Kneppelhout & Korthals - The Dairy Plan 2016 and competition: a tough combination02/21/2017

By Eric Janssen - Attorney, Of Counsel

This blog is an edited version of an opinion article that was originally published in Vee & Gewas, number 30 (in Dutch). Click here for the original article. This blog includes links to relevant legislation and decisions as mentioned in the opinion article

In a letter from November 18th, 2016, Martijn van Dam, Dutch State Secretary for Economic Affairs, has informed the Dutch parliament concerning measures he has agreed upon with the dairy industry for phosphate reduction. Three measures have been agreed upon: (i) lowering the amount of phosphate in cattle feed, (ii) reduction of the number of livestock through a stimulating subsidy to terminate the business earlier and (iii) phosphate reduction by forcing individual dairy farmers to limit production of milk to a certain amount. The Dairy Plan will apply to the entire industry.

Not all details from the Dairy Plan 2016 have been made public, which makes it tough to evaluate the Dairy Plan on all aspects. The following evaluation is exclusively based on elements from the Dairy Plan that have been made public.

State aid
The subsidy that should stimulate dairy farmers to terminate their business earlier (measure ii) would usually qualify as state aid. However, the State Secretary is aiming to use the European Regulation that allows Member States to compensate dairy farmers for reducing their production.

Competition in general
The State Secretary states that the current competition frameworks apply for measure (i) and (iii). He has a point there. Measure (iii) is an exceptional adjustment of production based on quotas. In the BIDS judgment, the European Court in Luxembourg rules that a reduction of production violates the prohibition on cartels. The Dutch Trade and Industry Appeals Tribunal (College van Beroep voor het Bedrijfsleven, CBB) had a similar conclusion in its judgment from March 24th, 2016 in the cartel case on pickled onions.

An agreement that could distort competition is not necessarily illegal. If positive effects outweigh the negative effects, an agreement is allowed. The Dairy Plan 2016 aims to reduce the use of phosphate. Question is however if such sustainability target that distorts competition is justified. The ‘Sustainable Chicken’ and the ‘Energy Agreement’ initiatives show that having sustainability initiatives exempted from the cartel prohibition could be tough.

Competition in agriculture
But that’s not it. Agriculture is a different industry with different exemption from cartel prohibition. These exemptions are stated in the Regulation on common organization of agricultural markets (Regulation). Among these exemptions are several decisions from industry trade associations can be exempted from the cartel prohibition if it concerns specifically mentioned targets from the Regulation. Question is if the phosphate reduction is one of those targets. And even if it is considered a target, the agreements have to be registered at the European Commission who has two months to evaluate the agreement. The tricky part in this is the fact that agreements on setting quotas cannot be approved through the Regulation. Same goes for production reductions. The European Commission has even published a paper on competition in the dairy sector in 2010 (!). There is also a special European “crisis” implementing regulation that allows production planning in the dairy sector. This crisis regulation cannot be used as a reference though, as the allowed agreements can only last for a short period of time.

Legally-binding for all
After all legal hurdles have been overcome, one can start thinking of having the Dairy Plan 2016 legally-binding for the entire industry. Such possibility exists through the earlier mentioned Regulation. Legally-binding agreements from acknowledged industry trade associations are possible of the trade association is representative and the agreements do not violate European Law. Also, the agreements have to align with one of the targets as stated in the Regulation. Again, the question is whether phosphate reduction is included among these targets. Also, one should also consider whether agreements can apply to all livestock farmers. The Cerafel order shows that when agreements have to become legally-binding for all, different cases cannot be treated in the same way.

At last
Saying all this, it is going to be a complex task to get the Dairy Plan 2016 through the Competition procedures. In a response to the draft Policy Competition & Sustainability 2016, the European Commission stated that legislation, not competition law, is the right tool to realize sustainability initiatives. One could wonder if they State Secretary made the right decision to not take the advice from the Commission into account.