals.
Option 3: more sector-wide cooperation in sustainability initiatives
Participation in a PO is not a solution for all farmers and food producers. The existence of a PO does not necessarily accelerate certain developments. Although evermore attention is being paid in the food supply chain to the rapid sector-wide achievement of sustainability goals, that is possible only if it is compatible with the cartel prohibition. Many initiatives – such as the “Chicken of Tomorrow” – failed when the competition authorities tested them against the cartel prohibition. This has now changed. Since December 2021, sustainability initiatives in the agri-food supply chain have been tested against the new Regulation 2021/2117. That Regulation has added Article 210a to the CMO Regulation. Article 210a provides that, if certain conditions are met, both horizontal and vertical sustainability initiatives are exempt from the cartel prohibition; see also this blog.
The initiatives that are eligible for exemption must be aimed at sustainability standards. This is understood to mean (Article 210a(3) of the CMO Regulation):
- environmental objectives, including climate change mitigation and adaptation, and other ecological protection measures;
- the production of agricultural products in ways that reduce the use of pesticides; and
- animal health and animal welfare.
Price agreements that do not aim to apply a sustainability standard are not exempt from the cartel prohibition, however. Article 210a(3) of the CMO Regulation offers starting points to arrive at sector-wide agreements to achieve certain sustainability objectives (or to do so more quickly). There is no guarantee that this will result in the sustainability initiative being lawful and in farmers and other food producers receiving a fair price. The European Commission will publish guidance, by 8 December 2023 at the latest, explaining the conditions of amended Article 210a of the CMO Regulation. That guidance is very welcome, since it will immediately remove any cold feet regarding the application of Article 210a section 3 of the CMO Regulation and will ensure that as many examples as possible of its successful application are quickly made known. To that end, the Commission has asked market parties to share their experiences with sustainability agreements. Several examples in Germany have already demonstrated what the exemption offered by Article 210a of the CMO Regulation makes possible: see here and here. This blog and this blog explain the possibilities and impossibilities of sector-wide cooperation in sustainability initiatives.
Is the Netherlands ready for the envisaged turnaround in the food supply chain?
The Dutch government has been fully committed for many years to a turnaround in the agriculture and food supply chain. Sustainability in that chain requires significant investments – and fair prices for farmers and food producers are crucial in achieving that goal. Without the prospect of fair prices, the investments will not be made, or in any event not quickly enough. And precisely that prospect is now increasingly under pressure for a number of reasons. Unfortunately, rising inflation, staff shortages, rising fuel costs and higher purchase costs, of feed and fertilisers, for instance, do not appear to be short-lived. These issues come on top of a process that was already underway, of scale increases and cooperation on the procurement side, excesses of market power, and the need to accelerate the sustainability transition in light of the climate crisis. It cannot be said with any certainty whether the Act and Article 210a section 3 of the CMO Regulation will provide sufficient relief in these circumstances. Since foresight is the essence of government, the Dutch legislature would be well advised now already to explore the competition-law and other options that offer at least the prospect of a fair price for farmers and other food producers. The possibility for farmers, market gardeners, fishermen and other food producers to join forces in a PO or to take a stand against excessive market power is an option, but in light of the climate crisis the government has set its sights squarely on a turnaround in the agriculture and food supply chain. The approach in other EU Member States, where POs have also been introduced, demonstrates that more can be achieved. A few alternatives, such as the introduction of a sector-specific statutory prohibition of economic dependency or a lower market share linked to the prohibition of abuse of a dominant position have been addressed in this blog. Another option might be to impose a (temporary) statutory ban on below-cost sales in certain sectors, in order to facilitate a certain transition. The conditions on which such a ban is compatible with European law are addressed in this article by Diederik Schrijvershof and Tess Heystee in the Tijdschrift voor Agrarisch Recht.
This blog follows the publication of the article “Sustainability in the agricultural and food supply chains and the market power of retailers: an unhappy marriage. Can competition law offer a solution?” that Diederik Schrijvershof and Tess Heystee wrote for the Tijdschrift voor Agrarisch Recht.
