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National initiative in the dairy sector seeks to operationalise new supply-chain policy

27 December 2011

A recent press release from Eurocommerce, a representative body of retail, wholesale and international trade sectors in Europe, highlights the continuing debate in the EU at the level of the sector and industry wide on how to promote better functioning of food supply chains.

In the UK, farmers’ organisations are looking to the development of model contracts for milk farmers to use in negotiations with dairy processing companies. In France, similar initiatives are under way in the framework of legislation introduced in 2010 (Act on the Modernisation of Agriculture – LMA). According to press reports, this legislation ‘obliges French dairies to draw up raw-milk supply contracts to submit to their farmers’, with the intention of improving the position of farmers vis-à-vis the processing industry. However, to date only 5% of French farmers have signed up for these contracts. These contracts have been described by farmers as ‘totally unacceptable’, since they contain no concrete commitments on price and make stipulations of the volumes to be supplied the sole prerogative of the processor. These contracts furthermore ‘do not allow the producers to unite in order to boost their bargaining power’.

As a consequence, the French Milk Board has now drawn up a ‘model contract’, which it recommends for use by farmers when negotiating with milk processors. The French Milk Board is seeking endorsement from the French minister of agriculture for this model contract. Producers who adopt the contract will pass on their right to negotiate with processors to the French Milk Board for a 5-year period. The model contract ‘specifies the supply volume and stipulates a milk price based on real production costs, verified annually by an independent commission’.

The European Milk Board (EMB) has endorsed this French approach of basing prices on ‘production costs plus’ arrangements. This follows criticisms from the EMB in October 2010 of opposition in the EU Council to the establishment of a milk sector monitoring agency, as proposed by the European Parliament. Such an agency would ‘collect market data on volume, price and costs’, as well as establishing an EU-wide obligation ‘to have contracts between producers and dairies’ linking prices to production costs. These proposals were however rejected by the EU Council.

According to the EMB, ‘once the state quota system comes to an end, it is only through a monitoring agency that we can prevent damaging surplus volumes being produced and the market plunging deeper into crisis.’ EU dairy farmers are fearful of a replication of the Swiss experience where in 2009 ‘the Swiss legislator abolished the quotas without bringing in a sensible follow-up regulation for the dairy market’, which resulted in a downward spiral in farm-gate milk prices.

Beyond the dairy sector, the EU High-Level Forum on a better functioning food supply chain has ‘welcomed a proposed set of principles to ensure fairer business relations along the food supply chain’. The Forum, co-chaired by four senior Commissioners, was established in 2010 and brings together representatives from farmers’ bodies and other stakeholders. Experts drawn from organisations across the food supply chain were asked to review fair and unfair business practices based on current and past practices, in order to draw up the set of principles to guide the better functioning of food supply chains. While progress has been made, the challenge now is to determine ‘how best to implement and enforce these principles and make sure that they are applied in daily business relations’. This work is seen as potentially making an important ‘contribution to Commission work in identifying appropriate policy options’ for promoting ‘a better functioning of food supply chains in Europe’.

Editorial comment

With the move away from price and production regulation to a more market-based agricultural system in the EU, the issue of unequal power relationships along major food supply chains has been receiving increased attention. While the EC has sought to establish an EU-wide policy framework, it is largely at the national level that initiatives are beginning to take this policy forward operationally.

These initiatives are increasingly focused on strengthening producer organisations and establishing transparent frameworks for the negotiation of business-to-business contracts. This focus is also potentially applicable to ACP–EU supply chains. It applies both in sectors where systems of regulated prices are being dismantled (e.g. the sugar sector) and in sectors where enormous disparities in power relationships exist along supply chains. This latter dimension is particularly relevant for smallholder-based farming economies, and hence for the attainment of food security and poverty eradication objectives.

The EU’s evolving policy experience in promoting a better functioning of food supply chains would seem to offer a useful opportunity for closer ACP–EU dialogue, focusing on the major lessons emerging from the EU’s recent initiative.

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