House of Commons - Welsh Affairs

Select Committee on Welsh Affairs Second Report

SECOND REPORT

The Welsh Affairs Committee has agreed to the following Report:—

THE PRESENT CRISIS IN THE WELSH LIVESTOCK INDUSTRY

1. This inquiry grew from an evidence session with the Welsh farming unions in December 1997.[1] The National Farmers' Union (NFU) Wales and the Farmers' Union of Wales (FUW), in joint evidence, impressed on us the seriousness of the situation into which the Welsh livestock industry had fallen. They raised concerns, felt very strongly in the Welsh farming community, about the fall in livestock prices and the growing difference between those prices and the retail price of meat, and about the importation of meat despite the apparent fall in demand for home produce. In the hope of clarifying these matters, and also of stimulating action to aid the industry, we have taken evidence, in Cardiff and in London, from the Welsh Office, from the Meat and Livestock Commission (MLC), from retailers, processors, manufacturers, frozen food producers and the catering and hospitality sector. We have also visited a retail packing plant in South West Wales.[2] We are conscious that there are sectors of this complex industry from which we have not sought evidence (slaughterers and renderers, for example) but we feel it important not to delay further before reporting our findings to the House.

2. We are grateful to all those who have given us evidence, or have briefed us informally, in many cases at short notice. There has been an understandable nervousness among some of our witnesses about exposure to further publicity, and about the publication of commercially sensitive information. We appreciate their caution, but strongly believe that the industry can only benefit from greater understanding and transparency.

3. In this inquiry we have focussed on the production of beef and lamb. The pig and poultry industries are small in Wales and have been less affected by the current crisis. While we have tried to maintain our focus on Welsh affairs, it has not been possible to limit our inquiry to Wales, since Welsh livestock producers sell in, and are dependent upon, a national, and increasingly international, market. Moreover much of the industry downstream of the farmer is nationally or internationally organised. Much of Welsh stock is slaughtered in England and on the Continent. We have found very useful the recent report of the Agriculture Committee on the UK Beef Industry[3], and hope that our evidence in turn will be of interest to that Committee. We are grateful for the able assistance of our specialist adviser, Professor Terry Marsden of the University of Cardiff.

The Crisis for Farmers

4. Income from farming fell across the UK by 37% in 1997.[4] In Wales it fell by 44%.[5] The reasons for this are multiple. BSE has led to a ban on beef exports and a fall in consumer demand for beef at home. The general trend away from eating red meat has continued throughout Europe. The measures imposed to ensure safety and improve consumer confidence have added greatly to the costs of beef production, and, to a lesser extent, of lamb production also. The strong pound has reduced the value of compensation and support payments under the Common Agricultural Policy (CAP) which are ecu based, encouraged imports and hampered exports of mutton and lamb. The prices that farmers get for their animals have fallen dramatically. Cattle prices in Wales have fallen by some 30% in two years and lamb by 39% in a year.[6] Prices now barely—and in some cases do not—cover the cost of production. The price of milk has fallen by 17% in the year.[7]

5. These problems are hurting farmers across the UK, but Wales is particularly badly hit. Welsh agriculture is dominated by livestock production. The beef, sheep and milk sectors together accounted for 87% of the gross output of Welsh agriculture in 1996.[8] Welsh lamb production has been particularly directed at the export trade. The land is mostly unsuitable for arable farming and the opportunities to diversify into different types of farming are limited.[9] For the most part, Welsh farmers work on small, family-run farms in upland areas. 80% of Wales is designated by the EU as a Less Favoured Area (LFA).[10] 40% of the farms in the LFA returned incomes below £10,000.[11] As the FUW put it, "there is no "slack" in the system for hill or lowland farmers to further "tighten their belts"".[12] Since milk, beef and lamb have all been hit at the same time, it has not been possible for mixed farms to balance one area of production with another, as they have done in the past.[13]

6. There should be no doubt that for many Welsh farmers the situation is desperate. Some farmers are leaving the land; more often, they are struggling on with mounting debt. There appear to have been few bankruptcies as yet, but only because the banks are loath to destroy the value of their assets by undermining the fragile market in farming land. Farmers' children are looking for a better future away from the land that their families may have farmed for centuries.[14] This drift away from the land deserves study to confirm anecdotal evidence. It is no exaggeration to suggest that much of Welsh agriculture will be destroyed within a decade unless urgent action is taken to reverse the decline.

7. The crisis in Welsh farming strikes at the heart of rural life in Wales. It is estimated that one in four jobs in rural Wales is in agriculture, and for each job in agriculture there are four or five in related employment.[15] Companies supplying farmers with feed and equipment have been hard hit, as have local cattle markets and abattoirs. Agriculture is vital to the economy of rural Wales. It is also vital to the rural environment: the landscape of Wales has been forged by livestock farming, and its maintenance relies on its continued management by farmers.[16] So too is a significant part of the Welsh linguistic and cultural heritage reliant on the survival of Welsh farming communities. The collapse of Welsh family farming would be a disaster for Wales as a whole—culturally, environmentally and socially, as well as economically.

8. The size of farms in Wales is considerably smaller than those in either England or Scotland. Paradoxically farms in Wales are larger than the average in most European countries. But the smaller European farms make a living income while those in Wales at present do not. The UK approach towards the EU Early Retirement Scheme must address the specific needs of Wales by lowering the age profile of our farmers as opposed to enlarging the holding size.

9. In principle, and in the medium term, we believe that Government aid should be directed to assist the development of the meat industry, not to maintain production irrespective of demand or quality. However, unless immediate action is taken to assist farmers, there will not be a livestock industry in Wales left to develop. The Welsh Office should act without delay to provide emergency assistance to enable livestock farmers facing bankruptcy to survive the present crisis.

10. The safety measures imposed because of BSE have added greatly to the costs of slaughtering and processing, affecting in turn the livestock price paid to the farmers. The MLC estimates that the additional costs borne by the British industry over and above its European competitors amounts to £27.45 per head of cattle and £1.70 per sheep.[17] It is essential that any further measures introduced to protect the consumer do not add further to the industry's costs.

The Meat Supply Chain

11. Farmers are at one end of a food supply chain, or rather, a complex structure of supply chains. Traditionally, the farmer has sold his animals at the local market. They have then been taken to the local abattoir for slaughter and the carcases sold on to a processor or wholesaler, who has cut them up and sold them in primal form (large cuts) to the retailer, who cuts them up into retail portions and sells them to the consumer. These relationships are changing. Increasingly, the multiple retailers (the big supermarkets) are by-passing local markets, sourcing their meat through "producer clubs", in which selected farmers are encouraged to meet certain quality standards in return for a price higher than they would get at the market.[18] The animals are then slaughtered and processed at plants approved by the retailers, not necessarily close to the producer. Increasingly, the meat supplied to the retailers is already "retail packed", labelled and ready for purchase by the consumer, though some retailers continue to provide in-store butchery counters for premium products.[19] Increasingly therefore, the retailers buy only the cuts they want to sell, not whole carcases, and pass the costs of wastage and of packaging to the processor. It appears that we will soon be seeing slaughter, processing and retail packing all at one centralised site, all for a single retailer. Within a few years, in all probability, production all along the chain will be dedicated to a particular retailer's requirements.

12. Similar, but longer, supply chains exist for manufactured meat products. Manufacturers of burgers, meat pies or ready meals, for example, buy their meat sometimes from the same processors who supply the retailers, or directly from abattoirs, but frequently from abroad. They sell their products to retailers, who then sell them to the consumer either under the manufacturer's brand label or, increasingly, under the retailer's own label. As with fresh meat, the major retailers exercise considerable control over the contents of own-label products and their chain of production.

13. Many farmers find unpalatable, or even sinister, the increasing control exercised by the major multiple retailers over livestock production. This control brings benefits for consumers, by improving quality and traceability, and premium prices to farmers participating in retailers' producer clubs. But farmers not meeting the standards set (probably the majority), or not wishing to involve themselves in producer clubs for fear of losing their independence, are finding no market for their produce, at least not at a price which gives them a sustainable living. The existence of these emerging premium markets appears to be putting downward pressure upon livestock market prices for both cattle and lamb, which are already distorted.[20] While no single retailer dominates the market, collectively the major multiple retailers exercise considerable power over the whole livestock industry. We feel strongly that there are grounds for the Office of Fair Trading to examine the nature of the retail meat supply chains in order to establish whether and in what form vertical restraints exist.

14. Slightly different supply chains operate in the catering industry, providing meat to the consumer in hotels, restaurants, workplace cafeterias, schools and hospitals, for example. Catering businesses generally buy their meat through catering butchers, who buy the primal cuts that they require from abattoirs and boning plants, and frequently from abroad.[21] However, these supply chains, too, appear to be changing, with some businesses now dealing directly with the abattoir.[22]

Prices

15. It is apparent to anyone who buys meat in the shops that the fall in livestock prices has not been matched by a comparable fall in retail prices. There is deep suspicion among farmers that supermarkets in particular have been profiteering at their expense, though this is strongly denied by the retailers.

16. The Meat and Livestock Commission (whose role is to improve the efficiency of the British meat industries and to encourage greater responsiveness to consumer needs) publishes monthly data on price spreads, for beef and lamb, "intended to be a broad measure of the difference between the producer and retailer price as well as trends in the difference".[23] Price spreads are calculated on the basis of retail price minus producer price as a percentage of retail price. This data shows an increase in price spreads for beef from 44.5 to 55.8% since December 1995, and an increase in lamb from 37.8% to 59.8%. The proportion of the retail price which the farmer gets has fallen markedly.

17. The price spread data published relates only to retail sales of fresh meat: no account is taken of the value of beef and lamb sold in the manufacturing and catering sectors. It is much harder to establish price spreads and margins here, since meat is only a part—perhaps a small part—of the cost input. Establishing price spread for beef used in a beef lasagne, say, is probably impossible.

18. Just because price spreads have increased, it does not follow that the profit margins of retailers, or anyone else, have increased. Costs incurred downstream of the beef farmer have increased markedly as a result of the BSE measures. Slaughter costs have risen greatly, because of loss of volume, increased inspection costs, the need to remove and dispose of specified risk material and the fall in value of the "fifth quarter" (hide, head, fat and bones). The Government's rendering subsidy has been phased out. Demand for the best cuts has recovered since 1996, but demand for forequarter meat remains depressed. Suppliers are therefore unable to gain advantage from selling the whole beast. Considerable expense has been put into marketing and promotion by retailers and manufacturers, in order to restimulate consumer demand. Retail prices have reduced a little, notably for forequarter meat. The price of stewing steak, for example, fell by 5% in 1997, while fillet steak fell by only 1.5%.[24] Furthermore, many retailers pay a higher price to their suppliers (as a quality premium) than the average market price reflected in the price spread data.[25] Nevertheless it is hard to explain the extent of the increase in price spreads, especially for lamb, for which BSE-related control measures have only recently been introduced.

19. The MLC have provided us with estimated costs and prices across the supermarket chain for beef and lamb, showing how costs are spread between the producer, the wholesaler/abattoir and the retailer.[26] Though the evidence is complex, and open to some dispute, their conclusion is clear: "the producer has borne the brunt of the reduction in returns"[27] . None of the extensive evidence supplied by the retailers has thrown doubt on this general conclusion.

20. Retailers maintain that their margins on fresh meat are low and that they have not increased over recent years.[28] Tesco, famously, have claimed that they "make little or nothing on selling meat".[29] The MLC believe that, overall, retailers' margins for beef have declined a little during the present crisis, while their margins for lamb have increased a little.[30] All the retailers are nervous of revealing hard data which they believe may benefit their competitors. Even in private they have provided us only with indexed data, rather than real figures. We are surprised at the difference between the margins quoted by different retailers and suspect that different accounting methods may be involved. Tesco's undertaking to fund a study of margins and costs along their meat supply chains, and to publish the findings in indexed form[31], is welcome, but not enough. If the retailers wish to reassure a suspicious public, they must be more open with the figures. It is at present very hard to compare meaningfully the MLC figures, based on whole carcases, with the figures supplied by the retailers, which are based on the meat that they sell. There is a very strong case, we believe, for an independent study of the retail pricing of meat products, perhaps as part of a wider examination by the Office of Fair Trading, to establish what level of wholesale and retail costs are now being passed on to the producer by the supermarkets. Research commissioned by retailers, however impartial, is unlikely to convince.

21. On the basis of the evidence available to us, it does not appear that supermarkets have been profiteering at farmers' expense, but they have clearly not been suffering greatly either. Whether or not they make profit on meat, their overall profits are considerable. Meat continues to contribute significantly to their large overheads. We appreciate that meat has to compete for shelf space with other products which offer a much higher rate of return, and that supermarkets are operating in a highly competitive environment. But it is not in their interests to destroy their source of supply. The fall in livestock prices over the last year has made many farms unprofitable: unless things change, they will go out of business. The bargaining power of farmers has progressively weakened as retailers' control of the supply chain has increased. It is essential that the supermarkets do not use their position of strength to force meat prices down still lower.

Imports

22. Anger among farmers about rising imports of meat, especially beef from Southern Ireland, erupted at the end of last year with demonstrations, protests and blockades of ferry ports and storage depots. We do not condone violence of this sort, but we sympathise with the frustration that led to it. Data collected by Customs and Excise shows that 138,101 tonnes of beef and veal were imported into the UK in 1997 and 124,595 tonnes of mutton and lamb.[32] This compares with domestic production of 694,000 tonnes of beef and veal and 322,000 tonnes of mutton and lamb.[33]

23. Only a small proportion of the meat imported goes to the retail trade. For the most part, the fresh meat sold in supermarkets is British. Some retailers only sell home-produced fresh beef.[34] Other retailers sell imported beef - mostly from the Republic of Ireland - they claim at times of peak demand, for Christmas for example or when beef is being promoted at a particularly low price, since British suppliers find it hard to meet such surges in demand for hindquarter cuts.[35]

24. The fresh lamb sold in supermarkets is also mostly British. Some retailers sell only British fresh lamb.[36] Others sell chilled New Zealand lamb in the winter, either instead of or in addition to British lamb, which, in their view, is normally less good at that time of year.[37] The frozen lamb sold by retailers, on the other hand, is entirely imported from New Zealand. Lamb production in the UK is geared to fresh product. While some abattoirs have small freezing facilities, the product is apparently not of the consistent quality or the quantity that retailers are seeking.[38]

25. Most meat for retail sale is now labelled by country of origin, though this is not yet a requirement.[39] There has been some suspicion that beef has been imported into Britain for slaughter and then sold under the label of British beef. We have been assured by retailers that "British" does mean reared in Britain, not simply slaughtered or packaged. There is a case for making labelling much more explicit.

26. While the fresh meat sold by supermarkets is mostly British, imported meat is used widely in the manufactured and frozen products they sell. The British Meat Manufacturers' Association estimated that 23% of the beef used in their sector was imported.[40] The UK Association of Frozen Food Producers state that all their members' beef burgers and grills are made with British meat but estimate that over half the beef for ready meals and pies etc is imported.[41] Almost all the increasing amounts of lamb used in the manufactured and frozen sectors are imported from New Zealand.[42] The reasons for buying abroad are various. First, British suppliers, we were told, find it hard to guarantee supply of large amounts of meat of a consistent type. Secondly, most manufacturers use at least a proportion of frozen meat and British abattoirs have not been geared to producing frozen meat.[43] Thirdly, certain manufacturing processes require more mature meat, and over 30 months beef can now only be obtained from abroad.[44] Fourthly, manufacturers wishing to export products have to use imported beef. And last, imported meat is significantly cheaper, largely because of the strength of the pound. Figures for 1997 suggest that imported forequarter beef of the specification required by manufacturers cost around 40p a kilo less than UK produce.[45]

27. Manufactured and frozen products are sold in supermarkets both as branded products and under the supermarket's own label. It is clear that supermarkets have considerable influence over what goes into their own-label products, including where this is sourced.[46] With branded products, sourcing appears to be left more to the manufacturer.[47] It would be open to supermarkets to require their suppliers to use British meat, though this might be hard for suppliers to achieve in the short term, certainly without increasing costs. We appreciate that retailers are operating in a highly competitive market, and that they have a responsibility to their low income customers to provide food at the lowest price possible. However, they also have a responsibility towards, and an interest in ensuring the continued existence of their supply base. The supermarkets have made much of the fact that they now buy predominantly British fresh meat: there is much more that they could do to encourage the use of British meat in manufactured and frozen products.

28. Manufactured products are usually labelled only by country of manufacture, though some products do now say that they are made of British or sometimes Scottish beef. In our view, labelling of manufactured meat products ought to show clearly the country of origin of the meat that they contain.

29. Imported meat is also used widely by the growing catering sector. As with the manufacturing sector, caterers have found it easier to meet their requirements for consistency and continuity of supply from abroad. They have apparently found it impossible, until recently, to "buy forward" UK beef, in other words to secure a guaranteed supply of produce at a fixed price.[48] Some effort has been made in recent months to buy and promote British beef. [49] The burger market is gradually returning to British beef, which it abandoned following the BSE scare.[50] Less effort seems to have been made to promote lamb. We were told that there is little customer demand for lamb[51], but we wonder whether this has really been tested.

30. In all sectors effort appears to have been made in recent months to buy more British beef and lamb, despite the price advantage of buying imported produce. We commend this. The strength of the pound makes it very hard for businesses, all operating in a highly competitive environment, to opt for British produce. The British meat industry is unlikely to recover until the strength of the pound is reduced and the export market for beef re-opened.

The Way Ahead

31. Traditionally, farmers have reared their animals, taken them to market and sold them for much the price that they were expecting, without much thought as to their ultimate destination. A large part of their earnings has come from government subsidy, which has been paid irrespective of the quality of their produce or demand for it. What has fairly been described as "dependency culture" has predominated. All this is changing. Government subsidy is declining, partly by intent, partly as a result of the strength of sterling. Increasingly, livestock is being bought and sold away from the traditional markets. Only farmers who meet the increasingly rigorous quality standards set by retailers are able to enter the new retail supply chains. Farmers are being forced to become more consumer-aware.

32. It will always be difficult for small Welsh farms to compete on price with large-scale meat producers in the UK and overseas, but Welsh producers are potentially well placed to meet the increasing consumer demand for quality, traceability and sustainable methods of production. The Welsh Office is, we believe, right in its view that the best way forward for Welsh livestock farmers is to produce premium products which command premium prices.[52] We welcome the effort, and government funding, that is being put into improving livestock quality. We wonder, however, whether the sheer number of quality assurance schemes is engendering confusion among farmers and the public. Much remains to be done: we heard complaint that, across the UK, the proportion of finished beef animals that meet retailers' specifications is less than 40%.[53]

33. We believe that more could be done to satisfy the increasing demand for organic produce. Welsh agriculture—and Welsh lamb in particular—has considerable potential in this regard. It is imperative that the Welsh food strategy maximise the potential for organic and sustainable production.

34. We welcome too the efforts being made to promote Welsh meat as a brand of quality. Some supermarkets now sell Welsh lamb across the UK.[54] Welsh beef seems to have been marketed less successfully. Welsh Black is not promoted nationally in the way that Aberdeen Angus is, for example.[55] It seems that most retailers label Welsh beef simply as British, except within Wales.[56] We are confident that both Welsh lamb and beef can appeal to consumers across the UK.

35. We are concerned that emphasis should not be placed exclusively on developing the retail market. Meat sales to the non-retail sector are still largely a by-product of the retail business. Parts of the carcase that the retailer does not want are sold on for manufacturing, but meat is not produced specifically for this purpose. This must change. Retail demand for red meat is falling, while the demand for ready meals, for example, is rapidly increasing. Growing too is the catering sector: eating-out is projected to increase markedly over the next few years. The manufacturing and catering sectors are markets that farmers - and their representatives - can no longer afford to ignore. These sectors should specifically be targeted as a market for Welsh meat.

36. There may also be scope for developing a market for frozen produce. Retailers told us that they would be interested in offers to provide Welsh frozen lamb.[57] The lack of a large-scale freezing facility for lamb in the UK needs to be remedied. Opportunities clearly exist for freezing lamb at times of surplus production. Wales should be leading the UK in this.

37. As the price spread data shows, the proportion of the retail price that the farmer receives is declining. Put another way, value is increasingly being added downstream of the farmer. Farmers may not like this, but it is a fact. The challenge for farmers, and for Wales, is to get in on the act. In the dairy sector Welsh farmers have already been successful in adding value to their produce (for example, by developing cheesemaking and yoghourt making enterprises). The opportunities for livestock farmers are perhaps less clear, and probably require collective action. New forms of co-operation between farmers and between farmers and downstream businesses are needed. There is scope for farmers in rural areas to form co-operatives, closely related to local meat packing plants to produce locally branded products. The new Welsh Development Agency should play a leading role with farmers in establishing such initiatives. Further, there is undoubtedly scope for more innovative uses of meat: indeed, as demand for traditional red meat declines, innovation is vital.

38. We have been struck in this inquiry by how little the various sectors of the food supply chain seem to talk to each other. This is changing. Retailers are increasingly talking to farmers, and making clear their requirements, through their producer clubs. The same should be done in other sectors. Several of our witnesses said that contacts that they had made with British suppliers had been at their initiative: farmers had not been beating at their doors.[58] Farmers are clearly unaccustomed to seeking markets for their produce. Skilled farmers are not necessarily skilled at marketing. Given the small size of farms in Wales, farmers need to get together, where necessary employing professionals to act for them collectively. All the organisations representing farmers must focus upon creating a vision for the future, as well as drawing attention to the present crisis.

39. To date, no-one seems to have taken it upon themselves to bring the sectors of the industry together. This is something that Government should be doing. Part of the problem seems to be that responsibility dissipates over a number of Government agencies. The Welsh Office Agriculture Department, the Development Board for Rural Wales, Welsh Food Promotions, Welsh Lamb and Beef Promotions, and on a UK level MAFF and the Meat and Livestock Commission, are all involved, but nobody appears to have taken a lead . The new Welsh Development Agency should be given clear responsibility for developing the food industry in Wales. We intend to pursue this during our forthcoming inquiry into Investment in Industry in Wales. This will be a crucial area for the Welsh Assembly. Meanwhile, these matters must be addressed by WOAD in formulating their new Welsh Food Strategy. The Welsh Office must develop a strategy for meat which assists farmers to market their produce effectively and to developing innovative enterprises within Wales which add value to the meat produced and create rural employment.

Conclusion

40. There is no doubt that the UK livestock industry is in crisis, and in Wales it is harder hit than elsewhere. There is immediate need for emergency aid to enable farmers to survive. In view of widespread concern, the role of the supermarkets and the retail pricing of meat requires independent study, we suggest by the Office of Fair Trading. In the longer term, government aid should be directed to assist the development of the meat industry, not to maintain production irrespective of demand or quality. The industry—farmers included—must adapt to meet the changing requirements of customers. The different sectors of the industry must come together to ensure that the market opportunities that do exist—in manufacturing and catering, as well as in the retail sector—are fully exploited. Meeting the requirements of manufacturers and caterers for consistency and guaranteed supply will require a restructuring of the whole industry. Government and the industry must come together to make Wales a leader in Europe in agricultural innovation and food quality.

1 See Evidence, pp 1-32 Back

2 TH Sutcliffe in Pontardawe Back

3 Third Report, Session 1997-98, HC474 Back

4 Evidence, pp 1,6 Back

5 Welsh Office: Agricultural Incomes in Wales 1997; see also Q11 Back

6 Evidence, p 214: March 1998 figures Back

7 Evidence, p 214: February 1998 figures Back

8 Evidence, p 15 Back

9 Q 3 Back

10 Evidence, pp 15; Q 21 Back