RESTRICTEDWORLD TRADE
ORGANIZATIONG/AG/W/40
11 December 1998
(98-4940)
Committee on Agriculture Original:  English
COMMUNICATION FROM CHILE
The attached paper concerning the canned peach sector in the European Communities is being
circulated at the request of the Permanent Mission of Chile.
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The following are some initial observations by  the government of Chile on the situation
of the European regulation in the canned peach sector after the 1996 reform, drafted to
complement a document written by UCL entitled “The Impact of CMOs and Their Application
on the Processed Fruits and Vegetabl es:  The Case of Canned Peaches”.
1. The 1996 reform of the CMOs
The efforts of the European Union to have its regulations respected, as seen in the October
1996 reform of the CMOs1, are laudable but probably insufficient to eliminate the possibility for
fraud.
This reform was aimed at limiting overproduction and reducing the level of abuses and frauds
in the canned fruits and vegetables sector, denounced in a 1994 report of the Court of Auditors2.
However, we believe that it does not address the problem adequately and that the situation will
therefore maintain itself just like it was before it was introduced.  In other words, the possibility for
both producers and processors to commit abuses and frauds to the Commission subsidies will not
disappear as a result of the modifications.
This was further verified when, in conversations with South European canners and peach
producers, they affirmed that the possibilities of bypassing the new regulation were multiple and the
methods for achieving it already in place.  The following chapter attempts to show that the potentiality
to commit fraud is effective and as preoccupying for third countries’ producers of canned peaches asbefore the reform was introduced.
The most relevant changes applied to the CMOs can be summarised as follows:
Fresh fruit
(a) The elimination of the Withdrawal Price (WP) and its replacement by a fixed Community
Withdrawal Compensation (CWC), predetermined to progressively decrease over the next five years
to reach a final level of 10,99 ecus/100 kgs. in 2002.
(b) The imposition of a quota proportional to production, for each producer, for the levels of
withdrawal allowed.  This quota is also set to progressively decrease over the next five years, startingat 50% then going to 45%, 40%, 30%, and 20% before reaching its definitive level at 10% of
commercialised production.
Processed fruit
(c) The obligation for processors to sign contracts with recognised producer’s organisations
instead of individual producers for the acquisition of raw material subject to production aid from the
Communities.  The modification also contemplates a transition period of five years during which a
progressively decreasing percentage of the processors’ raw material may still be bought from
individual producers.
(d) The obligation for the processor to realise the payment of raw material (bought at a price at
least equivalent to the MGP) through a postal check or bank transfer.
                                                     
1Council Regulation (CE) nº 2200/96 of October 28th 1996 and Council Regulation (CE) nº 2201/96 of
October 26th 1996, both published in the Official Journal of the European Communities L297 of November 21st
1996.
2Court of Auditors, Annual Report 1994, with the answers from the institutions, OJ C 303 of November
14th 1995.G/AG/W/40
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2. The Communitary Withdrawal Compensation
For the first modification (a), fixing and reducing the levels of compensation for fruit
withdrawn will have little effect if the quantity and quality controls that are supposed to oversee those
withdrawals are deficient. The mere existence of  a withdrawal compensation, no matter how low its
level, is an incentive for fraud as long as the producer can still withdraw rotten and bruised fruit or
submit the same fruit several times for withdrawal, as was the practice under the former CMO regime.
If a producer can dispose of its normally unmerchantable fruit production through withdrawal and
receive a compensation for it, whether it is 14,65 ecus/100 kgs. or 10,99 ecus/100 kgs. matters little.
It will still prove to be a incalculable benefit that will encourage overproduction, stimulate fraud,generate profits and in the end positively affect the competitivity of the European canned peach
industry, thereby distorting the international market of that product.
3. The percentage limitation on withdrawal
In a similar way, the second modification (b) will not address the problem either.
Firstly, the modification does not prevent producers to sell their “withdrawal allowance” to
each other if needed.  Since the % limitation is set per producer and not for total production, the
example that follows will demonstrate that the regulation can be bypassed with a simple manoeuvre:
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Example
A producer (X) produces 100 kgs. of peaches and commercialises all of his production
(100 kgs.). Another producer (Y) also produces 100 kgs . but only commercialises 50 kgs. Y is entitled
to withdrawing 25 kgs. only (50% of “commercialise d production” in 97/98) and does not know what
to do with the 25 kgs. that he is left with.  Since (X) has not used his “withdrawal allowance”
(50 kgs.), he can buy (Y)’s peaches at a price lower than the withdrawal compensation and then
withdraw them himself.  This operation allows (Y) to dispose of his leftover 25 kgs. and gives each
producer an additional income that they would otherw ise not be entitled to. (X) could even repeat the
same manoeuvre with another producer as he still has 25 kgs. left of his “withdrawal allowance”.
In the end, withdrawals will distribute themselves according to market law until reaching a
higher “ceiling” than the x% per producer intended in the regulation.
Secondly and most importantly, since controls are inefficient, the producer could reach an
agreement with the processor where he would bill hi m for 200 kgs. of fruit when he actually only sells
him 100 kgs.  In this scenario, the processor would be allowed to charge a higher level of subsidy by
showing that he processed 200 kgs. when he really processed only half that quantity and the producer
will be allowed to withdraw more of his unwanted production (or sheer overproduction) as his limit isset by a percentage of what he commercialises.  Again, both would gain profit from this operation,
making fraud highly worthwhile.
As for the first modification (a), the reform is useless if not accompanied with strict controls.
Indeed, if the figures submitted as “commercialised production” are not effectively controlled, what
good will it do to limit withdrawal to a lower percentage of that production?G/AG/W/40
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4. The obligation to buy raw material from producer’s organisations
The third modification (c) pretends to give the producers a better bargaining power in their
relation with the processors. That way, supposedly, it will be more difficult for the processors to take
advantage of the overproduction to offer the producers a price lower than the MGP for the rawmaterial or to extort any other benefit such as free transport, delayed payments, etc.
In practice, however, to anticipate the eventual negative effects of that aspect of the reform,
the processors have started to control the producers’ organisations themselves.  Instead of having a
more open market where negotiation will ensure a smooth commercialisation, the canned peach sector
will take the direction of an integrated industry where the processors control their raw material
production.  In such a system, they will be able to take advantage of the Community subsidies at bothends, production and processing, therefore again making more room for fraud, making their product
more competitive by inflating subsidy levels and distorting the international market of canned peaches
at the expense of third countries’ exporters.
5. The obligation to use postal checks or bank transfers
Of the four major modifications contemplated in the reform, this one (d) is probably the one
that will have least effect.  Indeed, it will be easy for any producer or processor to present false
operations that do not correspond to the reality of exchanges.  Given that controls are deficient, a
processor could very well buy 100 kgs. of raw material while presenting a bank transfercorresponding to the buying of 200 kgs. in order to inflate the level of production aid he will be
entitled to. The processor could pay the producer a sum of money equivalent to the value of 200 kgs.,
thereby generating the necessary bank proof, but really buy only 100 kgs. and recuperating half of the
money later through an agreement with the processor.  He could also effectively buy a 100 kgs. but at
a price lower than the MGP using the same operation (effectively paying but recuperating part of themoney later through the means of an agreement) to generate a bank proof and charge for the subsidy
as if the raw material had been bought at the MGP.  The possibilities of falsification are endless.
Therefore, the obligation to use bank transfers or postal checks, if combined with the same
laxness in controls as for the rest of the operations, is in no way a guarantee that the processor will
actually receive the production aid he is entitled to only for the fruit he buys at the MGP.
6. Conclusions
In spite of these new rules applying, the room for fraud does not disappear as long as controls
are not made more efficient.  As before the reform, the problem does not lay in the regulations
themselves but rather in their failed application and the lack of controls supposed to ensure theircorrect execution.
In short, if the Commission can not guarantee the adequate application of its reforms,
they will not better th e situation in any way .  Third producer and exporter countries will still be
affected by the distortion caused by the high level of EU subsidies and the uncontrolled fraud linkedto them.  As European products are made competitive artificially and international prices are
compressed as a result, the distortion in the international market of canned peaches will remain as
prejudicial to non-European peach producing and exporting countries.
Additionally, since the measures approved in the new regulation will take five years until
being applied to their full effect, what little impact they could have is set too far in the long term to
offer a solution to the problems third producing countries are experiencing in the short term because
of the high level of subsidies and the existence of  frauds and abuses.
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