The EU Commission cultivates competition in agriculture

Late 2015 saw two significant developments concerning the application of EU competition rules to the agricultural sector. These rules are uniquely complex, as a result of the interplay between the EU’s generally applicable competition rules and its flagship Common Agricultural Policy, or CAP.

On December 22, 2015, the Commission published new guidelines (the Guidelines) on the application of derogations from the EU competition rules provided for in Council Regulation 1308/2013 establishing a common organization of the markets in agricultural products (the CMO Regulation).  The CMO Regulation provides for general and special derogations allowing EU farmers to cooperate in joint selling activities that might otherwise be prohibited under the EU’s competition rules.  The Guidelines clarify the application of the specific derogations applicable to the joint selling of olive oil, beef and veal and arable crops.  The Commission’s announcement stressed that these rules are designed to reinforce farmers’ competitive position and counterbalance increasing concentration at the processing and retailing stages.

Unlike the predecessor rules, the CMO Regulation allows agricultural producers to cooperate without the Commission’s prior authorization provided that they satisfy the conditions set out in the Guidelines.  This approach will increase the burden on agricultural producers and their advisors to ensure that any proposed cooperation benefiting from the CMO Regulation is procompetitive.
[In a related development, in a case involving price fixing by French producers of Belgian endive, the French Supreme Court referred questions about the interaction between the EU competition rules and the CAP to the European Court of Justice (the ECJ).  The French competition authority imposed fines for violation of the EU competition rules, but the French Court of Appeal annulled the fine.  The European Commission took the unusual step of intervening before the French Supreme Court to challenge the Court of Appeal’s approach.

The EU’s farming and food sector accounts for 6% of the EU’s gross domestic product, and the EU is both the largest global exporter and the largest importer of such products worldwide.  These issues addressed in the Guidelines and the French endive case are important not only for EU agricultural producers, but also for customers of agricultural products ranging from food producers, to wholesalers, to large retail supermarket chains to the hospitality industries, as well as to EU agricultural producers’ global competitors. The ECJ’s judgment in the Belgian endive matter will likely become the leading EU case on the interaction between the EU’s competition and agricultural policies for years to come.

The EU’s agricultural policy and its competition policy are both enshrined in the EU’s constitution, the Treaty on the Functioning of the European Union (TFEU).  These policies are sometimes at cross-purposes, however; 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 CAP’s objectives, set out in Article 39 TFEU, are 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; and
• To ensure that supplies reach consumers at reasonable prices.

The EU’s competition policy prohibits restrictive agreements and concerted practices and abuses of dominant positions.  As applied in decades of individual decisions and judgments of the Commission and the European Courts, as well as voluminous “soft law” guidance from the Commission, cooperation among competitors of the type contemplated by the CAP objectives are suspect and may attract significant penalties.

Articles 40 and 41 TFEU provide for the establishment of a common organisation of agricultural markets, including common rules on competition; compulsory coordination of the various national market organisations; and a European market organisation, while Article 42 TFEU authorizes the EU Council and Parliament to determine the extent to which the EU competition rules apply to agricultural products.  The EU legislator has done so through regulations adopted in 1962 and repeatedly updated, most recently in the CMO Regulation. The EU’s generally applicable competition rules only apply to the agricultural sector where not in conflict with the CMO Regulation.  

The CMO Regulation is long – 232 articles – and complex, covering all agricultural products listed in Annex I to the TFEU except fishery and aquaculture products.  The CMO Regulation contains detailed provisions on market interventions, aid schemes for various sectors, associations of producer organizations (POs), associations of POs and so-called inter-branch organisations, which may among other things collect and publish market data, forecast production and prices, coordinate 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.  The CMO Regulation also addresses competition rules and exceptional measures for market disturbances, animal diseases and health risks, specific problems and severe market imbalances and crisis reserves.
The CMO Regulation contains both general and sector-specific derogations from the competition rules.

General derogation

The general derogation covers all agricultural products within the scope of the CMO Regulation and exempt from the EU competition rules agreements, decisions and practices (i) that relate to the production of or trade in agricultural products if they are necessary for the attainment of each of the CAP objectives (not only one or more of them) and (ii) of farmers, famers’ associations, associations of such associations, or recognised POs 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 CAP objectives are jeopardised.

The first limb of the general derogation thus applies to a wider range of undertakings, but the conditions for its application are stricter than for the second limb of the General Derogation. Neither limb of the general derogation applies to agreements, decisions and concerted practices that entail an obligation to charge an identical price or by which competition is excluded. Article 209(2) of the CMO Regulation states that no prior decision of the Commission or a national authority is required for the general derogation to apply; application is based on self-assessment by the producers.  However, a producer claiming the benefit of the general derogation bears the burden of proving that the conditions for application of the general derogation are satisfied.

The specific derogations relate to three sectors:  olive oil, beef and veal and certain arable crops.  These derogations permit POs to negotiate contracts for the supply of relevant products and to engage in related activities without being caught by the EU’s generally applicable competition rules, subject to complex conditions.  The Guidelines explain that these objectives must be achieved by generating significant efficiencies through the integration of activities in POs so that the POs’ activities will contribute to the fulfillment of the CAP objectives, including by pursuing an effective commercialisation strategy. The Guidelines discuss the type of activities that can create the significant efficiencies required to benefit from the derogation and give specific examples of situations in which such activities can create significant efficiencies.

A number of conditions must be satisfied for the specific derogations to apply while POs are negotiating supply contracts on members’ behalf:

• The PO must be formally recognised by national authorities.
• The PO must pursue one or more of the objectives of concentrating supply, placing members’ products on the market or optimising production costs.  
• The integration of activities must generate significant efficiencies so that the PO’s activities overall contribute to the CAP objectives, as determined using one of two methods, a simplified method provided by the legislator or an alternative case-by-case assessment.
• The volume of a given product subject to negotiations by a particular PO must not exceed 15% of the total national production, in the case of arable crops and beef and veal, or 20% in the case of olive oil.   The Guidelines give guidance on how to calculate the volumes marketed by farmers' organisations and how to check that they do not exceed the thresholds, taking into account notably natural variations over time.  The Guidelines also explain how exceptional circumstances, e.g. a natural disaster, can be taken into account when calculating these volumes.
• Producers cannot be members of more than one PO negotiating supply contracts on their behalf, although producers can sell their products both through a PO and directly to the market.
• The PO must notify the volume of products covered by the negotiations to the competent national authorities.  

In addition, the CMO Regulation includes a safeguard clause authorizing competition authorities to decide that an individual negotiation should be reopened or should not take place.  The Guidelines clarify the situations in which the authorities may apply the safeguard clause.

Compared to the general derogation, therefore, 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 POs; not inter-branch organisations or other undertakings who may benefit from the general derogation. On the other hand, the conditions to apply the specific derogations may be easier to meet, and the assessment methods and notifications provided for give POs greater certainty.

The Belgian endive case originated in practices adopted by French producers of Belgian endive between January 1998 and March 2012, when two predecessors of the CMO Regulation were in effect.  These practices included setting minimum prices and operating a mechanism to withdraw endives from the market as a form of price support.

The French Court of Appeal struck down the fine imposed by the French competition authority, on the ground that EU competition rules did not apply to the price mechanisms implemented by the endive producers.  The Court of Appeal was unclear, however, as to whether in its view these mechanisms were permitted under the general derogations set out in the predecessors to the CMO Regulation, under the specific derogations, or under a purely national regime in effect at the time.

The ambiguity of the Court of Appeal decision led the Commission to review each of the possible grounds in detail.  The Commission argues that the general derogations did not apply, notably because the producers’ price mechanisms were not necessary to achieve all of the CAP objectives and these mechanisms related to price.  In any event, argued the Commission, the CMO Regulation’s predecessors required prior Commission approval for the general derogation to apply, and the producers had never sought or obtained the Commission’s approval.

Similarly, the Commission argued that the predecessors of the specific derogations discussed above could not justify the price fixing mechanisms because these mechanisms were not among the specific permitted conduct and producers could not extend the application of the specific derogations to other conduct by analogy. The Commission argued that setting minimum prices clearly exceeds POs’ legitimate authority.

The complex competition rules applicable to European producers are unfamiliar to many competition lawyers. These rules 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.

However, the competition rules applicable to the agricultural sector are important to companies in many activities. First and foremost, these rules apply to EU producers and are specifically designed to increase producers’ bargaining power. In the second instance, therefore, these rules are important for various types 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. Third, understanding what EU agricultural producers can and cannot do under the EU competition rules is important to their non-EU 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 Guidelines include many examples of ways the CMO Regulation’s general and specific derogations can be applied in practice. On the ground, however, the facts of each situation are different, and each case must be examined carefully on a case-by-case basis.