FOOD LINKS
211. There are some particularly good recent examples
of how local sourcing of food can be aided by the development
of local food links. For example the work of East Anglia Food
Links has demonstrated the potential for alternative channels
of food production and consumption to those offered by the supermarkets.
Co-operation and collaboration
212. There has not been a track record of successful
co-operation in agriculture in the United Kingdom, particularly
when compared with many of our competitors in the rest of Europe.
The Co-operative Group suggested that the reason for this was
that "historically we have got too hung up with legal structures
and legal definitions and lost sight of co-operation as a tool
for better mutual understanding and for closer working relationships,
by actually focussing in on the economy of scale issues".[413]
Other witnesses thought that there were also cultural explanations,[414]
and said that in the past there had been little economic incentive
or pressure to collaborate.[415]
The traditional independence of farm businesses, and the pride
that farmers take in defending that position, is a real weakness
in developing new forms of enterprise - despite the fact that
many farmers belong to co-operatives.
213. The tale of co-operation in milk production
is instructive. The 1990s saw the abolition of the Milk Marketing
Board, its replacement with Milk Marque, a voluntary co-operative,
and the subsequent ruling by the Monopolies and Mergers Commission
that Milk Marque was a "scale monopolist" and that it
had exploited its monopoly position "by using its selling
price to price discriminate and to control the supply of milk
made available to the market".[416]
The Commission's ruling required the break-up of Milk Marque with
the result that three regional co-operatives were formed. The
associated re-organisation of the milk marketing arrangements
throughout the United Kingdom has done much to affect views of
the attractiveness of co-operatives in the agricultural sector.
214. Since the break-up of Milk Marque there appears
to have been concern and uncertainty among farmers about the rules
on co-operation and the extent to which they can co-operate, particularly
in comparison to the scale of co-operatives in the European Union
and other parts of the world, which appear, in some cases, to
have monopoly scale. The Secretary of State outlined the Government's
general approach which "is that we think our competition
authorities do strive to do what is right for the customer in
the market place, and that co-operatives cannot expect to be immune
from that just because they are co-operatives". She was uncertain
about whether the concern and uncertainty were borne out of reality
or perception. Nonetheless she had "taken up the issue to
see whether there is anything that we need to discuss, any light
that the competition authorities can usefully cast on this issue".[417]
The inconsistency of Government policy in this area has been counter-productive.
215. The Secretary of State accepted that "there
is a genuine and general argument about the role of competition
authorities and what market place they should be judging, which
runs right through the whole area of competition policy, and always
has".[418]
This may particularly be the case in the agricultural sector,
where it seems to us that both the CAP and the European single
market mean that decisions about competition issues should at
least take account of the wider European market rather than just
the domestic market.
216. Co-operation and co-operative structures have
nevertheless continued to evolve in the dairy sector in particular.
In May 2002, amelca, a farmer collaborative venture, opened a
milk processing plant in Derbyshire.[419]
In the same month United Milk also opened a brand new processing
factory in Wiltshire,[420]
and in June it was announced that one of the co-operatives created
following the break-up of Milk Marque, Zenith Milk, would merge
with the Milk Group, a co-operative formed when the milk market
was initially deregulated, to form Dairy Farmers of Britain.[421]
Nevertheless it is sobering to contrast the fate of Milk Marque
in this country with the creation and growth of Fonterra in New
Zealand, an organisation specifically engineered to carry the
New Zealand flag in export markets without facing worries about
the competitive position in the very small domestic market. (A
Sainsbury's executive noted informally that the equivalent of
the entire New Zealand population had shopped in his group's stores
by lunchtime every Wednesday!)
Fonterra: New Zealand's largest company
The New Zealand Dairy Board was formed during the last century by companies who processed milk in order to deal with the marketing of dairy products from New Zealand in the export market. Over the course of time the processing companies themselves merged so that by the end of 2000 more than 95 per cent of the dairy industry had consolidated around two major manufacturing companies, New Zealand Dairy Group and Kiwi Co-operative Dairies.
In 2000 the New Zealand Dairy Group and Kiwi Co-operative Dairies agreed to merge. By the end of 2001 the Fonterra Co-operative Group Limited had been established, which has taken over the marketing responsibilities of the Dairy Board, and the processing businesses of the two former companies.
Fonterra is a co-operative, owned by nearly 14,000 New Zealand dairy farmers. It is the ninth largest dairy company in the world, and the largest dairy exporter, dealing with 30 per cent of the international dairy trade. Fonterra is also New Zealand's largest company: it accounts for around 20 per cent of the country's exports by value, and seven percent of its gross domestic product.
Fonterra has recently moved into the Australian dairy sector, merging some of its operations with those of Bonlac, an Australian co-operative.[422]
The company has a range of related interests. As well as collecting, processing, exporting and marketing milk and milk products, it also owns a chain of farm supply shops and we were told that it even mines coal to meet some of its own power needs. In October 2001 its net assets amounted to NZ$11 billion (approximately £3.6 billion).[423]
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217. We saw and heard of examples of other successful co-operatives
both in this country and in New Zealand during the course of our
inquiry. The single factor that seemed to underpin their success
was attention to what the consumer wanted, usually as expressed
by the retail buyer: primarily reliability, uniformity and continuity.
Professor Hughes told us about a strawberry co-operative that
he is involved with which is able to offer supply throughout all
twelve months of the year.[424]
In New Zealand we learned of lamb co-operatives on the North and
South Islands working together to provide year-round supplies
for their customers.
218. The National Farmers' Union told us that it has been working
for nine or ten years to bring the co-operative sector together
and to encourage co-operation and market focus. More recently,
following the recommendation of the Policy Commission, the NFU
has been involved in taking forward the English Collaborative
Board as proposed by the Policy Commission on the Future of Farming
and Food.[425] The
Policy Commission envisaged the Collaborative Board being responsible
for "encouraging and supporting collaborative activity ...
[and] advis[ing] Government on the direction of Government grants
available to collaborative ventures".[426]
Sir Donald Curry told us that the Policy Commission referred to
collaboration rather than co-operation "because we believe
that business structure is not crucial to achieving the objective".[427]
219. Following the meeting in Downing Street on 26 March 2002,
to take forward the recommendations of the Policy Commission,
it was announced that there would be "an industry-led initiative
to promote increased collaboration and co-operation among primary
producers".[428]
A steering group has subsequently met under the chairmanship of
Steve Ellwood, Head of Agriculture at HSBC. It is "looking
at potential benefits that an [English Collaborative Board] might
bring to the agricultural and horticultural sectors in England,
helping farmers and growers meet customer needs in an increasingly
competitive market". The steering group intended to bring
forward its recommendations in late June or early July.[429]
220. However, the Steering Group of the English Collaborative
Board did not publish its proposals until 27 September 2002.[430]
It recommended the establishment of an English Collaborative Board
which operated independently of existing industry bodies, with
an operating board and national and regional executives.
English Collaborative Board[431]
Aims
to enable farmers and growers to become more competitive by implementing collaborative business solutions, and to develop the effectiveness of farmer controlled businesses in agriculture and food marketing chains. These will be achieved by mapping needs, advocating collaboration, providing specialist advice and project delivery, and through training and education.
Measures of Success
The success of the ECB will be judged on a number of factors including:
1. Achievement of the objectives set each year by the Operating Board.
2. Satisfaction of membership as measured by subscriptions and satisfaction surveys.
3. Growth in the turnover of FCBs and the share of the market this reflects, plus any increase in collaborative actions in conjunction with the food chain growth
4. Activity/best practice e.g. mergers, expenses, new initiatives.
5. Farmer share of value added.
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221. The role of Government, and particularly of the competition
authorities, in encouraging co-operation and collaboration is
critical. Many of our witnesses related the nervousness felt by
farmers about the attitude of the competition authorities towards
co-operative enterprises. It is clear that farmers are primarily
operating in a global marketplace, and that their competition
are enterprises such as Fonterra, which dominates 98 per cent
of milk production in New Zealand, rather than one another. Thus
it is important that Government look at farming co-operatives
in the light of global rather than domestic circumstances, and
in particular on the basis of the resources and capabilities of
other European co-operatives. Should an English Collaborative
Board be established it should have clear objectives and appropriate
governance rules reflecting its industry accountability which
can be monitored. It should analyse both best practice and failure
(such as amelca) and disseminate its findings.
222. We also believe that there is a role for organisations such
as Business Link in helping to overcome barriers to co-operation
and collaboration. It could offer specific help to promote actively
co-operation and co-operatives.
Food Chain Centre
223. Another initiative from the Policy Commission that has received
widespread, although not universal,[432]
acclaim is the establishment of a Food Chain Centre. The Government
has accepted this recommendation, and has announced that the Centre's
objectives will include the "provision of information, analysis
and training and promotion of benchmarking, best practice exchange
and collaborative trading relationships. Its initial work will
include a value chain analysis survey for redmeat (part of the
Industry Forum Adaptation project), a cost benchmarking service
for horticultural produce, a grain value chain analysis and a
review of benchmarking practice throughout the food chain".
The Government also announced that the Food Chain Centre would
be facilitated by the Institute of Grocery Distribution, and that
the Government would provide £300,000, initially, and more
if the European Commission gives approval under state aid rules.[433]
A number of groups told us that they would be supporting the Food
Chain Centre, mainly "in kind": both the Department
for Environment, Food and Rural Affairs and the National Farmers'
Union said that they were seconding staff.[434]
The Institute of Grocery Distribution has calculated the cost
of the Food Chain Centre at £6 million over a three-year
period.[435]
224. Representatives of all parts of the food chain had a range
of issues to which they wanted the Food Chain Centre to provide
answers. The National Farmers' Union told us that farmers needed
to know "what is best practice elsewhere in Europe"
and that "chopping out unnecessary links in the food chain"
was critical.[436]
Safeway highlighted the role that the Food Chain Centre could
play in "taking costs out of the supply chain".[437]
The Secretary of State said that "one of the biggest contributions
that the Food Chain Centre can make at the initial stages, it
seems to me, is to provide unbiased information that cannot be
contested".[438]
225. In some ways, the Secretary of State's comment gets to the
nub of the problem - the lack of trust, rather than of transparency,
in the food chain. One argument in favour of intervening in markets
is to correct market failure. The need for unbiased information
implies that there is such a failure. We are therefore satisfied
that it is right for Government to intervene in the market in
order to improve the flow of information. We hope that the
Food Chain Centre will find a way of communicating information
fully and in a useful way to farmers and to all other participants
in the food supply chain.
226. We asked the Government how they would judge the success
of the Food Chain Centre. Lord Whitty told us that "I think
it is early days. We need to get the thing off the ground, and
that is what we are doing this year. We need to ensure that all
the industrial elements are fully engaged and that they will bear
the bulk of the cost both in money and in kind, which they are
prepared to do. So I think the public expenditure question is
probably a residual question rather than a main one".[439]
We accept that the Food Chain Centre needs to get off the ground
but believe that would be far easier if the all those involved
in establishing, steering and running it knew what the Government
wanted it to achieve. It is also important that the Department
for Environment, Food and Rural Affairs has a clear system in
place to assess whether it is getting good value for the public
money it is investing. Therefore the Department should set out
how it will judge the success of the Food Chain Centre and what
criteria it will use to decide whether or not to continue funding
the Food Chain Centre, if it is permitted to do so by the European
Commission.
413
Evidence taken on 27 February 2002, Ev 121, Q.568. Back
414
Evidence taken on 27 February 2002, Ev 122, QQ.569-570. Back
415
Evidence taken on 27 February 2002, Ev 122, Q.570. Back
416
Milk - a report on the supply in Great Britain of raw cows'
milk, Monopoly and Mergers Commission, Cm 4286, July 1999,
para 1.8. Back
417
Evidence taken on 15 May 2002, Ev 326, Q.1139. Back
418
Evidence taken on 15 May 2002, Ev 326, Q.1140. Back
419
Derby Evening Telegraph, http://www.businessderbyshire.co.uk/news/02/may/020502nm.htm.
amelca has subsequently gone into receivership. Back
420
Farmers' Weekly interactive, http://www.fwi.co.uk/article.asp?con=3554&sec=17&hier=17. Back
421
Zenith Milk news release, http://zenimilk01.uuhost.uk.uu.net/PR22.htm. Back
422
Fonterra in merger deal with Bonlac, Financial Times, 2
July 2002. Back
423
See http://fonterra.com/. In its first annual report, published
on 12 August 2002, Fonterra reported a loss of NZ$50 million in
the year to May. The New Zealand Herald reported that the co-operative's
Shareholder Council had found that Fonterra "had not added
economic value in its first year". The Council was disappointed
with "a weaker than forecast balance sheet, overly high corporate
overheads, insufficient focus on minimising costs and return on
invested funds, and inadequate management information systems"
[Fonterra fails to impress farmers, New Zealand Herald,
24 August 2002, see: www.nzherald.co.nz]. Back
424
Evidence taken on 6 February 2002, Ev 45, Q.207. Back
425
Evidence taken on 8 May 2002, Ev 303, Q.1026. Back
426
Farming and Food - a sustainable future, p. 36. Back
427
Evidence taken on 13 February 2002, Ev 72, Q.357. Back
428
The Department for Environment, Food and Rural Affairs news release
117/02. Back
429
ECB Steering Group Media Release, 22 April 2002. Back
430
Proposals for the Establishment of an English Collaborative
Board. Back
431
Ibid. Back
432
Evidence taken on 27 February 2002, Ev 119, Q.552. Back
433
The Department for Environment, Food and Rural Affairs news release,
117/02. Back
434
Evidence taken on 8 May 2002, Ev 305, Q.1029; and evidence taken
on 15 May 2002, Ev 325, Q1132. Back
435
Evidence taken on 10 April 2002, Ev 178, Q.681. Back
436
Evidence taken on 8 May 2002, Ev 304, Q.1029. Back
437
Evidence taken on 27 February 2002, Ev120, Q.553. Back
438
Evidence taken on 15 May 2002, Ev 325, Q.1130. Back
439
Evidence taken on 15 May 2002, Ev 325, Q.1131. Back
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