Examination of Witnesses (Questions 880-900)
JONATHAN PEEL, SIMON HARRIS, RUTH RAWLING, ERICA TOWN AND NEIL MAKIN
WEDNESDAY 1 MAY 2002
880. Is not part of the problem that while you two are global companies, many of the marketplaces in which you trade are essentially national because of different tastes and that therefore you can get involved in these cosy relationships, effectively to rip off your consumers, because there is no global framework within which they can compare prices or resource other products to meet their demands?
(Mr Makin) If you were to see our position statements, which I shall happily send you and if you were to see British Sugar position statements, which I am sure Simon would happily send you, you would not see anything in the way of a cosy relationship.
881. But you did not answer the point which I made which was that you actually address national marketplaces.
(Mr Makin) Yes, to a certain extent we do. The EU is much broader than that.
(Ms Town) In my particular case 25 per cent of our confectionary products are exported and over 40 per cent of that is to non-EU markets. It is very, very important and we have competing factories amongst our own businesses who can make other products. Kit-Kat for example could be made elsewhere in the world. We do not want that to happen but our fundamental competitiveness still has to be correct.
882. Let us look at that competitiveness. It has certainly been fashionable for a while to criticise the aggressiveness and competitiveness of the UK food sector and say that it is a poorly run, stodgy business to be in and that actually the discussion we are having, which is about input costs, illustrates the rather poor performance which perhaps ought to be addressed in this sector. What would you say to that?
(Ms Town) I have worked in the food industry for 22 years and I believe it is one of the most highly competitive markets.
883. I am talking about global competitiveness here. You may well be very competitive against other UK suppliers, but the problem is that the norm in the UK and to some extent in Europe is poor.
(Ms Town) I believe on confectionary that it is probably one of the best value markets around the world.
884. So by implication you would welcome an opening up of global marketplaces because you think the EU sector would do very well in that, do you, because your industry is well placed and geared to face competition on a global basis?
(Mr Makin) I welcome competition as well, welcome competition at the manufacturing/consumer end. We would also welcome more competition in the sugar processing sector. At the moment there is no competition in the sugar processing sector and that clearly is wrong. We cannot buy sugar in different parts of Europe.
885. Although you concede that you have been rather silent or modest in putting forward that argument.
(Mr Makin) The facts are that the noise of the pro-sugar lobby has been at a much higher level of decibels than has the manufacturers. Yes, we do have to do a lot better. Clearly the meetings we had at ministerial level, with MPs, via the trade associations, did not quite make the same amount of noise and have the same level of impact on Members of this place as it should have done. Of course we have to do better and we shall.
886. I have to say that as somebody who has obvious vested constituency interests and was tending to take the view of British Sugar, I had nothing whatsoever from any of your organisations, either written, phone calls or anything. I should have thought whoever was the Director of Public Affairs ought to consider their position.
(Mr Makin) I am sure they did.
Mr Todd: I sat on the Agriculture Committee at that time, as did one or two of my colleagues here. I heard not a peep except when I met a very charming lady from Cadbury Schweppes and asked what she was doing. She agreed that it has been a pretty feeble effort. I do not know what you have been up to but it has not been much.
887. Erica Town started by saying that Mars had migrated for much manufacturing to Europe.
(Ms Town) For sugar confectionary.
888. What other examples do you have? Is that because commodity prices are too high because of support mechanisms?
(Ms Town) Yes and when you are making investment decisions with the uncertainty on the time frames that we are looking at, you do not know when X or Y is going to happen, if you are making a decision to make a new plant, you would not put it in the UK. For example, we have a Polo plant which we invested in six or seven years ago in York. If we were making that decision again, I doubt it would be put in a UK factory when 95 per cent of the cost of that product is a commodity over which we have no control as a supplier because of the duopoly in the UK.
889. Would you want to go to Eastern Europe in the expectation of Eastern Europe coming into the European Union and eventually those prices meeting somewhere?
(Ms Town) That would be the long-term expectation. Obviously distribution factors, quality factors, all of those technological abilities still have to come into it.
890. Would you agree that the protection of the comfort zone of the duopoly of British Sugar and Tate & Lyle is at the cost of UK jobs in the confectionary sector?
(Mr Makin) Potentially yes.
891. We have heard from Ruth Rawling that in the cereal sector the decline in market prices has led to a greater consumption for the animal feed sector. Some of our earlier witnesses have said that if only cereal prices have been set in the 25 per cent low at the beginning, quite a lot of the distortions might not have happened. But the price has come down and you have indicated that farmers do seem to have read the market signals in the sense that you are now able to get the sort of grain you want more easily in Europe at prices which are more acceptable to you. We have heard you say that there is no reason why the UK should not remain a significant player in world markets in cereals; there is no natural handicap or disadvantage there. If that same process were to happen in other commodities, would we see the same phenomenon? Would we see you being able to get the raw materials you want in other sectors more easily, being more disposed to investments in Europe? In other words, for whatever pain from adjustment the agricultural sector might take, would there be a compensating gain for the broader economy?
(Ms Town) May I comment on dairy. We see the UK as a very freely traded market; agriculture has been through some crises but that has been good because it has come out the other end. We have more controlled markets in France, environmental considerations in Holland which prevent farm expansion. Yes, in the longer term, in the 10-year plan, the view is that the UK is very, very strongly placed, provided all the other mechanisms are taken away that would make that competitiveness less.
892. Let us continue in dairy for just a second. As you know, the dairy price is showing a downward tendency at the moment and there is a great deal of angst in the dairy community: these are our production costs and we cannot go any lower. There was also a study which said that if quotas did go down there would be some consequence. Are you saying that in the absence of quotas and that support you would expect the dairy industry to be able to find an equilibrium at a lower price and the gains in productivity. Would that be your expectation?
(Ms Town) Yes, it would. That the farmer could produce with a much bigger herd, with all the capital investment he had made and be able to compete, not completely with New Zealand because of weather factors.
893. We do not want to be too mesmerised by trying to transpose one set of conditions to another.
(Ms Town) Yes; generally. More importantly the UK would have very high quality standards, very high levels of traceability, which would bring an added value as well to that commodity.
894. When you would be looking for your suppliers would you be looking for a minimum size? The implication of what you said seems to be that the change in the dairy sector will be a consolidation and a move to much large herd size. Is that your expectation?
(Ms Town) Yes.
895. The future lies with size, does it?
(Ms Town) As far as I understand it, that is the driving factor that will help bring the price down, as well as the right kind of cattle and breeding programmes as well.
896. Is there anything you feel you would like to say that you have not said? It is a bit late to undo anything you have said. Is there anything you would like to say? Do you think you have not left quite the impression you wanted to? Now is your chance without hesitation, repetition or deviation to put the record straight or leave us with one final message.
(Mr Makin) This is not the one final message but just picking up on that last point, yes, we are committed to the UK because of quality and price and service and delivery. Indeed someone like Cadbury who uses fresh milk anyway does not really have much alternative to the UK and Ireland. On things like sugar we are committed to the UK, which just makes it a futility that if we are driven, because of the current regime, to run out of budgets or no longer have availability of export refunds, we start having to use inward processing relief sugar. We are actually bringing sugar from other countries into this country to process when we have over-capacity in our own. There are some severe structural defects in that sort of relationship. There clearly are other impacts of the current regime which we have not had a chance and timeand you have been very generous with your time alreadyto look at this morning.
897. The American Farm Bill. We have been talking about supporting European markets and you did actually say there would be distortions in the American market as well. What is your telegraphic response to what is happening on the Hill there?
(Ms Rawling) I understand that they have agreed a Farm Bill. It increases support for American farmers by $7.4 billion a year for the next 10 years going forward on top of the existing support. Some of it goes in the reverse direction to WTO arrangements in that some of the payments to producers are more closely linked with production and market prices than in the past. That is about as much as I know on a headline basis at the moment. I have not seen a detailed analysis yet. There are going to be some really quite difficult consequences there for the WTO negotiations and indeed for European reform because the US is clearly going in a reverse direction.
898. We are certainly all inter-competitive at the moment, are we not?
(Mr Harris) I did not come back earlier because I did not want the session to be dominated by sugar when we are meant to be talking about the entire food industry. May I make a couple of points very quickly? One is that looking at the world market for sugar is extremely misleading. Research done by a leading firm of commodity consulting economists based at Oxford shows recorded world prices are typically something like half of long-run average world production costs. It is a huge distortion of the world market. The only point is that to make a comparison between EU prices and world prices is highly misleading.
899. I think he has your £160 per tonne in his sights. You might have to sort yourselves out outside.
(Mr Harris) Secondly, something like one quarter of our own sugar production occurs overseas in Poland, which is beet, and China, where it is cane. We believe that the UK is a highly competitive beet sugar producer and we ourselves benchmark against other beet sugar processors around the world and we are in the top three on the basis of production costs. I do not think you can say that we are part of a cosy industry which is just sitting there doing nothing. Far from it. If we did lobby heavily on EBA, it was because we were the most directly affected. You would expect us to.
900. I notice we have hit a little nerve there.
(Mr Peel) One final comment. Obviously the food and drink manufacturing industry is one of the two largest manufacturing industries in Britain. We are very keen that it should remain in Britain and that it should remain in Britain to invest in Britain. This morning's evidence has shown just what a broad church we are. It has also shown how timely is the setting up of the food chain centre.
Chairman: We will not pursue that particular line. I remark only that when you have very broad churches almost anything of importance happens in the chancel. Thank you very much indeed for coming to see us. We shall no doubt be in touch because we shall probably wish to seek amplification, clarifications or precisions as we put the report together. If there is anything you would like to send usRuth Rawling has undertaken to give us some material alreadythat would be extremely helpful. Thank you very much indeed. We shall no doubt be back around this course at some stage. We are all very conscious that the WTO increasingly looks like the most important rendezvous in this whole debate. Thank you very much indeed.