The Common Agricultural Policy after 2013 - Environment, Food and Rural Affairs Committee Contents

Examination of Witnesses (Questions 392-434)



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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