Examination of Witnesses (Questions 860-879)
JONATHAN PEEL, SIMON HARRIS, RUTH RAWLING, ERICA TOWN AND NEIL MAKIN
WEDNESDAY 1 MAY 2002
860. There is a feeling that British agriculture is not competitive and is in serious decline if not terminal decline. The main aim of this Committee is to look at the future of UK agriculture. Do you actually think it has a future?
(Mr Peel) Yes, we do. We want to continue to source as many products from Britain as we possibly can. The United Kingdom is one of the two best areas in the world for dairy production. We think that it is ideally suited for beef and red meat production. We think that Britain is ideally suited for fruit and vegetable production. There are certainly areas where British farmers should be able to compete, but it is a global market and it is necessary to get British products as competitive as we possibly can on the world market. That is why we are looking for changes in the system to make it happen. We need it done over time because people take time to adjust but we do want to keep the industry investing in Britain and to keep the industry investing in Britain we need to be able to source locally as much as we possibly can.
861. Do your European equivalents believe in the same kind of analogy of process?
(Mr Peel) Yes. There is obviously a wide range of views across Europe. Our sister organisations across northern Europe would look to source what they possibly can in northern Europe. Southern Europe has always had a rather different tradition where the more Fortress Europe inclinations come from. There are signs of change; certainly there have been signs in France up until recently, but that was before the election. Certainly Britain, Germany, Denmark, Sweden and the Netherlands had been meeting together to try to bring about a more market-oriented CAP.
862. What do you mean by this gradual change from subsidies to free market?
(Mr Peel) The market has been heavily subsidised over many years. It is now nearly 30 years since we joined the European Union. Before then there were subsidies of farmers; their prices were met. At the moment we have a major problem because of the high price of the pound against the euro; it is in the region of 25 per cent. Things cannot change over night without causing an awful lot of hardship to British farmers and this is a point which is made to me by many farmers that things cannot change over night. Ideally, if we want to keep Britain competitive and we want to keep the food industry located in Britain and investing in Britain, this will have to change as we move into an increasingly global market. We have the pressure from Doha, we had the Doha Declaration in November, which talked about the removal of export subsidies, talked about reducing domestic support. That is the way we think the wind is blowing and we want time to make sure we can adjust to it.
863. What would you advise the Government to do to achieve this? How do we go about this? Mr Harris will be thinking in terms of British Sugar and I have to declare a constituency interest here in that I have a sugar beet factory in my constituency. Logic says, indeed the Government are already heading down this road, that that kind of subsidy is going to disappear. It will have a major impact upon farming. From your perspective how is the farming industry going to cope with this change?
(Mr Makin) Inevitably, on the question of how the Government is going to cope with this, the Government are going to have to be prepared for other types of direct support to the countryside, to rural areas. May I take an analogy with industry and business? If we were looking at a major programme of restructuringand that is going to happen anyway; that is going to happen as a result of change to the CAP, whenever it comes, that is going to happen as a result of the inclusion of big countries like Poland and other enlargement countries, restructuring will be inevitableas a country we have to be able to support the countryside if we believe, as I do, like Jonathan, like the FDF, that the continuation, sustainability of fresh milk, locally grown sugar beet is very important for industries like ours. That will mean things like education, it will mean things like training, it will mean things like looking at different structures of farming, it will mean talking more to the farmers, bringing the marketing skills to bear on helping farmers market their Argyll black-faced sheep or their turnips or whatever. It is being done quite successfully in little niche areas at the moment with venison and kippers and things like that. You are looking at a considerable step change in terms of rural development, in terms of planning and in terms of assisting the farming community. All that will have to be done if we want to retain our countryside.
864. I can understand that.
(Mr Makin) But they are not doing it yet.
865. Whether they are doing it yet or not does not matter. This is messing around on the periphery. We have been in New Zealand where they do a bit of this but to keep farming going we are really talking about volume trade, volume production to a certain extent, which obviously has to be oriented from a consumer's point of view. I am not trying to be rude but I hear what is a very easy thing to say, we hear it from governments, we hear it from all kinds of organisations, but the real practical thing is to keep UK farming going in terms of the volume trade, the core element, not all this elastoplast stuff on the outside, being park keepers as was put to us by one New Zealand farmer. How are we going to achieve that? The fear is that UK farming will end up by being so marginalised that from your perspective you will end up increasingly getting the material you want in terms of volume from overseas. So I come back to my basic question. How are we going to keep UK agriculture, the actual real farming bit, going?
(Ms Rawling) We did an exercise trying to compare production costs on grain in different countries of the world. It is very difficult to do because of the distortions by government regimes in different systems. Our conclusion was that for wheat production, for example, and some barley production, the UK is as competitive as anywhere in terms of significant volumes; certainly within the European Union. Even if you compare it with somewhere like the US, which has a large amount of distortion in its own system, it will almost certainly never be the cheapest place in the world to produce wheat, but in terms of the volume of wheat that the world demands, the UK will be right in there and will stay in there. The problem is that there is no real world market price for wheat, because of all the different government schemes around the world, but if we can get to a market price where farmers are talking to consumers through the food industry and where support is kept in terms of more direct payments so that it is not distorting what is actually grown on the farm, we shall still see wheat production in the UK, there is no question about that.
(Mr Harris) We see in relation to the sugar beet crop, for example, two particularly important features. One is working with sugar beet growers to improve their competitiveness through a series of targeted initiatives. There you are seeing a much closer, a much more direct relationship between the processor and the grower which in sugar beet has certainly been very successful and may be the sort of thing we are going to have to start looking at for other crops as well. We also have to emphasise that when we are talking about the CAP reform and everything that is only one part of the policy discussion. When we say "food chain" we are also talking about issues of traceability, food assurance, food quality and so on. For that domestic sourcing is a key feature and part of the FDF evidence. We are concerned that we know what is being produced on farms, how it is being produced, so that we can reflect that back to the retailers who come along to us and ask whether we can guarantee this, whether we can guarantee that.
(Ms Town) I should like to add something on dairy, given your New Zealand experience. We believe that we could be one of the prime producers in Europe of high volume, very high quality product but to do that it is likely that will create surpluses. What do you do with those surpluses? You will need to export them, if you want to get the volume, if you want to help the UK consumer by bringing the general price down, producing bigger farms, supporting those regions, for example something like the B quota scheme which operates in Canada, which I am pleased to say has just been given a WTO rubber stamp. Those kinds of mechanisms, whether they are EU ones or British ones, need to be looked at very seriously in order to be able to promote volume and all the things we are really good at. At the moment it is a push market where things are made, with no real understanding on the part of the farmer of where those could go and where there is real demand. Marketing orientation definitely needs to be part of their thinking and understanding and their ten-year plans as well. Milk will be a single one, but there will be other crops where they need to look at more market orientation, where there is something they look at and understand the whole food chain and trends in food to be able to put their structure in place.
866. The FDF argues in its memorandum that CAP compensation payments remain acceptable as these are not trade distorting. In light of the considerable changes in production and trade flows in cereals and oil seeds since the CAP regime was introduced, how does the FDF defend its assertion that CAP compensations are not trade distorting?
(Ms Rawling) The answer is that they are much less trade distorting than market price support. The question of how trade distorting they are is quite a difficult one. What we do know is that the further you go away from trying to link payments directly to production, the less distorting it is. There is an issue with compensation payments at the moment because you still have to produce to get them. To that extent there is still an element of trade distortion there. This is quite a complex question and the FDF memorandum did not quite go into all these details. If we move more towards direct payments which are fully decoupled, they would become less trade distorting still. I understand the OECD is doing some work on rating different kinds of payments in terms of their trade "distortiveness". There is a graduating scale here. Certainly they are much less trade distorting than market price support.
Mr Simpson: It would be helpful if you could provide us with a more sophisticated argument on this issue.
867. As you were answering questions earlier you were talking effectively about micro measures. One macro measure which could make a substantial difference to producers is a realignment of the relationship between producers and processors. Would you welcome that?
(Ms Town) No, I do not believe we would. You end up with large parts of the market being controlled and it is not real market again. The alignment between processors and producers as one, that kind of vertical integration, normally creates inwards distortions.
868. That is exactly the situation in New Zealand. They get their market power from the fact that the producers own the processors. That is as much a market situation.
(Ms Town) They are a highly marketing orientated organisation though and that is not true of, for example, co-operatives as they have been historically within the UK, who were more trying to be protectionist rather than moving outward and trying to meet the needs of the consumer.
869. Their internal market is only about 4 or 5 per cent of the size of our internal market.
(Ms Town) Absolutely; yes. It is a very different orientation.
870. Could I just return to the sugar regime for a few moments? In its evidence on security of supply or just-in-time production the FDF raises the prospect of the sugar beet industry in the UK disappearing. Is that a reality?
(Mr Peel) That was given to us by Simon, so I am going to pass that to the author.
(Mr Harris) I surely did not say that the sugar beet industry might disappear?
871. Let me read it. It says, "For example, the loss of the sugar beet industry in the UK would not only affect the sugar producers".
(Mr Harris) The point we were making there was the growing integration of the supply chain. When people talk about reliance on the world market, for example, in relation to sugar, yes, you can import what we call parcels of sugar, shipments, but that is not the sort of volume you need to run modern food processing factories. Indeed in the UK, both ourselves and the cane sugar refiner hold stocks for the food manufacturing sector. They themselves, as a generalisation, do not hold very much at all. We have therefore a rather sophisticated "just-in-time" delivery system which is based on the fact that we have large factories, silos and tanker fleets able to deliver to the quality standards required when required.
872. So you are not telling us that the sugar beet industry is going to be wiped out but you are concerned about the changes in the EU sugar regime. Perhaps you would just remind me where we are on that. "Everything but arms" is now in place, it is being phased in, the final date is 2007-2009, something of that order. If you were looking at the future, what are the consequences both to the producers and to the growers?
(Mr Harris) That is a big question. As a broad sweeping generalisation, on the assumption that the Doha WTO round is going to be more or less a repeat of the Uruguay round, with various different twiddles at the edges but more or less, then we are very clear that the British sugar beet industry will certainly be able to handle that. We are not so sure about some of those on the continent but that is not our concern. We are very concerned, however, about the conflict in EU policy-making between the CAP reform as we know it, driven by what is going to happen at WTO, what might happen in the mid-term review, as against EBA, which offers uncontrolled access; at least in principle it does. We feel that the EU has not got its policies into alignment. We note in particular that if you start saying you have to reform the sugar regime very substantially, then that will not only have drastic implications for EU sugar producers, but also drastic implications for Third World suppliers to the European Union sugar market. The EU is the world's second largest importer of sugar already. When we start talking about sugar reform, it gets fairly complex because you have to balance all these interests. At the moment the balance has not been coherently put together.
873. Are you telling me that change is inevitable? What we have to try to define is the timetable for change, the consequence of change and the need to be clear about who drives the change, whether it is the markets or Government policy.
(Mr Harris) I would say yes, to all of that.
Chairman: When we get global warming you will no doubt be able to grow your cane on the South Downs.
874. May I turn the heat on the sweet tooths at the end of the team here? There is a point at which supply chain integration becomes cosy. If I turn to the issue of the sugar regime and the EBA proposals, I think all MPs with any interest in that were lobbied intensively by British Sugar and by Tate & Lyle, who essentially represent the Caribbean nations, for resistance to change as far as possible during the process. I drew to the attention of a representative of one of your companies the fact that I had heard absolutely nothing on this subject from the confectionary sector which presumably had a clear interest in reform of the sugar regime. Can you explain that?
(Mr Makin) We clearly did not do well enough.
875. Do a little better than that and say what you actually did. I saw no evidence whatsoever that your sector was lobbying for more vigorous change, when there was an opportunity to do so. It really did seem as though you were so comfortable in bed with your current suppliers that you did not wish to disturb their concerns which were being lobbied vigorously at that time.
(Mr Makin) No, that was not the case, but you are of course right that the impact was clearly not as heavy as it could have been.
876. Why not?
(Ms Town) From a Nestlé point of view, we feel very strongly about the inequities of the internal sugar regime when we are paying £500 per tonne for sugar that we could buy at £160 per tonne on the world market. I have brought a couple of examples: Mars do not make one single sugar product in the EU any more; they have moved all their production. We have had to move the production of Polo Fruits to the Czech Republic in order to get the consumer price.
877. Were these points made at the point where UK policy makers were attempting to make some judgement on this matter? I do not think they were. Tell me why?
(Ms Town) I am pretty sure they were. There was a view for example that Nestlé is not a British company, which is not true in that it has a lot of vested interests here.
878. You have a plant in my constituency.
(Mr Makin) At that time I certainly spoke to quite a few parliamentarians, some on this Committee. Certainly I wrote to all our constituency MPs and to the MEPs. I also was instrumental in getting the BCCCA, which is the confectionary alliance, making statements in this regard. You are absolutely right that our side of the lobby has not been as effective in the past and we have to do better. There is no disguising that.
879. It was a flaccid effort, to be quite honest and one where the closed markets camp of the sugar sector easily triumphed. It certainly gave the impression that competitiveness was not really a great concern of the sector. I must admit that the stock market takes a similar view that the food sector generally in this country is a cosy show, which does not really reward investors.
(Mr Makin) Certainly at the BCCCA, at the European organisation and in companies, I would say that reform of the sugar regime would be the number one issue on our list.
(Ms Town) We should like to see the precedent of the cereal reform being used as a very good precedent of how to do that for the sugar regime.