Memorandum submitted by the Food and Drink
Federation (CAP 32)
1. The Food and Drink Federation (FDF) welcomes
the Government's "Vision" document as a necessary first
step which we trust will help to stimulate a constructive debate
in Europe about the future of the CAP. Our members broadly support
the Government's key objective, namely the creation of a prosperous
and sustainable domestic agricultural sector that responds to
market signals and not state subsidies within the next 10 to 15
years. We believe it is unfortunate that the Government chose
not to include a roadmap for how this new agricultural model could
be achieved or identify who the "winners" and "losers"
in the reform process may be. Further, the timing of the paper's
release—in advance of the EU budget discussions and December's
World Trade Organisation Ministerial meeting—whilst politically
understandable, was in our view detrimental to the paper's reception
and credibility, both at home and abroad.
2. We commend the EFRA Committee for launching
this inquiry and in the paragraphs below I should like to address
a number of the questions set out in your Terms of Reference document
of 30 January 2006.
FDF AND THE
UK FOOD AND
DRINK MANUFACTURING
INDUSTRY
3. FDF represents the UK food and drink
manufacturing industry, the largest manufacturing sector in the
country with a turnover in excess of £69 billion. Our industry
employs around 500,000 people or 14% of the manufacturing workforce.
We are committed customers of UK farmers, purchasing around two-thirds
of the country's agricultural produce. To supplement our raw material
supply base, we also import around £7 billion worth of ingredients
for further processing. Our member companies operate in an increasingly
open and competitive international market place. To succeed in
this environment, the industry must be able to access a steady
supply of raw materials that are safe, of high quality and reasonably
priced. Competitiveness will be key if we, as the UK, are to retain
our title as the world's fifth largest exporter of value-added
food and drink products, exporting in excess of £10 billion
per year.
EXPENDITURE ON
"PILLAR 1" OF
THE CAP
4. The CAP's market price support systems,
when combined with high EU import tariffs, ensure that UK food
and drink manufacturers pay comparatively high prices for key
raw materials. This is demonstrated in Figure 1. With raw materials
making-up a varied but uniformly significant proportion of the
industry's operating costs, it is clear that these polices have
a negative affect on the competitiveness of European food and
drink manufacturers, both at home and abroad. As an example, the
Association of Cereal Food Manufacturers (ACFM) estimates that
agricultural raw materials represent between 55 and 65% of their
members operating costs.
5. FDF members would therefore support a
reform process which fully decouples support from production;
encourages the domestic farming industry to restructure and improve
efficiency; and exerts a reasonable amount of downwards pressure
on raw material prices. Without significant price cuts, our competitiveness
will be further eroded in the face of further trade liberalisation
and the UK manufacturing industry may continue to downsize and
move offshore. Such a scenario could have a devastating impact
upon domestic farmers, rural employment and the economy more broadly.
Figure 1
EU AND WORLD MARKET PRICES FOR RAW MATERIALS,
2004
Source: FDF
6. It is also questionable whether many
of the EU's market price support systems will be viable or economically
efficient once export refunds are eliminated in 2013.
— Agricultural Commodities—In
the absence of export refunds, an intervention purchasing system
for agricultural commodities could only operate alongside inefficient
production limiting programmes and/or costly private storage schemes.
Without such instruments, it would be impossible to prevent or
dispose of domestic surpluses. It should be noted that production
limiting programmes, such as EU milk quotas, lead to an inefficient
allocation of resources. Further they can be one of the main obstacles
preventing farmers from realising the economies of scale that
would enable them to offset the reductions in intervention prices
brought about by CAP reform.
— Processed Products—European
manufacturers of "Non-Annex One" products—notably
biscuits, cakes, chocolate, confectionery and dairy products that
have been subject to second stage processing—will be at
a significant competitive disadvantage on the world market when
their export refunds are eliminated. At present, these manufacturers
receive export refunds to compensate for the comparatively high
prices they are required to pay for raw materials, principally
sugar and dairy ingredients. On average, these refunds represent
9% of total export revenues in the biscuit, cakes, chocolate and
confectionery sectors and 12.5% of export revenues in the dairy
sector. These returns are greater than the net profit margins
of the two sectors, which the European food and drink federation
(CIAA) estimates to be between 2 and 8% and 1 and 3% respectively.
It is therefore evident that much of this trade will not take
place in the future without further CAP reform or the introduction
of alternative instruments to export refunds. UK decision-makers
should bear in mind that "sugar confectionery", "chocolate"
and "cheese" are currently the country's 3rd, 4th and
6th most important processed food exports.
7. Our industry is the number one customer
of UK farmers and we are committed to maintaining food production
in this country. We agree with the Government, that the abolition
of market price support should not lead to a collapse of farming
in the UK or Europe. This assumes that the reforms are implemented
equitably across EU member states, coupled with an appropriate
degressive compensation programme and phased-in over a reasonable
timeframe which gives farmers time to adjust. On the contrary,
we believe that a well crafted reform package could help to realign
and bolster the prospects of European agriculture by making it
more competitive and responsive to consumer demands.
8. It seems likely that the EU will embark
upon another round of CAP reform before the end of the decade.
A significant amount of further analytical work will be required
to inform the decisions underpinning this reform. The Government's
"Vision" document represents a necessary first step
in the CAP reform debate and we trust that officials from the
Treasury and DEFRA will be proactive in helping the Commission
with the further work that lies ahead.
April 2006
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