Written evidence submitted by Arla Foods (FS0083)

 

 

Introduction

 

  1. Arla Foods is a dairy cooperative owned by around 9,000 farmers based in seven northern European nations.  Approximately 2,100 of our owners in the UK, representing around 30 percent of British dairy farmers.

 

  1. Arla is the fourth biggest food and drink company in this country.  We have processing sites across England and Scotland, employing around 3,500 people. Arla is a leading supplier of fresh milk, butter, spreads and cream, as well as the country’s largest cheese manufacturer. Our much-loved brands include Lurpak, Cravendale, Castello and Anchor, as well as Lactofree, Skyr and Arla Protein.  Our turnover in the UK is just over £2 billion (we recently announced that our income in this country for the first half of 2022 was £1.15 billion[1]).

 

  1. As a cooperative Arla is strongly committed to sustainable milk production.  Earlier this year we announced the endorsement of the Science Based Target initiative (SBTi), confirming that our sustainability targets and plans are consistent with what is required to meet the Paris Agreement target of limiting global warming to below 1.5 degrees.  We have raised our target for reducing carbon emissions from our operations to 63 percent by 2030, having already achieved reductions of 24 percent against a 2015 baseline.[2]

 

  1. At the same time our farmers are making considerable investments in their businesses, including in annual climate checks assessing the climate efficiency of their farms.  These checks are based on externally validated data about their animals, feed composition, crop production, use of fertilizer, manure handling, use of electricity, fuel and renewable energy, amongst other things. This data, which comprises the biggest climate database in the dairy sector globally, confirms that Arla farmers are already among the most climate efficient dairy farmers in the world with 1.15 kg of CO2e per kilo (against a global dairy emissions average of 2.5kg[3]).  It also presents individual farmers with clear plans to improve their performance over coming years.

 

  1. In the remainder of this submission we have considered in turn the six key questions posed by the Committee.  We would be very happy to provide additional information, either in writing or in oral evidence, if that would be helpful for the Committee.

 

(1) Factors affecting the resilience of food supply chains and causing disruption and rising food prices

 

  1. Dairy farmers in the UK are facing the same cost pressures as the rest of the agriculture sector.  Costs of fuel, feed and fertiliser were already high before the war in Ukraine and since the Russian invasion they have risen further.  On-farm costs have increased by around 51 percent in the UK since the start of 2021, with feed prices up by approximately 73 percent.[4]

 

  1. These are not the only issues for farmers; shortages of labour and the costs of employing staff are also significant concerns.  During May we surveyed our farmer owners about this topic[5] and were told that three-fifths (61.3%) of farmers are finding it ‘somewhat harder’ or ‘much harder’ to find staff now than they were before the start of the Covid-19 pandemic.  Meanwhile 82% of farmers looking for staff have either had no applications or applicants have not had the right qualifications.  In response farmers are increasing pay, in many cases by 10-15 percent, adding to the inflationary pressure they are facing.

 

  1. However, this is not simply impacting on costs.  A small but significant number of farmers told us it is also affecting production.  4.3% say they have cut the number of milkings and 6% have reduced the size of their herd due to staff shortagesIf the situation doesn’t improve this problem will grow.  6.9% say they will cut milkings in the next 12 months, and 6.8% will reduce their herd size; 11.9% are considering leaving farming altogether if nothing changes.

 

  1.                                                                                                                           The challenges associated with the cost of energy, feed, fertiliser and labour are having a tangible impact on milk production across our sector, which is down year-on-year by around 3 percentTo reinforce our farmers’ ability and confidence to invest in their businesses and to maintain production levels Arla has increased we pay our farmers for milk by more than 30 percent over the first half of 2022, and by well over 50 percent compared to a year ago.  This inevitably has led to rises in the prices paid by consumers.

 

  1.                                                                                                                       The pressures faced by farmers and by the processing and logistics arms of our cooperative show few signs of easing up in the coming months.  For example, the labour market continues to be very tight, with shortages of potential employees on-farm and in processing and warehousing in particular.  Difficulties with finding lorry drivers have eased somewhat since the crisis a year ago, but this issue has not gone away.  Even without these shortages, wage inflation in other parts of the economy will inevitably feed through into food and farming and will also add indirectly to costs for farmers using carpenters, plumbers and other tradespeople.

 

  1.                                                                                                                       Perhaps the biggest worry at the moment is the cost of energy.  Arla’s own energy bills are already very significantly higher than they were a year ago: in July 2022 the amount we were paying for electricity had more than doubled (103%) and for gas increased by nearly two-and-a-half times (145%) over the preceding 12 months.  By March 2023 we believe that electricity costs will be up by 171 percent and gas by 289 percent compared to the same baseline. Meanwhile farmers tell us they are facing unaffordable rises: it has been widely reported that bills are going up by four or five times when they come up for renewal. The recent announcement by the Government of protection for businesses was welcome, but this will need to be extended beyond six months if the projected jump in energy prices is not going to have a severe impact in the Spring.

 

  1.                                                                                                                       Finally, as we have mentioned, Arla farmers are strongly committed to sustainable farming and as a cooperative we have pledged – amongst other targets – to delivering net zero across our value chain by 2050.  The Government’s Agriculture Act and Environment Act, as well as other laws and regulations, place significant new requirements on farmers and on the wider food sector.  Delivering against all of these objectives will require significant investment by farmers, food processors and others.  This will add to the cost base of the industry.

 

 

 

 

(2) Outlook for UK food price inflation in the short and medium term, and policy interventions the Government should consider to manage these pressures

 

  1.                                                                                                                       As the above analysis shows, it is important that the Committee and other stakeholders do not regard the current cost pressure on the farming and food sector as a temporary anomaly.  Many of the issues currently faced by the industry – for example energy prices, labour shortages and investments in automation, and the need to spend money on becoming increasingly sustainable – will persist for the medium and long term.  In this context, we note that a number of commentators have said that we are facing a “new normal” when it comes to the price of dairy products.[6]  If farmers do not receive a price for their milk which covers all of their costs then they will be forced out of the industry, which will of course bring significant risks for UK food security.

 

  1.                                                                                                                       Against this backdrop it is reasonable and perhaps inevitable that the Government will be asked to intervene to ensure that all consumers have access to affordable and nutritious food, and to promote the production of food products in the UK.  We would urge the Government to pay attention to the following areas.

 

  1.                                                                                                                       Government can also support food and farming by ensuring that the financial support it is offering to the sector can be accessed with minimal difficulty. To that end we urge it to ensure that the Environmental Land Management System (ELMS) minimises bureaucracy wherever possible. Where they require farmers to deliver public goods demanded under ELMS then recognising existing schemes such as Red Tractor and Arlagarden (to which all Arla farmers adhere) would be a significant step forward in this regard.

 

  1.                                                                                                                       Another priority is to attract and retain people in the food and farming sector.  Arla is already playing a part in this: our Arlagarden standards require fair treatment of workers on farm, and it is a requirement for every farmer in our cooperative to adhere to these standards.  In addition, as a company we already run a number of schemes and apprenticeships aimed at attracting people into the dairy industry, from logistics to processing to marketing and in other areas.  But there is only so much individual companies and farmers can do; Government support and coordination is vital.

 

  1.                                                                                                                       We are therefore strongly supportive of the review of the labour market announced in the Food Strategy White Paper, and the comments about access to employees made in the ‘mini-budget’If farmers, food processors and the logistics sector cannot find sufficient numbers of qualified and motivated people there will inevitably be further wage inflation and potentially direct impacts on the ability of individual businesses including farms to continue in business.  It is therefore critical that the Government takes urgent steps to:

 

 

 

 

 

 

 

  1.                                                                                                                       One answer to shortages of staff is to encourage automation.  However, the up-front costs of installing, for example, ‘robo-milking’ equipment may be too high for small farm businesses.  The Government should look at ways it can support farmers and others in the farming and food sectors to invest in automation and other means of increasing productivity on farm.

 

  1.                                                                                                                       Increased automation, of course, will mean that farmers and processors will use more electricity.  This makes reforming the energy market all the more vital.  As a first step we support the Government’s efforts to decouple electricity costs from the wholesale gas price and welcome the promises in the mini-budget to facilitate the introduction of energy infrastructureWe would particularly highlight the following:

 

 

 

  1.                                                                                                                       At Arla we have experience of using methane from AD plants in combined heat and power equipment deployed at some of our processing sites; and we have started to use biomethane as a fuel in our transportation fleet.  However, progress could be made much more swiftly if a joined up policy to promote anaerobic digestion and biogases was adopted by Government.

 

  1.                                                                                                                       Ensuring that supplies of fertiliser and carbon dioxide are maintained is crucial.  The Government has already taken active steps to ensure security of supply when this has been threatened and we urge it to continue to do so.  We would also repeat the point made above about ensuring that the ELMS regime encourages farmers to produce and use biofertilisers that are a by-product of energy production on-farm.

 

(3) Effects of increasing food prices on access to healthy and nutritious food

 

  1.                                                                                                                       The Government will want to consider what further support should be offered to vulnerable consumers as food prices remain higher in future than they have been in the past.

 

  1.                                                                                                                       As a company Arla already supports a number of initiatives to help those in need: for example, our relationship with the charity Magic Breakfast has seen us donate significant volumes of milk for their breakfast clubs aimed at providing a meal at the start of the day to schoolchildren who would otherwise go hungry. Since 2020 we’ve given enough to fill around 9.5 million bowls of cereal. However, individual companies can only do so much; it is for the Government to decide what can be done to help consumers over the long-term.

 

(4) Impact of the Food Strategy White Paper

 

  1.                                                                                                                       There are elements of the Food Strategy White Paper that will contribute to improved food security and may also help consumers access affordable and nutritious food.  However, we are concerned that some parts of the White Paper have the potential to undermine UK production and that the way the White Paper interacts with other policies may lead, unintentionally, to reduced domestic output in the name of improved sustainability.

 

  1.                                                                                                                       A key area of concern is that policies balance affordability, nutritional content and sustainability, particularly if their objective is to ensure all consumers can access an affordable, nutritious, diet. For example, eco-labels and recommended diets have to consider the nutrient density of a food alongside its environmental impact; in other words, to assess nutritional benefit per gramme of carbon.  It is also important to differentiate between companies and even brands and to adjust over time, since if there is a single, undynamic, assessment for ‘dairy’ there would be no incentive for companies to improve beyond the regulatory minimum point. The White Paper says that a new Food Data Transparency Partnership will address these issues, and we look forward to seeing the outputs of its work.

 

  1.                                                                                                                       Making sure that policies support one another and do not have unintended consequences is an important way in which the Government can support the food and farming sectorThe Food Strategy White Paper may generally support production, but measures introduced under the Environment Act and other legislation and regulations could have the opposite effect. Protecting water and air quality, reducing the impact of product packaging and examining the ways in which HFSS goods are marketed are of course all very important, but how and when these new regulations are applied could be adjusted to reduce their disruptive impact on our industry. 

 

  1.                                                                                                                       An important current example is the application of new rules for air and water quality and the impact they will have on nitrate usage.  These could have significant impacts on production and therefore on food security and yet they risk being applied without apparently thinking through the full implications for the whole of the farming system, as we have seen in relation to the farming rules for water in England and nitrate vulnerable zones in Wales.  There is also a disconnect between proposals to provide financial support to farmers investing in slurry management and the introduction of the new regulations.  We would invite the Committee to look at the full range of policies and legislation and the impact they are likely to have on future food security.

 

  1.                                                                                                                       A related point is the need for a consistent approach across the whole of the UK. In some areas, such as packaging and recycling as well as water quality, the devolved administrations are taking a different approach, or following a different timetable, to England.  An example is the introduction of a deposit return scheme in Scotland next year. Having a piecemeal approach adds costs and complexity to the supply chain and could even limit the availability of certain products. We would urge the Government to work together with the devolved administrations to look at their plans for food and farming in the round and develop a more joined up approach.

 

 

 

(5) Appropriateness of the current level and target for food self-sufficiency

 

  1.                                                                                                                       At present the majority of dairy products consumed in the UK originate from here. However, by value we import more than half of the dairy we consume, reflecting the fact we tend to export lower value products and import more costly ones.[7] Yet we have significant natural advantages when it comes to dairy farming. We would urge the Committee to promote policies which help to increase the proportion of milk, butter, cheese and other products consumed in the UK that comes from here.

 

  1.                                                                                                                       A point for the future is that identifying and promoting export opportunities has a role to play in ensuring the UK’s food security, since they can play a major role in underpinning the financial viability of British food and farming overall.  We therefore believe that the Food Strategy White Paper could have been far more ambitious for dairy in particular; implying that we should just stand still is not good enough.  There are enormous opportunities to export higher value British dairy products to the world, and we want to work with the Government to put in place the structures and marques to support this, as discussed in the White Paper.

 

(6) Land use strategy for England

 

  1.                                                                                                                       We have noted with interest the Government’s announcement in June that it remained committed to publishing a land use strategy for England next year. As others, such as the Food Farming and Countryside Commission, have said: “the UK has finite land resources, and it is unlikely that we will be able to grow enough food, restore biodiversity and nature, de-carbonise the economy and adapt to climate change while also building all the new homes, transport and energy infrastructure the government has promised.[8] It is clear that the land use strategy could undermine domestic food production, particularly if potentially productive farmland is lost to development or to re-foresting and other projects.

 

  1.                                                                                                                       As we have said already, the UK has an opportunity to expand production of dairy both for consumption by British consumers and for export. We hope that any land use strategy that emerges recognises this and supports the dairy sector and agriculture more generally.  However, we note recent statements by the new Government, for example about investment zones and wider deregulation, which could mean that the land use strategy is significantly altered.  It would be helpful to understand soon whether Ministers intend to publish a strategy and what it will now include.

 

In conclusion

 

  1.                                                                                                                       Arla is grateful for the opportunity to contribute to this important and timely inquiry.  We would particularly draw attention to the likelihood that food prices will remain high for the long term and the need for policy-making to adapt to that context. We also believe that urgent reforms to the energy sector, particularly to help farmers to install technologies such as solar power and anaerobic digestion, are needed and could have a rapid impact on mitigating cost pressures.

 

  1.                                                                                                                       We stand ready to provide the Committee with further information and would be very happy to give oral evidence if that would be helpful to the Committee.

 

September 2022

6

 


[1] https://news.arlafoods.co.uk/news/arla-foods-to-make-first-ever-half-year-supplementary-payment-to-farmer-owners

[2] https://news.arlafoods.co.uk/news/arla-doubles-co2e-target-for-operations-to-meet-1-50c

[3] Figure from the Food and Agriculture Organisation (FAO).

[4] According to the Kite Consulting Cost of Production Report, August 2022.

[5] Survey conducted online in the four weeks running up to 26 May. 541 of our farmers responded, or more than a quarter of all UK Arla farmers.

[6] Kite Consulting, Project Reset: Why we face a new normal in dairy product prices https://www.kiteconsulting.com/wp-content/uploads/2021/11/Kite-Project-Reset-report-FINAL.pdf

[7] https://www.gov.uk/government/statistics/united-kingdom-food-security-report-2021/united-kingdom-food-security-report-2021-theme-2-uk-food-supply-sources

[8] https://ffcc.co.uk/library/a-land-use-framework-for-england