Unfair trade practices, Italy tries to exclude cooperatives and producer organizations

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The draft legislative decree aimed at implementing the EU directive on unfair commercial practices – EU dir. 2019/633, so-called UTPs (Unfair Trade Practices) – aspires to exclude from its scope sales by farmers to cooperatives and producer organizations (POs) of which they are members.

A dangerous deviation from EU rules, in a country where the cooperative world plays a leading role in agricultural and food production chains. And producers’ organizations, in turn, have an important role, which is also destined to grow in order to strengthen the bargaining power of producers thus aggregated.

It is intended to show how and to what extent the disapplication of this directive may penalize cooperators and cooperatives, through a balance sheet analysis of a large cooperative in Piedmont, Compral Latte. #CleanSpades

1. Unfair trade practices, EU dir. 2019/633. Genesis

EU dir. 2019/633, as noted, represents the outcome of two decades of analysis on the serious power imbalances plaguing the food supply chain. With negative effects on all sectors, from farm to fork, as well as on the competitiveness of their players-however organized-and on the market itself. (1)

Indeed, the asymmetry of contractual powers is compounded by the impossibility of deriving transparent and reliable data on market dynamics. Precisely because complex contractual relationships of often unknown content alter the fundamental values of exchanges. (2) The dysfunction is therefore systemic. (3)

2) UTPs Directive, the ABCs.

The UTPs Directive introduced a minimum, illustrative and non-exhaustive list of requirements and prohibitions to be applied to contracts for the supply of agricultural and food commodities. As well as to the services offered by relevant buyers to suppliers. ABC to follow.

A) Mandatory requirements

– mandatory written form of supply contracts, where requested by suppliers (with the option to reinforce their protection at the national level, as Italy has done by requiring written form in all cases, in Article 62 of Law 27/2012),

– payment terms at 30 and 60 days for perishable and non-perishable goods, respectively,

– Sales values not less than the production costs of the goods. And consequent ban on below-cost sales.

B) Mandatory Prohibitions

– Unilateral and retroactive changes in supply contracts,

– Cancellation of orders for perishable goods on short notice (<30 days),

– Payment for services not rendered,

– Misuse of confidential supplier information by the buyer,

– Supplier’s liability for deterioration of products already sold and delivered,

– responsibility of the supplier in handling claims for facts not attributable to its negligence,

– prohibition of commercial retaliation and/or threats if the supplier makes use of the rights guaranteed by the directive.

C) ‘Gray’ business practices

Some business practices are permitted only if subject to a clear and unambiguous direct agreement between the parties:

– Returns (or payments) on unsold products,

listing-fee,

– Other unsolicited services, promotional and advertising expenses,

– transfer to the supplier of advertising costs in addition to those that specifically pertain to its products,

– Payment for handling goods following delivery (e.g., logistics).

3) Cooperatives and producer organizations, the exemption assumptions

The draft decree legislation to transpose the UTPs directive (4) excludes from the notion of ‘assignment contracts’ – and thus, from the application of the rules – ‘contributions of agricultural and food products by farmers and fishermen to cooperatives of which they are members and to producer organizations‘ (Article 2.1.e).

However, the European legislature did not provide for any exceptions to these concerns. Indeed:

‘the term “supplier” may include a group of such agricultural producers or a group of such natural and legal persons, such as producer organizations, supplier organizations and associations of such organizations‘ (EU dir. 2019/633, Art. 2.1.4),

– payment terms (at 30 or 60 days) always apply, even in cooperatives, ‘to payments related to the sale of agricultural and food products.’ With a single, limited exception (which member states can still exclude, for the best protection of cooperators) on ‘additional payments made by a cooperative to its members‘ (dir. EU 2019/633, recital 17, last cpv.).

4) Ineligibility of waivers

The aforementioned exemptions from the application of the criteria precisely laid down in the UTPs directive–in addition to other unacceptable exemptions contained in the enabling act (4)–clearly reduce the levels of protection for agricultural entrepreneurs.

Such exemptions are not compatible with the provisions of EU Directive 2019/633, where it is stipulated that member states can only strengthen-not even diminish-the protection of producers. Following the French example, which has already been referred to. (5)

POs such as agricultural consortiums and cooperatives on the other hand are subject to the same market pressures and dynamics as other suppliers. (6) Beyond the mutualistic objectives contained in their statutes, which were moreover distorted in the Consorzi Agrari d’Italia operation, CAI S.p.A. aka Federconsorzi 2. (7)

5) Risks to farmers, POs and cooperatives.

The assumption of removing farmers from the protections provided in the UTPs directive-when they give their own (and others’) commodities to cooperatives, or sell them through POs-is not only contrary to EU law, but results in serious penalization of farmers.

The most concrete risk for farmers-in addition to being exposed to undercutting sales to finance organizations whose management is not always brilliant (an understatement)-is to suffer late payments, which Directive (EU) 2019/633 instead categorically prohibits. From theory to practice, the example of the Compral Latte cooperative in Savigliano (CN) is recalled.

6) Effects of unfair trade practices on cooperatives. The case of Inalpi SpA – Compral Latte

Compral Latte’s 2020 budget analysis , comparing with the 2019 budget, does not show any income problems (EBITDA, ROI, ROE ratios). On the other hand, the cooperative’s critical asset and financial situation, caused by late payments from its sole client Inalpi SpA, is highlighted. A vicious cycle that also involves the payment of milk supplies to cooperating farmers outside the legal deadlines.

6.1. Net financial position

Compral Latte’s net debt as of 12/31/20, i.e., the algebraic difference between financial debts, cash and cash equivalents, and financial (tax) receivables, increased by € 3.7 mln (+73%, from € 5.1 mln to € 8.8 mln) compared to 12/31/19. Short-term bank debt increased from € 7 mln to 10.6 mln (+51%).

The debt to EBITDA ratio-which can come to be understood as the number of years it takes the company to repay its financial debt (based on EBITDA as the ‘primary’ cash flow)-has increased by 10 points in 12 months, from 14.9 to 24.5 in 2020. (9)

6.2) Receivables from the sole customer Inalpi SpA.

Accounts receivable as of 12/31/20 increased by approximately € 5.6 mln compared to 12/31/19 (from € 15.5 mln to 21.1 mln, +36%). The increase in accounts receivable-which for Compral Latte is the main item in current assets, in the absence of inventories in stock-represents the main financial requirement (beyond the increase in capital assets, for the construction of a € 0.5 mln office building).

The average collection period for receivables as of 12/31/20 was 112 days, compared to 93 days as of 12/31/19. It is noted how this expresses an average delay of:

  • 67 days, compared to the payment terms for perishable goods now prescribed in Italy (30 days end of month invoice date, i.e. 45 days on average),
  • 82 days, comparing with the peremptory deadline (30 days from delivery) set by EU dir. 2019/633.

6.3) Trade payables

Inalpi’s trade payables increased by €2.1 mln (from €9.9 mln to €12.1 mln, +21% in 12 months). They are the company’s main source of financing, covering trade receivables and investment to build the office building.

Supplier payment terms rose to 65 days, average value, as of 12/31/20. 5 days more than on 31.12.19. As was to be expected, perhaps even inevitable, given Inalpi SpA’s late payments.

6.4) Net working capital

The ability of the enterprise to meet financial commitments in the short term is expressed, in essence, by net working capital (difference between current assets and current liabilities). Since Compral Latte has no inventory, this value is not affected by the inventory valuation criteria.

Compral Latte’s net working capital-which stood at € 700,000 as of 12/31/19 (with current assets > current liabilities)-was negative by € 200,000 as of 12/31/20. As a result, current liabilities exceeded current assets, due to the greater increase in financial and trade payables than in receivables.

7. Interim conclusions.

Disapplying the Unfair Trade Practices Directive to supplies of agricultural commodities and foodstuffs from farmers to cooperatives and POs of which they are members is illegal and dangerous.

The apparent competitive advantage thus attributed to cooperatives and POs translates into financial burdens and undercosting on the weakest link in the chain, their farmer and rancher members precisely.

This, on the other hand, strengthens the power of these intermediary organizations. No longer serving those who work the land but the treacherous bread-eaters who fatten their fees.

And where does the ‘government of the best’ stand? #CleanSpades

Dario Dongo

Notes

(1) Dario Dongo. Unfair commercial practices, the EU directive 2019/633. GIFT (Great Italian Food Trade). 4.5.19, https://www.greatitalianfoodtrade.it/mercati/pratiche-commerciali-sleali-la-direttiva-ue-2019-633

(2) Data are completely obscure where written supply agreements are even missing. As has been determined by the Italian Competition and Market Authority (AGCM, so-called Antitrust Authority) in 95.2 percent of relations with suppliers of F.lli Pinna Industria Casearia S.p.A. (see. previous article https://www.greatitalianfoodtrade.it/mercati/pastori-sardi-e-pratiche-commerciali-sleali-sanzioni-irrisorie-dell-antitrust-a-f-lli-pinna-e-altri-5-caseifici)

(3) The European Commission has acknowledged the need for transparency in agrifood markets, but its ISAMM(Information System for Agricultural Market Management and Monitoring) system is still totally inadequate (see. article https://www.greatitalianfoodtrade.it/mercati/trasparenza-nella-catena-del-valore-lavori-in-corso). All the more reason to introduce telematic commodity exchanges, as the writer has humbly proposed (see. article https://www.greatitalianfoodtrade.it/idee/una-borsa-merci-tele matica-per-favorire-trasparenza-ed-equità-nella-filiera-alimentare)

(4) Dario Dongo. Unfair trade practices and the European delegation law, critical analysis. GIFT(Great Italian Food Trade). 4/24/21, https://www.greatitalianfoodtrade.it/mercati/pratiche-commerciali-sleali-e-legge-di-delegazione-europea-analisi-critica

(5) Dario Dongo. Unfair trade practices, the lesson of Paris to Coldiretti and Confindustria. GIFT(Great Italian Food Trade). 9.5.21, https://www.greatitalianfoodtrade.it/idee/pratiche-commerciali-sleali-la-lezione-di-parigi-a-coldiretti-e-confindustria

(6) Dario Dongo. Unfair trade practices in the agribusiness supply chain, the protections that are missing. GIFT (Great Italian Food Trade). 4/26/21, https://www.greatitalianfoodtrade.it/idee/pratiche-commerciali-sleali-nella-filiera-agroalimentare-le-tutele-che-mancano

(7) See the section ‘Agricultural consortia in CAI SpA, mutualistic purposes?” in the previous article https://www.greatitalianfoodtrade.it/idee/federconsorzi-2-alias-cai-spa-un-po-di-chiarezza

(8) Dario Dongo. Inalpi, intimidation and updates. #CleanSpades. GIFT (Great Italian Food Trade). 12.9.21, https://www.greatitalianfoodtrade.it/idee/inalpi-intimidazioni-e-aggiornamenti-vanghepulite

(9) According to financial analysts, an optimal index should not exceed 6. While this is not a golden rule, having to dynamically assess the company’s ability to meet its financial commitments

Dario Dongo
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Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.