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IC51 - Investigation into the dairy sector: “The aim is to concentrate supplies and centralize services”


PRESS RELEASE


PRESS RELEASE

 

INVESTIGATION INTO THE DAIRY SECTOR: “THE AIM IS TO CONCENTRATE SUPPLIES AND CENTRALIZE SERVICES”

Upon the conclusion of an investigation carried out in the dairy sector, launched in May 2015, the ICA “deems fundamental - within the process of the reorganization of the sector - to create and acknowledge various Producer Organizations (POs), capable of concentrating dairy supplies and centralizing several company functions and services”. Pursuant to the indications provided by the European Union, this can be a logistic, organizational and financial operation. Moreover, it can also concern the first processing phase of the product, with the aim “to increase the efficiency of the single enterprises belonging to each organization”.

The ICA’s investigation had the aim to ascertain, pursuant to competition law and regulations protecting the weak contractual party, several specific issues concerning the functioning of the dairy chain. In fact, the farmers’ main trade unions reported a series of mechanisms capable of affecting price formation. In particular, farmers’ associations complained about the scarce connection between consumer prices of dairy products and the prices paid to farmers for the purchase of raw milk.

As known, this sector is facing a period of serious crisis at global level. However, at national level, according to what found during the ICA’s investigation, the effects seem to be stronger than in the other European Countries: “National production costs – said the ICA – are in average higher (of about 5 cents of Euros per litre) compared to those of the other main European producers, among which – in particular – France and Germany”. Against “a very high fragmentation” of the sector with about 34,000 producers (most of which not large in terms of production and livestock), “the demand is concentrated, being represented by about 1,500 buyers”. Therefore, the result is that “farmers sell the entire production of milk to a single purchaser, while processing enterprises have many suppliers”.

“However, from a competition law standpoint, the investigation – as highlighted in the ICA’s report – did not identify any specific problems in the functioning of the sector able to influence the final prices of dairy products”. In fact, no aspects were identified “capable of steadily generating and withholding extra-profits to the detriment of the operators working in the upstream markets”.

The “tendential price uniformity of raw milk could be attributed primarily to the commercial practices established in the sector. In fact, the conditions negotiated between the main Italian purchaser, Gruppo Lactalis, and farmers’ associations are publicly available, making those prices a benchmark for the sector”. Negotiations in Italy are still “substantially carried out according to the old logic of an inter-professional agreement”. Therefore, they can be “object of the ICA’s assessment, so as to verify agreements consistency with what provided for by competition law and community regulations in the agricultural markets”.

Furthermore, as regards the weak contractual party, “investigations led to exclude that the estimates of the average production costs can be used as an automatic benchmark, below which the prices applied by the industry for purchasing dairy products must be necessarily considered an illicit imposition”. Rather than in verifying the fair economic conditions applied to processing enterprises for the purchase of dairy products - which would make the ICA’s role overlap into a function of market regulation - the specific law (art. 62 of D.L. no.1/2012) “seems to find its more natural scope of implementation in ascertaining that negotiations characterized by significant imbalance are set on transparency, fairness, proportionality and mutual correspondence of services”. More in particular, also keeping into account the current market situation, the ICA reasserted the importance to comply with the conditions set by the Italian regulations in dairy transfer contracts. In fact, the latter, among other things, must be in written form and have the minimum duration of a year.

An important role in defining negotiation criteria, according to the ICA, can be carried out by Interprofessional Organizations (Organizzazioni Interprofessionali - OI), upon the condition that they are sufficiently representative of all the categories involved. “Therefore, even without negotiating the sale price, Interprofessional Organizations will be able to define contractual requirements as regards form, minimum contents and modalities through which the various prices negotiated can vary during the period of validity of the contract; possibly also on the basis of agreed indexation mechanisms” that could be usefully realized by a third party public body such as ISMEA.

In conclusion, as regards possible policy interventions in the sector, “the ICA reasserted the need to provide protection tools in the agricultural sector that do not deter efficiency competition among national dairy companies, stifling the already ongoing virtuous process of concentration of farmers”. Secondly, the ICA “reasserted the need to use community and national funds in a more targeted way for the redevelopment of the sector”.

Among the operational proposals indicated in the ICA’s investigation, some are as follows: to stimulate the creation of adequate sized POs not limited at centralizing negotiations with the industry; to favour the installation of several plants for producing powdered milk; to promote the creation of one or more health insurance funds; to increase the efficiency of farms, with the joint commitment of the Ministry of Agricultural Policies and Organizations of the sector; to provide adequate tools aimed at agricultural welfare, so as to support farmers’ income in disadvantaged areas; to continue the promotion of a more rigorous regulation in terms of product labelling and traceability; to stimulate research and innovation, so as to place products with a higher added value on the market; to favour exportations and penetration into new markets.

Rome, 11 March 2016