New EU competition rules for the agricultural sector

Agricultural policy and competition policy are both enshrined in the EU’s constitution – the Treaty on the Functioning of the European Union (TFEU). However, these policies are sometimes at cross-purposes. In its Common Agricultural Policy, the EU is charged with increasing the earnings of agricultural workers, stabilising markets, assuring the availability of supplies and ensuring that supplies reach consumers at reasonable prices. The TFEU provides for a common organisation of agricultural markets, including special rules on competition, compulsory co-ordination of national market organisations and a Europeanwide market organisation.

To achieve these objectives, the EU has granted derogations from its generally applicable competition rules, allowing EU producers to co-operate in ways that would not be allowed in other sectors. The competition rules applicable to the agricultural sector are thus uniquely complex, consisting of a mix of special rules for the agricultural sector and generally applicable EU competition rules.

Understanding the competition rules applicable to the agricultural sector is important not only for the EU’s agricultural producers, but also for customers ranging from food producers and wholesalers to large retail supermarket chains and the hospitality industry, as well as EU producers’ competitors. The farming and food sectors together provide 7 per cent of all jobs and generate 6 per cent of European gross domestic product. The EU is both the world’s largest exporter of agricultural products and the largest importer of such products, in particular from Argentina and Brazil (€21 billion); the Association of Southeast Asian Nations (ASEAN), China and India (€16 billion); developing African, Caribbean and Pacific states and South Africa (€14 billion) and North America (€11 billion).

Under Article 4 of the TFEU, the EU shares competence over agricultural policy with the 28 Member States. Article 39 of the TFEU sets out the Common Agricultural Policy objectives as follows:

• To increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour.
• To ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture.
• To stabilise markets.
• To assure the availability of supplies.
• To ensure that supplies reach consumers at reasonable prices.

The TFEU confers broad powers to effect these objectives. Article 42 of the TFEU authorises the EU Council and Parliament to determine the extent to which the EU competition rules apply to the production of and trade in agricultural products, taking into account the Common Agricultural Policy’s objectives. Under this provision, in 2013 the EU adopted Regulation 1308/2013 establishing a common organisation of the markets in agricultural products (CMO Regulation), which entered into force in 2014.

The CMO Regulation provides for a number of general and specific derogations from the EU competition rules in the agricultural sector. In January 2015, the European Commission published draft guidelines on the application of the specific derogations for the olive oil, beef and veal and arable crops sectors set out in the CMO Regulation. The European Commission plans to adopt final guidelines in the fourth quarter of 2015.

The CMO Regulation is long – 232 articles – and complex. Thus, a detailed description is outside the scope of this article. The antitrust-related provisions are contained in Title II and Title IV. Title II covers (among other matters) the formation of organisations of producers of relevant products and associations of those organisations (collectively, Producer Organisations). It also covers so-called inter-branch organisations, which may among other things collect and publish market data, forecast production and prices, co-ordinate how products are placed on the market, explore potential export markets and seek ways to restrict the use of animal health or plant protection products. Title IV provides for general derogations from the EU competition rules and specific derogations for particular sectors.

The general derogation

The CMO Regulation provides for a general derogation from the EU competition rules for all agricultural products covered by the CMO Regulation in two circumstances:

• Under Article 209(1)(i) of the CMO Regulation agreements that relate to the production of or trade in agricultural products are exempt from Article 101(1) of the TFEU if they are necessary for the attainment of the Common Agricultural Policy objectives. This derogation has been interpreted to require that the relevant agreement must be necessary for all of the Common Agricultural Policy objectives, not just one or more of them.
• Under Article 209(1)(ii) of the CMO Regulation, Article 101(1) of the TFEU does not apply to agreements, decisions and concerted practices of farmers, famers’ associations, associations of such associations or recognised Producer Organisations concerning the production or sale of agricultural products, or the use of joint facilities for the storage, treatment or processing of agricultural products, unless the Common Agricultural Policy objectives are jeopardised. It is not necessary for all of the Common Agricultural Policy objectives to be jeopardised for this limb of the general derogation to apply.

The specific derogations

Articles 169, 170 and 171 of the CMO Regulation set out specific derogations for the olive oil, beef and veal products and certain arable crops. These articles allow joint sales and salesrelated activities through Producer Organisations and are intended to strengthen producers’ bargaining positions in relation to downstream operators, provided that these activities generate significant efficiencies through the integration of activities in Producer Organisations so that the Producer Organisations’ activities contribute to the fulfilment of the Common Agricultural Policy objectives.

To ensure compliance with the objectives of concentrating supply and placing products on the market, Producer Organisations must effectively pursue a commercialisation strategy. In this regard, they would normally negotiate and set all elements relating to supply contracts, including prices, volumes, and possibly other contractual terms such as quality specifications, duration, termination, exit, payment periods and procedures, arrangements for collecting and delivering products and rules governing force majeure. Producer Organisations’ commercialisation strategies may also entail agreements on production planning and exchanges of commercially sensitive information.

A number of conditions must be satisfied for the specific derogations to apply:

• Formal recognition – the PO must be formally recognised by national authorities under Article 152(1) or 156 of the CMO Regulation.
• The Common Agricultural Policy objectives – the PO must pursue one or more of the objectives of concentrating supply, placing members’ products on the market or optimising production costs. A Producer Organisation must actually concentrate supply and place products on the market; pursuing the objective of optimising production costs is not sufficient.
• The significant efficiency test – integration of activities must generate significant efficiencies so that the Producer Organisation’s activities overall contribute to the Common Agricultural Policy objectives. Agreements to carry out contractual negotiations can restrict competition and ultimately impair the fulfilment of the Common Agricultural Policy objectives, for instance if producers conclude an agreement that fixes prices, reduces output or shares markets.
• Market share capital – the volume of a given product (subject to negotiations by a particular Producer Organisation) must not exceed 15 per cent of the total national production in the case of arable crops and beef and veal, or 20 per cent in the case of olive oil.
• No multiple memberships – producers cannot be members of more than one Producer Organisation negotiating supply contracts on their behalf. However, producers can sell their products both through a Producer Organisation and directly to the market.
• Notification – the Producer Organisation must notify the competent national authorities of the volume of products covered by the negotiations.

In addition to these general conditions, the CMO Regulation includes a safeguard clause authorising national competition authorities – not the European Commission – to decide that an individual negotiation should be reopened or should not take place. Such actions are considered preventive measures and would not involve sanctions, but if a Producer Organisation does not respect a national competition authority’s finding, proceedings can be launched under general competition rules.

Compared to the general derogation, the specific derogations have a narrower scope in that they apply only to contract systems and related activities for olive oil, beef and veal and certain arable crops. They also apply only to activities of Producer Organisations, not inter-branch organisations or other undertakings who may benefit from the general derogation. On the other hand, the conditions for applying the specific derogations may be easier to meet, and the assessment methods and notifications provided for give Producer Organisations greater certainty.

While the special rules governing competition in the agricultural sector take precedence over the EU’s generally applicable competition rules, the latter also apply to the agricultural sector to the extent they do not conflict with the specific rules outlined above. Article 101 of the TFEU applies in principle to all economic activities of producers and Producer Organisations, including both the agreements creating Producer Organisations and decisions made or contracts concluded by Producer Organisations.

The European Commission’s regulation on the application of Article 101(3) of the TFEU to certain categories of specialisation agreement (Specialisation Block Exemption Regulation) is particularly relevant to co-operation among agricultural producers. For example, a specialisation agreement can refer to joint production of agricultural products and any activity of processing or transforming agricultural products into other products, such as slaughtering and cutting meat, milling cereals and so on. In the context of agricultural Producer Organisations, a specialisation agreement is more likely to concern processing/ transforming raw agricultural products into other products, as there are few joint ventures on production of raw agricultural products.

Under the Specialisation Block Exemption Regulation, Article 101(1) of the TFEU does not apply to specialisation agreements if the parties’ combined market shares do not exceed 20 per cent, or if the agreement includes any rigid restrictions. Rigid restrictions include fixing prices, limiting output and allocating markets or customers, except for fixing of prices charged to immediate customers in the context of joint distribution of products produced through the specialisation agreement; setting of capacity and production volumes in the context of a joint production agreement; and setting of sales targets in the context of joint distribution of the products produced through the agreement.

The complex competition rules applicable to European agricultural producers are a unique blend of familiar, generally applicable competition rules and sector-specific derogations applying to the agricultural sector as a whole or to limited parts of the agricultural sector. These rules are important for companies engaged in various activities.

First and foremost, these rules apply to EU producers. However, since the rules are specifically designed to increase EU producers’ bargaining power, understanding them is also important for a wide range of customers, including food producers who use agricultural products as raw materials, wholesalers who buy and resell such products, retail companies such as supermarket chains and the hospitality industry. Understanding what EU agricultural producers can and cannot do under the EU competition rules is also important for competitors both inside and outside the EU.

The uniquely complex general and sector-specific rules in the agricultural sector must be navigated with care. The draft guidelines include many examples of ways the CMO Regulation’s general and specific derogations can be applied in practice, as well as the operation of the Specialisation Block Exemption Regulation in cases where the CMO Regulation’s derogations are not available. On the ground however, the facts of each situation are different, and each case must be examined carefully on its own merits.