Memorandum submitted by the Scotch Whiskey
Association
1. INTRODUCTION
1.1 The Scotch Whisky Association (SWA)
is the trade body which represents the interests of the Scotch
Whisky industry at home and abroad. Its main objective is to protect
and promote Scotch Whisky.
1.2 Scotch Whisky is important to the economy
of Scotland and the UK as a whole. With exports contributing £2.5
billion a year to the balance of trade, Scotch Whisky represents
almost a quarter of all UK food and drink exports and supports
65,000 jobs. It competes in the world market with other distilled
spirit drinks, such as Cognac.
1.3 The SWA is following closely the
development of the global and domestic biofuels industry. It has
significant implications for the UK potable alcohol distilling
sector, not least in relation to procurement, price and competition
issues. It will be important to take a holistic view of the implications
of the development of the biofuels sector and to ensure that there
is a level playing field for all distillers, whether of potable
alcohol or for fuel.
1.4 The SWA welcomes the Committee's timely
inquiry and the opportunity to provide evidence on the sustainability
of the biofuels industry.
2. IMPLICATIONS
FOR RAW
MATERIAL SUPPLY
CHAIN
2.1 Scotch Whisky is a strictly defined
product, with a production process protected in UK law, under
The Scotch Whisky Act 1988 and the Order made under it (which
came into effect in June 1990). Scotch Whisky must be distilled
and matured in Scotland. The raw materials used in Scotch Whisky
production are cereals, water and yeast.
2.2 The industry relies on a sustainable
cereals supply chain, using good quality, largely Scottish-sourced
grain as its major raw material. In 2005, for example, the industry
used some 442,000 tonnes of barley and around 545,000 tonnes of
other grains (largely wheat and maize) in Scotch Whisky production.
2.3 As the committee is aware, the Renewable
Transport Fuels Obligation (RTFO) will obligate fuel companies
in the UK to replace 5% of their total transport fuel with biofuels
by 2010-11. The Government's biomass strategy estimates that to
achieve this target, even assuming a 50% import of biofuel, around
1.68m tonnes of wheat would be required in the UK for bioethanol
production.
2.4 The Scotch Whisky industry is experiencing
growing international demand, with global exports in 2006 rising
by 4% in value and 6% in volume compared to 2005. New investment
in distilling, warehousing and bottling capacity is being made
across Scotland to meet that demand. Supported by growth in traditionally
important markets, such as the USA, but also in significant emerging
markets in Asia and South America, it is anticipated that Scotch
Whisky production will continue to increase in the coming years,
with a greater demand for barley and wheat as its essential raw
materials.
2.5 It is therefore clear that bioethanol
plants working on an industrial scale, and using grain (principally
wheat) as their raw material, will have an impact on cereals supply
in the UK. This is particularly important at a time of growth
for the Scotch Whisky industry and when such plants are likely
to have capacities, and a demand for grain, in excess of the Scotch
Whisky industry's total grain whisky production capacity.
2.6 As a result, the SWA is carefully monitoring
the potential implications of the biofuels sector for the availability
of basic raw materials for Scotch Whisky production. Should the
bioethanol industry, for example, continue to grow as is widely
expected, a direct consequence is likely to be a tightening in
cereal supply and an increase in cereal prices (at a time when
world cereals prices have already increased significantly. Wheat
and malting barley prices, for example, have more than doubled
in the past 12 months).
2.7 The Scotch Whisky industry supports
specific grain varieties (through the Home Grown Cereals Authority
(HGCA)) which provide efficient alcohol yields and other beneficial
factors. Whilst we would envisage the bioethanol industry requiring
grain with similar distilling properties, there is a risk of diversion
by farmers to growing different varieties of grain which are not
tailored for the potable alcohol market, with a consequent reduction
in the acreage of wheat and barley for the potable alcohol distillers.
Should the agricultural sector respond to a demand for different
cereal varieties, availability of distilling quality grain could
be impacted, with a potential detrimental affect on production
efficiencies.
2.8 The industry is also mindful that the
anticipated size of biofuel plants in the UK may encourage cereal
growers to focus on growing crops attractive to that industry,
such as oilseed rape, rather than barley and wheat. Such a trend
would reduce grain availability and again increase demand and
price for traditional distilling cereals.
2.9 The recent decision by the European
Commission to suspend for one year the CAP set-aside provisions
is welcome, but it is unlikely by itself to have much effect on
the cereal market and prices, as the land currently set aside
is not likely to be used for planting cereal crops.
2.10 The SWA believes it is important the
Government ensures that any assistance provided to the biofuels
industry, in particular the production of bio-ethanol, does not
have any unintended consequences for the competitiveness of existing
industries, such as the UK spirits sector.
3. IMPLICATIONS
FOR CO-PRODUCTS
MARKET
3.1 The production of ethanol from grain
produces a nutrient-rich co-product used widely as feed, for example
for the Scottish meat and dairy herd. This is an important local,
sustainable market for distillers.
3.2 Bioethanol production from grain will
also create a significant volume of co-product, which will impact
on the distilling industry's established outlets. This would have
implications from an economic point of view (reducing income from
animal feeds) and on the re-use of residues from the production
process (a lower number of available outlets).
3.3 The distilling industry is exploring
opportunities to utilise co-products as an alternative fuel, as
well as continuing its current policy of sustainable recycling
to animal feeds. We would wish Government to be supportive of
these efforts, outside of biofuels, to assist moves towards a
low-carbon economy.
4. COMPETITION
IMPLICATIONS
4.1 A wide range of incentives are being
offered to biofuels producers in the UK to stimulate growth in
the industry. In contrast, there are no such incentives available
in the potable alcohol distilling sector and new entrants face
significant capital barriers to the market.
4.2 It is important that Government ensures
that the range and scale of incentives, including subsidies, being
offered, for example to locate in the UK, does not create an uneven
playing field for spirits manufacturers that are in direct competition
for raw material and outlets for co-products.
4.3 The UK Government has expressed, in
its biomass strategy, a desire to ensure that its own strategies
towards biofuels will not lead to an uneven playing field. That
is of course welcome but we remain to be convinced that the framework
for biofuels development in the UK contains adequate checks and
balances to ensure unintended consequences for other industries.
4.4 The SWA would encourage the Government
to be specific about how they intend to ensure a level playing
field and what account has been taken of the potential disbenefits
to indigenous distillers of the subsidies available to biofuels
distillers.
5. REGULATORY
CONTROL FRAMEWORK
5.1 It is technically feasible that a biofuels
producer might seek to distil alcohol of potable quality.
5.2 Whilst we understand that the tax revenue
from both potable and fuel alcohols are, and will be strictly
controlled by, HM Revenue and Customs (HMRC), there remains concern
that the reduced rate of taxation for biofuels could, theoretically,
make it attractive to the counterfeit industry to use alcohol
intended for fuel purposes in what might purport to be potable
products, without any of the usual stringent food safety checks
in place.
5.3 It is imperative for public health and
excise protection reasons that robust strategies and policing
are put in place to stop the diversion of non-potable alcohol
into the potable alcohol market.
5.4 The legitimate potable alcohol trade
and its trade associations continues to work closely with HM Revenue
& Customs, with the spirits industry's commitment clearly
demonstrated by our "Memorandum of Understanding" with
HMRC to tackle spirits fraud. Launched in October 2005, this agreement
sets out a framework to formalise the long-standing co-operation
between the industry and HMRC. This enables HMRC to target resources
on the areas of highest risk and the industry would not wish to
see any developments in the biofuels industry undermine the success
such co-operation has achieved.
5.5 We would therefore encourage HM Revenue
& Customs to adopt a similar approach with the biofuels industry
and ensure that all parts of the alcohol supply chain (potable
and otherwise) are subject to similar levels of scrutiny.
6. CONCLUSION
6.1 The emergence of the biofuels industry
will have significant implications for a wide range of sectors,
including the UK distilled spirits industry. In supporting the
development of biofuels, care must be taken not to undermine the
competitiveness of existing industries and to ensure a level playing
field for distillers of potable and non-potable alcohol to the
benefit of the wider economy.
2 October 2007
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