Are we being short-changed?

EVERYBODY LOVES to hate a winner. And with our national penchant for supporting the underdog, British farming surely provides the ideal backdrop for a contest between ordinary folk and the mighty corporations with which we do more than 70% of our grocery shopping.

After all, we spent 65bn last year on food and grocery shopping and Tesco, the leader by far, took almost a third of those sales.

Analysts predict that it alone will bag profits of 2bn this year. Compare that to the 14.5bn net sales of all British farmers in 2004, and the scale of the imbalance between the different ends of the supply chain becomes clear.

 But does it help to continually portray farmers as victims in the struggle that has enveloped the food chain? And should we lay all the blame at the doors of the supermarkets?

 Well, yes and no. Research by the Office of Fair Trading in early 2004 turned up a string of retailer abuses which their suppliers were powerless to prevent. Ranging from forced “loyalty payments” and delisting to sudden contract changes, the OFT had hoped the Code of Practice it drew up in 2002 would give suppliers a way of defending themselves against bullying tactics.

EVIDENCE

 An audit of the code published before Easter found that supermarkets were by and large complying, though it admitted that evidence had been hard to find.

 But most farmers are not covered by the code, and in any case, it has been widely criticised for failing to help suppliers who are usually afraid to come forward with their concerns.

 Duncan Swift, head of Grant Thornton”s food and agribusiness recovery group branded the code “ineffective” and called for urgent action. “The current code fails to stipulate the minimum required contract terms that should govern every supply from a food supplier to a major supermarket. Too much remains unwritten. Even though suppliers can ask for some of it in writing most don”t as they are too afraid of being seen as potential trouble makers. Most suppliers are also mindful that the termination of a relationship with a major multiple could all but cripple their business – no wonder they lay low.”

Besides radical reform of the voluntary code, he also called for a new supermarkets ombudsman to safeguard the long-term future of the UK”s food industry.

But organic vegetable grower Guy Watson says he was still receiving diktats from the retailer he worked with in 2003. He gave up trying to work with their buyer when the latter ended a phone call with the words “we whistle and you jump, sonny” before hanging up.

 “Since then, supermarket behaviour has changed on the outside, but I”m not convinced that the underlying ethos is different,” says Mr Watson.

“They all talk about long-term relationships and working together to take costs out of the supply chain, but I don”t think they”re really interested in appreciating their suppliers” businesses, other than as a negotiating tool for saving a few more pennies.”

But Robin Tapper, head of food and farming at the NFU, warns that farmers may have pinned too many hopes on the OFT.

“There”s an expectation, ill-founded, that the OFT can address the issue of supermarkets making large profits at the expense of farmers and there”s some way that some of that profit can go back down the chain.

“Neither the OFT, nor the supermarket”s code of practice, nor the NFU”s Buyers” Charter can address that issue. That is a trading issue. We can certainly lobby for a fairer share for farmers, as we have done in the dairy and other sectors, but it is a separate issue from fair play.”

opportunity

 Meanwhile, the hunt for profits which has spurred rampant consolidation throughout the food chain is not going to end. As global brands and multinational retailers assert a stronger influence on consumer spending, UK supermarkets will have to keep cutting costs and expanding to survive.

And it is certainly in the interests of the farmer that supermarkets do survive, says Mr Tapper. “Supermarkets are a major customer of British agriculture, with Tesco the biggest single customer. They are the market so we have got to work with them, but it has to be in an open, transparent way.”

 Sion Roberts at English Food and Farming Partnerships in London agrees. “Don”t blame your enemy for his strength; blame yourself for your weakness,” he says.

“Farmers have had a very difficult time of the last few years and many farms are in a very difficult position. If your business is on the borderline you”re under a lot of pressure, and it”s quite understandable that people lash out.

 “But perhaps what farmers have got to do is think about their own situation rather than just blaming other people for being so good. The fact is, they are good, so you”ve got to do something about it.”

The market is certainly there for farmers to exploit, as British food sales blossom at the same rate as Britons” waistlines. Last year we spent a total of 111bn on food and groceries, not including alcohol. Growth over the past decade has been phenomenal, with food sales up 56% from 71bn in 1995. But over the same 10-year period, British agricultural output has actually dropped by more than 3bn to its present level of 14.5bn.

What this shows is that, despite the huge market, trading conditions have become more challenging for British food producers, says Joanne Denney-Finch, chief executive of the food and grocery retailers” think-tank IGD. She points out that food prices have decreased in real terms over the past 20 years, as modest rises have been outstripped by inflation.

 “Whilst the overall economy is doing fine, for many people in the food chain – whether retailers or farmers – it feels like a recession, even though it isn”t. The emotions are the same, so everybody feels vulnerable.”

 RESTRUCTURING

 But suppliers are paying a high price for the restructuring of the industry and Karen Schenstrom, Sainsbury”s director responsible for primary agriculture, admits that her company has made some difficult decisions on suppliers lately. “It”s tough and it”s going to get tougher,” she says of trading conditions. “We have seen consolidation of our supply base and we”re now far better placed to supply what our customers want.”

Ray Maynard, Tesco”s senior fresh vegetable buying manager, agrees that times are hard for suppliers but insists growers have been relatively untouched by the upheaval.

He recently moved 50,000t of potato packing business from its oldest packer – Romney Marsh Potato Co in Kent. Most of the tonnage has been moved to Branston, which supplies two-thirds of Tesco”s 360,000t demand.

 PROFESSIONAL MIDDLEMEN

 But the recent cull in processors and suppliers is a sign that the retailers are changing the rules, looking for more proactive middlemen. They are no longer just conduits for produce, but becoming “category managers”, whose job is to take on the day-to-day problems of procurement.

 “I expect suppliers to be blue-chip companies – they must come up with innovative ideas and take costs out of packing and supplying. In return we give them guaranteed programmes,” says Mr Maynard.

 “The only way to run a business in fresh produce successfully is to understand each other”s position. The good farms of the future understand what the customer wants. They know that the job is not finished when the packhouse receives their potatoes, or when the delivery is made to our distribution centre. The job is finished when the customer puts down his fork and says that was good”, and decides to return to purchase more.”

And farmers are not let off this hook either. All of the supermarket buyers that farmers weekly contacted said they expected their producers to become more focused on their retail customers.

 TRUST

 So with all these new expectations being kicked down the supply chain to farmers, the pressure is unlikely to let up. What do they stand to gain from all this extra work?

Waitrose is perhaps the best example of a farmer-friendly retailer. It has taken steps to cultivate its producers through producer groups, all of which have waiting lists. In return for exacting quality, hygiene and animal welfare standards, says the company, Waitrose producers are paid a price that reflects these additional requirements, as well as the costs of production.

Asda has also taken steps to guarantee long-term contracts for producers, based on agreed costs and profit margins.

Cost Plus is its way of buying potatoes and carrots from growers, where they sit down and negotiate an acceptable cost per unit, then add a profit margin. Chris Brown, Asda”s farming and agriculture managers says the only reason the initiative has not been extended to other products is that relationships with farmers in other sectors are less advanced.

He is in the process of widening the dialogue with farmers through meetings around the farmhouse kitchen table. “From the retail perspective that means us coming out of our bunkers, and to a greater extent, it means farmers wanting to talk through the issues.”

Tesco”s Roy Maynard is also quick to emphasise the advantages of working more closely with his buyers. Payment is made in 7-14 days and programmes planned up to three years into the future.

But many in the dairy sector, for instance, might be bemused by this description of closer working with the supply chain. Although a 3.5p/litre increase in the retail price of milk has been negotiated, many farmers have yet to see the benefits trickle through as some of the major buyers drag their feet.

 “There is no transparency there at all, except in the Arla-Asda direct supply relationship and with Marks & Spencer and Waitrose,” says the NFU”s Robin Tapper. “It”s vital that we create a transparent environment so that farmers can negotiate better in the marketplace. It”s not just the supermarkets, which are improving, but also the processors who are at fault.”

 MARKET

 Whether farmers are working closely with the big retailers or selling their produce for the price on the day, industry figures agree that they will have to know more about their market, especially now the EU is stepping back from production-based subsidy.

Sion Roberts says that co-operation between farmers is the best way to develop that alignment, warning that failure will mean losing out to imports.

 “The difficulty for an individual farmer is that though he”s good at farming, he can”t also be good at processing and marketing and all the other things. By being a member of a farmer-controlled business of a sufficient size to employ good quality managers, technical staff and salespeople, he can do the job professionally.”

Although the UK is home to a growing number of successful co-operatives, from KG Fruits to Milk Link, the best examples can be seen abroad, Mr Roberts says.

Take dairy co-op Fonterra, for instance, where figures show that returns to members in 2003/04 hit an average 152,000 each. Of that payout, 17,000 came from so-called value-added sales, with a cumulative investment of 194,000 in the co-op.

“Farmers are going to have to change their strategy from a very farm-focused strategy, which it has been for many years, to develop supply-chain-oriented strategies, and that”s going to mean investing off farm and into their supply chains and markets.”

All very well, but how does a farmer go about setting up partnerships? He should first broach the topic with neighbours, says Mr Roberts, and perhaps consider calling EFFP for advice on the next step. However, it is not always about rushing off to set up a new farmer-controlled business.

 “In many cases, farmers will find there”s already an FCB operating in their region. We advise people to go and talk to them and see if they can do it without all the cost of setting up a new business.”

STANDING OUT

 Fundamentally, though, most agree that the key to the survival of British agriculture is adding value to the basic product farmers grow so well. By de-commoditising producers can widen profit margins and escape the boom and bust cycle of world market prices.

 There are endless ways of differentiating a product in the marketplace, sometimes as simple as providing excellent customer service or high quality. Or it could be through branding products by traditional means of production, health attributes, novelty or local provenance.

“Just because you”re producing something local doesn”t mean your products are going to be bought by food service operators and retailers,” says IGD”s Joanne Denney-Finch. “But if you”ve got something special and different, you”ve got a lot of leverage, whatever size you are.”