Environment, Food and Rural Affairs Committee
Oral evidence: Farmgate prices, HC 474
Wednesday 2 December 2015
Ordered by the House of Commons to be published on 2 December 2015.
Written evidence from witnesses:
– Christine Tacon, Groceries Code Adjudicator
– George Eustice MP, Minister of State for Farming, Food and the Marine Environment, Mark Filley, Head of Livestock, Dairy and Genetic Resources, and Tim Mordan, Deputy Director, Farming Sectors Team, Defra,Watch the meeting
Members present: Neil Parish (Chair); Simon Hart; Dr Paul Monaghan; Rebecca Pow; Ms Margaret Ritchie; David Simpson; Angela Smith; Rishi Sunak
Questions 312-450
Witnesses: Christine Tacon, Groceries Code Adjudicator, gave evidence.
Q312 Chair: Christine, thank you very much for coming to our inquiry into farmgate prices. Perhaps you would like to introduce yourself. We will probably move straight into the first question, which is: what is your role? There will be a lot of detailed questions in a minute, but how do you see it rolling out and what have been your experiences in these first few years?
Christine Tacon: Good afternoon. Thank you very much for inviting me to speak to you. As you know, I am the Groceries Code Adjudicator. It is a role that was set up following two Competition Commission inquiries, which came up with the Groceries Supply Code of Practice, which became law in February 2010. They wanted the retailers to have a voluntary ombudsman, which they did not do; therefore, the Groceries Code Adjudicator Act went through Parliament, creating my role. I got my powers from June 2013.
The Groceries Supply Code of Practice—we have brought some copies along for you to keep—is about certain things that the Competition Commission found when they were looking into the industry that they felt could end up with retailers passing excessive risk on to the suppliers, and that suppliers would potentially then go out of business or not innovate, and as a result the consumer would have less choice. It was all predicated on trying to find the consumer angle on why there needed to be intervention.
The Code itself prohibits various practices that the Competition Commission found when they did the investigation. It covers things like delays in payments and forcing suppliers to use a certain third party if the retailer is getting a kickback, and the supplier ends up having to pay more. Retailers have to give reasonable notice of delisting and can only delist for commercial reasons. They cannot ask for retrospective lump sums or vary agreements. It was an attempt to have an overarching principle of fair dealing and about 15 different practices the Competition Commission found that they wanted to prohibit in future. The Code applies to the relationships between retailers and their direct suppliers.
My office is actually funded by a levy on the 10 retailers, and I determine what the levy needs to be each year. I ask BIS approval to put that levy on then. The first year I asked for £45,000 per retailer, and this year I asked for £110,000 per retailer.
Q313 Chair: There are 10 of them, I take it?
Christine Tacon: There are 10 of them, so multiply it by 10, yes. Hopefully that is a bit of an introduction.
The way that I work, or what the law allows me to do, is to work in two ways. One is to arbitrate, which is generally where a supplier has taken an issue up through the proper channels with the retailer, goes to what is called a Groceries Code compliance officer, and if they cannot resolve the Code issue then, they can come to me for arbitration. When I am in arbitration mode, I am obviously working between a retailer and a supplier who know who each other are. It is a legal process, and at the end of it I can award compensation if I find that the retailer has breached the Code in their treatment of the supplier. I have four arbitrations on the go; two of them are nearly finalised, not because I have come to a final settlement, but because when they start trading legal arguments I am persuading them all of the time to keep talking and getting those closed down. Arbitration is very much a backstop when things have gone wrong.
The investigation role is where I can launch an investigation when I have reasonable suspicion that the Code has been broken, and going through my whole process, on which I issued statutory guidance. If I find a retailer in breach of the Code, I can take any mixture of sanctions or making recommendations, and I will then monitor compliance against those recommendations in future, naming and shaming. From April this year I have the ability to fine. The level of penalty I asked for and got was 1% of UK turnover, which for our largest retailer is nearly half a billion pounds.
Q314 Chair: I take it that those fines that can be levied from April can only be levied on investigations that you undertake after April? You cannot do it retrospectively?
Christine Tacon: Correct. It is actually in respect of breaches after April. It is not retrospective legislation, so it is only from then. So for the investigation that I am finalising at the moment into Tesco, which was launched in February for breaches prior to February, I will not have the ability to fine in my sanctions should I find them in breach at the end of the investigation.
I do have a massive cosh in that 1% of UK turnover. We are talking about businesses that work on 2-3% profit. It is a maximum. I do not start at the top and work down; I start at zero and work up, but that was the level I wanted, because I needed that disincentive. I did not want there ever to be an ability to break the Code and pay the penalty because they were better off. It needed to be a real deterrent.
Q315 Chair: Can I just interrupt there? One of the roles that I have always seen for your role is that it is more about making sure that you change the culture of the retail sector, so to what degree do you believe that the retail sector is in fear and trepidation of you?
Christine Tacon: I wholly agree with you that my role is to change the culture of the sector. However much you train the buyers as to things that they cannot do, if the pressure comes down on them from the top and the only way that they know how to achieve what is demanded is to break the Code, then that is an issue. I have contacts at CEO-level and at the chair of audit committee level—because I see them as independent of the CEOs—again about the culture and not to put pressure on them.
The way that I have been working with the retailers is that I have quarterly meetings with each of the Code compliance officers, so that works out at 40 meetings per year, and two meetings with all of the Code compliance officers together, because sometimes it is easier for me not to have to say something 10 times over, rather to say it once to a large group of them. Then I obviously have meetings with the CEO and the audit chairs of the retailers as well. All of them do that; nobody has fought back against the meetings. In these meetings, I raise the issues that I have got that are coming up through the trade and from suppliers, and I have tried to focus on only five issues at any one time, just so that I do not bombard them. Every quarter they have to tell me what they have done to progress against those issues in the top five and whether they have changed their practices, or whatever else.
Whether they are in trepidation, they certainly come and see me whenever I ask them to. I know that they bend over backwards to try and solve something so that it does not come to an arbitration, because, as I said, my compensation could be quite severe, as can my penalties. I have found that rather than being in fear of me, they have been totally co‑operative. When I am pushing on the training—because they have to train their buyers—I have asked every retailer to show me their training, and when I have told them that I do not think that their training is good enough—it’s not exciting, it’s not real, they need to do examples and things like that—then they have been very responsive.
Q316 Chair: Are they worried about their reputations, do you think?
Christine Tacon: They are all very worried about their reputation. Interestingly, I have published three case studies since I started where I found a retailer in breach in a particular incident, and they have admitted that they were in breach, and I have written that up as a case study. Of course, that got picked up by the press and they were named as to what they had done, and got negative press about it.
To put it another way, I do a survey every year with suppliers, and last year I had 1,000 suppliers answer it, which I was really pleased with. The retailer that came bottom of that survey in terms of perceived compliance with the Code—so it is not what I said; it is what suppliers felt—has actually put that chart up at their supplier conference and said that they did not want to be bottom of the chart next year, and made a whole load of statements about things that they were going to change. I do think that they are listening, and I do think that they care about their reputation, and I do think that suppliers will want to supply retailers who stick by the Code.
Q317 Rebecca Pow: Could I quickly ask what were some of those things that you said that they ought to change? What are the sorts of things that you are highlighting?
Christine Tacon: One of the issues was that under contract law they are allowed to go back six years to find evidence that the supplier owed them some money, and some of the retailers were using third party, no-win-no-fee auditors who were going through historic emails with very sophisticated software trying to find evidence that a supplier owed them some money. They would then send an invoice to that supplier saying that unless they gave evidence to the contrary they would deduct the amount in two weeks. That was one of the main areas of complaint and main issues that people were raising when I first started in the role.
I spoke to all of the retailers about it and said that it was not strictly against the Code—they can go back this far by law—but that I was horrified by the practice and it was not something that I felt was fair. I asked them if they could limit the time that they went back to two years, when there is a reasonable probability that the suppliers would have the paperwork and the people in place.
Q318 Rebecca Pow: Sorry, the suppliers owed the supermarkets money or the supermarkets owed the suppliers money?
Christine Tacon: No, this is where the retailers would have third parties going through and looking for any instance where a supplier owed them money. If they found a scrap of evidence that it was owed, they would use that to slap the invoice on the supplier, and then the supplier would have to do a huge amount of work excavating their old emails to say they sent an email afterwards negating it. In some cases they were getting so many that they were just trying to negotiate it to split it 50/50, but in some cases they were just paying up because they could not find evidence to the contrary. Bear in mind that they had finalised those financial years, so some of these were quite big payments.
Q319 Chair: So they were just basically extracting money?
Christine Tacon: There might have been some validity to them, but it was really difficult. I met some suppliers who had four people employed full-time who did nothing but try and refute those claims. That is one area where I got the retailers voluntarily to agree to only go back two years instead of six.
Another area that suppliers told me about, particularly in chilled, where you have large deliveries backing up to a retailer’s depot and being emptied, the supplier would then say that they had sent 100,000, and the retailer would split the delivery down and send it to lots of their other depots, and come back saying that it was 1,000 short and they were deducting it from the invoice. The supplier had no proof of delivery, particularly in chilled as it is all so fast, and it the suppliers were losing money. I galvanised suppliers together to try and get some evidence, and 20 suppliers recorded evidence for three months and worked out that on an annualised basis they were losing £15 million a year. So I got the retailers together to say them that this was something where, if I investigated them, I could have evidence from at least one party and sometimes two parties of what they had sent, and I could have evidence that they had not paid for it. This was something where if I launched an investigation, they could find themselves in difficulty. I gave them all time to go back and change their procedures, which quite a few of them are doing and are reporting back to me what they are doing.
They were not all having problems, and interestingly what the sample showed us was that in some retailers it was only one of their eight depots that had a problem. So they were able to go in and solve that. I am trying to push them all forward to improve their practices.
Q320 Rishi Sunak: Thank you very much for being here. Should we call you Madam Adjudicator, or—?
Christine Tacon: Christine will do.
Rishi Sunak: Fantastic. Christine, we appreciate you being here and making time. I would like to talk to you a little bit about your remit, and how far it extends. Our understanding is that the Code covers direct suppliers to retailers only.
Christine Tacon: Yes.
Rishi Sunak: We have been spending a lot of time as a Committee looking at the dairy sector, which I am sure that you are aware, is going through some tough times. What we hear a lot from farmers is that they do not supply retailers direct. I think that only 3% of producers actually directly supply retailers. The vast majority of producers of milk are not covered by your Code and your body, unfortunately, and they ask us why the remit of the Groceries Adjudicator cannot be extended. I would love to hear your thoughts on that, and what you think we ought to do. Indeed, it is something that this Committee in a previous session has called for as well.
Christine Tacon: You are correct that the remit is just between the direct suppliers to the retailers, and I have explained that it is the retailers that are paying for my role as well, so that makes sense that it is that body. I should make it very clear that the Code says nothing about whether people are being paid the right price. It is not about that. If you have negotiated something and agreed it, I cannot interfere. I only interfere if the retailer tries to change it once you think that you have agreed it and spring something else on you. I know that an awful lot of the issues that you are looking at in terms of farmgate pricing are price. I cannot interfere in price in the area that I am involved in regulating. In terms of farmgate prices, the area that I am most able to get involved in is fresh produce, which I know that you are not looking at, because there tends to be more direct suppliers in that area.
The Code came from two Competition Commission inquiries that were looking at the consumer being disadvantaged. The first inquiry said that the consumer was not being disadvantaged because they were getting such cracking prices. Then they looked at it again, and saw that there was an argument that the lack of choice would be a consumer detriment. So the Code comes from the Competition Commission inquiry, so I have been told that if I want to extend the Code then I have to make a case to the CMA and they would potentially need to do another investigation in order for that to happen. I cannot extend the Code. I have to go through the Competition and Markets Authority to extend it.
In terms of what I am allowed to do, that was set by an Act of Parliament, so for that to be changed, that would require primary legislation. Otherwise I am likely to be trying to ask the retailers to do something and they will start slapping lawyers’ writs and judicial reviews on me saying that I am not allowed to do this.
Q321 Rishi Sunak: Just to pick up on what you said, it sounds like you can suggest to the Competition and Markets Authority if you think that there is a reasonable case for an investigation or for your powers to be expanded. It strikes me that the processing and dairy supply market is not that dissimilar from the retailer/supplier market, in that there are concentrated retailers in this country, large companies buying from small suppliers. The dairy processing industry is very similar. There are a few very larger processors that are buying from lots of small individual milk suppliers. The structure of the market looks quite similar and, therefore, is it an area that you could explore whether there ought to be an investigation about practices in that market?
Christine Tacon: I can make a case to the Competition and Markets Authority if the retailers have come up with a new practice—if I think that there is something that they are doing that was not covered by the original Code. What I have tended to do is to slide everything that I find under one of the headings. For delays in payment, which most people would assume means being paid in 50 instead of 40 days, I have said if ever the retailer is not paying you in full that is a delay. It is more a matter of if I come across something that I cannot slide under any of the headings’ then that is what they meant when they said, “if there’s an issue with the Code.”
It all comes down to whether the Competition and Markets Authority decide that it is worth investigating because they think that there is any consumer harm. That is what worries me. I know exactly what you are saying: you have got a lot of people supplying one outlet, so you are there to protect that, but it was justified on the consumer harm ground. My understanding of a lot of the issues in farmgate prices is that they are about price, which I do not engage in anyway. The other thing that I would say, as well, is that I reckon there are about 8,000 suppliers to the 10 retailers, but there are probably 150,000 suppliers to the 8,000. It is not just a little bit more. It is a completely different scale.
Q322 Chair: Can I just follow up the question? When your role was set up, was there a period of time to elapse before it is looked at again or re-evaluated? What process will that be?
Christine Tacon: It is in the Act that I have to be reviewed after three years, but what it says is I will be reviewed against how effectively I have been doing what the Act told me to do. It is not a review—
Q323 Chair: More than necessarily looking as to whether your role should be widened?
Christine Tacon: Correct, and that review is in March.
Chair: This coming March?
Christine Tacon: 2016, yes.
Q324 Chair: So it would be quite within our remit to say to Government that we might like your role enhanced. Would that be the process to go through?
Christine Tacon: I am not sure that I am the person to ask, but my understanding is that the review is going to be a review, as per the Act, of how well I have been carrying out the role that I have been given to do. I am not sure whether that would be the right process to say that you think that there is a further market failure that needs to be investigated, which I think is really what you are saying.
Chair: We will investigate that, because it might be one way of helping what we believe to be right, but it may also help you as well.
Q325 David Simpson: You are very welcome, Christine, to the Committee. Currently your office is running an investigation into Tesco. What is happening with that investigation and what progress is being made?
Christine Tacon: I launched the investigation at the beginning of February, and I am following my statutory guidance, so I had a call for evidence and then I started making statutory requests of retailers and suppliers for evidence. Then, once I have that, I have the right to call people to interview. I have been conducting the investigation as per my statutory guidance.
Q326 David Simpson: What period of time do you think that will take? You started in February.
Christine Tacon: Yes, I have said that I am going to publish in the New Year.
Q327 David Simpson: Is that January, February or March?
Christine Tacon: In the first quarter of the New Year, I hope, though I obviously have various processes to go through, which are out of my control, once I have finished my report. There is the Maxwellisation and things like that to go through.
Q328 David Simpson: You said in your opening remarks, I think I am correct in saying, that you currently have four arbitrations that are being carried out?
Christine Tacon: Yes.
Q329 David Simpson: How many investigations have you had from when you started in your office to where we are today?
Christine Tacon: Just one. That is my first one. So the Tesco investigation in February—
David Simpson: This is your first one?
Christine Tacon: the Tesco investigation in February is my first investigation.
Q330 David Simpson: Okay, and then you have four arbitrations currently on the go.
Christine Tacon: Yes.
Q331 David Simpson: Are they near complete?
Christine Tacon: Two of them are nearly complete.
Q332 David Simpson: What date, again, was your office established?
Christine Tacon: June 2013.
Q333 David Simpson: Is Tesco the first one?
Christine Tacon: Yes. So from the beginning: as soon as I got the role, I had to get a team together and we had to write my statutory guidance on investigations. I could not start an investigation until I had done the statutory guidance, but I had to write it, put it out to consultation and then do that by December 2013.
Q334 David Simpson: You have brought me on to a good point. You talked about your team. For resources, you said that there are 10 major stores that help to fund your organisation. What about staffing? Are you properly resourced to do the investigations?
Christine Tacon: I have been increasing staffing since I started. Obviously, starting at nothing, but I am still—
Q335 David Simpson: Can I ask how many staff you have?
Christine Tacon: Yes, we are now a staff of seven, and I use external resource when I need it. For example, I am using external resource on the investigation.
Q336 David Simpson: Currently seven members?
Christine Tacon: Seven members, yes.
Q337 David Simpson: Do you think that that is enough?
Christine Tacon: It is enough for what I am doing now, given that I have used external resource for the investigation. I did not know how many investigations I was going to be doing, so if I was going to staff up to do them internally, that would be different. However, there is nothing stopping me from having a bigger team. If I need more money, I will make the business case and of course BIS have to endorse it, but the team is the size that I have evolved. My latest recruit is a compliance manager, so that once I have actually made recommendations I have ways of actually making sure that they are being complied with.
I do not want you to think that I do not do anything. In terms of working with the retailers, I have been pushing. I said to all of them that the first time I heard that they were doing something, I would raise it with them and give them the chance to put it right; and if I found them doing it again, I would go straight to an investigation.
David Simpson: I would not for a minute suggest that you are not doing anything. You made a comment at the beginning that the supermarkets did not fear you, but they were fully co-operative. It is a bit like that in our house at home. We do not fear, but we fully co‑operate.
Q338 Chair: Further to that rather direct question, how are Tesco co-operating with your investigation?
Christine Tacon: They are fully co-operating.
Chair: You have no problems with the co-operation.
Christine Tacon: No.
Q339 Chair: The fines were not in place when you took on the investigation, but you have other powers that you can use if you find it necessary when you have finished your investigation, regarding Tesco. What would they be?
Christine Tacon: If I find them in breach of the Code, I could make them do a public apology, naming and shaming, or I could make recommendations and then I would monitor compliance against those recommendations. That was why I needed to make sure I had got a way of doing compliance, as well. I think that the recommendations can be pretty powerful.
Q340 Chair: Naturally, you are not going to tell us what is going to be in your report, and I do not expect you to, but how detailed is your report likely to be and how much of that will be in the public arena?
Christine Tacon: The report will be in the public arena; it is important to me that the industry learns from investigations, whereas with arbitrations both sides have the ability to ask them to be confidential. It could be quite a lot of work, from my point of view, and it has not actually changed the world. My view of investigations, whatever the outcome, is that the learnings from that could lead to guidance that I issue to the sector as a whole, but it needs to be done in such a way that everybody is going to learn from it.
Q341 Chair: That’s right, because in a way this first report, especially with the largest retailer in the country, will possibly send a good message to other retailers. Would you endorse that?
Christine Tacon: As I said, it could lead to me writing very clear guidance to the rest of the sector, in terms of interpretation of the Code and what I would consider to be a breach in future.
Q342 Ms Ritchie: You are very welcome, Christine. I am moving on to the issue of the power of the retailers. When supermarkets have so-called price wars, who pays for them?
Christine Tacon: I do not really think that I have the answer to that. I do not know who is actually paying for them. It is up to them to decide how they are pricing things.
Q343 Ms Ritchie: Maybe I will try another question, then. Do supermarkets put pressure on processors to supply products at a cheaper rate, despite the Groceries Code?
Christine Tacon: The Code is about not changing your supply agreements. They cannot reduce prices and then turn around after three months and ask the supplier to make up their lost margin. They cannot do anything retrospective like that. However, the reason that that was in the Code was because the Competition Commission found evidence that people used to do things like that. If they respond immediately to a price reduction with another retailer, they can go and speak to their suppliers about a price reduction, but they certainly cannot go back retrospectively and ask them to fund it. They can go and speak to them about it, and I would expect them to, but that would be a negotiation between them. They cannot mandate it and they certainly cannot, having done a price reduction, then go back and ask for margins to be made up.
Q344 Ms Ritchie: Speaking before this Committee last week, representatives from Aldi and Waitrose have claimed that their purchase and retail prices are not directly related to each other. Would it be possible for the Groceries Code Adjudicator to verify whether a supermarket’s purchase and retail prices are connected or disconnected?
Christine Tacon: I am afraid that I have no remit on price at all. It is nothing to do with me. What I will get involved in is if they have contracts changed without notice or negotiation. I am sorry, but if I started asking those questions I would have lawyers telling me that I could not do it.
Q345 Ms Ritchie: Then do you think that the Code has strengthened the relationship between retailers and suppliers?
Christine Tacon: That I definitely think it has done. What I am trying to do is make sure that suppliers feel that they can challenge back and collaborate. I meet far too many suppliers, particularly in the fresh produce industry, who said that if the retailer says jump, they ask how high, whereas the first thing that they should be asking is why, what is the retailer trying to achieve, and how can they get there? Some of what I have got into the Code actually puts a lot more power back into the suppliers, that things cannot be changed without notice, so that they know where they stand.
However, if you speak to the retailers, they do not want to keep changing their suppliers. I spoke to one the other day, and asked how long their agreement was for. They said that the agreement was for a season. I asked if they tendered at the end of the season, and they said that they wanted them to be suppliers for life. They only wanted to change it if there was a reason to change it. They want to build these relationships and I am quite pleased that some of the areas that I am getting them to look at are actually getting suppliers to work better with retailers, with less fear.
Q346 Ms Ritchie: Do you have evidence that suppliers are afraid to raise their concerns with you for fear of retribution?
Christine Tacon: Yes, I do. In the survey that I did, the last survey, about a quarter of suppliers said that they would not raise an issue with me because they feared retribution. I do try to say that if they raise one issue with me, and they are not going to take it up with the retailer, I will not take that up on their behalf unless I have more suppliers who have the same issue, because then I could breach their confidentiality. One in five people in the survey last time said that they would not raise an issue with me and I am actually doing another round of survey at this moment to try and understand more about what they are worried about. I repeatedly say that I have a duty of confidentiality and I will never raise something either without their permission or without a sufficient body of evidence that I can do it without breaching that confidentiality.
Q347 Ms Ritchie: I know that you do not have responsibility for prices, but I am sure that you have certain views, opinions, perspectives and things. Do you believe therefore that the fall in farmgate prices across the agricultural sector has resulted in increased profit margins for the large supermarkets or has the fall in prices been passed on to consumers?
Christine Tacon: I obviously do not have a view on that as the Groceries Code Adjudicator. What I would say is that global market prices have generally fallen at about the same rate and that consumer prices have fallen considerably. Consumers are doing very well out of all of this. There has been a seismic shift—
Q348 Chair: Are the farmer and the grower also doing very badly out of it as well?
Christine Tacon: I was going to say that there has been a seismic shift in retailing, with the advent of the discounters. There has been a huge push on actually reducing prices in retail as well.
Q349 Ms Ritchie: How has the farmer done?
Christine Tacon: How has the farmer done? You will have to ask the farmers that, but what I do see, particularly in—I am much more experienced now of horticulture. I do see them consolidating, getting bigger, investigating in efficiencies, investing in more efficient pack houses, and continually responding to that price pressure, but an awful lot of our farmers in horticulture are competing with the Dutch, who are extraordinarily efficient growers. Price pressure can be a good thing if it leads to increased efficiency.
Chair: Provided enough of the retail price gets back to the grower.
Q350 Simon Hart: You mentioned not wanting to proceed with an investigation unless you had a body of evidence, but in certain circumstances retailers might only have one or two suppliers of a particular specialist product. They would never be able to raise their concerns with you, because they would be identified if there were one, two or three of them. What options are open to them?
Q351 Christine Tacon: At the moment the issues that come up continually—and it is not just people who talk to me; training courses are feeding back to me the issues coming out—tend to be issues that I would say were endemic across all categories. If a retailer is delaying payment, or if a retailer is being very aggressive in the forensic audits, or a retailer is delisting without giving due notice, it tends to be across the board. My five issues are about demands for lump sums, charging for customer complaints—though that is one I have now closed—overcharging for artwork and design. They tend to be endemic issues, and those are the sorts of things that I hear about.
When someone feels that they have been badly treated by a retailer and feels that they have been undermined and their business eroded over a period of time, then I would really advise that they take it up with the Code compliance officer, if they feel that the Code has been breached in that process. There they really do have to go and speak to them, and I tend to say that the Code compliance officers are in legal, in audit; they are not allowed to be in the buying chain of command. They know that if they cannot come to an agreement it will sit on my desk and how I will interpret it. It should not be the first thing that you do. You have to try and take it up with the buyer and the senior buyer, but it is not a backstop. I do not think that it tends to happen that I have one or two issues that I have not heard about before.
Q352 Chair: I think that you are probably saying to us that you are clearly saying to the retailers that they cannot behave in this way.
Christine Tacon: Yes.
Chair: This is key to it, more than perhaps the investigations, in some ways.
Christine Tacon: It is about spelling it out. It is about saying that when somebody has delivered units to you, you are not giving them proof of delivery, and then you are telling them that something is missing, you are delaying payment and breaching rule 5 of the Code. Then they go back and think about finding a different way of doing this.
Q353 Dr Monaghan: Christine, you have highlighted the fact that you have at your disposal significant sanctions. While this Committee has been taking evidence, we have identified some misunderstanding, perhaps doubt, about your ability to initiate an investigation. For clarity, can you tell the Committee what would cause you to launch an investigation?
Christine Tacon: The Act is very clear that I have to have reasonable suspicion in order to launch an investigation. I try and ask suppliers to give me evidence. I do need to know, if I am launching an investigation, that there is a reasonable chance that it is going to stick, so I might be asking them for evidence of invoices, things being discounted. I would ask them to give me some evidence for it. I have been asking trade associations to try and collate issues from their members, so some of them will tell me to look at some evidence from one of theirs. I do need to have the reasonable suspicion to launch it. What tends to happen is I get a lot of anecdotes and I tend to build the anecdotes and then I might pick someone and ask for some evidence to support that, because I need to know that it is an issue.
In a way, that has been the beauty of the collaborative approach, that I can actually raise issues with the retailers when I have only got them as anecdotes, and ask them to do something about it and to prove to be that they are doing something about it, and I will then need the evidence. So I would basically be following up anecdotes. If people said to me that something had happened, I would ask them to show me that in writing. More and more people are actually bringing me the documents behind it. That would be the sort of thing. What I would need is a lot of anecdotes and a few pieces of evidence. That would be enough.
Q354 Dr Monaghan: Would you form a judgment or take any consideration of the proportionality of an investigation against the anecdotes that are being provided to you?
Christine Tacon: I am not quite sure what you mean,
Dr Monaghan: If you are receiving anecdotes about what might be judged relatively trivial matters, would you consider that appropriate for an investigation, or if you were receiving anecdotes against potentially significant matters? That is the consideration that I am asking you to give us an evaluation of.
Christine Tacon: No, in my statutory guidance I have put in prioritisation principles—what the impact is on the industry, how widespread it is and that sort of thing. I would be going through those, but I am very mindful that in the Competition Commission reports they did say that I should be making sure that I am prioritising small suppliers over large suppliers, in the way that I am exercising my duties.
Q355 Dr Monaghan: Could you give us an example of where the balance would fall, in terms of what would prompt you to initiate an investigation or deal with a matter another way?
Christine Tacon: The first thing would be was if it was something that I had already raised with the retailers as an issue, because that is what I have said. If I have an issue I will raise it with them and give them a chance to do something about it. Let us say it is on retrospective demands for lump sums—if I hear that somebody has been making demands for retrospective lump sums now, it is much more likely to lead to an investigation and I would need some evidence to do that. However, it would not be a proportion. It would go through my prioritisation principles, but it would be that, “I’ve said you can’t do that. You’ve now gone and done it.” It would be an investigation. Is that good enough?
Dr Monaghan: That is helpful, thank you.
Q356 Chair: Certainly in the past, and I do not know if it is still happening, there has been the approach where some large retailers have asked suppliers to almost buy the space where the product is going to be presented in the supermarket or retailer. Have you found much of that and are you worried about it, or do you think that the practice is much less prevalent now?
Christine Tacon: One of the three case studies that I put on the website was about Tesco asking for payments for shelf positioning. So you would pay more if you wanted to be on the mid-level shelf. There was an article in The Grocer magazine. I asked them about it and they admitted that they should not have done it and they turned it into a case study to talk about that. They were saying that they were only requesting it, because the Code is very clear about requesting and requiring, and I used that to demonstrate that if you request something but if they do not say yes they would be worse off, that is a requirement. That was quite useful to have as a case study and the investigation that I am doing into Tesco is about delays in payment and payment for shelf positioning, because I had reasonable suspicion that both of those had been breached, even though I had previously told them that they could not do this.
Q357 Chair: You make an interesting point on the difference between a request and a requirement, because it must be a fine balance. If you are being requested by Tesco to do something, if you are not a very big supplier or are under big pressure, you would almost see it as a requirement. That is something that you make a judgment on, but I think it is probably one of the places that you may well see the most pressure being put on the supplier.
Christine Tacon: I am fully aware of that and that is why that case study was particularly useful to start to spell out, that if you are asked for something and you say “no” and are going to be worse off, do not tell me that is a request. It is a requirement.
Q358 Chair: I will bring Rebecca in, but just going back over the question that Simon Hart gave to you, the trouble that I see is that you have got very few suppliers in the market that are supplying Tesco or the big retailers, so they are going to be identifiable. That is the bit about which we worry more than anything. Are you getting it through loud and clear to these retailers that if they are draconian and trying to stop people making a complaint, then you would take a very dim view of that?
Christine Tacon: I cannot see many instances where there would only be a few suppliers who would be complaining about something. I know that you have price in your mind, but I am not on price—
Q359 Chair: Take milk, for instance. Very often the big retailers are supplied by only one or two major processors. So therefore, if a complaint is made then they are damned sure that they know where it has come from.
Christine Tacon: Yes, but if the retailer was starting to ask for lumps sums, they would not only be asking for them from the two dairy processors. It would be across the board. They tend to be issues that are widespread, rather than just on any one particular sector.
Simon Hart: The point is that you are not hearing the complaints at all, because nobody is stepping forward to make them. So what we do not know is—
Q360 Chair: Yes, are they too frightened of retailers?
Christine Tacon: I would love more suppliers to tell me what their issues are and what is going on, but I do get told regularly. I go out a lot myself and that is how I hear. I meet small groups of suppliers generally put together by a trade association or an accountant or lawyers, or something like that. I meet them in small groups and people will then start telling me things. Whenever I go out to do things I always leave time either side, in case anyone ever wants to see me privately, so that they can actually talk to me about something specific. I get six-monthly reports on what the top issues are that are coming up out of the training. I am confident that I know what the issues are. We still get a trickle; we get some in every week, but I would prefer to be inundated with them, just because that gives me an idea of proportionality, how widespread it is, that sort of thing.
Sorry, just one more thing; also, when I do my annual survey, we are actually saying that these are the issues that people are telling us about and asking if they have experienced any of these. So we are really spelling them out, so that people know what I am talking about, and I am getting feedback on those. So I am aware, from that as well, which are the top issues.
Q361 Angela Smith: I suppose it is a related point. I just wanted to ask about resources. In your written evidence is a plea not to burden the GCA with any extra responsibilities and I think price is part of that. Is this because you feel that the GCA does not have sufficient resources to do that? Would you, in fact, be happy to see an extension of the responsibilities of the Adjudicator if extra resources were made available to do the job? Is it resources that are dictating your view or is it actually a philosophical or theoretical view that you have on this?
Christine Tacon: It is neither. I am new in the job and I am trying to change the culture of 10 of the largest businesses in the UK—an embedded culture that has been going on for decades. I think I am doing a reasonably good job, but even in the last survey seven out of 10 suppliers said that they had come across a breach of the Code in the last 12 months. The good news is that in the previous year it was eight out of 10, but I am actually trying to do a very large job, and I believe I am making some progress and taking it forward. Part of the plea was the fact that I felt that I was coming under criticism for not doing things that I was not set up to do, and did not have the legal ability to do.
Q362 Angela Smith: With respect, that is not the question that I asked. What I asked was: arising from that, do you feel that you have the resources to do the job that you are doing now, within the current remit of the role?
Christine Tacon: Yes, I do.
Q363 Angela Smith: Do you feel that if you were given extra resources and the job that you were doing was a full-time position, that there would be a case for extending the remit of the Adjudicator?
Christine Tacon: I cannot extend the Code and I cannot change the law. I am trying to work within what I have.
Q364 Angela Smith: Do you have a view on whether or not, given your experience in the job so far, that the role could be usefully expanded? On the basis of the experience that you have, you must have a view on the limitations of the role.
Christine Tacon: The way that I am doing the job, it works very well—the fact that I have got 10 retailers and 10 dedicated people to work with to force change through their organisation. If the role were suddenly to do exactly the same with 8,000 suppliers working with 150,000 people supplying into them, it is a completely different job.
Q365 Angela Smith: That is not what I was driving at. I was not making an assumption at all about how it could be expanded. What I am saying is that, given your experience in the role so far, is there any way in which you feel that the Code could be usefully expanded and that your role could be usefully expanded? On the basis of the experience that you have had so far, should it teach us any lessons about how the code could perhaps be improved?
Christine Tacon: It is difficult. If people said, “Here are a few more retailers we want you to cover,” that would not be a problem at all, because you would do it in exactly the same way. If I were told that my role now included whether people had the right price, I would not know where to start doing that.
Q366 Angela Smith: That is not the question that I am asking. I am not presupposing anything. I am just asking you, on the basis of your experience, whether there was anything about your role or the Code itself. What are the lessons learnt so far? Are there any lessons to be learned?
Christine Tacon: The only lesson that I wanted to point to is that the Code is actually reasonably woolly in terms of what it says, and I like that, because it has allowed me to put lots more things into it and to interpret it. There is a lesson there: that if you are very prescriptive, you are giving people the ability to work around it. By saying “no delay in payments” it allows me to put lots of things underneath that. To date I have actually been saying that I think the Code is very well written and I find it very easy to use. One real lesson is that it was set up that my office had to be staffed by secondees, and it is really quite difficult getting secondees out of the Civil Service at the moment. Every recruitment takes me longer than I would choose. That is just in terms of a lesson. There are many times I have wanted something, decided that I have the budget for it, been ready for the person, but it has actually been really difficult to recruit.
Q367 Angela Smith: Has that had any real impact on the work that you have done? Can you measure that impact for us in any way?
Christine Tacon: I can probably measure it in the stress of the individuals that are there because we all just have more to do.
Q368 Angela Smith: And it takes longer, does it, to do the job?
Christine Tacon: Yes.
Q369 Angela Smith: Could we measure the delays, sometimes, in getting the job done or a particular task completed?
Christine Tacon: I do not think so. I would probably say that on average I have done more than three days a week. Do you know what I mean? It has impact in other ways. We still get the job done, but we are having to work harder to do it.
Angela Smith: You have to work harder to do it?
Christine Tacon: Yes. I do get there, it is just that it is slow.
Q370 Angela Smith: Perhaps the Civil Service should think differently about using secondees, then. Is there perhaps a different way of doing it?
Christine Tacon: I do not know. It has just been difficult for me to get people. You find people in Departments, and then the Departments will not release them. I think it is just a difficult time within the Civil Service, when they are downsizing. They still count on their headcount, even though they are in my office as a secondment.
Q371 Angela Smith: Have you ever been refused somebody?
Christine Tacon: Yes.
Angela Smith: How many times?
Christine Tacon: I would say about three times.
Q372 Angela Smith: Is that in recent times? In the last—
Christine Tacon: Since I started. I only started in June 2013. It has just been a frustration and it has taken longer. But I am very pleased with the team I have got.
Q373 Dr Monaghan: Just very quickly, is that difficulty in accessing secondees from the Civil Service peculiar to your organisation, or is that across the board?
Christine Tacon: Do you mean is it because they are coming to work for me?
Dr Monaghan: Yes.
Christine Tacon: Oh, I do not think so. Most people are really excited about coming to do that. So no, I do not think that it is peculiar to me.
Dr Monaghan: So the Civil Service are reluctant to give secondments to their staff to any other organisation?
Christine Tacon: Yes, because they are downsizing, and it counts on their headcount even though that secondee is in my department and I pay for them in full. It is actually a headcount issue.
Dr Monaghan: Thank you. It is just useful to be clear.
Chair: You are actually paying them. However, as you say, it is a headcount. That is something we need to raise very much with Government and system.
Q374 Rebecca Pow: Thank you very much, and welcome. We have actually covered quite a lot of my specific issues, which Angela comprehensively dealt with. I would just like to ask: is three days a week is enough for your remit?
Christine Tacon: It has not been recently, but I am hoping to average three days by the end of the year.
Q375 Rebecca Pow: Your role is going to be reviewed in the spring by the Department of Business, Innovation and Skills; is that something that you would raise? Would you say that you are able to cope with your remit in three days?
Christine Tacon: I think that I can cope, but it really depends on what the workload is going to be. If I suddenly end up with three investigations running in a row, it would be something else. What I have been doing is pacing what I have been doing according to what time I have got to do it. I have been happy that I can do what I have done in the three days. It has gone up recently, but I am hoping that it will go back down again. If they ask me whether I would do more days or not, I would have to then think about that.
Q376 Rebecca Pow: How many are in your team?
Christine Tacon: There are seven in the team.
Q377 Rebecca Pow: Do you think that you have succeeded in your role so far, if you had to sum it up today?
Christine Tacon: I am not there yet. I have got a lot further to go, but I get a lot of feedback from suppliers that it is making a difference. Just knowing that I am there is a big deterrent. The survey itself showed improvement in absolutely every area, apart from one on packaging, so I then had a workshop on packaging, and artwork and design to say what they should—
Rebecca Pow: Can you give an example? Improvement in what? In payment or in—
Christine Tacon: No. I have been saying that these are some common examples that people have said to me where retailers are potentially breaching the Code: “Have you experienced any of them?” They are going down and ticking them, and that is where we got that seven out of 10 of them said that they had experienced some sort of a breach in the last 12 months. We then asked them a year later, and every one of them had gone back down.
Q378 Rebecca Pow: Yes, I was just asking you to give me one example. What was breached?
Christine Tacon: All of the things I have talked about: “Have you been asked for a lump sum?”
Rebecca Pow: Just mentioning payments.
Christine Tacon: Yes. “Have you been asked for a retrospective lump sum?” They can just tick “yes” nor “no”. “Do you feel that you have been told to use a third party supplier that was more expensive than you could have bought for, and you suspect that the retailer is getting some benefit out of it?”. “Yes” or “no”. So it is actually putting them into supplier language, rather than the Code language, and what are the sorts of things that they are experiencing.
Q379 Rebecca Pow: Very quickly, it has been raised with us at these inquiries and at the Westminster Hall debate, that people are still saying that the Groceries Code Adjudicator does not have enough teeth. By that, I think what they really mean is that it is actually the smaller suppliers who do not have access to you, and would like to raise complaints and issues. I know that we have talked about dairy a lot, but it is particularly the dairy industry who are saying that you are not doing anything for them and not helping the link from them to the retailer. What would you say?
Christine Tacon: I would say that, to do the job that I have been given, which covers direct suppliers to retailers, I think that I have got plenty of teeth. The ability to investigate and the ability to fine is more than enough, because the level of fine is so large, to get co-operation with me. I think the people who are saying that I have not got the teeth to do the job, if you are reading behind it, they basically want me to be able to do more: they want me to be able to get involved in price and in farmer to processor. They do not mean that I have not got the teeth to do the job I have got. What they actually want me to do is a different job.
Q380 Rebecca Pow: They are probably not understanding exactly what your specific role is. I think that that is part of it. Are we absolutely right that really all of this is for the benefit of the consumer and that is why it was set up? Really the farmer and the supplier at the other end of the chain does not really come into your remit.
Christine Tacon: That is what the Competition Commission is for. It is to protect consumers. They did not even investigate relationships between farmers and processors. When they did their investigations, they were looking at direct suppliers to retailers, and the first time they found no detriment to consumers, so they said that there was no case to answer. It was only through persistent lobbying that they had another look, but it is all justified on consumer choice.
Q381 Chair: Yes, but your role should have a knock-on effect. If the retailers are not taking undue amounts unlawfully out of the system, then there is a reasonable chance that more of the retail price that the consumer pays gets back to the wholesale supplier, albeit through the processor.
Christine Tacon: Again, it is not about price. What it used to be is about the retailers saying that they have not made as much money out of this, and turning to their supplier and saying, “Give me a handout.” If the supplier had not expected it to come and suddenly needed the money, then arguably they found a way of getting it further down the chain. Where we are trying to get to is the supplier doing the renegotiation with the retailer and knowing exactly where they stand and what they can afford, and the whole thing is more predictable going forward. It is taking the unpredictability out.
Q382 Chair: It should not have to kick back to the wholesaler, the wholesale product.
Christine Tacon: Yes, and I think that has largely stopped because the penalty is so large, and they all know that if they do it, I will be coming to investigate.
Q383 Chair: With your role as it is at the moment—and you have talked about having a little bit of a problem where sometimes you want to bring a civil servant in on secondment, and I think that that is something we will note in our report—is there anything else, in an ideal world, that you would like to see with your present role?
Christine Tacon: What would make my life a lot easier is if people understood what my role was. I just feel that I am getting a lot of criticism for not doing a job that I was never set up to do, because I do think that it is making a difference, and if you do not mind me saying, it is quite a distraction, having to continually reinforce to people about when I cannot get engaged in things. Apart from that, my job satisfaction comes from suppliers who tell me that it has made a difference.
Q384 Chair: Do you believe you are effective in setting out your role to the retail sector?
Christine Tacon: I am effective, but I still have a way to go. As I have said, there were still seven out of 10 suppliers who said that some potential breach of the Code happened in the last year, and my big push at the moment is actually for suppliers to get trained. There is a law there to protect them and they should know about it. The retailers are trained every year; they know that law inside out. The suppliers need to know it just as well as they do if they are going to use it in their negotiations.
Q385 Chair: You believe that you are having an effect, you believe that the culture is changing and that it is great that it has gone from eight to seven in that box of problems. Do you hopefully foresee that box-ticking coming down from eight to four or three relatively quickly?
Christine Tacon: Yes. I would like to bring that down faster, yes. Some of it is about supplier awareness, because I am not sure how many of them do not like something that has happened but do not realise that actually the Code has not been broken. My aim is to get that down and keep it down
Q386 Chair: We shall await with great interest your report into Tesco in the New Year. We very much appreciate the time that you have given us, and your frank and open answers. I think that also perhaps your being able to air what is happening as far as the Groceries Code Adjudicator is concerned, here in public in a Select Committee, will in a small way help the public and the farming community to see what your role is. I hope that that has some good effect.
Christine Tacon: Thank you very much. It is great if it helps to do that as well. Thank you.
Chair: We are most appreciative. Thank you very much.
Examination of Witnesses
Witnesses: George Eustice MP, Minister of State for Farming, Food and the Marine Environment, Defra, Mark Filley, Head of Livestock, Dairy and Genetic Resources, and Tim Mordan, Deputy Director, Farming Sectors Team, Defra, gave evidence.
Q387 Chair: Good afternoon and welcome, Minister. If you would all like to introduce yourselves, starting with Mark, and then we will proceed with the evidence. So very much welcome.
Mark Filley: Thank you, Chairman. My name is Mark Filley and I am the Head of Livestock and Dairy Policy at Defra.
George Eustice: I am George Eustice, the Minister of State for Farming.
Tim Mordan: Good afternoon, everyone. I am Tim Mordan, and I head up the Farming Sectors team in Defra.
Chair: Welcome. We have just, as you probably realise, had the Groceries Code Adjudicator here this afternoon and we had some very good evidence from her. Thank you very much for joining us. First of all, to the Minister, what is your assessment of the current situation? Do you agree that price volatility is now inherent in the agricultural industry, and what are we going to do about it?
George Eustice: There has always been price volatility in agriculture, even in the days when I was in agriculture. It is certainly very challenging at the moment, and I think that across most sectors we have seen low prices over the last 12 months. Most of them have one thing in common, and that is the exchange rate of the pound against the euro, which has exercised downward pressure on virtually every sector. Alongside that there have been other exacerbating factors. In some cases good weather has led to high yields and an increased production, and that has pushed prices further down globally. In other cases, such as pork, we have seen the Russian ban have a knock-on impact through Europe and that has added further downward pressure.
We have also seen, in a couple of areas, prices pretty much stabilise. Beef, despite dipping in early summer as it normally does, has actually recovered to quite stable levels, and although the poultry sector has had downward pressure on prices has weathered it quite well. It is a mixture, but generally most sectors are suffering from low prices, partly driven by exchange rates, generally exacerbated by other factors around the world.
Q388 Chair: Naturally, for all of us, it is relatively easy to work out what the problems are. It is probably a little bit more difficult to find the solutions. How is the farming sector in particular going to be able to protect itself against the impact of volatility? What can we do now? What can we do a little bit more in the future?
George Eustice: I know that you have had specific inquiries on dairy, and obviously dairy is an area where we have had 18 months now of low prices. They have plateaued over the last six months or so, but what we are looking at quite seriously now in Government, and working with the AHDB on is the development of a futures market, either in skimmed milk powder or perhaps in butter, and I think that this would help manage future volatility. I do think that there is a big role in a post-quota environment to use futures markets to help manage risk so that farmers are better able to fix their prices for longer periods of time and know exactly what price they are going to get for the production that they are investing in.
Q389 Chair: In a way, it is for the industry to bring forward proposals, but what encouragement and what help can Government do to bring that about?
George Eustice: We have some of our policy officials giving quite a bit of thought to this, and we have brought in somebody with expertise in financial futures markets and hedging. We should note that the City of London is the world’s premier financial centre, so we have a lot of expertise in futures markets. Some sectors as well, such as cereals, have always used futures markets as a way to protect themselves against risk, so there is a precedent for this for agricultural commodities. However, to make a futures market work you have to first of all have the liquidity. That is not liquidity in the sense of liquid milk, but a big, deep market so that people can swap in and out of contracts relatively freely. You also need to have a reliable physical market, against which you can benchmark any derivative market. That is sometimes the challenge, getting a market that is large enough and liquid enough, first, for people to be able to access easily, and, secondly, for it to be a reliable benchmark against which derivative markets can then operate.
Q390 Chair: You talked at the beginning about the fact that the pound is relatively strong against the euro in particular. The problem is probably a good one in a respect, as probably the economy is looking pretty good. I suspect that the pound will remain pretty strong for some time and it could even strengthen. I do not expect that the Government is looking into introducing something like the green pound, or any intervention into the currency or the way agriculture is funded, but is your Department looking at any solutions to that?
George Eustice: Obviously, there is a very strong and very well established currency futures market, and that is easily accessible now by people who wanted specifically to hedge any exposure they have against exchange rates. All farmers, whether they are exporting or not, are obviously exposed to exchange rate volatility through the farm subsidies that they receive. There is already a private market in currency futures that could help them. We learned a lesson in the euro debate, in which I was very involved 15 years ago, that floating currencies are a good thing. If you believe in market forces, a currency allowed to find its level in an international market, depending on the economic circumstances pertaining at the time, is actually a really useful tool. When we had the credit crunch in 2008, which because of our banking sector had a disproportionate impact here on the UK, we were able to devalue.
Q391 Chair: I was not thinking so much about the actual value of the currency in the way that we hedge and trade the currency, but more what it reflects on farmgate prices. If you can import a product cheaper because our currency is strong, and when we export again our currency is strong, so it makes our exports dearer and our imports cheaper. Have you given that any consideration?
George Eustice: Apart from what I have already mentioned around futures markets, which I think are the main tool in the box, which is why we are putting quite a bit of emphasis on this to help farmers mitigate risk, there are other things that you can do to improve your resilience against such downturns. Opening new export markets is important, so if you have pressure on your home market then you have got access to alternative markets. This is particularly important in some of the livestock sectors to get a higher value for the carcass; there is a market with a higher price, quite often, for what is called the fifth quarter—some of the offal, the pigs’ trotters, the chicken feet and things like that, for which there is no ready market in the UK. There are other things that we can do, such as opening export markets so that we have got other options when there is a downturn.
Q392 Chair: The final part of my question, for now: how do you see the long-term future of the agricultural sector fitting into support for the sector in the 25-year plan working out?
George Eustice: I have said many times before this Committee, that despite the undoubted challenges that this sector is facing at the moment, and lots of businesses losing money with the prices that they are currently getting, I do think that the long-term prospects for our food and farming industry are very good. We have got a competitive agriculture sector, more efficient than most of our European counterparts. We have got the right climate to produce food. We have got a lot of world-beating science expertise in this country. I really think that we are well placed to provide food for a growing population.
Chair: And the plans for the sector through the 25-year period?
George Eustice: We are working on that. We had an initial meeting in July, where we brought a whole load of industry stakeholders together and we are currently in the process on working on the first draft of that. We have run a number of regional groups so that we can engage those smaller businesses who were not able to get to the first event that we held in London, and also a number of sector-by-sector briefings as well. This plan will very much look at issues such as skills and how we attract new talent and create new business opportunities for people who want to get into the food and farming industry. We will be looking, as well, at how we can improve integration in the supply chain. We have got some very big players in food processing. It is our biggest manufacturing industry, but sometimes in the primary sector things are quite fragmented and farmers quite often end up being price‑takers. So I think that we can look at different types of contractual model to ensure that the risk is shared more fairly throughout the supply chain.
Q393 David Simpson: I am sure that the Minister will join with me in congratulating Northern Ireland in getting the Chinese market open again for the pork sector. That will mean an awful lot to the farmers who are losing £6 a pig; this will lead to the fall of the floor to start with and then it will increase. Going back to the dairy sector, how do farmers really protect themselves when you have a fall in dairy prices right through the whole period? It is forecast for Northern Ireland to be 16 pence for January. How do they protect against that, when you have a vulnerable market? Is it solely less production or what is it?
George Eustice: First, I completely agree. We were a long time waiting and trying to open that market for pork, and I have had many discussions with members from Northern Ireland. Obviously we are very pleased with the progress there.
Northern Ireland has been particularly exposed to the dairy downturn, and that is because, whereas around 50% of production in England is liquid milk, in Northern Ireland the bulk of the milk goes to processing, and processors have been particularly exposed to global commodity prices. I appreciate that, and it is in recognition of that that when we did the support payment from the EU, the €500 million support payment that we pressed hard to get, we actually gave a significant uplift to Northern Ireland in recognition of that. I know that that does not remove all of the losses that they will have made over the last 12 months, but we did recognise the particular plight of Northern Ireland farmers.
In answer to your question, there is always going to be a challenge with dairy, which is that the time it takes to respond to a market signal can be quite long, in that if prices are going up then by the time you have invested and increased the size of your herd, added more dairy replacements and invested in extra capacity, rented more land. This takes time, and the difficulty is that quite often by the time that production responds to that signal you have already started to see a downturn. Then there is a lag, quite often, in responding to the downturn. In fact, worse than that, one of the things that we have seen this time which we did not have quite so much in 2012 was that in 2012 the crisis was exacerbated by very high feed costs, so the variable costs that famers had were higher, their margins per litre were even tighter, and that meant that they responded quite quickly to reduce production. As feed costs this time have been much lower, we have seen in some instances farmers producing more in order to try and help cover their overheads. That has probably then exacerbated the problem. Indeed, as prices were falling we still saw production go up in the region of 4% the past 12 months.
Q394 Chair: We actually had Arla in a week or so ago, saying that farmers had produced more milk in order to keep the imports out. What would you say to that argument then?
George Eustice: I am not sure. I think that farmers are trying to produce more milk, in order to try and pay the bills.
Chair: Exactly.
George Eustice: I am not sure that they are in some geo-political—
Chair: That was their argument—that if we contract our production, all you do is suck in more imports. It is an interesting argument.
George Eustice: It is, and there are some who would argue that in a post-quota environment, part of the solution to this is through having the A and the B pool food processes. It is not universally liked, that model, as it has its own downsides, but the idea is that for a fixed amount of production a processor pays you a higher price, and any overproduction you take your chances in the B pool. That then sharpens the market signal to cut production when production is running too high. There is an argument for that, to try and speed up the reaction of the industry to price signals.
Q395 Rishi Sunak: I thank the minister for what is, I think, the third time you have been here in six months, so I appreciate you making the time. It was just a very quick follow-up around the futures market and it is encouraging to hear that that is something that the department is actively working on. When we heard evidence from the NFU’s chief dairy advisor, she had mentioned that one stumbling block was the lack of real-time data on production and pricing. She was talking about it in the European context, and they were speaking to the Commission about it, but I would be interested to get your thoughts on whether that is, indeed, something that needs to be fixed here, and whose responsibility it is. Who can make that happen, if it needs to happen?
George Eustice: Yes. It is, and we have got somebody with expertise in futures markets who is looking at just that issue for us. Other member states are also considering this. I know that the Republic of Ireland, for instance, is also looking at the issue of futures at the moment. The Commission is showing interest in this. Phil Hogan has picked up the baton on this and is keen to learn from us in this area as well. There are some benchmarks out there, but you are right: at the moment it is difficult to say that any of them are reliable enough. The US does have the most mature futures market. I think that that one is predominantly butter, so that does provide a guide against which you could have a derivative market, but it is in the US and there are some differences between that and Europe. We actually ideally want to set up in the European Union, Europe-wide, and London is the right place to do that.
There are others. There is the Fonterra international auction, which is a big skimmed milk powder dairy auction run by the New Zealand company Fonterra. They clear high volumes, and that therefore also has a reasonably reliable spot price, but again it is not perfect, in that people hold back stocks, so it is not always an accurate indicator of the real situation on any given day. So there are a couple of examples there—a US futures market and there is the Fonterra auction—which give you a starting point, but we accept that at the moment we are not there in terms of having a reliable enough benchmark against which to establish a derivative market.
Chair: Of course, New Zealand is peculiar, because 97% of its production is exported. That is why you have that massive co-operative. I do not think that it would be allowed anywhere else, really, would it, with that amount of control.
Q396 Ms Ritchie: Moving on to the issue of the dairy industry specifically, in relation to the supermarkets. The supermarkets told us last week that the price paid to suppliers is not limited to the price charged to the consumer. Is this a problem of retailers selling milk cheaply?
George Eustice: I think that they probably make a fair point, in that if you look at most of our major retailers, the reality is that some of them, such as Tesco and Sainsbury’s and I think M&S have aligned contracts for most of their liquid milk production. It is a different story when it comes to milk going into processing, but on that, quite a few of them are still paying farmers over 30 pence per litre, which is a very fair price, and that is because it is linked to their costs of production. We are also starting to see some supermarkets, Tesco for instance now, guaranteeing a price of I think 29 pence per litre for farmers supplying their own-brand cheese supply, and saying that they will maintain that until at least February next year. So we are starting to see some supermarkets also give assurances of that sort, over and above the international market, to those suppliers providing them with cheese.
I think that the point I would make is that although famously we are seeing four pints of milk beings old for 89 pence, or between 89 pence and £1, that is not necessarily reflective of what they are paying farmers, and in those cases we should give credit when it is due. When it comes to liquid milk producers, some of those farmers are on still quite good contracts, and the supermarkets are losing money on that at face value.
Q397 Ms Ritchie: Therefore, is the Government, and I am pushing you a little bit on this, comfortable with dairy being treated as a loss leader by the supermarkets, and sold below the cost of production by major retailers?
George Eustice: The evidence is that a staple product like milk is not a product whose volumes change dramatically depending on the price that is set. People buy the amount of milk that they need, and it is not that sensitive to price changes. What is really happening with the supermarkets is that they are all in price wars with one another, so on some of those staple goods they are trying to have these loss leaders in order to win market share. What we are doing as a Government—it is not for us to interfere and start dictating what their prices and price policy should be, but this is what we have done—is that we have written to all of the major supermarkets, and I have been following that up with phone calls over the last couple of weeks, to encourage them to do two things, really. One is to increase the amount of UK dairy products that they procure, and we have seen progress with Tesco planning to switch its own-brand yogurt to use 100% British milk. We have seen improvements, for instance, with M&S moving more of their cheddar cheese to being British and others such as Morrisons also moving in a good direction on this. The second thing we have asked them is to do much more to promote the British brand on their products, so that, rather than just having the Red Tractor logo tucked away somewhere on the label, we are using the Union Jack to really promote the product, because there is a lot of consumer interest in buying British. Quite a lot have done that; supermarkets such as Iceland are doing much more to promote British.
Q398 Ms Ritchie: Further to that, Minister, apart from writing to the retailers and understanding that you do not wish to dictate to the market, what other efforts are the Government undertaking to address the unequal negotiating positions of farmers and large retailers? Farmers have been very much marginalised in the past number of months.
George Eustice: I am aware that you have just taken evidence from Christine Tacon from the Groceries Code Adjudicator. In the last Government, we brought the supermarket adjudicator into being to enforce the Code. At the end of the last Parliament we introduced the ability for it to levy fines up to 1% of turnover; that is a significant amount. The adjudicator is in middle of an investigation, for instance, relating to Tesco, so I think we are starting to see that work. What that will not do, as I am sure Christine Tacon made clear to you, is start to dictate prices. What it does do is look at unfair, anti-competitive dealing practices, such as forcing companies to pay to have their product displayed in a particular part of the store, forcing them to contribute retrospectively to promotions and make retrospective price changes.
Q399 Chair: Minister, last week we had Waitrose in and we were talking about the price of liquid milk. They gave a price of 32 pence, I think, which is very good. For processed milk they were paying something like 25 pence, which again is not a bad price. I am not knocking them, but it shows at least a 7 pence difference between a liquid and a processed milk contract, so if you then start to bring that down to a lower price for liquid milk, it gradually drives the price down. What more, therefore, can you and the Government do to encourage the retailers to be paying a good price for processed milk? For a long time we have considered supermarket own brands of processed cheese as probably one of places where the average price of milk is driven down. What more can you do there?
George Eustice: To be fair, we first have to recognise that it is more challenging to do an aligned contract on processed products, for two reasons. First, this is much more susceptible to pressures on international commodity prices. The supermarkets would say that, if they start to pay those inflated prices on cheese, for instance, they are much more exposed to competition from other countries. There is a caution there that we have to recognise, whereas in liquid milk we produce almost 100% of our own domestic liquid milk. It is perishable product, and it is very much a nationally-traded product, so it is a different ballgame when you are talking about processed products.
Q400 Chair: If some retailers can do it, why cannot all of them do it?
George Eustice: That is right, and, as I ring round, I am gently prodding them without dictating what they should do. Tesco has already given an undertaking to its cheddar cheese suppliers that it will pay 29 pence per litre to those producers. We are seeing some movement in others as well, where they are able. M&S has also said that it is interested in looking at aligned contracts in other sectors. It experimented with an aligned contract, for instance, on lamb. It is looking at whether it could have an aligned contract on beef. It does make a point, however, that it is more challenging in those other sectors, because they are more susceptible to global movements.
The second reason it is more difficult on dairy is that it takes something like 10 litres of milk to make a kilo of cheese. You also get a big by-product from the cheese manufacturing process—whey and other products—and this is traded internationally as a commodity. If, therefore, you are overpaying for your milk, you have the second problem is you have an overpriced by-product that you cannot pay for. That makes it undoubtedly more complicated to offer an aligned contract.
Q401 Chair: Again, if some can, others should be able to. Perhaps we should print a list of people with what they pay for the liquid milk and what they pay for the processed milk. Have you considered that we should put that on a Defra website?
George Eustice: One of the reasons we are talking to supermarkets is partly because where there is good practice going on, where they are doing the right thing, I want to make sure that is recognised.
Q402 Rebecca Pow: I was absolutely intrigued, Minister, to hear that you had personally written to all the supermarkets and now you are phoning them. Not you personally—
George Eustice: Me personally? Yes. I should clarify that the Secretary of State –
Rebecca Pow: You must have surprised them.
George Eustice: The Secretary of State wrote to all supermarkets to highlight the plight of the dairy industry, and to ask everyone to redouble their efforts. For our part, we are trying to increase public sector procurement of British produce, and British dairy produce in particular. We are encouraging them to do the same. It is quite an encouraging story in that some of them, despite the market, are trying to do their best.
Q403 Rebecca Pow: I am very heartened to hear it. Does it take that to make them think about buying British? You said just now that some of them were thinking about swapping. Why were they not doing that before and why did we not think of doing that before? It seems such an obvious thing, though I am sure the answer is not simple.
George Eustice: Let us not exaggerate the power of Government, through having a phone call, to change the world.
Q404 Rebecca Pow: Basically, what I want to know is what is making them swap from an import to “Let’s get British”? Why were they not looking at British anyway?
George Eustice: The reality is, though this is often misunderstood, that there is huge consumer demand for British produce in both dairy and in the meat trade. People want to know where their food came from and how it was produced. There has been growing consumer interest in British provenance. Some supermarkets, such as Morrisons, have from the beginning always tried to source all their meats from British farmers. What we are seeing from all supermarkets is that there is consumer demand for this, so they are reacting to it.
Q405 Rebecca Pow: You think that is a slightly new step.
George Eustice: I think it is. They recognise the difficulty farmers are facing and there is a lot of consumer pressure on them to help. If we can add to that pressure through writing to them and engaging with them, I am happy to do that.
Mark Filley: Absolutely. It is a bit of a collaborative effort, in truth. Obviously organisations like the NFU maintain a constant dialogue with the supermarkets in encouraging them to think about their approach. It is important to reflect on that.
Q406 Simon Hart: Is it not the case that the moment all of this changed was not as a result of a private telephone call or a firm letter from Secretary of State? It was actually when farmers were forced into a degree of direct action earlier on in the year which over a weekend projected the problem on to the public stage and over a couple of days resulted in a much more willing dialogue with the supermarkets. Was that not a clear message that you can do all the stuff you like behind the scenes you like, but what really frightened them was when their brand reputation was at risk? Did that not reinforce the need for farmers to occasionally, and reluctantly, take direct action?
George Eustice: I think you would need to speak to the individual supermarkets to ask them what the driver was behind their decision. The only thing I would say about Farmers for Action is the reality is—
Simon Hart: Was it not just that?
George Eustice: The NFU had also been in private and constructive engagement with all the supermarkets many months before that direct action took place, so I am not sure it is true to say that this happened overnight because suddenly it was on the Ten O’Clock News with cows walking through supermarket aisles. I understand your point, but I am afraid you would have to ask the supermarkets.
Tim Mordan: It is fair to say that some of examples the Minister gave had taken a long time in preparation. For example, the Tesco own-brand yoghurt had been one or two years in preparation. It just happened to be announced at a time when there was lots of attention.
Q407 Angela Smith: Farmers are suffering a cash-flow crisis. We know that the EU has introduced targeted aid to help with that, and that payments are due to be made about now. The payments will be made through the RPA, is that correct? This is about the time, as well, that the Basic Payments Scheme becomes operational. Are you on track, Minister, to make sure that the targeted aid delivered by the EU and the payments through CAP are going to be made on target—in other words, this month and in January?
George Eustice: Yes. It is worth saying that, on the dairy support payment, we had originally said that we intended to pay that in the first week of December. We actually made very quick progress on that and we started sending paying that out over two weeks ago.
Angela Smith: Yes, I saw that.
George Eustice: The last figure I saw is that up around 85% of those dairy farmers have now received their support payment already. The vast majority of those received it on day one, almost three weeks ago. The ones who have not received it are typically the ones that did not register correctly or had a change of business address, or that kind of thing. They are working through that.
On the BPS I can announce that the payment window opened yesterday. We said that we would aim to pay the majority of people by the end of December. I can say that, as of close of business last night, 39% of farmers had already received their cheque. That was particularly prevalent among smaller farmers. Some people have said that we should try to prioritise smaller farmers. While we have not taken that approach, the way that it has worked out is that something like 45% of smaller farmers have already received their BPS payment. We are on track to pay the vast majority by the end of January and the majority by the end of this month.
Q408 Angela Smith: Are there any outstanding problems? I know that it is a very small margin, the 15% of dairy farmers. In terms of the Basic Payment Scheme, there will be a small minority, I suppose, that you will have problems with. Are you confident that those problems will be ironed out, both in relation to the dairy support scheme but also the more general support out there?
George Eustice: Yes. We have done all that we can to help people who will not get their payment by the end of January to plan for it. In the course of the next week, we will be writing to those farmers that we anticipate might not get their cheque until after the end of January. I had a meeting last week with all the major banks to say to them that we were writing to farmers, and that if farmers came to them with such a letter it meant that their payment was on its way but that they would need some short-term support. The banks have given me an undertaking that they will do that to help those particular farmers through.
The people we are talking about are predominantly people who have common land and for complex reasons, where we have had a judicial review on the challenge to our methodology, we have had to do everything in a far more complicated way. It means that those with common land will get a higher payment but they will, sadly, get it later, probably not until February. The other group likely to face some delays is those where there have been inspections, just because the new CAP is so much more complicated. Factoring in inspection reports is going to take a bit longer than we had anticipated.
Q409 Angela Smith: In terms of any support that is needed from the banks, which I think is the right way forward for farmers in that situation, who will pay the interest costs on the loans that the farmers will enjoy access to?
George Eustice: That will be a matter for negotiation between the farmers and the banks. The reality here is the payment window runs from 1 December right up to June. We are ahead of most other member states and most other parts of the UK in getting that payment out. We will do everything we can to get it out as quickly as we can, but there is no legal obligation on us to pay everybody on 1 December. Our obligation is to pay everybody within the payment window, and that is what we are working to.
Q410 Angela Smith: You say that you are ahead of most of the rest of the UK. Can you elaborate a little?
George Eustice: That is my understanding of the data. I have not had the feedback yet, but I know that some other parts of the UK were facing some challenges similar to us in terms of payment.
Q411 Angela Smith: Scotland, Northern Ireland, Wales or all of them?
George Eustice: You might need to ask them. They might have surprised everybody and done better than we thought.
Q412 Chair: Can I put on record that, provided the Rural Payments Agency carries on as it has, and it has paid out 39% on the first day, this is great news? Without getting too political, Angela, I had to wait a very long time past June for the original Single Farm Payment that was introduced by the last Government. I suggest, therefore, that if we can carry on as we have, considering the problems we had with the computer system, this is good. Naturally, if anybody is left waiting, it is bad, but we are, I hope, learning lessons from what we had before. I look forward to that happening. We have the Director of the Rural Payments Agency coming back in January, so we shall know the exact figures then. I think the one thing that the Government can directly influence is getting the Single Farm Payment out to farmers. Everything else the Government do is more indirect.
Rishi Sunak: I just want to echo exactly what you said. To put it on record: thank you to Mark Grimshaw and his team for that welcome news—39% on day one. I think that is great. I am glad to hear everything is on track.
Chair: Yes, and to see the pressure that the Secretary of State, you and the Government have put to this, because, to be blunt about it, it was a mess. It looks like we have picked it up and it is coming out okay, so thank you for that. You get lambasted when you are wrong, so you might as well get some praise for getting it right.
Q413 Dr Monaghan: The review of the voluntary code for dairy produce was published in October 2014. Seven recommendations were made. Can you tell the progress that has been made addressing those recommendations?
George Eustice: The principal recommendation was that we should try to get more of the remaining processors signed up. It is my understanding that we have about 85% of processors or production currently covered by the code. The second thing we are interested in is whether we can get retail buy-in to encourage that, in particular whether retailers would be willing to say they would only buy products only from British code-compliant processors. When I tried that out on the retailers, and I did early on, there was resistance; there was pushback to such an undertaking. It was, however, left with AHDB to work with industry to work out how to take forward those recommendations. I am not aware, Mark, that anything has happened.
Mark Filley: That is right, Minister. The AHDB are leading a conversation with other partners in the industry, looking at the code and looking at contractual best practice. We are very conscious that it is an industry code, so it is right that they have that conversation.
Q414 Dr Monaghan: In evidence previously the Committee has heard that farmer-owned co-ops are exempt from the need for processors to give farmers at least 30 days’ notice of price changes. The current code differentiates between co-operatives and non-co-operatives. Is that helpful?
George Eustice: Alex Fergusson reviewed the code and looked at this issue. You are right. Some of the dairy companies thought that was an inconsistency. He concluded, though, and I discussed this with him at the time, that there actually was a difference between co‑operatives. That is that they are farmer-owned, farmer-controlled or they have farmers on the board. The point that he was making is where sometimes when you get a difficulty with the co-operatives is when farmers, who ultimately own these co-operatives, are not assertive enough in asserting their rights. They control it; that is supposed to be the difference. They are not like private companies that are in contractual relationships with a farmer in the same way. These are farmer-owned co-operatives, so it is a different model. That is recognised in the European milk package as well. There is a difference between a co-operative that is controlled by its farmers and a private organisation, although they do say that co-operatives should put in place equivalent measures and have equivalent procedures.
Mark Filley: That is absolutely right. There is that legal reason that we cannot do something different or go further than the EU dairy package, which sets the framework in this area. That makes the same difference between co-ops and PLCs as the code does, so the code just follows the EU legislation.
Q415 Dr Monaghan: Is it helpful that the code differentiates between co‑operatives and non-co‑operatives?
George Eustice: I think the point I made, as Mark has explained, is that it partly has to because of the EU milk package, which differentiates in that way. Is it helpful? I think there are two ways of approaching this. If a processor wants commitment and long-term dedication from a farmer, then it should be very clear on the basis on which it is calculating its price so that farmers know exactly where they stand and what they are letting themselves in for if they sign a long-term contract. If a processor is unwilling to give such an undertaking, the farmer should have the freedom to vote with his feet and walk away at relatively short notice, which would is deemed to be three months in the code. I think that is very important because I have heard, when I was on this Committee, dairy processors say, “It is not in our interest to bankrupt our farmers”. It is a very paternalistic attitude of, “We will look after them because it is not in our interest for them to go bust.” To me, that is not good enough. You have either a clear basis on which your price is calculated, or you have the freedom to walk.
Q416 Dr Monaghan: On that point, not all processors have signed up to the code, so is the code fit for purpose?
George Eustice: The ones that have not signed up are quite often some of the very small ones. I think it is fair to say that in some cases they have a very different, much closer relationship with the dairy farmers who supply them. I can understand the argument that, in some cases, with small dairies in specialist they have a slightly different, slightly closer, more of a family-type relationship with a small number of dairy farmers, and it is a slightly different situation. The recommendation from Alex Fergusson was that we should try to get all signed up, and that the more we can get signed up to the code, in my view, the better.
Tim Mordan: That is part of work that the AHDB are doing that Mark mentioned. They are looking at why there is not 100% coverage, especially of the smaller processors, and seeing what we can do to learn lessons and encourage them to sign up.
Mark Filley: There is just one other point I would make. The EU Commission has a statutory responsibility to review the impact of the dairy package. That was due to take place in 2018, but the Commission has brought that forward, so that will be happening next year, we think, in the context of this new high-level group that has been set up to look at risk management tools and otherwise supporting the industry.
Q417 Dr Monaghan: Is that likely to impact on the code, do you think?
Mark Filley: If it ends up adjusting the EU framework, then potentially it could. Obviously it would take time to feed through, but it could.
Q418 Chair: As far as contracts are concerned and the voluntary code, if you are in an area where you have only one person buying milk—there are parts of west Wales, and I am not going to name the particular processor and the particular buyer—how much influence can you have in making sure there is another contract that a farmer can find? These contracts work well when you have a robust market that is going up and you have plenty of people wanting to buy your milk, but if you live in a certain area where you have very few people able to give you a contract and your contract might run out, is there anything you can do there?
George Eustice: It is very difficult because there are remote areas where you do not have the density of dairy farmers for sufficient processors to be interested to create the competition you need. There is a danger that farmers in those circumstances can end up being price takers. We are always keen to look at options to improve processing capacity, particularly in areas where we have a good milk field, like Cumbria and the north-west, where there is potential to have a really cost-effective production model, largely grass-based, but there are currently weaknesses in the processing capacity. We are interested in potentially supporting investment in new processing capacity to help in those circumstances, but it is a challenge. I do not think I have ready any easy answer, apart from in some of those cases where it is co-operative and the farmers, perhaps following Alex Fergusson’s advice, have to be more assertive in making sure that their co-operative is well managed and they are getting a fair price.
Q419 Chair: Yes, it is very difficult for some farmers because over the years they have almost been encouraged to go down the co-operative route, and then the fact their co‑operative might not be as strong as the next one may be the problem. To what extent can you encourage another processor to go into a geographical area? Is there any way you can do that?
George Eustice: It is quite difficult, but we are, for instance, exploring whether, with the Commission, we could use the European Investment Bank as a model to lend finance for new processing capacity, potentially using funds through the Royal Development Programme on a loan basis through the EIB. Phil Hogan, the Commissioner, is quite interested in these sort of models. I think Spain has done something similar in one sector of its agriculture. That is the type of thing we are exploring at the moment.
Tim Mordan: That is absolutely right, yes. It would not be very quick, but we are exploring that.
George Eustice: It would not solve the immediate problem.
Q420 Rebecca Pow: Moving on to a sweeter note, Minister, you previously said that there was a dessert deficit in the UK, which I found very interesting. Perhaps you would like to expand on that a little bit and tell us what steps you might be taking to entice supermarkets to take more home-made British desserts.
George Eustice: I do not recall this. I am not sure whether it was me who said this or whether it was the Secretary of State.
Rebecca Pow: Ice creams—
George Eustice: Oh, it was Owen Paterson. The dessert deficit, it was—
Rebecca Pow: I think it was you, Minister.
George Eustice: Liz Truss, the Secretary of State, has made this point as well If you look at some sectors of dairy, notably yoghurt, it is an area where there is a lot more potential for us to manufacture much more. We have some fantastic companies like Yeo Valley, which does really good work and is increasingly expanding and doing better, but traditionally some of the big brands in yoghurt have been based in Germany or other European countries, and they are quite established brands and have a European distribution network. Historically, they have been quite strong here in the UK. There is more we can do on that. Of all the dairy products, yoghurt is probably the one where we could make most progress to achieve import displacement.
Q421 Rebecca Pow: Going into these markets obviously requires investment. It is not a straightforward thing that you can do tomorrow. Are the Government providing any grants or will the agri-tech technology grant offer any opportunities?
George Eustice: This type of thing probably would not be one for agri-tech. That tends to be supporting academic research or knowledge transfer from academic institutions to farm level. However, the Rural Development Programme has a strand called countryside productivity, and I would certainly anticipate that some of the calls in that would, for instance, enable individual farms to invest in dairy equipment if they wanted to make cream or ice cream or add their own bottling plants so that they could retail their own products.
Q422 Rebecca Pow: It all sounds so nice, Minister, but it is not that straightforward for a dairy farmer to do that, is it? It is very expensive, so would this not be more of a role for the co-operative groups or a middle man?
George Eustice: I think it could. As I said, when it comes to big projects, the last Rural Development Programme and Defra worked on this, supporting a big investment in Davidstow in Cornwall, which has gone on to become incredibly successful. It is where all the Cathedral cheddar cheese comes from. That was facilitated partly with quite a big investment from Defra through the Rural Development Programme at the time. We are looking at the European Investment Bank to see whether we could make available loan finance to help some of those larger processing projects. At the other end of the scale, I do not think you should knock the many good examples there are out there of dairy farmers who have decided that they were sick of being price takers and were going to try to add value and started to make their own cream or ice cream. There are many examples of farmers who have done just that and done very well.
Q423 Rebecca Pow: We have one in Taunton Deane—Granny Gothards being one. What about then trying to encourage shoppers to buy these products and to move away from all those brands we know so well?
George Eustice: There has been a big change in the past 15 years, with consumers showing much more interest in food provenance. I remember a couple of years ago Tesco had a big push to get lots of very small, niche, local products into local stores in the area. There is a small ice cream company, Salcombe Dairy, in Devon that was just supplying one or two Tesco stores in Devon. That was all they could do. That was pretty much their entire production, but there was interest from that supermarket in those locations to have really local food. They are picking it up; have seen a huge growth in farm shops over the past 15 years, an exponential rise in sales. People want to know where their food has come from, how it was produced. There is much more interest in food provenance and people’s relationship with food is starting to change.
Tim Mordan: And farmers markets, of course.
Q424 Chair: Could we move to the red meat sector now? The UK sheep sector has been seriously affected by falling farmgate prices, with average prices down approximately 20% from May to September this year. British pig prices are about 15% to 20% lower than they were a year ago. A farmer loses approximately £6.10 per pig. Are you in favour of a voluntary code for red meat that would then include retailers? They seem to be even more vulnerable to market pressures.
George Eustice: Yes. As I said earlier, I think M&S experimented with aligned contract on sheep, so there is some interest in looking at this by some supermarkets. It is harder to strike up those types of relationships in the meat sector because sheep and beef are quite a mobile product.
Q425 Chair: I think Marks & Spencer, Waitrose and one or two other and others have beef contracts.
George Eustice: Some of them do, but they will all tell me is, whereas a dairy producer, because of the nature of its business, is more likely to lock into a longer-term contract, the culture in beef and sheep is that you cut and run and get the best price you can wherever you go. It is a much more fluid market. That is largely a cultural thing. However, I am keen to do this. A year ago, we did set up a voluntary code for beef processors, and we got sign-up from most of the big players. There were two notable exceptions—Dunbia, who faced criticism recently for changing the specifications of their product at very short notice; I have written to them about that and encouraged them to join this code. The other one is Dawn Meats, which I think is based in Scotland. However, we had quite good sign-up from the others. It requires them, principally, to give twelve months’ notice of any change in specification and have transparency on charges and levies and the like. That is important.
I am also this week writing to the BMPA to see if we can do something similar in the sheep sector. The beef code we put in place a year ago has worked reasonably well, though not perfectly, and we still have two big players who have not signed up yet but I think should. However, I am also keen to explore whether we could do something similar for sheep.
Q426 David Simpson: Minister, in relation to Dunbia, I know the company very well. It is just outside my constituency. May I just ask for a point of clarification on the change of specification? Was that introduced by the supermarket or by Dunbia?
George Eustice: My understanding is that it was introduced by Dunbia. I want to just clarify for the record if I said 12 months. I meant 12 weeks; it is 12 weeks’ notice if they want to change the specification. Most of the other large processors, such as ABP, have signed up to the code and they have managed, by and large, to abide by it and give farmers that notice. It is very important that farmers know what they are producing for because if they are starting to produce for a particular specification and then it is changed with two weeks to go, it is not at all fair on them.
Q427 David Simpson: There has been a price differential between the Northern Ireland meat market and the mainland here that has the net differential. Would that come under the voluntary code as well or will it be solely down to a contract that is negotiated?
George Eustice: I suspect that in Northern Ireland, because of the fact that you share a land border with the Irish Republic, the exchange-rate pressures are more acute and it makes it harder to export your own livestock into the Republic and makes you more vulnerable to imports from the Republic. I suspect that that is probably what heightens the pressure, the fact that you share a land border with the Eurozone.
Q428 Chair: Finally on the sheep-meat sector, this year we have seen prices paid to the farmers drop, and it does not seem to be reflected in the same drop with the retailers. What worries me is if the farmers are getting less, but the retailers are not dropping the price in the shops you are not necessarily increasing consumption by a lower price. If the price comes down in the shops then, technically speaking, people might eat more lamb and the price would or potentially would go back up again. To what degree are you worried that the retailers may be keeping the wholesale price lower than it should be by not lowering their prices in the shops?
George Eustice If that were the case there could be a concern. I do not know whether Mark or Tim would be able to confirm it. I am not sure to what extent that is the case, but you are right. There has been increased production—production of lamb in the UK is up this year, but because of problems in the Chinese market we have had more New Zealand lamb coming in, certainly for the most part of the year. Prices have firmed up a bit since September, I understand, but it has definitely been a challenging year for lamb. I am not sure. I will definitely have to write to the Committee.
Q429 Chair: Could you supply us with the figures? I may be wrong, but I think, looking at the figures, you will find that the wholesale price of lamb has dropped a lot faster than has been reflected in the retail price of lamb, on average, so I would be interested. Do you actually have the figures?
George Eustice: I definitely have the figures. The wholesale price of lamb has gone from a peak at the beginning of this year of £4.50 per kilo down to under £3.50 now, so it has been a significant drop across the year.
Chair: I am not certain that that has been reflected in the price that the customer pays in the shop.
Q430 Angela Smith: The role of the Groceries Code Adjudicator will be reviewed next year. Can you indicate to us your thinking on what the role may look like once you have had a good look at it? Is the role going to be expanded, extended or changed in any way?
George Eustice: The first thing to say is that, although it has a lot of relevance to Defra and the farming sector, it is BIS that will carry out that review. The Groceries Code Adjudicator sits within BIS, so it will be BIS Ministers who supervise that process.
Q431 Angela Smith: So your thinking—
George Eustice: My thinking is it has worked reasonably well. It is well resourced at the moment, and it is for them to say how much resources they need. I think it is around £1 million a year at the moment to fund it. They can recommend or ask for a change to the levy if it is necessary in order to increase their funding. They have the power to fine where necessary. They have quite wide discretion to carry out investigations. When it was set up there were a lot of concerns that farmers would be fearful of reporting problems, but actually there are many different ways now. They just need a reasonable suspicion that there is a need to act. I think it has worked reasonably well, but we have always been clear and it is clear in our manifesto, that as part of that review we would like to consider its remit.
Looking further up the supply chain is quite a big deal, because you are suddenly going from talking about 10 supermarkets and their relationships to tens of thousands of companies potentially. That would be a major step and I suspect it would not be done lightly. There is one thing that I have always been interested in that could be considered. That is creating some sense of obligation for processors, who are dealing with supermarkets, to also insist on the Code being abided by. It might sound an obvious thing to say, but I think that the supermarket buyers understand the Code very well. Christine Tacon says that often the issue is that processors and co-operatives acting on behalf of farmers are not assertive enough in saying, “I cannot agree to that; it would be in breach of the Code”. We need them to have the self-confidence to just gently put on the table that there are certain things they cannot agree to rather than thinking it is easier to live with it and pass that cost back down the farmers.
Q432 Angela Smith: That is interesting. We heard from the adjudicator earlier that she has experienced problems securing secondees to her office. Broadly, because of the reduction in size of the Civil Service, the Civil Service is sometimes very reluctant to provide secondees and there have been delays. Would you like to comment on that?
George Eustice: That is not something that she has raised with me and it is not something that I am not aware of. Since she has raised it with the Committee, I will certainly take that up with BIS ministers. We will follow that up through BIS. It is clearly an organisation that is hosted within BIS, and they do have officials seconded from BIS. As I said, there is an agreement around the level of levy that they need. I think they are adequately resourced at the moment, but if ever there is a feeling from the supermarket adjudicator that they need more resources, it is open to them to make that case to ministers and to have the levy changed accordingly.
Q433 Angela Smith: Having the resources is one thing, but having the staff there on the basis of the resources is another. It will impact down the supply chain to the farmers if those secondees cannot be secured at the right time.
Tim Mordan: We happen to have somebody from my team seconded there at the moment.
Q434 Chair: I think she was commenting on secondment from Defra as well. I think that is highly relevant to you.
George Eustice: I am afraid that is news to me, but we will investigate.
Q435 Chair: I have one last thing on the Groceries Code Adjudicator. What she was saying and I think we do accept, is that she is changing the culture of the way big retailers react. She does not necessarily have to investigate everything in order to get the cultural change because she is actually there. There could, therefore, be an argument for widening her remit so she may not have to do thousands and thousands of investigations. Just the fact that she is there can send a message further down the food chain. Are you considering and will you be making representations? I think it comes up after three years. Is it next year?
George Eustice: It is next year. It is reviewed next year.
Chair: Will you be making representations?
George Eustice: Defra, undoubtedly, because of the interest it has for our sector, will be involved in that review. We were clear in our manifesto we did not rule out looking at the whole remit of the Groceries Code Adjudicator, so we will do that.
I know that she has been keen to encourage training and one of the things that can go a long way is training for those selling to supermarket buyers, to train them to have the self‑confidence to put on the table that some things being requested are against the Code, and that does not necessarily mean the end of the relationship with the supermarket. It need not be that if it is done the right way. Those companies that have been most effective with this have found it is really useful. What you want is not companies hiding under the bedsheets saying they are too scared to report anything to the Groceries Code Adjudicator because they are terrified there will be reprisals. You actually want the opposite. You want these suppliers to have the self-confidence and the courage to just say, “That is against the Code. I am afraid I cannot agree to it”. Government cannot do everything. We cannot always be there enforcing all the time.
Chair: We did put those points to her. She came over very competently on it, so I think it is having the right effect. It is just how quickly and how much further we can widen that.
Q436 David Simpson: Minister, how can labelling be improved to help customers make the choice of what they want to buy?
George Eustice: We have been pushing the Commission very hard since June for compulsory country-of-origin labelling on some dairy products. There are mixed views on that in Northern Ireland that I am conscious of, but in every other part of the UK I think people would welcome country-of-origin labelling being compulsory, just as we have done. We have had it on beef for over 10 years now. In April this year we pushed hard and got it introduced on pretty much everything else—pigs, poultry and lamb all now require compulsory country-of-origin labelling. That means that to say UK origin has got to be born, reared and slaughtered here in the UK.
I do not accept the Commission’s argument that it would be too complicated and too difficult to do this on dairy products. It might on some dairy products, but on butter, on cheese, on some of the staple dairy products you could deliver country-of-origin labelling relatively inexpensively. We will continue to put that pressure on the Commission. The commission is very resistant to going this way, so we are not going anywhere fast on this agenda, but in the meantime we have switched our focus to retailers. It is one of the reasons the Secretary of State wrote to them; it is one of the reasons I am ringing them now. We are encouraging them to do more on voluntary country-of-origin labelling scheme that we have on dairy.
Q437 David Simpson: You made a good point in relation to the Commission. I understand, rightly or wrongly, that the Commissioner himself has been playing silly beggars over this whole thing. With labelling, as you mentioned, there is an issue in Northern Ireland. I think the issue in the past—I do not know if it is the current one—was that, when we look at labelling and the difficulty with border, that you have mentioned, if we have product going to the Republic of Ireland with a Union flag on it, it has been boycotted. It is an issue that is sensitive and I think we need to get a solution to it, but I think that has been an issue for some time. Supermarkets have been boycotted because they had a Union Jack on some of the cheese products that were going to some of the supermarkets. That is Northern Ireland.
George Eustice: I understand that you have particular circumstances in Northern Ireland that can make that challenging. Commissioner Hogan comes from Ireland. He understands Irish issues and has a rather Irish perspective on the issue of country-of-origin labelling on dairy. However, there are things we could do on a voluntary basis here in the UK, given that we have a small number of large retailers, all of which are interested in doing more to do this. The voluntary code does require that if they do not put the Union Jack on cheese, for instance, the milk also has to come from the UK.
Q438 Chair: I was going to ask you a provocative question. Why do we not just do it? Why do we have to kowtow to the European Commission? With your political experience, having been so bold in the past—
George Eustice: Mr Parish, in another two years, you might have the option to bring forward such a Bill to do that, depending on the outcome of the referendum. For the time being, it is an EU competence.
Q439 Angela Smith: There are some companies that produce British milk, cheese, yoghurt, where it is entirely sourced in the UK, but they do not voluntarily label it as such. Davidstow cheddar is Cornwall and is quite clear, but the label does not actually say that it is British. Yeo Valley, Rachel’s yoghurt—a whole range of things. I wonder whether Defra could do more to encourage companies.
George Eustice: One of the things we are encouraging is trying to get the retailers to adopt the GREAT branding, which is an incredibly successful, very striking branding that you will have seen used at the moment in international trade shows. We are keen to start using that potentially in retail settings so that we can promote British products.
Q440 Chair: In a way, there is a great advantage that retailers see in promoting a British product. With dairy, some of the problems may be the reverse side of the coin. Perhaps some are trading off a product that is not British and is largely seen to be British by another way of labelling it. Perhaps that is the problem in some respects. If we can be certain that everything that is British is labelled “British” that which is not would have to be labelled something else. That is probably one of the problems we have. Have you any idea how much of our British processed dairy products are labelled and sold as British? Does the Department have any figures on that?
George Eustice: I do not have figures to hand, but certainly the supermarkets I have spoken to, if they are sourcing British dairy products, are very keen to advertise that fact. Many of them have started to move much more of their cheddar now to being British and promoted as such. The challenge is much more in the catering sector, where clearly this is a product where people do not see the packaging. If people are eating a product with cheese in a restaurant, they are much less likely to say, “Where did this cheese come from?” than they are when they are selecting cheese from a supermarket aisle.
Chair: If you have any figures, then perhaps you could supply them to us in writing.
George Eustice: We will.
Tim Mordan: We are having discussions with retailers, and caterers in particular, about their own voluntary principles, which seem to work very well. They are very proud of them. That is all about providing clear, honest and consistent labelling. From the discussions we have had with them so far, they do not see there are any great holes to be filled in the voluntary principles. We are working with them to see if they need a boost of some sort.
Chair: That would be very good if you can.
Q441 Rebecca Pow: This is related. You have a plan to increase our exports and we have heard some good stories, but do you have targets for how much you would like to raise British produce within the next five years?
George Eustice: We do not have specific targets at the moment, but we are working on our food and farming plan. A key element of that will be looking at exports and which markets we should be opening. It is quite possible that we will have objectives in there of what we want to achieve by way of exports. The Secretary of State recently went on a visit to China, where we had the breakthrough with pork, for instance, helping Northern Ireland and other producers. We are opening, on average, around 100 markets a year for agricultural products around the world.
Q442 Rebecca Pow: Do you have enough resources for that with the cutbacks in the Department? Do you have enough man and womanpower to drive this Great British name?
Chair: Surely you ought to be asking for womanpower.
Rebecca Pow: I am sure I did say women as well. Do you have enough resource to do that because your Department keeps saying that this is going to be or way forward, which is heartening, but can you actually pull it off?
George Eustice: The Secretary of State has put a lot of emphasis on exports and opening new markets for our products. The Spending Review was not as harsh as some people predicted. The projections to Defra are that we do not have to save quite as much as had originally been predicted. We do have resources there. We have a very strong team at Carlisle who work at export certificates. We have, in the last 12 months, appointed Karen Morgan as a trade commissioner in China to help open doors there. We continue to work on this and we also get quite good support from UKTI, which we work very closely with on these projects.
Q443 Rebecca Pow: One issue that has been raised, particularly by the International Meat Trade Association, is the of licencing and certificates. If you want to get your products out there it is quite long-winded and complicated. Is there any way this area could be simplified to help move things along? Is that something you are looking at?
George Eustice: I might ask Tim to explain certification. I have had this raised in Anuga when I visited the trade fair there. Some of the meat processors raised this concern that they thought it was taking longer. Having looked at it, there is no reason it should, because we have quite a rapid turnaround. It should be within 24 hours typically.
Tim Mordan: There are two aspects to it. One is negotiating the certificate in the first place, so if we wanted to send something to China and open up a new market, we have to agree the export health conditions with the importing country. A couple of weeks ago the Minister mentioned pigs’ trotters to China. That has taken a long time. Especially with the likes of China and some other countries, it just takes a long, long time. There are very rigid processes one has to go through before getting the health conditions signed off. For some countries, politics comes into play, which means they are not always as swift as we would like to sign up. That is one aspect. In the case of China, it can take months, if not years, to get to the stage where a protocol can be signed.
Then, once you have the export health certificate it needs to be issued. A couple of years ago we had some problems with delays, not necessarily due to resources; it was more to do with logistics and processes. That is by and large sorted out, as far as I am aware. We could write to you if there are any outstanding issues, but I think we are now turning around the certificates pretty quickly.
Q444 Rebecca Pow: Just one other thing. It was raised when we had the representative in to talk about the 25-year food plan. I did ask her if there was a plan for what happens if we exit the EU. Producers have spoken to me about how very complicated it would be for them exporting into the EU with all the paperwork, all the certificates and legislation they would have to go through if we were not in the EU. These are specifically food producers. There appears to be nothing in place to consider that. Is that the case, Minister?
George Eustice: As you know, the Prime Minister is focused on getting a successful renegotiation. He has written to the commission to set out his views on what needs to change, so we are very much at the beginning of that process. If we can get a successful negotiation we hope to be able to recommend staying in the European Union, albeit a reformed one.
Q445 Rebecca Pow: Is any PR being done to explain how complicated it would be for our food producers if we left? Is it our third biggest industry? I would urge that this is looked into and that perhaps people are told.
George Eustice: As with any referendum campaign, there will be two sides. There will be a stay-in campaign and a leave campaign. People will be able to hear both sides of the argument. I am sure that the stay-in campaign will be making the case for the single market and the harmonised regulation that goes with it. Equally, the out campaign will probably tell you that there would be an EU-UK partnership that would ensure that trade could continue unhindered.
Q446 Chair: Just pressing you on this: when we had the Scottish independence vote, the Scottish Government did put forward, rightly or wrongly, how they might run an independent Scotland. Surely the Department has to consider how food production and agriculture would run. Are you giving any consideration to how it would run if we were not part of EU? When it is a democratic vote, you cannot take for granted that people will vote in a certain way. It is probably a bit beyond your pay grade.
George Eustice: As I said, we are focusing on Plan A, which is to get a successful renegotiation before we start talking about a Plan B.
Chair: But there is not a Plan B at the moment.
George Eustice: There is not a Plan B that anybody is willing to talk about at this stage while we are focused on Plan A.
Q447 Chair: That was a bit of an unfair question, possibly. Now, a hardy annual is about the splitting of the sheep carcass. A lot in the industry now believe there is no need to split the carcass. It is very much part of the old BSE, TSE regulation. To what extent can you do anything about that? I think there are ongoing talks, but what is happening?
George Eustice: This is something we are keen to try to move forward. I chaired the industry analysis that there is no risk to human health from this now. The TSE regulation was a very important plank of regulations because it was part of a response to the concerns over BSE, but, in the event, the science is now pretty overwhelming that scrapie cannot cause CJD in the way that BSE, its sister disease, could. We think, therefore, this is now over the top. The so-called two-tooth rule—if you have two teeth, then suddenly you need to strip the carcass—is rather arbitrary because tooth eruption can happen at different times, depending on diet and stress on the animal, depending on the breed, even. That is, therefore, a very arbitrary link.
There are two ways of approaching it. One is to do what countries such as France and Spain do. They have a slightly different technique where, rather than splitting the carcass, they—it sounds rather horrible—have a sort of suction device with which they chop the tail off and pull the spinal cord out. The industry looked at this two years ago and the processors in particular were not very enthusiastic about going that route because it would entail additional time. The other alternative is to have a different measure based on perhaps a calendar year or a particular age, which is what the NFU has been promoting recently. I said that I am certainly supportive of exploring that. I had a meeting with Tim Bennett of the FSA two or three weeks ago to discuss this. I know that the FSA will be engaging the Commission on this to see if we can get some progress.
Q448 Chair: Again, especially as far as the export market concerned, it would very much have to be something that is agreed by the Commission.
George Eustice: It would. We could change the domestic statutory instrument to do what France and Spain do already, but to move away from the so-called two-tooth rule you would need a change in the EU regulation or at least some kind of tolerance and acceptance of what we were going to do agreed in advance.
Q449 Chair: I have one final question. How would you ensure that the work of the farm inspection taskforce will co-ordinate with local authorities to ease regulation burdens on farmers? Particularly, it is trying to get one inspection, the one-stop shop we keep talking about. We have made progress, but what more progress can we make?
George Eustice: We are working on this concept of a single farm inspection taskforce. We are starting with the agencies controlled by central government, so we are getting the Environment Agency, APHA and the RPA together to try to establish a kind of triage process so that there is a single point of entry rather than having several inspections in one year. You might get one organisation that co-ordinates everything, all visits in one go, so that you reduce the impact on farms. We are also considering the extent to which APHA might be able to do some of the livestock checks that the RPA currently does so we can reduce duplication. We are also interested in whether we can do more by way of recognising that people are signed up to private accreditation schemes, and reflect that more than we are able to at the moment in the inspection regime.
When it comes to local authorities, it is our aim that eventually we would get them into this process as well. However, the NFU did a report at the end of the last Parliament that concluded that, when it comes to local authorities, the average farm gets a visit from the local authority inspectors about once every 10 years, so it is patchy. In some cases, some people would say maybe you do not get as many, but there are things like animal feed inspections. I think local authorities trading standards do animal feed inspections, so obviously we would particularly want to get those and some of the animal welfare inspections that they do within that process.
Q450 Chair: The figures we have from the NFU said that local government were responsible for 24,000 to 25,000 inspections per year. That is quite a number of inspection and would be higher than the once per 10 years on 114,000 farmers. There are a few more farmers in the total.
George Eustice: There would be more than that. I think it depends how you count. If you take out such things as food and feed inspections, then the level of inspection is actually very low. I can check the figures. My memory is focused on the enforcement report that the NFU produced at the end of last year. One of the striking things was that they said the number of inspections by local authorities was lower than most people thought.
Chair: You have been very generous with your time. There is Question 18, on which you could perhaps give us some written evidence. That is: “Was there a delay in signing off the marketing of the AHDB promotions? Should we be promoting meat, and lamb in particular, more than we have been?”. If you would be happy to give that in writing, we would be happy to receive it. I thank all three of you, and the Minister in particular, very much for being so generous with your time. We have put you through your paces well today, and thank you for answers. I thank the members for hanging on through this day, on which there is a very important debate going on in the Chamber. Thank you very much.
Oral evidence: Farmgate prices, HC 474 1