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I welcome the Minister for Environment and Rural Development and the Deputy Minister for Enterprise and Lifelong Learning. We are very glad to have you with us this morning. If you read the Official Report of last week's meeting, you will know that we had a heated but useful round-table discussion with a range of participants, including representatives of farming, food production, the retail industry, consumers and the co-operative movement. We discussed some pretty difficult issues. We are keen to get your take on what more we can do to help our Scottish rural and farming communities to provide good, high-quality and affordable food. Would either of you like to kick off with a few introductory comments before we ask the questions that we have prepared?
We have with us from the Environment and Rural Affairs Department Gerry Smith, David Henderson-Howat, who is head of policy in food and agriculture, and Elizabeth Baird, who is responsible for food-related matters.
Thank you. I invite the Deputy Minister for Enterprise and Lifelong Learning, Allan Wilson, to make his opening remarks.
The committee is concentrating on the place of agriculture in the food supply chain and on the joint importance of agriculture and food and drink for rural development. The importance of the sector is emphasised by the fact that food and drink manufacturing employs one in five manufacturing employees. It has a gross output of approximately £6.5 billion a year, and contributes approximately £2.8 billion to exports.
Thank you. I will open up the discussion to members' questions and comments. Everyone wants to speak, but Richard Lochhead caught my eye first.
The crux of the issue that the primary producers—in other words, the farmers—have raised is that the supermarkets might be abusing their power and are certainly making their lives very difficult. They are not getting a fair return on every pound that supermarket consumers spend. Indeed, representatives of the milk sector have stated that in many cases they cannot even meet their production costs from the return that they receive.
I am interested to find that, at the outset of this very important inquiry, Richard Lochhead assumes that supermarkets are the sole cause of the problems in the food chain. I am not suggesting that supermarkets do not contribute to the problem, but I would like to see the evidence that the committee has received that shows that the problems in the Scottish milk sector are entirely attributable to them.
I am wary of turning our inquiry into an inquiry into the milk industry, although that industry is perhaps one of the better illustrations of the problems that the committee is trying to wrestle with. There is the general issue of supermarkets controlling such a large share of the market. The committee has received evidence about supermarkets changing their orders at very short notice and about the primary producers struggling to cope with those changes and the lack of a sound basis to their contracts. That makes it difficult for producers to plan ahead. It has been put to us that that illustrates the large degree of power that the supermarkets have in the marketplace, which allows them to act in that way, with the primary producers generally having no option but to give their business to the supermarkets. I am trying to pin down whether the minister agrees with that description of the situation.
We need to consider the situation sector by sector. I do not know whether the committee has received any evidence from the beef sector, for example. To my certain knowledge, it has a number of very important contracts with a range of major supermarkets, which clearly specify that they require high-quality Scotch beef that has been born, bred and reared in Scotland at prices that reflect market conditions.
To follow up on the point that Richard Lochhead made, although the evidence that we took did not suggest that there had been a problem in every farm in Scotland, it indicated that there were specific problems, especially in the vegetable industry. Practical examples of that were presented to us. Although the point was made that that did not characterise the relationship between farmers, producers and retailers overall, it was a significant problem for the farmers affected. A farmer who thinks that they have agreed a contract and, on that basis, works to produce X amount of goods at X price, but who is offered a much lower price when they come to sell those goods to the supermarket is stuck because, at that stage, there is not much point in having a pile of rotting vegetables on the farm and no money coming in. Farmers in such a position have very little choice—they have to get the goods off the farm, so they might as well sell them for much less money. That is not a satisfactory position to be in, but the last thing that those farmers want to do is to complain to the supermarket, only to be told that it will get the produce from somewhere else. In addition to the big-picture discussion—
I agree with that. We have been looking at how we can assist in the development of best practice. It is undoubtedly true that a number of fruit and vegetable suppliers have found contractual relationships difficult and that those relationships militated against their being successful. On the other hand, potato production is a segment of the market in which a great deal of work has been done to improve collaborative working among the grower, the processor, the packer and the supermarket. Arrangements have been established that have narrowed down the areas of variation within such contracts. Several potato producers have made significant progress on the total volumes that they will supply and on the de minimis prices at which they will sell, which has narrowed the variation in those contracts.
I return to Richard Lochhead's opening question, which was about the position that the Executive has been taking with UK ministers. What is your position on how the Office of Fair Trading operates in relation to food supply chains and what improvements to the supermarket code of conduct do you think are necessary? For example, do you believe that the code of conduct should be extended to apply throughout the food supply chain?
You have asked two separate questions. I have made my position on the OFT's view of the market absolutely clear. In food and agriculture—and probably in other sectors, too, but that is the sector for which I have particular responsibilities—I find it difficult, as I said in my opening remarks, that the competition authorities can define the market narrowly in Scottish terms when the production and supply companies operate in a market that is at least Europe-wide, and probably wider. If one is trying to control competition, that ought to be done at a European level, at least. That issue forms part of the discussions that I am having with Lord Bach and, in turn, with Mr Sutcliffe. It may be that the issue is statutory.
You are correct in saying that there is a great deal of complexity in the supply chain, and you seem to suggest that extending the code of conduct throughout the supply chain would make sense.
To be honest, I am more attracted to the idea of looking at the food chain as a whole rather than simply coming to the automatic conclusion that once we sort out the supermarkets, we will have sorted out the food chain. The work that we have done and my limited attempt to understand the food chain across various sectors of Scottish agriculture suggest to me that the issue is more about looking at the food chain as a whole than picking on a particular element of it.
One of the problems that was raised about the operation of the code of conduct was that farmers and processors want to remain anonymous when they make complaints. I notice that your Liberal Democrat colleague at Westminster, Andrew George, has been calling for a food trade inspector in the OFT to investigate individual cases. Do you support that? Will you lobby Mr Sutcliffe on that issue when you next meet him?
As I just indicated, I am more inclined to look at the food chain as a whole. I have not talked about this in great detail, but we have been looking at ways of bringing greater transparency to the process, and that is really what we need. One tends to need regulators—people who can dig under things beneath which no one knows what is happening—when there is a lack of transparency. Having a regulator to look at the food chain might improve transparency, but we would have to discuss the idea of having a regulator that operates across the UK, otherwise, it would not work. We also have to work much harder to get the links in the food chain working with one another so that we do not have processors picking off prime producers, prime producers feeling that they have been excluded and deals being done between producers and the final link in the chain—the supermarkets. The end result of such a scenario is that there are not many winners and a great many losers.
I would like to hear Allan Wilson's view. From an enterprise perspective, what kind of improvements should there be in the supermarket code of conduct? Should it be expanded? Do you agree with the Lib Dem idea of having food trade inspectors? Is there agreement between you and Ross Finnie?
Mr Finnie and I have a long record of working in partnership together on those matters and I look forward to continuing that relationship in my present post.
One point that was forcibly made to the committee was that although there is a lot of support for co-operative work—we saw evidence of some excellent on-going work—people wanting to collaborate have been made to take a cautious approach. Vertical integration that could have taken place has not yet done so because of the interpretation that has been made of what the OFT would say. Given the establishment of the co-operative development agency and the fact that we are keen to develop co-ops in Scotland—some have been set up in the farming sector—is there a role for the Executive in considering the co-operative development side? The evidence that we have received is that more could be done to make a case through the UK competition authorities.
That is a fair point. Richard Lochhead's criticism of us is wholly misplaced and not reflective of what we have done. From speaking to producers from both a constituency and a ministerial perspective, I know that the dairy sector recognises that Scottish ministers have been engaged in tackling its problems. I often met producers and others during my time in the Environment and Rural Affairs Department. We have been proactive in discussions with colleagues in Westminster and elsewhere in furtherance of those interests.
We may need to come back to that because we have strong evidence that we are going in the opposite direction, particularly in relation to milk.
I am not so sure. We have to be careful about generalisations.
Last week, the committee received specific evidence in writing on that.
On milk.
Yes.
Sorry, but in your opening remarks you did not say to which sector you were referring.
The point relates particularly to the milk production sector, but it has also come up in other discussions.
I understand that, but there are many complexities to the issue. In December, the price for milk that was available ranged from 17.3p to 23.4p per litre. One difficulty for the primary producer co-operatives is that the price that they were offering was at the bottom end of that price range. We can look at improving how co-operatives work, but it is not right to suggest that co-operatives are offering the best price in the market.
The specific point is that the industry wants more co-operative working.
Sorry, that is different; that is to do with collaboration.
That is in addition to promoting co-operatives in the industry. However, people have been explicitly prevented from integrating vertically. We will leave the point for the time being, but other members may come back to it.
From listening to the evidence given to us by farmers and producers in recent weeks, there is no doubt that certain sectors genuinely believe that the Scottish farming industry is in crisis, particularly in milk and red meat, for which farm-gate prices are lower than production costs. That point was made by witness after witness. With the decoupling of EU farm payments and the disappearance of the incentive to produce goods at a loss, what does the Minister for Environment and Rural Development see as the long-term future for the farming industry? Many of the people to whom we spoke believe that it does not have a future.
For the long term, over the next 10 or 12 years in which there may be some form of support, we must create an industry that can survive without subsidy. That is a challenge that we have singularly failed to address over the past 25 years; rather, we have assumed that the industry would continue to receive subsidies. We must create an industry that can produce and receive a price in an unsubsidised market. We must look on the current subsidy as assistance to the industry in getting to that point, rather than continuing to use it to distort market signals and as an income supplement. That is a huge challenge.
The point was made to us that although dairy farmers in some parts of Scotland can get out of milk production and into something else, there is no alternative in large parts of south-west Scotland. Farmers have put in new plant and can do nothing else, so they produce milk in the traditional way, but the price continues to reduce. We heard evidence that a supermarket could raise the price by 2p a litre, but by the time that filtered down to the farm gate, farmers would receive less than they did before the supermarket raised its price. What do you say to farmers who are in that position? They ask us what we can do about that; we ask you as the minister.
That describes why we have a structural problem. I believe and have said for two or three years that there is a serious structural problem, because 45 per cent of milk production goes into liquid milk, whose price is variable, and 55 per cent goes into pure commodity trading. We can contrast those percentages from farmers in the United Kingdom and particularly here in Scotland with those of their competitors in Europe, where far greater amounts of milk go into added-value products. Our European competitors are attracting higher prices for bigger percentages of the X million litres that they produce, because a larger percentage of their production goes into added-value products.
As the minister with responsibility, what can you do about that? That is the question that farmers ask.
As a great promoter of private enterprise, you will agree that the interest is in what the sector and the private investors are doing. I do not run businesses. I am surprised that you as a Conservative do not understand that, but I am always surprised at these evidence sessions.
What is the climate that you can produce?
The issue is vertical integration. That is the one matter on which I am wholly at odds with the OFT's interpretation of what constitutes a market for milk, because it is demonstrable that greater clout is needed to enter new markets and to achieve vertical integration. I have been on about that issue for some time.
I wholly endorse the minister's view that if firms are operating in a global marketplace, competition rules should be applied in that light.
Agricultural businesses, like other businesses, are entitled to take advantage of the advice services of the enterprise networks at a local level. A lot of good work is being done in areas such as Dumfries and Galloway to improve the management of local agricultural businesses and to ensure that they are equipped with the necessary skills to negotiate what is a complex marketplace.
There is a perception that the local enterprise companies sometimes do not view agriculture as a business—which it patently is. There has perhaps been something of a disconnection there in the past. Are you doing anything proactively to facilitate those connections?
At a strategic level, there is very good co-operation and collaboration between food and drink industry clusters and Mr Finnie's department and officials in the development of agricultural strategy. Agricultural business support is integral to that process. I have no doubt that the enterprise networks are working effectively at a strategic level with their counterparts in the Environment and Rural Affairs Department. At a local level, I know that a lot of good work is being done by local enterprise companies in areas where there is a particular synergy with the sector, for example in Ayrshire and Dumfries and Galloway. That depends on the LECs. We would be happy to discuss that point with the enterprise networks to ensure that they are wholly attuned to the needs of agricultural businesses. I have no evidence to say that they are not.
We have heard evidence about the importance of the Executive supporting Scottish farming through public procurement. That support is given to an extent—it is there at local government level and at grass-roots level, with small primary schools sourcing eggs locally, for example. However, we need to look more widely than that. How are you making progress in public procurement to ensure that, throughout government, from top to bottom, when food is sourced, it is sourced locally, or at least sourced from Scotland?
Our hands are not entirely free in that respect. If I have read this correctly, there are two areas where we can make specifications for Scottish produce. It is possible to specify things with protected geographical indication status. That covers a limited, but quite important, range of products, including Scotch beef and lamb, Arbroath smokies and one or two others. Secondly, we can specify to the fruit and vegetable industry that we wish to have fresh seasonal produce. Generally, European competition law does not allow specification, depending on the size and scale of the contract. We have tended to specify with regard to other value and quality issues for national health service and other larger contracts. We can specify to a limited extent, but we cannot specify that all produce must be Scottish.
Wearing your environmental hat, could you include a clause on food miles?
Not at present.
Is there any way of negotiating the inclusion of a clause on food miles?
Food miles are increasingly on the environmental agenda across Europe. However, I am not aware of any specific proposals in any dossier that would lead to what you suggest in the immediate future.
That is a great pity, because taking account of food miles is an obvious way of helping the local farming industry and addressing the environmental aspects of transport. I am surprised that nothing on any agenda anywhere deals with that.
You say that you are surprised, but Mediterranean countries are able to supply fresh fruit and vegetables for much longer, sadly, than producers in Scotland can—we get the occasional bad day that seems to interfere with a long growing season—so there is absolutely no pressure from those countries for action on food miles; in fact, the position is quite the reverse. Those countries have developed industries to supply from February right through the season to September and October. I do not necessarily support that, because the attached costs are an issue. However, there is no support for what you suggest from the Mediterranean states.
I do not want you to think that no effort is being made to encourage greater co-operation between those who procure contracts for primary produce and suppliers. Scottish Food and Drink is organising several regional forums to bring together suppliers and contractors to ensure greater co-operation. There are several concrete and positive examples of that in my own neck of the woods in North and East Ayrshire. For example, local suppliers have been encouraged to supply for school meals on the Isle of Arran. A lot of good work is being done within the confines of the legislation to which Ross Finnie referred to ensure that local suppliers and their fresh local produce are given prominence in the contracting process.
Do contracts have to be small scale before such procurement is permissible? Is the problem with large-scale contracts? If so, is there any way that we can get round the European procurement rules by breaking down large-scale contracts into small-scale ones, so that one local authority does not contract for all its school meals but the contracting is done on a school-by-school basis?
Do we not do that already? Local authorities, rather than the Scottish Executive, are responsible for procurement. However, there is a lot of good practice that we are working on rolling out. I quoted the Ayrshire examples to ensure that other local authorities take up that good practice and roll it out.
I hear what you say, but at what level do we come up against European procurement rules?
We will have to come back to you with the threshold, as I do not have it to hand.
That would be interesting because it would give us a sense of the kind of local market that is being operated. We would also be able to see what scope there is for creative thinking. Local food produce that is sent miles away is an issue that has come out strongly in discussions. We have all talked about excessive food miles even though it is an avoidable problem. We are not saying that we will never import anything. What we are talking about is where good local food produce is not being used in local schools or hospitals. The committee would be interested in any analysis that the Executive has carried out on developments in the sector.
We are at the stage at which focusing on finding solutions for producers and the food industry must come back into play. There are contradictions between the outlooks of food producers and the food industry. Although adding value is important, selling more processed food is not necessarily good for people's diets. The Executive must take on board the idea of creating a sustainable structure for our food producers that involves consumption and distribution. Can the ministers share with us any suggestions on how they might achieve that?
Which CAP money?
I mean the second tier of CAP money for rural development.
Within the current rural development regulation of the CAP, 10 per cent is applicable within the competition element. I suspect—considering the allocations of funding that are specified within the regulation—that the bit that would have to apply for such purposes would be the competitive element, which does not amount to a large sum. Realistically, we have to consider more whether we are allowed to do that and to lever in private capital rather than just assume that we will have access to CAP moneys. I accept that there is an issue about achievement of greater vertical integration not just in the milk sector, but across agriculture in Scotland.
Processors' raw ingredients are the important element, which is at the heart of the question about whether there is a future for domestic production. Your answer to the question may relate to whether we are prepared to accept a reduction in the production of raw ingredients to the point at which we become less self-sufficient in food. That is what will affect producers, so we are looking for a way through this.
There are two ends of the chain. Do not expect consumers to be overwhelmed by labelling that tells them that produce is high quality: outside the store, consumers will tell you that they want high quality and that they want this and that, but most of their choices inside the store are based on price. We want Scottish produce to be sold in a high-quality niche market, but there is a price attached to that. It will be difficult to educate consumers that spending a few pence more is worth their while. We should be careful about simply concluding that the solution is vertical integration: we could keep producing more quality Scottish produce, but more Scottish consumers will have to feel that it is worth paying a small premium to support Scottish industry. Labelling issues will also arise.
You give it £300,000.
Okay—Rob Gibson might want to nationalise the organisation.
No.
Okay. We are providing funds for people to run a consultancy business that produces plans that lever in private sector funding to improve the collaborative chain. That seems to me to be a worthwhile buck to spend.
What about the European level? Is there a way of—
The problem is that the Europeans look at us somewhat askance. They are doing things; their competition authorities are not sitting on them.
We might want to reflect on that when we draw up our report.
It would be remiss of me not to point out that the public subsidy that has been called for to support vertical integration of the dairy sector—or any other sector—would have to comply with the state-aid regulations that are set across Europe in order to provide competition that benefits consumers.
We might want to reflect on that, too. We have heard much evidence on the issues and we have previously recommended that rural development money should be spent on local producing and finishing so that we add value to the rural economy. The Executive could pump-prime that through European funding. We have also talked about food co-ops. There is therefore a big agenda for the committee to reflect on after the ministers have gone.
As you know, we are concluding our consultation on the standards that are to be set in restaurants and other premises where labelling can mislead consumers. The most obvious example is beef. Many establishments describe their beef accurately as Aberdeen Angus beef, but what they do not tell you is that it was produced in Brazil. That is ever-so-slightly misleading, so we are going to tackle it.
The evidence from the Consumer Association is that consumers in Scotland trust their farmers. If that trust exists, we should make the most of it by ensuring that people buy what is being produced. Perhaps we can return to that.
I have listened with great interest to the questions and the answers. Disappointingly, I disagree with very little that the ministers have said.
Lord Bach—the minister at DEFRA—and I almost accept that previous efforts have not been successful, so we have been reviewing the evidence of cases over which we did not agree with the OFT. We have tried to produce more information on the very European nature of the milk trade, and to assemble that information slightly differently. We are trying to test with Department of Trade and Industry and OFT ministers how we will position it. We have had several meetings, but there is always a great mystery about how, in the final analysis, the OFT defines the market. We are progressing with evidence and discussions, and Willy Bach is seized with the point—there is no disagreement between us—that we need to present the evidence differently.
Can you give us even the vaguest timescale for when some changes might come about?
No. There is a hint that some legislative change might be required, and that the definitions of "market" under competition law might be part of the problem. It might be that, historically, it has always been interpreted consistently.
It would be wrong simply to focus on the regulatory side without pointing out that it is also a matter of brand development, raising consumer awareness and stimulating market growth domestically. One of the high-level strategic objectives of the Scottish food and drink strategy is to improve individuals' skill levels, whether that is in negotiation, brand development or market analysis. The people who are involved in those processes, at any part of the chain, should be up to their tasks and should be developing brands and promoting greater consumer awareness of the benefits that accrue from buying Scottish and from supporting the Scottish food and drink industry.
We have explored many issues this morning. Mark Ruskell has one more supplementary question that he promises will not inspire the entire committee to come back in for another go.
Heaven forbid.
I have not suggested that we should simply go down one route. Collaborative and co-operative working is very important and I do not think that we have pushed far enough in that regard. I am absolutely clear about the relationships up and down the chain. As I think I said in my opening remarks, it is very important that those relationships become more transparent.
Is that something that you will push with the OFT?
Yes, in the sense that—to respond to one of your earlier questions—although I have not come to a final view, I am attracted to the idea of considering transparency up and down the food chain, rather than simply pointing at bits of it and saying, "You're responsible for this." I am not sure that the evidence supports that.
Thank you very much. We have bashed around many of the issues that we have heard about in evidence over the past few weeks. Our next task is to decide on our conclusions and recommendations. I thank the ministers for coming. I ask members to stay for a couple of minutes longer to deal with agenda item 4.
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