Original publication: March 2016
Authors: Alessandro SORRENTINO, Carlo RUSSO, Luca CACCHIARELLI
Short link to this post: http://bit.ly/2HuDSvt

This study was published in the reference document of the Workshop on the “Effects of the structural changes on EU farming: How to better support the European model of agriculture of the 21st century with the CAP” of 14th March 2016, organised by the Committee on Agriculture and Rural Development (COMAGRI) and the Policy Department B (AGRI Research) of the European Parliament .

It is structured in three parts:

1. Farm structural change in Western Europe and the CAP.
2. Farm structural change in Central and Eastern Europe and the CAP.
3. Food value chain in the EU – How to improve it and strengthen the bargaining power of farmers.

Background

The food supply chain plays a substantial role in the European economy, connecting sectors such as agricultural, food processing industry and distribution that together make more than 5% of European value-added and 7% of employment. Furthermore, all European consumers are directly affected by EU food supply chain performance since food and beverage account for a significant part (14%) of the average European households’ expenditures (EC, 2015).

The EU food system is evolving rapidly. Changes in the organization of international trade, technology, and in society’s needs are triggering a deep restructuring of the agro-food supply chains. E-food and convenience retail, food customization, food quality, safety and identity are just few examples of the challenges that agro-food firms are facing. The increasing competitiveness and social pressure foster innovation in the organization of the agribusiness. As a consequence, the food supply chain is a complex series of inter-related markets (with increasing forms of coordination, integration and contracts).

As widely shown in many studies about structural changes (see Van der Ploeg et al., 2016; AKI, 2016), the speed and the modalities of the adjustment trajectories in farming sector tend to diverge from those of upstream/downstream sectors. For example, the consolidation of farming systems is much slower than in processing and retailing. Furthermore, size is not the only difference: social, economic and organizational variables move along with different dynamic models in agriculture with respect to downstream and upstream sectors. The new CMO measures provide the opportunity to introduce a ‘drive belt’, reducing the potential misalignment in adjustment patterns of farming and the other sectors.

This trend poses new challenges to the public governance of agricultural markets. The centralized top-down approach characterizing the CAP first pillar in the XX century has become obsolete and incapable of effectively governing a complex and rapidly evolving agro-food system. The recent 2013 reform opted for a more decentralized approach, and now private entities such as Producer Organizations (POs), Associations of Producer Organisations (APOs) or Inter Branch Organizations (IBOs) are assuming an increasing role in the governance of the agricultural markets. This report moves from these recent developments to propose an economic assessment of the ability of the new regulations to pursue CAP objectives in this new scenario.

Objectives and structure of the analysis

The aim of this analysis is to assess to what extent the new measures for the single CMO introduced by the last CAP reform may improve functioning of the EU food value chain and strengthen the bargaining power of farmers. The final objective is to provide a cognitive and analytical framework identifying policy options to consolidate the degree of farmers’ cooperation and to improve specific CAP rules.

Such a goal is pursued through:

  • a brief overview of the EU food value chain focusing mainly on the market structure at different stages of the supply chain, on the price transmission and on the recent developments in selling features and contractual arrangements;
  • an analysis of the changes introduced by the 2013 CAP reform and the Milk Package in the measures addressing POs, IBOs and agricultural contractual relations; the analysis is mainly focused on the effectiveness of the exemptions to EU competition policy aimed at strengthening farmers’ bargaining power.
  • a simple bargaining model aimed to identify the determinants of the bargaining power in the food supply chain; the model is used to assess the capability of Producer Organizations to strengthen farmers’ bargaining power.
Main choices and perimeter of the analysis

In our study we focus on competition, which is one of the major issues in agro-food supply chains. Agricultural markets are highly interdependent and competition at different stages of the supply chain matters for the overall functioning of the entire food sector. Welfare implications of competition at any stage of the food supply chain concern several ‘weak subjects’ such as small farmers and consumers,  and for that reason are of specific interests for policy-makers.

Relevance of competition issues arises from the fragmentation of the farm system and the consolidation of downstream stages. The difference in industry concentration between farm sectors and other sectors is often referred as one of the causes of the changes in the distribution of value added in the last decade. The sharp decline in farmers’ share of value added is one of the most critical issues for agricultural policy. In order to achieve a more sustainable distribution of value-added, the recent reform set the explicit goal of balancing power across the agro-food supply chain. Fostering horizontal coordination via POs is considered a key measure to this purpose.

The main instruments featuring the new paradigm of market organisation proposed by the CAP reform are: POs, APOs and IBOs. Actually, to make vertical integration though IBOs effective, the downstream firms in the food supply chain need a clearly recognizable upstream counterpart, which is also reliable and able to comply with their qualitative and quantitative standards. If so, the development of the IBOs is in some way consequent and subsequent to an adequate concentration of the agricultural supply. That explains why in this report we have chosen to focus our attention to the POs’ capacity in exploiting their functions and rebalancing the bargaining power along the supply chain.

Final considerations

Our analysis pointed out three critical issues in the current CMO regulation with respect to the organisation of the agricultural markets and the exemption to competition rules in agriculture:

  • there is no specific setting for a specific legal form for the recognition of a PO (e.g. cooperatives);
  • derogations to competition rules differ widely across sectors without a clear justification why provisions do not apply in certain sectors;
  • derogations on a case by case approach leads to legal uncertainty; producers and their organisations need positive and clear examples specifying which practises are allowed and under which conditions.

These critical issues call for a revision of the current procedures aimed to provide harmonisation of rules and legal certainty in their interpretation. For this purpose the approaches based on marginal adjustment of the current regulation might not be advisable. A more comprehensive approach based on rewriting the rules on POs and derogation to competition law in agriculture may be more effective. Despite of the high burden of producing a new regulation, a comprehensive approach can offer the opportunity of developing a simple and consistent regulation, reducing legal uncertainty.

The suggested policy options and recommendation follow factual, theoretical and normative analysis based on economic categories and assumptions. So they are supposed to provide some general principles consistent with economic reasoning and empirical data.
Our theoretical analysis identified three key goals to be considered in the possible revision of the CMO regulation:

  • simplification of rules concerning agricultural exemptions to the general competition rules (art. 101 TFEU). This goal calls for convergence toward a single framework of PO objectives and agricultural exemptions to general competition rules with sector specificities only where and when strictly necessary. Possibly, the multiple layers of derogations to competition rules should be summarized in a single principle.
  • effective strengthening of farmers bargaining power. Joint selling and production planning (art 152 1.c.i CMO regulation) can be effective tools for rebalancing power in the agro-food system. We also concluded that requiring a minimum size for POs may improve their effectiveness. Such requirement should be calibrated on the structure of the downstream (upstream) relevant market: more consolidated buyer (seller) industries call for larger POs. Promoting the diversification of the POs’ market channels is a key success factor. This objective can be pursued even allowing multi-sector POs. Consistency in Rural Development policy is advisable: measures to support POs’ flexible investment, as well as legal and trade services aimed at strengthening the farmers’ negotiation power, should be a distinctive criteria in evaluating the measures in priority 3.
  • safeguard of competition in the agri-food single markets. Concerns about the anti-competitive behaviour of POs should be explicitly considered. We found that designing pro-competition PO governance (no entry or exit barriers for members, POs bounded to accept all their members’ production, POs operating at cost), imposing cap on PO market share size calibrated on the structure and size of the downstream/upstream relevant market and limiting no erga omnes provisions might help preserving consistency with current competition law.

Link to the full study: http://bit.ly/573-428

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