Food Prices

HL Deb 16 December 1998 vol 595 cc1430-50

8.9 p.m.

Lord Rowallan rose to ask Her Majesty's Government what is their view of the disparity between farm-gate and supermarket prices for food products; and what steps they intend to take to redress this imbalance.

The noble Lord said: My Lords, this is our third debate on agriculture and related subjects in recent weeks. That shows how important a subject agriculture has become and also the importance of the rural communities of Britain. Perhaps I may say how pleasant it is to see so many new faces attending the debate.

We know that farmers are in crisis. We know that the Government have agreed to inject a large sum of money into the agricultural industry to try to stave off the worst effects of that crisis. We know that BSE, E. coli, the high value of the pound and the green pound, cheap foreign imports and no export market have depressed farm product prices to uneconomic levels. Yet we see the prices of agricultural products in our supermarkets continue to rise in such a way as to rub salt into the wound of the depression at the farm gate. We must ask why. That is the reason I decided to ask this Question today.

Is it excess profiteering and greed to feed an ever-hungry shareholder or is it spiralling costs for the supermarkets which must be passed on? Two things are fact. First, the average British family pays £1,000 per year more to buy the same food as its European counterpart. Secondly, the average profits of supermarkets in the United Kingdom are three times those of their European equivalents. In the United Kingdom the food retail industry is dominated by the Big Four: Tesco, with annual profits of £866 million—I repeat that figure, £866 million; Sainsbury, with profits of £735 million; and Asda and Safeway with profits of £400 million. Those four control nearly 65 per cent. of UK food production and distribution. They have doubled their profits on food and soft drinks in the past 10 years.

Lest it be thought otherwise, I am not against profit. "Profit" is not a dirty word. Profit is to a large extent what makes the world go round. Without profit there is no business. But profiteering at the expense of the agricultural industry and the housewife by not passing on market decreases is neither fair nor ethical. Profiteering is not the same as profit. Profiteering is wrong but making a profit is fair. What we must do in today's debate is distinguish between these two words.

The power of the Big Four supermarkets is enormous. They have virtually killed off the local butcher and greengrocer from our high streets. They have the financial clout to run loss-making promotions to entice more customers into their stores. The threat of delisting is enough to frighten any producer. All the supermarket has to suggest is, "If you won't sell to us at our price, we will remove you from our list of suppliers." That is a death threat to any business, large or small.

According to the Hong Kong & Shanghai Banking Corporation, in the past five years shelf prices in British supermarkets have increased by 16 per cent. at Tesco; by 15 per cent. at Sainsbury; by 9.5 per cent. at Safeway; and by 4 per cent. at Asda. That is a frightening statistic. How Tesco can go to 16 per cent. and Asda to only 4 per cent. leads one to wonder what is going on. Prices are often rounded up to the nearest 5p or 9p further to increase profits. The housewife very often does not notice. But if she does and complains, the supermarket can then refuse her custom. The supplier, too, cannot complain for fear of being delisted. So in fact what we now have in this country is a cartel, a monopoly over our food industry being run by the Big Four.

To be fair, the Office of Fair Trading is investigating at the moment, and yet nothing is seen to be happening. How long does it take to investigate such blatant profiteering? What are the powers when it has proved the case. And prove the case it must, as now we have the Meat and Livestock Commission reporting the facts. These facts were widely publicised recently in various newspapers, including the Daily Express, Daily Mail and the News of the World. They proved that huge profits are being made and that there are large add-ons from the farm gate to the supermarket shelf in all meat produce.

According to the MLC report, the supermarkets are making £81.50 more profit per beef steer than they did three years ago, £10 more on every lamb and £7 on every pig. While the farmer sells his beef for £515, having kept the animal for up to 18 months and from which he has to take his feed, grazing and veterinary costs, often leaving him with a very small return, if any, on his capital outlay, the supermarket makes a profit of £267.80 for cutting it up and putting it on the shelf. The story is the same for sheep. The farmer gets £35 gross and the supermarket makes a profit of £25 net. With pigs, the figures are £50.90 for the farmer and £30.20 for the supermarket. For chickens, the farmers get £1.12 and the supermarket makes a profit of £1.31. So, in the case of the humble chicken, the supermarket actually makes a bigger profit than the farmer receives for rearing the bird.

Another way to look at the same statistics in the MLC survey is that lamb now selling in the markets at £1.40 per kilo sells in the supermarket for £12.99 per kilo for leg steaks, £10.49 for gigot chops, £8.69 for double loin chops and £5.49 for half legs. In every case the farmer is left with little or nothing after costs but the supermarket is making a healthy profit.

To be fair, Tesco has stated—I am sure the figures are correct—that the price of £1 paid for meat at the farm gate rises to £3.15 before it can be distributed to its stores as a result of weight loss in killing and curing. Nevertheless, profits are there for all to see and at a time when the farmer, the essential start of the food chain, is struggling to break even, let alone make a profit.

The story does not end with livestock. Fruit farmers, who have no choice about when to harvest, are told what the price is—take it or leave it. According to John Breach, chairman of the Independent Fruit Growers Federation, fruit growers are in dire straits, often having to sell at a loss in order to recoup any costs as the following week their crop is totally worthless, being over-ripe and unsaleable. David Nike, an agricultural business consultant, has stated that 60 per cent. profit margins are being added on to the price of the humble potato.

There is something seriously wrong with our food industry. Surely what we need is a supply chain which offers transparency, shared profits within the chain—in other words, each link in the chain being satisfied by the return, including the final consumer—and a long-term commitment from both supplier and buyer. There surely is no gain from reducing the cost of food to the consumer when farmers and growers cannot cover their production costs for in the end the supply will undoubtedly dry up as no one can carry on doing something at a loss for ever.

We urgently need to set up independent and verified farm assurance schemes with collaborative marketing to meet buyers' demand for consistency and quality of product. Then, and only then, would we have a sense of confidence in the food chain. The farmer could rear his meat and grow his vegetables and fruit knowing that there was a market for them at a profitable level; the buyer from the supermarket could find himself with a reliable and consistent supply of food; and the consumer could be assured of good, consistent quality at a steady and affordable price.

I therefore ask the noble Lord, Lord Hoyle, to confirm that the Government will hurry along the Office of Fair Trading investigation and put a stop soon to the unfair way in which our farmers and producers are being held to ransom and our housewives' shopping bills are being increased in this cavalier fashion by the Big Four supermarkets. I should like him to confirm whether it is a fact that only four people from the Office of Fair Trading are looking into the problem. That seems very few people for a major problem. I also hope that pressure can be brought to bear, as we near the 21st century, for a completely new approach to the marketing of that vital commodity to human life, food. A fairer and more equitable system, as I have already described, to benefit everyone in the food chain and not just the strong and wealthy supermarket would be very useful. I should be grateful to hear from the noble Lord that the Government will consider such an idea already being actively promoted by the National Farmers Union as a way out of the current crisis.

8.18 p.m.

Lord Haskel

My Lords, I congratulate the noble Lord, Lord Rowallan, on asking this Unstarred Question. I am not a farmer, but I find the idea that there is a clear relationship between farm gate prices and supermarket prices both a little naïve and a little outdated. A management guru said recently, Companies used to compete on costs, but now they compete on knowledge". Indeed my right honourable friend the Secretary of State virtually repeated this when he introduced the White Paper on competitiveness a little earlier today.

Let me explain what I mean. I am sure the noble Lord owns a camera. He will have a clever camera that does all kinds of clever things. But these wonderful things are possible because the producer has a knowledge of optics and electronics; they do not depend necessarily on the materials that are used. That is what adds the value. That is what enables a dealer to get a higher price for a camera. Surely it is the same with food. There is a long supply chain from farm gate to supermarket. The noble Lord told us all about it. It is this supply chain which adds the value. I refer to the preparation, the cleaning, the packaging, the transport and the organisation to get the food to the supermarket at the right time. The farm-gate prices have little relevance after all those operations.

The noble Lord may have a point if the supermarkets are using their buying power to force down prices at the farm gate, and then engaging in a scheme to maintain high prices in the shop. However, as the noble Lord has said, the Director General of Fair Trading is looking into this matter. Sadly, his inquiry will end before March 2000, when the new Competition Act comes into force. Under the present regulations, the director general has no powers to act in relation to prices as such. If he discovers anti-competitive behaviour, he can issue directions and rap naughty supermarkets over the knuckles. That is not really much of a deterrent. However, under the new Act, matters will be completely different. There will be complete freedom to compete, but not to abuse. Perhaps it is this abuse which the noble Lord calls profiteering. That is what he is concerned about.

Under the terms of the new Act, if there has been an abuse of market position, instead of getting a rap over the knuckles and being told not to be naughty, companies can be fined 10 per cent. of their turnover—£80 million in the case of Tesco. Injured third parties can sue for damages. In addition, if he thinks there has been abuse, the director general does not have to wait—therefore the patience of the noble Lord, Lord Rowallan, will not be so greatly tested—he can impose interim measures pending the completion of his investigation. These are altogether much tougher rules.

I might add that the new legislation makes the director general entirely independent of Ministers. His sole concern would be the anxieties of the noble Lord and of farmers. In all fairness, I think the noble Lord should congratulate my noble friend the Minister and the Government on getting the legislation through. Sadly it did not come into force on 7th November, when it received Royal Assent. If it had done, perhaps the farmers would be in a much stronger position.

The noble Lord is concerned about the profitability of supermarkets. Profitability is a difficult concept and I am not sure whether this is a useful line of argument. First of all, under present legislation, firms can charge whatever they like. Most prices are pitched at what the market will stand, both at the farm gate and in the supermarket. At present the Director General of Fair Trading can get prices reduced only if there is evidence of anti-competitive behaviour, because measures to combat the abuse of market power come into force only in March 2000. Until then firms will presumably continue to charge what the market will stand. However, this rule is already in force on the Continent. It could be one reason why, for some products, supermarket prices are lower there than here. Unlike on the Continent, our food prices are zero rated for VAT, and therefore our prices should be lower.

In addition there is the difference in accounting practice between here and other European countries. Indeed, if you calculate profitability based on return on capital employed, the returns are higher on the Continent than here. Therefore, as I say, I am not sure that profitability is a useful line of argument. There is also the confusing problem of the pricing of certain products, because some are priced as loss leaders, and therefore a selective shopping basket of priced goods can prove things either way. The noble Lord pointed out that there are four major supermarket groups, but there are also the discounters from the Continent, who are competing quite strongly with the supermarkets.

As regards farm-gate prices, obviously the CAP has an important impact. The prospect of lower support prices must be worrying for farmers, but other factors such as the welfare of animals and the use of chemicals enter into the value chain to justify higher prices. However, the reality is that, if market prices have decreased, businesses have to adapt. Oil companies, for instance, have had to adapt to the fact that oil prices have gone down from 18 dollars a barrel to nine dollars a barrel in the past 18 months. Those companies are having to adapt to that situation. That is one of the factors in business.

The supply chain is where the business happens, as the noble Lord pointed out. This is where the nub of his argument lies. If the farmers are being exploited, that is bad for business. Exploitation is bad for any business, including supermarkets. It is bad for a variety of reasons. First, the public will not want to shop at, nor indeed investors invest in, firms that exploit. Retailers are shunning products made with child labour or which are not environmentally friendly, because the public just do not want them. The public have become much more discerning in these matters. I agree with the noble Lord, Lord Rowallan, that it is bad for productivity if part of the supply chain is exploited because it is just not efficient to go from one source to another exploiting them. Like all businesses, supermarkets need the entire chain to be innovative and competitive. Indeed this factor is repeated in the White Paper on competitiveness which we discussed this afternoon.

This competitiveness is achieved by creating a common understanding and, at the same time, by having vigorous competition. Supermarkets need suppliers who can continually respond to the rising quality of demand because that is the way to the customer's wallet. Exploitation has no place in this: competition has. I say to my noble friend the Minister that by virtue of the Competition Act I think the Government have already taken steps to solve the noble Lord's problem.

8.27 p.m.

Lord Mackie of Benshie

My Lords, I am not as optimistic as the noble Lord, Lord Haskel, about the effects of the Bill which will come into operation in 2000. I could not quite follow his speech but I gather that he was giving farmers a lecture about being competitive and producing what the supermarkets want. I gather that he compared the farming industry with the oil industry and generally taught us our business, as he is entitled to do. I believe he explained that the supermarkets have great costs as regards killing the beast, skinning it, throwing away bits and so on. He might consider that the farmer has to raise the calf to 18 months and then has to put it into calf—apply the bull, if the noble Lord understands that expression—and then has to rear the new calf. He has a three, four or five year period of preparation, which is slightly different to the mere killing of the beast and butchering of it. Therefore I think the noble Lord's argument loses a little of its virtue in the face of the difficulties experienced by the primary producer.

I am conscious that the noble Lord, Lord Rowallan—as he said himself—has raised a subject which has been much discussed. However, he looks to the future which I think is right and proper. I am glad that he has raised the matter. There is no question that for the first time for many years the public support the farmers because the figures produced are so horrendous that the public realise that the old myth that this is only farmers grumbling is no longer the case. They have a genuine grievance. In addition, the countryside as we know it is in danger as a result of the financial conditions. The promises for the future by the governments of all the large EU countries do not bode well for the countryside.

The figures I have are probably from the same source as those given by the noble Lord, Lord Rowallan. The noble Lord, Lord Haskel, might look at the most telling. He said that in terms of capital the French make more money. But the simple shopping basket test carried out by the Sunday Times was horrifying. The same items cost in the UK £81.59; in Holland £49.55; in Belgium £50.67; and in Italy £60.90. Whatever is said about capital, the matter is straightforward: people are paying more in this country than in equivalent countries in the European Union. There must be some reason for that. It is an extraordinary thing that we have the four large supermarket companies.

I have nothing against Tesco; indeed I am all for it. In Forfar there is a Tesco store that is absolutely wonderful. You can buy virtually anything there. I can sometimes buy a bottle of Whyte & Mackays whisky, of which I am fond, for as little as £14 a litre—in which case I normally buy three or four bottles.

Of course the supermarkets are to a certain degree holding the country to ransom. Taking the figures that are available on farm produce, instead of prices falling in the stores, they have been held up simply because the supermarkets can do that. I dare say that they do not meet and decide to hold up prices, but they are holding them up. The four large stores sell some 67 per cent. of food in this country. It is ludicrous that they have all happily taken the extra profit and not one of the large stores has tried to grab the market. Without a shadow of a doubt, that is bad for business. We talk about competition in farming; but there must certainly be competition in retailing.

It is the old story. In most cases the primary producer gets it in the neck. Whether it be a matter of oil, tin or food, the primary producer is often hammered. The oil business can take care of itself. It has large profits. Those profits do not exist in farming. Farming needs to be looked after if we want to keep the countryside. If we want to let the countryside go, a large number of competent young men can buy big acreages and farm them purely for profit. They will not keep up hedges or ditches; they will simply grow as many crops as they can and pay as little as they can for the land, doing themselves a good deal of financial good but not doing the countryside any good.

Labour governments supported agriculture and did it a lot of good from 1947 onwards. If we take the case of the Milk Marketing Board, have the public benefited at all from its abolition? The farmers certainly have not. The price of milk has plummeted. It must be realised that if farming is to be kept as a stable industry, which is for the good of the country and what urban people want, the Government have to allow, and assist in, some organisation of the primary producer.

Many factors can help. I should like to think that we can help markets, as has been done in France. In many parts of France the supermarkets do not have a look in when it comes to food, because there are very good markets. One of the lessons we have learnt is that butchers—and in my part of the world fishmongers—can thrive as individuals because butchers hang their meat properly. The supermarkets do not hang meat. One of the tenets of shopping at a supermarket is that, once the customer has bought something, he or she gets out of the way as quickly as possible in order to assist the cash-flow. So there can be survival for certain individual concerns. But there is no question that the bulk of our food will be in the hands of the big organisations. The Government must keep them in their place. They cannot be allowed to merge further. Since only four of them handle the food that we buy, that would be a highly dangerous position. Matters would become a great deal worse.

The Government are conscious of the problem. The new Act will not solve it. The Government have to look to organisation, and to helping any such organisation to produce a constant supply of good food. In that case protection would be needed from the flood of cheap food from overseas, which is produced under different conditions to those enforced on our farmers here. The Government have a case to answer. I thank the noble Lord for introducing the debate.

8.36 p.m.

Lord Grantchester

My Lords, I declare an interest as a dairy farmer in Cheshire. While the debate has focused on the disparity between farm-gate and retail prices, there is a wider question; namely, the disparity in power between the farmer and the retailer, and whether that leads to abuse.

It is perhaps instructive to reflect that over the past 10 years the retail price index for all items represented by "a basket" of selected consumer goods has risen by 55 per cent. During this period the retail food price element of the index has risen by 40 per cent. In other words, the price of food has fallen in real terms—a fact for which no doubt the supermarkets can take some credit.

However, within that overall picture farm-gate prices have risen by only 7 per cent. The upward rise in the retail price index for all items and RPI food has been relatively smooth. By contrast, the rise in farm-gate prices has been characterised by alternative periods of sharp rises, often due to currency weakness as in the period 1993–95 following the devaluation of sterling in 1992, followed by severe declines. In 1997 farm-gate prices fell by 14 per cent. on 1996.

Should noble Lords believe that prices paid to farmers will rise as agriculture falls out of a low trough, perhaps I may remind the House that under Agenda 2000 proposals price cuts vary from 30 per cent. for beef, 20 per cent. cuts for cereals, to 15 per cent. for milk.

What will the demand for competitive agriculture mean for the likely price of foods to the consumer? Does the past lead us to believe that it will be anything other than a continuing rise, with the balance of the margin going to the retailer? Indeed, MAFF's own statistics pointed to the effect of Agenda 2000 in reducing the retail price index by a mere 0.3 per cent.

During this time, farmers have been left holding the short end of the income stick, while at the other end a small group of intensely efficient retailers have been pulling in profits of up to £850 million each. Between them, Tesco and Sainsbury turn over more money than the Republic of Ireland. In terms of relative size, the individual farmer is not a David to the supermarkets' Goliath; he is more like a microbe. Retailers are simple, ruthless machines which perform solely for profit and share price. Their scale gives them the opportunity to be mercilessly efficient in reducing unit costs.

The modern parlance that the consumer demands ever-improving quality at a reducing price can have no other outcome. Multiples demand more food, better food, to be put before more consumers at a faster rate and at a lower cost. For this to work, today's price must be undercut by tomorrow's and that of the day after, and so on. To do that and at the same time increase profits supermarkets apply continual downward pressure on their suppliers. Farmers must get less, abattoirs must be paid less, packaging costs must be reduced, and the supermarket will always get the same, or increased, slice, even if the overall income stream is smaller.

That is confirmed in the Meat and Livestock Commission report, which states that the gap between meat prices for producers and retailers has widened significantly in the past three years, suggesting that supermarkets have not shared in the overall decline in industry margins. In the summer of 1995, the gap between what the supermarket paid processors for packed retail cuts of beef and the retail shelf price was 15.5 per cent. of the total price. In the summer of 1998 it rose to 23.8 per cent. Between July and September 1998, the multiples took £267.80 for every £515 spent on the steer to pay for staff, building, shelf space, shareholders and expansion. In 1995 the multiples took £186.30 from a steer price of £743.

While other noble Lords have pointed out that it may not be of direct relevance, and claim and counterclaim rage in the press, one significant increase in costs that must be recognised is that relating to safety and welfare issues. It is not generally recognised that there is now, following safety and other increased legislation, a collection of inspectors in white coats, each with a clipboard, standing over each operator in the slaughterhouse. I trust that the Office of Fair Trading in its inquiry will analyse and report on all those aspects.

Following the food scares, the BSE crisis and the animal welfare issues, the consumer, through legislation, now imposes higher standards on agriculture. Farmers, in trying to take their produce out of the commodity bracket and to brand it, even if that is no more than "British", are confronted by a supermarket intent on imposing its own branding, whatever the supply. In that way, the supermarket maintains its creed to the consumer and its control over the income stream. It is a fair question to which the Government must respond, that labelling must be honest and correct. "British produce" must be British and produced to British standards. As consumers demand, through legislation, that farmers must meet certain production and welfare standards, should it be acceptable that foreign supplies can be sold that do not conform? This is a question that must be addressed in Europe by Ministers. Access to the market by supplies below indigenous standards should only be allowed provided it is clearly marked that they do not conform to home standards.

The Minister of Agriculture recently joined the British Retail Consortium to confirm that all supermarket branding and fresh pig produce will be to British standards. Will the Minister also insist that below standard produce from overseas will be labelled as such?

I should also like to draw attention to other issues targeted by the supermarkets in order to reduce farm-gate prices: namely, auction markets and cattle movements. In setting up producer clubs to source direct supplies, the supermarkets source entirely on a deadweight basis, to their quality standards. The price paid by the majority of deadweight operators is at some stage linked to the price obtained at the live auction. It is fair to say that most deadweight purchasers will pay a system of bonuses, some immediate and some at the end of the marketing season. However, this denudes the auction market of a high quality product and effectively lowers the average quality of the auction offering. This in turn lowers the average market price. Thus the deadweight producer lowers the average market price which is used to determine the price he or she is paid. The high quality deadweight product is also influenced in the average price by the bottom end product at the market.

It must be remembered that the auction market is not only an end market, it is flexible and provides an acceptable outlet for all standards. It allows the producer—maybe overstocked or low on feed—to sell an animal to be purchased and finished by another producer. It also provides an infinite variety of choice to suit all customer requirements.

One of the criticisms of auction markets concerns welfare. The Livestock Auctioneers Association is to be commended on developing new standards and systems, as markets are public places visited by all and sundry. There is not much by way of welfare in a large stock wagon going round farms, possibly incurring between 10 and 20 stops for a load before setting off on a long journey. It is far better for the farmer to take his consignment to an efficient market, with good loading and unloading facilities. The livestock industry must retain a broad geographical spread of markets. I trust the Minister will endorse that.

It is also important to understand the issue of livestock movements. Some slaughterers on contract to multiples are already offering a premium of at least 5 pence per deadweight for cattle that have been moved once only. Others have laid down a two-movement limit, and more anti-movement enticements will follow.

The claimed justification is that livestock are more easily traced, their welfare has not been compromised and they have been supposedly cheaply produced as sales commission by auction markets or by dealers is a non-essential expense. The drive is being helped by the cattle passport system which remorselessly clocks up a movement every time an animal changes hands, even if it was only held temporarily by a broker. If this justification is not quickly shown to be a falsehood, the flexibility of livestock finishing will be destroyed and efficiencies between upland and lowland farming jeopardised. Putting animals through an auction market does not automatically create welfare problems or impose a burden of unjustified expense. It is simply more efficient to move cattle to their bulky feed and bedding than the other way round.

In conclusion, I draw to noble Lords' attention that there are many issues to be addressed as well as the simple cost analysis, which must also bear careful scrutiny. I ask the Minister what is his reply to those who call for a supermarket regulator. I urge noble Lords to remember those issues when the subject of CAP reform returns and the much anticipated food standards agency legislation appears.

8.47 p.m.

Lord Graham of Edmonton

My Lords, I apologise for the quality of my voice, I have a heavy cold. However, even if I breathe hard it will not cross the Floor of the House.

I join in the comments made by colleagues on how grateful we are to the noble Lord, Lord Rowallan, for having the energy to seek the debate. He did so in order to make a point and also to share his concerns with the House. He should be grateful, as I am, for the quality of the contributions. They have not been great in quantity but the quality has been there. It is a lesson on the topic that we are discussing. At the end of the day quality is all-important.

I have been impressed by the facts and knowledge displayed by colleagues. I have learnt a great deal on which I shall reflect. I must declare an interest, first, as a consumer who is interested in prices being as low as possible but fair. All farmers are consumers and so have an interest in the price they have to pay when they visit supermarkets.

I started my working life in the retail industry as an errand boy. That was a staggering 59 years ago in 1939 with the Newcastle Co-op. I became a director of other co-operative societies and my interest in retailing stems in part from my professional work with co-ops. I also declare an interest as honorary secretary of the All-Party Retail Industry Group. I remind the House that that receives much of its support and sustenance from the British Retail Consortium. In the context of this amicable debate we should recognise that the consortium represents retailers who sell more than 90 per cent. of the goods that pass over our counters. The body represents 320,000 shops and 30 per cent. of the commercial property floorspace. It provides employment for 2.9 million people, 11 per cent. of the total workforce.

I am also president of the Institute of Meat. My predecessor was the noble Lord, Lord Gallacher, who followed the noble Lord, Lord Vestey. I throw that fact into the debate to demonstrate that those of us who are not farmers and do not come from an agricultural background nevertheless take an interest in these matters.

I have referred to my connections with the Co-op. The Co-op has large stores and very many small stores. Whether the supermarket chains have 25,000 square feet, 50,000 square feet or have hypermarket status, by and large their outlets are of the larger size. There are many other organisations apart from the Co-op that are community-based.

In this debate I am not prepared to throw either bouquets or brickbats because the position is not straightforward. I hope that noble Lords will not try to find a villain or a saint. In this story there are no villains or saints. The villain of today will be the saint of tomorrow. There was a time when the farming community was vilified because of some of its activities. The same applied to some of the larger stores. At one time the scapegoat was the European Community, but the scapegoat changes. If I were a farmer I would fully share the concern and anguish about the state of the industry. That is the livelihood and heritage of the farmer. The present state of the industry may drive many people not just to despair but, sadly, suicide, as we read in the newspapers. I have enormous sympathy for the farming community which is affected by the present situation.

The noble Lord, Lord Rowallan, referred to an orderly state of affairs in which products were produced and marketed in a reasonable way. Robert Owen started the Co-op movement in 1844. He believed in co-operative communities in which people grew their own food and provided their own materials. I do not think that we should look at two ends of the chain, one being the farmer and the other the consumer, because each is dependent on the other.

Everyone is entitled to fight for his livelihood and that includes the supermarkets. Anyone who believes that the situation in retailing is hunky-dory has another think coming. My experience of these matters goes back 50 years. No industry has undergone a greater revolution than retailing. The biggest change came about four or five years ago with Sunday trading. That was a massive, traumatic change but change occurs all the time. Sometimes people will be on one side of the argument and sometimes on the other.

Life is becoming more complex as is retailing. The retail chain is also becoming more complex. I do not believe that the price to the consumer is the be-all and end-all. Sadly, in certain quarters there is a tendency to believe that all one must do is sell as cheaply as possible. Good sense tells one that quality and fairness to suppliers is a very good profit-maker. It makes sense to treat suppliers and employees fairly and charge the consumer a fair price, but that is not life.

Lord Mackie of Benshie

My Lords, I thank the noble Lord for giving way. We appreciate the complexity and efficiency of the retail industry. What worries us in this case is that with an over-supply the price to the consumer is not falling. Therefore more is not being consumed and the natural process of recovery is not taking place.

Lord Graham of Edmonton

My Lords, the noble Lord makes a very good point. I am afraid that I am unable to speak to the detail because I am neither a practitioner nor a professional in this area. Reference was made earlier to the price of oil. It was said that oil was not strictly analogous to this case. It is not. However, when one hears the word "glut" one believes that automatically that should be reflected in lower prices. In the case of oil, for every 62 pence paid for a litre 50 pence is a tax that is imposed on the industry. We are all beneficiaries of that. We must be very careful about where we start and finish.

Over the past 10 years the price of goods in the shops has risen by 36.5 per cent. General inflation has risen by 50 per cent., but in real terms the price of retail goods has fallen by just under 14 per cent. Efficiency, innovation and competition all play a part. When one criticises the supermarket one must bear in mind that the consumer is not attracted solely by price but by the range of goods, their quality, the opening hours, the increased role of new or extra services and their quality and value for money.

I am aware that the noble Lord, Lord Mackie, has far greater experience of these matters. However, when one considers pigmeat, only parts such as the loin and the steak are particularly attractive. But the person who has produced it may feel that he is entitled to sell all of it at a premium price. That is not so. The imbalance is dealt with by the retailer selling at less profit. As a consequence today much goes abroad.

I see that my time is nearly up. As an ex-Whip I do as I am told—sometimes. I conclude by agreeing that there is need for a better system than one that drives farmers to despair, not through their own fault or by government action but by a combination of factors. This has been a very good debate. It is not in the interests of supermarkets to treat their suppliers badly. If they do, it will backfire on them. I am grateful to the noble Lord, Lord Rowallan, for allowing noble Lords to express their views.

8.59 p.m.

Lord Razzall

My Lords, any regular attender of this House over the past few months will realise that the question posed by the noble Lord, Lord Rowallan, has arisen in a number of different forms in at least three or four debates. Anyone who has listened to those debates will appreciate that there is a significant problem.

I do not wind up on behalf of the Liberal Democrat Benches as a farmer or with any farming background, but as a representative of the consumer interest. The case on behalf of the farming community has been well made and effective. Indeed, following the remarks of various speakers, there has been a remarkable achievement by major supermarkets. Three years ago the average consumer probably believed that most farmers were heavily subsidised, and battening on the consumer through tax subsidies and handouts from Brussels. Over that three-year period the behaviour of the supermarket chains seems to have succeeded in turning public opinion the other way round. The old adage that one never sees a poor farmer is turned the other way. The consumer now believes that one never sees a farmer who is not poor. That is a remarkable achievement on the part of the major supermarket chains over that period.

As various speakers have said during the course of the debate, we are talking about four major supermarket chains because they represent 66, 67 or 68 per cent. of the UK food market. Therefore if we are to have any serious debate on the issue, we must talk about the behaviour of those four supermarkets and the interrelationship of those four supermarkets with the farming industry.

I do not wish to go into the statistical points made effectively tonight and previously on behalf of the farming community. The case has been made strongly about the interrelationship between farm-gate prices and the prices for the consumer in the supermarket. I commend those who are not convinced to read from time to time the trade magazine Grower which is full of uncomfortable reminders of how multiples exercise their power over the farming community.

We have not yet heard the Minister's winding-up speech. The noble Lord, Lord Haskel, put what I understand to be the Government's answer to the points made. While he did not speak on behalf of the Government, he gave what I understand to be the Government's response. I understand that the noble Lord spoke for himself. However, I anticipate what the Minister will say: that the Office of Fair Trading is currently looking at the issue as to whether supermarkets are charging excess prices and will be reporting early in 1999. The noble Lord made some comments about whether or not there was profiteering or overcharging. It would be entirely inappropriate to prejudge what the Office of Fair Trading will say.

However, I take issue with the noble Lord on the question which has been well trailed: that the four major supermarkets have margins well in excess of those prevalent in continental Europe. He made the point that the return on capital for the supermarket chains is lower than in continental Europe. One fundamental fact differentiates us from continental Europe as regards the property market. The high cost of land for the development even of out-of-town supermarket chains in the UK significantly reduces the return on capital for the UK supermarket chain compared with continental competitors. I do not think that that is a particularly satisfactory response.

The supermarkets' response is that nothing is wrong. Those of us who have raised the issue have been lobbied. Some of the lobbying which I and others have received from the supermarket chains would have us believe that supermarkets are beneficial organisations, almost charities, providing a service to the consumer almost on a free basis. The point is exaggerated in order to make the argument. However, there are some characteristics of the industry about which the Government should be concerned. One of the defences put forward by the major supermarkets is that the shopper typically nowadays has a choice of several supermarkets within a short drive. In reality that is not normally true. Although no one, single major supermarket has more than 25 per cent. of the market, that does not apply when one considers the matter on a city-by-city or region-by-region basis. For example, Sainsbury's and Tesco's combined share of the market is 57 per cent. in London and the south. Asda is based predominantly in the north.

In agriculture the relationship between the farming community and the buyer is changing significantly. Although this point was mentioned in previous debates, not many noble Lords have referred to it today. Supermarkets are seeking control over production. Some farmers have commented that they foresee the day when a Tesco or Sainsbury's farmer will produce only what his supermarket boss tells him, including for the beef farmer what bulls to use and on what day to sell his finished cattle. The fear is that supermarkets are beginning to dominate the farming community and to introduce a range of vertical agreements which will operate against the consumer interest.

What should the Government do? Clearly farmers are bleeding. It is simply not enough for the Government to say that the OFT is looking at pricing; that when they have seen its report they will decide what to do; and if that is not enough they will wait for the Competition Act which will come into force in May 2000. Bearing in mind the significant public concern on the issue, action clearly needs to be taken before the year 2000.

I have three recommendations. I welcome the Minister's response to them. First, I do not think that the Department of Trade and Industry can rely on the Office of Fair Trading to consider the pricing issue. There has to be significant consideration of whether or not there is market dominance by individual supermarkets in individual cities. For example, in Cambridge everyone shops in Sainsbury's. Does Sainsbury's have market dominance in Cambridge; and what is the effect of that market dominance on the pricing policy of food in Cambridge? That issue requires strong direction from the Government. It cannot simply be left to the Office of Fair Trading to consider.

The second issue is whether or not the vertical domination of the supermarkets within the farming process is a problem. When the Competition Bill was debated in your Lordships' House, significant attempts were made to increase the powers in the Competition Bill on that vertical domination issue. Those attempts did not succeed. Nevertheless, we believe that the Department of Trade and Industry has a responsibility, in particular in the light of allegations in relation to the major supermarkets and the farming community, to look at that vertical domination.

Finally, I do not believe that it will be sufficient simply to rely on the powers of the Office of Fair Trading and the Competition Act to deal with the problem. All the evidence of the past shows that where cartels, or potential cartels, exist they will always circumvent the powers that the law will impose upon them. The Government need to take the initiative—I do not know which ministry or Minister it should be—to get together the farming unions, the farmers and the supermarkets to agree what can be done to solve the problem. The fact is that housewives go into supermarkets to buy products at this price. There would be no point in housewives doing so if the pricing policies of the supermarkets drive so many farmers out of business. Prices then have to rise.

9.9 p.m.

Baroness Byford

My Lords, I, too, thank my noble friend Lord Rowallan for bringing forward this important and timely debate. As we heard last week, farmers are indeed going through a particularly difficult time. Some are going out of business, some are struggling and others are looking with concern to the future of their industry. My noble friend Lord Rowallan, spoke about that issue again tonight. He asks the Government: what is their view of the disparity between farm-gate and supermarket prices for food products; and what steps they intend to take to redress this imbalance". A few weeks ago, at a time when some Welsh farmers were getting only 25 pence for a whole lamb and some were taking their stock to the RSPCA and dumping them, I bought four Welsh lamb chops in a local supermarket. Those four lamb chops cost me £3.50.

I mention this as it highlights the agony being experienced by farmers. They see their local supermarket price and they compare it with the price they are obtaining at the farm-gate. So where does the blame lie, or, to put it less aggressively, why are the prices at the farm-gate so low? My noble friend has linked his Question from farm to supermarket.

It is true that the top five supermarkets, Asda, Somerfield, Kwik Save, Safeway, Sainsbury and Tesco, dominate food retailing in Britain. Between them they control half the grocery market. The remainder is split between the Co-op, Iceland, Marks and Spencer, William Morrison, discounters such as Aldi and smaller independents. Does this dominance help or hinder consumer interests? I think that most people would agree that the supermarkets have given the customer better value over recent years. But some consider that the process may have gone too far and that food quality and customer choice is being compromised for the sake of profit.

Some say that supermarkets are the consumers' best friend. They have kept prices low while dramatically expanding the range of goods offered. But that does not tell the whole story. While supermarket prices for pork, beef and lamb have stayed about the same over the past three years, farm-gate prices have plummeted.

The NFU compared prices for August 1996 with August 1998 and found that, while the farmers' share for beef had risen from 31 per cent. to 34 per cent. as consumer confidence rose following BSE, the share for everything else had dropped dramatically. Lamb went from 39 per cent. to 24 per cent., poultry and milk from 46 per cent. to 30 per cent. and pork from 42 per cent. to a mere 24 per cent.

The rapid growth of supermarkets and the closure of traditional bakeries, independent butchers and local corner shops, all add to the reduction of choice in some areas. But, from the customer's perspective, how much more convenient to be able to do your shopping in one store, usually with ample car parking space, a crèche to leave your children to play in, someone to help you load your goods into the car or to provide a home delivery service. So far, the poor farmer has paid a heavy price in falling income.

Furthermore, in the past 10 years, 50,000 retail businesses have disappeared from our towns; village shops are on the verge of extinction and local producers are unable to distribute their goods or are forbidden to do so by increasingly arbitrary measures. The powers of the health department and the agriculture ministry have already damaged organic farmers, traders in unpasteurised milk and cheese, high street butchers and small producers of every kind.

However much we may lay the blame at the door of the supermarket, we have to accept that we also bear the responsibility for the sea change in our shopping habits. Those of us who have local shops but do not support them on a regular basis, should not be surprised if they are unable to make an adequate living. Before too long they will be forced to close, unable to compete with the supermarkets.

In the short term, when the pound is strong, cheap imports may be seen as an attractive substitute for domestically produced food which is temporarily more expensive. But, in the longer term, it will be disastrous if a significant number of domestic producers are forced out of business. Both supermarkets and customers should be aware that, as my noble friend Lord Rowallan pointed out, this scenario is not in their long-term interest.

The message to farmers must be that, since supermarkets are and will remain their largest customers in the foreseeable future, it is important that they work closely together. Farmers can strengthen their hand by closer co-operation; many have already started along this path.

For their part, supermarkets must recognise that they carry great responsibility, to customers and farmers alike. They can be a positive influence on Britain's agriculture. As the noble Lords, Lord Mackie and Lord Grantchester, said, they must accept that farmers need to achieve a proper living; that consumers expect quality and good value products, clearly labelled, from which to make their choice of purchase. Supermarkets on the whole do not buy directly from the farmer but through their suppliers and meat processors.

Sainsbury's has formed partnership arrangements with 10,000 livestock farmers. Those farmers produce animals of agreed specification for sale to their meat suppliers. The benefit to the farmers of partnership includes a guaranteed outlet for 52 weeks a year, giving them greater long-term security.

Tesco has pioneered a major initiative in partnership with its producers and is funding research to raise welfare standards in its meat and livestock products. It also commissioned an independent report to analyse the supply chain for beef and lamb. Tesco welcomed, in public, the establishment of a food standards agency.

The British Retail Consortium conducted a recent MORI survey undertaken between 6th–10th November to ascertain customers' attitude to shops and shopping in Great Britain. They considered range of goods, quality of goods, opening hours, range of extra or new services, quality of services and value for money. Their findings support customer satisfaction in all areas ranging from 88 per cent. to 61 per cent. and reaffirm that customers are continuing and will continue to shop at supermarkets.

If customers continue to demand the "better cuts" rather than using some of the cheaper meats, if demand from the Eastern countries and from Russia remains depressed and if the pound continues to be strong, there appears to be little that can be achieved as regards raising the price to the farmer while lowering prices on the shelves.

So what should the Government do? I have some questions and suggestions. First, will the Government push ahead and establish the food standards agency, which should have been included in the Queen's Speech? Secondly, will the Government give greater direction to the labelling of products to make sure that UK labelling is applied only to products grown and processed in this country, rather than to those grown elsewhere but processed here, to which the noble Lord, Lord Grantchester, referred? Thirdly, will the Government give more thought to the whole question of packaging, some of which is not necessary and causes additional environmental problems? Fourthly, will the Government make some commitment to ensuring that animal welfare standards set by our country and our farmers do not jeopardize our farmers to the extent that they become uncompetitive? Fifthly, as other noble Lords have mentioned, we await the response from the Office of Fair Trading, to which we look forward urgently.

I welcome the opportunity to take part in this debate. Again, I thank my noble friend for making it possible. I look forward to hearing the response of the noble Lord, Lord Hoyle. I am aware that the noble Lord, Lord Donoughue, is unwell. From these Benches we wish him a speedy recovery and look forward to debating with him in the near future.

9.19 p.m.

Lord Hoyle

My Lords, I am grateful for the comments in relation to my noble friend's speedy recovery. He asked me to apologise for not being present tonight. He wanted to be here. As everybody knows, he takes a great interest in agriculture, but I am sure he will be cheered by those words of encouragement. I am sure that everyone hopes he will soon be up and about and enjoying a drink at Christmas.

This has been a good debate and we are indebted to the noble Lord, Lord Rowallan, for raising it. It raises many issues of specific concern to farmers at the moment and draws attention to the inquiry being conducted by the OFT. I do not know whether there are four or more people examining this issue, but I shall investigate what the noble Lord said and write to him on the matter. However, I can tell him that the OFT is due to report early next year. It has been said that I cannot anticipate what it is going to say, but we all look to receiving an early reply and studying it at great length.

Everybody who spoke tonight mentioned the powers of the supermarkets and what might be done in that regard. I hope to answer many of the points raised in the course of my response. First, I agree with everyone who spoke that there is no denying the power of the big four supermarkets. We know how successful they are and, as the noble Baroness, Lady Byford, said, there is no turning back the shopping habits of the British people. The supermarkets drive a hard bargain, not only with suppliers here, but also with those abroad. They also demand high quality products at competitive prices and benefits come to the suppliers from that. Guaranteed access leads to large markets. It is therefore a matter of benefit for both sides.

The concern expressed in this House and wider in the media is that supermarkets are in some way "ripping off" the consumer. I must emphasise that there is no clear evidence one way or the other and that is why it is important that we receive the report from the OFT. It is fair to say—my noble friend Lord Haskel made a good point—that if the Competition Act had been in force (it is not the Government's fault that it is not in force; industry, including the farming industry, requested a delay of two years) it would have helped considerably in relation to some of the matters discussed this evening. Having said that, we have been keen to discuss the problems of the farming community with all parts of the food chain, including the retailers. Given their share of the market, they are extremely important to the producers.

It is important that supermarkets understand that it is not in their interests to drive British producers out of business. That is why we, as a government, have been seeking a way forward and why my right honourable friend the Minister for Agriculture, Fisheries and Food recently met senior members of the British Retail Consortium not only to discuss how the present market conditions affect BRC members, but also to consider whether anything more can reasonably and properly be done to alleviate the difficulties that farmers are presently experiencing.

In addition, my right honourable friend made many contacts with retailers in the course of his duties. They are aware of the problems of the farming industry. They are making efforts to ensure that their sourcing practices meet or exceed consumer expectations in areas such as quality, traceability and local supply. However, as has been said, they must also have concern for the higher standards in relation to animal welfare and the environment, which are a cost to our farmers. They have given us some assurances that, from the beginning of next year, they will demand the same high welfare standards from imported pigmeat as our own producers have to meet. They will also not accept meat from pigs that have been fed meat and bonemeal. As has been said, in addition they have given an undertaking not to sell imported meat, processed or packaged in the UK, under a British label. I believe that everyone will agree that those are valuable commitments which will benefit both producers and consumers alike.

However, retailers are but one part of the food chain. It is important that all involved in the food chain recognise their interdependence. The Government need, and are determined, to do that. We want to bring together all parts of the food chain and encourage them to discuss how they can work together because that is in everyone's interests, from producers and others in the food chain right through to retailers.

The whole supply chain would benefit from working more closely. The benefits of collaboration are urgently required for our primary producers. That is the reason for this debate. As we have heard, the primary producers are critical of the multiple retailers and other major buyers. We must accept that the big customers are important and that it is right that in many instances they dominate and set the trends in the market. In additions, they provide access to many millions of consumers. It has been admitted that that is a fact of business life. It is inevitable that small businesses, such as farmers, will encounter difficulties when dealing with major companies if they are not well organised. They need better collaboration. Another aim of the Government is to bring them together.

Like many noble Lords, I was particularly pleased to see the launch at the Royal Smithfield Show by my noble friend Lord Donoughue—it is unfortunate that he cannot be present—and the president of the National Farmers' Union of a joint MAFF/NFU initiative to highlight the benefits of collaborative marketing to our primary producers. Through that approach and better marketing our producers can offer the scale, quality and consistency of supply required by major buyers. Collaborative marketing means producers achieving economies of scale, having recourse to professional marketing, technical and administrative assistance, strengthening their negotiating ability, which is important given the forces against them, and improving supply chain communication. The Government fully agree with the NFU that that is the best way forward for many of our farmers. They must come together and market their produce better. They have a very good story to tell.

I advise my noble friend Lord Grantchester that we must ensure that the labelling indicates whether something really is British. While indicating that a product is British, we must tell the story behind that and say that being British means that it is of better quality and is superior. Retailers, as well as consumers, ought to pay more for that because they are getting a better bargain.

If we can bring this together, it is the kind of initiative that will not only help the producers but everybody in the food chain including the consumer. I am delighted at the initiative of the National Farmers Union in that respect. This can only be of tremendous benefit to producers and consumers alike. I believe this is the way forward. We must wait for the report. I cannot anticipate what it will say—nor indeed would noble Lords wish me to—but I think it is right that we have this initiative.

It is also right, as has been recognised tonight in different reports, that the supermarkets do not agree with what is being said. They say, rightly, that they have to pay not only the price to the producer but other charges, including cutting of meats, transport and so forth. We are not entering into the argument here, but we say that the producers should have a fair bargain in return for all their hard work. Bringing the two together is a good thing. Better marketing must lead forward. That will benefit us, not only in this country but overseas.

I thank the noble Lord, Lord Rowallan, once again for initiating the debate. It is taking place at the right time. I hope that all sides of the industry—producers and retailers—will take note of it and that it is also noted by the OFT which is preparing the report. It can have done nothing but good.

House adjourned at twenty-nine minutes before ten o'clock.