Associations of Agricultural Producers: Implementation of EU Norms?

Associations of Agricultural Producers: Implementation of EU Norms?

Photo: ua.depositphotos.com / Sonyachny
30 August 2023
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In May 2023, Parliament passed in the first resting the draft law No. 8149 ‘On the Association of Agricultural Producers.’ This legislative proposal allegedly aims to harmonize Ukrainian legislation with the EU Directive No. 1308, which regulates agricultural markets and the functioning of agricultural producer associations. The draft law incorporates 9 out of the 232 Directive articles and includes two articles from the EU Commission Regulation 2016/232, which focuses on international cooperation. However, in practice, the draft does not align with the logic of the Directive and contains numerous risks.

Before discussing what the draft law proposes, let us provide some context: why the EU regulates agricultural markets and what Directive 1308 says about associations of agricultural producers. 

Regulation of agriculture in the EU

Economic theory suggests that government intervention into market operations is necessary when there are so-called “market failures”, such as asymmetric information (producers knowing more about the quality of their products than consumers), monopoly, externalities (the use of herbicides by one farmer harming the bees of another farmer), the provision of public goods (for instance, not everyone can afford private education, but since education is vital for society, the state finances it).

Agriculture meets several criteria from this list. For example, a consumer of groceries does not know which chemicals were used during their production and whether they are harmful for her health (asymmetric information). Governments often aim to ensure that essential food products are affordable for citizens (public good). Agricultural production can have an adverse effect on the environment (externalities), and so on. 

Furthermore, the revenue of agricultural producers is characterized by significant uncertainty. For instance, adverse weather conditions or pests can greatly reduce the harvest. Conversely, if weather conditions are favorable, all farmers in a specific region are likely to have a good harvest, leading to a decrease in prices for their produce and thus reducing their income (since farmers’ products are mostly homogeneous, they can only compete on price, unlike, for example, clothing or electronics manufacturers who can add a certain markup for their brand. Additionally, farmers operate within a long production cycle during which they can hardly react to price changes or other unforeseen events). Furthermore, farmers’ revenues impact their willingness and ability to sow crops for the next year, thereby affecting future food prices.

To balance the interests of producers, processors, consumers, and society as a whole, European countries and the European Commission have developed a complex (and costly! – see the Box) system for regulating agricultural markets. An important component of this system is communication with market participants to consider their interests. In this communication, the “voice of the farmers” (of which there are over 11 million in the EU) is represented by producer associations, which are discussed below. 

Support for agricultural producers

According to the UN, governments spent $540 billion to support agricultural producers in 2021. By 2030, this figure is forecasted to more than triple to $1.759 trillion.

Over the past ten years, the EU spent EUR 55-60 billion per year to fund the Common Agricultural Policy (CAP). 

The Treaty establishing the European Community in 1957 laid the foundation for forming the future Common Agricultural Policy (CAP), which gained legal force in early 1962. Originally created as a tool to overcome food shortages in post-war Europe, CAP gradually evolved in response to changes in the global and European markets. It shifted from market support to supporting producers and their associations and from scaling up production to introducing new technologies and innovations, improving product quality and environmental protection. Today, CAP has transformed into a tool for financing excessive production and global food price dumping, which has a negative impact on developing countries. However, farmer unions and large landowners constantly slow down CAP reform. Ukraine experienced the lobbying power of European farmers when five EU countries banned the imports of Ukrainian grain.

European rules for associations of agricultural enterprises

Articles 152-165 and 210 of EU Directive No. 1308/2013 (provisions introduced by the draft law) stipulate that European Union member states can recognize three types of agricultural producer associations: producer organizations, associations of such organizations, and interbranch organizations. Producer organizations can include market participants whose primary activity is agricultural production (typically, a producer can belong to only one “relevant” organization). Interbranch organizations can include enterprises or entrepreneurs engaged not only in agricultural production but also into trade or processing, thus operating across multiple levels of the value-added chain.

EU member states recognize such associations of enterprises if they are registered legal entities, if their statutes and aims align with the rules established by the Directive, and if they demonstrate the capacity to effectively implement their declared activities. Member states may establish requirements on the minimum number of organization members and/or the cumulative market share of its members. EU member states periodically review the organizations they have recognized and can recall the recognition if these organizations do not meet the criteria outlined above. The governments of the EU member states inform the European Commission annually about the list of organizations they have recognized.

Directive 1308/2013 stipulates that the statute of an organization must ensure the implementation of established rules by all its members (thus an organization must have an enforcement mechanism). The development of these rules must follow democratic procedures. This means that producer organizations should operate as democratic self-governing entities. Furthermore, if an organization is deemed representative (covering no less than 60% of production for the fruit and vegetable sector and no less than ⅔ of output for other products, and also including no less than 50% of producers), EU member states, at the request of such an organization, can make the rules established by the organization mandatory for all producers in a specific sector for a defined period of time.

This rule facilitates the implementation of innovations, such as higher quality standards for products or environmental protection and modern cultivation and processing technologies (however, at the same time it increases the negotiating power of organization members, enabling them to establish privileges for a specific group of producers). For instance, if an organization introduces a higher quality standard for particular products, producers who are not members of the organization could save by not adhering to the standard yet still selling their products at a higher price established in the market by the organization’s members. Thus, non-members can profit without any effort. This rule can also be applied to protect intellectual property, such as geographical product names. Finally, this rule contributes to enhancing product safety for consumers and lowering the environmental impact of the production process.

The Directive also defines the possible objectives of producer organizations, including supply regulation to stabilize prices (while preventing anti-competitive practices or harm to other market participants), marketing of respective products, scientific and technological developments for more efficient production and reduced environmental impact, technical assistance (training) for farmers etc. (Article 152). Interbranch organizations address similar issues but at a higher level. For instance, they gather and publish data on production and trade volumes, prices, market analysis, and export opportunities. They also promote organic farming and responsible waste management, develop methods to enhance product quality etc. (Article 157).

For organizations of producers of specific products the Directive establishes slightly modified objectives. For instance, waste management is not mentioned among the allowed goals for interbranch organizations of dairy producers, but the promotion of milk consumption is (Article 157). For organizations of oils and tobacco producers, permitted objectives include joint distribution, marketing, and the collective improvement of product quality (Article 162).

The rules outlined in the Directive are quite general and flexible – it is more of a philosophy that organizations and governments collaborating with these organizations should follow. The main idea is that governments can (but don’t have to) incorporate market regulations developed by producer associations into the national legislation. However, this regulation must be developed democratically, correct market failures, and should not harm competition.

The Ukrainian legislative tradition is different. Our laws often extensively outline who should do what and under what conditions. So, what does the draft law 8149 propose?

Proposals of Ukrainian MPs for agricultural producers

The draft law introduces three “European” types of producer organizations into Ukrainian legislation – organization, association of organizations, and interbranch organization. These organizations must be nonprofit (current legislation  – the Economic Code, laws on public associations, and agricultural cooperation  – allows for various types of enterprise associations, both for-profit and nonprofit, to be engaged in production activities and provide services to their members).

The draft law and the Directive are remarkably different with respect to objectives of producer organizations. While 6 out of 11 Directive objectives relate to the development and implementation of new technologies (including technical assistance to association members in adapting technologies), among 10 objectives defined in Article 4 of the draft law, only one is associated with technological development, while two relate to competition protection (which is the responsibility of the Antitrust Committee), and two more deal with the protection of members’ rights by associations. In Article 7, the draft law partially lists the objectives set in the Directive, naming them ‘activities’ upon which organizations can make decisions. Seven of the 15 listed activities mirror the objectives defined in the Directive, and two partially coincide with those. However, the rest of the activities (e.g., “joint use of storage premises,” production, processing, or packaging of agricultural products) are formulated so that any agricultural producer organization could align with at least one of them. Therefore, while the constraints of objectives in the Directive are relatively weak, in the draft law they are practically absent.

The essential difference between the EU Directive and the draft law is in the definition of an organization as representative. The draft sets only the market share restrictions: 60% for producer organizations in the fruit and vegetable sector, 50% for other industry organizations, and ⅔ for associations of producer organizations. In contrast, the Directive besides the market share requirement establishes the requirement for the number of participants in such an organization – they must constitute at least 50% of the respective producers. This provision of the Directive aims at taking into account the interests of the majority of market participants. Its absence could lead to a situation where a representative organization would include only a few producers with significant market shares. In this case interests of smaller producers would likely be ignored.

Furthermore, the proposed draft law defines that the combined market share of a non-representative organization of producers must be within the range of 10-25%. Thus it is unclear how an organization can grow into a representative one. However, within five years after adoption of the proposed draft law, organizations that already hold a 25% market share will be able to acquire representative status. If during these five years another organization with a higher market share applies to be recognized as representative, the competent authority (Ministry of Agriculture) must “transfer” this status from the previous organization to the next one (market share is determined based on the State Agrarian Registry). This creates an uneven playing field: only organizations with a 25% market share at the time of the draft law adoption can compete for representative status. It is unlikely that such competition will be fair if the Ministry of Agriculture ensures that producer organizations do not exceed the 25% market share.

A slight yet significant difference between the draft law and European legislation is that producers participate in creation of organizations (Article 2) rather than initiate them as stated by the Directive. This contradicts the overarching logic of the Directive, which emphasizes the need for organizations to be democratic and self-governing, which implies that they should be established only when producers see the necessity for their existence and thus invest their time and effort in their establishment and operations.

A similar misunderstanding of the main idea of the Directive can be observed in other draft law provisions. For instance, Article 2 envisions the existence of separate laws to delegate regulatory powers of government authorities to representative producer organizations (a “top-down” approach). In contrast, the Directive states that governments can introduce specific regulations (such as quality standards) created and approved by producer organizations (a “bottom-up” approach). 

Another substantial discrepancy concerns funding of producer associations: while according to the Directive, organizations are funded by membership fees (with the possibility, according to the decision of the respective country’s government, to collect fees from non-members if they benefit from the organization’s activities), the draft law also includes “other sources not prohibited by law.” The standard provision in our legislation in this case distorts the incentive system. Thus, if an organization is funded only by membership fees, its members will have incentives to ensure that it operates effectively and efficiently. Consequently, this will encourage them to actively participate in the organization’s activities, making it democratic and self-governing. However, if funding can come from other sources, one can imagine a scenario where one or a few major players (oligarchs) “buy” a particular organization and use it to promote their interests.

Overall, there is a remarkable difference in approaches between the Directive and the draft law: a democratic approach aimed at supporting grassroot initiatives versus a command-administrative approach. This difference is evident in both minor details and significant provisions. For instance, the draft law attempts to regulate issues that should be regulated by statutes of organizations, such as the absence of arrears on membership fees (Article 7), the deadline when an organization should provide information to its member (Article 9), mechanisms for enforcement of internal rules (Article 10), or the scheme of votes distribution within a representative organization (Article 12).

The draft law includes an obligation (rather than a right) of government authorities to involve representative producer associations in the development of regulations (Article 12), thus creating a tool for lobbying interests of a specific group of producers. The draft law even proposes changes to the Bylaws of the Verkhovna Rada, introducing mandatory expertise of draft laws by these associations (this seems redundant as the Bylaws and the Law on Committees of the Verkhovna Rada already include the need to collect opinions of stakeholders during the legislative process; furthermore, it is unclear why only agricultural organizations rather than, say, industrial ones “earned” a specific mention in the Bylaws). At the same time, this involvement should occur through a council of representative associations, the formation and provisions of which need to be approved by the Cabinet of Ministers. Thus the idea of voluntary and mutually beneficial cooperation between producers and government agencies is [once again] replaced by formal mechanisms that can be easily circumvented or captured.

The Central Scientific Experts Office of the Verkhovna Rada has pointed out flaws in the draft law (the impossibility of delegating government powers) while the parliamentary Anti-Corruption Committee has highlighted corruption risks (the absence of a procedure to verify whether members of a representative organization are affiliated with one another). Moreover, a number of agricultural associations oppose the extension of rules developed by specific organizations to all market participants (even though the possibility of this extension is foreseen in the EU Directive, as we explain above).

Therefore, in its current form the draft law does not align with the logic of the EU Directive; rather, it mechanically incorporates some of its provisions. Thus, significant revision is necessary. But first MPs need to establish whether Ukraine should at all implement European regulation of agricultural markets, which is quite complicated and requires substantial resources. After all, introducing specific privileges and subsidies is much easier than later repealing them – and Ukraine should avoid repeating past mistakes of the EU.

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