Retailers suspected of milking the market

VILNIUS - Price increases across the Baltic region are forcing regulators to step up price-fixing investigations and allowing populist, left-leaning politicians to call for tighter regulation of corporate profits as government officials seek to head off inflation that threatens to stall recovery from the world’s deepest recessions. Estonian milk prices have jumped 66 percent in the past year. The cost of some vegetables has more than doubled, reports Bloomberg.
“I certainly deplore situations where someone raises prices without a reason,” Estonian President Toomas Ilves told the country’s food producers’ lobby on Sept. 29. “I urge the consumer protection and competition watchdogs to pay particular attention to what is happening to our prices.”

Estonia said on Oct. 7 that September annual inflation was the fastest in 20 months at 4 percent. Lithuanian prices rose 0.6 percent, the biggest monthly jump since January, the statistics office said on Oct. 8. The small size of the Baltic markets and a drive to reduce regulation to boost living standards after communism has made them more vulnerable to global price increases than larger countries, economists say.

In Estonia, regulators are concerned that the country’s plan to adopt the euro on Jan. 1 is giving companies an added excuse to raise prices. Estonian food prices rose 5.3 percent through August from their November lows, compared with the European Union average of 1.5 percent, according to data compiled by Bloomberg. Latvian prices have grown 3.2 percent and Lithuania’s 1.6 percent.

Accelerating inflation may derail the region’s economic recovery, said Violeta Klyviene, an analyst at Danske Bank in Vilnius. In 2008, inflation accelerated to 10.6 percent in Estonia, 15.3 percent in Latvia and 11.1 percent in Lithuania, choking off domestic demand and contributing to the collapse of a property bubble.
“Global food price increases become a new risk factor for Baltic inflation,” Klyviene said. “The Baltic economies tend to absorb price shocks to a much larger extent, pushing inflation higher, as the main players on the Baltic market are likely to abuse their dominant position domestically.”

Estonian prosecutors and competition authorities started an inquiry into dairy prices last month, after most leading retailers, including the Selver supermarket chain of Tallinna Kaubamaja, raised milk prices by 25 percent on Sept. 21. They launched a probe into a possible bread cartel in August, when the bread producers’ lobby announced plans to boost prices by 10 percent to 20 percent.

Lithuanian President Dalia Grybauskaite threatened last week to cap retailers’ profits if returns from food prices continue to rise, though this would seem to be a return to a state controlled economic system that the Baltic countries have only recently emerged from.

The Baltic States, which were part of the Soviet Union until 1991, may have waited too long to regulate market consolidation “as they believed too much in the market regulating itself” and rapid economic growth masked the issue, said Maris Lauri, chief economist at Swedbank in Tallinn. “It is difficult to improve competition in small markets, and one should probably try to avoid different markets from concentrating too much,” Lauri said. “Certainly in many cases this wake-up call comes too late. Another thing is careful supervision. Its importance has increased, not least by euro entry in Estonia’s case,” he added.

Estonia has “few tools” to control price increases, Prime Minister Andrus Ansip said last month, after European Central Bank President Jean-Claude Trichet said Estonia must remain “alert” on price developments and take “forceful” action on inflation after joining the eurozone economy.

Prices for milk rose 41 percent in the 12 months through early September, according to the Konjunktuuriinstituut research institute. That was before the 25 percent increase. Vegetable prices increased by between 11 percent and 107 percent. Pork, poultry and bread prices declined, the institute said.

Competition among Lithuania’s four biggest retail chains - Maxima, Rimi, Iki and Norfa - is “in theory, but not in practice,” lawmaker Valentinas Mazuronis said on the TV show Lietuvos Rytas. Mazuronis’ Law & Order party has proposed capping profit on food products at 20 percent for wholesalers and 25 percent for retailers.
Lithuania’s Competition Council is examining trends in food prices to determine if retailers had confidential price agreements.

“Growing profits of retail chains on fundamental food products are an audacious exploitation of consumers,” Grybauskaite said in a statement Oct. 5. “Such actions by retail chains are intolerable and unjustifiable.”
Estonian Minister of Agriculture Helir-Valdor Seeder countered at a government press conference on Oct. 7 that it will not be possible for countries in the EU to implement state-imposed retail prices on consumers, or purchase prices on producers, reports Postimees Online. When asked about the ideas emerging in Lithuania concerning the possible maximum prices for foodstuffs, Seeder remarked that no such price limits have been set in any EU member states and Lithuania will not be able to do so, either.

Ansip added that no one is happy about the developments concerning milk prices in Estonia, but he categorically disagreed with those who have explained the price increase with the impending transition to the euro. “I cannot comment on potential cartel agreements, but the conflicts described in the media leads one to think that the situation was an attempt to conclude a cartel agreement to increase prices,” he said, noting that he believed that the market would not accept these (higher) prices.

The Estonian prime minister stated that people should not pay the higher prices that are being charged. “Consumers have a right to cover their pockets and say that they would not agree to pay the required amount - this would be the only medicine against price surges,” explained Ansip.
This, however, is not such an easy option for those who need to buy milk.
Ansip estimated that stability in prices ought to be achieved in the first half of next year.