Examination of Witnesses (Questions 180-198)
MR DON THOMAS, MS LYNDA JAMES, MR REES ROBERTS AND MR BOB BANSBACK
TUESDAY 11 DECEMBER 2001
180. Can you see that happening?
(Mr Bansback) We are very determined to try to work with the industry and the retailers to apply pressure to do this; because they actually benefit from it as well; in our examples, it is not just the processor and the producer. And if you can demonstrate that everyone benefits from a situation then there is a good chance of persuading people to move in that direction.
181. Can I ask Mr Thomas to comment on the same question, on prices?
(Mr Thomas) It is a complex issue. One of the things we believe is that the route to market between farm and consumer is too long and there is a far too protracted route, inevitably, to get the animal from the farm to the market, and there are too many potential players in that route, and each player in the route will obviously take a slice of the residual profit.
182. So what is the answer?
(Mr Thomas) One of the answers is to streamline the route and perhaps get a shorter route to market.
183. How do you do that?
(Mr Thomas) Vertical integration, I guess; it really depends on the farmers becoming more proactive in going the next stage beyond the farm gate. They must realise they have got to get nearer to the consumer. So that is one method, but that is not simple and that is a very expensive investment method for them to do that. I think we see the potential for farmer co-operatives to be making inroads into that activity, they need to become more involved in the marketing, in the full sense of the word, of their product. We actually believe, through Welsh Lamb & Beef Promotions, we have got them involved in the marketing concept; what I would like to see is for them to get involved in the marketing infrastructure, to actually become more proactive in the route to the market-place as well, and thereby, obviously, get a larger slice of the residual cake.
184. Is that likely to happen?
(Mr Thomas) I do not think we can stand still, I do not think we can stay where we are. I think, if agriculture is to become a viable industry and remain a viable industry, it has got to align itself far closer to the food industry, because agriculture is just a supplier of raw material to the food industry. And if farmers are to play their part, I think they should take stakes in the food industry, through some form of vertical integration. I actually believe that this is a great opportunity, as was mentioned earlier, from Objective One status, actually to invest in the sustainable links in that chain, and perhaps Government could facilitate and catalyse that, so that in perhaps five, ten years' time we will see farmers being a bigger stakeholder in the food industries, rather than the supplier of agricultural products from the farm, as it were.
(Mr Roberts) Can I add quickly, Chairman, just a supplementary to that. As a farmer, I think the salutary experiences we have had over the recent years, and we are all aware of them, have convinced farmers that they do actually have to do what we have been talking about today; and there are good, shining examples, albeit minor at the moment, of that vertical integration starting to happen. And I think most people do realise now that something proactive does have to happen, and that is a challenge for the MLC, Welsh Lamb & Beef, Agri-Food Partnership, everybody, to assist in that.
185. I asked you earlier about the role of the farmers and your members, how they are able to pass on their ideas to you, and you talked about one way was at the AGM, have you actually had a deep and meaningful discussion on this very topic with your members, who, after all, as you said to us, 50 per cent of the farmers of Wales are members?
(Mr Thomas) Yes. We do have these discussions, and we are in a position to try to influence the opinion of farmers in that area. I think we are now, I believe, as a producer co-operative, albeit in the marketing facilitation rather than in the full sense of the work, I think we are showing a good example of what can be done through farmers actually working together just to brand a project. So I think the next logical extension of that is for farmers to be persuaded to go beyond the branding route and actually take a stake in the actual process itself; now that could be in joint venture with existing parties, of course, because to ask them to invest and to recreate the entire industry would be an enormous commitment on them. I think one of the ways they can do it is to go into joint venture relationships with existing players, whereby the farmer can bring a lot to that party.
Chairman: A lot of our report actually focused on what farmers could do, in terms of vertical integration, so I am pleased to hear that you are moving that way.
186. To a large extent, my question has been anticipated, in the discussion we have been having. If I can just understand then what you are saying, on the basis of the evidence, there has been quite a significant increase in the price spread, but that, to a large extent, reflects the greater intermediate costs of the supply chain, it cannot simply be read as excessive profits; but the supermarkets have been able to protect their margins to a greater extent than other players in the supply chain. Is that really a reflection of their underlying market power, effectively, in the supply chain, in a fundamental sense?
(Mr Bansback) Yes, undoubtedly it is, and we have made no secret of that, and that is why we strongly support the idea of farmers grouping together and all the comments that we have heard about this, because there does need to be a more even balance of power. But we have also heard some very positive comments from Don about the role of two multiple retailers, and others, in a difficult situation, and I think it is through engaging more positively and this industry seeing itself as part of a team, that is the type of relationship that we want to secure to an increasing degree; but that is not to deny that we feel that the distribution and the benefits have been not quite as we would wish to see them in the supply chain.
187. How does the price paid to the farmer differ between the UK and the rest of Europe, and what role do both your organisations have in developing export markets?
(Mr Bansback) The price at the moment, and prices have been very volatile, actually, in the last month, since the announcement on exports, but if we take the current situation, the beef price in Wales currently is very similar to the actual continental beef price, in overall terms; that is not to say that there are not significantly cheaper cuts that can be imported, because that is to do with the balance of cuts in a carcass, but the average price is very similar. This is no consolation because the price on the continent is very depressed because of the continuing publicity on BSE and everything else, but that is where we are. On sheep, it is very different; our current price must be something of the order of 15 to 20 per cent lower than the average in continental EU countries, and for about four or five months of the year, when we were not exporting at all, our price was getting on for a half the price that was being fetched by French producers, so there was a very significant differential. In terms of exports, just to start off with MLC, we have been very active in the current circumstances in working with Government, and through our Brussels office as well, to get movement on export markets, and we have been at least encouraged that there appears to be opportunities now, and indeed exports are beginning to move. And it is our objective to work very hard in the major export markets to correct some of the misinformation that still goes around about what the practice is in the UK and to get positive messages over there so that the exporters can start to develop the business; and it is to use opportunities, like the Anuga food exhibition and the other contacts that we have. MLC has a Paris office, which is very active, it has six agencies in Europe that are going flat out to try to get back the business that we want to be developing during the course of next year; so we are very committed to that. We enjoy a very good working relationship with Don and his colleagues, in terms of the specific opportunities for Welsh lamb, which are in the Mediterranean countries as well as in France, and you will see us working very closely together on this.
(Mr Thomas) Yes, I agree, export markets are very important, and if we can recover them we will do everything we can to do so; and, particularly, as has been mentioned, to Wales, the light lamb in particular was a very, very important issue, that we do have some excellent potential still there to develop more markets in the Mediterranean areas. So, yes, we do rely a lot on the MLC's market intelligence, and then we try to position the brand behind that; we actually believe that if we export Welsh lamb, and it is obviously part of British exports, and that seems to work extremely well, certainly on the export side.
188. Looking back to the power balance question that was opened up by Mr Price, why do you think producers in the UK have not been able to develop sufficient co-operative critical mass to allow them to negotiate more effectively with retailers and large processors here in the UK, and indeed to compete more evenly in Europe?
(Mr Roberts) That is a difficult one to answer, and I think we have to look into the culture of our industry; those of us, like Mr Williams and others, who have been involved for many years with dealing with the producer end of the chain, have found it very difficult to engender a willingness within that industry to co-operate and collaborate. I think it is a culture of "the market forces will reign," and each individual is a business in itself and an island. That mood and culture is changing, of course, as we have referred to previously, but I think that is the basic reason behind it. I would also say that the Government has a part to play, historically and at present, in this. If we look at other examples across the world of what you are referring to was a challenge over the past years, Governments were involved proactively in, whether it will be tax breaks or active encouragement, for that collaboration, to gain the critical mass so that it could have countervailing power; in that country. I believe that the Government over many years, and not one party, has not believed that it was appropriate to involve itself that closely. And therefore we find ourselves in a position now that we are in a much weaker state than our competitors, in France, Holland, Denmark, there are many shining examples of where it has worked; and, as part of the industry, we have been to those countries to see what is possible. So there is a belief in the industry, I think, that something needs to be done, and, with governmental commitment, it can be done. I would just refer to the "Farming Futures" document that was published on 21 November, that point was very clearly stated, and that was a document that tried, via 52, I think, bullet points, to mark a vision for the way forward; and clearly that is the way that that document saw how farmers can gain that countervailing power, and critical mass.
189. What about Welsh Lamb & Beef Promotions; do you think, if you were bigger, if you had a stronger hand in the processing side, that you could start getting the balance a little bit more in the favour of the farmer?
(Mr Thomas) Yes, undoubtedly. I believe that Welsh Lamb & Beef Promotions need go, we are increasing our membership rapidly. I think when we get to over half of the members in Wales perhaps we should increase our mandate, we should add added attributes, other than being the broker and the promoter, perhaps we should take a more proactive role in facilitating the marketing, in the full sense of the word. I firmly believe that, as an industry, agriculture has underinvested in marketing for many, many years, for many generations. I do not come from an agricultural background, I am used to industries where the marketing percentage spend of the output is quite significant. I think, if we look at how much is invested in marketing Welsh agriculture, it is probably in the 0.0 per cent factor. I think farmers should be encouraged proactively to invest more in the marketing function in its full sense, and thereby obtain a better return from that investment. I think marketing should be regarded as an investment on the farm, they do that in New Zealand, they invest off the farm, and that is actually regarded as a farm asset; if they take a stake, for example, in a dairy co-operative, that is an asset to the farm, as if they build their own shed. I think, brutally, independent farmers in the UK have wanted to see the asset in bricks and mortar, rather than in off-farm enterprises that they feel they can subscribe to. I think the need for co-operation is very great at the moment; unfortunately, the "want" has not been that great, I think farmers probably have not wanted to do it because they have had alternatives. I think, as we go into the future, those pressures are going to increase, and I think it is our job, as a producer co-operative, to persuade more and more people to sign on and be actively part of this culture, really.
190. What were your respective organisations' views on the Competition Commission report on supermarkets?
(Mr Roberts) If I may start and I will refer to my colleague to address it in more detail. Certainly, the Commission's report has been a major step forward in trying to introduce that balance of understanding throughout the chain. Obviously, it is a voluntary situation; there are mechanisms within it for complaint and the opportunity to follow up any misgivings that any of the producers or retailers have about how it works. I will refer to Mr Bansback to deal with that in more detail.
(Mr Bansback) There is not a great deal to add. We were not directly involved in it ourselves, we provided a lot of data and information, and we do see MLC's role in all this as providing the factual information, regularly, rigorously, objectively, so that people can form their own judgements. Obviously, we have noted the fact that, from the industry's point of view, there is some disappointment in the conclusions. We have referred already to the issue of the competitiveness of the sector, and it is our belief that there is competition between the multiple retailers, and we collect prices on a daily basis, so we are aware that that is competitive. From the point of view of the Code of Practice that has emerged as a result of it, time will tell; there are good elements in there, but, clearly, there are some improvements that could be made, and, as far as MLC is concerned, we shall be watching carefully. But we still believe that the best way ahead for the industry is not through this sort of code of practice, through legislation, but actually working, networking, being closer to the end customer, through a more integrated supply chain.
191. Are you saying that you were not involved in the report?
(Mr Bansback) No; we provided evidence to the Commission, but we were not part of the discussion on the conclusions and the negotiations on the Code of Conduct, we were not involved in that at all.
192. You said before that improvements could be made; what are those improvements?
(Mr Bansback) I think, firstly, clearly, there is disappointment that there are only four multiple retailers involved in this exercise, and, obviously, there is a much wider range; and, incidentally, in terms of producers in Wales, there is a wider range of multiple retail companies that are involved in the exercise. I think the voluntary nature of this and the measures to actually monitor what is going on are all issues, that there is scope for improvement. But our reaction at the moment is that it is early days, let us see how it goes, and if it is not working then, obviously, we will be as concerned as everyone else to make sure that it is stiffened up.
193. There is often a lot of frustration from farmers about the MLC, because they see the MLC as trying to be good to all sides, so to speak. The unions almost legally cannot advise farmers on the price to sell their produce, and who does the farmer turn to then for that advice on what price they need to sell it, to break even or to make a profit?
(Mr Bansback) We do have, and do play, a very important role in this. We cannot dictate what happens in the market-place, and, therefore, although producers in the dire circumstances they have been in are very frustrated and they obviously are criticising us and others in this context, I think what we can do is make available to both the abattoir sector and, most important of all, the supermarket sector what the actual costs are in producing a kilogram of beef, sheep meat and pig meat. And, therefore, with good practice down the supply chain, if an efficient producer is operating at this particular cost, then, if you have got a genuine sharing arrangement, that should be taken account of in the price which they pay down the line. And the good practice examples we are doing are making use of our data, MLC data, in order to cost what is actually happening at the producer level, and those producers, in these examples, even in difficult times, were making a margin. And, I think, providing the information and the intelligence is a key feature of what we are doing.
194. Perhaps we could turn to Mr Thomas, for your views on this?
(Mr Thomas) We certainly were not involved in providing any input, as a body, to the Commission's report, but I would agree, with regard to multiples, in particular; what we try to do is to establish a relationship between the producer and the market-place, and I think that relationship should be mutual and each recognises each other's issues. Where we have facilitated meetings of, for example, a multiple meat-buyer coming to talk to a group of producers, we have found that a great deal of harmony does actually break out eventually, it starts of with animosity, but when each one respects and understands each party's view, I think that is the basis of building the relationship. I think it is important that the farmers know and understand the requirements and the needs of the market, marketeer and the market-place, but I also believe that it is very important that the multiple retailer understands and appreciates the requirements of the farmer. So relationship marketing is one way of bridging that gap. We also believe that, ultimately, it is the consumer that will decide what is sold in a supermarket, and if we can establish a very strong consumer demand, for Welsh Lamb and Welsh Beef, particularly, in our case, that is built on the perception and assurance and the comment that perhaps the meat produced is as good as, if not better than, anywhere else in the world, then I think the supermarkets will be somewhat obligated to source home-produced product. And if they are obligated to source home-produced product, the producers are in a somewhat stronger position than if they are being able to be diluted against world products. So I think a lot of it is to do with consumer promotion, to the UK consumer, to get them to appreciate and understand the rigour and quality of our meat production systems in the UK, that they are, in our opinion, I believe, superior to most anywhere else in the world.
195. To return briefly to the Code of Practice and, you felt, the voluntary nature of the Code; but do you think the actual language in the Code is strong enough to give suppliers and producers a greater sense of confidence in working with the multiple retailers: a question to the MLC?
(Mr Bansback) I think there is a case of balance here. I think we were surprised that the outcome of this was not a rather tougher reference to various areas in part of it. But I would go back to the overall issue, that time will tell, we have got the code and farmers are in their own discussions with the multiple retailers, following the publication of the Code. At this stage we are just going to wait and see what happens, and to work very closely with our levy-payers to make sure that their interests are safeguarded.
196. You mentioned areas where you would have expected the language to be a little bit more robust; could you indicate which particular aspects of the Code you would have anticipated would have been slightly stronger?
(Mr Bansback) No, I cannot, not at this moment in time.
197. Just one further question. In terms of the threshold level of market share, do you believe that should have been set higher than it is, in terms of the supermarkets that are covered by the terms of the Code?
(Mr Bansback) Yes. Certainly, from the industry point of view, they would have liked to see a wider group of retailers, as I said, come into the Code, and we would share that view.
198. It goes beyond just the farmers though, does it not? You, Mr Roberts, referred to "Farming for the Future", the document produced by the Assembly, in co-operation with various people in the industry, and that has called for as early as possible a review of the Code of Practice, because clearly they felt that it was too weak; would that be true?
(Mr Roberts) I was part of the group of people that were involved with that document, and I am not aware that the feeling was that strong. The feeling, I am sure, was the Code of Practice needs to be reviewed regularly, the feeling, obviously, the Code of Practice is there, and we have to suck that and see, in the short term; but events like this are the route into reviewing and adjusting what is, after all, a voluntary arrangement with all sectors. And, in response to what you are saying, I would say that the rhetoric may have been stronger than the view; but the feeling was very strong that review should take place.
Chairman: If there are no more questions; thank you very much for coming this morning.