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Lord Rowallan rose to ask Her Majesty's Government what is their view of the disparity between farm-gate and supermarket prices for food products; and what steps they intend to take to redress this imbalance.
The noble Lord said: My Lords, this is our third debate on agriculture and related subjects in recent weeks. That shows how important a subject agriculture has become and also the importance of the rural communities of Britain. Perhaps I may say how pleasant it is to see so many new faces attending the debate.
We know that farmers are in crisis. We know that the Government have agreed to inject a large sum of money into the agricultural industry to try to stave off the worst effects of that crisis. We know that BSE, E.coli, the high value of the pound and the green pound, cheap foreign imports and no export market have depressed farm product prices to uneconomic levels. Yet we see the prices of agricultural products in our supermarkets continue to rise in such a way as to rub salt into the wound of the depression at the farm gate. We must ask why. That is the reason I decided to ask this Question today.
Is it excess profiteering and greed to feed an ever-hungry shareholder or is it spiralling costs for the supermarkets which must be passed on? Two things are fact. First, the average British family pays £1,000 per year more to buy the same food as its European counterpart. Secondly, the average profits of supermarkets in the United Kingdom are three times those of their European equivalents. In the United Kingdom the food retail industry is dominated by the Big Four: Tesco, with annual profits of £866 million--I repeat that figure, £866 million; Sainsbury, with profits of £735 million; and Asda and Safeway with profits of £400 million. Those four control nearly 65 per cent. of UK food production and distribution. They have doubled their profits on food and soft drinks in the past 10 years.
Lest it be thought otherwise, I am not against profit. "Profit" is not a dirty word. Profit is to a large extent what makes the world go round. Without profit there is no business. But profiteering at the expense of the agricultural industry and the housewife by not passing on market decreases is neither fair nor ethical. Profiteering is not the same as profit. Profiteering is wrong but making a profit is fair. What we must do in today's debate is distinguish between these two words.
The power of the Big Four supermarkets is enormous. They have virtually killed off the local butcher and greengrocer from our high streets. They have the financial clout to run loss-making promotions to entice more customers into their stores. The threat of delisting is enough to frighten any producer. All the supermarket has to suggest is, "If you won't sell to us at our price, we will remove you from our list of suppliers." That is a death threat to any business, large or small.
According to the Hong Kong & Shanghai Banking Corporation, in the past five years shelf prices in British supermarkets have increased by 16 per cent. at Tesco; by 15 per cent. at Sainsbury; by 9.5 per cent. at Safeway; and by 4 per cent. at Asda. That is a frightening statistic. How Tesco can go to 16 per cent. and Asda to only 4 per cent. leads one to wonder what is going on. Prices are often rounded up to the nearest 5p or 9p further to increase profits. The housewife very often does not notice. But if she does and complains, the supermarket can then refuse her custom. The supplier, too, cannot complain for fear of being delisted. So in fact what we now have in this country is a cartel, a monopoly over our food industry being run by the Big Four.
To be fair, the Office of Fair Trading is investigating at the moment, and yet nothing is seen to be happening. How long does it take to investigate such blatant profiteering? What are the powers when it has proved the case. And prove the case it must, as now we have the Meat and Livestock Commission reporting the facts. These facts were widely publicised recently in various newspapers, including the Daily Express, Daily Mail and the News of the World. They proved that huge profits are being made and that there are large add-ons from the farm gate to the supermarket shelf in all meat produce.
According to the MLC report, the supermarkets are making £81.50 more profit per beef steer than they did three years ago, £10 more on every lamb and £7 on every pig. While the farmer sells his beef for £515, having kept the animal for up to 18 months and from which he has to take his feed, grazing and veterinary costs, often leaving him with a very small return, if any, on his capital outlay, the supermarket makes a profit of £267.80 for cutting it up and putting it on the shelf. The story is the same for sheep. The farmer gets £35 gross and the supermarket makes a profit of £25 net. With pigs, the figures are £50.90 for the farmer and £30.20 for the supermarket. For chickens, the farmers get £1.12 and the supermarket makes a profit of £1.31. So, in the case of the humble chicken, the supermarket actually makes a bigger profit than the farmer receives for rearing the bird.
Another way to look at the same statistics in the MLC survey is that lamb now selling in the markets at £1.40 per kilo sells in the supermarket for £12.99 per kilo for leg steaks, £10.49 for gigot chops, £8.69 for double loin chops and £5.49 for half legs. In every case the farmer is left with little or nothing after costs but the supermarket is making a healthy profit.
To be fair, Tesco has stated--I am sure the figures are correct--that the price of £1 paid for meat at the farm gate rises to £3.15 before it can be distributed to its stores as a result of weight loss in killing and curing. Nevertheless, profits are there for all to see and at a time when the farmer, the essential start of the food chain, is struggling to break even, let alone make a profit.
The story does not end with livestock. Fruit farmers, who have no choice about when to harvest, are told what the price is--take it or leave it. According to John Breach, chairman of the Independent Fruit Growers Federation, fruit growers are in dire straits, often having to sell at a loss in order to recoup any costs as the following week their crop is totally worthless, being over-ripe and unsaleable. David Nike, an agricultural business consultant, has stated that 60 per cent. profit margins are being added on to the price of the humble potato.
There is something seriously wrong with our food industry. Surely what we need is a supply chain which offers transparency, shared profits within the chain--in other words, each link in the chain being satisfied by the return, including the final consumer--and a long-term commitment from both supplier and buyer. There surely is no gain from reducing the cost of food to the consumer when farmers and growers cannot cover their production costs for in the end the supply will undoubtedly dry up as no one can carry on doing something at a loss for ever.
We urgently need to set up independent and verified farm assurance schemes with collaborative marketing to meet buyers' demand for consistency and quality of product. Then, and only then, would we have a sense of confidence in the food chain. The farmer could rear his meat and grow his vegetables and fruit knowing that there was a market for them at a profitable level; the buyer from the supermarket could find himself with a reliable and consistent supply of food; and the consumer could be assured of good, consistent quality at a steady and affordable price.
I therefore ask the noble Lord, Lord Hoyle, to confirm that the Government will hurry along the Office of Fair Trading investigation and put a stop soon to the unfair way in which our farmers and producers are being held to ransom and our housewives' shopping bills are being increased in this cavalier fashion by the Big Four supermarkets. I should like him to confirm whether it is a fact that only four people from the Office of Fair Trading are looking into the problem. That seems very few people for a major problem. I also hope that pressure can be brought to bear, as we near the 21st century, for a completely new approach to the marketing of that vital commodity to human life, food. A fairer and more equitable system, as I have already described, to benefit everyone in the food chain and not just the
Lord Haskel: My Lords, I congratulate the noble Lord, Lord Rowallan, on asking this Unstarred Question. I am not a farmer, but I find the idea that there is a clear relationship between farm gate prices and supermarket prices both a little naive and a little outdated. A management guru said recently,
Let me explain what I mean. I am sure the noble Lord owns a camera. He will have a clever camera that does all kinds of clever things. But these wonderful things are possible because the producer has a knowledge of optics and electronics; they do not depend necessarily on the materials that are used. That is what adds the value. That is what enables a dealer to get a higher price for a camera. Surely it is the same with food. There is a long supply chain from farm gate to supermarket. The noble Lord told us all about it. It is this supply chain which adds the value. I refer to the preparation, the cleaning, the packaging, the transport and the organisation to get the food to the supermarket at the right time. The farm-gate prices have little relevance after all those operations.
The noble Lord may have a point if the supermarkets are using their buying power to force down prices at the farm gate, and then engaging in a scheme to maintain high prices in the shop. However, as the noble Lord has said, the Director General of Fair Trading is looking into this matter. Sadly, his inquiry will end before March 2000, when the new Competition Act comes into force. Under the present regulations, the director general has no powers to act in relation to prices as such. If he discovers anti-competitive behaviour, he can issue directions and rap naughty supermarkets over the knuckles. That is not really much of a deterrent. However, under the new Act, matters will be completely different. There will be complete freedom to compete, but not to abuse. Perhaps it is this abuse which the noble Lord calls profiteering. That is what he is concerned about.
Under the terms of the new Act, if there has been an abuse of market position, instead of getting a rap over the knuckles and being told not to be naughty, companies can be fined 10 per cent. of their turnover--£80 million in the case of Tesco. Injured third parties can sue for damages. In addition, if he thinks there has been abuse, the director general does not have to wait--therefore the patience of the noble Lord, Lord Rowallan, will not be so greatly tested--he can impose interim measures pending the completion of his investigation. These are altogether much tougher rules.
I might add that the new legislation makes the director general entirely independent of Ministers. His sole concern would be the anxieties of the noble Lord and of farmers. In all fairness, I think the noble Lord should congratulate my noble friend the Minister and the Government on getting the legislation through. Sadly it did not come into force on 7th November, when it received Royal Assent. If it had done, perhaps the farmers would be in a much stronger position.
The noble Lord is concerned about the profitability of supermarkets. Profitability is a difficult concept and I am not sure whether this is a useful line of argument. First of all, under present legislation, firms can charge whatever they like. Most prices are pitched at what the market will stand, both at the farm gate and in the supermarket. At present the Director General of Fair Trading can get prices reduced only if there is evidence of anti-competitive behaviour, because measures to combat the abuse of market power come into force only in March 2000. Until then firms will presumably continue to charge what the market will stand. However, this rule is already in force on the Continent. It could be one reason why, for some products, supermarket prices are lower there than here. Unlike on the Continent, our food prices are zero rated for VAT, and therefore our prices should be lower.
In addition there is the difference in accounting practice between here and other European countries. Indeed, if you calculate profitability based on return on capital employed, the returns are higher on the Continent than here. Therefore, as I say, I am not sure that profitability is a useful line of argument. There is also the confusing problem of the pricing of certain products, because some are priced as loss leaders, and therefore a selective shopping basket of priced goods can prove things either way. The noble Lord pointed out that there are four major supermarket groups, but there are also the discounters from the Continent, who are competing quite strongly with the supermarkets.
As regards farm-gate prices, obviously the CAP has an important impact. The prospect of lower support prices must be worrying for farmers, but other factors such as the welfare of animals and the use of chemicals enter into the value chain to justify higher prices. However, the reality is that, if market prices have decreased, businesses have to adapt. Oil companies, for instance, have had to adapt to the fact that oil prices have gone down from 18 dollars a barrel to nine dollars a barrel in the past 18 months. Those companies are having to adapt to that situation. That is one of the factors in business.
The supply chain is where the business happens, as the noble Lord pointed out. This is where the nub of his argument lies. If the farmers are being exploited, that is bad for business. Exploitation is bad for any business, including supermarkets. It is bad for a variety of reasons. First, the public will not want to shop at, nor indeed investors invest in, firms that exploit. Retailers are shunning products made with child labour or which are not environmentally friendly, because the public just do not want them. The public have become much more discerning in these matters. I agree with the noble Lord, Lord Rowallan, that it is bad for productivity if part of
This competitiveness is achieved by creating a common understanding and, at the same time, by having vigorous competition. Supermarkets need suppliers who can continually respond to the rising quality of demand because that is the way to the customer's wallet. Exploitation has no place in this: competition has. I say to my noble friend the Minister that by virtue of the Competition Act I think the Government have already taken steps to solve the noble Lord's problem.
Lord Mackie of Benshie: My Lords, I am not as optimistic as the noble Lord, Lord Haskel, about the effects of the Bill which will come into operation in 2000. I could not quite follow his speech but I gather that he was giving farmers a lecture about being competitive and producing what the supermarkets want. I gather that he compared the farming industry with the oil industry and generally taught us our business, as he is entitled to do. I believe he explained that the supermarkets have great costs as regards killing the beast, skinning it, throwing away bits and so on. He might consider that the farmer has to raise the calf to 18 months and then has to put it into calf--apply the bull, if the noble Lord understands that expression--and then has to rear the new calf. He has a three, four or five year period of preparation, which is slightly different to the mere killing of the beast and butchering of it. Therefore I think the noble Lord's argument loses a little of its virtue in the face of the difficulties experienced by the primary producer.
I am conscious that the noble Lord, Lord Rowallan--as he said himself--has raised a subject which has been much discussed. However, he looks to the future which I think is right and proper. I am glad that he has raised the matter. There is no question that for the first time for many years the public support the farmers because the figures produced are so horrendous that the public realise that the old myth that this is only farmers grumbling is no longer the case. They have a genuine grievance. In addition, the countryside as we know it is in danger as a result of the financial conditions. The promises for the future by the governments of all the large EU countries do not bode well for the countryside.
The figures I have are probably from the same source as those given by the noble Lord, Lord Rowallan. The noble Lord, Lord Haskel, might look at the most telling. He said that in terms of capital the French make more money. But the simple shopping basket test carried out by the Sunday Times was horrifying. The same items cost in the UK £81.59; in Holland £49.55; in Belgium £50.67; and in Italy £60.90. Whatever is said about capital, the matter is straightforward: people are paying more in this country than in equivalent countries in the
I have nothing against Tesco; indeed I am all for it. In Forfar there is a Tesco store that is absolutely wonderful. You can buy virtually anything there. I can sometimes buy a bottle of Whyte & Mackays whisky, of which I am fond, for as little as £14 a litre--in which case I normally buy three or four bottles.
Of course the supermarkets are to a certain degree holding the country to ransom. Taking the figures that are available on farm produce, instead of prices falling in the stores, they have been held up simply because the supermarkets can do that. I dare say that they do not meet and decide to hold up prices, but they are holding them up. The four large stores sell some 67 per cent. of food in this country. It is ludicrous that they have all happily taken the extra profit and not one of the large stores has tried to grab the market. Without a shadow of a doubt, that is bad for business. We talk about competition in farming; but there must certainly be competition in retailing.
It is the old story. In most cases the primary producer gets it in the neck. Whether it be a matter of oil, tin or food, the primary producer is often hammered. The oil business can take care of itself. It has large profits. Those profits do not exist in farming. Farming needs to be looked after if we want to keep the countryside. If we want to let the countryside go, a large number of competent young men can buy big acreages and farm them purely for profit. They will not keep up hedges or ditches; they will simply grow as many crops as they can and pay as little as they can for the land, doing themselves a good deal of financial good but not doing the countryside any good.
Labour governments supported agriculture and did it a lot of good from 1947 onwards. If we take the case of the Milk Marketing Board, have the public benefited at all from its abolition? The farmers certainly have not. The price of milk has plummeted. It must be realised that if farming is to be kept as a stable industry, which is for the good of the country and what urban people want, the Government have to allow, and assist in, some organisation of the primary producer.
Many factors can help. I should like to think that we can help markets, as has been done in France. In many parts of France the supermarkets do not have a look in when it comes to food, because there are very good markets. One of the lessons we have learnt is that butchers--and in my part of the world fishmongers--can thrive as individuals because butchers hang their meat properly. The supermarkets do not hang meat. One of the tenets of shopping at a supermarket is that, once the customer has bought something, he or she gets out of the way as quickly as possible in order to assist the cash-flow. So there can be survival for certain individual concerns. But there is no question that the bulk of our food will be in the hands of the big organisations. The Government must keep them in their place. They cannot be allowed to merge further. Since only four of them handle the food that we buy, that would be a highly dangerous position. Matters would become a great deal worse.
The Government are conscious of the problem. The new Act will not solve it. The Government have to look to organisation, and to helping any such organisation to produce a constant supply of good food. In that case protection would be needed from the flood of cheap food from overseas, which is produced under different conditions to those enforced on our farmers here. The Government have a case to answer. I thank the noble Lord for introducing the debate.
Lord Grantchester: My Lords, I declare an interest as a dairy farmer in Cheshire. While the debate has focused on the disparity between farm-gate and retail prices, there is a wider question; namely, the disparity in power between the farmer and the retailer, and whether that leads to abuse.
It is perhaps instructive to reflect that over the past 10 years the retail price index for all items represented by "a basket" of selected consumer goods has risen by 55 per cent. During this period the retail food price element of the index has risen by 40 per cent. In other words, the price of food has fallen in real terms--a fact for which no doubt the supermarkets can take some credit.
However, within that overall picture farm-gate prices have risen by only 7 per cent. The upward rise in the retail price index for all items and RPI food has been relatively smooth. By contrast, the rise in farm-gate prices has been characterised by alternative periods of sharp rises, often due to currency weakness as in the period 1993-95 following the devaluation of sterling in 1992, followed by severe declines. In 1997 farm-gate prices fell by 14 per cent. on 1996.
Should noble Lords believe that prices paid to farmers will rise as agriculture falls out of a low trough, perhaps I may remind the House that under Agenda 2000 proposals price cuts vary from 30 per cent. for beef, 20 per cent. cuts for cereals, to 15 per cent. for milk.
What will the demand for competitive agriculture mean for the likely price of foods to the consumer? Does the past lead us to believe that it will be anything other than a continuing rise, with the balance of the margin going to the retailer? Indeed, MAFF's own statistics pointed to the effect of Agenda 2000 in reducing the retail price index by a mere 0.3 per cent.
During this time, farmers have been left holding the short end of the income stick, while at the other end a small group of intensely efficient retailers have been pulling in profits of up to £850 million each. Between them, Tesco and Sainsbury turn over more money than the Republic of Ireland. In terms of relative size, the individual farmer is not a David to the supermarkets' Goliath; he is more like a microbe. Retailers are simple, ruthless machines which perform solely for profit and share price. Their scale gives them the opportunity to be mercilessly efficient in reducing unit costs.
The modern parlance that the consumer demands ever-improving quality at a reducing price can have no other outcome. Multiples demand more food, better food, to be put before more consumers at a faster rate and at a lower cost. For this to work, today's price must
That is confirmed in the Meat and Livestock Commission report, which states that the gap between meat prices for producers and retailers has widened significantly in the past three years, suggesting that supermarkets have not shared in the overall decline in industry margins. In the summer of 1995, the gap between what the supermarket paid processors for packed retail cuts of beef and the retail shelf price was 15.5 per cent. of the total price. In the summer of 1998 it rose to 23.8 per cent. Between July and September 1998, the multiples took £267.80 for every £515 spent on the steer to pay for staff, building, shelf space, shareholders and expansion. In 1995 the multiples took £186.30 from a steer price of £743.
While other noble Lords have pointed out that it may not be of direct relevance, and claim and counterclaim rage in the press, one significant increase in costs that must be recognised is that relating to safety and welfare issues. It is not generally recognised that there is now, following safety and other increased legislation, a collection of inspectors in white coats, each with a clipboard, standing over each operator in the slaughterhouse. I trust that the Office of Fair Trading in its inquiry will analyse and report on all those aspects.
Following the food scares, the BSE crisis and the animal welfare issues, the consumer, through legislation, now imposes higher standards on agriculture. Farmers, in trying to take their produce out of the commodity bracket and to brand it, even if that is no more than "British", are confronted by a supermarket intent on imposing its own branding, whatever the supply. In that way, the supermarket maintains its creed to the consumer and its control over the income stream. It is a fair question to which the Government must respond, that labelling must be honest and correct. "British produce" must be British and produced to British standards. As consumers demand, through legislation, that farmers must meet certain production and welfare standards, should it be acceptable that foreign supplies can be sold that do not conform? This is a question that must be addressed in Europe by Ministers. Access to the market by supplies below indigenous standards should only be allowed provided it is clearly marked that they do not conform to home standards.
The Minister of Agriculture recently joined the British Retail Consortium to confirm that all supermarket branding and fresh pig produce will be to British standards. Will the Minister also insist that below standard produce from overseas will be labelled as such?
I should also like to draw attention to other issues targeted by the supermarkets in order to reduce farm-gate prices: namely, auction markets and cattle movements. In setting up producer clubs to source direct supplies, the supermarkets source entirely on a
It must be remembered that the auction market is not only an end market, it is flexible and provides an acceptable outlet for all standards. It allows the producer--maybe overstocked or low on feed--to sell an animal to be purchased and finished by another producer. It also provides an infinite variety of choice to suit all customer requirements.
One of the criticisms of auction markets concerns welfare. The Livestock Auctioneers Association is to be commended on developing new standards and systems, as markets are public places visited by all and sundry. There is not much by way of welfare in a large stock wagon going round farms, possibly incurring between 10 and 20 stops for a load before setting off on a long journey. It is far better for the farmer to take his consignment to an efficient market, with good loading and unloading facilities. The livestock industry must retain a broad geographical spread of markets. I trust the Minister will endorse that.
It is also important to understand the issue of livestock movements. Some slaughterers on contract to multiples are already offering a premium of at least 5 pence per deadweight for cattle that have been moved once only. Others have laid down a two-movement limit, and more anti-movement enticements will follow.
The claimed justification is that livestock are more easily traced, their welfare has not been compromised and they have been supposedly cheaply produced as sales commission by auction markets or by dealers is a non-essential expense. The drive is being helped by the cattle passport system which remorselessly clocks up a movement every time an animal changes hands, even if it was only held temporarily by a broker. If this justification is not quickly shown to be a falsehood, the flexibility of livestock finishing will be destroyed and efficiencies between upland and lowland farming jeopardised. Putting animals through an auction market does not automatically create welfare problems or impose a burden of unjustified expense. It is simply more efficient to move cattle to their bulky feed and bedding than the other way round.
In conclusion, I draw to noble Lords' attention that there are many issues to be addressed as well as the simple cost analysis, which must also bear careful scrutiny. I ask the Minister what is his reply to those who call for a supermarket regulator. I urge noble Lords
I join in the comments made by colleagues on how grateful we are to the noble Lord, Lord Rowallan, for having the energy to seek the debate. He did so in order to make a point and also to share his concerns with the House. He should be grateful, as I am, for the quality of the contributions. They have not been great in quantity but the quality has been there. It is a lesson on the topic that we are discussing. At the end of the day quality is all-important.
I have been impressed by the facts and knowledge displayed by colleagues. I have learnt a great deal on which I shall reflect. I must declare an interest, first, as a consumer who is interested in prices being as low as possible but fair. All farmers are consumers and so have an interest in the price they have to pay when they visit supermarkets.
I started my working life in the retail industry as an errand boy. That was a staggering 59 years ago in 1939 with the Newcastle Co-op. I became a director of other co-operative societies and my interest in retailing stems in part from my professional work with co-ops. I also declare an interest as honorary secretary of the All-Party Retail Industry Group. I remind the House that that receives much of its support and sustenance from the British Retail Consortium. In the context of this amicable debate we should recognise that the consortium represents retailers who sell more than 90 per cent. of the goods that pass over our counters. The body represents 320,000 shops and 30 per cent. of the commercial property floorspace. It provides employment for 2.9 million people, 11 per cent. of the total workforce.
I am also president of the Institute of Meat. My predecessor was the noble Lord, Lord Gallacher, who followed the noble Lord, Lord Vestey. I throw that fact into the debate to demonstrate that those of us who are not farmers and do not come from an agricultural background nevertheless take an interest in these matters.
I have referred to my connections with the Co-op. The Co-op has large stores and very many small stores. Whether the supermarket chains have 25,000 square feet, 50,000 square feet or have hypermarket status, by and large their outlets are of the larger size. There are many other organisations apart from the Co-op that are community-based.
In this debate I am not prepared to throw either bouquets or brickbats because the position is not straightforward. I hope that noble Lords will not try to find a villain or a saint. In this story there are no villains or saints. The villain of today will be the saint of tomorrow. There was a time when the farming community was vilified because of some of its activities.
The noble Lord, Lord Rowallan, referred to an orderly state of affairs in which products were produced and marketed in a reasonable way. Robert Owen started the Co-op movement in 1844. He believed in co-operative communities in which people grew their own food and provided their own materials. I do not think that we should look at two ends of the chain, one being the farmer and the other the consumer, because each is dependent on the other.
Everyone is entitled to fight for his livelihood and that includes the supermarkets. Anyone who believes that the situation in retailing is hunky-dory has another think coming. My experience of these matters goes back 50 years. No industry has undergone a greater revolution than retailing. The biggest change came about four or five years ago with Sunday trading. That was a massive, traumatic change but change occurs all the time. Sometimes people will be on one side of the argument and sometimes on the other.
Life is becoming more complex as is retailing. The retail chain is also becoming more complex. I do not believe that the price to the consumer is the be-all and end-all. Sadly, in certain quarters there is a tendency to believe that all one must do is sell as cheaply as possible. Good sense tells one that quality and fairness to suppliers is a very good profit-maker. It makes sense to treat suppliers and employees fairly and charge the consumer a fair price, but that is not life.
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