It's worth it: retailers warned about problems with products in case of price fixing
The trade warned of possible problems with the supply of products due to price fixing in long-term contracts with suppliers. The relevant bill was previously developed by the Ministry of Agriculture. The appearance of the document raised concerns among businesses — the AKORT association has prepared a letter to the ministry. Companies believe that fixing the value can lead to serious consequences — goods will flow to the gray market, and retail chains will face losses and a difficult-to-predict market situation. The Ministry of Agriculture, on the contrary, believes that the annual price fixing in contracts stabilizes the cost of products. The Ministry of Industry and Trade clarified that expert discussions of the document are currently underway. Whether the new initiative of the authorities will help to stabilize the price situation is discussed in the Izvestia article.
Why is retail against annual price fixing
Fixing food prices in long-term contracts can lead to problems with the supply of products. This is stated in a letter from the Association of Retail Trade Companies (ACORT) addressed to the head of the Ministry of Agriculture Oksana Lut (Izvestia has the document).
The reason for the retailers' concerns was the amendments that the ministry proposes to introduce into the law "On the Basics of State Regulation of trading Activities." They are designed to legislate the share of direct long-term contracts with a fixed (formula) price of retail chains with suppliers for socially significant goods.
As Izvestia wrote, the ministry prepared a draft of the changes last summer. However, they were immediately criticized by the retailer, who stated that if such contracts were concluded, he could become a hostage to his obligations and find himself at a disadvantage compared to other market participants. After that, the Ministry of Agriculture relaxed the requirements, but did not abandon the fixed cost. The Ministry only suggested that the parties would be able to independently set the price or the formula for calculating it. Previously, it was proposed to transfer this function to the government. At the same time, the main terms of the contracts have been preserved: the validity period is from one year, and the minimum share of sales under such contracts will gradually increase. In 2026, it will make up 80% of the total supply, in 2027 — 85%, and by 2028 it will reach 90%.
"The experience of previous years (price fluctuations for buckwheat, sugar, sunflower oil, eggs, etc.) shows that such phenomena are difficult to predict, cannot be regulated, and when attempts are made to introduce them, they lead to an overflow of regulated products to the gray market and negative changes in the investment plans of business entities. In this regard, the purpose of the draft law, defined as ensuring the stability of market prices (in a market economy), seems unattainable," the letter says.
It also notes that cost stability has not been achieved even under centralized planning conditions. "The ban on changes during the year proposed by the bill and the impossibility of unilateral cancellation of the contract creates the risk that any even minor error in the "price formula" has fatal consequences for the parties to supply contracts," trade representatives believe.
At the same time, they note that retail chains and manufacturers support the development of long-term relationships. However, in a situation of market pricing for food production components, it is not possible to establish state regulation of market value while maintaining profitability of production.
In this regard, the business believes that the best option would be to encourage producers to conclude long-term contracts between producers and processors of raw materials, which will reduce volatility in the sector and ensure the stability of costs and, consequently, prices for the end user. They also suggest that the authorities take into account the practical and positive experience of retail trade leaders developing projects of agro-contracts and agricultural aggregators with manufacturers.
— The preparation of the appeal is related to the concern of all participants in the commodity distribution chain about the risks that arise from the introduction of a mandatory share of long-term contracts with a fixed or formula price between retail chains and food suppliers. The proportion of such contracts varies throughout the year depending on seasonality and negotiation campaigns with suppliers. For example, when stocks of domestic borscht vegetables run out, long—term contracts are terminated and a new negotiation campaign for the new season begins," Stanislav Bogdanov, chairman of the ACORT Presidium, explained to Izvestia.
According to him, the obligation to ensure year-round 80-90% of sales of goods under long-term contracts for all product categories is difficult to fulfill.
— This eliminates the consumer from the equation, who must have a wide choice and decide for himself which goods to buy. If suppliers are forced to enter into long-term contracts with online retailers, there is a risk that it will become unprofitable for them to work with legal retail. The assortment will decrease, spontaneous trade will grow, or a black food market will appear," Stanislav Bogdanov explained.
He also noted that price fluctuations for basic foodstuffs are of a complex nature, which is influenced by many external factors: global economic conditions, climate, regional peculiarities, inflationary costs, and the personnel situation.
— It is difficult to predict and take into account all these factors in advance over an annual period, and the proposed ban on renegotiating contract terms may put both manufacturers and trade at a disadvantage. Any inaccuracy or error in the price formula can lead to significant losses, jeopardizing the stability of supplies," emphasized Stanislav Bogdanov.
The pros and cons of price fixing
The legislative initiative is being worked out jointly with State Duma deputies and the Ministry of Industry and Trade in order to maintain a stable price situation for socially important food products, the press service of the Ministry of Agriculture told Izvestia.
"It is assumed that manufacturers and retail chains will independently determine the price of products for a long—term period," the ministry explained to Izvestia, refraining from commenting on the position of the business.
The Ministry of Industry and Trade, in turn, confirmed to Izvestia that work on the bill is being carried out jointly with the Ministry of Agriculture, State Duma deputies and the industry community.
— Now we have agreed that it is necessary to establish requirements for long-term contracts for key types of products, where it is necessary to ensure that there are no significant cost jumps. We are negotiating with colleagues regarding the formats of working with her. The option we have proposed is a price fork. Colleagues from the Ministry of Agriculture suggest considering the possibility of fixing or establishing a price formula in a long—term contract based on mutual agreements between the supplier and the buyer," explained Roman Chekushov, State Secretary and Deputy Head of the Ministry of Industry and Trade.
According to him, expert discussions are currently underway. We are not forcing this issue, because over the past few months, starting in May, we have not recorded large inflation in the consumer basket, he explained.
— I would like to note that already this season, agricultural producers and our retail chains are concluding long-term contracts without waiting for any regulation. The volume of such contracts is quite large. However, such agreements are mostly of a framework nature, which is what the initiative under discussion is designed to change," the deputy minister explained.
In the State Duma, Izvestia was informed that they do not yet know about the draft law of the Ministry of Agriculture.
— The Agrarian Committee has not officially received this bill. As soon as it arrives, we will discuss it with the industry community, especially with those manufacturers whose activities are associated with high volatility in cost and production volumes," Yulia Ogloblina, deputy chairman of the committee, told Izvestia.
The State Duma Committee for the Protection of Competition has also not yet heard about the initiative. At the same time, they noted that the legislative introduction of long-term contracts has been discussed for a very long time.
— I personally developed such an initiative, but it was based not on price fixing, but on long-term contracts for the volume of products supplied. For example, if you are engaged in poultry production, then it has a cycle of one and a half years," Sergei Lisovsky, deputy chairman of the committee, explained to Izvestia.
According to him, the conclusion of such contracts is a global practice, but in Russia it is now necessary to take into account the high level of inflation: prices for goods in January of this year are not comparable with prices in October. Therefore, it is wrong to automatically transfer the practice of concluding long-term contracts, the deputy believes. At the same time, he noted that even in world practice, cost fluctuations of up to 10% are allowed, depending on the market, seasonality and other circumstances.
— Therefore, if we introduce such a measure, we need to establish the possibility of price fluctuations. If it is fixed, then in the event of a surge in value, retail chains will simply abandon this product in order not to work at a loss," Sergey Lisovsky believes.
Izvestia sent a request to Rusprodsoyuz, as well as to the largest retail chains.
"We first heard about this initiative from the head of the Ministry of Agriculture, Oksana Lut, back in July, and we discussed the specific provisions of the initiative at the Public Council under the Ministry in October," Babken Ispiryan, deputy chairman of the Council of the People's Farmer Association, told Izvestia.
According to him, everyone remembers the situation with the price hikes for eggs, vegetables, and butter.
— Then, for some reason, they tried to blame us, the agricultural producers. Meanwhile, the Ministry of Industry and Trade is the regulator of trade policy, and the solution to the problem lies in the plane of trade legislation. In this regard, the draft law is the first step towards systematization and stabilization of contractual relations with the networks. In this regard, we stand in solidarity with the Ministry of Agriculture," he said.
According to him, farmers need stability and predictability of sales, and the ministry needs products on store shelves.
— When potatoes were the flagship of rising inflation last year, we initiated price fixing between chains and agricultural producers, following the example of how it works with processors. But then we were talking exclusively about the vegetables of the borscht set. Our proposal was formulated in order to maintain the profitability of agricultural producers, which could then be reinvested in the development of production and improvement of the quality of potatoes and vegetables. And also to avoid sharp price spikes," the Chief of Staff of the Potato and Vegetable Market Participants Union (Potato Union) explained to Izvestia Tatiana Gubina.
According to her, when it was not possible to reach an agreement with the networks, it reached the level of lawmaking, however, in the version as it is proposed now, potato producers are not very interested. Therefore, it is necessary to sit down at the negotiating table and discuss this situation. In particular, it may be necessary to first launch pilot projects with volume and price records, but not all food products. After all, for example, confectionery products are very difficult to regulate, as there are many ingredients: flour, sugar, etc.
According to Tatiana Gubina, manufacturers are already working with networks to conclude long-term contracts, but without fixing prices.
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