LFMI has examined a draft law proposing to prohibit unfair practices in sales of dairy products and submitted its comments and proposals to the legislative and government bodies.
On the proposed restrictions on the import of raw milk
The draft law stipulates a prohibition on the import of raw milk unless all domestically produced raw milk is purchased and the supply of dairy products produced from foreign milk on the Lithuanian market.
The proposed restrictions may be against the European Union law
The functioning of the European Union (EU) internal market is based on the free movement of goods, people, services and capital. The Treaty on the Functioning of the European Union prohibits quantitative restrictions on exports or measures having equivalent effect. Although the proposed prohibitions would apply to raw milk import only, they would impose export restrictions for other EU countries. Therefore, the draft law restricts the free movement of goods and may be against the EU law.
The proposed prohibitions would limit milk supplies and increase prices for consumers
By prohibiting the import of raw milk unless the Lithuanian supply of raw milk is insufficient, the draft law would impose artificial constraints on the supply of dairy products. Such a restriction would bolster the prices of raw milk and dairy products. To add, the prohibition on supplying dairy products produced from foreign milk on the Lithuanian market would raise consumer prices and limit the availability of products.
The proposed legal restrictions would aggravate business conditions in Lithuania
In 2013 imported milk accounted for 25 percent of the total milk processed in Lithuania. The proposed trade restrictions would seriously affect both the dairy industry and the market. It should be also noted that the draft law would put Lithuanian producers at a disadvantage and discriminate them against foreign producers, because the prohibition on supplying dairy products produced from foreign milk on the Lithuanian market would be applicable to Lithuanian companies only.
On the proposed restriction on unjustified reductions of the purchase price of raw milk
The draft law stipulates an obligation for raw milk purchasers to justify any reduction of more than 3 percent in the purchase price of raw milk before the Competition Council of the Republic of Lithuania. According to the wording of the draft law, purchase price reductions would not be allowed. However, “unjust” prices do not exist in a market economy. If both the purchaser and the seller agree on a particular price, it is to be deemed reasonable and just.
The authors of the draft law do not out forward arguments to support the claims about the dominant position
In the explanatory note raw milk producers are said to be enjoying the dominant position on the market. However, having a dominant power on the market is not a violation of the Competition Law. What is more, no data or evidence is provided to prove the dominant position on the market or the fact of market abuse. Finally, abuses of a dominant position are already regulated by law and by the Competition Council. Therefore, there is no valid reason why a separate law is to be adopted to regulate the raw milk market.
On the period for providing information regarding amendments to, or termination of, a contract for raw milk sales
The draft law prohibits legal entities from unilaterally terminating or amending contracts on raw milk sales unless they notify the other party to the contract within the revocation period which may not be shorter than 30 days.
It should be noted that the present regulation does not provide an exact period for such notification and both parties to the contract are expected to agree on it. To add, failure to inform the other party to the contract within the revocation period is considered as an infringement of the law and both parties may file a claim for damages related to the infringement in court. Additional regulation will not make parties comply with their agreement.
On the price (mark-up) regulation
Under the proposed regulation, dairy product retailers shall not apply mark-ups higher than ten percent for the basic milk products listed by the Government. Mark-up regulation is against the law and may be in breach of the Constitution and its principle of freedom of individual economic activity and initiative.
On the prohibition on purchasing raw milk from different producers for a different price
The draft law stipulates a requirement for raw milk purchasers to pay the same price for raw milk of a similar quality purchased from producers of a similar size and there are two possible scenarios of such an obligation. Firstly, all raw milk purchasers will have to agree on the same price, thus forming de facto a cartel. This is against the Competition Law. Secondly, the purchase price of raw milk from producers of a similar size will be determined by the first deal of a reporting period and all other raw milk purchasers and sellers will have to charge the price of the first deal. Most importantly, none of these scenarios guarantees higher purchase prices for producers. On the contrary, legalization of cartels may result in an even lower purchase prices as well as a loss of a theoretical possibility of selling raw milk to others.
Having in mind the aforesaid arguments, LFMI calls for the rejection of the draft law.
The full position paper in Lithuanian can be found at http://www.llri.lt/naujienos/ekonomine-politika/konkurencija/ekspertize-draudimas-pirkti-zalia-piena-is-kitu-valstybiu-apribos-pasiula-ir-didins-kainas-vartotojams/lrinka