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European Commission WorkshopEuropean Commission Workshop““Market Monitoring: Market Monitoring:

Experience at the Community and national levelExperience at the Community and national level””Brussels, 24 September 2008Brussels, 24 September 2008

Monitoring the Food Supply ChainMonitoring the Food Supply Chain

Adriaan Dierx Adriaan Dierx DG ECFIN, European CommissionDG ECFIN, European Commission

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Food supply chainInteractions between firms in the agricultural, food processing, and wholesale and retail industries

Question to be addressedDo competition and regulation problems contribute to exacerbate the effects of agricultural price increases on consumer prices?

Reporting deadlineDecember 2008 European Council

Investigation of the Food Supply Chain

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Investigation of the Food Supply Chain

Objectives1. Better understand how competition and regulation

in the food processing industry and the downstream retail markets have affected price developments:

• Explore reasons for differential impact of price rises across Member States

• Explore why price increase is faster for processed food than for non processed food

2. Identify some best regulatory practices3. Identify possible actions at the Community level

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Consumer prices of processed food are increasing more rapidly than that of

unprocessed food (averages of annual growth rates, monthly data, 2007-2008)

0

5

10

15

20

25

30

BE BG CZ DK DE EE IE GR ES FR IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK EU-15

%

Processed foodUnprocessed food

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Price developments of processed and unprocessed food relative to

overall prices (HICP=100 in 2005)

97

98

99

100

101

102

103

104

2005 2006 2007 2008

2005

=100

ProcessedUnprocessed

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What do we mean by food supply chain?

3 sectors: • Agricultural sector• Food processing industry• Wholesale and retail trade

Important to understand interactions between firms and at which level regulations have an impact

Scope of the exercise

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Schematic representation of the food supply chain

Agricultural Sector

Food processing industry(including first and second

transformation)

Retail sector

Wholesale/Buyer groups

Non-food sectors:Textiles, Biofuels etc.

Factor markets(inputs)

Consumer

Reg

ulation

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Food processing industry• Economically important• Important backward linkages

(to agricultural sector, amongst others)• Relatively low rate of labour productivity growth

in comparison with the US• Indicators point to problems of regulation and innovation as well as, to a

lesser extent, of competition

Wholesale and retail trade• Economically important• Important linkages with others sectors; ICT user; essential for the

transmission of price shocks• Relatively low rate of labour productivity growth

in comparison with the US• Indicators point to problems of regulation and innovation as well as, to a

lesser extent, of competition

Link with market monitoring initiative

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3 case studies:• Cereals for animals Meat• Cereals for milling flower Bread and cereals• Milk Milk and Cheese

Why ? 3 main selection criteria:• High inflation rate • Highest weight in typical consumer baskets• Data availability

Focus of analysis

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Elements of market power along the milk supply chain

Milk production is very dispersed– Milk production takes place in all EU member states– In 2005, there were 2.8 million holdings of dairy cows in

EU-27Milk processing is relatively concentrated– Market leaders in terms of milk processing are Arla Foods

(DK,SE), Lactalis (FR), Campina (NL) and Friesland (NL)– The largest dairy company in the EU is Danone (FR)

however this has a more diversified product rangeLarge supermarkets generally hold market power due to upstream competition between processors – Processors tender the lowest price to large supermarkets in

order to gain their contract; the knock-on effect is higher prices paid by smaller milk distribution outlets (UK evidence)

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A multi-dimensional framework for the analysis of the dynamic interactions

between structure, conduct and performance

Quantitative approach:Consumer price = f( Producer prices, competition, Control variables)Factors influencing the pass through of input prices into consumer pricesQualitative approach :Analysis of mergers and anti-trust decisionsSurvey amongst National Competition Authorities Questionnaire sent to national regulatorsMeetings with main actors (High-level group on the competitiveness of the agro-food industry, European Round Table of Retailers)

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First tentative assessment (I)Food supply chain is very complex: large heterogeneity across sectors of the food industry and across countries Difficulty to draw general policy conclusions applicable to all countries/sectors

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Percentage point difference between inflation rates of consumer and producer prices of food

(July 2007 - July 2008; period average)

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-6

-4

-2

0

2

4

LT AT SK FI LV GR BE CZ PL DK IE SI BG HU

Per

cent

age

poin

ts

NL CY PT RO IT FR SE DK ES LU UK

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First tentative assessment (I)Food supply chain is very complex: large heterogeneity across sectors of the food industry and across countries Difficulty to draw general policy conclusions applicable to all countries/sectorsOver the recent period, structural break in the pass through of changes in producer prices into consumer prices in some EU countries

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Structural break in the pass-through from consumer to producer food prices

2002:1-2008:7

Break No breakBelgium Bulgaria

Czech Republic GermanyDenmark Netherlands

Spain AustriaFrance PortugalItaly Slovakia

Latvia UKLithuaniaHungaryPoland

RomaniaSloveniaSweden

Note: the pass-through from producer to consumer prices was not significant in: Ireland, Greece, Cyprus, Finland. Data were not available for Malta and Estonia.

Structural break in the period from 2007:6 (Chow test results)

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First tentative assessment (I)Food supply chain is very complex: large heterogeneity across sectors of the food industry and across countries Difficulty to draw general policy conclusions applicable to all countries/sectorsOver the recent period, structural break in the pass through of changes in producer prices into consumer prices in some EU countries: softening price movements for consumers in the euro area and exacerbating them in the new Member States (Poland, e.g.)

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Pass-through of producer prices into consumer prices

(January 2003 – June 2008; annual growth rates; monthly data)

-6

-4

-2

0

2

4

6

8

2003 2004 2005 2006 2007 2008

%

Poland Euro area

Note: A positive value means that consumer prices have increased more rapidly than producer prices

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First tentative assessment (II)

The higher pass-through over the recent period of changes in producer prices into consumer prices in the new Member States could be related to changes in the competitive environment in the retail sector (see September 2008 issue of the Monthly Bulletin, ECB)

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Average concentration of the top 3 retail firms is lower in the new Member states than in the old member states in 2007….

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

bg pl ro it gr es cz fr hu sk de dk be pt nl uk at ie se fi

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…. but it has been increasing over recent years

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

bg pl ro cz hu sk

2004 2007

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First tentative assessment (II)

The higher pass-through over the recent period of changes in producer prices into consumer prices in the new Member States could be related to changes in the competitive environment in the retail sector (see September 2008 issue of the Monthly Bulletin, ECB)

The presence of several large supermarket appears to contribute to an increased price flexibility (see Dhyne et al. 2008, Interim Report “Price rigidity in the euro area. An assessment”, first draft )

Regulations that deter entry tend to result in increased margins and lower productivity growth

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Thank you for your attention