On 21 April 2016 Germany’s Federal Competition Office ("FCO") announced that it opened administrative proceedings against two leading dairies over potential restrictions on the supply of raw milk by farms. In a "pilot proceeding" the German regulator is set to investigate problems in the supply chain for milk which came to light once more in recent procurement negotiations between dairies and supermarkets. Thereby the investigation potentially affects supply and pricing strategies of many other players in the German milk market and could be the signal for tougher regulatory stance in procurement markets for agricultural commodities throughout Europe.
- Background of the proceedings
- Subject matter of the proceedings and allegations of the FCO
- Potential implications of the FCO's investigation
Background of the proceedings
The German milk market has been under scrutiny by the FCO for years. In 2012, the German regulator wrapped up an extensive inquiry into the milk sector which identified several concerns over restrictions in the supply of raw milk and found that the sharing of price information between dairies could facilitate coordination. At that time, the regulator clearly expressed its intention to increase the pace for liberalisation in the milk market and its expectations that the abolition of European milk quotas as of 1 April 2015 would lead to a reorganisation of the relevant markets.
After monitoring the implications of the new regulatory regime for one year, the FCO has now decided that enforcement activities are warranted as the abolition of milk quotas apparently had hardly any effect on the relations between milk producers and dairies. Another reason why the FCO has stepped in once more also could have been that the purchase prices for raw milk further decreased leading to additional price pressure on farmers.
Subject matter of the proceedings and allegations of the FCO
In its press statement of 21 April 2016 (which can be accessed here), the FCO announced to probe "initially" whether market leading dairy DMK Deutsches Milchkontor GmbH ("DMK") and its parent Deutsches Milchkontor eG ("Deutsches Milchkontor") bought milk from farmers on anticompetitive terms. The FCO suspects that – despite the abolition of the EU quota system in 2015 – supply terms in farmers’ contracts with dairies barely changed. In particular, the investigation will focus on
- long-term contracts for farmers,
- exclusivity clauses which allegedly result in an obligation for farmers to tender their whole production to "their" dairy (i.e., DMK and Deutsches Milchkontor), and
- a reference price system under which a price change at one dairy is followed by its rivals.
As other dairies seem to have similar terms in their supply contracts with farms, the regulator suspects that the German procurement market for raw milk is effectively covered by a nationwide network of exclusive long-term supply contracts. The regulator suspects that the above characteristics could restrict farmers’ options to sell their products and thereby impede effective competition between the dairies for the procurement of raw milk. Reducing the options for the farmers to sell their raw milk could in the eyes of the FCO also prevent new dairies from entering into the market and delay the implementation of effective quantity controls in the German milk market. Moreover, the FCO seems to assume that the marketing strength of and added value created by the individual dairy hardly comes to play in the contract negotiations between dairies and farmers and that the system results in disproportionate pricing pressure on farmers.
Potential implications of the FCO's investigation
The FCO's investigation may have far-reaching implications for the entire German milk industry and could be the starting point for the regulators to monitor more closely the procurement markets for agricultural commodities in Germany and potentially throughout Europe:
- The press release expressively mentions that the investigation serves as a "test case" which will "initially" focus on DMK and its parent. Given that the regulator suspects that the German milk procurement market is covered by a nationwide network of similar contracts, it can be expected that the terms and conditions of the supply contracts of other dairies will also become part of the investigation.
- The approach taken by the FCO could affect supply and pricing strategies of many players in the German milk market:
- The proceedings could lead to a strengthening of the farmers' bargaining power which may enable them to charge higher prices for raw milk.
- Besides paying higher purchase prices, dairies may be forced to accept shorter (and non-exclusive) supply contract terms.
- For retailers, the investigation may lead to less transparent price systems and – potentially – higher purchase prices.
- In case the FCO finds that the terms and conditions are anticompetitive, prima facie it is not unlikely that farmers may claim monetary compensation from dairies.
- In a broader context, it is interesting that the FCO seems to be willing to take actions against the crisis on the German milk market by tackling oversupplies – which farmers blame on the abolition of the quota system and sanctions on Russia – with enforcement action. The public discussion in many European countries has taken a view that more regulatory action may be required to reduce oversupplies on agricultural markets and to ensure a proper functioning of the food supply chain.
The FCO's announcement may now intensify discussions in other European countries if such interventions are warranted or if markets can get it straight without intervention. The Spanish milk industry seems to pursue the latter option. According to recent press coverage, dairies are seeking to reduce production by 170,000 tons, after EU officials authorized market coordination to allow an increase in prices (see here).