Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


Memorandum submitted by the Co-operative Group (A 52)

  The Co-operative Group, of which Farmcare is a part, has a significant interest in the Common Agricultural Policy (CAP) and proposals for reform of agricultural policy at UK, EU and international level. The consumer-owned Co-operative Group is a family of businesses whose activities range from financial services to funerals. Three of our businesses are direct food chain stakeholders, concerned with farming production, dairy processing and retailing of food. Crucial to the development of these three businesses, therefore, is the future direction of agricultural policy, both in terms of food production and land management.

  Given the remit of the Committee's inquiry, this submission focuses particularly on Farmcare. We have been involved in farming for over 100 years and Farmcare has grown into the UK's largest commercial farmer, managing around 90,000 acres of farmland in England and Scotland—owned by both the Co-operative Group and private landowners. We currently employ 220 people, and this number more than doubles with seasonal and casual workers. We have a mixed farming portfolio with a strong concentration in arable, dairy farming and horticulture.

  Farming in the UK is in deep crisis. Farmcare has felt the full impact of the downturn in farm incomes; our profits fell from £6.0 million in 1996, to £3.4m in 1997 and £1.0 million in 1998, followed by losses of £0.5m in 1999, and a further loss of £3.8m in 2000, with expectations of even greater losses this year. Against this background, we undertook a major strategic review of our farming business in 2000.

PROSPECTS FOR PRODUCTION SUBSIDIES AND QUOTAS, AGAINST THE BACKGROUND OF WORLD TRADE LIBERALISATION AND THE MID-TERM REVIEW OF THE AGENDA 2000 REFORM OF CAP

  The Co-operative Group believes that the status quo of agricultural policy is no longer an option. The crisis facing UK farmers as their incomes plummet has been well documented[1], and is borne out by our own recent results. At the same time the public is fast losing its appetite for production subsidies and confidence in the CAP is declining. [2]The next round of World Trade Organisation (WTO) negotiations, initiated at Doha last month, and the mid-term Agenda 2000 review present powerful institutional drivers for reform. Furthermore, it is clear that there is renewed UK political will to drive forward lasting reform of agricultural policy.

  We cannot claim to read the minds of those who will be directly involved in the WTO or Agenda 2000 re-negotiations nor to predict the outcomes that will be achieved.

  However, as an organisation that has a very important stake in these outcomes, we have a considered view about the direction in which agricultural policy should develop. As a business with a clear responsibility to the consumers that we serve and the rural communities in which we trade as well as farm, we believe that root and branch reform of the CAP and agricultural funding regimes is essential.

  We are clearly at a juncture where the debate about reform is now about means rather than ends.

  Agriculture has been the recipient of payments from the public purse to an extent unknown in any other trading industry. Farmcare, for instance has been a net beneficiary of the CAP, receiving about £2 million in subsidies and owning over 30 million litres of milk quota. However, we believe that public subsidy of food production is no longer of strategic importance, nor is it desirable from either its consumers' or producers' point of view. Indeed, we would argue that protracted and artificial (production-based) subsidy of the farming economy serves only to damage the long-term competitiveness and commercial sustainability of UK farming, providing that our global competition also becomes subsidy-free. But it is also imperative that our global competition moves towards subsidy-free farming.

  For our industry to survive and thrive into the future, farmers must become significantly more market-focused and demand-led. Production subsidies have driven farmers to concentrate on yield, in particular on quantity rather than quality, in place of an understanding of market signals. The wine lakes and grain mountains of the late 1980s may have become a thing of the past following the limited MacSharry reforms but we are still witnessing the disastrous implications of headage payments for livestock production. If as an industry, we continue to farm with a yield-based rationale, only to sell in to the anonymous commodity market, against falling world prices, we will in effect be signing our own death warrant.

  We support the managed shift away from the market and price support mechanisms of the CAP's Pillar 1. Farmcare is confident that there is a clear role for UK farmers as food producers if, in the absence of production subsidies, we become more market-responsive. This will involve changes away from globally uncompetitive basic commodities towards the production of those market-led, value-added products where we have the potential to become world leaders. Our own farms are aiming, within a few years, to plant nothing that has not effectively been pre-sold for a specific customer—in other words, producing for the market, not the subsidy—and producing what the consumer wants to eat, not what the farmer wants to grow.

  We are convinced of the inevitability of the removal—over time—of production subsidies. It is a prospect that we anticipate with confidence. Farmcare is confident that although change can always produce short-term uncertainty, the change away from subsidies will allow significantly more confident involvement with, and responsiveness to, the market which we believe will prompt greater competitiveness amongst farmers and, in turn, secure the lasting sustainability of the industry.

HOW TO PROMOTE BETTER STEWARDSHIP OF AGRICULTURAL LAND

  Farmcare believes that as a result of the desirable shift away from production subsidies, agricultural produce will be much more closely related to the market and that farmers will develop a capacity to recognise and respond to the market's changing demands. However, as a responsible farming business we also recognise our role, and that of the wider farming community, as custodians of the land that we manage.

  Farmers are custodians of the vast majority of the "countryside" in the UK . The farming community as a whole has a responsibility not to degrade the environment in which it works and from where it draws its income. The use of that land, however, and in particular, levels of cultivation clearly vary according to location, fertility, climatic conditions etc. Farming practices will inevitably differ between high density, demand-led dairy farming in the fertile Cheshire plains or low density grazing in the Peak District uplands.

  Farmcare has led the way in developing environmentally responsible, commercial farm practices. We were pioneers of Integrated Crop Management Systems, operate Countryside Stewardship schemes across our farms, have worked closely with the Farm Wildlife Advisory Group and are sponsors of the Silver Lapwing award for conservation and environment management on commercially successful farms. With our relatively high Research & Development capacity we have been able to monitor the correlation between inputs and environment outputs in a commercial farming environment. We are also one of the largest organic farmers in the UK.

  We welcomed the creation of the Rural Development Regulation and support the shift in payments to the CAP's Pillar 2. However, we do not believe that agri-environment payments should be seen as compensatory payments for the phasing out of production subsidies. In our model of demand-led commercial farming, we believe that market signals point clearly to consumers' growing interest in the farming methods by which their food is produced. The Co-operative Group, with its unique position as farmers, processors and retailers, has worked hard to respect the "plough to plate" concerns of consumers, pioneering animal welfare initiatives on our farms, such as the RSPCA's Freedom Foods. We have also supported calls for an Organic Action Plan to allow for the sustainable growth of a domestic organic supply. However, 21st century UK farming must be competitive and demand-led and we would therefore strike a note of caution against the proliferation of subsidies for extensification that may, inadvertently, confuse market signals and fail to respond to the needs of consumers.

  We also recognise the contribution—and needs—of farmers who are engaged in non-commercial land management and the maintenance of the aesthetic quality of much of our countryside. There is undoubtedly increased scope in the Rural Development Regulation for the provision of public subsidy to meet this "public good".

OPPORTUNITIES AND DIFFICULTIES FACED BY AGRICULTURE AS A RESULT OF POSSIBLE REDUCTIONS IN PRODUCTION SUBSIDIES

  Farmcare does not underestimate the potential difficulties that may be triggered by the reduction and possible removal of production subsidies. In any industry the process of change must be managed, and suitable provision made for those who are unable to embrace change.

  The process of economic liberalisation within New Zealand provides some interesting lessons in terms of the opportunities and difficulties faced by farmers following the removal of subsidies. The removal of subsidy was achieved over a relatively short period of time, with few farmers forced out of the industry. Although farm incomes and land values temporarily declined, the "big bang" precipitated more market-led production and a restructuring of the industry which has resulted in one of the world's most competitive farming economies. [3]

  Co-operation amongst the farmers of New Zealand played a major role in the recovery of the industry and we believe that wider and deeper co-operation between and within the farming and food sectors is essential to recovery. British farmers have been less innovative in their approach to co-operation than many of our European and American counterparts, where major marketing and supply co-ops are able to exert considerable pressure. To put the problem into perspective, Farmcare is Britain's largest commercial farmer, yet accounts for considerably less than 1 per cent of the market. This structural weakness is particularly stark when set against the supply industries on one side—for instance machinery, seed and fertiliser companies—and the food processing and retail sector on the other.

  Increased levels of farmer co-operation, in particular collaborative working practices, will counteract some of the inefficiencies which have hitherto undermined the potential sustainability and competitiveness of the farming sector.

  It has been estimated, for instance, that there is 40 per cent over-capacity of farm machinery in the UK, with pieces of expensive equipment lying idle much of the year. Within Farmcare, we are looking at new ways of equipment-sharing across our farming units, and potentially across different farming businesses, changing planting times to facilitate more use of less machinery. By coming together to solve problems co-operatively through structures such as machine rings, farmers can realise the potential to optimise limited resources.

  We also believe that demand-led co-operatives will enable farmers to improve the efficient use of certain farming inputs. By working together on the procurement of certain inputs, for example fertilisers, groups of farmers will be able to achieve an efficiency of scale though increased negotiating power with suppliers, many of which are now global.

  However, co-operation must not be thought of merely as a way of bringing together small non-viable farms to prolong their existence. Rather, the removal of production subsidies presents a unique opportunity for farmers to improve their business performance through co-operation and collaboration. Through higher levels of horizontal integration, farmers will also be able to meet more effectively the requirements of corporate consumers ie retailers and processors and, ultimately, the consumer at home. Demand-led farmer co-operatives will be able to aggregate larger volumes of high quality produce to meet the specification and supply programme requirements of consumers with whom they will have direct contractual relationships. This form of marketing co-operation, and the inherent improvements of mutual understanding, is vital if we are to see the development of an integrated food chain and a more globally competitive farming industry.

  We believe that in addition to encouraging farmers to work in innovative co-operative ways, the phasing out of subsidies will prompt farmers to explore new production income streams. The production of bio-fuels offers farmers a new opportunity to meet the demands of an emerging market for alternative energy sources. There is clear market potential in this area so long as the infrastructure for fuel conversion is put in place. However, we must be careful that subsidies are not merely extended to new crops, rather than developing new markets where there is a legitimate role for public support.

The Co-operative Group

17 December 2001


1   Agriculture in the UK 2000 (ONS, 2001) among other sources. Back

2   Eurobarometer Survey (May-June 2001). Back

3   Farming without Subsidies: Lessons from New Zealand, Malcolm D Bale. Back


 
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