Examination of Witnesses (Questions 340
- 359)
WEDNESDAY 25 OCTOBER 2000
MR RON
GREEN, MR
GRAHAM KEATING
AND MR
KARL TUCKER
Chairman
340. You have obviously sent submissions in
and we have seen those submissions. Both of you have expressed
some concern in the written evidence that conventional food businesses
are getting into the organic field. Everybody tells us there is
a tremendous demand here. It is one of the great expanding areas
of demand. As this market expands, can demand be met by small
specialised companies? Is it inevitable that mainstream processors
trying to get into that business are being urged to treat it as
a sort of sideline which will make an extra bob or two or is it
going to become part of their own main business? How do you view
that development? Most questions are likely to be directed at
both of you so do not hesitate, each of you, to comment with the
brevity with which I am sure you are accustomed.
(Mr Keating) We take the view that it is inevitable
that bigger manufacturers will come into organic. We think the
market is probably polarising into very small processors selling
at farm shop level who will never become any bigger, what I will
call organic entrepreneurs who have developed regionally and bigger
manufacturers who are coming in and using organic as an additional
sales stream. The downside of that is that the people in the middle,
the entrepreneurs, are potentially going to get squeezed out of
the market as the big manufacturers come in. As far as consumers
are concerned, our concern is that organic credentials are perhaps
lost. People are buying into organic because they believe they
are buying into a whole set of values from closeness to the soil,
involvement with farming communities and so on and the advantage
of businesses like ourselves, which are solely organic, is that
they are getting that encapsulated in the product. Bigger manufacturers
will use organic as a small operation within their bigger manufacturing
which can cause a conflict of interest. For example, if you have
a tin of baked beans which is organic and a tin of baked beans
which is non organic, how do you market that at a basic level?
Are you going to confuse the consumer as to what the advantages
are of each as well as the consumer wanting to buy into a level
of confidence that organic means something different, it is worth
the extra few pence they are paying for the product?
341. Mr Green, do you want to comment?
(Mr Green) Yes. I largely agree with that. We have
got no concern with the big people coming into it, our main problem
is in the territory of organic and whether we can maintain it.
From our point of view we are fresh produce and a mixed packhouse
leads, we believe, to all sorts of problems. We want to be assured
by the various bodies that it will be maintained if it spreads.
342. You think it is possible or desirable,
perhaps it is not going to happen, that there should be a sort
of autonomous organic industry right the way through, as it were.
Do you think that there should be a view organic will be best
if we can try and maintain an autonomy? If the demand is expanding
and if the retailers, and we have Iceland in front of us later
on, are going to say we see this as becoming more and more mainstream,
do you see that as realistic?
(Mr Keating) I think the important thing is overlaying
to whichever businesses are organic that it is a different mindset
and it is a different set of controls. It is not just simply like
a manufacturer who might produce vegetarian and meat based products
and they just segregate them. I think the view we have is that
it is important, particularly in the UK, that we encourage UK
supply at farmer and grower level wherever possible. The potential
downside at the moment, such is the voracious appetite for organic
foods in the UK, is that big manufacturers will simply go to where
they can get the products and import them if required. That does
not make it wrong, it does not make it not organic, but we have
the business of taking the view we want to try and make sure we
follow a Buy British policy wherever possible.
343. Do not hesitate to intervene, Mr Green.
Have you any concerns about the way in which some farmers are
converting to organic? What I mean by that is with milk in particular,
because conventional farming is very difficult at the moment,
some farmers are saying "Gosh, I cannot make it as a conventional
farmer, the premium looks jolly attractive" and they are
shifting to organic. Is there a concern that perhaps a lot of
smaller people might try to go organic, not be able to hack it,
are doing it not because they have a vision of what organic production
is like but maybe because they cannot maintain a livelihood under
conventional farming? As the market expands would you expect the
producing base also to become larger scale, to become more autonomous,
as it were? Are you concerned at all about that conversion process?
(Mr Tucker) We are working very closely with OMSCo—the
Organic Milk Suppliers Co-operative—to make sure they have
an infrastructure which ensures that farmers who are coming in
to the process of conversion are fully supported through a mentoring
scheme with farmers who have been in place for a long time so
they can cascade down the tricks of the trade they have learned.
Clearly the Soil Association and the other association bodies
have a duty to the consumer and the industry to make sure that
those standards in conversion are maintained in line with all
the regulations as they are and may be in the future. The price
which we pay for organic milk, we tend not to think of that as
being a premium.
344. The farmer thinks of it as a premium.
(Mr Tucker) They do at the moment but the prices when
they were set were a lot closer and the milk premium has been
exaggerated. We have been trying to get that message through to
the farmers that it is not a premium, if the conventional price
does start to rise again it will not push up the organic price.
We are trying to get an element of sustainability into the whole
model to try and smooth out this boom/bust cycle.
(Mr Green) Yes, indeed. If they do get in it just
for money, I think some of them will learn their lesson very quickly
and come back out because it is not just for money that most people
move into organic, for many of them it is a way of life.
Mr Öpik
345. On that point, I am interested to hear
you say that because in Montgomeryshire, my constituency, people
are moving into organic largely because of the pricing structure.
Rather than me asking a closed session, how do you regard your
pricing policy in terms of your relationship with farmers?
(Mr Green) In our personal company basically we pay
as much as we can. There is always I think, without doubt, a premium
on conventional produce. How long that will be maintained, we
are not sure.
346. You say in the report that you are concerned
about your suppliers basically being picked off by larger businesses.
Why is that if you have long term pricing contracts?
(Mr Green) No. We have not got any pricing contracts
with any of our suppliers. We are all verbal. It has been built
up since the 1970s and 1980s. It is Graham's company which has
got the signed contracts.
347. I will ask Graham.
(Mr Keating) We took the view that when we started
making organic yoghurt the reason why we made it was because we
had local farmers who had turned organic back in 1992/1993 and
could not actually find a market for their milk because at that
stage the market had not been developed. They came to us and said
could we actually produce some products for them, which we did.
Since then we have realistically been responding to huge amounts
of demand. At that stage we recognised that we were going to have
to get more farmers to convert and even then, and certainly now,
there was a great scepticism amongst farmers: "Well, by the
time I have gone through my two years and three months conversion
period, the price will have dropped, the market will not be there.
Somebody else will have moved in". It was a pragmatic exercise
for us to say "We will give you a rolling three year contract",
which we formed in 1996/1997, to say this guarantees the farmers
at this price. It gives them a known return. It was a calculation
on the cost of organic farming. Some farmers will do very well,
some not so well, depending on their size. It was designed that
in a good year they would make some money to reinvest in their
farms and in a bad year they would not be operating at a loss.
Further to that we recognised that we needed perhaps to further
incentivise farmers to then choose us as their core market and
we developed some sharing of our success through an annual milk
bonus scheme as well on top of the guaranteed 29½ pence per
litre. We hope we have ring fenced our supply chain and encouraged
a lot more prime to the pump really. Sainsbury's have since added
to that contract with their own five year contract with OMSCo.
348. You are not worried at the moment at losing
your suppliers?
(Mr Keating) No.
349. This is a slightly more general question.
How do you ensure the supply is expanded? Are you working to expand
potential suppliers, the number of?
(Mr Tucker) We are working very closely with OMSCo,
as we said earlier. Our requirements for milk and projected requirements
for milk and forecasts are that there needs to be a 20 per cent
increase in UK milk production. We are working actively with them
to encourage farmers to convert based upon the sustainability
of the three year rolling contract which Graham mentioned has
been converted to a five year contract. Prices will be sustained
in the future. We attend conferences and try and give market feedback
to the farmers. One thing we have found is that the farmers are
very keen to gain information on the end products, the actual
market their milk is going into. In the past they have been removed
from that process and do not really feel an ownership or involvement
in the thing the consumer buys.
350. Two other things. One is is distance a
criterion, how far the product has to travel?
(Mr Tucker) The product or the raw material?
351. I was really thinking about the finished
product.
(Mr Tucker) Once you reach a certain size you have
to be supplying the whole market. We do not find this is an issue.
352. You do not have a strategy, for example,
to have suppliers near your outlets?
(Mr Keating) Suppliers to us, the majority at the
moment are in the South West and Wales. We are beginning to get
milk from the Midlands.
353. Do you take the transport aspect of it
into consideration?
(Mr Green) I do not think you can afford to. If you
are supplying the supermarkets you have to go nationwide. Obviously
when it gets to the supermarket level they may try to go out of
the depot that is nearest to our depot. We serve predominantly
the Southern depots.
(Mr Tucker) As the milk pool expands and the market
expands yoghurt is quite a low user of milk so as the liquid milk
develops the processing capacity will start to become more geographically
spread. As it reaches critical mass there will be far more economies
of scale from taking different plants very much based in the South
West. As it reaches up there will be economies on the transport
side.
354. Any particular considerations when dealing
with your horticultural suppliers in regard to organics?
(Mr Keating) An issue for us as well as yoghurt and
dairy products is we are purchasing fruit and at the moment the
suppliers are predominantly from abroad, very little UK source.
A lot of that is driven by climate and availability and we do
not see that changing, particularly in the coming years. We are
working, again, to try and develop direct relationships with growers
in key places.
Mr Jack
355. Mr Keating, can I just ask you about premia
looked at from the point of view of returns to your supplier per
capita because it is easy to talk about extra per litre but there
is a yield lost for organic producers. Can you just give me a
feel for what the real world situation is for that? How does it
compare, for example, with the price of mainstream milk you were
able to command when deregulation started? Mr Green, how do the
prices you get compare with, say, the mainstream prices for horticultural
products, say, five years ago?
(Mr Tucker) In response to the milk question, in the
earlier years of OMSCo, when they were limited to 20 to 25 members,
their average milk yield per cow was higher than the UK average
milk pool. Possibly that was because they were very, very good
farmers who were enlightened or whatever. There is a reduction
in yield per farm because of the stocking rate but per cow the
yields are still in excess of UK average. It is horses for courses
in that sense. In terms of how it responded when MMB broke up,
it would be very difficult to make that calculation. There are
so many factors involved and different sizes of farms, we could
not answer that at the moment.
(Mr Green) I think you will probably get more accurate
figures from the Soil Association because they have lots of data
on many farms. I think it depends on the growers. If you get a
poor grower he is not going to get his return, but if you get
a good grower in organics then his returns will be substantially
higher than conventional growers, so long as he farms it right.
356. You have both put a lot of emphasis in
terms of developing your supply chains on the fact you have tried
to give long term sustenance in terms of guaranteeing arrangements
but sitting behind you are gentlemen who if they hear the words
"extra payments, premiums, people are doing terribly well"
will start deciding that there has to be something worth eroding.
Are you worried about that?
(Mr Keating) We have taken the view as a business
that we started our business and immediately invested economies
of scale into production. The cost of a product to the consumer
is obviously the raw material and we have guaranteed the price
to the farmers, we have guaranteed the price to our fruit growers.
So we have a fixed cost which is more expensive, but as a manufacturer,
if we have the right economies of scale the purchaser packaging
should not be more expensive, it is not organic, it is good quality
packaging, it has to be environmentally friendly. The labour costs
and the processing costs and transport should, as long as we get
the volume through, be similar. We take the view, as I said, we
have guaranteed the price of the more expensive raw material.
We do not take any more percentage margin or cash margin on the
rest of the process. Effectively all we are passing on to the
retailer is that farm additional cost based on what it actually
costs to farm or grow the product. As the market then grows overall
there will be further economies of scale to be had through distribution
to wider supermarkets through sort of whole crop utilisation.
If I am using part of a crop that somebody else could use the
rest of, rather than the rest of it going into conventional, it
could go into somebody else's organic product. As the market grows
there will be a lot more, and there is already much more interchange
between the organic world. That is unusual. At the moment with
organic it is a bit of a club in terms of manufacturers and retailers
trying to find ways of sharing expertise and cost savings but
we take the view very clearly that as soon as the farmer gets
a worry that all it is going to do is go back to him as it has
in conventional and the price will be driven down, that is the
danger zone and we are all working very hard to try and buffer
that.
(Mr Green) At the moment we are working with lots
of dairy farmers in the South East to try to see how we can put
products into dairy farms. Some of their land is in set-aside,
which they have done in the past, and they will be able to produce
vegetables or fruit or whatever.
357. You both make it sound quite easy to switch
from conventional to organic. What is the number one risk that
you can see on the horizon to this tranquil picture you are painting
of easy movement from conventional to organic? What are the risk
factors?
(Mr Green) Too many people trying to get on the lifeboat,
I suppose, if sales do not go hand in hand with the production.
As long as the sales carry on with the momentum that there is
at the moment there is no fear of anyone having too much produce.
If with sales suddenly for some reason—and this is why we
are worried about the integrity of organics—something goes
wrong and people lose faith in organics, then there will be a
lot of people with a lot of produce and no-one to buy it.
Mr Todd
358. The horticulture sector we have heard already
has converted much less to organic than most other sectors of
the market place. Is that your experience as well, that it has
proved harder to find sizeable horticulture suppliers to meet
your needs?
(Mr Green) Yes.
359. Obviously you buy fruit, as you said. What
could be done to change that?
(Mr Green) I believe with Graham's side it is the
processing. We have surplus fruit sometimes but we cannot get
it processed. There are people working on it at the moment. There
are lots and lots of ventures going on at the moment that may
cure that very soon.
|
