France: EGalim 2 as trade negotiations reopen

published on 20 April 2022 | Reading time approx. 6 minutes

“In view of the significant changes in economic conditions, distributors must adapt the contracts binding them to many suppliers. New negotiations must be opened on the basis of a transparent and constructive dialogue between the parties with the implementation of indexation and renegotiation mechanisms as well as the framework of logistics penalties.” – This was stated by the Minister of Agriculture and Food, Mr. Julien Denormandie, on March 16 during the presentation of the economic and social resilience plan.

Thus, under the aegis of Bercy and the Ministry of Agriculture, the 2022 trade negotiations, which were just completed on 1er March, have been “reopened”. A weekly meeting with Mr Julien Denormandie, Minister of Agriculture and Food, in conjunction with Mrs Agnès Pannier-Runacher, Minister Delegate for Industry, and Mr Alain Griset, Minister Delegate for SMEs, is scheduled every Thursday to monitor the progress of the negotiations.

The reasons?

The sudden rise in agricultural commodity prices and the soaring costs of packaging and energy linked to the conflict in Ukraine have already put a strain on the 2022 trade negotiations. In this context, it is now urgent that the players in these negotiations get back to the negotiation table. In addition, a non-binding Charter of Commitment was signed on 31 March 2022 by the players concerned (federations of processors, manufacturers and retailers). It remains to be seen whether the parties will play the game.

In this respect, a brief reminder is in order: past trade negotiations were first marked by a purely formal challenge: that of introducing into legal documents (general terms of sale, agreement to be signed before 1er March 2022) the obligations resulting from a Law adopted in October 2021 which the Ministry of Agriculture only came to clarify with its “Frequently Asked Questions” on 13 December 2021.

The second challenge was then for some suppliers who do not have the power of unavoidable international groups, not only to find relevant indicators but above all to pass on price increases other than those linked to agricultural raw materials used in the composition of food products and products intended for pet food. For these latter increases, the principle of “sanctuarisation” that has been put in place should, in principle, have made it possible to pass on the increases suffered by agricultural producers and farmers to large-scale distribution.

The third challenge is certainly the one that the “independent third parties” referred to in the EGalim 2 law are trying to meet today and which – in theory – only have a few days left to draw up the certificate referred to in Article L441-1-1 of the Commercial Code for their clients – suppliers who have chosen option 3.

It should also be remembered that this law imposes, on the one hand, an obligation of transparency on suppliers of agricultural raw materials (1) and, on the other hand, the introduction of an automatic price revision clause in the single agreements concluded between the supplier and the distributor (2):

1. A transparency obligation with regard to providers of agricultural raw materials (with some exceptions)

This transparency obligation is reflected in the obligation for suppliers, with the exception of wholesalers, to include in their GTCs the following:

Option 1: the share of agricultural raw materials and processed products composed of more than 50 percent of agricultural raw materials in their food products, as a percentage of volume and as a percentage of tariff;
Option 2: The presentation of the aggregate share of the same agricultural commodities;
Option 3: the use of an independent third party, it being specified that this option is only possible if the supplier reports a tariff change compared to the previous year. This independent third party, commissioned at the supplier's expense, will be responsible for certifying, no later than one month after the contract is concluded (which, it should be remembered, will have been signed no later than 1er March 2022), that the change does not concern the part of the change resulting from changes in the price of raw materials. Although the Commercial Code does not specify who this independent third party is, the text simply states that the latter will be bound by professional secrecy with regard to the facts, acts and information of which it has knowledge by reason of its functions. This obviously immediately brings to mind auditors and chartered accountants.

It is interesting to note that in the context of the 2022 trade negotiations, according to the initial feedback, the majority of agreements signed with the major retailers mention the choice of option 3, an option that may have appeared more reassuring, in that the first option, and the second to a lesser extent, involve suppliers disclosing to their buyers both the construction of their prices and the composition of their food products.

It would also be interesting to identify the proportion of suppliers who have chosen this third option “by default”, having been put off by options 1 and 2.

Since then, it has been noted that this option 3 does not release suppliers from their obligation to determine the proportion of agricultural materials in each of their food products, a step prior to the independent third party carrying out its mission. The technical opinion issued by the Compagnie Nationale des Commissaires aux Comptes (CNCC), which reflects its discomfort with this “at sight” mission, recalls above all that the attestation is carried out on the basis of the methodological note provided by the client:

“...given the difficulties in understanding the applicable legal and regulatory texts and the differences in interpretation that may arise, it is essential that the interpretations and options taken by suppliers are clearly explained in the methodological note that they draw up and which is intended to be attached to the auditor's certificate.”

The auditor thus “limits” his mission to a verification of the elements prepared by his client.

2. Introduction of an automatic price revision clause

Second major innovation: the automatic price revision clause!

The Commercial Code now provides that the written agreement between the supplier and the distributor must contain an automatic price revision clause based on the variation in the cost of the agricultural raw material, whether upwards or downwards, used in the composition of the food product or the product intended for pet food. The revision formula must therefore take account of the production cost indicators published by the inter-professional organisations.

While this clause may seem like a good idea at first glance, in reality it has proven to be both complicated and sometimes impossible to draft. The identification of the most relevant indicators has proved to be complex as there may be a multitude of indicators for some sectors and none for others. Moreover, the only indicators available actually reflect agricultural commodity prices and not farmers' costs. The revision formula should then not stop in upstream contracts at this single reference. The choice of the latter by suppliers needs to be rigorous, as they have a considerable impact on the automatic revision of prices.

But not only...

The choice of indicators remains a key issue, as these must be included in the general terms and conditions of sale, which must explain the conditions under which they are taken into account in determining prices.

Finally, it should be noted, although this is not an obligation resulting from the EGalim 2 law, that contracts with a performance period of more than three months relating to the sale of agricultural and food products whose production prices are significantly affected by fluctuations in the prices of agricultural and food raw materials and products, energy, transport and materials used in the composition of the packaging must include a clause relating to the terms of renegotiation of the price allowing these fluctuations to be taken into account, whether upwards or downwards.

In contrast to the above-mentioned clause, this is a renegotiation that must be carried out and not an automatic price revision.

The coming weeks will undoubtedly be particularly interesting to follow this announced “re-opening” of trade negotiations:

It should be remembered that according to the Charter of Commitments of Agricultural and Food Product Suppliers and Mass Retailers in the Context of the War in Ukraine, signed on 31 March 2022, the retailers have undertaken to “activate the renegotiation clauses by agreeing to reopen discussions on agricultural and industrial costs”, and this “even when the criteria for triggering the clauses are not necessarily met”. As for the suppliers, they have undertaken “to justify the requests for increases and to put in place reversible mechanisms so that it works in both directions.”.

It remains to be seen whether the renegotiation table will be open to all....