Written Evidence submitted by Dairy UK (LS0039)
- Dairy UK is the trade body representing dairy processors in the United Kingdom.
- UK dairy is a sustainable food sector that provides high quality, safe, value for money, nutritious food to consumers, both at home and abroad. It is a major contributor to the UK economy, and dairy farmers are guardians of a significant portion of the British countryside.
- The dairy sector has successfully faced several disruptive challenges recently, including Brexit and Covid. Labour shortages are now placing the sector under considerable stress. It is testament to the resilience of the sector and the commitment of its staff that there has yet to be significant disruption of supplies to consumers.
- We would welcome any effort by the UK Government to alleviate the challenge created by labour shortages to prevent any disruption to food supply.
Question 1: What is the extent and nature of labour shortages currently being experienced in the food supply chain?
- The UK dairy sector, both at farm, milk collection and processing level, is suffering from significant labour shortages.
- Dairy UK co-funded the report by Grant Thornton on ‘Establishing the labour availability issues of the UK Food and Drink Sector’. The report concluded:
‘Severe disruption in the availability of workers impacted by the reduction in free movement of people coupled with the unprecedented disruption of the Covid-19 pandemic has created a chronic labour shortage across the whole supply chain’.
- Dairy UK collected information from its members for the case studies from the dairy sector included in the Grant Thornton report. The average vacancy rate reported by the ten companies that responded was around 7.5%, but with several companies reporting around 15%. Processors reported that they are feeling the impact of labour shortages across all categories of labour, both by profession and skill level.
- Reported consequences included:
- Increased pressure on remaining staff
- Increased production errors leading to product wastage
- Reduction in product range to simplify production processes leading to loss of sales
- Reduction in overall productive capacity
- Shorting/curtailment of deliveries to customers
- Loss of growth opportunities
- Significantly higher operating costs due to wage price inflation and overtime payments
Raw Milk Collection
- Through Dairy UK’s Dairy Transport Assurance Scheme, information was also collected from hauliers involved in the collection of raw milk from farms for delivery to processors. The average vacancy rate for the nine companies that responded was 9.4%, but with two companies reporting vacancy rates of over 13%.
- Reported impacts included:
- Greater pressure on existing staff resources
- Increased overtime and rest day working for the drivers currently employed
- Wage inflation from 10 to 30%
- Loss of contracts
- Increase in driver turnover as drivers were recruited by competing sectors
- There have also been reported instances where haulage arrangements have broken down and farmers have been required to dispose of milk on farm. To date these instances have been sporadic and intermittent. The industry has been aided by the seasonal downturn in milk production. However, haulage arrangements will come under increasing stress as milk production recovers towards the seasonal peak in output that will occur in April and May 2022.
- The intensity of driver shortages varies regionally depending on local and regional factors in the market for drivers. Hauliers expect problems to persist from anywhere between six to eighteen months.
- Dairy farmers are also experiencing a chronic shortage of labour. Non-UK labour is important to the viability of a large number of British dairy farms. According to a recent survey 42% of dairy farms recruited foreign workers in the last five years.
- The impact of labour shortages ranges from the absence of cover for holidays, to farmers only just surviving by focusing on milking cows and fire-fighting the rest of the operation. For many farmers the situation is not sustainable. In particular medium sized farms are under threat. Farm workers are also being lost to other sectors as wages rise.
Question 2: What are the factors driving labour shortages in the food supply chain?
- As cited in the Grant Thornton report, the global pandemic saw 1.3 million foreign born workers leave the UK, of which 700,000 were in London according to estimates by the Economic Statistics Centre of Excellence. An unknown number of individuals also brought forward their decision to disengage from the labour market.
- For drivers Covid brought fundamental changes in demand. The shift to home delivery brought a steep increase in the need for drivers. Covid also reduced the supply of newly trained drivers by reductions in testing capacity. Lockdown also accelerated the decision by some drivers to retire, which had a disproportionate impact on availability due to the preponderance of drivers over 55.
Question 3: What is the outlook for the labour shortage situation in the coming months and years?
- It will take some time before a new equilibrium is reached between the dairy sector and the labour market.
- The sector is working to make it a more attractive career proposition to the domestic labour force. This most obviously has been through an increase in wages to enable the industry to compete with other sectors of the UK economy, with the largest increases being reported for drivers. This has been supplemented by initiatives such as retention bonus schemes, flexible shift patterns, extra holiday days, the use of apprenticeship programs etc. Overall, this has led to a significant increase in operating costs.
- At the same time the sector will be accelerating efforts to increase the productivity of labour by investment in labour saving technology. This is a time-consuming process that requires significant capital expenditure. Whilst labour saving technologies are more readily available in food processing, undertaking similar investment at farm level is more problematic and challenging.
- Both increased wages and greater capital expenditure in technology will increase the industry’s operating costs in the short term, which may not be recovered from the marketplace. The UK dairy sector operates in an international context. The UK is not self-sufficient in dairy, and it is neighboured by countries with large dairy exportable surpluses that have well established positions in the UK dairy market (Denmark, Germany, the Netherlands, France and Ireland). The dairy sector in these countries do not face an equivalent change in operating costs. This will mean lower profitability for UK processors. For a low margin industry this will mean a lower rate of growth, or contraction in some areas.
Question 4: What other issues are affecting the food supply chain?
- The sector faces a challenging environment, largely because of impending changes to Government policy:
- Packaging Costs: the proposed Deposit Return Scheme, changes to Extended Producer Responsibility and the Plastic Packaging tax will either have impacts on the sector’s operating costs or on the demand for its products.
- Environmental Compliance Costs: the Government’s Clean Air Strategy will impose significant additional environmental compliance costs on dairy farmers
- Reductions in Basic Payments; the shift away from direct payments will reduce income to dairy farmers in England whilst it is unlikely that they will be able to access equivalent funds being made available under the Sustainable Farming Initiative to offset this loss.
- Free Trade Agreements: the Government’s commitment to conclude Free Trade Agreements with Australia and New Zealand will increase the international competition the sector is subject to. The accession to the CPTPP agreement should provide offsetting export opportunities but this process will take time to conclude.
Question 5: What impact will the timetable for introducing physical checks at the border on food and live animal imports from the EU have on the current issues being experienced by the UK food supply chain?
- The Government’s decision to delay the full implementation of import checks is a broadly welcome initiative to reduce potential disruption to supply chains in the run up to Christmas whilst the food sector is under stress. However, it will also act to prolong the competitive disadvantage the domestic industry operates under compared to its European counterparts. As some point the UK industry must be allowed to compete on even playing field.
Question 6: What measures has the Government taken to alleviate the problems being faced by the food supply chain this year? To what extent have they been successful?
- The Government has taken a range of measures to alleviate problems in the supply chain, particularly in respect of the supply of drivers. The Government has streamlined the testing process and increased capacity. It has also under the Seasonal Worker Scheme permitted an extra 4,700 drivers to be recruited on three months visas for the food sector. However, this does not match the call made in the Grant Thornton report for the introduction of a 12-month Covid-19 Recovery Visa which would have provided a more generalised solution to the short-term challenges facing the sector.
Question 7: Does the Government need to take further steps to support the food supply chain?
- Dairy UK reiterates the call in the Grant Thornton report that the UK Government should commission the Migration Advisory Committee (MAC) to undertake a detailed review of the sector – as it has done for the social care sector – and identify areas of shortage where short-term immigration solutions can be implemented and/or what roles should be added to Shortage Occupation List.