Examination of Witnesses (Questions 820
- 839)
WEDNESDAY 12 DECEMBER 2007
Mr Callton Young, Ms Ruth Rawling, Mr Tim Innocent
and Mr Simon Harris
Q820 Lord Plumb:
I was particularly interested in your suggestion that there could
be farmer-based risk insurance systems; that is not something
that has applied necessarily in the past, but if I was to use
more the futures market there are those who said we relied on
the futures market last year when they decided to offer their
grain on the futures market and lost half the value of the grain
because of it and they feel that perhaps once they have been bitten
they are a bit shy. Nevertheless, it is a system, I accept, that
obviously is going to perhaps be used more in the future, but
the insurance risk, do you think that is something that will grow?
Ms Rawling: I am no expert on this, but when
they did the fruit and vegetable reform recently apparently there
are some conditions in there which allow producer co-operatives
to offer certain types of group insurance schemes of this kind
to their members, and that kind of idea is one of the things the
Commission is thinking about on a broader basis behind this. If
you look at the US, for example, they do have some quite considerable
farmer-based insurance schemes, but I understand that the Commission
is not thinking so much of those types of systems, partly because
they are extremely expensive.
Q821 Lord Plumb:
That might encourage farmers then to co-operate more.
Ms Rawling: Yes, indeed.
Q822 Lord Plumb:
Which you would welcome as a food industry.
Ms Rawling: I think if that is one of the ways
that farmers feel more comfortable in managing risk in the future,
that should be encouraged, but there should always be alternatives
including the more market-based systems for farmers as well.
Mr Innocent: The danger that we could see with
these types of systems is that we may go back to an intervention
or protectionist type scheme by default really, we might move
ourselves in that direction by the back door, and that is something
that we want to prevent, so we need to understand more about how
these schemes are going to work before we could make a fuller
comment on it.
Mr Harris: If you look at the US experience
it is quite interesting in this. They had, almost like the EU
but more formalised in the US, a system of disaster relief, and
in the US you always have a major climatic event somewhere every
year. Colin Peterson, who is the current chairman of the House
Ag Committee, his idea now is that they want to maintain disaster
relief on a formalised basis rather than on an ad hoc basis responding
to each year's disasters, but only on condition that farmers themselves
take out risk insurance first, so the federal government is not
going to pick up the entire tab for climatic variation and the
risks that go with it, but they are there as it were as the last
resort when your insurance-based system will only cover you to
X per cent.
Chairman: Let us move on to modulation;
Viscount Ullswater.
Q823 Viscount Ullswater:
I note that the FDF supports compulsory modulation rather than
voluntary modulation because of the risk of distorting the marketplace
between Member States. Do you actually support an increase in
compulsory modulation? I note from your evidence that you suggest
that if there was to be any increase in moving funds from Pillar
I to Pillar II the Pillar II scheme should be reviewed, but could
you give us an indication of what you have in mind with this?
Ms Rawling: Our real concern here goes back
to our fundamental themes; it is all about maintaining the competitiveness
of the farmers we source from and not putting in place schemes
that can put them at a disadvantage vis-a"-vis farmers in
other Member States. For that reason it seems a better idea that
there should be one rate of compulsory modulation across the EU;
however, I would not want to exaggerate this too much because
some of these measures have really rather little impact on actual
production and therefore probably do not really impact competitiveness
that much, so I think that is the key point for us. We know that
people are balancing other objectives with these schemes—Callton,
I do not know if you want to add something to that.
Mr Young: That is true; reading the Defra impact
assessment of the UK voluntary modulation package it concludes
that actually there will be very negligible impacts on production
and price, and we have to accept that, but one of the real issues
with a lot of impact assessments prepared by government is that
there are lots of negligible impacts and the cumulative effect
of all those negligible impacts do add up over time. We do not
want to make heavy weather of this. Our main point is that a level
playing field with compulsory modulation across the EU Member
States would be preferable paid at one level. We would not object
to that at all because it is a level playing field. The real issue
we have is where you get significant variations from which all
the negligible impacts are then cumulative in their effect.
Q824 Lord Cameron of Dillington:
You indicated your general support for the WTO but you call for
retention of export refunds for processed and Non-Annex-One products.
If, in the Doha Round, tariffs on agricultural imports fall to
a level no higher than those on other manufactured products, could
you still argue that export refunds are justifiable?
Ms Rawling: Thank you very much; this is quite
a tricky question actually, if I may say so, and therefore a difficult
one to answer because it is always an issue of where are the EU
prices versus the world prices and just what are the tariffs on
manufactured products. We have always stipulated that export refunds
should not be phased out until we have a level playing field.
Q825 Lord Cameron of Dillington:
But are you ever going to get a level playing field?
Ms Rawling: I do not know, but it is an ambition
we have to strive for in order to keep our competitiveness and
keep the price of our finished goods competitive on a broad basis.
Tim, I do not know if you want to add to this.
Mr Innocent: For us, particularly in confectionery,
where we are exporting a lot of confectionery product, then one
of our key raw materials is sugar—and I know we have a question
on that later. Essentially, even under the reform of the sugar
regime the price will not arrive at the world price level so there
will always be a discrepancy and, therefore, to make us competitive
with our confectionery products to export to the free market,
to the world market, we do need to continue to see some form of
export refund for processed products.
Q826 Chairman:
They are not flavour of the month though, are they?
Mr Innocent: No.
Q827Lord Cameron of Dillington:
I was wondering is it in the spirit of your general support of
WTO?
Mr Innocent: What we are supporting really is
alignment of prices. As I think we said in the previous answer,
we are able to cope with the volatility within markets by different
mechanisms or different types of contract with suppliers, farmers
and so on, but when there is a structural difference in pricing
it is very difficult, and that is really the government intervention
point that we made. Whether we will ever get to a completely level
playing field I do not know, but if we were at that point then
clearly export refunds would not be needed.
Ms Rawling: If I may just add something, it
is very interesting that just recently of course the Commission
has proposed to eliminate or suspend the import duties on grain,
given the way the world markets have gone this year, and of course
we are in something of an exceptional situation. But as an experiment,
if you like, in terms of what does it look like if you actually
do have a level playing field, this year is actually quite interesting
and may help people see that in fact there is no need to be quite
as scared of some of this reduction of tariffs as might have been
thought to be the case. Obviously this year will not continue
forever but that is an interesting example of the kind of level
playing field that you might eventually get to, and of course
in the grains sector with very low tariffs within certain import
quotas we are much closer to it than we were even five years ago.
Q828 Lord Cameron of Dillington:
I must say if you have access to agricultural imports from all
over the world without tariffs then there cannot be any justification
for export refunds it would seem to me.
Ms Rawling: We would agree with that, it is
simply the discrepancy in the raw material prices that we are
facing that we need export refunds for; that is the reason for
them and once we are able to buy raw materials at the same price
as everybody else then we do not need them.
Q829 Lord Plumb:
Just adding to your sensitivity on this question, who has benefited
most from export refunds in the past?
Ms Rawling: I do not know if Tim wants to take
that question.
Mr Innocent: In terms of manufacturers, do you
mean, or named companies? I am just trying to get a sense of the
question.
Q830 Lord Plumb:
All I am really saying is the criticism of export refunds, which
comes mostly from the Americans, has always been that the farmers
benefit in this country from export refunds, but you are now calling
for the retention of export refunds in certain parts. I am just
asking the question, are you now saying we should retain export
refunds when in fact the farmers are accepting that they are going
to go.
Mr Innocent: It is to maintain the balance,
and it is a jobs issue and an economics issue, is it not really,
in terms of if we have comparable costs then we have efficient
operations and we can therefore produce the products and export
them, but if we do not have comparable costs it is difficult for
us to do that so the notional amount that we produce as an export
can be very beneficial to factories in terms of overhead absorption
et cetera. The benefit may not be per se to farmers, but the benefit
is in terms of the general jobs argument within the UK and retaining
a sound UK feed manufacturing business.
Mr Young: We are not arguing to retain all the
export refunds, it is for processed products.
Mr Innocent: It is where there is a discrepancy
only between the world price and the institutionalised EU price.
Lord Plumb: My question was really related
to the principle of the system.
Q831 Lord Cameron of Dillington:
Can I move on to sugar now, probably a question for Mr Harris.
Why should sugar be regarded as a sensitive product?
Ms Rawling: If I may take this question first.
Q832 Chairman:
That is the deal is it?
Mr Harris: She is the leader.
Ms Rawling: As chairman of the committee there
are some things I have to do. The European sugar industry, as
you know, has undergone recently a radical reform for us with
a 40% cut in production and a 36% cut in support prices, and this
is envisaged to go through until 2015. The WTO negotiations—and
of course we do not know where those are going to come out—are
looking at something like a 70% cut in the import tariff applied
to third country sugar imports and quite such a large cut was
not really envisaged at the time of the reform negotiations, so
there is a possibility that it could undercut the European market
at the time when that market was beginning to stabilise. Our sugar
processors view this development as extremely damaging for the
remaining European producers and also for those developing countries
who will have unrestricted access to the EU market from 2009,
and therefore they would like to see sugar treated as a sensitive
product as a way of redressing this potential imbalance and preventing
any possible collapse of the market and avoiding that a WTO agreement
could undermine the sugar reforms. Our sugar users, on the other
hand, would be unhappy if sugar were treated as a sensitive product
and they would like the implementation of sugar reform to move
forward as they feel we will need imports to ensure we have sufficient
sugar in the EU, and imposing tariff restrictions on sugar is
not generally in line with our general call for liberalised markets.
I would be very happy if my colleagues want to add to that.
Mr Innocent: We debate this, as you I am sure
can tell, on a number of occasions. We have another question later
about sugar, but we have a common viewpoint that we would like
to see efficient industries and, clearly, we have another common
viewpoint which is that it is a key raw material for us and therefore
we need it to manufacture our products. Our call on the non-sensitive
issue is to make sure that we have ready access to that very vital
raw material and if the only way that we can do that is by having
imports at the world price with no restrictions, then that will
be what we need to do to maintain our manufacturing base. I maybe
do not agree but I can understand where Simon's point is, the
industry is going through some very significant changes and we
are probably, jointly, not happy with some of the ways that the
quotas have been cut on a cumulative basis for the very efficient
manufacturers.
Mr Harris: We would both jointly like to emphasise
the large area of common agreement between us, apart from when
we are arguing about price. Leaving that to one side, as Tim said
our interest is in having an efficient industry. Our concern as
a sugar processor would be that the industry is already going
through a very traumatic restructuring process. You are talking
about taking out 40% of production capacity. That is a hell of
a lot and because it is such a capital-intensive industry we are
having to use a standard, industrial type restructuring scheme
to do it, which is going to cost of the order of €6 billion
to buy out that redundant capacity that is having to go. With
that sugar regime reform, the second strand of it was the stick
which was a 36% price cut. That was based on an implied WTO agreement
on a cut in the topmost tier of import tax, which is where sugar
falls, of no more than 60%. We are now looking at, probably, a
cut of 70%; that is over the tipping point and the effect would
be, with low world prices—particularly with the US dollar
weakening all the time—that the EU market could be undercut
by third country supplies even on an import duty paying basis
unless sugar is either treated as a sensitive product and/or the
special safeguard clause which currently exists is maintained.
We should recognise that sugar is sensitive in virtually all countries
where there are sugar industries in the world, Australia being
the exception, and even there they are finding that their espousal
with trade liberalisation is not serving them so well as they
thought it would do. The point here, as I have already said, is
that there is so much capital invested in this industry, in particular
on the cane side—the cane industries are development polled
for the countries in question—so that governments willy-nilly
are involved with these industries.
Q833 Chairman:
Could I just check where we are with sugar reform because you
are speaking as though it is going ahead full steam and everything
that we seem to hear is that basically the Member States are trying
their best to subvert the sugar reform.
Ms Rawling: My understanding is that there was
an agreement in the Council in September for further cuts in capacity,
but this is actually not happening until the beginning of next
year.
Mr Harris: If I may, the original reform had
one fatal error in the text when it said that the compensations
to be paid to growers should be at least 10% of the total compensation
payable. That phrase "at least" meant it became an area
of negotiation and, once it became an area of negotiation between
farmers and processors, governments got drawn in and once governments
are drawn in then that delays everything and it all gets into
a big mess. At the same time, in Eastern Europe in particular
a lot of governments are saying we did not join the European Union
in order to lose our sugar industries, which was in effect what
they were faced with, because they only joined in 2005, so they
walked straight into sugar regime reform as it were. The third
issue is that everyone had under-estimated the unwillingness of
the co-operative sector to rationalise and, off the top of my
head, over half the sugar industry capacity is now owned by co-operatives,
but not the more traditional, small farmer co-operatives, these
are big companies who just happen to be owned by farmers to an
extent. We have been led into the need for a second reform therefore,
the reform of the reform, to address these issues and, in particular,
they have introduced the right of grower initiative so that growers
can demand to renounce quota irrespective of their processor,
whether private or co-operatively owned, and irrespective of their
government. At the same time, the amount of compensation going
to growers was vastly increased so that for one year they will
give an amount of €300 per tonne of sugar equivalent as compensation,
which is a huge amount of money—it is more than ten times
profit, more than ten years worth of profit, particularly in Eastern
Europe where their costs are generally lower, and this will break
the logjam. At the same time, processors have been offered an
inducement in terms of being persuaded to renounce quota, which
we are going to come onto in a subsequent question.
Chairman: Let us move on to biofuels.
Lord Palmer.
Q834 Lord Palmer:
As you are no doubt aware, there has been tremendous, in my view
ill-informed, press speculation, and you do indeed express a certain
amount of anxiety about the consequences of the expansion of biofuel
production on the prices of food and indeed feed. Have you undertaken
any research to identify what impact might be expected? Would
the economic analysis you call for examine the net emissions savings
from differing strategies for fuel production—and of course
we are all aware that ABF have just opened the first bioethanol
plant last week?
Ms Rawling: Thank you. First of all I would
say that our members do support the idea that renewable energy
from agricultural sources does have a role in tackling climate
change and food security, but of course our primary concern is
that we do have access to the raw materials for our food and drink
manufacturing. We would like the policies around renewable energy
to be formulated in such a way that they avoid distorting the
availability of raw materials for food and feed. We have not undertaken
our own research, I do not think we are actually equipped to do
it because it is actually quite complex to do, but we have called
for some really thorough impact assessments to be done in this
area which look at the market, not just of the UK and the EU together,
but also how it fits into the global market, because one of the
things that really has happened and caused the past volatility
this year is that biofuels mandates and things were introduced
at a time when stocks of arable raw materials were at their lowest
for a generation on a worldwide basis. That confluence has not
helped to keep our raw material prices for the food and drink
manufacturers accessible. There are other factors that come in—a
confluence of various climatic factors and things as well—but
we do think this is an area where it is complex, you need lots
of different parts of government doing some joined-up thinking
about how different areas of policy interact with each other in
order that you do not get unintended consequences happening in
different sectors. We notice that there has been other research
done, in particular there is a recent study by the OECD which
is quite relevant to this, but we do think that this requires
quite a lot of underlying work to be done and, on the emissions
point finally, it is clear that one of the reasons for promoting
biofuels is to help climate change and, therefore, you do need
to measure the emissions here. It is a complex thing to do; I
have not really understood yet that anybody has a really good
methodology for measuring greenhouse gas emissions on agricultural
supply chains, so let us be aware that this is a very complex
area. Of course, for the food manufacturers more emphasis on second
generation biofuels would actually be the way we would like to
see things going and we would very much be behind the Council
conclusions back in the spring which said that the EU biofuels
target is subject to two very significant caveats: one, that second
generation biofuels are available and, two, that sustainability
criteria are fully worked through. We would very much endorse
that; we are just worried that people have been rushing into this
a bit without thinking it all through properly.
Q835 Lord Palmer:
It presumably has not helped that food today is the cheapest it
has ever been in real terms for the last hundred years; particularly
with such a tiny percentage of the weekly wage going on food it
does add to the complexity of this very difficult subject, would
you not agree?
Ms Rawling: Absolutely, and it is true that
food is now a small part of expenditure of families in countries
like the UK, but that is not true in some of the countries in
Europe, those who have recently joined the EU, like Romania or
the Czech Republic where it is still around 30% and of course
in other parts of the world. You do have to look at the balance
here because there are knock-on effects from this really being
felt in many different places.
Mr Young: I agree, I was just looking at the
summary I had of the OECD's report of September which concluded
that "Increased biofuels production at target levels assumed
by the EU, the US and Brazil [this is the global picture] and
others would lead to upward pressure on agricultural feedstock
prices. The rapid growth of the biofuels industry is likely to
keep these prices high and rising throughout at least the next
decade between 20 and 50% by 2016." That is significant,
and I would agree with the observation that in the UK food prices
are relatively low compared to income, but the impact, particularly
in urban communities in less developed countries, would be very
significant as a result of EU biofuels policies, US biofuels policies,
and that is why a joined-up approach, a global thinking-through
of the impacts of these policies, is really essential.
Chairman: Sugar regime. Lord Greaves?
Q836 Lord Greaves:
Back to sugar! You think you have dealt with it, do you?
Ms Rawling: I am sure there are always additional
things to say about sugar!
Chairman: I think we have discussed it
this side of the table.
Q837 Lord Greaves:
I think we have established so far that the position is difficult.
The existing reforms have not reduced production by as much as
expected and some of your members anyway are not happy about across-the-board
quota reductions to tackle the problem further. What are the answers?
Ms Rawling: I think, as has already been mentioned,
an efficient industry is in all our interests, and these across-the-board
reductions tend to cut the most efficient as well as the least
efficient, and that is why I do not like them, but I would allow
my colleagues to add to that.
Mr Innocent: From the point of view of sugar
users the thing that we worked on with the Commission through
CIUS, our European organisation, was that, yes, there needed to
be some change but we wanted to see the efficient industries remain.
I think that the recent across-the-board cuts that we have seen
are quite counter-intuitive really to the initial premise of the
sugar reform. Essentially, we do need the supply of that raw material,
as I think we have already said, and in many ways we would be
happy for there to be no quota and to allow the most efficient
to produce in the most efficient place. We know that was not in
the reform but it was certainly the position that we put forward
and I think that the UK Government was of that view as well.
Q838 Lord Palmer:
Could I ask a quick supplementary. I ought to know, but roughly
what percentage of UK sugar usage is actually imported at the
moment?
Mr Innocent: What percentage for industrial
use?
Q839 Lord Palmer:
Well, for food use?
Mr Innocent: For food use. In terms of industrial
usage by companies like ourselves, about 70% of EU sugar manufacture
is used in industrial products. The remaining 20-something per
cent will be used in domestic. There is some industrial usage
but I think that is predominantly outside those quotas, is it
not Simon?
Mr Harris: Yes.
Mr Innocent: For a lot of the industrial usage.
A significant proportion is in edible food I would say.
Ms Rawling: I think perhaps just to be clear
here when you talk about industrial use you mean use within the
food manufacturing sector.
Mr Innocent: Sorry, yes.
Ms Rawling: Just in case there was any confusion
there.
Mr Innocent: The EU classifies it as industrial
use, which means for making food but it is not industrial use
when it is for making paper and citric acid and other things,
so it is a strange anomaly and I seem to be using their language
as well!
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