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



Memorandum submitted by the Food and Drink Federation (FDF) (A31)

 

1.  INTRODUCTION

  The Food and Drink Federation (FDF) represents the food and drink manufacturing industry, one of the two largest manufacturing sectors in the UK, employing over 530,000 people. Many more are employed in support industries. The industry's annual turnover is some 64.5 billion. It purchases some two thirds of UK agricultural produce. In 2000 UK food and drink exports totalled nearly 8.8 billion, of which almost 40 per cent went to non-EU countries.

  FDF addresses every aspect of food and drink manufacturing, from research to sourcing raw materials, processing, packaging, labelling and distribution. We promote the industry's views and work to improve understanding of its operational requirements in responding to Parliamentary, Government, EU and international consultations and through liaison with other parties.

2.  FDF RESPONSE TO INQUIRY

  Because of its remit, FDF has concentrated on the first part of the Committee's inquiry, namely its consideration of "the prospects for production subsidies and quotas, against the backdrop of world trade liberalisation and the mid-term review of the Agenda 2000 reform of the CAP", to which FDF would add EU enlargement. FDF wishes to spell out what, as the purchaser of some two thirds of UK agricultural produce, the industry looks for from UK agriculture, against this backdrop. In this instance FDF has not commented on either better stewardship of agricultural land, or on the opportunities and difficulties faced by agriculture itself, though these points will be indirectly addressed in this submission.

3.  SUMMARY OF KEY POINTS

 (i)   The importance of UK competitiveness

  The UK food and drink manufacturing industry is a major exporter: it is essential that it can continue to compete for the new markets opening up outside Europe (Section 4).

  A major challenge over the next five years will be to retain production within the UK, as companies make new regional or global investment decisions and as the UK enlarges (Section 4).

  A major factor in retaining this production will be the ability to continue to source competitively priced agricultural raw materials within the UK, or nearby in the EU (Sections 4, 5, 7).

  FDF supports equitable liberalisation of world trade (Section 6).

  When EU prices for agricultural commodities are above the world level, the industry's competitiveness is threatened. This is met in part by export restitutions/refunds (Section 6).

  FDF believes that the CAP as currently constituted does not address the longer-term needs of either the consumer or the agricultural of food manufacturing sectors (Section 6).

  Reduction of EU internal support prices for raw materials will help to achieve competitive ingredient costs for manufacturers, closer to world market levels. In turn that will mean lower food prices, to benefit the consumer, and lower export refunds, to benefit the taxpayer (Section 6).

  If the cost of reducing barriers to exports to third country markets is that barriers against imports from third countries have to be lowered, it will be essential to retain the incentive to process food and therefore add value within the EU. EU tariff reductions must not outpace internal price support cuts (Section 6).

  It is essential that businesses, markets and communities be given sufficient time to adjust to any changes that are made, and that standards of sustainability are not lost in the process (Section 6).

  The current WTO agriculture negotiations, the prospect of major EU Enlargement by 2004, and the mid-term review of the CAP all offer the prospect and opportunity for change (Section 6).

 (ii)   Keeping agricultural production within the UK (Section 7)

  A major factor in retaining processed, value-added food and drink production in the UK will be the ability to continue to source the appropriate, competitively priced, agricultural raw materials within the UK, or nearby in the EU.

  It is efficient and responsive farming that enables the food and drink manufacturing industry to source locally, while remaining competitive. If manufacturers cannot source locally, then the pressure will be on to reinvest and move to countries and regions where competitively produced resources are located: the impact of Enlargement cannot be ignored here.

  This pressure to relocate will equally apply to the chain between primary and secondary processors, especially where the latter work on the principle of "Just-in-Time" delivery.

  Sourcing form within the UK and elsewhere in the EU can also benefit food safety, food quality and help meet the justified demands for greater levels of food traceability and for sustainable agriculture.

  However, FDF cautions against any measures that would lead to distortions of the Single Market. These would include moves for any transfer or increase in those payments to be made under the CAP at national level and at national discretion, whether by means of additional national subsidies, or allowing funds to be directed to alternative uses (Section five).

 (iii)   Specific sectors (Section 8)

    —  FDF has consistently sought abolition of the dairy quota system, and continues to do so.

    —  For cereals FDF wishes to see the end of market distortions caused by official CAP support mechanisms, such as intervention, Blair House Limitations for oilseeds and set-aside.

    —  FDF members wish to encourage beef production, given the UK's advantages of climate and existing expertise.

    —  The UK must remain viable in sugar. It has an efficient sugar industry based on processing domestic sugar beet and imported raw cane sugar. It is crucial that in any moves towards liberalisation the UK's quotas are not reduced when other Member States are producing large surpluses. The UK is amongst the most efficient EU producers of sugar beet: FDF believes that the sugar beet industry will remain viable in the UK based on long-run average production costs.

    —  The UK is a major apple-producing area, yet FDF notes that apples and many soft fruits are currently easier to source from abroad and at lower costs.

    —  Transition away from the current CAP arrangements will need to be handled with extreme sensitivity, not least to allow companies, producers and markets sufficient time to adjust.

4.  IMPORTANCE OF INTERNATIONAL TRADE AND THEREFORE COMPETITIVENESS TO THE UK FOOD AND DRINK INDUSTRY

  The UK food and drink manufacturing industry is, as already stated, a major exporter. FDF therefore welcomes the Committee's specific reference to world trade liberalisation and the mid-term review of the CAP, to which we would add EU Enlargement. If Enlargement is to proceed according to the timetable agreed at the December 2000 Nice Summit, then the agriculture "chapters" of the negotiations will need to be closed within the next 12 months.

  All three factors are key to the future competitiveness of our industry.

  In a mature EU market it is only by being competitive internationally that the UK food and drink industry can be maintained.

    —  One of the major challenges over the next five years will be to retain production within the UK, as companies make new regional or global investment decisions, influenced by many factors including currency rates, EU enlargement and social costs.

    —  A major factor in retaining production will be the ability to continue to source agricultural raw materials within the UK, or nearby in the EU.

    —  Many of the developing countries, who currently consume our products, see themselves as net exporters of processed, value-added food and drink products within10 years.

  Over the next 10 years there are major opportunities to be grasped as new markets continue to open up, particularly in Asian and Latin American countries, where large numbers of consumers are starting to enjoy disposable incomes and look forward to new diverse choice in the food they eat. The OECD states that in the decade to 1996 this market already grew by some 500 million people. FDF looks to HMG to help gain these new areas for export opportunities for UK-based producers, rather than lose these markets to others. Such exports offer the main sources for growth for food and beverage companies: the European market can no longer offer much room for growth.

5.  SOURCING AT HOMEAND ABROAD

  The UK food industry sources its agricultural raw materials both at home and abroad. As previously mentioned the industry purchases some two-thirds of UK agricultural produce, estimated at an annual cost of 11 billion. In total the industry imports some 7 billion of raw materials from elsewhere in the EU, and around the world. This includes many items that UK farmers cannot grow easily—commodities like maize, cocoa or coffee, rice or beans like navy beans, (which are then processed into baked beans). In addition, of course, there are other food imports, mainly fruit and vegetables (eg bananas), which go straight to the retailer/consumer.

  Most of our raw materials and ingredients come from the UK and elsewhere in the EU. FDF would therefore strongly caution against any measures that would lead to distortions of the single market. This would include any moves for any transfer or increase in those payments to be made under the CAP at national level and at national discretion, whether by means of additional national subsidies, or allowing funds to be directed to alternative uses. Equally FDF is concerned at UK tendencies to gold-plate EU legislation, to the detriment of farmer and food manufacture alike. All too easily this adds costs not faced by our competitors. Currency exchange rates can be an additional complicating factor here.

6.  COMPETITIVELY PRICED AGRICULTURAL MATERIALS

  FDF supports equitable liberalisation of world trade. It is essential that there are close relationships between raw materials (from either inside or outside the EU) and value added food products, thus ensuring that the EU food industry remains competitive both inside and out. Where EU prices for agricultural commodities are above the world level, these are potential threats to the industry's competitiveness, met in part by export restitutions, or refunds. Therefore FDF would stress that internal EU price-linked support will need to be removed, or reduced to safety-net levels, before export subsidies can be eliminated. If not, UK and EU exporters will not remain competitive.

  FDF wants to see a more market oriented CAP that will allow the EU to meet the challenges posed by Enlargement and the new WTO round, the "Doha Development Agenda".

  FDF believes that the CAP as currently constituted does not address the longer-term needs of either the consumer or the agricultural or food manufacturing sectors. However, it is essential that businesses, markets and communities be given sufficient time to adjust to any changes that are made, and that standards of sustainability are not lost in the process.

  Reduction of EU internal support prices for raw materials will help to achieve competitive ingredient costs for manufacturers, closer to world market levels. In turn that will mean lower food prices, to benefit the consumer, and lower export refunds, to benefit the taxpayer.

  For farmers, pressures are ever increasing for economically rational and environmentally sustainable policies. For the food industry, the CAP through forcing up raw material prices and artificially distorting the location and level of ingredient supplies has a profound impact on productivity and efficiency, to the direct detriment of our competitiveness.

  Yet if the cost of reducing barriers to exports to third country markets is that barriers against imports from third countries have to be lowered, it will be essential to retain the incentive to process food and therefore add value within the EU is maintained. EU tariff reductions must not outpace internal price support cuts.

  The current WTO agriculture negotiations, the prospect of major EU Enlargement by 2004, and the mid-term review of the CAP all offer the prospect and opportunity for change.

  In particular, FDF looks to the current WTO agriculture negotiations to:

    —  fulfil Article 20 of the Marrakesh Agreement of 1994, which looked to these negotiations "correcting and preventing restrictions and distortions in world agricultural markets (in order to) establish a fair and market-orientated agricultural trading system;"

    —  fulfil the strategic approach set out by Article 20, to include "long-term objectives of substantial progressive reduction in support and protection resulting in fundamental reform in an ongoing process".

  FDF wants the negotiations to result in a fairer and clearer set of trading rules, treating agricultural products and value-added processed food and drink products in balance, and providing a coherent approach to the three key areas—market access, export competition and internal support. FDF looks to WTO members to respect environmental, animal welfare and social standards, seeking comparable conditions of production.

7.  AGRICULTURAL EFFICIENCY

  As already mentioned, the food and drink manufacturing sector purchases around two-thirds of the UK's farming output. We want to sustain this market and see it grow. Farmers need to produce what consumers tell us (and the retailers) they want to buy.

  A major factor in retaining processed, value-added food and drink production in the UK will be the ability to continue to source the appropriate agricultural raw materials within the UK, or nearby in the EU, at competitive prices. Because of our geographical location, it should be a myth that UK agriculture cannot be competitive in many sectors. Reorientation of subsidies to land/environmental management is a perfectly viable proposition, provided these are properly defined, and conditions do not undermine economic agricultural production.

  It is efficient and responsive farming that enables the food and drink manufacturing industry to source locally, while remaining competitive. If manufacturers cannot source locally, then the pressure will be on to reinvest and move to countries and regions where competitively produced resources are located: the impact of Enlargement cannot be ignored here.

  This pressure to relocate will equally apply to the chain between primary and secondary processors, especially where the latter work on the principle of "Just-in-Time" delivery. For example, the loss of the sugar beet industry in the UK would not only affect the sugar producers, but could also affect soft drink manufacturers who work on this principle.

  Considerations of food safety, food quality and the justified demands for sustainable agriculture can be boosted by sourcing agricultural raw materials from within the UK, or elsewhere in the EU. With increasing consumer and legislative demands (both UK and EU) for traceability of food products (not just for GM/non-GM purposes), for greater auditability and for consumer assurance, a greater level of guarantee can generally be given from home grown and other EU produce than may be the case from non-EU sources.

8.  AGRICULTURAL PRODUCTS AND THE LEVELS OF SUBSIDY

  FDF argues that the UK needs to concentrate on those agricultural products that are natural or beneficial to the UK.

  These would include:

Dairy

  The UK's location in NW Europe makes it one of the two best geographically located regions in the world for grass fed milk production, the other being New Zealand. Currently under the CAP, the UK dairy quota means that it has been only 90 per cent self-sufficient in its milk requirements. FDF members have consistently sought abolition of the quota system, and continue to do so although for a variety of differing reasons. However, in view of current market distortions, the transition out of quota will be difficult and will need to be handled very sensitively.

  FDF would also point out that, while many dairy companies will have their own milk suppliers, co-operatives and others do not. FDF would urge even greater links between the farmer and the eventual user, many of whom will have differing requirements for protein content, or protein-fat ratio. Often the farmer has little idea as to whether his milk will end up in a milk bottle, as cheese or any of the other myriad dairy products.

Cereals and oilseeds

  Again, cereals and oilseeds are crops for which the UK is well suited. FDF members, which include cereal millers and oilseed crushers as well as users, are particularly keen to see the end of market distortions caused by official CAP support mechanisms, such as intervention, Blair House limitations for oilseeds, and set-aside. Changes to the cereal regime have been effective in reducing the role of intervention, but in some cases the farmer's incentive to grow a particular variety is not consumer oriented, but influenced by such CAP-driven considerations. FDF members would like to see:

    —  elimination of compulsory set-aside.

    —  encouragement of renewable raw materials on voluntary set-aside or on land in current use. A clear policy framework on the non-food sector is essential, that promotes these crops in the long term and provides certainty for investors. FDF notes that the Commission has just published its proposals on biofuels.

    —  Measures to eliminate the discrimination between cereals and oilseeds, including:

    1.  ending Blair House discrimination for oilseeds produced on set-aside land (ie end limitation of 1 million tones of soybeanmeal equivalent). This needs doing in the context of mandatory or voluntary set-aside;

    2.  confirming that the Blair House limitation on main oilseed acreage is no longer applicable;

    3.  reducing further the role of cereals intervention (completing the unfinished work of Agenda 2000), for example by abolishing monthly price increments;

    4.  abolishing intervention for cereals or, pending this, introducing an equivalent safety-net for oilseeds.

  However FDF members consider that compensation payments remain acceptable as these are not trade distorting.

  This is another area where transition away from the current CAP arrangements would have to be handled with extreme sensitivity, not least to allow companies, producers and markets sufficient time to adjust.

Beef

  As a result of the BSE trials and tribulations, FDF looks forward to the re-emergence of one single set of rules, EU wide, for beef and meat products, and the restoration of the Single Market in this area.

  FDF notes that it is current EU policy to reduce the price of livestock to world levels, to compensate farmers by direct subsidy, and to avoid the use of intervention, despite the fact that the use of beef intervention is widespread across the Continent, partly driven by an increase in BSE levels.

  FDF also notes that the UK's self-sufficiency in beef production has fallen from some 80 per cent to 60 per cent as a result of FMD. FDF believes that the UK should be looking to increase its beef production, given our advantages of climate and existing expertise.

Sugar

  This is a controversial policy area, as virtually all the world's sugar industries are supported. Sugar does not form part of the mid-term review of Agenda 2000, but has its own review due in 2003. The UK must remain viable in sugar. It has an efficient sugar industry based on processing domestic sugar beet and imported raw cane sugar. It is crucial that in any moves towards liberalisation the UK's quotas are not reduced when other Member States are producing large surpluses. The UK is amongst the most efficient producers of sugar beet in the EU, a position that has been markedly improving in recent years. The loss of the sugar beet industry to the UK would have a knock-on effect on those secondary processors dependent on "Just-in-Time" delivery referred to above.

  Because many other parts of the world are more effective at hiding the level of subsidy to sugar growers than is the case under the CAP, the residual world market price for sugar is distorted. However, FDF believes that the sugar beet industry will remain viable in the UK based on long-run average production costs, a more reliable longer term guide. This is another area where transition away from the current CAP arrangements would have to be handled with extreme sensitivity, not least to allow companies, producers and markets sufficient time to adjust.

Fruit and vegetables

  Vegetables have an open market and are barely affected by the CAP; fruit is another matter. The UK is a major apple-producing area, yet FDF notes that apples and many soft fruits are easier to source from abroad and at lower costs. It is not, however, certain that this area will be covered by the mid-term review either.

9.  POSTSCRIPT: SEEING THE CHAIN AS A WHOLE

  FDF believes it is essential that the food chain is seen as a whole, and indeed it is becoming increasingly integrated. Every day, the food supply chain has to deliver products that customers want at the price they are prepared to pay. This is a commercial reality, which all components of the food supply chain must recognise. In recent years the representative organisations of the different sectors of the food chain have worked—in partnership with Government—to break down barriers and increase communication between the sectors. Regular meetings now take place where issues of mutual interest are debated and joint strategies can be planned. FDF also has regular dialogue with the FSA and welcomes the application of its remit to the whole of the food chain.

  All elements of the food supply chain operate in intensely competitive global market conditions. As a result, the range and nature of the products on offer has altered hugely over the last decade to accommodate the changes which have taken place in lifestyle, working patterns and taste; prices in the shops are now cheaper (in money terms) than they were three years ago—and food price increases have consistently stayed below RPI for over ten years.

  FDF and its counterpart organisations representing the other sectors in the food chain do not believe that these competitive pressures will lessen or that customers will become less demanding either about the range of products they want or the price that they are prepared to pay for them.

  We think it will be important for these competitive pressures and their consequences at all levels of the food supply chain to be fully understood and taken into account by the Committee. We believe it will also be useful for the Committee to explore the mechanisms by which market signals from customers are transmitted down the food supply chain, and how these mechanisms could be made to function more efficiently. We also believe it is essential the Committee understands the need for profitability across the chain if it is going to be sustainable.

14 December 2001

 


 
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