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HCA Uses its Powers to Uncover Roots of Record-High Food Inflation

HCA Uses its Powers to Uncover Roots of Record-High Food Inflation

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After the covid-19 pandemic, the EU economy is now being disrupted by the Russia-Ukraine conflict. The rising energy prices and disrupted supply chains have resulted in a further increase in inflation. According to the Hungarian Central Statistics Office, average inflation in Hungary was 24.5% in December 2022, the highest in the European Union. However, inflation of food products was even higher, reaching a staggering 44.8% year-on-year price increase by December 2022. This number is almost three times higher than the EU average.

If prices on a market seem to be too high, especially in comparison with neighbouring countries, this immediately raises the suspicions of the Hungarian Competition Authority (HCA) (for further details, see "Immediate changes to covid-19 rapid tests market as HCA publishes results of accelerated sectoral inquiry" and "Competition authority publishes results of the first accelerated sectoral inquiry into the national brick market"). The current situation with respect to the food sector is no different. In January 2023, the HCA announced that it would conduct a thorough investigation into the food sector through various proceedings. These proceedings have already started at high speed.

Accelerated sector inquiries into milk and dairy products and preserved food markets

The first proceeding released to the public was an accelerated sector inquiry into the markets of milk and dairy products, initiated on 20 January 2023. The price of milk increased by 52.1% in one year, while consumers had to pay 79.2% more for dairy products in December 2022 compared with the previous year. On 15 October 2021, the government introduced a price cap on milk with 2.8% fat, which remains applicable now. However, this has not stopped the prices of other milk and dairy products from increasing. These products are now the focus of the HCA's investigation.

On 8 February 2023, a second accelerated sector inquiry was launched into the preserved food market (eg, canned and frozen food). This segment also observed significant price increases, as well as temporary deficits over the past year.

An accelerated sector inquiry can be initiated if rapid intervention is justified. In this case, the HCA suspected not only that the increase of input costs drove inflation sky high, but also aimed to investigate the reasons behind the suspected distortion of competition in the relevant sector. The HCA must prepare its draft report within 30 days (which may be extended two times by an additional one month each), instead of the ordinary one-to-two years. To speed up the proceeding, it can even conduct dawn raids to collect evidence. The HCA has resorted to this tool in this case: it conducted dawn raids at numerous companies at different levels of the distribution chain (eg, manufacturers, distributors, retailers and wholesalers) at the beginning of February 2023.

The companies are also obliged to reply to the HCA's questions. Their replies cannot be untrue or misleading; otherwise, substantial procedural fines can be imposed on them.

Consultation with significant market players

The HCA has also initiated consultations with significant market players in the food production and retail sector to inquire about the market developments and to draw attention to the relevant provisions of competition law. The Hungarian watchdog also monitors international food inflation, as well as the enforcement proceedings initiated by other competition authorities in this sector.

The president of the HCA has noted that the HCA is carefully examining the various signals from consumers and market players. The HCA will not shy away from initiating more accelerated sector inquiries or other (eg, antitrust) proceedings in the near future.

Comment

As the investigations continue, companies at all levels of the food supply chain should be well prepared for the HCA appearing at their premises to conduct a dawn raid or approaching them in writing with a request for information. It is important for businesses to be aware of their rights and obligations during dawn raids. It may be too late to ask for help when the HCA's officials have already visited the company, taken away documents to be used as evidence, or fined the company or its employees. There are effective prior compliance tools to prepare for such investigations.

Companies should also be on the lookout for the results included in the reports of the accelerated sectoral inquiries, as they include various recommendations on potential ways of increasing competition. These recommendations are usually followed quickly by the legislature or even the HCA itself, which can initiate various (eg, antitrust) proceedings.

By Anna Turi, Counsel, and Mark Kovacs, Attorney at Law, Schoenherr

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