Earlier this year, Banana Link published a blog asking whether a prohibition on selling below cost price could help protect banana producers from the downward pressure exerted on prices by European supermarket giants. In a further development, Oxfam Germany has received an unpublished legal opinion on the design of fair prices in the food chain. It was commissioned by Agriculture Minister Ursula Heinen-Esser from North Rhine-Westphalia. The expert opinion shows legally secure, innovative ways how fair producer prices could be enforced. Its implementation would be a political breakthrough.
We reproduce below an English translation of a German language blog by Marita Wiggerthale, Senior Policy Advisor at Oxfam Germany that explains this legal opinion and how a ban on selling below cost price could deliver fair prices to consumers.
[Note: many of the hyperlinks from this blog are to German language publications]
Whether for meat, milk or bananas, producer prices often do not cover production costs. They are also not linked to the evolution of consumer prices. Farmers are fighting against the continued exploitation by the large retail chains and food corporations. Currently there are protests in front of the central warehouse of Edeka in Wiefelstede.
Low producer prices are detrimental to farms, nature, climate and animal welfare. Global agricultural commodity prices have fallen steadily – with the exception of cyclical price peaks – while at the same time consumer prices have risen. This shows that the production of cheap mass-produced agricultural goods has mainly benefited the powerful corporations in the food chain. Because agricultural production has been globally oriented towards comparative cost advantages and specialisation, it is overall vulnerable to crises, pests and diseases. In addition, low food prices incentivise unhealthy diets. Calorie-rich foods are consumed more than nutrient-rich foods.
What approaches are proposed in the legal opinion?
In the discourse on a socio-ecological reorientation of agriculture, the market mechanisms and power relations in food trading are rarely taken into account. However, it plays an important role who has the power to set prices. In his 144-page legal opinion, the lawyer Dr. Kim Manuel Künstner convincingly presents how price fairness can be substantiated and how fair producer prices can be achieved.
It essentially analyses three possible approaches:
- a general ban on purchasing below production cost
- a ban on the advertising of meat prices
- an implementation of the EU directive on unfair trade practices, an implementation of the EU directive on unfair trade practices, as we would have liked it enshrined in German law.
In his outlook, Mr. Künstner also discusses the formation of a counterweight on the producer side as well as approaches under antitrust law – for example, merger control, break-up rules, vertical price fixing. The fresh meat and meat products sector are used as an example. Since the Bundestag passed the German law against unfair trade practices at the beginning of May 2021 and an evaluation is only taking place in 2023, I would like to focus here on the comments on the first two approaches from the legal opinion.
A general ban on purchasing below production cost
The pricing strategies of supermarket chains play a major role in the value-added options in the food chain, and meat is no exception. Because prices in the store are so low, the pie to be distributed is small. The smaller the pie, the bigger the distribution struggles. Risks are shifted along the supply chain to those whose bargaining position is weak.
Edeka, Aldi & Co. want to lure consumers into their stores with cheap prices for meat to increase their overall sales. This mixed calculation pays off for the supermarket chains, but not for the other market participants. Consequently, producers are reluctant to invest in more environmental, animal and health protection. For the slaughter companies, the purchase prices are decisive. The transparency of slaughter prices allows their customers a “transparent calculation” and weakens their negotiating position. A ban on purchasing below production costs along the value chain could enable a fair distribution of added value and, under certain conditions, a bigger pie.
For the implementation of a general ban on purchasing below production costs, three options could be considered according to the expert opinion:
- a ban covering only production costs of farmers
- a ban along the entire value chain as in Spain – i.e. the ban would also apply to the purchase of food from processors
- a responsibility (under civil law) on the part of food retailers to ensure that producer prices at least cover their production costs.
The latter would also be conceivable as a complement to the first two options. The responsibility of food retailers could therefore also be applied in German law in such a way that it demands proof from its suppliers of the payment of purchase prices for agricultural products that cover production costs. An extension of the prohibition under competition law of selling below purchase price at retail level pursuant to Section 20 (3) GWB is not recommended. The reasons given are the difficult implementation and the doubtful contribution to price fairness. Similarly, the French regulation, which provides for a 10 percent minimum margin for retailers, is not considered appropriate. Even if it has led to a drop in sales of foie gras, it runs the risk of raising food prices somewhat without bringing about any significant changes in the aggressive pricing policy of food retailers on the side of food retailers. From a European and constitutional point of view, none of the first three options raise serious concerns.
No overriding concerns from the perspective of European and constitutional law
The EU directive on unfair trade practices allows the German government to include a price regulation in the German law in the sense of a ban on purchasing below production costs. If this would only apply to market participants in Germany, this would not be a problem under EU law. If the price regulation considered possible production cost advantages of producers from other member states and if it was practically possible for buyers to determine the production costs or the minimum prices, there would still be no objection. If such a regulation were to interfere with the free movement of goods (Art. 34 TFEU), it could nevertheless be in conformity with European law if an exception can be considered imperative for the public good (Art. 36 TFEU). However, Dr. Künstner considers such a legal interpretation to be unlikely. However, the introduction of such a prohibition would not be contrary to the objectives of EU agricultural policy (Art. 39 TFEU).
Conclusion: The design would have to be in such a way that no obstacle to market access arises. The German Basic Law is not committed to a particular economic order. State intervention in price setting is fundamentally permissible from a constitutional perspective. Competition can take place not only through prices, but also through different qualities. According to the Constitutional Court, the legislature is free to intervene in a regulatory manner in a free economy, in particular in the free setting of prices, in order to protect certain market participants. The freedom to exercise one’s profession (Art. 12 GG), the freedom of property (Art. 14 GG) and the general freedom of action (Art. 2 GG) would not be unreasonably restricted. The legislative competence for the improvement of the income of the agricultural population lies with the Federal Government. This means that the Federal Government could introduce a ban on purchasing below production costs in the next legislative period. The existing Agricultural Organisations and Supply Chain Act (AgrarOLkG) would already provide the necessary legal framework.
A ban on price advertising for meat
Fresh meat plays an important role in the leaflet advertising of food retailers to attract consumers to their stores with low prices. If they buy further products, the food retailer can increase its trade margin through a mixed calculation. In the case of a ban on price advertising for meat, Dr. Künstner assumes that the importance of the price of meat for the selection of food retailers will dwindle among consumers and spread to other products.
A ban on price advertising is not entirely alien to the legislator. Advertising bans with a price reference already exist for medicines and infant formula. However, the Unfair Competition Act (UWG) does not help here. It only covers price advertising that creates a false perception in the mind of an average consumer, i.e. it is misleading. The UWG does not cover cheap offers or discount price advertising in general. The mere fact that the advertised price is not at a desirable or reasonable level does not justify an advertising ban under the UWG. Advertising enjoys constitutional protection in Germany and in the EU, even if it does not enjoy a particularly high level of protection within freedom of speech.
To justify an interference with freedom of expression, it must pursue a legitimate purpose and be appropriate and proportionate. The purpose of a price advertising ban is to remove the incentive for retailers to sell meat and meat products at particularly low prices. In other words, the purpose is to improve the revenue side so that this revenue contributes along the chain to the improvement of animal welfare, environmental and health protection (Art. 168 TFEU) and the standard of living of the agricultural population. These constitute sufficiently weighty public welfare concerns in the German Basic Law and in EU primary law.
A measure is already suitable if it is possible to achieve the objective or if it is more likely that the desired result will be achieved at least in part. A price advertising ban is necessary if there is no milder, equally effective means of achieving the desired objectives. As an example, an additional meat and consumption tax is mentioned, which is not milder than a price advertising ban. Since there is no danger of jeopardising performance-oriented competition, this measure is also considered appropriate.
My final thoughts
Politicians are beginning to rethink prices, as was also made clear in the Bundesrat initiative from the 1000th plenary session. This is a good thing because previous approaches have not led to fair producer prices. Economists should also pay more attention to price fairness and unequal power relations in supply chains. The ban on purchasing below production costs remains on the political agenda. The coalition agreement states: “We are taking action against unfair trade practices and examining whether the sale of food below production costs can be prevented.” Such a ban would herald a paradigm shift. Prices could be set from the bottom up in the future.
The food law in Spain, which is used as a reference in the expert opinion, obliges the first buyer in the chain to pay the farm a price that covers its actual production costs. Full costs would have to be applied here. By embedding this instrument in the German Agricultural Organisations and Supply Chain Act, imports would also be included. Price fairness would thus be promoted in domestic, European and global supply chains. The prerequisite is that buyers have corresponding information on prices that cover production costs. The ombudsman and price monitoring body adopted by the Bundestag in May 2021 would have to collect the necessary data and make it publicly available.
If a ban on purchasing below production cost is introduced, some precautions must be taken:
- There may be situations where, for a limited time, it may make sense to sell food at prices that do not cover production costs. For example, when fruit or vegetables are in danger of rotting.
- Solutions must also be identified for markets where there are structural surpluses, such as milk and meat. Increasing demand is not enough to achieve market equilibrium. Nor does it make sense from a nutritional and climate perspective. Nor is a shift to exports a solution. Neither for small-scale producers in countries in the Global South, nor for farms in Germany.
- Should food prices rise, provisions should be made for low-income households by adjusting the already low basic income support.
- Consideration must also be given to possible circumvention via purchasing alliances, as the discussion on unfair trade practices shows.
A price advertising ban could make sense not only for meat, but also for other products that represent high-risk products from a human rights perspective. Such high-risk products include bananas. When Lidl announced in autumn 2018 that it would switch completely to fair trade bananas, its competitors (Aldi, Edeka and its discounter Netto) apparently reacted with targeted dumping offers and lured consumers into their stores. The consequence: Lidl retreated and reintroduced cheap bananas with questionable certificates into its assortment.
The effect of such a “first mover disadvantage” could be significantly mitigated by a price advertising ban. It would also be conceivable for the supermarket to compensate for possible declines in sales through a mixed calculation. In the best case, other supermarkets would follow suit. If they do not do so, it cannot be assumed that they will want to cooperate in order to negotiate fair prices for bananas, for example. In this respect, the current discussion about exemptions from antitrust law for the implementation of sustainability goals does not seem to me to be expedient. Even more so as it opens the floodgates to anti-trust behaviour under the guise of sustainability. It is already possible today to ask competition authorities for a case-by-case assessment.
In the next legislative period, the Act against Restraints of Competition (GWB) will be evaluated and further developed according to the coalition agreement. Among other things, aspects of sustainability and social justice are to be integrated. I find it exciting what this means for abuse and merger control. Questions of social inequality should play an important role here. Antitrust authorities should also recognise rising social inequality as a major problem.
Senior Policy Advisor
Photo: Paul Lievens/Banana Link