Written evidence submitted by the National
Pig Association
SUMMARY OF
RESPONSES
1. An Adjudicator is needed to ensure that supermarkets
deal with supply chain-wide issues fairly and lawfully. The pig
supply chain is a case in hand because rising production costs
have not been equally distributed along the chain and producers
are effectively subsidising the supermarkets.
2. The Adjudicator must be able to look at the
indirect relationships between different levels of the supply
chain and the way different levels of the supply chain interact
with one another.
3. The Adjudicator must be able to investigate
the supply chain proactively to ensure that "fair dealings"
between all parts of the supply chain benefits consumers in the
long run.
4. Dealing "fairly" must mean allowing
British pork producers to maintain a sustainable business by providing
them with a fair price for their produce that reflects higher
costs of inputs.
5. In terms of penalties, "naming and shaming"
is potentially a tougher sanction than the financial penalties
suggested, unless the latter are very tough. Tight conditions
should be applied to the prominence of any self-reporting of wrongdoing
by supermarkets.
ABOUT THE
NATIONAL PIG
ASSOCIATION (NPA) AND
THE BRITISH
PIG SECTOR
— The
NPA is the representative trade association for British commercial
pig producers and is allied to the NFU and represents the pig
interests of NFU members. The NPA engages with processors and
retailers on a regular basis to discuss supply chain issues and
help British farmers get a fair price for their produce.
— As
an important component in the food and farming landscape, a resilient,
sustainable, profitable and competitive pig sector is in the public
interest. The UK pig industry has changed considerably over the
last decade and this has had an impact on every aspect of the
industry.
— In
2009 the total number of pigs slaughtered in the UK was 9.03 million—a
figure which has fallen from 16.29 million in 1998. Figures show
that even though the UK pig herd is smaller it is much more efficient
than it has been in the past.
— Total
pig meat produced during 2009 was 720,000 tonnes. However, the
total amount consumed was 1,484,000 tonnes. This shows that we
are less than 50% self sufficient in pig meat.
— The
pig sector is robust and at its reduced size is non-subsidised,
distinguished by the fact that it operates to very high standards
of welfare and production. However, the industry is facing a crisis
in the form of rising feed cost which is not being covered by
the price farmers receive from retailers. With the right level
of support from retailers, the pig sector could grow again, create
new employment and provide in greater volume the excellent products
consumers want to buy.
— The
industry has worked hard to recover from difficult conditions
in 2007-08, where rapid rises in feed costs outstripped increases
in producer prices. The establishment of the Pig Meat Supply Chain
Task Force by DEFRA was a significant step bringing key representatives
from all sectors in the pig meat supply chain together to increase
collaboration within the sector and with Government, making progress
in areas such as animal health and country of origin labelling.
— The
UK has very high animal welfare standards for pigs. The higher
standards may mean that in some cases UK pork, bacon, ham and
sausage are slightly more expensive than imported pork and pork
products. However, by importing pork, bacon and other pork products
without specifying equality of welfare standards, retailers and
other buyers may be supporting production that would be illegal
in the UK on animal welfare grounds.
THE NEED
FOR THE
GROCERIES CODE
ADJUDICATOR
1.1 The Adjudicator is a
very important role that has the potential to have a very positive
impact on the pig supply chain. Over the past few years, UK pig
producers have faced difficulties in their negotiations with large
retailers. This is because the supply chain in the pig industry
does not currently function in a way that is economically sustainable
for producers.
1.2 Rising production costs
driven by the increases in the global price of wheat, and to a
lesser extent soya, have not been equally distributed along the
chain. Instead the impact has been almost entirely passed on to
producers. Despite a recent rise in pig prices which we understand
has all been financed by processors, producers are continuing
to losing a crippling average of up to £12 on every pig produced
while supermarkets continue to make large profits. Currently supermarkets
are making collective profits of £16 million per week from
pig meat. This is a stark comparison to producers who are losing
£1.8 million every week, effectively subsidising the top
tiers of the supply chain.
1.3 Some supermarkets, particularly
those with the dominant market share, try to deflect criticism
away from themselves by arguing that they do not have a direct
relationship with producers. An Adjudicator is needed to ensure
that supermarkets deal with supply chain-wide issues fairly and
lawfully.
1.4 Supermarkets have been found to transfer
too much risk and unexpected costs to suppliers in order to gain
competitive advantage (normally lower retail prices). This conclusion
from the Competition Commission is accompanied by the conclusion
that suppliers' incentives to invest in new capacity are lessened.
In our experience, it is not just expansion that is fettered,
but continuation in business. So it is not just growth and choice
that is impinged, but the national pig herd size itself, which
in turn is forced onto a downward trend. The excessive transfer
of risk is bad for the economy and anti-growth.
The Functions and Powers Appropriate for any Code
Adjudicator
Must be able to look at supply chain wide problems
2.1 In order for the Adjudicator to look at issues
that affect the entire supply chain it must be able to look at
the transition points from each tier of the supply chain to the
next to ensure that they are being conducted in a fair and even
handed manner.
2.2 It must also be able to look at the indirect
relationships between different levels of the supply chain and
the way different levels of the supply chain interact with one
another.
The Food Director at the British Retail Consortium,
Andrew Opie recently said:
"Supermarkets do not generally pay farmers directly
for their pork. The direct relationship is between farmers and
processors."
This is not a satisfactory defence, as we argue below.
2.3 Although the relationship is not a direct
one, when supermarkets take too much profit from the top of the
chain, then the margins of those below become squeezed, particularly
when costs such as feed prices are far higher, ultimately leaving
those at the bottom with a margin that is unsustainable or, as
we currently see, a loss. This can be exacerbated by retailers
refusing to raise retail prices to provide enough money to support
the whole supply chain in a viable manner.
INTERPRETATION OF
POINT ONE
OF THE
GROCERIES CODE
"DEAL FAIRLY
AND LAWFULLY
WITH THEIR
SUPPLIERS"
2.4 Retailers very rarely buy directly from pig
producers but that should not absolve them of the responsibility
to deal with them fairly and lawfully. We contend that the Adjudicator
should be able to enforce supermarkets to deal with their suppliers
"lawfully and fairly" whether directly or indirectly.
The term "fairly" is open to interpretation and supermarkets
will no doubt argue that they do meet their CSR commitment to
treat their suppliers, including producers, fairly. All will claim
to deal fairly, but when subject to challenge, resort to the argument
that they do not deal directly with primary producers. They cannot
have it both ways.
2.5 We say that dealing "fairly" must
mean allowing British pork producers to maintain a sustainable
business by providing them with a fair price for their produce
that reflects higher costs of inputs. If the Adjudicator is not
able to examine how these indirect relationships affect the whole
supply chain then it will ultimately be powerless to fulfil this
remit.
Such an approach is in line with food and farming
minister Jim Paice's comments:
"If supermarkets and retailers believe that
future consumers will want to buy British pigmeat, they have a
responsibility to ensure the supply of British pigmeat for the
future and that lies behind the adjudicator and the code. The
Competition Commission's conclusions were not about farmers but
about consumers. It was concerned that retailers were shifting
too much risk on to the supply side and that in future the consumer
might lose because the supply side was constrained. Therefore,
it is in the interests of the consumer to ensure a supply of British
pigmeat for the future." Westminster Hall Debate on Pig Farming,
23 March 2011
2.6 British consumers now face the real prospect
of high welfare, British pork, bacon, ham and sausages becoming
the exception on supermarket shelves as British farmers go out
of business and British pork is replaced by lower welfare, imported
alternatives.
2.7 The Adjudicator must be able to investigate
the supply chain proactively to ensure that "fair dealings"
between all parts of the supply chain benefits consumers in the
long run and provide a "level playing field" for producers.
Must be able to investigate confidential material
2.8 So far as investigations are concerned, the
Government's proposed policy is to restrict admissible evidence
for the Adjudicator to investigate to material that is publicly
available. The justification for this is to prevent the complainant
suppliers from potentially being identified. However, much of
the proof of unfair dealings will lie in commercially confidential
material or private behaviour not in the public eye. Therefore
we propose that the Government introduce safeguards to protect
anonymity, while ensuring that vital evidence can be admitted.
COVERAGE OF
INDIRECT SUPPLIERS
3.1 In the main, pork producers do not negotiate
directly with those who are selling the produce to consumers,
whether that is the food service sector, or retail outlets. However,
when there are problems in the supply chain, such as higher costs
at the producer end, it is the retailers at the top of the chain
that fail to respond in a way that is fair to their suppliers.
Therefore the Adjudicator must be given the power to investigate
problems and arbitrate complaints arising from indirect suppliers
which relate to the behaviour of supermarkets.
3.2 The structure of the UK industry is relatively
straightforward with pig producers selling to the abattoir, either
directly or through a buying group or co-operative. The animal
is then slaughtered, cut into basic primal muscle groups and moved
into a cutting plant or sold on to the further processing sector.
So in the pig supply chain, retailers' direct suppliers are the
processors. Relationships between producers and processors are
good in the main, as producers tend to have far more direct contact
with them as suppliers and processors are more responsive to higher
costs experienced by producers.
3.3 The deadweight average pig price (DAPP) records
the price producers are paid for each pig slaughtered in the UK.
At the time of submission the DAPP was 149p/kg. In 2010 the DAPP
averaged 142p/kg, 3% lower than 2009. In addition to the falling
DAPP, pig farmers have also had to contend with rising feed costs,
leading to an increase in the overall cost of production. In January
2011 the cost of pig production was 25% higher than the 2009 average
and 34% higher than the 2007 figure. This level of change cannot
be managed by simply telling producers to improve their efficiency.
3.4 Rising production costs are not being matched
by an equivalent rise in the price that producers get for their
pigs, meaning their profit margins are squeezed so much that they
make a significant loss on each pig they produce. This has been
the case for most producers since August 2010. This, in our view,
is a clear cut example of supply chain failure. If the supply
chain were working correctly, pig producers would be able to pass
some of the increased production costs up the chain with each
level taking a small reduction in profit and ultimately the consumer
potentially paying only a small amount more.
3.5 One such issue we hope the Adjudicator will
have the power to investigate is the use of aggressive cut-price
discounting by supermarkets. In the vast majority of cases this
has absolutely no relation to over-supply at the bottom of the
chain and in reality involves cheaper imported products often
produced to far lower animal welfare standards. It is more often
than not the result of supermarkets competing for business amongst
each other on certain key lines. However, the loss is forced down
the chain and so rather than being borne by the supermarket it
comes out of producers' bottom lines.
3.6 This situation is evidently unsustainable
in the long term and threatens the UK livestock sector. If it
continues then we will see famers going out of business and the
industry shrink. This has knock on effects for a range of issues
including employment, tax revenue, skills, our countryside and
sustainability.
ENFORCEMENT POWERS,
PENALTIES, APPEALS,
AND FUNDING
4.1 In terms of penalties, "naming and shaming"
is potentially a tougher sanction than the financial penalties
suggested, unless the latter are very tough. The commercial advantage
in squeezing supplier prices is likely to be exceeded by some
margin any proposed fines. However, retailers guard their reputations
jealously and effective naming sanctions could bite.
4.2 The point on information about adverse findings
being published in clause 9 must be tightly defined. Otherwise
a wrongdoing retailer may be tempted to "bury bad news".
Conditions should be applied to the prominence of any self-reporting,
for example:
— On
the home page of the corporate website for a specified period.
— In
the executive summary of the company's annual report and its CSR
or similar social responsibility report.
— In
a report to its main board, its audit committees and other supervisory
committees.
— In
a regulatory announcement to the stock exchange through RNS.
4.3 The proposal that an unsuccessful complainant
should pay costs if their complaint is found vexatious or wholly
without merit is very unwelcome. An alternative would be for a
gatekeeper to evaluate all complaints quickly and discard them
quickly if they fall into those categories. Otherwise supermarkets'
lawyers will use the costs regime to deter complainants by immediately
arguing that they are vexatious and therefore exposed to costs.
15 June 2011
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