Examination of Witnesses (Questions 300-308)
TUESDAY 29 APRIL 2003
MR JONATHAN
PEEL, MR
SIMON HARRIS,
MS RUTH
RAWLING AND
MR CHRIS
TYAS
Tony Worthington
300. Yes, but I am using them as an example?
(Mr Tyas) Perhaps I can just explain a little bit
some of the situation on coffee; but, particularly in the light
of Mr Khabra's question during the previous session, on coffee
prices, I would like to say very clearly, from the beginning—
Chairman: Can I say, also, I think Piara
has another question he wants to put. I am sorry, we will not
lose it, Tony. Piara has another question he wants to put on coffee;
so why does not Piara put his question on coffee as well and then
you can respond to them all, rather than having two bites. Is
that alright, Tony?
Tony Worthington: Yes.
Mr Khabra
301. This question is following the question
which I asked earlier on and you listened to the response made
by the first group. Now my question to you particularly, Chris,
is because Nestlé is a big producer where coffee is concerned,
and could you say what role processors and retailers can play
in seeking to address the coffee crisis? That is one question.
And, following that, will your members be supporting and participating
in the International Coffee Organisation meeting which is taking
place on 19 and 20 May? What can Nestlé do to persuade
competitors to support such initiatives?
(Mr Tyas) I think, first of all, I have to say very
clearly that Nestlé is not in favour of the low coffee
price environment, not only is it bad for farmers but, as predominantly
a soluble coffee producer, instant coffee producer, then it is
bad for our business. Perhaps if I take just a few minutes to
explain that, in terms of two sorts of coffee, basically, soluble
coffee and roast and ground coffee. If you buy a soluble coffee
then you have to have behind that a large amount of processing
in which to be able to turn it into the instant product that you
consume, which has a high capital cost and processing cost and
skilled people behind it. If you take roast and ground, the ground
coffee, then the price of that moves up and down purely at the
green coffee price. So at a time with very low coffee prices then
ground coffee becomes much more competitive in real terms, because
the green coffee is a higher proportion of the total cost, than
does soluble coffee; so it is bad for our business as well as
being bad for the farmers. But let me say that the fundamental
problem of low coffee prices is actually supply exceeding demand,
so the most that we can possibly do to aid, whether it is ourselves
or the retailers, is to increase coffee consumption. To put it
in very simple terms, last year's production of coffee was 117
million bags, but only 109 million were consumed; you can all
see the answer to that. And, fundamentally, you go back to the
mid 1990s, you look at the World Bank subsidisation of production
in Vietnam and you see the size of production in Vietnam today
has changed that fundamentally. Nestlé as a whole has worked
very hard to grow consumption; in the last 10 years, coffee consumption
has grown by about 17%, as a whole, but Nestlé have grown
their part of the market, the instant coffee market, by 40%. But,
clearly, that is the main way in which we can increase the price
paid to the farmer. If I turn to Mr Worthington's question for
a moment, and I would like to come back to your last one, on the
ICO, afterwards, in terms of seeing Nescafé in the developing
market, the market of origin, we are trying to add more and more
value in the country of origin. So, if you look at Nescafé
today, something like 55% of that is processed in the country
of origin and then shipped as instant coffee, it is not packed
necessarily in the country of origin, in fact, it is not normally
packed in the country of origin, because that adds a huge amount
clearly to transport costs, and in fact to duties, because of
the escalating tariff. The chief area of escalation, rather in
the way our colleague, Ruth Rawling, has put it, is not at the
stage of processing, turning it into instant coffee, but is at
the stage of packing, or filling into jars, or something like
that. So the coffee that you drank in the country of origin quite
probably was processed there, and indeed packed there, it had
not been taken to a developed country and then shipped back.
Tony Worthington
302. You see, there is a central point here,
that you see this formidable disincentive to developing countries
going into manufacturing, processing, value-added areas, because
of the tariffs. What I would like to know is whether, if those
tariffs disappear, you think there will be a great surge of value-added
activity in the developing world, or are there other barriers,
other difficulties, other obstacles, that will stop the benefit
of removing those tariffs coming through?
(Mr Tyas) I think there are other barriers. As Ruth
Rawling said earlier, the tariff at a primary process level at
the moment is not all that great, it is particularly at the packing
level; but there are other barriers, political instability is
another. If you take another major commodity, which companies
are interested in, as is Cargill, it is cocoa. Cocoa is sourced
largely from the Côte d'Ivoire, and the Côte d'Ivoire,
to some extent, has moved into primary processing, into cocoa
liqueur. Now, clearly, in the period of political instability
that the Côte d'Ivoire has been through, that has put companies
that depend upon that in a great degree of difficulty. So it is
not the only factor involved.
303. On a wider plain, how big a factor is it;
will there be no development of manufacturing or processing unless
those tariffs are removed, or will there still not be development
if those tariffs are removed?
(Ms Rawling) Chris, if I may just make a point here.
I think one of the things you have to look at in the processing
chain for food is what does it consist of? Does it consist of
major capital investment, because some very sophisticated, highly
developed processing, producing highly sophisticated processed
products were involved; in that case, the advantage of that capital
investment, by and large, seems likely to remain in the developed
countries. Whereas, if you look at a product which has a large
amount of labour involved in its production then it is much more
likely, because many developing countries have an advantage with
their labour costs, that that production could happen in a developing
country. I can speak briefly about poultry. There is a growing
western market for white poultry meat products which it is very
difficult to meet from home production because people do not want
poultry farms expanding all the time in the countryside. So what
is happening is that poultry production is growing in some of
the countries that previously have been mentioned, and the processing
of that poultry meat, because it is very labour-intensive, is
something that can be done very well in developing countries,
providing it is done to a very high standard. That kind of processing
we are seeing growing rapidly in countries like Thailand, Brazil,
and I would expect in the future in China, because the labour
cost involved gives the developing countries a comparative advantage.
Chairman
304. Just before we move on to sugar, can I
ask just two, very quick, naïve questions. Ethiopia. Ethiopia
is so poor they cannot afford fertilisers or pesticides, so, by
definition, their coffee is organic. There is a premium for organic
goods; why would it not be possible increasingly to market Ethiopian
coffee as organic coffee per se?
(Mr Tyas) We do buy, in fact, a great deal of Ethiopian
coffee, but most coffees that are preferred by the consumer are
a blend of different coffees, and therefore are unlikely to be
100% Ethiopian in origin, but certainly they make up a very large
fraction of many of the coffees that I am sure you consume.
305. And the second question, in relation to
the difficulties with cocoa in Côte d'Ivoire, to what percent
does that present an opportunity for Ghana and Syria and other
countries on the west coast to increase their capacity? There
must be a benefit to the countries demonstrating stability, that
they will increase their yields?
(Mr Tyas) It provides a very great opportunity, and
much further afield even than that, in that one sees already Vietnamese
farmers growing cocoa to replace some of their coffee plants,
clearly with the low prices involved.
Mr Walter
306. The Chairman said, in the earlier session,
that probably we eat too much chocolate, and I think probably
we all consume too much sugar, and it is in many processed products,
as you will be aware. Perhaps I can just quote what is a slightly
provocative statement from Oxfam, "The Great EU Sugar Scam,"
it is right on the front cover. It says: "European consumers
and taxpayers are paying to destroy livelihoods in developing
countries. Under the Common Agricultural Policy (CAP), the EU
has emerged as the world's largest exporter of white sugar. Subsidies
and tariffs generate vast profits for big sugar processors and
large farmers—and vast surpluses that are dumped on world
markets." Not my words. Now the EU's sugar regime is going
to be reformed, I think that probably is inevitable, but what
sort of reform would the Food and Drink Federation favour, and
what relevance, what weight, do you give to the concerns of the
developing countries, the other sugar producers in the world,
and are there any conflicts in your position? And we might want
to hear from British Sugar on this, between the position of the
producers, the food manufacturers, who use the sugar, and somebody
like British Sugar, who is actually a producer as well as a processor?
(Mr Peel) The Food and Drink Federation is a very
broad church, we represent something like 95% of all the food
manufacturing industry in this country. Obviously, we work very
hard to get a common position wherever we can; sugar is one area
that probably we find harder, far harder than any other area,
and what we say is that, on the one hand, the primary processors
say this, which you will hear from Simon in a minute, and, on
the other hand, the secondary users say that, and I am sure you
will hear from Chris in a minute too.
(Mr Harris) I think, as a first point, that as a point
of fact, we should all remember, is that in the United Kingdom,
actually we share this market 50/50 with developing country suppliers;
so, when people make comments about the European sugar regime,
I think it is important to bear in mind the point that actually
the nub of those comments should be directed at the Continent.
The UK has kept a balance between beet and cane as an objective
of Government policy since before the Second World War; the proportion
has altered over time, particularly when we joined the EU, but
even now it is about 50/50, roughly. And the second point is that
our quota is such that we do not have surplus quota sugar, we
sell all our beet sugar quota in the UK market; if you like, we
have that luxury, whereas countries like France have a quota which
is double their consumption, in Belgium it is even higher than
that. So, although we are sitting in the UK, when we are talking
about the sugar regime and the excesses of the sugar regime, we
need to be looking more towards the continent than the UK context,
if I can so put it. The next point is that, actually, our own
beet sugar processing industry, is among the top three in the
world as a processor, and our beet sugar industry as a whole,
including the growing of the agricultural crop, is one of the
most efficient in the EU; so we have a good industry here. Also,
through Tate and Lyle, there is a very good cane-refining industry
here; so we have efficient industries here. When it comes to reform
of the sugar regime, the point to bring out, which no-one will
love me for, is that, in reality, it is very complex, because
the sugar regime is trying to achieve several policy objectives
at the same time, and, as normal, when you are trying to do that,
you get something which is very complex, and you get into issues,
even within the EU, like efficiency versus regionalisation. At
the moment, the quota system allows sugar beet to be grown throughout
the EU, and the southern EU Member States, for example, place
a lot of importance on this, because some of their other, alternative
crops, like cotton, are under attack as well. Also, the EU gives
very significant preferences to developing countries for sugar
already. The ACP Arrangements, the African, Caribbean and Pacific
Arrangements, which are a direct lineal successor of the Commonwealth
Sugar Agreement, have been in place since about 1951, if you include
the Commonwealth Sugar Agreement in that. The recent innovation
has been the "Everything But Arms" Initiative, which
for sugar will not start to phase in fully until 2006, and will
come into full application in 2009, I think. But we have here
a conflict. If we are saying that the objective of sugar regime
reform is to lower prices in the EU then we are going to lower
the prices to a lot of poor countries in the ACP, and we are going
to devalue any investment that the EBA countries might make, in
order to supply the EU market. Because, as has already been said,
sugar is very much an example of a capital-intensive industry;
it is the most capital-intensive of any soft commodity to process.
If you build a new cane mill or a new beet factory then you are
into hundreds of millions of dollars. So if we are saying that
by having this initiative for the EBA countries, we have opened
up our market, or are going to open up our market to them, access
is one thing but value is another matter. If they have access
at the world market price then it is no use to them, because they
cannot compete at the world market price. The world market price,
of course, is a residual price, highly distorted, but Brazil is
the only country that can take advantage of free trade.
307. So you are saying that, to set an extreme
example, if we abandon completely the sugar regime, quotas, tariffs
and all the rest of it, in fact, that would not have the desired
advantage, other than maybe to Brazil?
(Mr Harris) Yes.
308. What would it do to the European sugar
industry?
(Mr Harris) A good question. Two points. One, how
much reform is there going to be in the rest of agricultural production,
and what is that going to do to land prices, because the value
of support, of course, is capitalised into land values; and, secondly,
are we going to be allowed to include sugar beet in the system
of decoupled farm payments, in which case we may find that quite
a lot of the European sugar production is still quite competitive.
Just because it is grown in Europe does not mean necessarily that
it is per se uncompetitive, particularly if you had a less
distorted world market; the trouble is, everyone says European
consumers are paying a price three times the world price, but
the world price does not represent anything, and that is one of
the problems about this whole exercise. European sugar yields
are a technical measure rather than a financial measure, but European
sugar yields expressed on a per hectare basis are much higher
than most cane sugar producing countries, not necessarily all
but certainly most; and technical innovation in the beet sugar
industry has been far faster than in the cane sugar industry,
where, indeed, in many countries, there has been a stagnation
of yields in recent years.
(Mr Tyas) I think Jonathan explained that there is
a divergence of view, clearly, within the Food and Drink Federation,
between the primary processor, we try to represent, and the manufacturer,
such as ourselves. From our position, we find ourselves that UK
food manufacturers are at a substantial disadvantage with competitors
in other Member States and third world countries, because of the
EU sugar regime. It is quite right to say that, although that
disadvantage is something like threefold at the moment, because
it is about three times the world market price that we have to
pay in our factories, that factories on the edge of the EU, for
example, have to pay, if there were a less distorted market, without
the kinds of restrictions for the countries of Mozambique, Australia,
or anywhere else, to access the EU for its sugar, then the difference
would be less than that. But I think most of the surveys, and
indeed the Oxfam survey itself says that the difference would
still be something like a half what it is today. Those high costs
mean that undoubtedly there is a loss of jobs, there is a loss
of exports, and there is an impact on investment decisions that
are made by major companies because they will try to source at
areas which can access much lower sugar prices than you can in
the UK today. I think, however, probably it does bring us back
to the first question which was asked, which was the WTO round,
and our views on that, and a lot of the exports that go outside
of the EU are at the moment only vaguely competitive because of
the restitutions, because of the export subsidies. If those export
subsidies are to disappear then we have to see a corresponding
reduction in the input price, and sugar is the classic example
which we are talking about at the moment, but dairy products also
are included in that, otherwise we will see a large loss of jobs
and of export income into this country.
Chairman: I think we will look and see
both of those statements. I think we could have a dialogue on
this for a long time. Let us look at both those statements in
the written text and I think to segregate them out in a while,
because I think those two answers just demonstrate the complexity
of what we are having to deal with, in a sense, in this. Thank
you very much for coming and giving evidence this afternoon. Thank
you very much too for coming and giving evidence kind of simultaneously
wearing two hats, which I think must always require enormous discipline,
both as being part of a trade federation and giving collective
views, and also ensuring that your own individual sectoral views
are not forgotten. So thank you for that; and thank you, Jonathan,
for co-ordinating it.
|
