Ref. Ares(2016)2923675 - 23/06/2016
Ref. Ares(2016)5579867 - 27/09/2016
BRIEFING
AGRICULTURAL CRISES:
A RESPONSE FROM THE FRENCH RETAIL SECTOR
CONTEXT
Agriculture in Europe has been caught in a web of
cyclical crises for more than 30 years, peaking yet again in the summer of
2015 in France and across Europe, where overall as an average for the whole year, agricultural prices for all products
decreased by 2,8%. Milk and pork commodities were particularly hit with a decrease of 14,4% and 6,7% respectively.
In a struggle to find solutions within the agri-food supply chain, since a few years EU politicians have started mixing up issues -
such as Unfair Trading Practices (UTP’s), support to SME’s, the recent agricultural crisis and retail brands – and debating them
together on the same platforms.
So when the prices for milk and pork in particular plummeted last summer, natural y some
politicians pointed their fingers at
retailers, claiming that the agricultural crisis was notably due to unfair trading practices (UTPs) between retailers and farmers.
So are retailers responsible for the agriculture crisis? If not what are the real causes? And how can retailers support a
stronger and more sustainable agri-food supply chain?
P. 1
May 2016
1. Retailers are not responsible for the agricultural crisis
“Retailers are not responsible for the agri-crisis”.
In an exclusive interview with
LSA in September 2015, Stéphane Le Foll, the French Agriculture Minister, discussed the
agricultural crisis that hit the milk, pork and beef sector last summer. According to him, retailers were not directly responsible
for the situation; but could play a decisive role in the reorganisation of the sectors.
1.1 Retailers are only one of many links in the food supply chain
Retailers are the last and most visible link (due to marketing and branding) in a highly complex supply chain including
wholesalers, manufacturers, processors and primary producers such as farmers.
Farmer
Processor
Distributor
Retailer
Consumer
1.2 Retailers very rarely deal directly with farmers
80% of the products that retailers sell in France are transformed products, bought through manufacturers and processors and not
directly from farmers. Even raw products (fruit, vegetables and meat) which make up 10% of total products sold, are generally
sourced from processors and rarely farmers themselves.
1.3 Retail net margins are relatively small
In France, retailers provide their financial results to the ‘Observatory on the formation of food product prices and margins’, who
then compile this information into an annual report.
In the
last report published in April 2016, for food categories combined, overal net margins totalled a mere 0.8% for retailers
(i.e. the net margin for the average shopping basket worth 50€ only brings 55 cents for the retailer). Unfortunately figures for
manufacturers (i.e. Nestle, Danone) in France are not consistent or to date, as they show a reluctance to reveal their net
margins by product.
However you can get a better idea when you look at global figures, which are more transparent: overal net margins for
manufacturers are much bigger than retailers. On average, the top two manufacturers in each product category represent 62%
of total sales of national brands. In 2013 (last available data for manufacturers) the net margins of these world leaders reached
11% on average, against 1.6% for the retailers.
1.4 Retailers are also subject to unfair trading practices
Unfair Trading Practices (UTPs)1 can be imposed at each stage of the food supply chain, from producers, processors and other
economic operators, right down to the final distributor.
Example
In 2012, DG Competition published it
s European Competition Network report (page 7) on activities in the food sector. One key learning
regarding the enforcement activity on agricultural products (not multi-products) is that infringements mostly took place at the beginning of
the agri-food supply chain (processing of cereals e.g. mil ing; the manufacturing of cereal-based products e.g. bread; and the processing of
milk).
Unfair Trading Practices are therefore not caused by one sector in particular, but are due to an abuse of superior bargaining
power by a few companies.
¹ For example in upstream agricultural production, it seems important to consider operators such as chemical industries (producers of fertilisers, phytonutrients etc.), seed
companies (three industrial seeds companies account for 55 % of world market) or feed providers.
P. 2
May 2016
2. What are the real causes of the agricultural crisis?
“
The current crisis is mainly the result of surplus production global y, exacerbated by the Russian embargo and a drop in Chinese
consumption, the lifting of milk quotas, stagnating consumption and changing dietary habits in Europe. This comes on top of
pre-existing structural issues in certain member states and sectors” – Christian Verschueren, EuroCommerce, 16 September 2015
2.1 Price volatility due to global surplus production
World prices for agricultural products hit an all-time low end September 2015; linked to both high levels of harvest and a broad
decline in other commodities (oil market in particular).
1200
S&P Dow Jones: GSCI Agriculture Index
:
-33% between 30/03
and 30/09/2015
1000
800
600
400
200
-46% between 30/07/2012
and 30/09/2015
0
Source : http://us.spindices.com/indices/commodities/sp-gsci-agriculture
2.2 The Russian embargo
In August 2014, Russia banned the import of certain foods and drinks originating from the European Union as a response to
Western sanctions over Ukraine’s crisis.
This ban resulted in a surplus of certain products which in turn drove prices down. Russia is the second most important
destination for EU agri-food exports and the ban represented a value of € 5.2 billion in 2013 exports, or 43% of EU agri-food
exports to Russia (European Parliament report on the Russian embargo).
P. 3
May 2016
Value of EU agri-food
products banned from
entering Russia (€m
2013 figures).
Click here for full
graphic (pdf): The
Guardian
The
European Parliament’s report on effects of the Russian embargo provides a good overview of the impacts on the
economy, farmers and jobs. The Russian food ban also forced the European Commission to mobilise €500 million of agricultural
funds in September 2015 to help EU producers hit by the trade restrictions – funds whic
h MEPs say are not enough.
2.3 Lifting of EU Milk Quotas
In April 2015, the EU put an end to milk quotas which were introduced in 1984 to prevent over-production that led to “milk lakes” and
“butter mountains” when farmers dumped surplus products, spurred by high prices.
Phil Hogan, the Commissioner for Agriculture, said that European dairy farmers will now be better poised to benefit from
demand for their products, particularly in Asia. However the European Commission assured that it would “remain vigilant” in
case of a threat to Europe’s milk producers, as they acknowledged the risk of price volatility. Unfortunately reduced demand
from China and price volatility due to surplus milk production, significantly contributed to the milk crisis last summer.
2.4 China’s decreased imports
The “official” growth of the Chinese economy remained stable at 7 % year on year in the second quarter 2015, but other
indicators - such as percentage of imports - show that the actual slowdown is much more pronounced than that of official
statistics. This includes the import of agricultural products, including milk.
Chinese imports:
Units: variation in %
25%
15%
5%
-
5%
-
2012
2013
2014
2015
15%
Source: General Administration of Customs of the People’s Republic of China
P. 4
May 2016
2.5 Changing eating habits
In France for example, statistics published b
y FranceAgriMer (France’s national agricultural and fisheries agency), show a
decline in the consumption of meat and milk right across Europe in 2014.
For every 100 kilos of pork consumed in
the EU in 2008, only 96.5 kilos were
consumed in 2014. The statistics for milk
consumption are similar.
These trends, occurring across the EU,
reflect a shift in consumer habits due to
the economic crisis and changing diets.
Source: FranceAgriMer
[Kilo of meat per inhabitant]
2.6 The questionable agricultural model
Agriculture in the EU has become increasingly fragile as it trades on economically volatile markets with many external factors
influencing it. It is also not set up to be competitive and is struggling as countries inside and outside of the EU compete with
each other in terms of pricing for products like meat and milk. An agricultural model based on economics seems the only viable
way forward.
3. How can retailers support a stronger and more sustainable agri-food supply chain?
“Together, we need to build up stronger cooperation, better information flows, improved sharing and learning. All these can
enable the sectors to find solutions together when faced, as we are now, with a common problem”, Christian Verschueren -
EuroCommerce – September 2015.
3.1 Support Small and Medium Sized Enterprises (SMEs)
If SMEs are the backbone of the EU economy and essential long-term partners for retailers, then current rules and practices
protecting them should be harmonised across the EU to:
Minimise risks linked to imbalances in bargaining power
Protect SMEs from the negative effects of global markets and trade
Value products ‘made in the EU’
In this respect the French Retail Federation (FCD) has signed many agreements with French SME associations to develop
sustainable business relationships together, of which most recently:
FEEF (representing 600 non-food and agri-SMEs): voluntary agreements signed i
n 2013 an
d 2014,
Coop de France (representative of French agricultural, agri-food and agri-industry cooperatives): signed a framework
agreement i
n 2015 and a regional agreement i
n 2016.
P. 5
May 2016
3.2 Direct partnerships with producers
Even though farmers are not the “direct” suppliers of supermarkets in France, our members have developed specific
partnerships within particular food sectors. Together with producers and processors, they have developed ways to work across
the entire supply chain to produce specific products. These working relationships occur in different forms: “tri-partite” contracts
(between the producers, processors and retailers); double “bi-partite” contracts (producer-processor contracts linked to
processor-retailer contracts); or production specifications (integrating the production process of the farmer or the processor).
Example:
In February 201
6, Auchan has developed a tri-partite contract of three years with an association of producers in the
north of France in Calais, regrouped under the brand ‘Le Porcilin’, together with the industrial brand Bigard and several
meat processors. This partnership allows for the right level of remuneration for all actors across the chain, whilst
guaranteeing quality pork products at an accessible price for consumers.
In addition to these types of direct working relationships, our members also work with farmers via agricultural inter-branch
organisations, of which the FCD is a member of four
: INAPORC (porc)
, INTERBEV (meat)
, INTERFE (fruit and vegetables) and
CNIP
(potatoes). These inter-branch organisations allow the collective improvement of: the quality and safety of products; economic
performance of the chain (logistics); and commercial relationships (best practice guidelines for contracts).
3.3 Value-added products
Value-added food, includes a manufacturing or production processes that increases the value of the commodity or
product, such as organic, ‘free from’ gluten, added Omega 3 etc… In 2015 and 2014, value-added FMCG food products were the
only products that actually showed an increase in sales by 1,6%. Also 36% of consumers are willing to pay more for products or
services that benefit society or the environment.
Example: Carrefour’s Auvergne free-range farm chicken.
These chickens are raised in a particular part of France, in the open air (free-range) and without antibiotic treatment. In 2015,
Carrefour sold 1 million of these types of chicken; and from 2013 to 2015 sales went up by 15%.
In France the decline of pork sales reached an all-time low in 2015 with a decrease of 6,7%. Knowing that the organic pork is in
demand in France and based on the fact that imports into France are increasing to supply consumer demand, maybe producing it
in France would be a solution.
3.5 Support increased transparency across the entire food supply chain
Since 2012, retailers have joined the French Government’s
‘Observatory on the on the formation of food product prices and
margins’ and provided details on the net margins of major in-store food categories.
According to the
latest report (April 2016) of the French Observatory on the formation of food product prices and
margins, in which eight supermarkets participated (Auchan, Carrefour, Casino, Cora, E.Leclerc, Intermarché, Simply
Market, Système U), retailer net margins (after corporate tax) dropped to only 0.8% of turnover.
Whereas retailers have shown good faith in disclosing their net margins, the observatory is faced with manufacturers refusing to
transmit necessary data in order to provide a comparative overview of the sector. For real transparency on prices and margins
in the food supply chain, all players should communicate the data needed for a complete analysis. Furthermore, it is essential
that the data collected corresponds to the same time period, because the Observatory used figures from 2013 for
manufacturers in their latest report.
P. 6
May 2016
CONCLUSIONS
There is no one-size-fits-all solution which can work across the EU and equal y, and therefore no strong case for an EU-level
regulation. This would only add additional administrative and economic burden to everyone involved and do little to help
remedy the ongoing crises we face together as an agri-food sector.
The French Retail Federation (FCD) therefore calls on the European institutions to refrain from an EU- level regulation on
unfair trading practices and continue to support the momentum achieved through national and EU joint initiatives, aimed at
promoting fair practices. This is a firm basis for commercial relations, encouraging businesses to deal with their disputes in a
way that allows business relationships to continue, rather than litigation, which breaks them.
Providing support to SMEs, increasing transparency and consolidating the upstream supply chain are all part of solutions for a
good functioning agri-food supply chain.
The French Retail Federation (FCD) is a professional organisation that represents over 50 retail members, primarily related to food
distribution. With around 30,000 food outlets spread across the country, our members employ approximately 750,000 people and
have an annual turnover of 194,5 billion euros. The sector includes 1,992 hypermarkets, 5,702 supermarkets, 4,605 maxi-discount
stores, 17,950 convenience stores; and more than 2,900 drives. The federation intervenes especially in the areas of food security,
sustainable development, economic relations (SMEs, industrial, agricultural sectors), relations with the social partners; and on
issues related to urban development and commercial planning.
CONTACTS
– FCD –
@fcd.fr
– FCD –
@fcd.fr
P. 7
May 2016