Supplementary written evidence submitted
by the Agriculture and Horticulture Development Board (AHDB)
Given that the UK farms tend to be larger than
the EU average, how likely is it that any scheme to support "small
farmers" will be of benefit to UK farmers?
1. Based on the concept that a small farmer is
one who farms a small area, any scheme to support "small
farmers" is likely to only benefit a minority of UK farmers.
According to the Farm Structure Survey of 2007[20]
(FSS 2007) in the UK only 39% of holdings (of more than one European
Size Unit)[21]
were smaller than 20 hectares in size. This compares to 39% in
Ireland, 40% in France, 52% in Germany, 69% in Austria, 78% in
Spain, 92% in Bulgaria and 97% in Romania.
2. Based on the assumption that 20 hectares is
the cut off point for designating a "small farmer",
less than 40% of UK farmers would stand to benefit under any such
scheme. Additionally these holdings only account for 4% of the
utilised agricultural area of the UK. Many of these small farmers
are engaged in livestock farming with over 80% of the land being
permanent pasture and meadows. Cereals or forage crops account
for most of the very small amount of cropping in this category.
So, while such a scheme has the potential to be beneficial to
some farmers in the UK, the majority will see little or no benefit.
3. Many small farmers are actually part-time
farmers either due to another job outside of the holding or semi-retirement.
The FSS 2007 indicates that more than 75% of UK small farmers
are considered part-time, with most of these putting in under
half of their time to the agricultural business. The survey indicates
that small farmers are also more likely to be over 65.
4. As such it is likely that any scheme that
supports small farmers will be of little benefit to UK farm businesses
as either they will be too large to qualify for the support or
they are only engaged in farming on a part time basis. However,
small farmers who are engaged in farming in a full time capacity
may be able to benefit from such a scheme. In addition, it is
possible that the definition of a "small famer" could
be set even lower than the assumed level of 20 hectares which
would further reduce the benefit to UK farmers. Finally, the support
for small farms may distort the market (depending on the approach
used) which potentially could have adverse effects on maximising
competitiveness/food production, and minimising Green House Gas
emissions.
The Commission has recently published its "Milk
Package" including proposals to improve the functioning of
the supply chain. In your view, are the sorts of measures in the
proposal sufficient to rectify the current imbalances and ensure
a fairer return to farmers?
5. The proposals could help to improve market
signals to producers which would help make the market work more
efficiently. Whilst the use of written contracts between producer
and processor is already common place in the UK, there is much
debate in the industry about whether the structure of these contracts
hinder the market from operating efficiently. The European Commission
proposals could address this issue by ensuring certain common
elements are included within contracts.
6. The key issues of pricing and notice periods
within written contracts still remain as problems in the UK milk
market. Firstly, only Tesco's and one other additional contract
we are aware of have a clear pricing structure with market indicators
or other factors explicitly linked to setting the price. Secondly,
those buying milk are able to change the price at short notice,
or even retrospectively, without the option of a farmer ceasing
supplies of milk to that buyer without a long notice period in
most cases. Finally, many contracts do not specify the monthly
volume of milk to be produced and this reduces the predictability
of supply for processors.
7. The European Commission proposals will be
of greatest benefit to the UK dairy industry if they instigate
change in the areas outlined without dictating a one-size-fits-all
approach. For example, all contracts must be set up with a core
principle that price changes must be agreed, and if there is no
agreement, farmers can leave within a reasonable period However,
the mechanisms for setting prices within contracts can be very
different and should be left to the commercial world. For example,
price setting on a milk-for-cheese contract could be very different
to that within a liquid milk contract. Contracts could specify
prices in different ways such as:
— xxppl
for the next six months for a liquid contract possibly with the
retailer agreeing an appropriate wholesale price for the same
period.
— Price
formula of AMPE (Actual Milk Price Equivalent)[22]
indefinitely for a commodity processor.
— Price
formula of MCVE (Milk for Cheese Value Equivalent)[23]
+ 2ppl indefinitely for a cheese processor.
The exact details of contracts should vary depending
on different circumstances and it should be left to commercial
organisations to decide on these. However, key principles should
be addressed by contracts, so price changes are agreed and producers
are able to easily and relatively quickly move to another buyer
if this isn't the case. This would aid clear market signals and
an effective supply chain.
The CAP provides a basic income safety net to
farmers. One argument for its retention is that it compensates
farmers for the poor returns they receive for their products from
processors and retailers. If direct income support were abolished,
would you anticipate that any action would be taken by retailers
and/or processors to secure their supplies?
8. Removal of the income safety net would increase
the exposure of farmers to fluctuations in prices and production
levels and this may incentivise processors and retailers to provide
greater support to their suppliers in order to ensure that the
flow of food and inputs they require continues. It is important
to note that action along these lines is already occurring in
many agricultural supply chains in the face of volatile commodity
markets. In the feed compounding sector, for instance, it is common
for compounders to enter into forward-buying contracts with producers
that cover many months ahead of the current market. This has been
crucial to them in recent months, allowing them to secure supplies
at set prices when raw material (particularly cereal) values have
been highly volatile.
9. Adapting to market volatility is most efficiently
achieved using a whole supply chain approach. Hence, an increase
in the exposure of farmers to risk requires not just action from
processors (and others in the middle of the supply chain) but
all those involved in the chain. For instance, if processors are
to enter into forward contracts with farmers, they may well seek
similar arrangements with end-users (eg supermarkets) in order
to share the risk burden. However, for such arrangements between
different agents in the supply chain to be successful, it is essential
that all parties fully understand the risks that they and others
face.
10. This has been seen to be very effective in
the poultry feed supply chain, for instance, where cereal farmers,
integrated poultry units and end-users have been successful in
spreading the risks associated with volatile wheat prices across
the whole chain. Given that feed wheat prices represent by far
the largest part of the costs incurred by the chain, this has
been crucial in ensuring the continued profitability of the relevant
firms as feed wheat prices have risen over the last 12 months.
11. Other examples of supply chains beginning
to work on this include the dairy market, where Tesco have undertaken
to pay farmers supplying them with liquid milk a milk price that
covers their cost of production. Many other supermarkets have
dedicated suppliers, with a premium price which also aids security
of supply. As the examples already exist it appears likely that
if the need arose more supply chains would become integrated and
work better together.
12. However, for those farmers not involved in
more integrated supply chains (and the vast majority are not)
and are in effect generally competing on the world market, they
would probably be fully exposed to market volatility. Their profitability
would depend on their competitiveness and how efficiently they
used tools such as the futures markets (although these are not
available in most sectors). In some production sectors it is clear
that there is potential for efficiency to be improved and this
lack of a safety net may stimulate improvements. However, it is
likely that there might be significant other impacts, such as
a drop in production, reduction in the number of farmers, abandonment
of marginal land etc.
13. An additional factor which should be considered
when deliberating this point is how effective CAP is at providing
a safety net in that in many cases subsidy payments get partially
or wholly transferred in to the supply chain or capitalised in
land costs/rents depending on how the supply chain is working.
The amount of the payment that gets lost to farmers depends on
factors such as how "decoupled" farmers consider the
payment (ie do they continue to produce food even though the market
price is too low because the subsidy payment allows them to do
so), whether the market price is driven by world demand/supply
factors or more regional factors, demand for land in a local area,
are input costs higher than they otherwise would be without CAP
support to farmers etc.
The Commission has recently released new proposals
regarding an "income stabilisation" tool to help manage
price volatility. What are your views on its utility for UK farmers,
impact on competitiveness and budgetary and WTO implications?
14. AHDB would need more details on how the proposed
tool may work before being able to provide a full analysis of
potential impacts. For instance, how will the scheme be funded—will
it come from the rural development or direct payment budget? However,
a few comments can be made based on the content that has been
reported in the press and from the Commission.
15. Reports coming out of Europe to date indicate
that the tool may be restricted to provide support only where
losses of income above 30% of average income occur and will be
limited to compensating for a maximum of 70% of the total income
loss. This is important for two reasons. It is expected that restricting
the scheme to these levels would meet WTO "green box"
requirements. Secondly, it shows that income fluctuations are
only to be smoothed on the downside and hence the term "income
stabilisation tool" could be misleading—as that may
imply a system that reduces income fluctuations in both directions,
such as Contracts for Difference (CfDs).
16. It has also been suggested that the system
will be voluntary since there is a varying appetite for such a
tool within member states. Part of the reason for this is that
it is seen to be complex from an administration point of view,
with difficulties calculating the average income and current income
loss for each producer in the member state. Only having the option
available in some member states may affect competition within
Europe, however restricting usage to situations where very large
reductions in income occur should reduce the impact of this.
17. AHDB would need more detail in order to fully
analyse the system and compare it to the other systems that exist
elsewhere in the world such as in the USA which may be of interest.
However, early indications suggest that it is likely that there
will be limited appetite for the tool from the UK farming industry
given the extra complexity it adds to the CAP, the costs of administering
the scheme and the potential erosion to the value of farmer's
direct payments.
February 2011
20 Data taken from the Farm Structure Survey in the
United Kingdom and from the equivalent surveys for other member
states is available from Eurostat (http://epp.eurostat.ec.europa.eu). Back
21
For each activity ("enterprise") on a farm (for instance
wheat, dairy cow or vineyard), a standard gross margin (SGM) is
estimated, based on the area (or the number of heads) and a regional
coefficient. The sum of such margins in a farm is its economic
size, expressed in European Size Units (ESU) where one ESU is
a 1200-euro standard gross margin. The ESU can be thought of as
a measure of the economic size of a farm business based on the
gross margin imputed from standard coefficients for each commodity
on the farm. An ESU roughly corresponds to 1.3 hectares of cereals,
one dairy cow or 25 ewes. In 2007, there were 183,000 enterprises
of at least 1ESU recorded in the UK. Back
22
AMPE calculates the value of a litre of milk at the factory gate
if it is turned in to butter and skimmed milk powder at the prevailing
prices for those products and allows for the processors costs. Back
23
MCVE calculates the value of a litre of milk at the factory gate
if it is turned in to mild cheddar, whey powder and whey butter
at the prevailing prices for those products and allows for the
processors costs Back
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