Examination of Witnesses (Questions 392-434)
ANDREW OPIE AND ANDREW KUYK
1 FEBRUARY 2011
Q392 Chair: I
welcome you both. Mr Kuyk, may I ask you to introduce yourself
and your colleague for the record please?
Andrew Kuyk: Well,
colleague is perhaps a polite description; we are from different
organisations.
Chair: I am sorry. You
introduce yourself and Mr Opie will introduce himself.
Andrew Kuyk: My
name is Andrew Kuyk. I am Director of Sustainability and Competitiveness
at the Food and Drink Federation, which is the trade association
representing the UK food and drink manufacturing sector, which,
as one of your previous witnesses said, is the largest manufacturing
sector in the UK.
Andrew Opie: Andrew
Opie. I am Food and Sustainable Policy Director at the British
Retail Consortium, which is the trade association for retailers.
Within our membership we have all of the major food retailers,
accounting for probably just over 90% of grocery sales in the
UK.
Q393 Chair: Thank
you. Just at the outset, recognising that food manufacturing—food
processing—is the largest manufacturing sector in the country,
do you think the farmers currently get a good deal or a raw deal?
I address that to Mr Kuyk.
Andrew Kuyk: Well
I am not sure I would be able to answer it in quite the terms
in which you put it, Madam Chair. We are the major purchaser of
the output of UK farming and if we were not a successful, profitable,
competitive business, there would not be a market for UK farmers.
So I think it is a complementary relationship. I think if we look
at the Government's aim for the future, which is to increase sustainable
output from UK agriculture, again it follows that it would be
in the public interest that there is a manufacturing sector that
is able to take that increased output. If we look to the wider
challenges of food security, I think that must be a win-win scenario
that we increase the productive potential of UK agriculture and
we have a resilient, competitive UK manufacturing base to be the
primary customer for that. So I think that is a situation where
both farmers and manufacturers can profit, so I would not want
to answer the question quite in the terms that you put.
Q394 Chair: Mr
Opie, there does seem to be a clear and pronounced difference
between farm gate prices and the prices on the shelf. Do you think
that can be rectified of itself or do you think there is a role
for the Grocery Code Adjudicator?
Andrew Opie: Well,
there is a difference because there are lots of elements that
go on from the farm gate before it reaches supermarket shelves
and I am sure Mr Kuyk would be—
Q395 Chair: Not
necessarily with strawberries.
Andrew Opie: Well,
there still would be processing, distribution, the storage in
the stores, the management of the stores themselves and the employees
within the stores. There are lots of costs in running a retail
store, whether it is a food retailer or a furniture retailer,
so those costs would have to be paid. So it is not a simple case
of taking it straight off the farm gate and putting it on the
shelf; there are lots of costs in between. But having said that,
if you look at the record of UK retailers and their support for
UK farmers, it is quite clear that they are pragmatists, taking
Mr Kuyk's and previous speakers' points about food security. We
know that they want to have reliable, good quality produce, primarily
sourced from the UK, on their shelves. So being the pragmatic
businessmen that they are, they know that they have to pay the
right price to keep farmers in business.
Q396 Chair: If
you look at the gross valueadded sourced from Defra's Food
Statistics Pocketbook in 2008, if you add together the 9% of agriculture
and fishery, the 27% of food and drink manufacturing and the 27%
of food and drink retailing, surely you must be as big, if not
a larger sector than, say, the equivalent in France. How is it
the agrifood industry in France seems to have more clout
with its government?
Andrew Kuyk: I
am not sure I am in a position to comment on those comparative
figures. I would be slightly surprised if we were larger than
France, given what I know about the size of agriculture in France.
The question of political clout with government is a matter of
the political system as well as a matter of the relative size
or economic importance of particular sectors. So again, in a political
system where you have a larger agricultural population, the way
that constituencies are organised and so on, that may well give
a different measure of political importance to a particular sector.
So I am not sure that that is necessarily a valid comparison.
Q397 Thomas Docherty:
Mr Kuyk, if I understand correctly, your written evidence slightly
contradicts what you said a few moments ago, in so far as in your
written evidence, you said, "Supporting inefficient or unproductive
sectors will not help the EU to remain competitive or meet future
food security needs. It may also harm UK interests." Without
drawing you too much down the road of one particular sector, if
I take, for example, beef, where quite a lot of it is farmed on
land that without subsidy would not necessarily be viable—and,
for example, Scotch beef has a certain premium cachet to it which
we know customers like—if there wasn't the subsidy, surely
that type of product wouldn't be available or would be available
at a much greater cost to the consumer on Mr Opie's shelves.
Andrew Kuyk: I
am not sure I would disagree with that. I think you are perhaps
putting a slightly different interpretation on what we said in
the evidence. There, we were talking in terms of the EU as a whole
and I have the section in front of me: "The EU is a very
diverse area of agricultural production." What I go on to
refer to in there is the principle of comparative advantage. If
we are looking in terms of future food security and we are looking
at the impacts over time of climate change, back to what was said
in the earlier evidence session about the need to produce more
from less and with less impact, it follows that we should be exploiting
comparative advantage—doing the things that particular areas
do best so that you make the most efficient use of those factors
of production. It is in that context that I say that supporting
inefficient or unproductive sectors will not help the EU to remain
competitive or meet future food security needs.
I think that goes to the heart of some of the debate
around Common Agricultural Policy reform. We have heard, and I
do not disagree with the idea, that it should be a common policy,
but the idea that there is a universal right to produce all types
of produce in all parts of the EU seems to me very questionable,
for precisely the reasons that I have stated in terms of the need
to increase resource efficiency to exploit comparative advantage.
So it is in that context I think that there are particular types
of production where, in particular areas—say beef on hills—if
you are to use that land productively, grazing it to produce meat
may actually be the most resource-efficient use of that land and
so that in that sense is perfectly legitimate. To take a hypothetical
example, it wouldn't make sense to have a scheme to boost citrus
production in the UK; we are not adapted for that. We are very
well adapted for wheats, for grasses, for some types of meat production
and so on. So that is what we were seeking to say in the evidence
about not supporting inefficient or unproductive sectors. It was
not specifically in the UK context; it was in that much broader
context of the need to exploit comparative advantage, the need
to take account of resource pressures as a result of the effects
of climate change and back to this mantra of producing more from
less and impacting less.
Q398 Thomas Docherty:
And just finally, would you accept that without some form of subsidy,
large but not all parts of the United Kingdom—in all four
nations, I should add—would struggle to be viable? I think
there are parts of Yorkshire, Madam Chair—the uplands, for
example—
Chair: Indeed.
Thomas Docherty: —that
very much depend… So you would accept that the subsidy is
important?
Andrew Kuyk: Well
I think it depends a bit what you mean by subsidy. Previous rounds
of CAP reform have introduced decoupling, single payments and
again, as we heard in the earlier session, crosscompliance.
I think the view that we have tried to reflect in our written
evidence to your Committee is that—again, looking through
the lens of food security—what we need to do is maintain
and enhance the productive potential of the EU and that means
using public funds for things like soil quality, water, biodiversity
and various farming practices that support that, including crop
rotation. We think that those are the things that should be supported.
Interestingly, the Commission's paper itself actually
says—back to the earlier discussion about what the philosophy
is, what the Common Agricultural Policy is for—"The
primary role of agriculture is to supply food." I think from
the point of view of the food manufacturing sector, we would regard
the supply of food as the primary public good that the Common
Agricultural Policy should be delivering. We would see some of
the environmental things that go with that as a means to an end;
unless you have healthy soils, unless you have healthy biodiversity,
unless you have good water—unless you have all those things
you are not going to be able to be productive and supply future
food needs. Food is not a discretionary activity. The Foresight
Report lays out very clearly that the world will need to double
food production by 2050. The European Union has to play its part
in that and it needs a policy that is adapted to that outcome.
So I wouldn't use the term subsidy in quite that way. If supporting
some of those factors that I have described enables, in a decoupled
way, certain types of production to continue, then that I think
is perfectly legitimate. So I would not regard it as subsidising
a particular output.
Back to comparative advantage, it may well be that
there are some things that are done in the UK or indeed elsewhere
at the moment that over time will be less competitive, because
comparative advantage has to operate on a global scale as well
and if there are people in other countries who can produce that
more competitively, fulfilling these criteria of more from less
with less impact, then in an open international trading system
they should be allowed to do that. That comes back to the earlier
point. If that then has socio-economic consequences—regional
employment and so on—you need a mechanism to deal with those
consequences in their own right, not through a policy that should
really be about sustainable food production. I am sorry if that
is rather a longwinded answer, but I hope that sets out
the approach that we were describing.
Q399 Richard Drax:
What factors influence your decision whether to source from the
UK, EU or globally? As far as the EU is concerned, do you think
the produce from there is of particularly high quality and good
standard?
Andrew Kuyk: Well,
I think as a general point—Andrew may like to comment on
this from the retail perspective as well—decisions on sourcing
are primarily commercial matters for individual companies. We
as a trade association don't have a view on that and indeed, competition
law would not be very friendly to us having discussions around
those sorts of issues in a trade association. So I think those
are primarily commercial matters for our member companies. They
will take into account a number of things: quality, continuity
of supply, price, year-round availability, traceability and increasingly,
I think, sustainability; people will be looking at what resources
are used in those various types of production. So I think it will
be a combination of those factors.
Businesses are in business to meet the customer's
needs. If there is strong consumer pull—and I think we are
seeing many more examples of that, where customers in the UK are
attaching importance to provenance, are asking for things that
are of UK origin or more local—then obviously as businesses
we would seek to do that. So I think it is not possible to give
a general answer to that. Some companies with particular requirements
from their customers will source in particular ways; others that
are perhaps in less differentiated markets will take a view based
on these general criteria about quality, availability, price and
so on.
Looking ahead—and given some of the points
made in the earlier session—I think if we are to tackle
some of these issues of food security and sustainable increase
in UK agriculture, there is a need for the food chain to work
together in a more collaborative way and to have more discussion
about how we can jointly meet those objectives. That is something
I think as a trade association we can and do legitimately support.
Q400 Richard Drax:
And what about the quality and standards from the EU? What is
your view on that?
Andrew Kuyk: I
think there is good and bad in all markets. As I said earlier,
I think UK food and drink manufacturers buy roughly two-thirds
of the output of UK farmers. Most of the rest of what we source
comes from the EU, but some also comes from international markets.
So it is a question of what meets the basic commercial criteria
and what meets consumers' needs.
Andrew Opie: I
totally agree in terms of the role of consumers, but the great
thing for British farmers is there is a lot of support for both
the quality of the produce that is produced here and an element
of British support through things like Assured Food Standards,
which all the major retailers support. So there is a strong brand
in itself, plus we have a very capable agricultural industry,
which gives retailers that continuity of supply and the quality
that they know their consumers will demand. As I said in my evidence,
there is a very strong support for UK sourcing from retailers,
because that is the pragmatic thing to do. For example our liquid
milk market: you would not go outside the UK; it just would not
make sense to do that. We produce that in this country. There
are lots of debates about how strong the UK element is in consumer
choice. It is clearly one of the elements, but it does have to
be balanced with price, quality and even durability, for example,
in the stores. But we feel we have a very strong sourcing record
on UK and we would expect to see other parts of the food sector
being as strong in their support as we are and I would include
Government procurement in that.
Q401 George Eustice:
You talked about other factors that influence buying and I want
to build on this theme. In particular, Mr Opie, I think the British
Retail Consortium in their evidence were quite upbeat or bullish
about the prospect of the expanding market for ethically produced
food or food produced to higher standards of environmentalism.
Defra have flagged this up as the future and one way that farmers
could develop and reduce their dependence on direct payments.
Do you think, though, that this trend can be sustained if you
have food security issues and rising food prices? Can that trend
of an increasing market in this area be sustained?
Andrew Opie: I
think there are a couple of factors there. First of all, there
are clearly some issues that consumers do relate to quite closely
and are prepared to pay more for. A good example would be free
range production, which held up really well; even in the recession
we saw a growth in sales. When it comes to some of the environmental
factors, there are already some higher tier products on the shelves,
as you are probably aware, from organic through to things like
LEAF and various other products.
I think what it will be is two factors. First of
all, consumers seeing that there is some value in that, because
of course consumers buy on value, not on price, of which this
would be one of the components that would be within their choice.
But secondly, increasingly what we are finding is retailers working
with suppliers, primarily in the dairy industry at the moment
but increasingly in other sectors, to look at the whole environmental
management through the chain, because sustainability for us and
our consumers is definitely going to increase. That will almost
be a standard of production.
Within that, there are some benefits for farmers,
because of course some of those areas are around efficiencies,
which actually may mean they produce not only better food but
cheaper better food at the same time. So I think there are some
real win-wins. I think we are lucky with the UK production; we
have a great farming industry in this country that has always
been shown to be quite responsive to the market and can work with
the market. So that was why we felt that puts UK farmers in a
very strong position going forward in terms of sourcing into the
UK market.
Q402 George Eustice:
The farmers' groups themselves are actually quite sceptical about
their ability to get a monetary value from these higher standards
of production. They said that people always say that they want
these things and they want good animal welfare, but when push
comes to shove, when they go into the supermarket, they will buy
cheaper options.
Andrew Opie: It
is not always seen as necessarily an added value, so there is
not always an added value product like we saw with the growth
of organics, but the basic cost of getting entry into the market
may be through this. Again, if we talk about standards—we
talked about Assured Food Standards earlier, for example; the
Red Tractor—retailers have always been very careful to make
sure when they source from outside the UK, for example, they apply
similar standards to those types of products that would compete
against those within that UK market. So it may well be it is the
cost of doing business as much as we have pressures on us in terms
of what is expected from us to deliver that when we do business.
But that will be the entry into the market.
Q403 George Eustice:
Just probing this point of whether it can continue to grow in
the future, are you aware of any economic modelling done by you
or any of your members to see whether this is going to be a growing
market?
Andrew Opie: No,
but we see the sales data themselves—so the retailers, and
people like the Institute of Grocery Distribution, do quite regular
surveys with consumers to see what their thoughts are in the future
in terms of what will influence their decisions in terms of consumer
behaviour. They do pick up this issue, but it has to be something
that gives the consumer recognisable value. Simply producing something
that we think might be the best thing might not actually get an
added value, because consumers might not see the value in it themselves.
That is the key thing. Consumers have to recognise and think that
there is some value in it for them and therefore be prepared to
part with their money.
Q404 George Eustice:
I know it will differ from product to product, but is there any
kind of ballpark estimate you can give us as to the amount of
sales that are currently organic and how it has grown in, say,
the last decade?
Andrew Opie: Organic
is still a fairly small part of the UK market, but we actually
look at the core market for people now and what that is delivering.
So if you look at the standard ranges and what they are delivering,
increasingly they are turning their attention to how we can cut
carbon emissions and water consumption through the chain and how
we can manage our waste through the chain and that is collectively
from farmers, through processors to retailers. These are all added
benefits that consumers are getting, not necessarily always at
an added cost, because often they are an efficiency within the
chain itself, but it means that the value and the quality of that
product is increasing year on year without necessarily being in
what you might see as a subbrand.
Q405 George Eustice:
Just to push on it, you said it was a small part of the market.
Are we saying 10%? Less?
Andrew Opie: No,
it is less than that. I don't have the figure to hand, but we
could send you a figure.
Q406 George Eustice:
If this is going to be a growing trend, is there any policy response
that Government or the EU could have to put farmers in a better
position to exploit it?
Andrew Opie: We
have obviously had some discussions on this around issues about
how farmers adapt to the future challenges, sustainability being
a good one of those. I heard earlier people were talking about
knowledge transfer, for example, and research and development.
How do we manage with this? How do we produce more food more sustainably?
That to us would seem a really good place for the Government to
play its role in terms of research and knowledge. There are some
areas where retailers are working directly with their groups of
farmers to try to look at things like feed regimes and waste management,
but what we also need is the Government maybe to hold that centrally,
so that all farmers could participate in that.
Q407 Thomas Docherty:
I used to work for one of the Big Four on their new stores project.
Let us be clear on this: the reason why the Big Four are going
down that particular angle of waste water and so on is twofold.
No. 1 was it was driving down their costs and secondly, particularly
for Tesco—because I used to work for one of their rivals—the
joke was whenever they had a controversial store, they would roll
out the eco store, because it was a way of trying to get planning
permission. This is not the Big Four suddenly discovering a new
sense of community ownership; it is a) cost and b) a PR gimmick
for them.
Andrew Opie: I
certainly would disagree that it is a PR gimmick, but there is
an element of cost in there. I made the point earlier that there
are cost reductions for all in the supply chain in this, from
farmers through processors to retailers. But retailers have made
it clear—through things like our own Better Retailing Climate
that we publish every year and through retailers' own CR reports,
which are independently audited—the role that they are playing
in sustainability. They recognise that as major sellers of food
in this country they have a major responsibility and they want
to step up to that responsibility.
Q408 Thomas Docherty:
Perhaps the argument was too strong. It is being driven by the
consumer, but also local authorities and getting planning permission.
Particularly Tesco—their eco store only ever comes out when
their stores are getting into trouble with the local authorities.
Andrew Opie: We
would say it would be a good thing if consumers were driving that
kind of agenda, because it would drive a more sustainable food
supply chain from the retailer right through to the farmer at
the other end, so that would be a positive. Things that do raise
the profile of how our food is produced and whether we can produce
it more sustainably seem to me like positive things that all retailers
and food producers should be engaged in. So we would welcome more
discussion around this. The Government has had it in its sights
in various food policies that have been developed over the last
few years, and we are certainly playing our part in that. I do
not see it as something that is a bit of fluff or something; this
is just the way to do business responsibly going forward and all
responsible food producers will be engaging in this.
Andrew Kuyk: Can
I just add from the point of view of my sector, we at FDF have
something called our Five-fold Environmental Ambition, which has
been running for three years now, which is trying to reduce carbon,
water, waste packaging and so on, very much for the sorts of reasons
that Andrew has been describing. Just before Christmas we launched
a review of that ambition where we are explicit in wanting to
extend those behaviours across the supply chain. It is back to
this thing around food security that greater resource efficiency
is going to be essential across the whole food supply chain. We,
along with BRC and indeed with the National Farmers Union, have
been in discussion with Defra over several months, both under
the previous administration and more latterly about how we can
collaborate more across the food chain to deliver these sorts
of wider benefits, because unless we do that, we are not going
to meet these future challenges. I agree that there are some cost
savings for companies themselves, but that is a very good incentive
for them to drive up performance, because good environmental practice
makes good business sense for all the reasons that it makes good
food security sense; if it is more efficient, it goes back to
producing more from less with less impact. So I think we are very
much on a shared journey in respect of that drive to improve sustainable
food production.
Q409 Neil Parish:
The Foresight 'The Future of Food and Farming' study that
came out last week highlighted the future challenges of food supply.
Are you concerned about the future availability of raw materials?
You talk, Mr Kuyk, about the need for Europe to produce its share
of food in the world. Could it be argued that linking the single
farm payment more to land and less to food production actually
reduces the amount of food that Europe produces?
Andrew Kuyk: Not
necessarily. I think it depends how it is done. I think the way
I would personally see this is not so much a straight choice between
Pillar 1 and Pillar 2, but I think we almost need a Pillar one
and a half; we need something that is a little way in between.
If those payments are directed to preserving and enhancing productive
potential, then it will contribute, because it will make land
more productive and again, back to the comparative advantage,
if it helps produce a move into things that Europe is better at
producing, then Europe can play its full part in meeting these
global challenges. So I would not necessarily say that direct
payments would inhibit that; I think direct payments, properly
targeted, whether you call it some kind of crosscompliance
attached to Pillar 1, whether in my terminology you call it a
Pillar one and a half. But I think there is a way of doing that
that would not inhibit Europe becoming more competitive and actually
increasing output sustainably in a way that would help meet the
global challenge. I think that is the real challenge for this
reform of the Common Agricultural Policy: to take a longer term
and broader and more radical view and say that this is the time
to start that.
Clearly there are going to be transitional issues,
clearly it cannot all be done in one move and, as I have already
hinted, there may have to be some accompanying measures in terms
of some of the socio-economic consequences in certain parts of
Europe. So it will take time. I think, as I have already suggested,
the language in the Commission's paper is actually quite promising
on that. I think where it disappoints is, having set that scene
and having said that the primary purpose of agriculture is to
produce food and having set out the background to food security,
the options it then sets out for trying to deliver against that
agenda are actually rather disappointing. So I think there is
scope for a greater level of ambition on the part of the Commission
to see if they can produce more of a step change rather than the
three options, which are either a status quo or a greening of
Pillar 1. I think something slightly more radical than simply
a greening of Pillar 1 is called for.
Q410 Neil Parish:
Are you concerned about the question of the availability of raw
material?
Andrew Kuyk: Yes.
Again, as food manufacturers—and I am repeating what one
of your previous witnesses said about crop rotations being longer
than the cycle of governments—a large commercial food manufacturer
is looking to know whether they are going to have a business in
10, 15 or 20 years' time, and so they are looking not just at
current market conditions but what is going to be available as
a raw material and indeed, in terms of future investment, whether
to invest in new equipment in an existing factory in the UK, whether
to put money into new technologies, innovation and so on, or whether
to relocate a manufacturing site to somewhere where raw material
supplies may be more abundant. So certainly the bigger manufacturers
will be looking very keenly at things on that sort of timescale
in the interests of their own businesses.
Andrew Opie: Certainly
we share the concern in terms of the global issues around food
production in particular. One example would be animal feed. Lots
of soy is produced outside the EU and then needs to be imported
into the EU to keep our livestock production—particularly
pigs and poultry—in business. That is a concern for us and
it is a concern we have raised with Government a number of times
previously. But also the impact of global trade is very important
to us in terms of its impact on commodity prices. We heard previous
speakers talking about maybe the fact that some countries now
are less willing to trade. We also understand that some countries
now are securing more food supplies for themselves and less is
available on the global market for trading, which again will have
a knock-on effect on commodity prices. Commodity prices will then
have a knock-on effect primarily in areas like livestock feed,
for example, which will then affect our meat and dairy industry
as well as those that directly go into processing for bread and
various other issues.
Chair: We will
come on to price volatility in a moment.
Q411 Amber Rudd:
I think we share your concern about global food supply and prices,
but looking at the UK, the UK used to have a policy of not minding
too much about local food security because we could always buy
it from somewhere else. Do you think that situation has changed
and that the government ought to reconsider that position?
Andrew Opie: I
cannot really speak on behalf of the government, but for food
retailers food security is a big issue, because gaps on the shelves
are the worst thing you can possibly have. It is not the done
thing and it just wouldn't work. So having secure, robust, auditable
food systems is crucial to food retailers. I think that is why
we have seen, as well as the work with farmers in terms of these
issues around sustainability that we have talked about, the closer
work with groups of farmers to ensure that retailers have a secure
supply of various commodities—we have already seen it with
liquid milk at the moment and we increasingly see it in some of
the red meat sectors as well. It is a factor that is driving food
retailers' business. So that issue around food security, but also
maintaining the quality that consumers demand in the UK, is a
really important factor to us.
Q412 Amber Rudd:
And so from a retail point of view, naturally you would like to
see EU farmers encouraged to focus on food production?
Andrew Opie: Well,
the right kind of food production is what we would expect to see—the
food production that gives consumers what they want in terms of
all the other issues around animal welfare, environment and sustainability.
Q413 Chair: On
the fluctuations and price volatility, in the FDF written evidence
a clear opposition was expressed to more market management through
quotas. In the NFU Scotland written evidence, they talk about
the situation possibly deteriorating if there was to be a World
Trade Organization deal resulting in reduced import tariffs and
therefore increased import penetration. May I ask both of you,
in your view, is market management at government level an appropriate
way of reducing the negative effects of price volatility on the
food supply chain?
Andrew Kuyk: "Probably
not" is how I would start that. Going back to the previous
session, I think one needs to look at what factors are causing
that volatility. I think there were some quite valid points made
there. Food manufacturers try to hedge their risks in the way
that prudent business would, through forward buying and so on,
and I think there is some confusion in concerns around using commodity
futures markets. Undoubtedly, there are some people who do use
them as a means of financial speculation, but unlike some other
futures markets, agricultural commodities are real things that
people want real delivery of to make real goods from. Most food
manufacturers engage in forward buying of commodities because
they want physical delivery of that commodity; they want to be
able to lock into a price. So I think having those sorts of instruments
available is an important part of normal business.
Where you have fluctuations as a result of extreme
weather conditions or other forms of disruption to supply, the
classic CAP intervention buying could be one way of dealing with
that, but again, there was a rehearsal of those arguments in the
previous session. You can't always guarantee that there will be
the shortage that will enable you to sell that back at a profit
or even at break even. Again, the point was made by one of the
previous witnesses that if you are looking at some of the recent
fluctuations in supply, if you were to create buffer stocks, they
would have to be pretty large in order to deal with that. So I
think it is quite a complicated set of arguments, but that is
why I couched my initial response in terms of "probably not".
There may be scope for some measures at the margin to try to deal
with that, but I think wholesale intervention, either in the general
sense of the word intervention or in the narrow CAP sense of the
word intervention, is probably not a wise solution and may well
be very costly and could actually compound some of the volatilities.
But one of the reasons that there are these volatilities is because
we are not making the most of productive potential, here or elsewhere.
As all the pressures on demand increase from population growth,
changes in diet and all these other factors, we are going to have
to produce more sustainably, so that is part of the answer as
well.
Q414 Chair: Thank
you. Do you have a view, Mr Opie?
Andrew Opie: Not
on market intervention, being freemarketeers ourselves,
but we do believe in global trade and we think that is where the
problem is. If you look at wheat stocks, for example, they are
not that much different from what they were three or four years
ago, but different countries around the world now have more control
on those wheat stocks and are not as prepared to trade as, for
example, someone like the US would have always historically been.
If you look at some of the kneejerk reactions that have been taken
in recent years by countries like Argentina, for example, in terms
of exports, all of those things do have an impact on global trade.
So we would be supporters of the maintenance of free trade around
the world to even out some of these volatility issues.
Q415 Chair: Just
to pursue you, Mr Kuyk, what would you propose? Do you think there
should be longer term contracts—five-year contracts?
Andrew Kuyk: To
return to one of my earlier answers, I think that is a matter
of commercial choice for individual companies. But if they saw
that as another way of hedging some of those risks, then that
seems to me a perfectly good idea. I would echo also what Andrew
said about an open international trading system. In my earlier,
probably nonanswer, I was not trying to argue against that.
I think an open international trading system is the primary means
of trying to deal with this, but some of the things we have seen
recently are resulting in price spikes and shortages despite the
existence of an open international trading system. So there are
issues there that do need to be looked at quite carefully.
Q416 Chair: Can
I just put two measures to you—the continued imposition
of quotas and a greater use of futures markets? How would you
both view those?
Andrew Kuyk: I
think our stance on quotas is, again, rather similar to what has
just been said about trade liberalisation. We do not believe that
quotas are a very good instrument for managing output and there
are examples at the moment where prices of some commodities—sugar,
for example—are at very high levels. The existence still
of a quota regime inhibits farmers' ability to respond to that
in the short term. As I say, I think futures markets play a very
important role for companies wanting actual physical delivery
of commodities and that is the primary purpose of those markets,
so if there were to be any nuancing of that, it needs to be done
in a way that does not undermine that primary purpose—the
use of those markets in order to provide that sort of forward
buying facility.
Andrew Opie: I
concur with what Andrew said. The only thing I would add from
our point of view is that, looking at the UK market, it is not
always easy to get farmers in the UK to enter into forward contracts
for sales, for example, because some farmers do like the market,
and actually, seeing volatility in the prices may encourage them
not to go into forward sales, thinking that they might miss something
in the future. Retailers would love more certainty in terms of
the price they are going to pay in the future; it evens out some
of the volatility, but it isn't always easy to engage with the
agricultural sector in terms of contracts.
Q417 Neil Parish:
If we go back to 1994, the retailer was only making a very small
amount of profit on milk, the processor was getting 22p and the
farm gate prices were 18p. Now we are seeing the retailer getting
significantly higher prices than that. Is it inevitable that farmers
get a low return, and are they getting their proper value out
of the food chain?
Andrew Opie: I
am going to start my answer by saying those figures are slightly
speculative, because they are not actually based on clear data
and I would—
Chair: I think they are
based on clear data; it is taken from the NFU website.
Neil Parish: I do accept
that—
Andrew Opie: Yes,
they are based on data, but they are not based on actual relationships
between retailers and their suppliers, which was going to be my
supplementary point. Actually, if you look at the league table
of milk prices that are paid in the UK at the moment—and
I have printed out the most recent one from the MDC Datum website,[1]
the industry website—it shows the top 10 prices are all
paid by retailers. Retailers have led the way in responding to
the problems that farmers have had with rising feed costs, for
example, by upping the price that they have paid over the last
six months. So all I am saying is that those figures come with
a bit of a caveat.
Having said that, retailers' profits remain pretty
stable; if you were to look over the last 20 to 30 years, retailers'
profit margin is always around 3.5% to 4% overall in the equation.
Interestingly, some of the recent price promotions on milk, which
retailers have in some ways been criticised for, have been paid
for by the retailers themselves, not the farmers, because their
price is published and is clear. So there are some changes in
there.
The other issue with dairy in our opinion is, if
you break it down, approximately 50% goes into liquid milk and
50% goes into processed products. Retailers have a big share of
the liquid milk market, but even then, it is well under 50% of
the milk that is actually produced in the UK. Therefore, they
cannot influence the whole of the market or the margins that farmers
would be receiving. The other thing that is clear from all the
dairy industry data is there is an enormous difference between
the more efficient dairy farmers, even in the UK, and the least
efficient dairy farmers in the UK.
Q418 Chair: But
that is size, presumably.
Andrew Opie: Not
just size. You can have some very productive small dairy farms.
Q419 Neil Parish:
I accept that I do not want a price that is going to prop up every
inefficient dairy farmer, but I think there is an argument that
the retailers are taking significantly more in the way of profit.
If you were being paid 18p back in 1994 for milk as a dairy farmer
and you are now being paid between 22p and 26p, there has been
an enormous increase in costs in that time and yet because the
retailer is taking significantly more, the price of milk to the
consumer has gone up. So part of my question—and you may
not want to answer this—is will a Food Adjudicator be able
to actually look at this process to see who is making the profit
there and whether the retailers are necessarily taking out too
much profit from the chain?
Andrew Opie: We
don't believe they are taking out too much profit and that is
quite clear in the profit margins, the published figures that
come out every year—every quarter for their sales but every
year in terms of profits. But I think the other thing for farmers
is to think about whether the price they are being paid is a sustainable
price for them to stay in business, regardless of what anybody
else in the chain might be taking—and we don't believe we
are taking a large proportion of the profit. So is that price—which
is published, at which farmers enter into a contract through the
dairy with the retailer, because most of them have this dedicated
chain—sufficient for that farmer to have enough profit to
be able to invest in his business for long-term development? We
believe it is and obviously those farmers who are going into those
contracts also believe it is.
Now, you can look around in terms of the price that
different farmers are paid and the price on the shelves; there
are lots of different issues. But I think the important thing
for farmers to think about is, "Am I getting the right price
from the people that I am supplying to keep me in business?"
We believe the retailers have led the way in showing that that
is possible. There are large parts of the food sector—the
Government included—who do not enter into these types of
agreements like retailers. Retailers have done that because we
need food security and we want liquid milk going forward. We are
prepared to pay the right price for it and we will show that in
terms of the prices that we pay. But that won't help all dairy
farmers and that is the problem. You have a large rump of dairy
farmers who are still basically sourcing into the usual market—which
may go for processing, may go in skimmed milk or may go for liquid
in hospitality and catering—who are not fortunate enough
to be in those types of deals. They are the ones who have the
problem, really, going forward. We have a lot of sympathy for
those dairy farmers, but retailers can only help those that they
need to supply them.
Q420 Neil Parish:
And as far as the Food Adjudicator is concerned?
Andrew Opie: First
of all it is interesting because Friday is the first anniversary
of the GSCOP (Groceries Supply Code of Practice)—the code
of practice, which retailers did not oppose, have administered
and have introduced to their business.
Q421 Neil Parish:
Is this a voluntary code now?
Andrew Opie: No,
it is a statutory code now and it applies to the 10 largest retailers.
It was expanded; anyone with £1 billion turnover or
above is now covered by it, so it takes it down to a lot of smaller
retailers. There are lots of contractual issues in there that
answer the questions that were raised by the Competition Commission
on things like retrospective payments, how the contracts themselves
are worked out and the right to independent arbitration if you
cannot get satisfaction from your retailer. All of those things
are in place and we would say, before rushing into a next stage
with an Adjudicator, we should see how that is working. We are
starting to get some evidence from that now. It is administered
by the Office of Fair Trading and we will get a report from them
later this year.
It probably would not help dairy farmers, because
the GSCOP and the Adjudicator only affect those who have a direct
relationship with a supermarket. Our main suppliers are actually
very large multinational food companies: the ones that you will
be very aware of, who have large brands themselves and are operating
well outside the UK. Those are our main suppliers. We have very
few direct farming suppliers—maybe some fruit and veg suppliers
and these sorts of people. So our suppliers in terms of dairy
are actually the dairies themselves—the processors and the
dairy companies; they are not the farmers. We shortcircuit
it through a special contract through dairies to try to help farmers,
but actually the contract is between the processors, the manufacturers
and the retailers. So the Adjudicator's role would not extend
into that area.
Q422 Chair: How
do you feel that the Commission measures to give farmers more
bargaining power, such as increasing transparency or standard
contracts, would affect your industry?
Andrew Opie: I
had a look at the high level group and we are obviously following
that work at the moment. We don't believe the issue that was raised
in the dairy would have a huge issue for us. We feel the UK is
quite a progressive market. UK retailers haven't waited for these
sorts of issues; they have gone out and secured their own dairy
supplies, they are paying them the best prices in the market and
they are happy to publish that so people can see it. So we did
not see anything greatly different in here that would necessarily
help the dairy farmers that are supplying our members with liquid
milk.
Q423 Chair: On
Mr Parish's line of thought, the NFU figures show that farm incomes
have fallen by 8% and retailers' income has increased by 4,000%.
If measures were taken to increase farm gate prices for farmers,
what would be the impact on food prices for shoppers?
Andrew Opie: There
would be an impact but of course it is right to say that the commodity
price itself, or even the farm gate price, is not the only price
that is applicable. So things like oil prices, the exchange rate
with the euro and employment rates for retailers who employ people
will influence our food prices. All these factors would have an
impact.
Thomas Docherty: The cost
of fuel.
Andrew Opie: The
cost of fuel, absolutely. Oil is crucial to these sorts of things.
But ultimately, retailers can only insulate consumers from so
much. So our own inflation figures, which we publish every year,
show at the moment food inflation running at about 4%, which is
actually historically quite high; we have seen periods of deflation.
Now, we can only insulate consumers against so much, and while
consumers are going through extremely tough times as they are
at the moment—and with the very competitive business that
we luckily have in this country, UK retailers can help consumers—the
last thing any retailer wants to do is pass any additional cost
on to consumers.
Q424 Chair: Just
out of interest, are you able to say how much milk that you sell
in your outlets, through your membership, is actually produced
in this country and how much produced in the EU and outside the
EU?
Andrew Opie: Liquid
milk, or—?
Chair: Well, the totality
of the market.
Andrew Opie: Well,
liquid milk, none. It is all produced within the UK.
Q425 Chair: Powdered
milk?
Andrew Opie: I
would have to check things out, because then you are into things
like cheese, yoghurt and dairy desserts, so the further down the
track you go, of course, the further you get away from UK producers.
But one thing I would say—and we did put it in our evidence—is
we are the only sector that is committed to the new country of
origin agreement, which we agreed with the Minister before Christmas.
We have made it clear that we will put country of origin on all
dairy products, where relevant; we will not make claims about
UK that would mislead consumers at all.
Q426 Chair: Is
that just for milk, or is it all the dairy products?
Andrew Opie: That
covers milk, dairy products and also meat products. We are the
only sector that is committed to this at the moment, so we are
being absolutely transparent with consumers and we will tell them
where their food is coming from. We are quite happy to do that,
because if you look at the cheese counters, the dairy counters
and the meat counters, retailers know they have a strong record
to say in terms of country of origin. But we are the only food
sector that is doing that at the moment.
Q427 Thomas Docherty:
On the issue of labelling of country of origin, are you committed
to ending the practice whereby, for example, cows are reared in
Devon and then sent to Scotland for a month and slaughtered, to
get the Scottish beef brand?
Andrew Opie: Well,
the country of origin is UK, in this respect. So this is about—
Thomas Docherty: I know
that, yes. But further to that, are your members committed
to ending the practice of shipping animals around the UK to get
brands?
Andrew Opie: I
am not aware of that practice, but I can—
Chair: I do not know that
we want to go there, because actually my farmers would not necessarily
like that. So we will not put that question.
Q428 Tom Blenkinsop:
Mr Kuyk, your evidence expressed that, "It is disappointing
that the Communication sees increased trade liberalisation as
a potential threat rather than an opportunity." An opportunity
for whom—farmers or processors and retailers?
Andrew Kuyk: Both,
I think. It follows from what I said earlier that if we move away
from a situation where inefficient and uncompetitive production
is being supported, you need some form of trade protection as
a buffer to that. If you increase trade liberalisation, and where
Europe can exploit a comparative advantage, that then opens up
markets elsewhere outside the EU. So I think it is an opportunity.
It is also an opportunity for increasing food supply—back
to the point about affordability. So for all the reasons that
we discussed earlier—and back to the need to use market
forces to help iron out some of the volatilities and so on—we
do believe that an open international trading system is the way
to do that. Provided that Europe is revising its Common Agricultural
Policy so that it puts emphasis on resource efficiency and comparative
advantage, then I think Europe has nothing to fear from increased
trade liberalisation and potentially a lot to gain in terms of
export potential. The problem with European agriculture in the
past is that when there were overt coupled subsidies that built
up large surpluses within Europe that were then exported with
the aid of export subsidies, that gave Europe a bad name and Europe
was seen as inherently uncompetitive. That was an artefact of
that phase of the Common Agricultural Policy. In a reformed Common
Agricultural Policy, I see no reason why trade liberalisation
should not be an opportunity rather than a threat.
Q429 Tom Blenkinsop:
I get the Ricardian economics of it. Is there not a huge assumption
that there are other global traders and players out there who,
at the moment especially, are not willing to be as liberal in
world trade? I am thinking of the Russian Federation in relation
to wheat and—
Andrew Kuyk: Well
I think there certainly are. It is probably invidious to name
names, but there are a number of countries who are themselves
agricultural suppliers who still have relatively high tariffs
against agricultural imports. That indeed is why we as FDF have
consistently been pushing hard for a successful conclusion to
the Doha Round. We believe that that remains a priority. It is
something that has had slightly less political emphasis over the
last couple of years, but we see that as something that needs
to be pushed alongside reform of the CAP.
Q430 Tom Blenkinsop:
I take that, but even in the last six months, would you not say
that global trade has actually become more protectionist?
Andrew Kuyk: I
think we have seen some export bans and things like that. Again,
as a Federation, I think we are slightly worried by the proliferation
of smaller, regional trade agreements, because there is a risk
that those could lead to greater protectionism. If they are genuinely
open, why not globalise them? Why not put them in a WTO context
and make them part of the Doha round? If they are being fragmented
and segmented off, it is because somebody sees some advantage
to doing that and that is probably a protectionist advantage.
So inherently we are still strong supporters of a successful conclusion
to Doha.
Q431 Neil Parish:
It is a good argument, of course, if you are going to suddenly
have Russia say, "No trade in wheat," to make sure that
we do actually keep a reasonable amount of production ourselves.
Because if it carried on across the world—if as soon as
there was a problem everybody said, "Right, we are not going
to export"—this argument that you can get your food
anywhere in the world and your security of food supply—does
that worry you?
Andrew Kuyk: What,
the practice of—
Neil Parish: Yes, because
basically if Argentina does not have enough beef it will stop
exporting beef, and if Russia does not have enough wheat for its
own people it stops it.
Andrew Kuyk: Absolutely,
yes. That does worry us.
Q432 George Eustice:
I want to push you on this point about free trade. We talked earlier
about organic food, which you then get a market premium for. But
in the pig industry, for example, a onesided new law came
in and forced certain welfare standards here, then on the other
side they were exposed to competition from countries that did
not have those same standards. So it is an asymmetric thing, because
you have regulation on one side and then you are telling these
farmers that the only way they can try to pay for that is to—and
quite a few people have said that maybe we should look at reforming
the World Trade Organisation so that issues like animal welfare
and impacts on the environment can be factors taken into account.
We all know that protectionism is a dirty word and that that is
why people are reluctant to do that, but the original GATT agreement
did include provision for that. Do you think that would be a positive
step forward?
Andrew Opie: I
am not going to comment on the WTO, but I think there is an opportunity
for retailers in this case, but brand owners; if they are serious
about the product they are giving to their consumers, then they
will apply equivalent standards around the world. In fresh pork,
for example, retailers a long time ago had already put specifications
that were akin to those in the UK. The UK Government, as you are
well aware, went before the rest of Europe—2012 in terms
of the ban. So I think there is an opportunity there if you are
working with the consumers to do that, which overcomes some of
the issues about trying to get it into the WTO. I am not an expert
on the WTO, but I would imagine that might be quite difficult
to achieve. But I think, as responsible food sellers, you don't
have to wait for those sorts of issues.
Q433 George Eustice:
Are you saying that all the Dutch and Danish bacon is produced
to exactly the same standards?
Andrew Opie: There
are some very, very minor issues around—I forget what it
is, but it is either tail docking or teeth trimming or something
like that. But those issues around the stalls and tethers, which
was the main welfare concern, the specification that the major
supermarkets were using some time ago was that they would not
take bacon from those production systems because they felt it
was unacceptable and also it would impair the UK pig producers
at the same time. It was unfair on them and wasn't giving the
consumers what they wanted.
Andrew Kuyk: Could
I just comment on the WTO question with regard to the environmental
thing? Again, back to the food security debate, which I know I
have spoken about rather a lot, but that is because it is rather
important. I think there are a lot of, in the jargon, externalities
of agriculture and food production that are not internalised and
I think the WTO probably does need to start looking at that. But
one thing at a time; let us get the Doha Round concluded first.
But I think that is probably going to be the next major international
trade issue—to make sure that there is a genuine level playing
field where countries that are trying very hard to improve sustainability
and through environmental regulation to try to prevent some further
damage, cannot then lose out to countries that have not enacted
similar legislation. I think that is an area that the WTO should
look at, and I think we would support that in the longer term.
Q434 George Eustice:
You mentioned the problem of bilateral and regional deals outside
of the WTO. If the WTO could be reformed in such a way that it
was fit for purpose, it would actually make it much easier, wouldn't
it, to progress this?
Andrew Kuyk: We
are getting into slightly different territory here. I am not sure
that the WTO itself is not fit for purpose; I think what is lacking
is the political will to use the mechanisms that are there. I
think this proliferation of interim deals is a way of trying to
move things forward in the absence of a multilateral deal. So
I think the WTO has worked well for a number of years. I think
this particular round has got bogged down in a number of ways
and needs new political impetus. I don't think it follows that
the mechanism is at fault; I think what is lacking is the political
will to get the negotiations brought to a successful conclusion.
Madam Chair, just very briefly, there were a couple
of questions that were aimed at the BRC rather than at us where
I just wanted to get on record the FDF position. On country of
origin, we did also work alongside BRC with Defra to get these
principles and as a Federation, we do support them and we agree
strongly that consumers should not be misled about the origin
of food products. The other thing, which again was not specifically
addressed to me, but on the code of practice and the Adjudicator,
I think Andrew said that the BRC did not oppose the code of practice.
We actively supported it and we do believe that there should be
an early introduction of the Adjudicator. We think that that would
help supply-chain relationships. Thank you, Madam Chair.
Chair: That is very helpful.
Thank you both for being so patient and so full in your replies
and for being with us this morning. We are very grateful. Thank
you very much indeed and I am sure we will continue the dialogue
on this and other issues as well.
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