The position of primary producers in the food supply chain is made more difficult both by tight regulation and groceries trade and food industry contract practices that are questionable in terms of effective competition, concludes a study published by the Finnish Competition and Consumer Authority today.
This report follows on a study on buyer power in groceries trade published by the Authority in January 2012, which highlighted trade practices that are questionable in terms of effective competition. In part, these practices also appear to be detrimental from the perspective of primary producers. The study also points out that the regulation to which primary producers are subjected results in imbalances in the conditions of competition.
This study based on questionnaires sent to the various links of the food supply chain in autumn 2012 throws light on the manifestations and impacts of buyer power and bargaining power from the viewpoint of primary producers. The sectors under scrutiny included especially meat production, fish farming and open air and glasshouse cultivation.
Many sources of friction in contractual relations
In the vegetable market, where primary production has direct business relations with trade, the position of primary producers appears weaker in relation to trade than to the food industry. One factor giving rise to problems is the lack of written contracts typical of the sector, which may for example facilitate one-sided amendment of contract terms, or only giving notification of the price after deliveries, or even actual sales, have been made.
The trade sector also strives to transfer the risk related to unsold produce by demanding that primary producers reimburse any losses. The situations encountered by some respondents, in which the producer is forbidden from bypassing the central organisations and selling their produce directly to individual traders, or in which they are obliged to only sell their produce to a single buyer, are dubious in terms of competition.
The position of primary producers as contract producers for the food industry may also contain aspects that have questionable effects on the conditions of competition. Problems may in particular be caused by exclusive supply obligations contained in the contracts, combined with the long periods of validity of such contracts, which makes subjecting procurement companies to competitive bidding more difficult.
Regulation frequently disrupts competitive neutrality
In the primary producers’ view, certain EU directives are applied in Finland in a stricter sense than would be necessary considering their minimum requirements. In addition, they feel that Finland often implements such directives ahead of time, which may undermine the position of Finnish primary producers compared to their counterparts in other EU countries. They also find that consumers are not aware of the differences in the conditions in which Finnish and foreign food is produced.
Additionally, regulation treats primary producers differently, for example depending on company size. As examples of this were cited energy taxes, where only the part exceeding EUR 50,000 may be claimed as an excise tax refund, and the regulations on slaughtering livestock, which in practice make it impossible for small abattoirs to operate.
Primary producers also incur heavy costs, or a so-called administrative burden, as a result of the regulations and supervision of compliance. Clearer regulation and lightening the administrative burden would indeed play a key role in any attempts to improve the competition conditions for primary producers. Ensuring that the regulations are applied similarly in various parts of Finland would also be of primary importance.
Cooperation improving market performance permitted in the Competition Act
One alternative for evening out the balance of power between links in the food supply chain could be increasing cooperation between primary producers. The competition legislation permits agreements that improve market performance where some of the resulting benefits are also passed on to the consumers. A large-scale relaxation in the application of competition rules in the agricultural sector would not, however, be a sustainable solution to improving the food supply chain performance.
However, the findings of the study also support the view that the problems affecting food supply chain performance and their solutions must be considered from a number of different angles. The provision on the dominant position of trade being debated by the Finnish Parliament, for example, is not alone a sufficient guarantee of fair competition in the sector, if other types of regulation encourage development in the opposite direction.
The report is available in PDF-format (in finnish).
For more information please contact:
Director General Juhani Jokinen, tel. +358 29 505 3389
Senior Researcher Officers Heli Frosterus, tel. +358 29 505 3336 and Tom Björkroth, tel. +35829 505 3350
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