House of Commons - Environment, Food and Rural Affairs Committee

The English pig industry - Environment, Food and Rural Affairs Committee Contents

Memorandum submitted by BPEX Ltd (Pigs 06)

BPEX Ltd is the English pig sector subsidiary of the Agriculture and Horticulture Development Board. BPEX Ltd focuses on increasing the competitiveness, efficiency and profitability of English pig levy payers, and on driving demand for English pork and pig meat products in the UK and globally.

BPEX Ltd welcomes the EFRA Select Committee's important and timely inquiry into the English pig industry.

EXECUTIVE SUMMARY

1. Consumption of pig meat is robust. But over time the costs of high welfare production systems, disease problems, increased imports and retailer pressures have reduced profitability and damaged business confidence, leading to a lack of investment. As a result pork and bacon production has steadily declined. For much of the past year the rapid rise in feed costs has outstripped increases in producer prices. The fundamental problems facing the industry are not cyclical; they are due to chronic longer term problems, mainly on the supply side. The supply chain in most cases is not operating in a way that enables meaningful relationships, including long term contracts, that fairly shares net margins, builds confidence and ensures the long term viability of a sustainable domestic supply base.

2. Unilateral UK pig welfare legislation has imposed additional costs, and reduced price competitiveness. There are various calculations of these costs; industry sources suggest they may be in the order of 5-8p per kg dw, or around an average of up to 7% of production costs over the period 2002-06. Other contributory factors have also served to reduce competitiveness.

3. Supermarkets and the hospitality industry could help alleviate the pressures on the industry in the following ways:

— help to improve supply chain transparency and efficiency, and encourage a more equitable and sustainable distribution of net margins throughout the supply chain;

— within OFT rules, enter into meaningful discussions with others in the supply chain;

— live up to Corporate Social Responsibility (CSR) promises on sourcing and labelling; and

— improve labelling to remove potentially misleading claims and provide accurate consumer information.

4. There are a number of ways in which the Government could do more to support the industry, including the following:

Public procurement:

— encourage government departments and local authorities to commit to implementing PSFPI within 12 months;

— require contractors supplying public catering services to commit to implementing PSFPI;

— require that all pork and pork products comply to the BPEX Quality Standard Mark or Red Tractor or an equivalent standard that meets UK minimum legal requirements for pig welfare;

— include high animal welfare standards in the new "Healthier Food Mark"; and

— state country of origin and the assurance standard used on all menus, at the point of purchase, and on packaging.

There is a range of other actions Government can take in respect of R&D, regulation, competition guidelines, support for industry competitiveness, and export development.

5. The industry itself has taken a number of initiatives to address the challenges it faces.

THE SELECT COMMITTEE'S QUESTIONS

1. What is wrong with the pig industry in England? Are present problems more than just a cyclical imbalance between supply and demand?

6. While consumption of British pork and pork products is robust,[1] over a protracted period the domestic industry has faced severe and sustained challenges to its competitiveness and viability arising from the following main factors:

— substantial investment in high animal welfare production systems—to meet unilateral UK welfare legislation that raises costs and reduces productivity;

— endemic diseases—chronic on-farm conditions such as PMWS that reduce animal performance on individual farms;

— increased imports—most produced to lower welfare standards than those in this country; and

— strong retailer pressure on suppliers, and lack of transparency in the supply chain—that squeezes margins, distorts market information and leads to inefficiencies and higher costs.

7. These factors have reduced profitability, seriously damaged business confidence,[3] and resulted in a lack of investment in production systems and a shortage of skilled labour. In turn, they have reduced optimum technical and financial performance. They have also led to increasing concentration at both the primary production and processing levels.

8. As a result, UK pig meat (pork and bacon) production fell from 1.155 million tonnes in 1998 to 0.739 million tonnes in 2007 (a fall of 36%) as both the breeding herd and productivity fell (there are expectations of a further substantial fall in the breeding herd during 2008 though, more recently, there are signs of a recovery in productivity).

9. In contrast, production across the EU increased over this period.[4] The cost of producing pig meat in the UK is also higher than in many other EU countries (except Italy), largely due to lower productivity, lower carcase weights and relatively high fuel and energy costs in this country.[5]

10. Over the past year, producer price increases have lagged behind sharp increases in production costs (notably of feed and fuel). At November 2007, producers were losing around £25 per finished pig. At August 2008, with higher prices and despite even higher production costs, this loss has fallen to around £7 per finished pig. At the present time, on average producers need a 6% increase in price to cover their direct production costs.

11. The fundamental problems facing the pig industry do not arise from imbalances between supply and demand and are not cyclical. They are mainly due to chronic longer term problems on the supply side—a steady erosion in the competitiveness of the industry and a failure of the supply chain to return prices that cover the production costs of high welfare and premium product systems and provide for much needed investment. Looking ahead, a continuing failure of business operators throughout the supply chain collectively to take a more strategic view of the marketplace may jeopardise the longer term viability of English production and its ability to meet the volume and quality requirements of British customers and consumers.

12. At the consumer level, survey and other evidence shows that British consumers are willing to pay more for high welfare pig meat. But the supply chain is not translating this willingness into corresponding producer prices, and instead is taking a short term view on sourcing and the distribution of margins within the chain. The absence of effective contractual relationships amongst parties in the chain has undermined the industry's willingness to reinvest. In addition, there continue to be labelling practices at both retail and food service levels that do not provide sufficiently clear information to consumers as to origin and/or production method.

2. Are domestic pig welfare standards a principal reason that English producers have problems competing with those outside the UK? Are there other reasons?

13. Meeting unilateral domestic welfare standards that go beyond the requirements of EU legislation has imposed additional costs for British producers that producers in other countries do not face (unless British customers also require foreign suppliers to meet UK standards). English producers are therefore less competitive on purely cost grounds, unless the cost premium for high welfare pork and pork products can be passed to the consumer.

14. The main additional cost of meeting higher UK welfare legislation relates to the switch from sow stalls to group housing of sows in indoor systems.[6] Key costs arise from capital investment in larger sow accommodation (a doubling of space allowance per sow), additional straw storage, and new feeding systems. In addition, such systems incur higher recurring operating costs in higher feed usage, additional labour, and reduced productivity as a result of less efficient feeding, reduced farrowing rates and smaller litter sizes.

15. The Farm Animal Welfare Council has estimated the capital cost of converting from stall systems to group housing systems at £400-£700 per sow.[7] One study has indicated that increasing space allowances alone added 4.6p per kg carcase weight (cw) in fully slatted sytems.[8] A more recent study has shown that the across a range of indoor systems, the cost of a stall system is 15% less than a group housed sow system.[9]

16. Data based on 10% of the English breeding indicates that for a typical 400 sow breeding unit, additional capital costs amount to around £440 per sow, or 1.6p per kg of meat produced, and additional operating costs to 6.4p per kg cw.[10] Together, these additional costs represent a little over 7% of the costs of production during the period when these additional costs were being incurred.

17. Information from Danish industry sources suggests that the premium for the Danish industry to meet UK welfare specifications is 5-6p per kg dw.

18. BPEX has strongly supported the Quality Standard Mark for pork, bacon and ham that promotes the quality, health and animal welfare attributes of British pork and pork products in order to engender awareness amongst consumers and a willingness to pay for quality.

19. As indicated earlier, animal welfare is not the sole reason why English producers have problems in competing with others. Other contributory factors include: disease, cheap imports, inefficient supply chains, and lack of investment confidence.

3. What could supermarkets and the hospitality industry do to alleviate the pressure on the domestic pig industry?

20. Key challenges are to improve the transparency and efficiency of the supply chain, to establish meaningful long term contracts within the supply chain that build confidence, to recognise the impact of raw material price movements, and to better manage risks within the chain. Relationships between retailers and livestock farmers tend to be at arm's length. Most farmers sell into a supply chain where the processor is their immediate customer, and where they are more removed from retailers and, ultimately, consumers who lie further up the chain. There are a few examples of integrated pigmeat supply chains where retailers and producers interact directly with each other such as Waitrose, who have a dedicated supplier base, and Morrisons, who own their own abattoir.

21. Producer prices are collected and published on a weekly basis and retail prices. However, how net profit margins are shared through the supply chain is difficult to establish, particularly at the retailer/hospitality and abattoir/processor levels. Average retail prices of pork and pork products have increased substantially over the last year, by 179p per kg or 37% (at August 2008 on the previous year). Over the same period the average pig price paid to farmers has increased by only 27p per kg. This indicates that farmer and abattoir returns could be moved to a more sustainable level without further significant rises in retail prices.

22. Maximising `carcase balance'—selling as much of the meat and by-products of the animal at as high a value as possible—remains a challenge. Processors do not always maximise the use of domestic carcases in bacon, ham and sausages. Instead meat imported for manufacture into these products displaces domestic meat and forces its export as commodity meat.

23. In recent months OFT rulings on milk have hampered the pig industry's ability to conduct meaningful supply chain discussions with retailers who have been extremely reluctant to enter into realistic dialogue on the effectiveness of existing supply chains and ways to address the lack of transparency in the pig meat market.

24. All major retailers and hospitality operators have CSR policies; some even have a specific policy on pigs. CSR statements are often high-minded in their intentions, and it is important that the practical implementation of these policies stands up to close scrutiny, particularly in regard to stocking policies or labelling. The most responsible retailers are rigorous in putting into practice their commitments on pork by undertaking ethical sourcing, stocking Quality Standard Mark pork and pork products, and clearly labelling with accurate country of origin information in accordance with FSA best practice guidelines. The poorer performers make limited use of QSM, take low levels of British and apply potentially misleading labelling practices.

25. Labelling is a key area for improvement. Idiosyncrasies in the law allow imports of fresh pork to be processed into bacon and ham and to be termed "British". This misleading practice needs to be ended. Similarly, some operators apply misleading labelling. For example "Wiltshire Cure" is a process for changing pork into bacon and ham. However Wiltshire cured bacon and ham may legally contain imported pork, contrary to the consumer's reasonable impression that it is produced in southern England.

26. Of imported pork and pork products, BPEX research indicates that 70% would be illegal to produce in this country on welfare grounds.[11] Labelling practices in both the retail and hospitality sectors do not always and/or adequately indicate the methods or systems used in production of pig meat to allow consumers to make an informed purchasing decision and, where they wish to do so, to actively select high welfare product at a fair price.

4. Can the Government do more to support the industry either directly or through its public procurement policies?

27. The PSFPI has been a very positive step in encouraging Government departments to introduce a range of quality parameters in food procurement. But there is still a wide differential between the best and the worst performing Government departments and local authorities. A recent joint report by the NPA and BPEX shows that across Government departments the proportion of British pork and bacon that is procured is low and highly variable.[12]

28. We suggest five steps the Government could take to do more in respect of PSFPI:

(i) Encourage every Whitehall Department and Local Authority to formally commit to implementing PSFPI within 12 months.

(ii) Require every contractor supplying catering services to Government departments and to public bodies to commit to implementing PSFPI.

(iii) Specify that "All pork and pork products must comply with the BPEX Quality Standard Mark or Red Tractor or an equivalent standard" in respect of UK pig welfare legislation. This should be a key performance indicator for all food supplied to the public sector.

(iv) Include high animal welfare standards in the new "Healthier Food Mark".

(v) State country of origin and the assurance standard used on all menus, at the point of purchase, and on packaging.

29. Other steps the Government might take include the following:

— Implement rationalised, proportionate and risk-based regulation that takes into account existing industry assurance and auditing mechanisms.

— Effective support for the competitiveness of the English pig industry (e.g. skills development and pig health and disease eradication strategies) through the Rural Development Programme for England.

— Realise the Food Standards Agency's aims of a more cost-effective Meat Hygiene Service.

— Implement a responsibility and cost-sharing regime for animal health that ensures meaningful pig industry involvement in the activities of an independent non-ministerial department.

— Encourage the EU authorities to improve the regulatory regime for GM animal feed ingredients.

— Provide clear guidance to retailers on how they can conduct supply chain discussions in order to improve the operation of the supply chain, while complying with competition rules.

— Invest in the Livestock Register Programme as a more effective industry database.

— Maintain Government's valuable support for the reestablishment and growth of exports of pig meat and products outside the EU.

— Maintain effective border controls to prevent illegal imports of foodstuffs.

— Clear and more streamline planning procedures.

— Continued support of the BPEX Pig Health Scheme.

— Reintroduction of capital allowances on agricultural buildings.

30. In summary, the Government has a vital role to play in ensuring an economic, policy, legislative, and regulatory framework that encourages business confidence on the part of the English industry so that it is willing to invest in the long term sustainable development of the industry that can also deliver wider public benefits and sustainability.

5. Industry Action

31. In closing, BPEX would like to highlight some of the steps the industry itself is taking to address the challenges it faces. These include: funding the take up of vaccine to tackle PWMS, establishing a BPEX knowledge transfer team, participating in the Zoonoses National Control Plan, and working with industry to develop, manage and deliver the pig assurance scheme, a pig health and welfare strategy, and a pig industry skills development strategy.

September 2008