House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Ninth Report

SUPPLY TRACEABILITY AND RELIABILITY

227. One of the major concerns of supermarkets and other retailers is to improve traceability through the supply chain. This is essential for the maintenance and improvement of food safety and quality, and if better information about the point of origin of a food product and farming practice is to be provided to consumers. Many steps have already been taken to improve traceability. Increases in sales of livestock under contract directly to retailers will obviously enhance traceability in that sector. This is a matter which could be of benefit to British agriculture: if robust systems for traceability continue to be put in place in this country the United Kingdom will enjoy a competitive advantage over countries which are slower to ensure that traceability is of central importance.

228. Similarly reliability of supply is of vital importance to retailers and caterers. We were told of two examples of reliability. First, in East Anglia, we visited a grower and processor of salad crops which had invested heavily in Spain to ensure that supply was maintained for as much of the year as possible. Second, Whitbread told us that whilst it sourced some beef for its restaurants in the United Kingdom from domestic suppliers, in Germany it was obliged to use meat from Argentina on grounds of "quality, consistency and scale".[440] There are obviously particular problems associated with the export of British beef. Nevertheless, it is quite possible that United Kingdom agriculture is better equipped to ensure reliability of supply than competing industries in other countries. This may provide an opportunity for British farming to exploit in partnership with customers and other suppliers.

Assurance and benchmarking

229. The National Farmers' Union identified the development of farm assurance schemes as something that the industry had done itself in order to "connect the producer and grower with the customer". It cited the development of the "little red tractor" scheme.[441] Professor Hughes offered the following assessment of quality assurance schemes:

442

Safeway said that it was in broad agreement with that assessment,[443] but acknowledged that it actually had its own standards for farm assured meat.[444] There are particular concerns about the proliferation of assurance schemes: if they are to be of use to consumers it is important that they are simple enough to be understood by them. The Policy Commission on the Future of Farming and Food said that "communication is confused. There are too many schemes, and consumers do not understand their implications".[445] It recommended that existing assurance schemes should be "rationalised" behind the well-known Red Tractor mark - although it admitted that customers were unclear about what precisely the Red Tractor represents.[446]

230. The environmental groups hoped that the breadth of the assurance schemes could be increased to include environmental conditions. If that could be done, the RSPB argued, then adherence to the codes of environmental practice by farmers could be verified through the marketplace rather than via systems of inspection.[447] In other words the consumer would pay for the policing of agri-environmental schemes. Similar points have been made about animal welfare standards. Assurance schemes offer another opportunity to British farmers. If properly promoted they can be very effective as marketing devices, allowing consumers to understand better the products that they buy. However, it would be helpful if there were common standards to the various elements to aid both transparency and compliance.

Livestock pricing

231. Farmers have a very strong attachment to livestock markets. However, since the foot and mouth disease outbreak last year, a number of restrictions on the operation of livestock markets remain in place. A number of question marks have been raised about the future of livestock markets - it is commonly accepted that the mixing of animals at markets and their subsequent widespread dispersal contributed to the spread of foot and mouth disease across the length and breadth of the country last year. In addition, there are a number of questions about their value in determining the prices for livestock.

232. Whitbread pointed out that "the farming industry tends to work on a weekly price basis",[448] in part because of the weekly nature of the livestock auctions. However, it pointed out that Whitbread publish menus that last for six months and because of that it wanted price stability.[449] Safeway told us that a large number of pigs and a growing number of cattle are sold on a contract basis.[450] Sainsbury's has launched its Partnership in livestock scheme, in which it and its processors say that "wherever possible livestock will be procured by the processors or their dedicated agents direct from farmers".[451] Meat and Livestock Commission figures for the last three years show that a majority of cattle and pigs are sold on a deadweight (ie. contract) basis. This all suggests that the livestock market is more and more becoming the disposal route of last resort and therefore will experience greater fluctuations in supply than previously, at least in percentage terms. It also means that procurers are likely to be looking to make up very variable amounts of shortfall, as they procure more and more product on contract. The impact of widely fluctuating demand and supply would be reflected in large price movements from week to week. In one sense, then, farmers who continue to use livestock markets are actually bearing the risk of the entire supply chain.

Table 10: Proportion of livestock sold via auction markets and on a deadweight

(dwt) basis[452]

	Cattle		Sheep		Pigs
	Auction	Dwt	Auction	Dwt	Auction	Dwt
1999 2000 2001	42.9 39.3 7.5	57.1 60.7 92.5	52.4 54.4 12.7	47.6 45.6 87.3	3.6 3.7 0.6	96.4 96.3 99.4

Note:
Higher deadweight sales figures in 2001 reflect the closure of auction markets as a result of foot and mouth disease.

233. Whilst we were in New Zealand, we noted that contract selling was the main mechanism. We therefore wondered how price was determined. In one case we were told of slaughterers making an assessment of the market in the coming twelve month period, and offering a price based on grade for the whole season, which they guaranteed. If prices for the final product were higher than expected farmers received bonuses, if prices were lower farmers were not penalised. Safeway told us that in a market system you could not "guarantee anybody a 'fair price forever'", and added that, like in New Zealand, prices would be set on the basis of a judgment. It said that Safeway had done that with Welsh Mountain lamb,[453] a product started as a local product in fifteen stores which was now available across England and Wales.[454] Safeway was convinced that livestock markets would "fade out".[455] With appropriate attention to detail farmers could benefit from selling their livestock on a contract basis: doing so is likely to bring them far closer to the marketplace, and will reduce risks.

Risk and insurance

234. We were told that the risk profile faced by the European farmer has been increasing since the 1992 CAP reform began to break the link between production and price support. Agenda 2000 continued that process, and the prospects of trade liberalisation - leading to reductions in export subsidies and import duties - would take it further. These developments, we were told, will "change the risk perception of the European and United Kingdom farmer".[456] The Policy Commission on the Future of Farming and Food acknowledged this, saying

"The Government should be prepared to support the development of basic safety net aids at European Union level, once CAP price support is removed. Such aids should operate so that they do not distort markets over the longer term, but provide short term relief during periods of market volatility.

"The Treasury should consult with banks and other financial bodies to investigate the efficient provision of suitable financial risk management instruments at reasonable cost. Collaborative farming ventures and industry levy bodies should be involved in these discussions, as they could be valuable conduits to transmit the benefits of such instruments to smaller farmers".[457]

235. In addition to the policy and market developments that are leading to changing emphases and attitudes to risk, the approach to managing disease risk needs to be considered. The Lessons Learned Inquiry reported that "much of the cost of the 2001 [foot and mouth disease] outbreak to the farming industry was externalised". It then noted that it was a complex question as to "whether compensation is the appropriate reimbursement mechanism or whether a system closer to insurance arrangement should operate".[458]

236. The Government has been considering various aspects of risk management and insurance in agriculture. In January 2001, the Ministry of Agriculture, Fisheries and Food produced an economic report entitled Risk management in agriculture,[459] and discussions have been going on between the Government and the agricultural industry.[460] The CLA was "slightly worried about the speed with which the Government is trying to push this issue". It said that there were problems over "the coverage of the risk" and "how the risks are shared between farmers, the insurance industry and the public who benefit potentially from the absence of disease".[461] In addition, the National Farmers' Union pointed out that in the case of foot and mouth disease those who "suffer the most severely are not the people who get the disease".[462]

237. The move from commodity price support to direct payments that are decoupled from production means that farmers are likely to experience more volatility in the prices they receive for their production. In addition, as we have seen from foot and mouth disease, the consequences of exotic disease entering the country is another type of risk. Representatives from Guy Carpenter, a global re-insurance broker, also highlighted some potential problems in developing an insurance market with the agricultural sector. They said that there was a need to establish an infrastructure before launching products: they identified a role for government in both of these phases.[463]

238. We welcome the fact that the Government and the industry are talking about the role of insurance and other approaches to risk management in agriculture. We note that in the 2002 Spending Review, in return for investment in United Kingdom agriculture, "the Government expects farmers to play their part in making their industry sustainable, for example by managing risks".[464]

239. We believe that discussions over insurance should move forward as quickly as possible, and that they should explore all possible routes of funding disease insurance packages, such as levies and fixed compensation payments (as is already the case for BSE, for example). There may be a legitimate role for some public sector contribution toward establishing a market in these products, reflecting the substantial human and animal health concerns of the public. In the case of changing market risks, which have arisen because of policy changes, we believe that ultimately it should be the responsibility of individual farmers to decide how to manage the market risk they face.

240. We are cautious about endorsing the Policy Commission's call for a safety net, even at European Union level. If, as we envisage, marketing of agricultural production is increasingly to take place on the basis of long-term contracts between producers and processors or retailers, risk will be reduced. Furthermore, the intervention system that led to the build up of expensive stocks was originally designed with similar objectives.

440 Evidence taken on 10 April 2002, Ev 197, Q.722. Back

441 Evidence taken on 8 May 2002, Ev 303, Q.1026. Back

442 Evidence taken on 6 February 2002, Ev 48, Q.224. Back

443 Evidence taken on 27 February 2002, Ev 116, QQ.528 and 533. Back

444 Evidence taken on 27 February 2002, Ev 117, Q.536. Back

445 Policy Commission on the Future of Farming and Food, p.39. Back

446 Policy Commission on the Future of Farming and Food, p.40. Back

447 Evidence taken on 6 March 2002, Ev 143, Q.606. Back

448 Evidence taken on 10 April 2002, Ev 195, Q.712. Back

449 Evidence taken on 10 April 2002, Ev 195, Q.712. Back

450 Evidence taken on 27 February 2002, Ev 119, Q.549. Back

451 Partnership in livestock, Sainsbury's, p.13. Back