Specificities of contractual issues in the EU tobacco sector Technical Assistance for Development of a Strategy for Alignment with Common Market Organisation (CMO) Requirements TR2014/AG/10-A1-01/001 This Project is co-financed by the European Union and the Republic of Turkey Specificities of contractual issues in the EU tobacco sector Miroslav Božić Ankara, 10th May, 2018

Content History of tobacco CMO Tobacco CMO after reform in EU Combating tobacco consumption

History of tobacco CMO (1) First CMO regulation in the tobacco sector in EU introduced in 1970 (Regulation 727/1970); main measures: intervention prices for tobacco leaf premium payments to purchasers who concluded contracts with producers Intervention: intervention price was paid for all tobacco sold by farmers to intervention agencies; intervention price was initially set at 90% of the “norm” price (price covering all production costs) Premia: paid to first processors who bought tobacco from EU farmers Intervention prices and premia were set for each tobacco variety

History of tobacco CMO (2) CMO regulation from 1970 was amended several times until the 1990s in order to better balance production with demand for tobacco leaf and reduce stocks by: Fixing the intervention price at 85% of the norm price Defining tobacco growing regions (only tobacco grown in those regions was eligible for support) Fixing maximum quantities for each variety Fixing the overall production quantity for which the CMO applied

History of tobacco CMO (3) Reform of the tobacco regime in 1992 (Regulation 2075/92); main elements: Intervention system abolished Premium system as supplement to producers’ incomes (per kg of tobacco) Premium paid only for tobacco delivered under contract Premium paid only for varieties produced in designated production areas Total quantity for which premium is paid limited at EU level („quota”, 350 thousand tons) Part of the premium retained to fund the Community fund for tobacco research and information (informing public on harmful effects of tobacco consumption)

History of tobacco CMO (4) Further reform in 2004, objectives: align the tobacco policy with the overall objective of developing a competitive, knowledge-based and sustainable EU economy Changes introduced quota system abolished premia abolished and gradually replaced by partially decoupled direct payments Since 2010 aid in tobacco sector completely decoupled from production: 50% of the previous tobacco aid included into the direct payments other 50% went to rural development Only Italy maintained coupled support until 2013 (Art. 68)

Cultivation contracts in the tobacco sector Implemented until 2007 Objective: to ensure a stable market outlet for farmers and a stable supply of raw material for first processors Farmers were stimulated to conclude delivery contracts by receipt of a payment in the amount of a premium by first processor; first processor was reimbursed by a paying agency Processors were allocated individual quotas within the overall EU quota; delivery contracts had to be concluded and premia paid only within the quota Mandatory elements of the contract: an undertaking by the first processor to pay to the grower, in addition to the purchase price, a sum equal to the premium at the time of delivery for the quantity under contract and effectively delivered an undertaking by the grower to deliver to the premises of the first processor raw tobacco corresponding to the quality requirements

How fair is farmers’ share in value chain? Production chain of Tobacco → Illustration 1: 1kg tobacco → 50-77 boxes of cigarettes 1kg raw tobacco: 0,80€ 1kg cigarettes → up to 406 € market value!

Impact of tobacco reform and socio-economic dimension of tobacco production in EU Illustration 2: Total amount paid to tobacco farmers by the processors in 2000 was 269 mill. EUR,... while total amount of premium was 953 mill EUR (cost for taxpayers in the EU!) Therefore, this system could not survive! Around 83% tobaco farms ˂ 5ha & more than 60% of farm labor are female workers ! Source: EP study on tobacco, 2009

Tobacco CMO today – after reform CMO Regulation No. 1308/2013; specific provisions: Product coverage: tariff heading 2401 (only tobacco, not cigarettes and other tobacco products) Interbranch organisations in the tobacco sector: Article 159: recognition of interbranch organisations in the tobacco sector Article 157: general rules for recognition of interbranch organisations Article 162: specific aims of interbranch organisations in the tobacco sector

Recognition of interbranch organisations (1) Recognition of interbranch organisation (IBOs) by Member States is mandatory on request by the organisation Conditions for IBOs: Constituted of representatives of economic activities linked to the production and to at least one of the other stages of the supply chain Formed on the initiative of all or some of the organisations or associations which constitute them Pursue a specific aim taking account of the interests of their members and of consumers Specific aims in the tobacco sector Concentration and co-ordination of supply and marketing Adapting the production to the requirements of the market Rationalisation and improvement of production and processing

Recognition of interbranch organisations (2) Member States shall recognise IBOs which: work on achieving specific aims of their members account for a significant share of economic activities Obligations of Member States: Decide on recognition of an IBO within 4 months after submission of the request Carry out regular check to see if the IBO complies with conditions of their recognition Impose penalties or withdraw recognition of IBOs in case of non-compliance or irregularities Inform the Commission by 31 March each year on decision regarding recognition, refusal or withdrawal of recognition untertaken in the previous calendar year

Only four recognized IBOs in the EU tobacco sector Recognised interbranch organisations in tobacco in EU (2017): Hellenic Inter-Professional Organisation of Raw Tobacco (Greece) IBO on (processed) Tobacco (Greece) Organización interprofesional del tabaco de españa (Spain) Organizzazione Interprofessionale Tabacco Italia (Italy) → exam. IBO contract 2015 - 2017

Combating tobacco consumption Council conclusions (1999) on combating tobacco consumption: call for Member States to reduce tobacco consumption and exposure to tobacco smoke EU legislation in force has as objective high level of protection of human health and meeting of obligations under the WHO Framework Convention for Tobacco Control: Directive 2014/40/EU: approximation of laws of Member States concerning manufacture, presentation and sale of tobacco products Commission implementing decision 2016/787: list of additives in cigarettes subject to reporting obligations Commission implementing decision 2015/1735: precise position of the general warning and information message on roll-your-own tobacco marketed in pouches Irony of the tobacco policy worldwide: Governments need taxes but they don’t want domestic consumers!

This publication has been produced with the financial assistance of the European Union The contents of this publication is the sole responsibility of NIRAS IC Sp. z o.o. and can in no way be taken to reflect the views of the European Union

IBO in Italy 2015 - 2017 organization of supply and market control; According to Article 157 of Reg. (EU) 1308/2013, the OIT pursues specific aims while taking into account the interests of their members. The aims are attributed to the following activity areas: organization of supply and market control; coordination of supply chain relationships; quality of production and competition policy; research and development; environmental compliance and sustainable production. The IA consists of specific rules for tobacco producers, their POs or their associations (APOs) and the industrial companies (first processors, manufacturers), and it introduces possibilities for: marketing coordination; Contract framing; qualitative features of tobacco; harvest insurance; Production methods; and financial contribution.

IB Agreement: Main elements Marketing coordination AGEA (Agenzia per le erogazioni in agricoltura, i.e. Italian Agricultural Payments Agency) communicates to the Organization Tabacco Italia (OIT) information concerning cultivated areas and expected production with respect to cultivation contracts Contract farming Producers, first processors and manufacturers sign and fulfil contractual conditions established by the interbranch agreement (IA) Qualitative features of tobacco Tobacco must fulfil minimum qualitative requirements established by the IA Harvest insurance Promotion of the drafting of insurance contracts against weather damage Production methods Producers must comply with guidelines concerning good agricultural practices and products specifications Financial contribution Members must make Interbranch fixed financial contribution (established every year by the OIT) to the organization to cover costs directly incurred during production, marketing and R&D activities