Micro-regulating trading practices between food multinationals and retail will end up in consumers paying

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

"European legislation preventing normal business negotiations with major brand manufacturers to share costs of things like promotions or logistics does nothing to help farmers." [Shutterstock]

As the European elections and the change of Commission loom next year, the Commission is in a hurry to get its last proposals out and parliamentarians are keen to complete their scrutiny before the campaign trail beckons, writes Christian Verschueren.

Christian Verschueren is director-general of EuroCommerce, the European association of retailers and wholesalers.

Elections are good things – they keep politicians’ minds on delivering what the electorate wants and needs. They can sometimes, however, lead to rushed decisions in the face of an upcoming election, on the basis of anecdote, misunderstanding or even dismissal of the real facts. Those decisions can also be governed by that worst enemy of good policymaking, an unconsidered response to calls for “something to be done”.

This is the situation we face in Europe today with the Commission proposal for a directive on so-called unfair trading practices (UTPs) in the food supply chain. Don’t get us wrong. We agree that payments for fresh products to farmers shouldn’t be delayed and that contracts shouldn’t be unilaterally changed. But European legislation preventing normal business negotiations with major brand manufacturers to share costs of things like promotions or logistics does nothing to help farmers.

In the face of diminishing resources for CAP funding, and resistance to Commissioner Hogan’s attempts to achieve the competitive and market-oriented policies which European agriculture needs to thrive, the Commission has responded to long-standing assertions that what retailers do in negotiating with their suppliers directly harms farmers.

I won’t go into the detail of why this does not add up, but suffice it to say that 80% of what retailers buy and sell is processed food which has often undergone multiple transformations before it ends up in the consumer’s basket.

What the dairy or grain merchant or slaughterhouse paid the farmer is often far removed from, and makes up only a small part of, what the retailer pays its supplier for a finished product.

The price of milk is often cited as an example, yet what the dairy pays a farmer is largely governed by the world price of milk, and only 16% of milk production ends up on retailers’ shelves as a litre of drinking milk. What the retailer pays for that litre makes no difference to the world price the dairy pays.

This is why retailers and wholesalers around Europe are shaking their heads at what two draft European Parliament reports are demanding as changes to the Commission proposal. The Commission’s draft was at least fairly balanced. It was meant to help farmers earn more, even if, for the reasons above, we doubt that any legislation on UTPs at European level can do this.

The latest changes proposed in the draft European Parliament report would mean negotiations between a supermarket and a brand manufacturer for a can of cola or frozen pizza would be regulated to the advantage of the large, often multinational industrial processor. By extending it to goods including any agricultural products, it would also cover cotton, tobacco and even wool. Do the legislators really want to help cigarette manufacturers make more profit or Coca-Cola negotiate even higher prices?

The sad fact is that, in the name of helping small farmers to be better off, the Parliament amendments are offering highly profitable and very strong multinational corporations the ability to wring even more profits out of the European consumers, with no guarantee that these end up anywhere except their shareholders’ pockets.

The Commission’s own assessment saw no evidence or justification for EU-level intervention in market transactions far away from farmers’ interests. Large multinational corporations hold more power than retailers or wholesalers, and make net profit margins of up to 30%.

Any retailer, whatever its size, represents a very small share (in a range of 1-2%) of these brands’ global turnover, and has little choice but to stock its products. It takes little imagination to see from this where the negotiating power really lies.

The process I am describing forgets the interests of 500 million European consumers, who never get a mention in the Parliament’s report. A number of large manufacturers have already promised their shareholders to increase profit margins further by 3-10%.

Strengthening the negotiating power of large manufacturers will have only one result. Retailers, operating on margins of 1-3%, will not be able to absorb the resulting price rises – the consumer will have to pay, and no farmer will see an extra cent. The Commission’s own impact assessment itself concluded that such an extension of the scope of the directive would harm consumers.

Massive state intervention, rigging the market in favour of large manufacturers and cooperatives (who can themselves often be the source of farmers’ complaints) won’t help any farmer earn an extra cent, and only add millions of euros to the shopping bills of hard-pressed families across Europe.

This intervention also sets a precedent for future interference in other complex supply chains, such as the motor or electronics industry – not a recipe for stimulating the growth and jobs Europe urgently needs. That is surely not the sort of Europe we should be seeking, or electors will be voting for.

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