Nidhi Singh, Founding Partner of Black Pearl Law Chambers and is a practicing Corporate Lawyer in India. She studied MSc in Law and Finance as a Louis-Dreyfus Weidenfeld-Hoffmann Scholar at Faculty of Law, University of Oxford (2015-2016).
I
BRIEF BACKGROUND ON THE COMMON AGRICULTURAL POLICY (CAP)
Since the Treaty of Rome has come into force, there has been an incessant conflict between the Common Agricultural Policy (CAP)[1] and EU competition policies. Some scholars have argued that farming activities should be entirely exempt from competition law given the peculiarities of the agriculture industry. Whereas some hold the view that agriculture sector is not that unique that it should be given the benefit of exemption from the principles of Competition law.[2] This article shall discuss the problems posed by the agricultural sector, which are in conflict with EU competition policies.
The legal basis for the CAP has been laid under Article 38 to 44 Treaty on the Functioning of European Union (TFEU. After the enforcement of the Treaty of Rome, Member States’ agricultural policies were replaced by intervention mechanisms at community level. When the Treaty of Rome established the common market in 1958, State intervention was a major feature of agriculture in the six founding Member States. If the principle of the free movement of goods was to apply to agricultural produce, ongoing State intervention notwithstanding, national intervention mechanisms which were incompatible with the common market had to be transferred to community level: this is the basic rationale behind the establishment of CAP.[3] One of the reasons for intervention in the agriculture sector can be attributed to the characteristics of the sector, which is vulnerable to climate and prone to systemic imbalances between supply and demand and price/income fluctuations. As these characteristics lead to permanent market instability, governments have felt the need to intervene and regulate the agricultural markets and sustain the income of the farmers’-which is one of the underlying features of CAP.
II
THE AGRICULTURAL EXCEPTION UNDER THE EU LAW
Article 42 of the Treaty on the Functioning of European Union (TFEU)[4] lays down the principle of the agricultural exception and its limits: The provisions of the Chapter relating to rules on competition shall apply to production of and trade in agricultural products only to the extent determined by the Council within the framework of Article 43 (2) and (3) and in accordance with the procedure laid down therein, account being taken of the objectives set out in Article 39.
Article 39 TFEU sets out the specific objectives of the CAP viz:
- To increase agricultural productivity;
- To ensure a fair standard of living for farmers;
- To stabilize markets;
- To ensure the availability of supplies;
- To ensure reasonable prices for consumers.
As also pointed out by the European Parliament, these objectives are both social and economic in nature and their purpose is to safeguard the interests of producers and consumers. Article 1 of Regulation 1184/2006[5], which replaced Regulation 26 of 1962, provides that Articles 101 and 102 of TFEU shall apply to the production of or trade in the products listed in Annex I to the TFEU except for those covered by Regulation 1234/2007[6], subject to the derogations set out in Article 2. Article 2 provides that Article 101 (1) shall not apply to agreements that form an integral part of a national market organization or that are necessary for the attainment of the objectives set out in Article 39 TFEU.[7] As Richard Whish in his book on Competition Law summarizes[8] that these derogations are strictly construed, and the Commission must give adequate reasons in the event it allows such derogation. The application of these derogations shall be applicable only to Article 101 and not Article 102 to the agriculture sector.
Article 2 of Regulation 1184/2006 and Article 176 (1) of Regulation 1234/2007 provide that Article 101 shall not apply to agreements, which form an integral part of a national market organization. However Regulation 1234/2007 established a common organization for many agricultural products. Further Article 2 of Regulation also permits agreements, which are necessary for the attainment of the objectives of the common agricultural policy. Article 39 (2) provides that, in implementing the common agricultural policy, account shall be taken, inter alia, of:
the particular nature of agricultural activity, which results from the social structure of agriculture and from structural and natural disparities between the various agricultural regions.
In order to apply these provisions, many industry specific regulations were adopted to put the Common Market Organisation (CMO) in place and provide marketing norms, set up organisations of producers authorized to oversee the distribution of produce, optimize the costs of production, put in place standard contracts, promote the quality of produce, orientate produce towards certain outlets.[9] As Michel Debroux, et.al, discusses in their article that the provisions concerning competition included in the CMO exempt these types of activities from competition law, but only under very strict conditions which forbid the monopolization of markets, distortions of competition that are not necessary to achieve the CAP’s objectives, measures that result in price fixing or discrimination, etc. Thus, when a CMO has been put in place with respect to a given category of products, neither the State nor the market players have much room left for maneuver when it comes to any agreements or practices that go against the CAP objectives which are deemed to be included in full in the CMO.[10] The exception mechanism is applied to the agriculture sector, although very strictly, but it is still much greater for other sectors within the EU. The Tribunal has held that the exception to the agriculture sector could be applied if all of the objectives listed in Article 39 are fulfilled. In the French Beef case (Endnote 10), the Court has admitted that although the agreement may be anti-competitive, it can be considered to be aiming to secure an ‘equitable standard of living for farmers’.
While applying the exceptions to the agriculture sector in application of the competition policy, few scholars have argued that the primacy of policy has been in favour of competition policy. However this is contestable as there are many cases under the EU law where the particular characteristics of the industry have been taken into account.
III
ROLE-PLAY BETWEEN THE FARMING SECTOR AND COMPETITION LAW
There are certain characteristics of the farming sector that needs to be accounted for while examining the application of competition law. Farming is hugely dependent on climate and there is a significant time gap between production and the produce reaching the market. This implies that the farming products are lacking in short-term flexibility in the supply of many produce. Further the market structure of farming businesses is quite fragmented and have to compete with the strong buying power of large industrial farming companies. The aforementioned two factors have led to a more tailored approach by the competition authorities. There are two questions that needs to be examined:
- Whether farming associations can optimize their output in a coordinated way and exchange some type of information between them?
In a French case[11], decision rendered by the French authorities highlighted that in case of farmers it fails to see a reason as to why they should not regularly share detailed information given that the market is not oligopolistic at the point of sale, thus the exchange of information would not produce significant negative effects due to fragmented character of the market and absence of barriers to entry.
The second question that needs to be examined is:
- The validity with regards to competition law of two types of farmers’ associations: the farmers’ trading association and the farmers’ governance association?
In the French case (mentioned above) concerning the economic organization of the fruit and vegetable sector, the Council found merits in the case on the basis of the fragmented nature of the market, precarious and perishable nature of the produce in question and reasoned that the inelasticity of output may lead to volatility in prices which in turn could lead to serious financial problems for farmers. The Council decided in favour of commercial farmers’ associations as it saw them as a platform to rebalance the commercial relationship that often leads to too much in favour of consumers. However, CMO is not absolute and in the event where farmers’ association could result in price fixing, such retail price-fixing is prohibited.[12]
The flexibility enshrined under a CMO is subject to certain limitations. For example: The French Competition Council has opposed to the steps taken by farmers’ association that resulted in any form of price-fixing. This was done by the Council in the maize-drying case (See decision No. 07-D-16 of 9th May 2007). The French competition authorities have suggested other financial instruments to solve such issues rather than indulging in inefficient methods of problem solving. Similar approach has been taken when the Council came down heavily on the price fixing of number of varieties of strawberries organized by organizations in South West of France. Further, it is also not advisable to restrict access to resources only to selected parties. In a decision No. 04-D-3, handed down on 3rd August 2004, several companies were condemned for having put in place a discriminatory system for access to the Laval slaughterhouse. (See Michel Debroux)
IV
CONCLUDING THOUGHTS
The European Council in a number of decisions has not favoured restricting the market or discriminatory use of resources such that it limits the access of resources to other parties in the agriculture sector. The competition authorities have come down heavily on such parties. Furthermore, in cases where anti-competitive practices were initiated by the authorities have been penalized by the Commission unless such authorities have positively and expressly imposed anti-competitive actions on certain businesses.[13] In the above article, the author has discussed the rationale behind CAP, exceptions given to agriculture under Competition law and possible conflicts between CAP and Competition law. In light of this analysis, it can be said that there continues be a continuous tension between CAP and Competition policy. This can possibly reduce in future if there is an adverse effect on the agriculture industry in the long run. In order to affect the substance of the regulations that govern the application of Competition law in the agriculture sector, it is important that a reform is initiated such that it boosts the commercialization of the farming sector and is able to match up to the ever increasing demands of the consumers.
[1] The Common Agricultural Policy (CAP) is the agricultural policy of the European Union. It implements a system of agricultural subsidies and other programmes.
[2] Mario Monti, ‘The relationship between CAP and competition policy: Does EU competition law apply to agriculture?’ European Commissioner for Competition Policy, November 2003.
[3] Fact sheets on the European Union, ‘The Common Agricultural Policy (CAP) and the Treaty’, available at http://www.europarl.europa.eu/atyourservice/en/displayFtu.html?ftuId=FTU_5.2.1.html, as accessed on September 1, 2016.
[4] Hereinafter referred to as The Treaty.
[5] OJ (2006) L 214/7.
[6] OJ (2007) L 299/1.
[7] On Article 39 see ‘The second derogation: common market organisations’, Article 2 contains a sentence dealing with the activities of farmers’ associations; this is not a further exception, but rather an embellishment of the policy expressed in that provision. See Richard Whish & David Bailey, ‘Competition Law’, Oxford University Press, at pp. 964.
[8] Ibid at pp. 964.
[9] Michel Debroux, Hogan & Hartson MNP, Paris, ‘Agriculture and competition law: a stormy relationship’, Focus, Farm Law, United Kingdom.
[10] See The Commission v. Spain, case C-113/00 and Henri Courivaud, La politique agricole commune est-elle soluble dans la concurrence? Lecture critique de la decision, (Can a common agricultural policy be reconciled with competition? A critical study of the ‘French beef case’) Contrat Concurrence Consommation No.1, January 2005, Study 1). Also See Supra note 9 at p. 2.
[11] Non-binding opinion-No. 08-A-07, 7th May 2008.
[12] See Decision No. 07-D-16 of 9th May 2007. A similar decision was made in 2003 that sanctioned the price fixing of a number of varieties of strawberries organized by the members of numerous professional organisations in South West of France.
[13] Ladbroke Racing cases (C-359/95 P and C-379/95 P, ECJ, 11th November 1997)