Report for the Hearing delivered in Case 23/84

I — Facts and written procedure

The British milk market has developed differently from the milk markets in the other Member States. Until 1930 there were no producers' cooperatives, and milk was bought directly from individual farmers by private dairies. During the agricultural depression of the 1920s and 1930s, farmers found themselves in a particularly weak position vis-à-vis the dairy companies, who had become very powerful, and it was found necessary to establish a statutory scheme to improve the production and marketing of dairy products. In 1933 a scheme for the establishment of a Milk Marketing Board for England and Wales was proposed by the National Farmers Union, accepted by the producers concerned in a referendum, and adopted by Parliament. Similar schemes were introduced in Scotland, where three Milk Marketing Boards (Scottish, Aberdeen and District, North of Scotland) were established soon afterwards, and in Northern Ireland in 1955. As a result of the introduction of the Milk Marketing Boards, dairy producers had at their disposal a democratically elected organization which could counterbalance the bargaining power of the dairy companies and inter alia negotiate milk prices with them by means of appropriate procedures. Prices were fixed by each Milk Marketing Board after consulting a Joint Committee composed of representatives of the Milk Marketing Board and of the Dairy Trade Federation or, if the Joint Committee was unable to agree, a third person appointed by the Minister for Agriculture.

On the accession of the United Kingdom to the Community in 1973 it became necessary to integrate the British system, the continuation of which was assumed in a declaration annexed to the Treaty of Accession, into the common organization of the market for milk and milk products established by Regulation No 804/68.

By an amendment made to Article 25 of that regulation by Regulation No 1421/78 of 20 June 1978 (Official Journal L 171, p. 12) the Council authorized Member States to grant certain special rights to an organization representing at least 80% of the number and at least 50% of the production of milk producers established in the area of its activities. These are:

That authorization can only be granted and maintained if certain conditions are met regarding the ratio of the quantity of milk used for direct human consumption to the quantity used for other purposes in the same Member State and to the quantity used for direct human consumption in the Community as a whole. The Council must also ensure, by adopting general rules, that the exercise of those special rights:

Council Regulation No 1422/78 of 20 June 1978 (Official Journal L 171, p. 14) concerning the granting of certain special rights to milk producer organizations in the United Kingdom provides that the United Kingdom may be authorized to grant the rights referred to in the said Article 25 to the Milk Marketing Boards, subject to a poll of the milk producers concerned, and sets out conditions governing the grant and maintenance of those rights. It also lays down conditions regarding the exercise of the special rights granted to the Milk Marketing Boards. Article 9 (1) of the regulation provides that the prices of milk sold by the Milk Marketing Boards to subsequent purchasers can only be differentiated in certain strictly defined circumstances, that is: (a) on the basis of the use intended by the buyer; (b) on the basis of other criteria established in accordance with the procedure referred to in paragraph 4, that is, fixed under the Joint Committee procedure. According to Article 9 (2), any differentiation must not result in distortion of competition on the United Kingdom market between local products and products from other Member States. To obviate that risk, Article 9 (3) provides that the Milk Marketing Boards may not sell milk at a price below the lowest price applied on the United Kingdom market for the relevant milk product imported from other Member States. Article 9 (4) provides that all selling prices actually applied by a Milk Marketing Board must, in accordance with the provisions referred to in paragraphs (1), (2) and (3) of the same article, be established on the basis of negotiations at which the Milk Marketing Boards and their milk purchasers are represented on an equal footing. Under Article 10, the United Kingdom has a permanent obligation to supervise the compliance by the Milk Marketing Boards with Community principles and rules and with the special conditions governing the authorization. It must also adapt its national rules governing the Milk Marketing Boards to bring them into line with Community regulations.

Commission Regulation No 1565/79 of 25 July 1979 laying down rules for implementing Regulation No 1422/78 (Official Journal 1979, L 188, p. 29) takes note, on the basis of the poll of milk producers, that the Milk Marketing Boards are representative within the meaning of Article 25 (1) of Regulation No 804/68 and authorizes the United Kingdom to grant them the rights set out in that article. Article 6 of the regulation requires the United Kingdom to adopt the necessary detailed provisions for continuing supervision of compliance with Article 9 of Regulation No 1422/78. Under Article 6 (2) those provisions must in particular specify the possible uses of milk under Article 9 (1) (a) and the other criteria of an objective nature which may be taken into consideration in accordance with the procedure laid down in Article 9 (4).

Article 6 (4) provides that for the application of Article 9 (3) of Regulation No 1422/78 the United Kingdom must adopt measures for the comparison on a regular basis of the firsthand selling prices realized on the United Kingdom market by the principal milk products made from milk sold by the Milk Marketing Boards and by similar milk products imported into the United Kingdom from other Member States. Under that provision the United Kingdom is also required to inform the Commission each month of the lowest prices recorded for domestic and imported products respectively.

In order to bring the legislation on the Milk Marketing Boards into conformity with the Community rules, legislation was adopted in 1981 laying down the special conditions to be fixed for the Milk Marketing Boards, applicable throughout the United Kingdom, and, for each of the regions where a Milk Marketing Board exists, amending the 1933 legislation establishing a Milk Marketing Scheme. The measures in question are the Milk Marketing Boards (Special Conditions) Regulations 1981 and five sets of Milk Marketing Scheme (Amendment) Regulations 1981.

Under that legislation the Milk Marketing Boards may apply a wide range of sale prices for milk, according to the intended use of whole milk or of skimmed milk obtained in the course of butter or cream production. Those prices are now set by the Joint Committee.

The Milk Marketing Board for England and Wales (used by the parties as an example because of its predominant position; the practices of the other Milk Marketing Boards are substantially the same) applied different prices for whole milk according to the various possible uses of whole milk.

In this case it is necessary to consider only a differentiation, which might be termed a first degree differentiation, under which the price of whole milk is fixed at a different level according to whether the milk is intended to be used for the production of bulk butter or packet butter, and a second degree differentiation, under which the price of whole milk may vary according to the intended use of the skimmed milk obtained from that whole milk, that is, the manufacture of skimmed-milk powder, the manufacture of animal feed, and other uses. The second price differentiation was also applied to whole milk used for the manufacture of cream.

By a letter of 10 June 1982 the Commission drew the attention of the United Kingdom to the objections it had to the system described above, and asked the United Kingdom to submit its observations on the matter.

By a letter of 12 July 1982 the United Kingdom replied that in its view the operations of the Milk Marketing Boards were no different from those of cooperatives elsewhere in the Community.

On 10 June 1983 the Commission sent to the United Kingdom a reasoned opinion in which it restated its point of view and asked the United Kingdom to take the necessary measures to comply with the reasoned opinion within a month of its notification.

In its reply dated 22 July 1983 the United Kingdom informed the Commission that, in England and Wales at least, the Joint Committee of the Milk Marketing Board and the Dairy Trade Federation had come to the conclusion that for commercial reasons it would be advantageous to end the practice of dual pricing of milk intended for butter manufacture, but fully reserved its position regarding the existence of an obligation to put an end to that practice.

On 25 January 1984 the Commission brought this action. By order of 30 May 1984 the government of the French Republic was given leave to intervene in support of the Commission's conclusions.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry. However, it asked the United Kingdom and the Commission to reply to a number of questions and to provide it with certain information.

II — Conclusions of the parties

The Commission, whose conclusions are supported by the government of the French Republic, claims that the Court should:

The United Kingdom claims that the Court should:

III — Submissions and arguments of the parties

1. Dual pricing system for whole milk utilized for the manufacture of butter

The Commission considers that the dual pricing system for whole milk utilized for the manufacture of butter, depending on whether it is to be sold as intervention or bulk butter or as packet butter on the retail market, applied by the Milk Marketing Boards :

(a) Breach of Article 9 (1) (a) of Regulation No 1422/78

The Commission considers it appropriate to observe first of all that contrary to the opinion expressed by the United Kingdom its argument regarding the interpretation of Article 9 (1) (a) is admissible, since the defendant had ample opportunity to submit its observations on that argument before the action was brought, but did not do so. It refers in that regard to its letter of 18 September 1980 in which, commenting on the United Kingdom's draft legislation to implement the Community legislation on the Milk Marketing Boards, it pointed out inter alia that the identity of the further buyer of the product manufactured (intervention agency or private trade) cannot, generally, be regarded as an objective criterion, and to its letter of 10 June 1982 and its reasoned opinion, in which it was clearly stated that the United Kingdom legislation constituted an infringement of Article 9.

With regard to the interpretation of Article 9, the Commission takes the view that the use to which the buyer intends to put the milk is the manufacture of butter. What the buyer of the milk intends to do with the product for which he has utilized the milk, that is, whether he intends to sell it on the open market or into intervention, has to do not with the intended use of the milk but with the nature of the buyer. Since the general rule under Community legislation is that prices should be identical, any exception must be interpreted strictly.

Nor can any support for the defendant's argument be drawn from paragraph 66 (7) of the Milk Marketing Scheme 1933, which allows milk prices to vary according to how the milk is to be used in the manufacture of a range of milk products, without mentioning the market on which those products are to be sold.

In view of those factors the Commission considers that the argument of the United Kingdom according to which, in addition to the market for bulk butter, there is a separate, discrete and clearly defined market for packet butter has no significance.

(b) The other criteria referred to in Article 9 (1) (b)

According to the Commission, the price differentiation applied by the Milk Marketing Boards is likewise not a differentiation on the basis of other criteria as referred to in Article 9 (1) (b). That provision refers to the Joint Committee procedure, which, as far as the Commission is aware, has never been used.

In any event, a differentiation of this kind is not a differentiation on the basis of objective criteria within the meaning of Article 9 (4) of Regulation No 1422/78 and Article 6 (2) of Regulation No 1565/79. In the United Kingdom legislation paragraph 66 (8) of the Milk Marketing Scheme 1933 lays down the objective criteria on the basis of which the Joint Committee may set different prices for milk. Those criteria include the quantity of milk to be delivered and the description, quality and condition of the milk. Differentiation on the basis of the type of sale intended has no relation to the categories set out in paragraph 66 (8) and cannot therefore be added to the list, with the Minister's approval, under paragraph 66 (8) (g).

Article 9 (2) and (3)

The Commission states that although it did not make any formal allegation that Article 9 (3) had been contravened it cannot accept the argument drawn by the defendant from that fact. The price reporting mechanism required by Article 6 (4) of Regulation No 1565/79 in order to check compliance with Article 9 (3) began to operate in its completed form for butter prices only in February 1982. For the period from February 1982 to April 1984, that is, a period of 27 months, 14 monthly reports showed that the lowest price of domestic butter on the British market was lower than the lowest price of imported butter. With regard to a number of those reports the United Kingdom has been unable to supply satisfactory explanations. In the circumstances it is therefore not correct to say that the existence of Article 9 (2) and (3) renders the application of Article 9 (1) unnecessary.

Similarly, the Commission considers that Article 6 (2) of Commission Regulation No 1565/79 cannot be held to render Article 9 (1) of Regulation No 1422/78 meaningless, and that the two regulations must be taken to apply cumulatively.

The Commission goes on to point out that the obligations provided for in Article 9 (1) are justified in the context of the special privileges granted to the Milk Marketing Boards and are in no way disproportionate.

(c) Distortion of competition

According to the Commission the dual pricing system for milk distorts competition between dairy products from other Member States and domestic products. The price paid for milk by United Kingdom butter manufacturers is calculated according to a system which takes into account the state of the market, and their profit margin remains virtually the same whatever the actual state of the market. An exporter of butter from other Member States to the United Kingdom, on the other hand, must take the market situation in the United Kingdom as he finds it, and if the market is in a poor state his profit margin will naturally be affected, so that he will be obliged to sell on the United Kingdom market at a reduced profit, or even at a loss.

The Commission adds that the figures provided by the United Kingdom in order to show that between 1978 and 1983 the United Kingdom market was not weaker than the markets in other Member States are not relevant, regardless of whether or not the statistics regarding the various Member States are comparable. The fact that the United Kingdom manufacturers' profit margin remains more or less the same while the margins of manufacturers from other Member States vary according to the actual state of the United Kingdom market remains true whatever the level of United Kingdom prices.

The Commission goes on to challenge the United Kingdom's argument that the relevant competition, which is between milk producers, not butter manufacturers, is not affected by the dual pricing system for milk.

In so far as the Milk Marketing Boards, within the Joint Committee framework, accept a lower return on the butterfat content of the milk which is sold for the manufacture of packet butter for the normal commercial market than for that sold into intervention, they are failing to obtain maximum returns for their producers.

In contrast to the Milk Marketing Boards, producers who are members of a cooperative, whose members can easily leave it and which is in competition with other cooperatives and with the private sector, can join other cooperatives which sell butterfat into intervention and are thus able to pay higher milk prices to their members. The great majority of milk producers in the United Kingdom cannot do that, but are obliged, as members of a Milk Marketing Board, to accept the price resulting from the average selling prices realized by the Milk Marketing Boards.

The fixing by the Milk Marketing Boards of a lower differential price for milk used to make packet butter compensates British butter manufacturers wholly or in part for the fact that their processing costs are higher than those of their competitors and encourages them to remain in the market for packet butter rather than to sell into intervention, and therefore there is a clear loss of income for United Kingdom milk producers as well as a distortion of the intervention system and of the conditions of competition on the United Kingdom market for packet butter.

(d) Discrimination between milk buyers

The Commission considers that to make a manufacturer pay a higher price because his butter is destined for intervention or the bulk butter market rather than for sale in packets on the retail market constitutes discrimination which cannot be justified on objective grounds. Contrary to the defendant's assertions, the markets for bulk and intervention butter and for packet butter cannot be separated, since the cost structures are not different; there are merely additional costs for the packaging and marketing of packet butter. In normal competitive conditions, and with a properly functioning intervention system, those additional costs should be reflected in a higher market price for packet butter than for bulk butter.

(e) Obstacle to the normai functioning of the common organizations of the markets

The Commission takes the view that the dual pricing system for milk used for the manufacture of butter leads to obstacles to the normal functioning of the common organization of the market, since by ensuring that the profit margin for butter manufacturers is substantially the same whether they sell into intervention or on the retail market, it deprives those manufacturers of any incentive to sell into intervention or to seek higher returns from export outlets when prices on the United Kingdom market are lower than the intervention price. It also creates a risk of increased sales into intervention in other Member States, since exporters from those States might not find it in their interests to sell on the United Kingdom market when the situation on that market is poor.

In that regard the Commission points out that contrary to the United Kingdom's assertions the statistics show that the price of butter on the United Kingdom market has always, with the sole exception of 1981, been below the intervention price.

It goes on to state that the United Kingdom's argument that increased recourse to intervention should be avoided is not a legal argument but a value judgment or even a political judgment, and can have no relevance to this case.

In reply to the argument that during the period in which the dual pricing system for milk was applied exports of butter from the United Kingdom increased both in absolute terms and as a percentage of domestic butter production the Commission points out that in view of the substantial increase in United Kingdom butter production prior to 1983 it would have been surprising if there had not also been, a significant increase in exports.

(f) Obstacle to the functioning of aid schemes

The Commission states that in both its letter of 10 June 1982 and its reasoned opinion it expressed its concern that the United Kingdom infringements might have the effect of distorting Community aid schemes. There is therefore no foundation for any argument that this submission is inadmissible.

According to the Commission the differentiation in prices for whole milk used for butter manufacture constitutes an obstacle to the functioning of the Community aid scheme, whose purpose is to increase the use of butter in the manufacture of pastry and ice-cream. That purpose is to be achieved by granting Community aid to enable the manufacturers concerned to buy butter at reduced prices. In England and Wales whole milk intended for the manufacture of bulk butter, which is normally used by the processing industry, was sold in September 1983 at a price more than 10% higher than the price of milk intended for the manufacture of packet butter. That difference, which affects the cost of manufacturing bulk butter, results in a reduction in the real level of Community aid.

Replying to objections raised by the United Kingdom, the Commission goes on to explain that its argument does not imply that manufacturers of pastry and ice-cream should be entitled to buy bulk butter at the prevailing packet butter prices; its argument is only that there should be a single price for milk used in the manufacture of butter.

2. Differential pricing for milk depending on the intended use of the resulting skimmed milk

The Commission considers that the differentiation in prices of whole milk used for manufacturing butter or cream according to the intended use of the skimmed milk obtained in processing also constitutes an obstacle to the normal functioning of Community aid schemes. The two aid schemes mainly concerned are that for liquid skimmed milk and that for casein.

With regard to the aid scheme for liquid skimmed milk intended for animal feed it should be observed, says the Commission, that the real level of that aid is reduced because the price for whole milk is always higher when the resulting skimmed milk is to be used for animal feed than when it is to be used for skimmed-milk powder. That not only reduces the quantity of liquid skimmed milk used for animal feed but also increases the risk that skimmed milk not used for that purpose may be used for the manufacture of powder and sold into intervention.

The price which livestock farmers are prepared to pay for skimmed milk is not a constant but is a function of the quantity purchased. Demand is highly responsive to the price of skimmed milk. In so far as the differentiated prices applied by the Milk Marketing Boards lead to a higher price for skimmed milk for farm use, that price tends to discourage purchasers and thus counteract the Community aid scheme. The adoption of a single price would, moreover, tend to increase net profits for milk producers.

With regard to aid for casein and caseinates, the real level of aid is reduced by about 15.2% as a result of the fact that the price for whole milk is higher when the residual skimmed milk is to be used for the manufacture of casein and caseinates than when it is to be used for milk powder.

In reply to the objections of the United Kingdom, referring to the continuing increase in casein manufacture in the United Kingdom, the Commission argues that that increase would have been even greater if the price of milk to be used for casein manufacture had been the same as that of milk used for manufacture into powder.

Finally, the Commission considers that the responsibility for the illegal pricing system practised by the Milk Marketing Boards lies with the United Kingdom, since it is for the United Kingdom to take the measures necessary for continuing supervision of compliance by the Milk Marketing Boards with Community principles and rules and with the special conditions governing their authorization.

The government of the French Republic, intervening in support of the Commission's conclusions, argues in particular that the United Kingdom has contravened Community law inasmuch as it has failed to take the necessary measures for supervision of compliance with Article 9 of Regulation No 1422/78 and compliance by the Milk Marketing Boards with Community principles and rules, in particular the fundamental principle of the free movement of goods.

The French Government considers that the Milk Marketing Boards possess an exceptional monopoly which should be subjected to strict control in order to ensure its continued compliance with Community principles. The provisions of Regulations Nos 1421/78, 1422/78 and 1565/79, taken together, clearly show that the intention of the Community legislature was to lay down very strict limits on the rights and privileges granted to the Milk Marketing Boards in order to prevent the abuse of those rights and privileges and their practical application in a manner incompatible with the general principles of the Treaty and Community law. The provision which allows the Milk Marketing Boards to set different prices for milk sold by them must therefore be interpreted strictly. Whereas Article 9 (1) (a) provides that prices may only be differentiated on the basis of the use intended by the buyer of the milk, the Milk Marketing Boards differentiate on the basis of the intended use of a different product, butter, and thus apply a differentiation which is not consistent with the ordinary meaning of the words used by the Council.

Paragraphs (2) and (3) of Article 9 support that interpretation. It is clear that the system operated by the Milk Marketing Boards also contravenes those two provisions by giving domestic manufacturers a competitive advantage and permitting them to maintain their position on the market regardless of market developments. That analysis is confirmed by the facts: it is for that reason that French butter manufacturers have repeatedly decided not to sell on the United Kingdom market, where they could only have competed by selling at a loss.

According to the French Government, the price differentiation practised by the Milk Marketing Boards does not fall within the ambit of Article 9 (1) (b). The other criteria referred to in that provision must be established in accordance with the procedure referred to in Article 9 (4), which clearly states that such criteria must comply with the principles laid down in the first three paragraphs of Article 9.

Furthermore, it cannot be asserted that price differentiation on the basis of the final use of the butter constitutes an objective criterion justified by the existence of two distinct markets for the butter. In fact there is only one market for butter, whether it be in bulk or in packets. It is essentially the same product, intended to meet the same needs, but viewed at different stages of marketing.

With regard to the need for a strict construction of Article 9, the French Government points out that that is not a new contention but a supplementary argument already put forward by the Commission during the preliminary procedure, clearly indicating the spirit in which it considered that the Community legislation should be interpreted.

The French Government challenges the argument put forward by the United Kingdom to the effect that exporters to the United Kingdom are not really placed at a disadvantage. The statistics produced by the defendant itself show that between 1981, the year in which the Community regulations on the Milk Marketing Boards were implemented, and, 1982 there was an increase in British butter production and a decrease in imports. The defendant itself states that a guaranteed profit margin is necessary to enable British producers to remain on the market regardless of the state of the market, since such a market, once abandoned, cannot easily be regained. It stands to reason that that profit margin guaranteed to United Kingdom producers is detrimental to exporters in other Member States who, when prices fall on the United Kingdom market, must reduce their profit margins or sell at a loss, or else restrict themselves to selling luxury butter, thus obtaining a higher profit margin.

Similarly, the argument that the restraint on trade is purely hypothetical and can only occur when the United Kingdom market is in a poor state has no merit. The Court has held that even a potential obstacle to trade

constitutes a breach of Community law, and a potential obstacle exists in this case since the price guarantee which should be provided in the United Kingdom by intervention is rendered inoperative by the guarantee of profit margins for United Kingdom producers.

The United Kingdom states first of all that since this case was brought the practices in question have been terminated for reasons that are not relevant to the case, without prejudice to the legal position.

It goes on to trace the historical development of the structure of the United Kingdom market which led to the creation of the Milk Marketing Boards and describes the most important aspects of that market, where demand for liquid milk for human consumption has always been very high. The priority given to the liquid milk market in the United Kingdom meant that before its accession to the Community little milk went for butter manufacture; supplies of butter came mainly from cheap imports of butter in bulk, which was then packed and marketed by specialized traders. Since the United Kingdom imported butter at world market prices, the prices at which butter was sold on the United Kingdom market were lower than the prices prevailing on the internal market of the Community of Six.

It could easily be foreseen that that situation would cause severe problems of adjustment on the United Kingdom market following accession, and in particular that there would be consumer resistance to higher butter prices. In comparison with the earlier situation on the United Kingdom market, the general effect of the common organization of the markets was to restrict imports from nonmember countries, promote an increase in butter production and impose prices higher than those on the world market. In those circumstances, the main problems dealt with in the Treaty of Accession were:

After accession butter progressively lost ground to margarine on the yellow fats market. The decline in market share was caused to a large extent by the sharp increase in the price of butter relative to margarine made necessary by the adjustment to the common agricultural policy and by persistent increases in Community intervention prices between 1973 and 1983.

With regard to the pricing of milk for butter manufacture in the United Kingdom, the United Kingdom emphasizes that since 1979, in accordance with Article 9 (4) of Regulation No 1422/78, milk prices have been determined not by the Milk Marketing Boards but by the Joint Committee, on which the Milk Marketing Board concerned and its milk purchasers are represented on an equal footing, and in default of agreement by an independent arbitrator.

Until 1978 the price was fixed by estimating market prices for end products (butter and skimmed milk) and subtracting processing costs, including the milk buyers' profit margin.

For the purposes of that formula the price of packet butter was assumed to be the average price of Country Life, the main brand of packet butter in England and Wales, and the price for bulk butter was assumed to be the intervention price.

With regard to costs, which of course differ for packet butter and bulk butter, the weighted average costs of the Milk Marketing Board and the Dairy Trade Federation were used in the calculation.

Until 1978 that process was used to arrive at a weighted average net butterfat value. A similar method was then applied in calculating a weighted average net skimmed milk value, and the two values together gave the milk price, depending on the destination of the skimmed milk. That system assumed, however, that the market price for packet butter was sufficiently higher than the market price for bulk butter to cover the additional costs of selling packet butter and thus to ensure equal profits for suppliers on both markets.

By 1977 the combined effect of increased butter imports from other Member States, speculation connected with the increase in intervention prices and the gradual reduction of accession compensatory amounts, the erratic nature of imports from New Zealand resulting from those factors and from variations in the levy, high levels of imported stocks, competition from margarine and falling butter consumption severely constrained price increases for packet butter in the United Kingdom. As a result net returns on packet butter fell progressively below net returns on bulk butter, and that was reflected in a corresponding reduction in the net butterfat value of milk used for packet butter. In those circumstances the continued application of the pricing system previously used would sooner or later have obliged the United Kingdom butter manufacturers to withdraw from the packet butter market, which was already dominated by imports. For those reasons the method of calculation was altered with effect from 1 May 1978: the price of milk used for packet butter was based on the net butterfat value for packet butter and the price of milk used for bulk butter was based on the net butterfat value for bulk butter. The introduction of those two values preceded the adoption of Regulations Nos 1421/78 and 1422/78 on 20 June 1978. Different values for skimmed milk had, moreover, been in use for many years.

In December 1978 a first report on the Milk Marketing Boards' selling prices was sent to the Commission in accordance with Article 9 (5) of Regulation No 1422/78, according to which the United Kingdom is to take the necessary steps to obtain advance information on the selling prices applied by Milk Marketing Boards on the basis of the various uses for which the milk is intended [and] communicate such prices to the Commission prior to their application.

By letter of 27 April 1979 the Commission expressed its concern that the dual pricing system might interfere with the normal application of the Community intervention system and discourage the use of skimmed milk on farms. The United Kingdom replied to those observations by a letter of 12 June 1979.

The United Kingdom goes on to summarize the position it took in a number of letters sent to the Commission before the adoption of Regulation No 1565/79, to the effect that it should be made clear that the provisions of that regulation did not preclude dual pricing. By letter of 13 July 1979 the Commission replied in the following terms:

Furthermore, by Article 1 of Regulation No 1565/79, the Commission authorized the United Kingdom to grant to the Milk Marketing Boards the rights set out in Article 25 (1) of Regulation No 804/68, despite the fact that it was already aware of the pricing policies applied by the Joint Committee.

Net returns on packet butter were lower than net returns on bulk butter from 1978 to 1983. During that period four main factors affected the United Kingdom butter market:

In 1981, at the instigation of the Milk Marketing Board, the Joint Committee made a determined effort to improve net packet butter returns, by means of a system called grief sharing. Each month target sale prices were agreed by the Joint Committee, and the Milk Marketing Board and the Dairy Trade Federation each bore one half of the shortfall if the target was not achieved. Since grief sharing was not successful in increasing market prices for packet butter it was abandoned after Christmas 1982.

The United Kingdom considers that even when the packet butter market yields a lower net return than that obtainable by selling bulk butter into intervention, it may still be in the longer-term interest of milk producer cooperatives and dairy companies to maintain a presence on the packet butter market because of the undesirability of allowing consumers to forget their brand, letting the organization and facilities stand idle, abandoning a market which would be difficult to regain or relying solely on intervention, whose viability as an alternative outlet in the long term may be doubted.

Before dealing with the substance of the case, the United Kingdom makes two preliminary legal submissions.

In the first of these, it argues that the Commission was aware of the dual pricing system as early as the end of 1978, but authorized the Milk Marketing Boards by enacting Article 1 of Regulation No 1565/79. If it wished to change that system, it should not have brought proceedings under Article 169 but should have exercised its powers under Article 2 (3) of Regulation No 1565/79, according to which supplementary general implementing rules or specific decisions shall be adopted by the Commission should this prove necessary. Under Article 9 (5) (b) of Regulation No 1422/78, moreover, the Commission could and should have submitted the prices in question to the Management Committee for Milk and Milk Products, in accordance with Article 31 of Regulation No 804/68. In April 1980 the Commission took the view that differential pricing was not as such automatically contrary to Community law; its view at that time was thus the exact opposite of the argument which it now puts forward. In those circumstances, the Commission may be entitled to seek to change the rules for the future, but cannot seek a declaration that the United Kingdom was in breach of the Treaty at all material times in the past.

In its second preliminary submission the United Kingdom argues that most of the Commission's allegations raise issues of fact; the Commission has not, however, discharged the burden of proof, since it has chosen to rely entirely on theoretical arguments. It has carried out no investigation of prices or of the actual levels of intervention or of exports, nor has it made any analysis of the market or of the actual functioning in the United Kingdom of the Community aid schemes. Since the theoretical arguments put forward by the Commission are entirely inadequate to discharge the burden of proof the action must be dismissed in limine.

The United Kingdom goes on to consider the substance of the Commission's case in detail.

1. Dual pricing system for whole milk used for the manufacture of butter

With regard to the dual pricing system for whole milk utilized for the manufacture of butter, depending on whether it is to be sold as intervention or bulk butter or as packet butter on the retail market, the United Kingdom makes the following observations.

(a) Breach of Article 9 (1) (a) of Regulation No 1422/78

First of all, the United Kingdom challenges the strict construction of Article 9 (1) of Regulation No 1422/78. If that construction is accepted it is clear that the two prices in question were at all times unlawful per se, irrespective of any actual distortion of competition or obstruction of the common organization of the market, or of any market situation which might have justified their introduction. The Commission itself, however, has not consistently upheld that view: in its letter of 13 July 1979 referred to above, signed by the Director General for Agriculture, it stated that a differential pricing system would be consistent with Community law if it did not distort the normal functioning of the market organization mechanisms and particularly the intervention arrangements.

The United Kingdom also challenges the admissibility of the strict construction argument. Neither the Commission's letter of 19 June 1982 nor the reasoned opinion of 10 June 1983 mentions the per se argument regarding Article 9 (1), which was first put forward in the application brought on 25 January 1984. An application under Article 169 of the EEC Treaty must be founded on the same grounds and submissions as those of the reasoned opinion. The reasoned opinion does not therefore constitute a complete statement of the reasons for the Commission's position. Furthermore, the United Kingdom has not been afforded a full opportunity to comment during the administrative procedures on the arguments regarding strict construction now raised in the application.

The United Kingdom goes on to consider the meaning of Article 9 (1). In its view the per se construction given to that provision by the Commission is incorrect. In fact, it clearly authorizes the fixing of two prices for the butterfat content of milk. It is important to note first that the expression the use intended by the buyer applies not only to butter but also to bulk butter and packet butter; that is, it refers to the market on which the end product is to be sold. The authorization given to the Joint Committee to set different prices was intended to permit those prices to reflect the different market prices for the end products. In that respect it is self-evident that the market for bulk butter is a separate, distinct and clearly defined market that is quite different from the market for packet butter. The Commission's argument that there is a single market and that the only difference is the additional cost of packaging and marketing packet butter cannot be accepted. That argument shows a fundamental misunderstanding of the nature of markets, which do not reflect simply the costs of production and selling, but reflect the interplay of all factors affecting both supply and demand.

In reality, the differences in market prices for bulk butter and packet butter do not derive merely from cost differences, but result above all from very different conditions of competition, since factors such as competition from New Zealand butter or from margarine and the constant decline in butter consumption affect only the price of packet butter. Those factors give rise to different market prices for packet butter and bulk butter and different returns for the milk producers depending on whether the milk is used for the manufacture of packet butter or bulk butter. Finally, since the price of milk is the same for all bulk butter whether or not it is sold into intervention, the Commission's assertion that because intervention is a buyer of butter, the differentiation applied is based on the nature of the buyer, must also be rejected.

(b) The other criteria of an objective nature referred to in Article 9 (1) (b)

Further or alternatively, the United Kingdom argues that the differentiation at issue is based on other criteria of an objective nature within the meaning of Article 9 (1) (b), namely:

Those criteria were established in accordance with the procedure referred to in Article 9 (4) and are based on verifiable information.

In the United Kingdom's view it is, moreover, unnecessary to give a strict construction to Article 9 (1) because of the additional safeguards provided by the Community legislation, in particular Article 9 (2) and (3). Those provisions, supplemented by Article 9 (5) of Regulation No 1422/78 (price reporting) and Article 6 (2) of Regulation No 1565/79, are fully adequate to counteract any potentially adverse consequences of price differentiation.

In that regard the United Kingdom disputes the Commission's contention that the price reporting mechanisms established under Article 6 of Regulation No 1565/79 have shown that the defendant is in breach of Article 9 (3) of Regulation No 1422/78. Information showing that no such breach has occurred has been provided to the Commission, which is now considering the matter in consultation with the United Kingdom authorities.

Similarly, the differentiation of the price of milk according to whether, for example, the butter was sold to luxury shops or to supermarkets would be precluded by Article 9 (2), since it would result in distortion of competition, and by Article 9 (3), since it would be very difficult to implement such a practice without selling milk below the lowest equivalent milk price for butter imported from another Member State.

The strict construction argument is, moreover, inconsistent with Article 6 (2) of Regulation No 1565/79. The natural reading of that provision is that the differentiation of milk prices according to the intended use of the end product is not excluded per se but only in so far as it might lead to discrimination between buyers of milk or constitute an obstacle to the normal working of the common organization of the market. The Commission in fact came to the same conclusion in its letter of 13 July 1979, referred to above.

Whilst it agrees with the Commission that that provision cannot render inoperative Article 9 (1) of Regulation No 1422/78, the United Kingdom considers that its adoption is an indication of the true ambit of Article 9 (1). If it had been thought in 1979 that the differentiation in question was prohibited per se by Article 9 (1) of Regulation No 1422/78, the proviso to Article 6 (2) of Regulation No 1565/79 would have been largely unnecessary.

The strict construction is also contrary to the principle of proportionality, inasmuch as the Commission is seeking to allege that there has been a breach of Community law per se without the need to establish any adverse consequences and even if there is no distortion of competition or obstruction to the normal functioning of the common organization of the market.

If it had been applied from 1978 onwards, the strict construction argument could well have resulted in the total exclusion of United Kingdom butter manufacturers from that country's packet butter market.

There is also no doubt that there is real competition on the United Kingdom butter market.

In those circumstances the strict construction of Article 9 (1) goes well beyond what is necessary in order to impose reasonable constraints on the Milk Marketing Boards and places a wholly unreasonable burden on both the Milk Marketing Boards and their milk buyers.

(c) Distortion of competition

Contrary to the opinion of the Commission, there is lively and effective competition on the United Kingdom market for dairy products, and it is dominated by imports. That cannot be denied in the light of the fact that since 1979 imports have remained stable at around 60% of United Kingdom butter consumption and in 1983 more than 40% of United Kingdom production had to be sold into intervention. More fundamentally, the Commission's argument is based on what may happen only when the United Kingdom market is weaker than the other markets in the Community.

Available information shows that the ratio between the wholesale price of packet butter and the intervention price has never been worse in the United Kingdom than in the rest of the Community.

In reply to the Commission's objections regarding the comparability of the figures it produced, the United Kingdom states that in so far as some of those figures do not include delivery costs, the difference is negligible, representing less than 0.5% of the intervention price, and that in so far as some of the figures do not include packaging costs, those costs are nevertheless included in the figures for most of the Member States, so that in broad terms the table compares like with like.

Furthermore, there is no evidence that the two prices for the butterfat content of milk determined by the Joint Committee have affected United Kingdom market prices for packet butter or led to any difference between United Kingdom prices and those of the rest of the Community.

According to the United Kingdom, the Commission confuses competition between milk producers and competition between butter manufacturers; the relevant competition is that between milk producers.

The United Kingdom states that the main exporters of butter to the United Kingdom are merely selling agencies acting on behalf of integrated producer cooperatives in the exporting countries.

The ultimate aim of such producer cooperatives is to achieve the best price for the raw material, their producers' milk. The relevant competition to consider is therefore competition between milk producers.

Contrary to the Commission's opinion, it is clear that, like his counterpart in other Member States, the United Kingdom milk producer must take the market as he finds it, and the return to him depends entirely on the state of that market.

The exporting cooperatives, moreover, practice dual pricing themselves when, like the Irish Dairy Board, they choose to export butter for a lower net return than that which could be obtained by selling into intervention.

Furthermore, the dairy companies' profit margin, criticized by the Commission, is a necessary feature of the system established by Regulation No 1422/78, because if that margin was not adequate, the dairy companies would withdraw from the market and milk producers would no longer have outlets for their products.

The existence of a reasonable margin for manufacturers of derivatives is required under general principles of Community law, as the Commission stated in its decision of 10 February 1976 in National Carbonising Company.

(d) Discrimination between milk buyers

The United Kingdom points out first of all that the price of milk is not fixed by the Milk Marketing Boards but by the Joint Committee or by the independent arbitrator, as the case may be. In the Joint Committee the Milk Marketing Boards and the buyers are on an entirely equal footing, and there is no way in which one buyer can be made to pay a higher price than others. There is no discrimination between milk buyers if the buyers concerned themselves decide to purchase at two prices in the course of a statutory procedure conducted fairly, equally and at arm's length.

Moreover, since the net return in the market for packet butter was well below that in the market for bulk butter, it would have been discriminatory not to adopt two different prices, since that would have penalized milk buyers specializing in packet butter.

That situation was the result of market forces operating in the United Kingdom at the time, and not of the system of dual pricing, which was not then in operation.

(e) Obstacle to the normal functioning of the common organization of the markets

With regard to the functioning of the intervention system the United Kingdom disputes the Commission's argument that the profit margin allowed to British butter manufacturers provides them with an incentive to remain on the market even if the market is in a poor state and causes traders in other Member States to sell into intervention rather than export to the United Kingdom. It points out that the Commission's argument is based on two assumptions:

Since neither of those assumptions is correct the Commission's argument must be rejected.

In any event the available evidence does not show any increase in sales into intervention in other Member States as a result of developments in the United Kingdom butter market.

Between 1978 and 1983 there were even years in which one or both of the two main exporters of butter to the United Kingdom, Denmark and Ireland, made no sales into intervention.

It is therefore clear that developments in the United Kingdom butter market had no effect at all on sales into intervention by the United Kingdom's two main Community suppliers.

However, even if it could be shown that there had been increased sales into intervention in other Member States, it is hard to see why, in Community terms, the place where intervention occurs is significant. Since intervention is a Community system, there is no concept of a normal level of intervention in any particular Member Sute, and if the total amount of butter sold into intervention in the Community remains the same the intervention system is not distorted at Community level.

The United Kingdom challenges the admissibility of the submission regarding exports from the United Kingdom, which was not raised prior to the application. With regard to the substance of the matter it considers that the Commission has provided no evidence to suggest that owing to the dual milk pricing system exports from the United Kingdom are lower than they would otherwise have been. On the contrary, as a proportion of production average exports have increased from about 10% to approximately 30%. That is a creditable performance, since both the world and Community markets are aleady oversupplied with butter and the United Kingdom has to compete with many powerful suppliers.

The pattern of United Kingdom butter exports is not substantially different from that of other Member States of the Community. The decline after 1981 is accounted for by the state of world markets during the period in question, during which there was a general decline in Community exports. It should also be pointed out that dual pricing was also in force between 1978 and 1980, when exports were rising.

(f) Obstacle to the functioning of aid schemes

On the question of aid for butter used for the manufacture of pastry and ice-cream the United Kingdom argues that this submission is entirely new and is therefore inadmissible. In the alternative it disputes the substance of the submission.

According to the United Kingdom, the Commission's argument, which in practical terms is that milk for the manufacture of bulk butter should have been sold at the same low price as milk for the manufacture of packet butter, would cause distortions of competition and interfere with the normal functioning of the market.

The argument would lead first of all to a distortion of competition between butter manufacturers since United Kingdom manufacturers would be able to buy milk for the manufacture of bulk butter at the packet butter price without incurring the packaging and other costs by reference to which that price is calculated. There would also be distortion of competition between the manufacturers of ice-cream and pastry, since if the whole benefit of the lower milk price were passed on ice-cream and pastry manufacturers buying from British butter manufacturers would be able to buy bulk butter much more cheaply. The Community aid scheme would therefore be distorted, since it can only function if ice-cream and pastry manufacturers normally buy bulk butter at a price not far from the intervention price.

It is also possible, on the other hand, that the benefit of the lower milk price would not be passed on by the butter manufacturer and that there would therefore be no reduction in the effective level of the aid. In either event it would be the milk producer who lost because, in the Commission's view, he must be restricted to the lower packet butter return even on sales of bulk butter to ice-cream and pastry manufacturers.

Such a result would be contrary to the objectives of the common organization of the markets inasmuch as it would reduce the milk producer's income and standard of living and would tend to deprive him of the opportunity to seek the target price for milk, or at least the intervention milk price equivalent.

Finally, there is no evidence that United Kingdom ice-cream and pastry manufacturers have in fact been disadvantaged. They have at all times bought bulk butter from United Kingdom manufacturers at a price close to the intervention price, which is the assumption upon which the aid is fixed, and there has therefore been no distortion of the aid scheme.

2. Differential pricing for milk depending on the intended use of the resulting skimmed milk

With regard to the differentiation in prices of whole milk used for manufacturing butter or cream according to the intended use of the skimmed milk obtained in processing, the Commission raises the question of the aid provided under Community regulations in respect of skimmed milk sold for animal feed (in the United Kingdom it is fed mainly to pigs). It points out that the aid is paid to the dairy by the intervention agency of the Member State concerned. The dairy must sell the skimmed milk at a price not in excess of a predetermined maximum, so that the aid is passed on to the farmer.

The price of skimmed milk used on farms is determined by the competitive market value of competing foodstuffs (for example soya/barley or soya/wheat mixes). According to the United Kingdom the value of that milk is higher than that of skimmed milk - converted into powder because the price which the pig farmer is prepared to pay for that foodstuff, (in relation to competing foodstuffs) yields after deduction of costs a better return to the milk producer than does the market price of skimmed-milk powder less the costs of drying.

The market for skimmed milk for animal feed is competitive; as a result of competition from other animal feeds skimmed milk is usually sold by dairies at a price well below the maximum ex-dairy price authorized by the Community regulations.

Moreover, the market has expanded in recent years, and use of skimmed milk in the United Kingdom as a whole compares well with the position in other Member States.

Those facts must deprive the Commission's argument of any basis, for it appears to be contrary to the basic aims of the common organization established by Regulation No 804/68.

As the United Kingdom understands it, the Commission's argument is that the United Kingdom milk producer should receive no more than he would receive on sales of skimmed milk for powder manufacture, even if skimmed milk can obtain a higher price on the market on which it is competitive. That amounts to saying that skimmed milk for animal feed should not in practice yield the milk producer any more than the intervention price. In that argument the Commission has overlooked the principal objective of Regulation No 804/68, namely the attainment of the target price.

It would also be contrary to the general principles laid down in Article 39 (1) of the Treaty to prevent the producer from exceeding the intervention price. It is difficult to understand how the effectiveness of a Community aid scheme can be given priority over the attainment of the target price and the achievement of a reasonable standard of living for milk producers.

The aid scheme is not obstructed if skimmed milk is sold below the maximum ex-dairy price. In England and Wales skimmed milk has invariably been sold below the maximum ex-dairy price.

Nor is the aid scheme obstructed if skimmed milk can be sold competitively in increasing quantities. The evidence shows that skimmed milk has been sold competitively in England and Wales and that it has been sold in increasing quantities.

Finally, a reduction in the price of skimmed milk for farm use would also reduce the return to the milk producer on skimmed-milk powder. In the circumstances, if dairies sought to expand their sales of skimmed milk to farms there would be less skimmed milk available to be dried into powder, particularly during the low-yield months in autumn and winter, and the unit costs of processing would therefore increase. Higher costs would then be deducted from the market price for skimmed-milk powder in determining the value of the milk. In that case the United Kingdom milk producer would lose both ways, by receiving a lower price for skimmed milk used on farms and for skimmed milk used for powder.

The United Kingdom notes that as a result of objections raised by it in its defence the Commission, in its reply, stated that it made no judgment about the level of the single price which should be applied with respect to skimmed milk. The United Kingdom infers from that that the Commission has abandoned its argument that the dual pricing system reduces the real level of aid and that its argument now is that if there had been a single price it would have been set at a level below the price charged for skimmed milk for use on farms in the context of dual pricing and that that system has therefore prevented the sale of an even greater quantity of skimmed milk to farms.

The United Kingdom considers that this argument, too, must fail. It points out in particular that:

Furthermore, even if the Commission could establish all its hypotheses, its argument still gives the effectiveness of the aid scheme priority over the attainment of a better price for the producer, which amounts to allowing the tail to wag the dog.

With regard to the price set for skimmed milk to be used for the manufacture of casein, the United Kingdom states that no mention is made either in the reasoned opinion or in the earlier correspondence of its alleged infringement of the aid scheme for casein. The arguments regarding casein put forward by the Commission are therefore inadmissible.

In the alternative, the United Kingdom argues that the Commission has applied Article 6 (2) of Regulation No 1565/79 without regard to the common agricultural policy as a whole.

There is no reason why the United Kingdom milk producer should not receive more than he would obtain by selling into intervention, if he can obtain a better price on the market by selling the skimmed milk for the manufacture of casein. In order to determine whether the normal functioning of the aid scheme has been obstructed it is necessary to ascertain whether the dual pricing system has in fact prevented the sale of skimmed milk for the manufacture of casein.

It should be pointed out that the manufacture of casein in the United Kingdom has increased since 1979 and that United Kingdom manufacturers are competitive on world markets.

The United Kingdom goes on to raise the same arguments which it raised against the Commission's similar argument regarding the aid scheme for liquid skimmed milk to be used for animal feed.

Finally, in reply to the arguments raised in the French Government's intervention the United Kingdom states that it is not correct to say that the Milk Marketing Boards have any kind of monopoly of the supply of butter in the United Kingdom.

With regard to the construction of Article 9, the United Kingdom emphasizes that the French Government interprets that provision in a restrictive manner, whereas it should be construed in a manner appropriate to its objectives. There is no evidence to support the allegation that French exporters have been placed at a disadvantage. It is noteworthy, moreover, that the situation on the United Kingdom market has not prevented Danish producers from continuing to sell their product there and to increase their market share to 20%. The assertion that the British market is a protected sector is not supported by any evidence. The high level of butter imports to the United Kingdom tends to show the reverse.

IV — Replies of the parties to the questions put by the Court

In reply to the questions put to it by the Court the United Kingdom states inter alia that:

For its part the Commission states that:

The United Kingdom and the Commission also submitted certain documents, in particular tables showing wholesale prices for packet butter and bulk butter, in which the figures for the Member States have been adjusted in order to make them comparable.

1 Language of the Case: English.