Memorandum submitted by the Welsh Office
1. The Committee asked for the Welsh Office's views on
the apparent disparity between producer prices for beef and lamb
and the prices charged by retailers for these products.
FACTUAL ANALYSIS
2. Supermarkets are the largest source of meat purchases
in Great Britain accounting for 65 per cent of all meat sales.
They are followed by butchers with around 11,000 shops in Britain
and they account for 18 per cent of all meat sales. The growth
in the share of the market by supermarkets is expected to increase
for the foreseeable future. The catering market has also grown
in recent years.
3. The Meat and Livestock Commission (MLC) monitor the
difference between producer prices and retail prices. These show
that the price spread (retail price minus producer price as per
cent of retail price) for beef in Great Britain increased from
48.6 per cent in 1996 to 54.4 per cent in November 1997; and that
for lamb increased from 36.6 per cent in 1996 to 51.9 per cent
in 1997. These figures need to be treated with caution however.
They take no account of the costs of marketing and distributing
the meat downstream of the farm sector. They are best regarded
only as a broad measure of trends in margins in the industry.
Separate figures for Wales are unavailable.
4. Margins in the slaughtering sector are thin. The MLC
estimate that there were 41 licensed abattoirs in Wales in 1995,
with only 30 of these plants active. Average throughput for all
active abattoirs was 18,352 livestock units per year, compared
to a GB average of 26,700 units. It is widely accepted that there
is substantial over-capacity in the slaughtering sector of the
industry. Before the BSE crisis, this was estimated at 52 per
cent for cattle and 83 per cent for sheep in Welsh abattoirs.
Thin margins have meant that failures have been a regular feature
of the sector. Although many operators recognise that the industry
suffers from over-capacity, the MLC has concluded that some do
not regard their individual plants as contributing to this problem,
and have every intention of using any spare capacity held by their
plants. Capacity is thereby maintained at what was already an
unsustainable level. This contributes to cost overheads which
are inevitably reflected in the pricing structure for slaughtering.
5. The current problems have not been limited to the
UK market. Other EC Member States have also seen falls in prices
and a drop in consumption, particuarly of beef, and experienced
difficulties with their exports outside the Community. A strong
pound and a relatively weak market, especially for beef, in most
other Member States has resulted in some countries, particularly
Ireland, the Netherlands and Germany, increasing their exports
to the UK. Such increased imports will have contributed to the
current weakening of the UK market but they are not solely responsible
for it. The reduction in demand and continuing oversupply of beef
in Europe are also significant contributing factors.
6. Although retail prices for beef and lamb have fallen
compared to last year, the decrease has not matched the fall in
farmgate prices. In November 1997, the average retail price of
beef in Great Britain was 171.4 p/lbר per cent lower than
in November 1996. For lamb, the equivalent price had dropped by
2.5 per cent from 204.6 p/lb in November 1996 to 199.3 p/lb last
year. However, as explained above, a substantial element of the
final price of food to the consumer is accounted for by processing,
distribution and marketing costs. This should be borne in mind
when comparing producer/retail prices because clearly individual
distribution and purchasing arrangements may lead to deviations
in trends from the broad industry measure. Some additonal costs
have arisen as the result of the need to comply with new hygiene
requirements. These requirements are in the industry's interests
also as they enhance consumer confidence.
7. It is the retail prices for cheaper cuts of beef which
have fallen the most—perhaps reflecting reduced demand for
the less popular forequarter cuts. Prices last year for stewing
steak and standard mince have averaged 5 per cent and 4 per cent
respectively lower than in 1996 and 7 per cent lower than in 1995.
However, retail prices for some of the more expensive cuts of
beef have remained fairly stable—for example prices for
fillet steak during 1997 averaged only 1.5 per cent lower than
the previous year and 1.5 per cent higher than in 1995.
THE WELSH
OFFICE'S
POSITION
8. Food retailing is a competitive business. Whilst the
purchasing power of supermarkets in particular is well recognised,
the question of whether they are behaving in an anti-competitive
manner with regard to their dealings with the producers is a matter
for the competition authorities. The Office of Fair Trading keeps
markets under review and is always willing to consider any substantive
evidence of the abuse of the buying power of the major multiples.
9. Multiple retailers undoubtedly drive a hard bargain
with their suppliers, whether home based or from abroad, setting
rigorous standards and demanding high quality at competitive prices.
Such demands have to be weighed, however, against the obvious
benefits to suppliers from guaranteed access to large markets.
Collaboration between producer and retailer is the key to successful
marketing in the fiercely competitive food market today and the
Welsh Office is keen to encourage such linkages in the food chain.
Such alliances not only benefit producers in the way outlined
above but also provide financial rewards through premium payments
and bonuses for quality produce.
10. The Welsh Office believes that the most effective
way for livestock farmers to gain better prices is for them to
produce premium products which command premium prices. This is
at the heart of the Welsh Food Strategy. A great deal is already
being done through support for branding, marketing, farm assurance
and traceability schemes by Welsh Lamb and Beef Promotions and
Welsh Food Promotions Ltd. The Welsh Office has supported a recruitment
drive under the Farm Assured Welsh Livestock (FAWL) scheme and
financial assistance has also been given to a scheme designed
to supply Farm Assured Welsh Lamb to market retailers, particularly
Waitrose. This has seen sales of FAWL produce increase and has
benefited producers through premium prices. In addition, the Welsh
Office is backing a major new beef development project,co-ordinated
by ADAS, to initiate a beef production and marketing strategy
in Wales. This £1.2 million project will help to improve
the competitiveness of Welsh beef. Under the Objective 5b programme,
support is also being given to the Welsh Black Cattle Society
and the Welsh Sheep Strategy, for breed improvement programmes.
Initiatives such as the Assured British Meat Scheme and the Beef
Labelling Scheme, which the Government is also supporting, will
also help to rebuild confidence in British meat and should benefit
farmers through increases in demand.
11. The Welsh Office is committed to building on the
work already in hand. An announcement on how the Welsh Food Strategy
will be reviewed and developed further will be made shortly.
L. K. Walford
Director of Agriculture
January 1998
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