House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Ninth Report

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]

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.

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