‘Chocolate Law’ subsidy stays sweet for food manufacturers

Chocolate and biscuit export subsidies compensate for high milk and cereal prices Keystone

Nestlé and other food manufacturers will receive the same levels of export subsidies for using milk and cereals from Swiss farmers next year. The government wanted to trim Chocolate Law payments by CHF26.7 million but parliament voted to maintain the current level of nearly CHF95 million ($93.8 million).

The decision is seen as a victory for the powerful food industry and farming lobby groups. So what is the Chocolate Law, how did it come into existence and how long can it keep going?

The Chocolate Law

The so-called Schoggigesetz (or Chocolate Law) was introduced in 1974 to compensate Swiss food exporters for the high price of Swiss agricultural goods. Milk and wheat are more expensive to produce in high price Switzerland while high custom duties curtail cheaper foreign imports.

The Swiss food manufacturing industry accounts for around 10% of all Swiss-produced cereals and 7% of milk. Its lobby group estimates that companies have to pay two to three times (or CHF130 million) more for agricultural raw materials than their foreign competitors.

The likes of Nestlé and Lindt & Sprüngli therefore receive state compensation for food products they export broad (see graph).

What’s new?

The exact amount of these food export subsidies is open for debate each year. The World Trade Organisation (WTO) insists that they should be capped at CHF114.9 million per annum. But state coffers rarely offer anything like that amount.

Between 2010 and 2014, the payments were around CHF70 million. The Swiss National Bank’s decision to scrap its franc-euro cap in January 2015 put yet more pressure on exporters, so the Chocolate Law pot was raised to around CHF95 million.

The government wants to cut expenditure, so recommended a return to CHF70 million from next year. Following intense lobbying, parliament has rejected any cuts in the subsidy.

Great news for Nestlé & Co…

In the short-term, yes. The problem is that WTO pressure finally forced Switzerland to concede defeat last year. It agreed then to phase out the subsidy completely by 2020.

To complicate matters, a “Swiss Made” law will come into force on January 1, 2017, compelling manufacturers to use local produce if they want to use the prestigious “Made in Switzerland” label.

Food manufacturers say they won’t be able to continue producing in Switzerland unless a new solution is found.

So now what happens?

The government has already put a proposal out to consultation – a process that ends in mid-January.

According to this proposal, import tariffs will remain in place to protect Swiss farmers. However, there are two possible solutions for food manufacturers, which could be used in combination.

Import tariffs on foreign agricultural materials might be lifted in some cases for food manufacturers that intend to re-export them in the shape of finished products.

Another part of the plan suggests re-labelling Chocolate Law subsidies and paying the money directly to farmers from 2020. Farmers would then have to enter private deals with manufacturers to funnel the money into their coffers when they buy the famers’ produce.