Report clears supermarkets of profiteering

An independent report today cleared supermarkets
of profiteering from the slump in producer beef prices.
Johann Tasker examines the small print and asks where,
exactly, is the money going?

FARMERS have complained long and loud that supermarkets are profiteering by maintaining high retail beef prices when producer returns have plummeted.

But although supermarkets have largely escaped the effects of BSE, they are not guilty of making money from farmers misfortune, says an independent report published today (Thursday).

The report, prepared by consultants London Economics for Tesco, acknowledges that beef farmers were hit hardest by the BSE crisis. Farmers suffered a double blow from the beef export ban and a booming exchange rate which sucked in imports, the report says.

Since the start of the BSE crisis, domestic beef prices have dropped by almost 54p/kg deadweight in real terms. But retail beef prices have dropped by less than 31p/kg and that has led to farmers accusing supermarkets of profiteering. The gap between producer returns and retail prices has risen by 23p/kg since Mar 1996.

But the report clears Tesco of profiteering, saying that retail prices have fallen less because of increased post-production costs incurred by anti-BSE measures.

“The costs of getting beef from the farm gate to the retailer have increased significantly following the BSE crisis,” the report says. “These have resulted from additional health and safety standards and regulations on the disposal of animal waste that have to be made by abattoirs and renderers.”

The report calculates that such post-production anti-BSE measures have increased costs by as much as 27p/kg, more than offsetting the increase of 23p/kg in the price gap between producer returns and retail beef prices.

An increase in rendering charges and falling prices for by-products pushed up abattoir costs by 14p/kg deadweight, according to London Economics analysts. Further costs of about 6p/kg were incurred as a result of tighter food safety legislation. Tesco itself faced extra costs of up to 7p/kg as it sought to rebuild its beef sales and reassure customers about the traceability of its beef.

“There is no evidence of excess profits at the retail level,” the report says. “Retail margins on beef sales before the BSE crisis were less than the average for the grocery sector, and remain tight or even negative.”

Instead, it is the highly monopolistic rendering industry which failed to reduce its charges in the wake of BSE, the report says. There is no evidence of renderers making excess profits but the two dominant rendering firms – Prosper de Mulder and William Forrest & Sons – control about two-thirds of the British market.

Although income from the sale of rendered products fell overnight by more than £150 million at the start of the BSE crisis, renderers received a similar amount in compensation from the government. But new firms find it difficult to enter the sector and profits remain high because existing renderers have maintained its monopoly structure, analysts found.

“Prosper de Mulder, in particular, has a reputation for aggressively protecting its market share,” the report says. “This has allowed renderers to pass on cost increases while their margins have remained intact.”

But Paul Foxcroft, of Prosper de Mulder, denied renderers were to blame for the producer-retailer price gap.

“Rendering is not making high profits and any profits we do make are much lower than those made by supermarkets.

“The costs of rendering have increased massively because of legislation and its a bit rich that supermarkets are accusing us of making money when theyre making so much more than we are.”

It looks like the debate will run and run, however. Consultants from London Economics might have had access to Tescos accounts, but farmers will take some convincing that the supermarket is not guilty of profiteering, according to NFU policy director Ian Gardiner.

“If you burrow into it, you can see the substantial costs incurred by Tesco after the crisis,” he said. “But if the answer to this question was simple, it would have been given a long time ago.”

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