COMMITTEE FOR AGRICULTURE AND RURAL DEVELOPMENT

COMMITTEE MEMBERSHIP AND POWERS

EXECUTIVE SUMMARY

RECOMMENDATIONS

SECTION 1: INTRODUCTION

SECTION 2: ISSUES CONSIDERED BY THE COMMITTEE

SECTION 3: RESPONSE TO ISSUES BY GROUPS GIVING EVIDENCE

SECTION 4: CONSIDERATION OF EVIDENCE

SECTION 5: CONCLUSIONS

List of Witnesses

List of memoranda submitted to the Committee (printed)

List of memoranda submitted to the Committee (not printed)

The Committee for Agriculture and Rural Development is a Statutory Departmental Committee established in accordance with paragraphs 8 and 9 of Strand One of the Belfast Agreement and under Assembly Standing Order No 46. The Committee has a scrutiny, policy development and consultation role with respect to the Department of Agriculture and Rural Development and has a role in the initiation of legislation. The Committee has 11 members including a Chairperson and Deputy Chairperson and a quorum of 5.

• to consider and advise on Departmental budgets and Annual Plans in the context of the overall budget allocation;
• to approve relevant secondary legislation and take the Committee Stage of relevant primary legislation;
• to call for persons and papers;
• to initiate enquiries and make reports;
• to consider and advise on matters brought to the Committee by the Minister of Agriculture and Rural Development.

The membership of the Committee since its establishment on 29 November 1999 has been as follows:

Dr Ian Paisley (Chairperson)
Mr George Savage (Deputy Chairperson)
Mr Billy Armstrong
Mr PJ Bradley
Mr John Dallat
* Mr Boyd Douglas
Mr David Ford
Mr Gardiner Kane
Mr Gerry McHugh
Mr Francie Molloy
Mr Ian Paisley Jnr.

* Mr Dallat replaced Mr Denis Haughey on the latter's appointment as a Junior Minister.

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The Northern Ireland Assembly Committee for Agriculture and Rural Development agreed the following revised Terms of Reference for its Inquiry into farm debt:

To investigate factors that may have contributed to farm debt or to difficulties in servicing this debt; and

To examine proposals for addressing farm debt, publish reports and make recommendations in the following areas:

• the effects on primary producers of the practices and policies of major retailers and their suppliers;
• the particular circumstances faced by the pig industry; and
• the particular circumstances faced by the beef industry.

The Committee's Report: 'Retailing in Northern Ireland - a fair deal for the farmer?' was launched on 5 July 2000 and this current Report relates to the particular circumstances faced by the beef industry.

The third and concluding Report from this Inquiry, concentrating on the pig industry, will be published in January 2001.

The main issues considered by the Committee were as follows:

• dependence on powerful UK supermarkets;
• pricing practices by processors;
• fragmentation of the producer base and limitations on the sale of cattle;
• BSE impacts;
• currency impacts;
• quality;
• marketing strategy;
• partnerships; and
• the role of the Department of Agriculture and Rural Development (DARD)

The Committee agreed a schedule of meetings with relevant industry organisations including farmers' representatives, processing companies, the Livestock and Meat Commission and DARD.

In advance of these meetings the organisations were invited to make written submissions to the Committee and members' questions were informed by these submissions. Transcripts of the meetings and copies of the submissions are reproduced in Volume 2 of this Report.

The Committee has addressed two fundamental questions:

• Why, when the two major components of the supply chain closest to the customer appear to be consistently profitable, does this profit not trickle back to the first link in the chain - the farmer?
• Why, when there is such state investment and involvement in the beef-farming sector, is it still unable to perform profitably?

These questions, the evidence heard earlier for the retailing report and the Committee's direct experience of the industry allowed the Committee to fully explore the issues identified above.

There is no doubt that the Northern Ireland beef industry is greatly affected by the market power of the UK supermarkets. The penetration of the retail markets is commendable but a distinction is drawn between access to the market and being paid a fair price. There is a strong belief on the part of all farmers' representatives that Northern Ireland farmers are being paid consistently less than their GB counterparts for essentially the same product. The tone and content of all the evidence taken from farmers' representatives indicate deep levels of dissatisfaction with a situation where their major partners (the processors and retailers) appear to be making good profits from beef whilst they are working at or below production cost.

The Committee cannot comment on allegations of price fixing by Northern Ireland meat plants, but remains in contact with the Office of Fair Trading and will assist their investigations in any way it can. There is no doubt about the deep mistrust between producers and processors. It is caused, in our view, by several things:

• the massively strong buyer power of the processors relative to the market power of the individual farmer. In this situation the farmer has no option but to take what he is offered for his livestock;
• the lack of practical options for sale open to most farmers. A few farmers have shipped cattle to GB and have done better there. For practical reasons this is not open to all;
• a payment for carcass quality system which, in the view of all on the producer side, does not adequately reflect the value differential across the grades; and
• the belief that processors have remained profitable throughout the period of deep crisis for the farmers.

All parties agree that improved co-operation throughout the food chain is a requirement for a successful industry. Most see the need for more collective efforts in such areas as herd improvement. The Committee sought views on the formation of a co-operative approach to beef production in order to create a more equal balance of market strength between producers and processors. On the whole, the producer side was keen on the principle but wary of the reaction of processors and the willingness of farmers to co-operate.

All parties were agreed that these were fundamental causes of farm debt, resulting in a lack of competition in the industry, slowing the potential re-opening of premium market niches and depressing the value of subsidy payments.

The best of Northern Ireland's grass-fed steer beef stands comparison with any competing product in terms of farm quality, traceability, hygiene, service and eating quality. However, the deterioration in conformation of the beef herd causes the Committee some concern. The elements causing this deterioration (high percentage of dairy cows, farmer pessimism and lack of price incentive) must be addressed.

The evidence suggests that, when market conditions permit, we should open up new premium European markets. However while Sterling remains at its present level the opportunities will be limited. Equally there is across-the-board support for the principle of protecting the place of our beef in any new market by selling it as a branded product. This would create the possibility of a price premium if the quality warrants it. More important, it would greatly hamper any tendency on the part of the retailer to substitute product as recently happened with pork.

Processors appear to be content that they have meaningful partnership arrangements through their producer groups which are normally aligned to specific retailers. The producers, however, are clearly not behaving as if they were equal partners in such ventures. The Committee heard no evidence pointing to meaningful contractual relationships with two-way undertakings to deliver on quality or price. These are not real partnerships in the normally accepted commercial sense and the arrangements seem to the Committee to be unacceptably one sided.

The Committee accepts entirely that DARD has primary responsibilities to both the farmers and the consumer and does not suggest that it should focus only on one part of the supply chain. However, we believe that the Department cannot neglect a situation where the rest of the chain is ignoring the well-being of the primary producer, particularly in view of the huge public investment in the primary producer part of the chain. Making that link work and securing its viability is not to create confrontation and conflict with the other links but to secure the very foundation of their existence. We believe that what is required is a real partnership to replace the tense one-sided relationship which characterises the current position.

It is clear to the Committee that the issue of farm debt in the beef sector has several fundamental causes, some outside the control of the parties in Northern Ireland and others capable of being remedied. The Committee is convinced that its conclusions are borne out by the totality of the evidence before it.

The continued exclusion of Northern Ireland beef from formerly lucrative markets in the EU is a matter of the utmost strategic importance to an industry which requires the stimulus of market competition to restore prices. The current exchange rate with the Euro greatly reduces the market opportunities and this is further exacerbated by the UK Government's reluctance to take advantage of the agri-monetary arrangements which exist to alleviate the effects of adverse currency movements.

The BSE crisis has created a situation where Northern Ireland's best beef is now being sold almost exclusively in the leading UK supermarkets. These customers have market power many times greater than the Northern Ireland beef processors and can, and we suspect do, dictate prices which the latter have no option but to accept. The processors in turn are immensely more powerful in market terms than the individual producer who, in his turn, has no option but to accept the offered price for his animal. The industry needs to open up new markets to ensure healthy levels of competition and to exploit the superior quality of Northern Ireland grass fed beef.

The fragmentation of producers is a serious obstacle to the creation of a modern responsive supply chain and the Committee's proposal to the industry, that a co-operative coming together of producers would be in the interests of the whole industry, is widely accepted. There are, however, serious levels of mistrust between the producers and the rest of the supply chain which must be remedied by the creation of real partnerships.

The beef herd is deteriorating in conformation quality because of a combination of the lack of sufficient quality-related monetary incentives from the processors, the impact of over fifty percent direct payments per animal from government and the impact of the nearly fifty percent Holstein input from the dairy herd. Although this issue was highlighted in the 1996 Red Meat Strategy, little impact has been made on the problem to date. However, a recent DARD initiative and the announcement of a further £300,000 for the Beef Quality Initiative is to be welcomed.

The Committee concludes, in light of all the evidence, that the Department cannot, in the public interest, continue to remain on the sidelines in relation to the inequalities which are so obviously a feature of the existing supply chain. This chain is being subsidised by significant subventions of public money. The Committee's consideration of all the evidence compels it to believe that the massive superiority of market power of both processors and retailers has led in large measure to the impoverishment of beef producers.

We are not recommending that Government enter the market in any way or that the Department interfere directly in market mechanisms. On the other hand the Department cannot afford in the public interest, nor in the interests of its own investment in farming, to be mere spectators as the produce of Northern Ireland beef farms is profitably processed and marketed in the absence of an acceptable return to the farmers.

It is, therefore, the duty of the Department to facilitate the re-balancing of this supply chain in such a way that the interests of the consumer and the farmer are both accommodated to those of the retailer and the processor.

The Committee also believes that the Department has a crucial and leading role to play through its various agencies, in facilitating the reversal of the continual decline in herd quality which has characterised the past few years.

The industry should continue to strive to keep at the forefront of perceived quality by being vigilant in relation to competitive attempts to emulate or improve on such features as farm quality assurance and traceability.

The industry should also develop one or more brands to ensure that once its product has achieved high levels of customer satisfaction and loyalty that this loyalty is to the Northern Ireland product. Otherwise, it will be perpetually prone to the kind of substitution which has recently characterised pig-meat in Great Britain.

Farmers should look beyond their present difficulties and become even more positively involved in creating their own future by responding to the recommendations we have made in this report.

The Northern Ireland beef industry has the capacity to become a true European market leader, albeit a niche player because of its relatively small size. The Committee urges the Department and the farmers urgently to do what is necessary to create a supply side with the capability to meet this aspiration and to be able to work as equals with a processing sector which has already proven its capability in this regard. The Department and producers should work together towards the creation of a well organised series of producer/processor partnerships based on trusting relationships, parity of market power and branding. There should be a Department-led strategy for the creation of these conditions and to achieve the herd quality on which everything in the end depends.

The Committee believes that implementation of the recommendations contained in the next section will result in the creation of a professional, efficient and profitable supply chain, producers who are comfortable and content with their supplier relationships and a product of the highest quality being sold in the best markets throughout Europe.

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RECOMMENDATIONS

EU Matters

1. The Department should continue strenuous efforts to secure the successful introduction of the beef exports scheme. Northern Ireland's case for a relaxation of the export ban is made all the more valid in view of the recent events in Europe.

2. The Minister of Agriculture and Rural Development should press the United Kingdom Government to introduce a ban on imports of foreign beef that presents a threat to the local agricultural industry and a risk to consumers.

3. The Department should continue to make strong representation to the UK Government about the effects on the Northern Ireland beef industry of the current position of the UK currency in relation to Europe, and make every endeavour to secure available agri-monetary compensation.

4. The public sector is a major investor in the beef sector and as such the Department must become a much more pro-active participant than hitherto.

5. The Department should conduct an investigation into the alleged price differential between Northern Ireland and Great Britain. The Department should work actively with the beef producers and processors to ensure that Northern Ireland producers, in the short term, secure the same returns for comparable livestock as pertain in Great Britain.

6. The Department should become much more actively involved in ensuring that there are effective and efficient beef supply partnerships at producer/processor level through the following actions:

• The Department should set as a high priority the transformation of beef production from a weak collection of individual farmers into a market orientated, organised production force able to serve markets responsively with quality product; and
• The Department should create and lead a highly focused Production Organisation Task Force with representation from the producers and the LMC. It should be required to consult with the processors and the retailers and should be focused on better serving the market. It should articulate a clear vision for how the producer side should be organised and prepare, by June 2001, an implementation plan for completion by end 2005.

7. The producer side should be prepared to co-operate with this initiative and also to make necessary investments as and when these are needed for its successful implementation.

8. In pursuit of its objective regarding herd quality in the Programme for Government and, as an input to the task force in Recommendation number 6 above, the Department should prepare an overall strategy, involving the whole industry, for herd improvement with the goal of making the Northern Ireland beef raw material base the best on these islands by end 2005.

9. The Committee would wish to see, from the Department, by the end of March 2001, its own departmental strategy for facilitating the achievement of this crucial goal.

10. The Committee believes that the producers themselves must pay greater attention to increasing the overall quality of beef cattle being presented for slaughter.

11. The Committee recommend that processors alter their pricing policies to offer stronger incentives in favour of carcasses with higher value, within an overall price regime that is commercially viable to both buyer and seller.

12. The Department should vigorously continue its direct and indirect actions in supporting the re-opening of European markets including measures to fund research and to support promotional and other measures.

13. The Department should immediately begin investigating, with the LMC and the industry, how Northern Ireland beef can be sold in Europe as a branded product at a profit for the producer. The Department should fund the LMC to examine this matter and to develop a Northern Ireland beef branding strategy. The Committee would wish to see the outcome of this by the end of April 2001.

14. The Department should ensure that Northern Ireland's leading position in areas such as farm quality assurance and traceability is not overtaken by any significant competitor.

15. The Department, at this time of financial crisis for beef farmers, should take all steps necessary to disburse payments on time. It should, to facilitate financial planning, publish a schedule of dates to farmers in receipt of such payments, and adhere to this schedule.

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1.

Background to the Report

1.1.

On 13 December 1999 the Northern Ireland Assembly Committee for Agriculture and Rural Development announced that it would undertake a major Inquiry into debt within the agriculture and fisheries sectors. The Terms of Reference for the inquiry were:

• To ascertain the level and extent of debt in the Agriculture and Fisheries sectors including an indication of any geographic differentials within Northern Ireland and the comparative positions in England, Scotland and Wales;
• To establish factors (within each sector) which have contributed to the current debt situation, including the Department's actions at the onset of the BSE and Pigs crises;
• To examine the actions taken and proposed by the Department which would have the effect of alleviating debt, including both national and EU policy considerations;
• To ascertain the extent to which aid available from the European Union, which may offer direct financial benefit to those involved in each sector, has not been taken up by the UK Government and to establish reasons for this;
• To assess the additional benefit to be gained by each sector if all available aid was utilised;
• To examine alternative proposals for addressing the problem of debt; and
• To report to the Assembly making recommendations to the Department and/or others on actions which would make a positive contribution to alleviating debt in the agriculture and fisheries sectors in Northern Ireland.

1.2.

At its first meeting following suspension of the Assembly the Committee agreed to review its Inquiry and to concentrate on three major issues in the Agriculture industry, issuing separate reports on each. Revised Terms of Reference were agreed as follows:

To investigate factors that may have contributed to farm debt or to difficulties in servicing this debt; and

To examine proposals for addressing farm debt, publish reports and make recommendations in the following areas:

• the effects on primary producers of the practices and policies of major retailers and their suppliers;
• the particular circumstances faced by the pig industry; and
• the particular circumstances faced by the beef industry.

1.3.

In reviewing the Terms of Reference the Committee was (and remains) conscious that it embarked on an Inquiry into debt. The informal evidence heard by the Committee, as it debated on the need for an inquir^y, was that over £500m was owed to banks and over £50m to the grain traders. The Committee then conducted a 'straw poll' of finance companies and discovered that a further £18m was owed to the banks' leasing and hire purchase arms and another £14m to two of the major agricultural finance houses. The Committee believes that the total amount of farm debt at the outset of its Inquiry was at least £650m.

1.4.

What was clear to the Committee, however, was that while these levels of indebtedness were undoubtedly high, there was a historical repayment capacity within the agriculture industry to service and repay such borrowings. The concerns, shared by banks, grain companies and farmers alike, were related to the reduction in farmers' incomes and the consequent pressures on this repayment capacity. This was amply demonstrated by the grain traders' estimate that bank interest as a percentage of farm income had risen from just over twenty percent in 1997 to eighty percent in 1999. For this reason the Committee believed it was appropriate to concentrate on recommendations aimed at improving farmers' capacity to generate additional income, thus relieving the pressures of indebtedness.

1.5.

The Committee published the first Report, entitled "Retailing in Northern Ireland - a fair deal for the farmer?" on 5 July 2000. The Report was the subject of an Assembly debate on 25 September and the following motion was agreed without division:

2.1.

The concerns raised in the Committee's Retailing Report have been investigated in great detail and on a wider canvas by the Competition Commission. It has investigated pricing practices and a range of practices in relation to suppliers and its findings are as follow^s:

• an overall decline in the price of food from 1989 to 1998;
• although grocery prices are higher in the UK, this effect is accounted for by currency and property price differences;
• there is no evidence that UK grocery retailers are acting in an anti-competitive manner so as to generate higher prices than would otherwise be the case;
• the commission is satisfied that reductions in farm gate prices have been reflected in retail prices;
• the existence of buyer power has resulted in the burden of cost increases in the supply chain falling disproportionately heavily on small farmers;
• a high degree of consumer satisfaction with supermarkets;
• the practice of below cost selling operates against the public interest; and
• widespread allegations from suppliers about the behaviour of supermarkets, combined with an unwillingness to be named. They found a climate of apprehension among many suppliers in their relationship with the main retailers. They concluded that five multiples had sufficient buyer power to adversely distort competition in the supplier sector. As a result The Commission has advocated a statutory code of practice.

2.2.

These findings are important and highly relevant to the plight of the Northern Ireland beef farmer.

2.3.

In the view of the Committee the Commission has confirmed the Committee's belief that all of the adverse effects of the recent shocks to the beef system have been allowed to fall on the producer sector. Neither the retailers nor the processors has paid heed to the fact that the result has been to severely damage:

• the short term living standards of thousands of beef farmers, driving them into loss making operation; and
• the ability of these farmers to invest in improvements in effectiveness and efficiency to the same extent as their prime suppliers.

2.4.

The clear implication of this is that, contrary to what has been said to this Committee in evidence, there is no evidence of a genuine partnership between the producer sector and the rest of the supply chain.

3.1.

Whilst the retailer plays a crucial role in farmer incomes, being the arbiter of final selling prices to the consumer and of prices paid to the processors and thence to the farmer, the Committee wants to look more broadly at the range of issues affecting returns to the beef farmers.

3.2.

It is clear from everything known to the Committee that the supply chain from farm to consumer is giving consumers supplies of meat of the highest quality at attractive prices. Furthermore, it is also clear that of the three main participants in this supply chain - the farmer, the processor and the retailer - the latter two players appear to have enjoyed good profits consistently for the past decade at least. This is best exemplified by their ability to grow strongly and continually to invest in expanding and improving their businesses.

3.3.

During the past five years, beef farmers' returns have been reduced by almost 40%^.Since the Committee would have expected the whole supply chain to suffer equally in bad times, a primary focus of the Inquiry is to understand the reasons for this apparent inequality of suffering.

3.4.

The Committee is very conscious too of the large amounts of EU direct funding currently being paid to the producers. There is no doubt that, without these payments, the beef industry would collapse.

3.5.

There is probably no other sector outside of central and local government with the same level of intense involvement from the relevant department of state. Direct subventions from the EU are on a large scale relative to what the market contributes. Moreover the industry is, quite properly, subject to intensive regulation in the interests of food safety. Furthermore, the Department of Agriculture and Rural Development (DARD) is heavily and expensively involved in research, education and advisory activities which in most other sectors would be left to the industry. The Committee is not criticising this level of involvement for it is well appreciated. The beef-farming sector is, thus, dependent on Government in general and on DARD in particular to an exceedingly high degree.

3.6.

The Committee has addressed two fundamental questions:

• Why, when the two major components of the supply chain closest to the customer appear to be consistently profitable, does this profit not trickle back to the first link in the chain - the farmer?
• Why, when there is such state investment and involvement in the beef-farming sector, is it still unable to perform profitably?

3.7.

These questions, the earlier evidence and the Committee's direct experience of the industry have led it to focus on a number of key issues which are introduced in the next section.

3.8.

A number of other issues were raised as contributing to the crisis faced by beef farmers. Among these were the perceived over-regulation of the industry and the United Kingdom Government's reluctance to take up agri-monetary compensation opportunities through the European Union.

3.9.

The Committee acknowledges that these are indeed factors but believes that these are well beyond the control of the local administration and has not explored them fully in this report. That said, the Committee is of the opinion that unnecessary regulation must be avoided, particularly where it disadvantages local producers against EU competitors. The Committee is also adamant that all available agri-monetary compensation must be taken up by the United Kingdom Government when circumstances exist for which such compensation was designed.

4.1.

The Committee would like to thank all those who participated in its Inquiry through written and oral evidence. This participation enabled the Committee to address a wide range of issues and to ensure that differing viewpoints on these issues were heard.

4.2.

The Committee would also like to thank those organisations that took the time to make written submissions to the Committee at the outset of the Inquiry (i.e. under its original Terms of Reference). When the Terms of Reference were revised a number of these submissions were found not to be relevant to the new Inquiry and they have not been published with this Report.

4.3.

A list of unpublished memoranda has been included with the Report and the memoranda themselves have been lodged in the Assembly's library and are available for inspection.

4.4.

Finally, the Committee would also like to thank the Competition Commission for its permission to publish extracts of its supermarkets report.

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5.

Assistance Available to Farmers Facing Debt

5.1.

An early response from the Department to the original Inquiry stated that indebtedness was concentrated on a relatively small number of farms. According to DARD, in 1998/99 forty-four percent of farms had no bank borrowings and nine percent of those who did had borrowings of £50,000 or more. The Committee realises, however, that this still equates to a significant (and growing) number of people who are facing genuine hardship as their ability to repay loans decreases.

5.2.

Although not explored as a main issue in this Report, the Committee firmly believes that there is a need to offer financial guidance and information to those who are unused to such hardship and suffering problems as a result. With DARD's network of offices and staff there must be opportunities for the Department to play a role in offering this guidance. The Committee, therefore, welcomed the announcement by the Minister on 20 November that up to £150,000 was to be spent in offering information, guidance and counselling for farmers and their families.

5.3.

Both the bankers and farmers groups highlighted the importance of farmers being able to access appropriate support in terms of available benefits. The Committee believes that there must be a realistic understanding of rural needs on the part of the Social Security Agency (SSA). It is the Committee's opinion that DARD should offer its close co-operation and knowledge of rural areas to the SSA in an attempt to ensure the uptake of available benefits by those most in need.

6.1.

An important issue relates to the role of the supermarkets. The Committee's first Report from this Inquiry deals with a number of the key issues in relation to the retailers. However retailers are an integral and crucial part of the supply chain and we need to examine the impact they have beyond those issues.

6.2.

In a competitive arena all organisations seek to create superior market power. In the case of the UK supermarkets the leading players demonstrate success in this quest perhaps better than any other sector. A small number of retailers now dominate the market for the nations' groceries. Their market power is immense. As a result they are, as organisations, in a position to dictate to their suppliers on every aspect of supply whether it be in the specification of the product, the conditions under which it is grown and manufactured or its price. This is in turn driven by the needs and wants of the mass of consumers they supply. Almost all of Northern Ireland's quality beef is currently sold to one or other of these powerful leading UK supermarkets. Consequently their impact on the industry is currently very great. Conversely, the industry is greatly dependent upon them.

6.3.

These most powerful members of the Northern Ireland beef supply chain are all public companies. Their primary obligation is to their shareholders who have supplied the capital to fund the company. To meet that obligation they have to trade profitably. Profitable trading requires them to sell competitively to their customers, almost all of whom can shop elsewhere if they choose. Supermarkets are, therefore, driven by both market price and the need to make a profit.

6.4.

It is not surprising that they will use their massive market power to demand in terms of both quality and price exactly what they want from their suppliers. The Committee has no powers to investigate whether the UK supermarkets are profiteering at the expense of the farmers (this is a reserved matter) and will rely on the Competition Commission's Report on The Supply of Groceries, published in October 2000. Relevant findings are discussed at paragraph 2 above.

6.5.

End prices for the bulk of Northern Ireland beef is, therefore, set ultimately by the UK retailers. They are very large relative to even the largest Northern Ireland processor of NI beef.

6.6.

A key issue for the Committee is whether almost total dependence on the UK supermarkets with their immense market power relative to that of the processors, is right for the industry.

7.1.

There are two major issues which the Committee wishes to take into account.

• The first relates to allegations of collective price fixing practices at the expense of the producers. The Committee felt that it had no other option than to hear the evidence offered, and agreed to do so off the record. It was alleged to the Committee that the Office of Fair Trading (OFT) had identified wrong-doing on the part of meat plants in the past. The Committee sought and received clarification on this allegation from the Office of Fair Trading and was satisfied that the agreement which they had detected did not constitute a cartel and had been dealt with in an appropriate fashion. That said, the OFT was considering a further complaint and, at the time of this report, the Committee was in correspondence with the OFT in an attempt to assist this consideration. The Committee has asked for sight of all relevant OFT reports on the matter and will urge immediate and forceful action to be taken should any wrongdoing be proven.
• The second issue relates to how prices reflect the quality of stock presented. There are two sub issues here relating to the fairness of the grading system on the one hand and the price differentials paid for different grades of cattle on the other.

7.2.

Both of these issues impact on the willingness of beef farmers to strive for the production of cattle of the highest quality.

8.1.

Given the market power of the retailers in respect of the processors, and a similarly large disparity in market power between a local beef processor and his suppliers, the issue of fragmentation of the producer base is, on the face of it, a fundamental causal factor in the current farm debt crisis.

9.1.

The BSE crisis has resulted in a stream of adverse impacts, some direct and others consequential. The most direct impact has been the collapse of a strategy of selling branded product to size matched high quality European supermarket chains. The indirect impacts, including the thirty months slaughter scheme and the many layers of cost resulting from tightened regulations, have also had serious impacts on farm income.

9.2.

The Committee notes the publication of the Report of the BSE Inquiry (the "Phillips Report") and its finding that no blame attached to the beef industry in Northern Ireland nor to DARD. While there have been renewed concerns about BSE in some European countries, the Committee is satisfied that the steps taken to address this problem in Northern Ireland set the standard for others to follow.

10.1.

This is a serious issue affecting as it does the ease with which continental markets can be re-taken profitably. It also has strategic implications on the import substitution side depending on the outcome of the forthcoming World Trade Organisation (WTO) round of talks. This threat combined with the propensity of major retailers to source their supplies at lowest cost creates another issue of long-term importance for the sector.

11.1.

The success of any industry or firm rests, crucially, on the efficient production of a superior quality product. This is a key issue as Northern Ireland beef farmers are well placed to be quality leaders in Europe if the right steps are taken.

12.1.

Given the right product, the future profitability of beef farmers will be determined by the markets that are served by the processors. A key aspect within this strategy is the copper fastening of demand for Northern Ireland product by seeking to sell it where possible as a branded product when entering new markets.

13.1.

The creation of well functioning partnerships is a key to the industry's future at every level. The Committee believes that there are probably excellent partnerships between the processor and retail sectors. The key issue is the apparent absence of partnerships which function in a meaningful way between farmers and processors.

14.1.

This is an issue of first order importance. The centrality and pervasiveness of DARD's role as it is currently exemplified is not in question. The issue is rather about DARD's stance in relation to the farmers as a trading sub sector and, in particular, in relation to assisting and empowering farmers to better organise their own part of the supply chain, in terms of responsiveness and ability to deal with the two higher levels of the chain. The underlying issue, as the Committee sees it, is the need to create balanced partnerships and a supply chain that is operating effectively and efficiently.

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15.

Dependence on powerful UK Supermarkets and Pricing Practices by Processors

15.1.

15.1.1.

The loss of premium price exports and the re-concentration by NI Processors on the UK beef market have combined to depress prices. Lack of competition for Northern Ireland beef is the biggest single factor in relation to price.

15.1.2.

Northern Ireland producers are unjustifiably at the bottom of the UK price league and the UFU believes this has enabled the industry to capture a much larger share of the UK supermarket trade.

15.1.3.

The present price for grade structure is not defensible and must be fundamentally overhauled to reflect the real value of the carcass.

15.2.

NIAPA states tha^t:

15.2.1.

Producers cannot cover production costs plus a guaranteed profit margin under the present system.

15.2.2.

It is convinced of the operation of a cartel although it has no proof of this.

15.2.3.

Competition is essential, including that of live shipping.

15.3.

NBA states that:

15.3.1.

The narrowing of the beef market to UK-only outlets since the onset of the BSE crisis has decimated farmers' incomes and also undermined the relationships between farmers and beef factories to a degree that can only be described as corrosive.

15.3.2.

The opportunity presented by Low Incidence BSE status must be grasped to reverse this situation by placing as much beef as possible in high priced EU and GB markets. Direct measures should be taken by Government and others with grants as needed to facilitate this development.

15.3.3.

There has been a constant differential of ten to twelve percent in prices between GB and Northern Ireland since the beginning of 1999. They conclude that NI prices are un-competitive and assert that the market price in NI is regulated by tactical buying of ROI cattle by the processors to soften the NI market.

15.3.4.

It believes that the current slaughterers' carcass grid system obscures what should be simple pricing messages and inter-plant price comparisons and that a simpler system should be installed.

15.3.5.

It advocates a DARD production costing system to enable the many small farmers to judge their cost/offered price ratios and be a basis for controlling the increasing tendency of processors to sell beef at or below production cost.

15.3.6.

NBA also seeks encouragement of more mart selling of finished cattle to provide another element of competition.

15.3.7.

NBA urges the development of an organised approach by finishers to the marketing of finished cattle to GB factories. They assert that price premia per head after all costs should be over £30.

15.3.8.

The NBA asserts that there is strong evidence of a successful purchasing cartel inside Northern Ireland and that it has been in existence for almost twenty years. It further asserts that the effect of this alleged cartel is such as to make any effort to create an organised producer element of the supply chain worthless. All of NBA's responses to the specifics of producer co-operation must be read in this light. Specific arguments used by NBA to back up its assertion of a cartel are included in the detailed evidence elsewhere in this report.

15.4.

15.4.1.

Claims that LMC grading is biased in favour of processors are unfounded and that in practice any bias is in the producer's favour. LMC grading is done on behalf of and monitored by EU experts as well as being supervised by the Department.

15.4.2.

The Office of Fair Trading has examined the allegations of a cartel in beef purchasing and their enquiries have not revealed sufficient grounds to conduct an investigation into the allegation.

15.4.3.

Beef profitability at present is such that, if a beef farmer is to earn the average industrial wage of £16,000 per annum from the enterprise, then the farm could not justify a land value of more then £1,000 to £1,500 per acre. Land prices are three to four times this level, rendering beef production incapable of financing land, buildings or other major asset purchases.

15.5.

NIMEA states that:

15.5.1.

It had satisfied the Office of Fair Trading regarding allegations of a cartel.

15.5.2.

Prices, denominated in Euros, have in fact not fallen since 1995; the drop in real terms has been due to the change in Sterling/Euro exchange rates in the meantime. Beef farmers only obtain half of their returns from the market and the rest (the subsidy element) is also denominated in Euros and has been equally affected when paid in Sterling.

15.5.3.

The industry's achievement in replacing export markets with new market penetration in GB is commendable.

15.5.4.

It refutes the argument that there is a price differential between NI and GB once everything is taken into account.

15.5.5.

The similar prices in NI meat plants is evidence of strong competition.

15.5.6.

Grading is an EU scheme policed by DARD and audited by Brussels. Any bias that exists has been in the producers' favour.

15.5.7.

NIMEA does pay for quality but is examining the question of sharpening these incentives with farmers' representatives. There are conflicting signals at present due to different approaches.

15.6.

DARD (The Minister) states tha^t:

15.6.1.

The Department does not see how there can be exploitation of the primary producers if excess profits are not being made by the retailers It is, however, acutely aware of the difficulties the primary producers are facing and the huge fall in their incomes. Those at the bottom of the food chain very often get the raw end of the deal when conditions deteriorate.

15.6.2.

The Department has no evidence of exploitation of primary producers by processors. A recent study in the Republic of Ireland came to the same conclusion and economists in the UK have found retail prices reflecting farm gate prices. Nevertheless, if there is exploitation properly verified by the OFT, the Department would treat it as an extremely serious matter.

16.1.

UFU states that:

16.1.1.

Improved co-operation throughout the entire food chain is imperative. It is the producer who faces the biggest challenge. The ongoing success of United Dairy farmers shows what can be achieved.

16.1.2.

Beef starts from such a low base of co-operation that achieving a fifty percent participation is too big a leap. The process should start with support for smaller market-orientated producer groupings.

16.1.3.

With regard to pricing the top tiers of the supply chain are in positions to adopt a 'take it or leave it' attitude to the tier below. The producer has to live with the result as the last and weakest member of the chain.

16.1.4.

Creating a successful co-operative producer link in the supply chain needs very significant resources. The Department granted £900,000 to assist in the setting up of UFIL, now incorporated into Linden Foods. Similar levels of assistance would be helpful in this case.

16.1.5.

UFU has members who would be both capable and willing to lead as they have in United Dairy Farmers. It would be important too that all participants had a financial stake in the enterprise. In the present situation of farm debt the amount invested would be constrained.

16.2.

NIAPA states that:

16.2.1.

It fully supports a co-operative system which must include suckler farmers as well as finishers. However, there are issues about finance, operations and making the best use of other organisations, for example, the LMC and the pig forum.

16.2.2.

Any major initiative is going to need suitable personnel who will be there to achieve focus and objectives.

16.2.3.

NIAPA's role would be robust selling and pro-active support. It does not have the funds to give the support necessary for any major new initiative. A feasibility study would be advantageous.

16.3.

NBA states that:

16.3.1.

The ability of processors to impose low prices stems mainly from the dominance of the UK supermarkets and the processors' own ability to act in concert. If there is a cartel, a co-operative approach will be thwarted.

16.3.2.

Profit will only be re-introduced into NI beef finishing if more beef can be sold at a retail premium elsewhere in the UK or on export markets. This will be made much easier if beef is branded.

16.3.3.

Although NBA is attracted to the idea that producers could take more control of the supply-side by co-operating, it is cautious following the failure of the Welsh Department of Agriculture to gain even minimal support for a similar initiative. Beef and pig sectors should be kept separate in any such initiative.

16.3.4.

A co-operative would need to secure the movement of beef to premium markets. It commends the Albert Heyjn initiative to the Committee as an excellent example of what is needed.

16.3.5.

It would only recommend significant investment in such a co-operative if there were proof of a lack of collective purchasing activity between processors. Success would depend on a combination of numbers, discipline and loyalty (to the co-operative). A financial stake in processing profits would help here.

16.3.6.

It would be prepared to take part in a feasibility study for a co-operative.

16.3.7.

Commercial partnerships between producers and specific factories without the intervention of a co-operative could perform the same function for the farmer.

16.4.

LMC states tha^t:

16.4.1.

It would support a co-operative development, but that this should be open only to producers of premium cattle. LMC is already supporting local groups of this type. A co-operative should be open to all in principle but should not undermine its credibility by actually including producers who are not committed to producing to the highest quality standards.

16.4.2.

LMC quote the Quality Beef Initiative in the North West as a good example where DARD Beef Development Advisors are working with LMC to offer a range of technical and marketing support to a co-operative venture.

16.4.3.

It would recommend such an initiative to farmers and also recommend that they be prepared to invest several hundreds of pounds a year if it is to be successful. On balance it would be better to deal with pig-meat through a separate organisation should co-operation be done for both species.

16.4.4.

The main impediment lies in the independent culture of our farming community when it comes to running their businesses.

16.4.5.

Such an initiative could improve carcass quality and reverse the £20 million per annum farmers are losing by allowing conformation and grade of cattle coming forward to deteriorate.

16.4.6.

A strong producer group could substantially close the gap in price between NI and GB. This gap is currently estimated to be worth another £20 million per annum to Northern Ireland producers.

16.4.7.

Such an initiative would be unlikely to have much influence on end prices from our existing customer base in the absence of branding. It might influence positively for the producer (at the expense of the processor and/or retailer) the distribution of the margin available from the chain.

16.4.8.

It is unlikely that such an initiative would have a direct influence on where beef is finally sold. If it produced a greater percentage of E, U & R grade cattle they are more likely to reach the premium markets where they are needed.

16.4.9.

Success will depend on setting robust quality standards and being willing and able to train those who want to attain them.

16.5.

NIMEA states tha^t:

16.5.1.

It would welcome in principle any development that removes the fragmentation of the supply chain. Over fifty percent of the ROI beef industry had been owned by farmer co-ops in the 1970's. That is now less than five percent. It would be wise to look at these examples.

16.5.2.

NIMEA has no aversion to the development of a supply chain relationship. Producers must play a large part in the thought processes and be creative in producing it. There are few ideas. Successful examples tend to come from areas such as poultry and pig-meat where there is a free market.

16.5.3.

NIMEA has expertise in meat processing rather than in supply chain relationships of that length. Nevertheless they would be happy to bring other ideas to the table.

16.5.4.

As far as NIMEA is concerned, ninety five percent of farmers, while they are not happy with their return, find their relationship with the industry has never been better. There are big concerns but no antagonism.

16.5.5.

The real problem is the strength of Sterling and Government allowing meat imports.

16.5.6.

NIMEA members have invested a lot in producer groups. One company has three and a half thousand members who are serviced by a team of four advisors. It provides subsidised computers and generally assists in the production of better cattle. NIMEA is willing to get involved in anything that is better than that. These producer groups are essential to provide traceability and quality assurance for NIMEA customers.

16.5.7.

The Northern Ireland farmer has never been willing to fully endorse the co-operative system and still wants his independence.

16.6.

DARD (The Minister) states tha^t:

16.6.1.

The Department is very supportive (in moral, practical and financial terms) of producer co-operation and of encouraging collaboration in marketing initiatives within the food chain and works extensively with the industry in this field. This applies to all sectors of the industry. The Minister is seeking to increase the resources which can be devoted to this and will respond positively to coherent proposals from the industry in relation to co-operation.

16.6.2.

The Government should not impose co-operation. Its role is to help develop initiatives that will have a positive impact. Truly successful producer co-operation must avoid engaging in a power struggle, but embrace the concept of partnership with processors and retailers. This is the Department's approach.

16.6.3.

The real answer is to build a partnership along the chain to create an awareness of market requirements. This is what DARD are currently doing.

17.1.

UFU states tha^t:

17.1.1.

BSE has, without doubt been the main contributing factor to the current crisis together with the double impact of the strengthened pound against the Euro and other national European currencies. The strong pound both lowers the value of EU direct payments to producers and their potential returns from beef exported to EU markets.

17.1.2.

It is imperative that BSE "Low Incidence" Status be obtained for Northern Ireland as early as possible.

17.1.3.

The UFU draws attention to Government's unwillingness to draw down all available packages of agri-monetary compensation and to provide matching funds where possible. This has unnecessarily exposed beef producers to fluctuating exchange rates.

17.1.4.

It also points out that Government's slowness in making direct payments has added un-necessarily to farmer's cash flow difficulties.

17.2.

NIMEA states tha^t:

17.2.1.

The formerly premium priced EU markets are now less profitable for NI beef exports than GB supermarkets because of the currency impact.

17.3.

DARD (The Minister) states tha^t:

17.3.1.

Many of the difficulties facing the industry originated with the BSE crisis. Although consumption has largely recovered, there are many lasting side-effects relating to the stringency of controls, thirty-month slaughter and onerous conditions applying to exports.

18.1.

UFU states tha^t:

18.1.1.

Payment differentials for cattle grades need to be fundamentally overhauled. Producers in NI have been penalised heavily in recent years by this unfair payments structure which clearly has not rewarded producers properly for the true quality of their livestock.

18.1.2.

It is an accepted fact that the quality of the beef herd has deteriorated mainly due to the influence of the dairy herd on the suckler cow population. Equally, it is essential that a system that pays producers a proper return be established.

18.1.3.

Since the onset of BSE a lot of people lost heart in breeding and decided to sell the best heifers and keep the worst for breeding because they were not worth anything anyway. As cows they were worth something under the thirty months scheme. We are reaping the rewards of that.

18.1.4.

UFU has been trying to get the powers that be and the meat plants to pay better for higher quality. They find it very frustrating that the meat plants would not talk to them for fear that the OFT would say they were price fixing. The OFT reported back in early 1999 that there was no case to answer.

18.2.

NIAPA states tha^t:

18.2.1.

Herd quality has been deteriorating as a result of the Holstein influence.

18.3.

NBA states tha^t:

18.3.1.

Carcass conformation is deteriorating due to the overwhelming use of the Holstein cow in the dairy herd.

18.3.2.

Post BSE pessimism has led many breeders to stop buying specialist bulls turning instead to retained three-quarter beef own-bred bulls.

18.3.3.

It is ready to co-operate with DARD and the LMC in staging winter evening meetings to reverse this trend.

18.4.

LMC states tha^t:

18.4.1.

The lack of suitable cattle for premium export markets is the single greatest obstacle to our successful re-entry. The current Livestock Breeding Initiative developed by DARD in conjunction with LMC is an attempt to address this.

18.4.2.

Perceived quality of beef involves quality parameters throughout the supply chain. To the markets served by the LMC this includes farm quality assurance, quality of animal and product traceability, cattle/carcass quality, hygiene quality, service quality and eating quality. In most of these aspects the major customers perceive and inform LMC that Northern Ireland is at the high end of the quality spectrum.

18.4.3.

There is a major adverse impact on carcass quality deriving from the high proportion of dairy cows in the herd. Scotland, with thirty two percent of dairy cows in 1999, had seventy percent of its cattle graded as E, U or R. In Northern Ireland with a forty eight percent dairy cow percentage the E, U or R percentage was only forty-two percent. Scotland is a major competitor at the premium end of the market.

18.4.4.

Grass fed steer beef is recognised as a superior product in European markets.

18.4.5.

Northern Ireland's superior traceability and Farm Quality Assurance Schemes are being emulated elsewhere and the terms are being devalued as a result.

18.5.

NIMEA states tha^t:

18.5.1.

There is a massive amount of evidence that herd quality has deteriorated. The animal is now a subsidy earner rather than a quality end product. Over forty percent of the animals emanate from the milk herd which has gone to extreme Holstein breeding.

18.5.2.

From the integrity of FQAS production and the quality of service of processors the quality score is at the top of the scale. However, for carcass quality the score is around or below the mid-point on any scale.

18.5.3.

Market led research and feedback to producers can do much to counter the downward trend and a ten-year market-led strategy involving all the parties is needed.

18.5.4.

Australian five star beef carries a money-back guarantee anywhere in the world. Northern Ireland farmers are a long way from that and must work toward that sort of peak in the long term.

18.6.

DARD (The Minister) states tha^t:

18.6.1.

It is not for the Department alone to secure an improvement in beef quality; producers, processors and the LMC all have a role to play. The Livestock Breeding Initiative is already in operation involving the Department, AI services and the LMC. Progress is being made. Another project involving herd genetics has also been commissioned.

19.1.

UFU states tha^t:

19.1.1.

It fully accepts the rationale behind branding and the extension of the "Greenfields" brand. In spite of the possibly high cost there is definite merit in exploring the proposal further and even considering a "Northern Ireland Food" brand.

19.1.2.

Everybody in the industry needs to explore the branding concept. This industry has a big Department with a lot of expertise and this sort of thing is in their remit. If a Europe-wide brand was introduced across Europe it could attract money to promote it. It is a pity that agriculture doesn't have a brand as distinctive as Bushmills Whiskey. A branding initiative could be led by the Red Meat Strategy Group or by the Minister's new Vision Group.

19.2.

NIAPA states tha^t:

19.2.1.

Branding is the most consistent way of maintaining market share and possibly giving an enhanced premium. Greenfields was a classical example. If it could be demonstrated to be so financially beneficial then farmers would be willing to invest, subject to seeing a return. Processors should share the cost.

19.3.

LMC states tha^t:

19.3.1.

It anticipates that successful development of export markets will create the competitive environment necessary for producers to receive an equitable return.

19.3.2.

Market research is under way to select the most logical targets from a "World-Map" of beef. Findings are being disseminated to processors and we have already investigated five countries in detail. The programme has already been agreed in the Red Meat Strategy. Implementation has been greatly frustrated by the continued export ban.

19.3.3.

LMC's ability to source more E, U & R grade cattle is a pre-condition for success. The weakness of the Euro is a major obstacle at present.

19.3.4.

Branding is a complex process within which naming and promoting the product are but two parts. A branded product has to be carefully created to satisfy particular customer needs. Above all, the product has to deliver 100% consumer satisfaction from the outset. Not all NI production could meet the specification.

19.3.5.

The branding of NI beef in a number of markets is both possible and viable. There are no fundamental objections to branding in the industry but there are concerns about cost and who would pay. Processors who are profitably supplying retailers where there is no demand for a brand have no commercial incentive to promote a Northern Ireland brand.

19.3.6.

The danger of retailer substitution of cheaper imported beef has to be of very real long term concern to beef producers. However, it is unlikely that the next round of world trade talks will totally expose European markets. There are logistical difficulties in bringing fresh produce from the southern hemisphere and carcass quality would take some time to align with the market.

19.3.7.

There is absolutely nothing to protect Northern Ireland beef from a decision to switch sourcing by the supermarkets other than anxiety on the part of retailers to be seen to be supportive of locally-produced beef. Such a move need not have major implications as Northern Ireland processors could easily use raw material from any part of the world. It has serious strategic implications for primary beef production in Northern Ireland, and how the industry addresses this will determine the long term viability of beef production in this particular region.

19.3.8.

This is the fundamental reason for LMC supporting the concept of branding - as a defence mechanism for Northern Ireland producers.

19.4.

NIMEA states tha^t:

19.4.1.

The short answer to the question "does the future lie in well-chosen European supermarkets?" is "No". The future lies in dealing with the bigger UK supermarkets which are the highest-priced outlets in the EU. All available quality grass-fed steers are currently being marketed to GB retailers. Any niche markets in the EU would have to be supplied at the expense of the premium markets in GB.

19.4.2.

There is no bigger marketing blunder than to sell something which cannot be delivered consistently, fifty-two weeks a year.

19.4.3.

The beef ban has not been lifted. Even with Low Incidence Status it will only be eased further and this is what makes these niche markets very nervous. It is correct to assume that the Northern Ireland meat industry will engage in vigorous attack of those markets when the low incidence clear is given.

19.4.4.

Only 43,000 steers in last year's kill of 215,000 were export eligible. Premium markets demand Farm Quality Assurance standards as a minimum, yet one quarter of beef farmers choose to stay outside the Scheme. In ROI this is being made a statutory condition of farming livestock. Perhaps the NI Assembly should follow suit.

19.5.

DARD (The Minister) states tha^t:

19.5.1.

The Department is striving to achieve low BSE incidence recognition and a relaxation for Northern Ireland beef exports. The £2.5 million already provided to support the Red Meat Marketing Strategy will be augmented with £500,000 under the Agenda for Government.

19.5.2.

The industry faces marketing challenges relating to consumer taste and lifestyle changes, changing market structures and the need to strive for higher quality. The Vision Group of industry experts will be addressing these issues.

20.1.

DARD (The Minister) states tha^t:

20.1.1.

A partnership approach is needed right across the chain where each link recognises that it is dependent on another. The Department would also say to the processors that if they squeeze out the primary producers they will not have a ready source of raw materials.

20.1.2.

The Department is fully committed to the principle of building partnerships both vertically and horizontally and there are many examples of this in practice. The Department will not impose co-operation but does not favour creation of co-operation between producer groups to strengthen their marketing as this could backfire. However if there is a demand from the producers for one producer group the Department would co-operate.

21.1.

DARD (The Minister) states tha^t:

21.1.1.

The Department's responsibilities are wide, embracing rural development, the rural community and the farming community and, of course, responsibilities to the taxpayers and consumers.

21.1.2.

In recent years producers have received £200 million per annum in direct payments and £100 million per annum in indirect payments. The processors have received £5 million per annum. It is wrong to claim that the emphasis is biased. All links in the chain require focus.

21.1.3.

The Vision Group is looking at how the viability of all sectors can be maintained by continuing to provide both advisory and financial and technical assistance where this is needed. The Department's role is to build an integrated approach rather than pit one part of the chain against another in what could be a pointless and self-destructive battle for control. It could backfire given that processors could decide to source their produce from elsewhere.

21.1.4.

The Department is concerned about any structural weakness and agrees United Dairy Farmers is an example which is working, though one created in totally different circumstances. Not all milk producers are members.

21.1.5.

The Department does intervene in the market by advising, enabling and helping producers to become more competitive in a changing market and is seeking an extra £500,000 for a market development scheme. This could include direct assistance, including the secondment of staff, to producer groups as in the past. However the Department has no evidence that a large scale co-operative is the right approach.

21.1.6.

The Department has a responsibility to make clear to the processors what steps they need to take to comply with EU regulations. This advice may lead to extra costs which may be passed back to the producer as part of the operation of the food chain.

21.1.7.

Meat inspection costs are not charged out to the plants at the full rate nor does the Department charge for all the other activities conducted at meat plants.

21.1.8.

There has been mistrust in the chain between processors and primary producers and the Vision Group is promoting sensible and open dialogue on the subject. Getting that relationship right is crucial.

TOP

In considering the evidence before it the Committee addressed each of the main issues as outlined in Section 2 above.

22.1.

There is no doubt from the evidence taken at the earlier stage in our work, and during the period since that the Northern Ireland beef industry is greatly affected by the market power of the UK supermarkets.

22.2.

On the positive side the success of the industry in winning increased market share with these top retailers is greatly to be commended. With European exports closed what could have been an unmitigated disaster has been converted into a strong market position with arguably the best retail outlets in the world.

22.3.

Even with the export markets beginning slowly to become available the strength of the pound is such as to make these outlets more profitable for processors than the alternatives immediately available in Europe. This could of course change, and quickly.

22.4.

Having an excellent market for beef is not the same as being paid a fair price. There is a strong belief on the part of all farmers' representatives that Northern Ireland farmers are being paid consistently less than their GB counterparts for essentially the same product. The tone and content of all the evidence taken from farmers' representatives indicate deep levels of dissatisfaction with a situation where their major partners (the processors and retailers) appear to be making good profits from beef whilst they are working at or below production cost. There is little evidence of trust between the farmer and the other parties. Representatives of the processors deny that this is so. The Committee does not agree. The Committee believes that what the processors see as trusting behaviour is that of suppliers who are utterly dependent on them for their livelihood. Compliance where there is no option but to comply is not the same thing as trust.

22.5.

This is serious at two levels. First, farmers are trapped in a market place which is unable to yield them a fair return for their investment and labour. Second, the kind of relationship needed to make a healthy supply chain is denied to the industry because of the mistrust that is created by feelings of exploitation. Whether these feelings are well founded or not, the Committee is certain that they are genuinely held by those who have given evidence.

22.6.

This evidence is, in a general way, strongly corroborated by the findings of the Competition Commission when they say:

22.7.

Furthermore, the market power disparity between processors and farmer suppliers makes it possible for the Northern Ireland processor to pass all such charges back to the farmer through the price paid for livestock. All the evidence received leads the Committee to believe that this is the case.

22.8.

Thus the market power of the Supermarkets is not only plain for all to see, it is also, according to the Competition Commission, provably being used systematically to add to the benefits gained by the normal terms of trade.

22.9.

Given that the large supermarkets not only dominate their suppliers but also collectively dominate the UK retail beef market they have the power collectively either to raise or lower the retail price of beef at will. They could, if they were so minded, take account of the effects of current pricing regimes on the beef farmer's ability to survive and would have the power to act. This has already begun to happen with milk production in GB.

23.1.

We have had it put to us that there is a cartel in operation by the processors. As noted earlier the Committee has no power to investigate such allegations. It has, nonetheless, listened to these allegations and to the equally vigorous protestations to the contrary by NIMEA. The Committee accepts the primacy of the Office of Fair Trading in responsibility for investigating this matter and, as the OFT is considering a complaint at the time of this Report, it would be unhelpful to comment further. The Committee agreed, however, that it would facilitate the OFT consideration in every possible way.

23.2.

That there is deep mistrust between producers and processors is not in doubt. It is caused, in our view, by several things:

• the massively strong buyer power of the processors relative to the market power of the individual farmer. In this situation the farmer has no option but to take what he is offered for his livestock;
• the lack of practical options for sale open to most farmers. A few farmers have shipped cattle to GB and have done better there. For practical reasons this is not open to all;
• a payment for carcass quality system which, in the view of all on the producer side, does not adequately reflect the value differential across the grades; and
• the belief that processors have remained profitable throughout the period of deep crisis for the farmers.

23.3.

The net result of these four factors operating together is to feed and deepen mistrust.

23.4.

However, the Committee also accepts that the market power differential between processor and retailer means that the basic price on offer is, in fact, determined fundamentally by the retailers.

24.1.

All parties agree that improved co-operation throughout the food chain is a requirement for a successful industry. Most see the need for more collective efforts in such areas as herd improvement.

24.2.

The Committee sought views on the proposition that the formation of a co-operative approach to beef production could be a vehicle for repairing a badly broken supply chain. It would also be a means for farmers to negotiate, on a more equal footing, with processors and others on how to create a more professional and responsive supply side. It would additionally lead to a more equal balance of market strength between producers and processors.

24.3.

On the whole the producer side was keen on the principle but somewhat wary of how to make such a thing happen. This is based on scepticism about the reaction of processors on the one hand and an equal scepticism about the propensity to co-operate on the part of farmers. NIMEA expressed its willingness to co-operate with such a development although it shared doubts about its feasibility. The LMC view was more positive, both in principle and about the practice, and suggested that any co-operative should be limited to those producers willing to meet all the requirements of quality production.

25.1.

All are agreed that much of the problem of farm debt stems from two other fundamental causes, the BSE ban and the strength of Sterling.

25.2.

The BSE ban has closed off the competitive element in marketing and has left the industry in the hands of a few major retailers in one country.

25.3.

The strength of Sterling has had a major impact on beef farmers by slowing the potential re-opening of premium market niches in the EU. It has also depressed the value of Euro-based direct payments. According to NIMEA the former profitable EU niches are now less profitable than markets within GB.

26.1.

Northern Ireland beef has a high reputation for quality. The best of our grass-fed steer beef stands comparison with any competing product in terms of farm quality, traceability, hygiene, service and eating quality.

26.2.

The problem lies in the deterioration of the conformation of the beef herd. There are several reasons for this. The "Holstein effect" of the almost fifty percent of dairy cows in the herd is the primary problem. This has been exacerbated by pessimism among many farmers whose determination to keep improving their beef herds has been dampened by poor market returns. This tendency has been exaggerated by the lack of incentive in the ratio of final price to produce quality. The fact that over half the return does not come from the market does not help. The Committee is concerned to see this downward trend in herd quality reversed.

26.3.

This problem will cause market failure if not remedied and must be resolved if we are to successfully penetrate markets with high demands for quality cattle.

27.1.

The Committee heard evidence on two linked elements of marketing strategy. Both are based on the belief that Northern Ireland grass fed beef is a superior product when compared to non-grass fed competing offerings from Europe and beyond.

27.2.

The evidence supports the hypothesis that when market conditions permit we should open up new European markets where discerning customers will pay a premium for this product. However while Sterling remains at its present level the opportunities will be more limited than formerly.

27.3.

Equally there is across the board support for the principle of protecting the place of our beef in any new market by selling it as a branded product. This would do two things. It would create the possibility of a price premium if the quality warrants it. More important, it would greatly hamper any tendency on the part of the retailer to substitute product as happened to pork recently.

27.4.

There is less certainty about how a branding exercise should be funded.

28.1.

It emerged, as the Committee took evidence, that the processors are reasonably content that they have meaningful partnership arrangements through their producer groups. These are aligned in the main with particular retailers and appear to satisfy the needs of these customers for such things as traceability, farm quality assurance and the like.

28.2.

The producers, although not commenting adversely on these specific arrangements, are clearly not behaving as if they were equal partners in a venture with which they are happy. We heard no evidence pointing to meaningful contractual relationships with two-way undertakings to deliver on quality or price. These are not real partnerships in the normally accepted commercial sense.

28.3.

It is our view that much needs to be done to create meaningful partnerships where the two parties feel equally empowered by the relationship. Current arrangements seem to the Committee to be unacceptably one sided.

29.1.

The Committee was pleased to be able to engage in a constructive dialogue with the Minister regarding the role of the Department across the spectrum of relevant issues.

29.2.

The Committee welcomes the Department's willingness to explore the possibility of creating a large-scale producer co-operative and willingness to support initiatives of this kind in practical and financial terms. We agree with the Minister when she says that nothing should be imposed on the industry. This Committee would not suggest either, that any major initiative be embarked upon without carefully studying its feasibility first. We have taken the idea to the industry and are satisfied that it has sufficient merit and acceptance as to warrant such a study.

29.3.

We note the Department's analysis of the background to the current crisis and acknowledge that it shares our concerns. We endorse the Department's continuing efforts to push through the Beef Exports initiative and it's funding of marketing initiatives. We look forward to dialogue with the Department's Vision Group and hope that our work here will be of assistance to them.

29.4.

The Minister argued strongly that in the absence of evidence this Committee could not lay blame at the door of the retailers for low returns. We cannot accept this. First the Competition Commission cite fifty-two areas where these supermarkets have abused their market power to impose requirements on their suppliers. The Committee believes it is reasonable to conclude that the base price might be similarly imposed. What is beyond dispute is that the beef producer has no option but to accept the price offered by the processor. The supermarkets maintain that they are reflecting farm-gate price movements in their store prices.

29.5.

There is a difference, however, between profiteering and exploitation. The Northern Ireland beef farmer feels exploited and all the evidence relating to farm income points to this as a possibility. Equally, there is no doubt about the power of the UK supermarkets to dictate prices. The supermarkets in GB have recently admitted that their retail pricing of milk was causing undue pressures on farm profitability. We are simply arguing that the same is true for beef.

29.6.

We also agree with the Minister's point that creating confrontation would solve nothing. There are plenty of examples of this kind of short-sighted approach. But there are plenty of examples too of positive, market-led co-operation which leaves everybody a winner. Size does not need to mean belligerence, but it could mean efficiency, progressiveness and economies of scale for the processors.

29.7.

The Committee accepts entirely that DARD has primary responsibilities to both the farmers and the consumer and is not suggesting that the Department should become restricted in its focus. However, accepting the need to be cognisant of the whole chain, we believe that the Department cannot neglect a situation where the rest of the chain is ignoring the well being of the primary producer. This is all the more important when we take into account the huge public investment in the primary producer part of the chain. Making that link work and securing its viability is not to turn on the rest but to secure the very foundation of their existence. We agree totally that the outcome of this ought to be a real partnership to replace the tense one-sided relationship which characterises the current position.

29.8.

The Committee is pleased that the Department is fully committed to the principle of building partnerships, both horizontally and vertically, between different stages in the food chain. This is exactly what the Committee seeks. We share the Department's vision that all parts of that chain should work together for mutual advantage rather than one sector seeking unfair advantage over the other. There must be true equality based teamwork between the producer, processor and retailer to satisfy the customer's needs for quality, food safety and good value for money.

29.9.

We understand the Department's reluctance to dictate to farmers on the isue of co-operation. However we would point out that when something is in their interests, even when a measure of persuasion has been necessary, this has rightly not deterred the Department when it was convinced of the need for action in the past. The farmers did not ask for APHIS or for the Farm Quality Assurance Scheme, both cornerstones of the industry's image of superior quality. We do of course accept that there is a need to be sure of the efficacy and feasibility of any new initiative before pushing ahead. In short we are endorsing the Department's track record as a leader and moulder of industry opinion and a catalyst for beneficial change.

29.10.

In that regard we are glad to hear of the Department's quest for additional funds for marketing development schemes for application to this area. We are pleased too to hear that the Department has quite a degree of flexibility in how it can assist farmer groups strengthen their marketing position and that in the right circumstances this could include the secondment of staff, as they have done in the past.

29.11.

We are glad too that the Vision Group has confronted the issue of mistrust between farmers and processors.

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30.1.

It is clear to the Committee that the issue of farm debt in the beef sector has several fundamental causes, some outside the control of the parties in Northern Ireland and others capable of being remedied.

30.2.

The whole industry and the Department will have to continue working together to make a significant impact on the current situation.

30.3.

The Committee, after hearing all the evidence, is convinced that the following conclusions are borne out by the totality of the evidence before it.

31.1.

The continued exclusion of Northern Ireland beef from formerly lucrative markets in the EU is a matter of the utmost strategic importance to an industry which requires the stimulus of market competition to restore prices.

31.2.

The current exchange rate with the Euro of course greatly reduces the opportunities referred to at 31.1 and this is further exacerbated by the UK Government's reluctance to take advantage of the agri-monetary arrangements which exist to alleviate the effects of adverse currency movements.

32.1.

The BSE crisis has created a situation where Northern Ireland's best beef is now being sold almost exclusively in the leading UK supermarkets.

32.2.

The industry needs to open up new markets to ensure healthy levels of competition and to exploit the superior quality of Northern Ireland grass fed beef.

32.3.

These UK retailers have great market power which they are quite prepared to use exclusively in their own interests subject only to maintaining a satisfied customer base. We have no reason to suppose that the interests of producers feature high on their map of priorities, a judgement borne out by the findings of the Competition Commission.

32.4.

These customers have market power many times greater than the Northern Ireland beef processors and can, and we suspect do, dictate prices which the latter have no option but to accept.

32.5.

The processors are immensely more powerful in market terms than the individual producer who, in his turn, has no option but to accept the offered price for his animal.

32.6.

This scenario is currently underpinned by the inability of the industry to export either live or processed beef because of a combination of the BSE beef ban and the strength of Sterling. This is further exacerbated by a scarcity of export standard animals.

33.1.

The fragmentation of producers is a serious obstacle to the creation of a modern responsive supply chain and the Committee's proposal to the industry players that a co-operative coming together of producers would be in the interests of the whole industry is widely accepted.

33.2.

There are, however, serious levels of mistrust between the producers and the rest of the supply chain which must be remedied by the creation of real partnerships. These must be based on a mutually agreed approach to supplying the market with the quantities of quality product needed, at the right time and for mutually agreed prices.

34.1.

The beef herd is deteriorating in conformation quality because of a combination of the lack of sufficient quality related monetary incentives from the processors, the impact of over fifty percent direct payments per animal from government and the impact of the nearly fifty percent Holstein input from the dairy herd.

34.2.

Although this issue has been clear for five years and was highlighted in the 1996 Red Meat Strategy, little impact has been made on the problem to date. However a recent DARD initiative and the announcement of a further £300,000 for the Beef Quality Initiative is to be welcome^d.

35.1.

The Committee concludes, in light of all the evidence, that the Department cannot, in the public interest, continue to remain on the sidelines in relation to the inequalities which are so obviously a feature of the existing supply chain. This chain is being subsidised by significant subventions of public money. Furthermore, part of the intention of this money is to maintain the viability of beef farming. This is clearly not happening. The market power imbalances we have had so vividly illustrated to us cannot simply be left to continue as they are. Our consideration of all the evidence compels us to believe that the massive superiority of market power of both processors and retailers has led in large measure to the impoverishment of beef producers.

35.2.

We are not recommending that Government enter the market in any way or that the Department interfere directly in market mechanisms. On the other hand the Department cannot afford in the public interest, nor in the interests of its own investment in farming, to be mere spectators as the produce of Northern Ireland beef farms is profitably processed and marketed in the absence of an acceptable return to the farmers.

35.3.

It is therefore the duty of the Department to facilitate the re-balancing of this supply chain in such a way that the interests of the consumer and the farmer are both accommodated to those of the retailer and the processor. The EU's cheap food objective needs to be in proper balance with the other aim of ensuring that beef farmers can sustain their businesses.

35.4.

The Committee also believes that the Department has a crucial and leading role to play through its various agencies, in facilitating the reversal of the continual decline in herd quality which has characterised the past few years.

36.1.

The industry should continue to strive to keep at the forefront of perceived quality by being vigilant in relation to competitive attempts to emulate or improve on such features as farm quality assurance and traceability.

37.1.

The industry should also develop one or more brands to ensure that once its product has achieved high levels of customer satisfaction and loyalty that this loyalty is to the Northern Ireland product. Otherwise it will be perpetually prone to the kind of substitution which has recently characterised pig-meat in Great Britain.

37.2.

This is not a simple matter when several processors are involved, nor is it trivial in terms of its cost. However branding is the only bulwark against the risks of product substitution at some future date, creating as it does consumer loyalty to the specific producer's product as opposed to loyalty to that of an intermediary.

38.1.

Farmers should look beyond their present difficulties and become even more positively involved in creating their own future by responding to the recommendations we have made in this report.

38.2.

The Northern Ireland beef industry has the capacity to become a true European market leader, albeit a niche player because of its relatively small size. The Committee urges the Department and the farmers urgently to do what is necessary to create a supply side with the capability to meet this aspiration and to be able to work as equals with a processing sector which has already proven its capability in this regard. The Department and producers should work together towards the creation of a well organised series of producer/processor partnerships based on trusting relationships, parity of market power and branding. There should be a Department-led strategy for the creation of these conditions and to achieve the herd quality on which everything in the end depends.

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Mr N McLaughlin - Vice-Chairman

Mr J Carmichael - Development Officer

Mr D Rowe - President

Mr C Pogue - Chairman-Pigs Committee

Mr K Sharkey - Chairman-Cattle and Sheep Committee

Mr H Marquess - N.I. Chairman

Mr T O'Brien - Vice-Chairman

Mr A McKevitt - Secretary

Mr W Gordon - Council Member

Mr D Rowe - President

Mr W Aston - Commodities Director

Mr C Pogue - Chairman-Pigs Committee

Mr M McCoy - Chairman

Mr N McLaughlin - Vice-Chairman

Mr J Carmichael - Development Officer

Mr R Foster - Chief Executive

Mr H Marquess - N.I. Chairman

Mr T O'Brien - Vice-Chairman

Mr A McKevitt - Secretary

Mr D Rutledge - Chief Executive

Dr M Tempest - Agriculture Manager

Mr P O'Neill - Marketing Manager

Ms B Rodgers - Minister of Agriculture and Rural Development

Mr P Small - Permanent Secretary

Mr P Toal - Deputy Secretary

Mr C Mathers - Chief Executive

Mr C Duffy - Chairman

Mr R Moore - Joint Managing Director of Linden Foods

Mr C Tweedie - Director of Dungannon Meats

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Northern Ireland Agricultural Producers' Association (NIAPA) Annex A

Ulster Farmers' Union (UFU) Annex B

National Beef Association (NBA) Annex C

Ulster Farmers' Union (UFU) Annex D

Northern Ireland Agricultural Producers' Association (NIAPA) Annex E

National Beef Association (NBA) Annex F

Livestock and Meat Commission (LMC) Annex G

Department of Agriculture and Rural Development (DARD) Annex H

Northern Ireland Meat Exporters' Association (NIMEA) Annex I

Livestock and Meat Commission (LMC) Annex J

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MEMORANDA WERE RECEIVED FROM THE FOLLOWING ORGANISATIONS PRIOR TO THE REVIEW OF THE INQUIRY'S TERMS OF REFERENCE

Northern Ireland Fish Producers' Organisation Ltd (NIFPO) 5 January 2000

Farmers Action 7 January 2000

Fermanagh Citizens Advice Bureau 12 January 2000

Northern Ireland Dairy Association (NIDA) 13 January 2000

Moy Park Ltd 15 January 2000

Northern Ireland Bankers' Association (NIBA) 16 January 2000

Department of Agriculture & Rural Development (DARD) 19 January 2000

Agri Plan Finance - NIIB Group Ltd. 19 January 2000

Agricredit Ltd. 19 January 2000

Anglo-North Irish Fish Producers Organisation Ltd (ANIFPO) 19 January 2000

Northern Ireland Scallop Fisherman's Association (NISFA) 21 January 2000

Northern Ireland Aquaculture Council 21 January 2000

HSBC Equipment Finance (UK) Ltd 25 January 2000

Northern Ireland Bankers' Association (NIBA) 4 February 2000

Moy Park Ltd 9 February 2000

National Sheep Association (NSA) 29 February 2000

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