A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.
Point of view

Milk contractual arrangements: Very small steps in the right direction

Frédéric Courleux, expert of Momagri

Article published in Terre-net1

By opening up the possibility of controlling supply on a voluntary and temporary basis at the Council of Ministers on March 14, 2016, Commissioner Phil Hogan returned the issue of the economic organization of the French dairy sector to the top of the agenda. In fact, the principles of Article 221 and 222 of the single CMO Regulation provide that the Commission can, in case of crisis, act to stabilize markets by allowing producers’ organizations and cooperative firms to deviate from competition rules through production planning. In other words, this is about determining whether the economic configuration of the French dairy sector––currently being redeveloped since the 2012 adoption of the “Milk Package”––must be altered to facilitate and improve the implementation of Articles 221 and 222.

In France, following the 2009 milk crisis, the challenges regarding price negotiations have led the various agricultural unions to promote the implementation of producer organizations (POs) to try to balance negotiating powers in the framework of “contractual arrangements”. Bringing producers together seemed necessary, with the understanding that a sole contract cannot rebalance a trade relation. Overall, two distinct approaches prevailed: One sought to organize producers for a same dairy plant (vertical POs), and the other wanted to bring together producers from a same geographical zone (horizontal POs).

Regarding the specter of too heavy-handed approaches to competition legislation, the French authorities asked the European Commission to define the concentration thresholds not to be exceeded by POs. The thresholds decreed in the “Milk Package” proved to be too lenient, since it was determined that a single PO cannot collect more than 3.5 percent of the European milk production and 33 percent of a member state’s milk production. In France––a major producing nation––the first threshold is the biggest constraint: A single PO cannot collect more than 5.2 billion liters of milk, i.e. 22 percent of the national production. It should be noted, however, that these thresholds are nor applicable to cooperative businesses, since their statutes are by nature in accordance with competition law.

Four years later, only 40 percent of milk collection by private firms involves one of the currently recognized 51 POs. For the most part, these POs only have a single buyer and never claim ownership of production (non trading POs), which in fact weakens their bargaining power. With regards to the European thresholds, it seems that if all such POs were to merge, they would not exceed the concentration threshold!

Beyond that, a recent report from the Ministry of Agriculture2 mentions quite abusive contractual practices, where the use of clauses called “of safeguard”, “of volatility” or “force majeure” allows businesses to unilaterally inflict lower prices, while none of these contracts include formulas to set prices involving the businesses’ added value or livestock farmers’ production costs.

Reference is also made to penalties for overrun or under-achievement individually imposed to producers without seeking to profit from POs’ contractual arrangements. Based on this, the report’s authors offer a very clear conclusion: “The balance between producers and buyers has broadly shifted at the expense of producers.”

The reasons to explain this situation are manifold. The cart has been put before the horse: The ruling forcing dairies to propose a contract to livestock farmers was published in November 2010, while the one validating the non-trading POs was not published before April 2012. In addition, France was the only country to offer five-year contracts to processors, when other countries solely opted for six-month or one-year contracts in order to improve the responsiveness of relationships between producers and dairies. As a result, France was the only nation to alter the situation of economic dependence by opting for long-term contracts that refer price settings to clauses that can be easily and unilaterally reconsidered.

Another unfortunate consequence of the “Milk Package” is to focus and use as example the non-trading POs instead of cooperatives. By doing so, cooperatives were wrongly accused to shun the contractual arrangement process, although they are more soundly based than non-trading POs. France is one of the very few major European countries where over 70 percent of its milk production is collected and processed by cooperatives (54 percent of collection and 45 percent of processing).

Yet, in view of the collective organization successes achieved by cooperatives in the French plant sector—especially sugar and grain––and by the large dairy cooperatives in the Northern Europe, one can only state the obvious: A cooperative firm is the most evolved form of producers’ organization, and the best contract for farmers is membership in a cooperative.

The results of the “French-styled” contractual arrangements, which were supposed to fill the gap of milk quotas, are thus not entirely satisfactory. Yet we can glimpse some reasons for hope. First, the first generation of five-year contracts is starting to become due this year, and the coming months could thus be used to strengthen the sector’s economic organization. In addition, ties between POs are currently initiated, and will lead to associations of POs, or to more valuable POs. Moreover, some privately held dairies provided their PO or POs––some of them in charge of milk collection––with the possibility to collectively manage production volumes. Producers can thus profit from some additional flexibility to ensure the production regularity required to maximize production tools. And they are starting to be involved in the issue of allocating the released or additional volumes.

Yet contrary to some recommendations promoting the participation of cooperatives to associations of horizontal or territorial POs––which could undermine cooperatives––it is clear that the rationale of the “French-styled” contractual arrangements must be reassessed. The limitations of the Bavarian POs (MEG)––often mentioned as an example––and the consolidation of Northern European cooperatives must be used as lessons.

On balance, the current context of crisis and the prospects of enforcing the Articles 221 and 222 must lead to continue the sector’s reorganization. The associations of POs and the cooperatives are becoming the reference level to design the crisis management tools that are required to adapt supply to demand. The prospect of implementing incentive or coercive measures to resolve the current crisis can only argue for a better administration of supply, for which cooperatives are the most successful form. Given the organizational performance of Europe’s northern nations, we could also dread that, should the French dairy farming sector does not improve its competitiveness, other countries that feel better equipped to withstand the crisis will seek to profit from this competitive advantage by reject the regulation measures that are nevertheless necessary.

1 http://www.terre-net.fr/magazine
2 http://agriculture.gouv.fr/mise-en-oeuvre-de-la-contractualisation-dans-la-filiere-laitiere-francaise-(...)

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Paris, 11 December 2018