Examination of Witnesses (Questions 938-959)
ANDREW BARNARD, MARTIN HUMPHREY, JIM REED AND PAUL ROOKE
WEDNESDAY 1 MAY 2002
Chairman
938. Gentlemen, thank you for coming. I am sorry we have kept you waiting. We have had an enormous number of things to get through. I am going to try to deal with you expeditiously, if you do not mind, which I am sure will suit everybody. When we were in New Zealand we were told that farming subsidy had been removed and what happened then, as the economy was liberalised, was that input prices followed those down. So a new equilibrium was established between the prices farmers were getting and what they were paying for their inputs. When you say to British farmers "If subsidies went or were reduced in Britain, would input costs follow them down?", everybody says, "Not bloody likely; of course they wouldn't. We are in a much bigger European marketplace. That determines the sort of price of inputs so we would not benefit from that sort of change". Since British farmers have actually taken a great hit in their wallets over the last few years, can you tell us what has happened to input prices and what would be your expectation in the even of the subsidy regime becoming significantly less supportive?
(Mr Reed) It is fairly speculative, but I think the experience of the last few years is very clear. If you look at the relationship between the total cost of inputs to agriculture and the total turnover in agriculture, it has actually remained fairly constant. My colleague Andrew Barnard has some figures on this.
(Mr Barnard) If you go back to 1995 some data I have seen recently indicates that as a percentage of gross output, input values have remained relatively constant at around 30-35 per cent whereas overheads as a percentage have continued to rise. That is probably more of an issue than inputs. It is worth adding that in terms of the pricing of various inputs, they themselves are very much commodity based. For example, if you look at raw materials into the feed sector, they are influenced by global market issues and shortage of supply in certain years. If you look at the price of fertiliser it is related very much to gas, issues which are not directly related to agriculture. It would appear, certainly from the experience of the supply sector, that the distribution margin has remained relatively constant over the years and has been a reflection of the movement of the raw materials themselves.
(Mr Reed) The trouble is that it is very hard to know where it would go in the future. If you look specifically at feed materials, feed material prices have come down in this country because combinable crop prices have come down in particular. That is fine, but we are now fairly near to world prices for combinable crops, so I am a bit doubtful about what scope there is for getting that particular element down further—and it is a big element.
939. What then is the answer to my question? When I tell my farmer that this happened in New Zealand and he says it would not happen here, what is the answer? Are you saying it would and in fact there is a sort of relationship?
(Mr Reed) I am not sure we are saying that. There is probably some further scope in some areas but the feed material one is an absolute classic. If I look to my right Martin Humphrey would probably love it if he thought that the price of wheat into his feed mill could actually come down significantly over the next few years simply because the subsidy system, such as it now is, is removed. I do not think he believes it.
(Mr Humphrey) And rightly so.
940. We were told early on that in fact grain prices have come down, which we know, because there has been a difference in the structure of support. The support is there and the marketplace has changed. That has led to a significantly greater take-up of cereals into animal rations, for example, the home-grown sales.
(Mr Humphrey) Yes, that is certainly the case and we have seen an increase of wheat in poultry and pig diets from 50 to 70 per cent over the last five years.
941. Obviously farming has been under a great deal of pressure over the last few years. A constant restructuring is going on which is in a sense more constant than imagined from the cycles of boom and bust in the industry. Have we seen a similar process of structural change in the agricultural supply trade? Who are the big five now compared with what they were? If I were a stock exchange expert what would I be expecting to see in that industry? What has happened?
(Mr Reed) I would talk in terms of what has happened in UKASTA. It is only about a decade since we had almost 600 members active in the supply industry. We now have about 250. There has been massive restructuring. In the last six or seven years the turnover in the supply sector represented by UKASTA has gone down from around £6 billion a year to under £5 billion and that reflects what we are saying about the proportion of input costs to agricultural turnover. There has been a tremendous shake-out. What is left in the agricultural supply sector is robust in many terms, but I have a real concern about the future. Part of the role of the agricultural supply industry is to supply not just materials, not just inputs, but also new technology. We have a big role in technology transfer and also the services in areas such as assurance schemes which seem to be increasingly demanded by the food market and which do rest very much at the agricultural end of the market on what the supply industry can do along with farmers.
Mr Todd
942. In your paper you said that some sectors of UK agriculture would essentially require subsidy in any form to keep going. Which do you think those are?
(Mr Reed) It is always dangerous dividing the sheep from the goats and those are not the two I would particularly draw attention to.
943. We are not too big in goats here.
(Mr Reed) No, but it is a good market apparently. I agree to a considerable extent with what Ruth Rawling told you in evidence earlier, that there will be a lot of wheat grown in the future in the UK. It is likely also that the dairy sector will survive to a substantial extent. The problem in looking at those two sectors in particular is that you have a very big variation between the best performers and the worst performers. Unfortunately, we no longer have a full national extension service which could in present circumstances be given the role of tackling the inefficiencies on individual farms and trying to sort them out. There is a problem too in the question of whether big farms are the only way to go in order to get economies of scale. I have a lot of worries about that.
944. When you say you have worries, do you think that is simply the wrong analysis or that you have a moral concern?
(Mr Reed) It is something of a moral concern because I am not sure that the wider British public actually wants farming to go in that direction. It certainly does not want all of it to go in that direction. You have this split in the public's desire to have cheap food, largely produced at home, a lot of people still attach real value to that. On the other hand, as we move increasingly into a global market, they also want to have a countryside which is attractive, they want access to that countryside, they want diverse wildlife.
945. But they do not necessarily believe that the best way to achieve that is through subsidising production.
(Mr Reed) No, they do not. Actually, I think it has been quite a good way.
946. Through an accidental process rather than a targeted mechanism.
(Mr Reed) Yes.
947. You mentioned wheat and dairy. From my memory of the previous evidence we also heard beef farming was certainly listed as another and also some elements of horticulture, which leaves a lot which would not fit into this list of competitive industries beyond subsidy.
(Mr Reed) We do see difficulty but not overwhelming difficulty in relation to the intensive livestock sectors. They are very important in this country at present, but we have seen a big decline in the breeding sow population. There has been enormous pressure on the poultry industry but that pressure has been there for years and it is a resilient industry.
948. Those two sectors are largely outside the subsidy mechanism anyway.
(Mr Reed) That is true, but they are affected by it.
949. By the input cost element.
(Mr Reed) Absolutely.
(Mr Humphrey) By virtue of paying for that high price.
950. Yes, they have to buy their inputs at a price comfortably above the world price. When you mentioned that there was a strategic importance to commercial agriculture, these comfy words are often used, but what did you mean by that? There are lots of other industries which one could say are strategically important. My constituency used to mine coal and that has gone. It used to be argued that was strategically important.
(Mr Reed) Yes. Not everyone burns coal. Everyone eats food. I suppose that is the basis on which we said it. It is entirely true that as globalisation develops, as long as you do not have any major world catastrophe or conflict, there should be no difficulty in people being fed. How they are fed and with what and whether they have the choice of selecting it on the home front where they perhaps know rather more about it are still important considerations for a lot of the population.
Chairman
951. De-intensifying or extensification, if the environmental schemes come in more extensively, then presumably that is helpful, that is paying the farmer in a sense not to produce. Your affection for the support put into production is presumably self-interested because the trend of these policies might be to make the farmer reduce his inputs and therefore less business for your association. It is your job to take that view; that is not a criticism, it is just a reflection.
(Mr Reed) Yes.
952. That could be one of the consequences, could it not, of the present trend of policies?
(Mr Reed) Yes, of course it could; yes. It is likely only to affect certain sectors to a great extent and obviously extensive livestock would be perhaps the main one. Nevertheless, you are right.
Paddy Tipping
953. You talked earlier on about the value of the landscape. In your evidence to the Curry commission you had the notion of an environmentally friendly scheme. Curry came out with the notion of a broad and shallow scheme. Were you influential? Do the two match up? Are they the same thing?
(Mr Reed) There might have been one or two others saying much the same as we were.
954. Yes, we have met them all.
(Mr Reed) The idea of a broad environmentally friendly farming scheme has been a hobbyhorse of mine for 20 years. It is not a bad hobbyhorse. It has a lot of attractions and particularly in the policy context that we now all see going forward. Something which enables every producer to get some money for doing simple things. I would emphasise even above broad and shallow, simple. Possibly attaching such a scheme to the IACS payment system or other systems within the industry, but from the point of view of the individual farmer, keeping it very, very simple. If he does certain things he gets a certain amount of reward. We particularly attach importance to that because the whole business of modulation will take quite a lot of money away from virtually all farmers. If all we do is stick with the existing rather narrow agri-environment schemes, then an awful lot of those farmers are going to have no opportunity to get that money back and would be hit very hard by that.
955. Are you saying to me that the present agri-environment schemes are far too complicated and that it takes a lot of time to get into them? In a sense what one needs to do is to have a rudimentary scheme that is very simple to administer.
(Mr Reed) Yes. If we talk in terms of what the public wants out of all this change, above all they want to see the generality of farming in the countryside improving certain things, be it access, be it landscape, be it wildlife. An entry level scheme onto which all the other elements could be built seems to me the right way to go.
956. You just referred to what the public wants. I am not at all clear what the public wants. You referred earlier to all the submissions to Curry: the RSPB want some things, the Ramblers' Association want greater access. How do we first of all define what the public wants? That is quite difficult. Secondly, an even more difficult question is: how do we decide what the value is, what the value of that public good is? How do we measure it and how do we pay for it?
(Mr Reed) It is extraordinarily difficult to define what the public wants because unfortunately the public is a ravening beast and wants an awful lot of things. Some groups within the public want one thing more than another. In terms of valuing them, yes, that is difficult. I know that DEFRA have done some work on establishing what the balance between different elements might be and to what extent they could be designed for in agri-environment schemes, but the problem is the one you alluded to earlier, that all those schemes tend to be narrow, complicated, really heavily bureaucratic. There is hope of defining something much better and simpler that would deliver the broad things the public wants, but it is not easy; I would not pretend it is.
957. If we move to a more friendly, more benign, less intensive system, clearly it has consequences for your industry. There would perhaps be reduced input but you seem very relaxed about this.
(Mr Reed) I am not particularly relaxed about it, but if the farming industry and the food industry are going to have to adapt to new conditions, there is no doubt the supply industry will have to do the same. It is not bad at doing that historically, partly because of its role in transferring new technology into farming. It has been fairly adaptable in the past and it may be that some of our member companies will be getting into totally new lines of business alongside their farmer customers.
(Mr Rooke) If you look at integrated farm management, particularly integrated crop management, then look at organisations such as LEAF, which certainly we belong to and some individual members belong to. Looking at that track record, which is now probably almost a decade old, there is a suggestion that the two issues are not mutually incompatible and there is a middle ground which suggests that we can see this benchmark of environmental issues moved up but a situation which does not actually cause tremendous problems for the industry, the industry's competitiveness or its ancillary industries. We would suggest that there is a balance which can be struck.
(Mr Barnard) One of the important issues the public would note and enjoy is to see the countryside being farmed rather than just having areas which are set aside into particular schemes. They do like to see the activity going on and that integrated type of farming approach is one: countryside stewardship linked to sensible farming practice would be a way forward.
Chairman
958. One of the leitmotifs of this inquiry has been the pound/euro relationship, in relation to one extent to agriculture. It must have a pretty big impact on your industry as well. The press is reporting farmers as saying they want to get their fertilisers from Eastern Europe. The Skoda is now a highly respectable car. I do not know whether they have a respectable tractor or not. Can you give me an assessment of that relationship? Do you think there is any real prospect of a sustained recovery of agriculture while it has this sort of millstone of the pound/euro relationship round its neck and the same question to your industry?
(Mr Reed) You are absolutely right. The strength of sterling has not been a great friend in most of the sectors we represent, but most especially because of the impact it has had on farmers themselves. There are still probably too many people around who look to the prospect of sterling falling against the euro as a general panacea. That is mistaken. The need for greater competitiveness at world level is going to be there whatever the fluctuations of currencies are. Yes, of course it would help if next week sterling fell 20 per cent against the euro. It might not help in other areas of industry and life. Frankly, it is not going to happen in the very near future. I would hope that we could sort out some solutions rather than spend our time looking for a silver lining some way over the horizon.
(Mr Barnard) In terms of the movement of the pound, particularly against the euro since 1995, it has obviously had a major impact on our customer base. It has also added quite a risk to the supply industry in terms of either importing raw materials, inputs, also exporting into other markets. It is something we have learned to live with daily and manage. We should like to see that relationship in terms of the euro come down to a point which allows us to compete.
Chairman: There is one further question, but I am going to ask if you would let us have the answer in writing because it is very complex. It is your proposal for the equalisation and stabilisation funds which we are interested in but we should like to see a little more text on that.
Mr Drew
959. Do you map impact of agri-monetary compensation on what that does with regard to farmers buying your products? We heard before about data problems. Clearly there is a debate alive at the moment about whether farmers should be drawing down agri-monetary compensation or whether the Government should be drawing it down to give the farmers. Can you give me a feel, not saying whether you want it or not, map how that affects your industry from previous occasions when it has been given?
(Mr Reed) If we are talking specifically about the lumps of agri-monetary compensation which have arrived on farmers' doorsteps, I would not say that there has always been a perfect pattern in terms of their paying their bills, but I suspect Andrew has some experience of that.
(Mr Barnard) We do not have a great deal of data around that but there is obviously a very, very close correlation to the movement of sterling relative to the total output from agriculture. I cannot believe that it is purely coincidence that we have seen that drop since 1995 to such a great extent whilst at the same time the pound has improved, almost with a direct correlation. There is that very close impact. In terms of measuring how our customers would change their buying pattern, we do not have a huge amount of data.
Chairman: Thank you very much indeed. I am sorry it was such a brief session, but we shall come back to you for further information. I am grateful to you for listening so patiently at the back. I hope you found it stimulating and were not too worn away wondering when we were going to get round to you. Thank you very much indeed for coming. We shall be in touch with you and particularly with some of those detailed questions which are important but a little too detailed to be able to ventilate effectively today.
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