Examination of Witnesses (Questions 340-359)
8 MARCH 2004
LORD WHITTY
AND MR
ANDREW SLADE
Q340 Paddy Tipping: What about the notion
of putting more transparency into the supply chain? How could
we do that? You are not very keen on a regulatory body but there
needs to be trust and a shared vision of the way forward, and
transparency is an important element of that.
Lord Whitty: Yes, I think as with
other parts of the food chain we can all do with a bit more transparency
both on the question of how prices are set and what deals are
done and on the stability of arrangements. Some work has been
done on that by the MDC, on pricing in particular. The Food Chain
Centre now is also looking at those relationships, it has just
started on their look at the relationships within the dairy sector.
I accept that some help in looking at issues of transparency would
be desirable, that is a different issue from regulation.
Q341 Paddy Tipping: I accept that. How
would we do that then? How would we persuade people to work in
a more transparent and co-operative way? You have got your Forum,
which you told us earlier on, in a sense, was not your bag, it
should be the industry taking this forward.
Lord Whitty: The Forum has played
its role in flushing out some of the information both in commissioning
studies and in the work of the various sub-groups looking at the
relationships which exist. As I say, there has been ongoing work
on the same area by the MDC and what I think is very successful
work on the food chain conducted by the Food Chain Centre in relation
to red meat is now being looked at in terms of the value analysis
and relationships within that sector. That is part financed by
the Government and also part financed by the industry and one
of the several post Curry institutions, as I call them, is hopefully
helping to facilitate the industry to put its own house in better
shape.
Q342 Mr Jack: Can I just explore what
you mean by this word transparency. One of the things that dairy
farmers would like to have sight of is who gets what in the value
chain? Do you mean that by transparency?
Lord Whitty: Partly, yes.
Q343 Mr Jack: So you would like to see
a proper understanding and disclosure by all the parties up the
chain of what their respective shares were, to answer the question
which has permeated through, particularly from the farming standpoint,
the perception that they are not getting their fair share of the
value chain?
Lord Whitty: I am not suggesting
that we could easily establish what every litre of milk had taken
from it. This is actually a relatively simply food chain compared
with red meat. There are only relatively few people who are taking
any part of it at all. The milk goes straight from the farm to
the processor and straight from the processor to the supermarket.
Q344 Mr Jack: What do you mean, therefore,
by the word transparency? If it is a simple food chain there ought
to be simple answers to simple questions. We are struggling. We
just heard evidence earlier that those who represent the industry
somehow magically never monitor what retail margins are, it is
not their territory, it is not their business to know if retailers
are making too much or too little, this is not where they operate.
Your image of transparency gives me some hope that perhaps the
relative shares might be exposed, or would they?
Lord Whitty: The across the board
ones would be, yes. There would be some, if you like, benchmarking
of what happens in particular parts of the chain.
Q345 Mr Jack: If I go to the Food Chain
Centre and say "what are you doing to make this more transparent",
what are they going to be doing?
Lord Whitty: They are analysing
the value of the product at the different stages in the chain
both from the liquid milk side and on the product side. They are
at a relatively early stage of their activities.
Q346 Mr Jack: They are going to analyse
the value at different stages in the chain. What is the purpose
of this analysis?
Lord Whitty: The purpose is that
the industry could operate on a more rational basis. As Andrew
has just reminded me, the KPMG report also covers broad stabs
at this area in the supply chain development detail.
Q347 Mr Jack: You are a key stakeholder,
to quote modern parlance, in the food chain sector. The Government
have put money into it and you say you hope as a result of their
work the industry will operate in a more rational way. Perhaps
you could explain to us where you see the rationality. What do
you mean by that?
Lord Whitty: There are a number
of different aspects to this really. We have an industry which
has operated on a very variable price at the farm gate, has largely
because of the quota system produced roughly the same amount of
milk whatever the state of the market—somebody once said
to me, "If the price of milk goes up they produce more, if
the price of milk goes down they produce more"—and
the self-interest of all elements must be a greater degree of
stability in that chain. Certainly it is in the interests of the
producers, I am pretty certain it is in the interests of the processors.
It is an industry which in a sense has some over-capacity—somebody
referred to the quotas as being a constraint on production, actually
they tend to be a motivation for production and there is certainly
over-capacity in the sense of getting a profitable return on it.
There is some significant instability in the market, both short-term
instability, which the Forum has done a little bit about in relation
to seasonality, and also longer term instability because there
is no long-term, or very few, long-term, firm contracts at price
and quantity in the liquid milk side; there are more stable relationships
in some of the product side. But again if you had more clarity
on the flows both of the milk and of the price at which milk was
being exchanged I think the market could react more sensibly to
develop longer-term stability.
Q348 Mr Jack: Do you think as a result
of these discussions, bearing in mind that both the processing
side and the supermarkets are always going to be the big players
relative to the smaller scale supply side, that there will be
a real development of a mutual understanding about the need to
try to sustain a dairy industry? The Committee has learnt about
the continual haemorrhaging of numbers and inevitably there are
implications for the well-being of the rural economy if you have
this continual reduction in the number of dairy farms. Obviously
some may amalgamate with others but there is bound to be an impact
and sustaining a dairy industry would certainly from the industry
stand-point be a key objective. Do you think there would be more
mutual understanding and recognition of the effect which large
players have on small players in this market place as a result
of the measures you have described?
Lord Whitty: I am not sure if
it is entirely as a result of the measures I have described, but
clearly part of establishing trust and mutual acknowledgement
and understanding of what the position really is does depend on
having figures and information which are largely agreed, and it
is probably a sine qua non rather than what delivers a
more stable outcome. It is unlikely that the outcome would be
an industry which had the same number of operators in it as it
currently does. I do not think we are talking about reversing
or even freezing the exit from the industry of a number of producers,
but what has happened until recently has been that the total number
of cattle has not gone down very much, the production has more
or less stayed constant, and it has been largely amalgamations
of herds and amalgamation also of the processing as well. The
net result is that neither is in a particularly economic position.
Chairman: The missing element so far
is the role of the supermarkets and whether they themselves should
be much more subject to a firm form of accountability. I will
ask Paddy to ask some questions on that.
Q349 Paddy Tipping: They are the big
powerful player, there is a code of practice but how do you rate
the current practice? Is it working? Is it effective?
Lord Whitty: No. The OFT study
itself shows that, although you can read it both ways. The code
of practice, whilst it might be said it is by and large being
followed, has not actually given any security to the suppliers
of all sorts including the dairy sector, and the likelihood is
that people have not complained about the supermarket practices
because they are afraid of being delisted or other sanctions brought
against them. I therefore think the code in its post-OFT inquiry
into the big four is not viable and the OFT's further work on
auditing will throw up some examples as to why it is not operating
as it should. The question then is what you do about it. Do you
have a different sort of code which would probably be subject
to the same problems? Even if you widened it to include the other
large supermarkets and possibly even the large processors, the
problem would still remain as to whether an individual small supplier
would be prepared to take advantage of that code if he feared
there could be significant sanctions. So I think the supermarkets
are probably the part of the food chain which is most susceptible
to public opinion and most sensitive to public opinion and therefore
need to recognise their obligations to the supply chain in a more
corporate responsibility sense maybe backed up by a code, but
nevertheless the code is not going to deliver the totality of
what is needed in terms of trust and stability of the chain.
Q350 Paddy Tipping: You meet the supermarkets
fairly regularly, what are you saying to them? What are you putting
to them?
Lord Whitty: I say all sorts of
things to them.
Q351 Paddy Tipping: Well?
Lord Whitty: Of course they will
say, "The bulk of the value added in this chain is not us.
We operate on fairly tight margins, we operate in a highly competitive
sector, a big part of the difference between what we charge on
the shelves and the 18p, whatever it is, the 19p-and-a-bit now,
that the farmers are getting is not down to us."
Q352 Paddy Tipping: But this is a strange
world, is it not? We have an OFT code which many of the producers
are saying is ineffective and are frightened of putting into operation;
you, the Minister, have just agreed it does not work; you have
suggested the OFT knows it does not work, so what next? What is
the logical next step?
Lord Whitty: The next step the
OFT are engaged in is doing an independent audit themselves which
would require people to put their head above the parapet. I think
that will show up maybe not a wide range but some serious problems.
I am not particularly talking about this sector but am talking
about their relationships with suppliers in general. Personally,
I think there is scope for a voluntary code which the supermarkets,
rather than being differentially subjected to in terms of the
top four, could be persuaded to sign up to. That would change
the atmosphere, it would still require people to identify themselves
if they had problems about the non-operation of the code. Taken
together with other aspects of greater transparency within the
chain, this could with reasonable goodwill—and part of the
Forum's activity is to establish that reasonable goodwill in the
dairy sector—lead to more stable relationships, more longer
term relationships and more confidence therefore in the long-term
future for those who remain in the industry.
Q353 Paddy Tipping: But there are some
in the industry who say, "This code of practice ought to
be given the force of law and therefore if the supermarkets do
not stick to it—and there is an issue about enforceability
there which I accept—they should be liable to some kind
of offence." What do you make of that suggestion?
Lord Whitty: Of course the current
code on the top four does have the force of law and a proven transgression
would be subject to further Competition Authority intervention.
The problem is, we have never got to the stage of proven transgression.
Q354 Chairman: Why is that? Given that
everybody complains about everybody in this industry, why have
we never had a situation where—
Lord Whitty: They complain about
everybody else to me and you and in the pubs and clubs of the
agricultural community, but will they say, "You diddled me
on that contract" when they want to sign another contract
next week? The answer to that is not very often. That is not just
a criticism of the industry, it is understandable that if you
want to remain in business you do not risk delisting. I think
the supermarkets are not prepared to be quite as harsh in that
regard as people fear, but the fear is a very real one.
Q355 Chairman: People go from being a
member of a co-op to being a direct supplier to going off on their
own, producers do take all manner of risks, yet you are telling
us that the big bad threat of the supermarket prevents them from
really actually saying what they think, so their only recourse
is to picket. That is a pretty sad indictment of this industry.
Lord Whitty: I do not think their
only recourse is to picket in fact. The relationships with the
processors and the retailers are best discussed around a table
rather than in the carpark of a regional distribution centre from
my point of view. There are times when shock tactics have an effect
but actually that is rather short-term and in the long-term they
have to sit down and discuss. At the end of the day the supermarkets
are still going to be there never mind how many pickets David
Handley and his friends manage to mount.
Q356 Chairman: They certainly moved a
lot quicker last time when they had the pickets on; the 2p went
on. There is an argument about whether it went—
Lord Whitty: The more respectable
elements in the farming industry will say it was because of a
lot of very solid work which the former president of the NFU was
doing. I am not saying that the picketing has no effect, clearly
if you are picketing you immediately start thinking a little more
sharply about what you are doing, but it is not a long-term solution.
A long-term solution does require sitting down at a table with
them and that is why whatever the short-term tactics of Farmers
for Action and others have been, in the long-term you do have
to discuss this, and that is one of the things the Forum is attempting
to facilitate.
Q357 Paddy Tipping: What are you saying,
as one of the more respectable members of the agricultural sector?
Lord Whitty: I am not respectable
at all, I am a politician.
Q358 Paddy Tipping: I was going to remind
you of your history as a trade union leader. What would your advice
be to the farmers who feel they are being ripped off? What should
they be doing?
Lord Whitty: As trade unions you
can have the odd demonstration and strike and whatever but at
the end of the day you do have to negotiate, and you usually have
to negotiate with somebody who is more powerful than you. You
need to get yourselves together rather more effectively in terms
of how you negotiate, which in a sense is one of the Curry messages,
that the industry does not get itself together sufficiently and
even the big co-ops within the sector do not always agree with
each other and there is a lack of cohesion between the producers
and the processors when they are dealing with the supermarkets
and the catering companies.
Chairman: Whatever the situation at the
moment, there are those who will predict it will get that much
worse as prices fall after the Single Farm Payment. I will ask
Bill Wiggin if he can tease out from you what you think is going
to happen.
Q359 Mr Wiggin: Let's start with the
decision to adopt a flat rate payment. Do you not think this may
penalise the most efficient dairy farmers, that is those who hold
the most quota per hectare?
Lord Whitty: There will be some
redistribution, both away from dairy and within dairy, but that
is the nature of the total reform. It does have a slightly differential
impact on dairy, partly for the reasons we were discussing earlier,
namely that the earlier stages of reform for dairy are later than
those for other sectors. So there would inevitably be a distributional
effect if you moved from what is a production-related subsidy
to an area-related subsidy. Within dairy you could argue that
the distribution was in favour of small and medium producers.
Some aspects of social and environmental policy would be, yes,
you do need to support them, but that is not the objective of
the policy, the objective of the policy is to provide over a pretty
long lead-in period a situation where there is no differential
in terms of support to farming except one which reflects the public
good which farming delivers to the rural community and to the
landscape, and that farmers' decisions are therefore based on
what the market is. That applies to dairy as much as it does to
anybody else. If you are a farmer with so many hectares, you would
then have to decide in the light of the fact all payments are
now decoupled, or will be at the end of the process, what is your
best future market. Yes, as compared with under the old system
to the end of the new system, dairy will in aggregate lose out
and some of the more intensive, larger dairies would lose out
within that.
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