Catalyst for change. Better ways of doing business in the horticulture & potatoes sector

Transcription

1 Catalyst for change Better ways of doing business in the horticulture & potatoes sector NFU Horticulture & Potatoes Board July

2 Executive Summary The NFU s vision is of a thriving, productive and profitable British horticulture and potatoes sector that is able to meet the demands of consumers; today and in future. Catalyst for Change is intended to start a debate about whether the way the supply chain operates currently is in the best long term interests of consumers and asks whether there are better ways of doing business that would bring benefits to all parts of the chain. The horticulture and potatoes sector is one of the most diverse in British agriculture, with over 4000 growers in Britain together producing over 9 million tonnes and 300 types of fruit and vegetable and potato. Nationally, the value of the horticulture sector in terms of its contribution to UK GDP is in the region of 3 billion. The horticulture sector employs around 37,000 people in England on a permanent basis and a further 56,000 seasonal workers every year. Horticulture is often described as a high risk, low reward industry. Growers today are operating against a backdrop of diminishing profitability, escalating farmgate costs and a declining share of the UK fresh produce market. By comparison, returns to growers of cereal crops (such as wheat and oil seed rape) have been much higher. It is increasingly likely that fruit, vegetable and potato producers will move into cereal production unless margins and profitability levels in horticulture improve, and are sustained. The UK horticulture industry has lost considerable market share to imports over the last ten years. As a result the UK s self-sufficiency in vegetable production has fallen from 73% in 1998 to 60% in Our self-sufficiency in fruit production has improved slightly over this period and currently stands at 38%. The NFU has identified four distinct trends in domestic production and consumption and has categorised a range of crops as either growing, having potential, shrinking or critical in terms of their selfsufficiency levels. A lack of trust and confidence within the supply chain has been identified as the most significant factor impacting on the horticulture sector s performance. Several examples of poor business practice are exposed, which have been identified through first hand discussions between the NFU, growers and intermediaries operating across all sectors of horticulture. These include: these practices constitute a breach of the Groceries Supply Code of Practice (GSCOP). Retail promotions increasing in frequency, length and depth with growers reportedly being asked to make substantial financial contributions to the cost of promotional campaigns. A lack of commitment to production programmes with growers taking all the risk of planting a crop with no commitment from the buyer. A short term trading culture in the sector, which is cultivated by a lack of long term contracts between growers, intermediaries and retailers. A tension between the actions of price driven retail buyers and the corporate sustainability objectives promoted by retailers. A continuation of this situation could lead to fewer British fruit and vegetables on supermarket shelves for consumers to buy, higher levels of imported produce, less product choice and innovation and the possibility of higher food prices in the long term due to a lack of efficiency and investment in the grocery supply chain. This document seeks to address some of the obstacles that currently exist in the fresh produce sector and aims to drive better behaviour and relationships between growers and their customers. In seeking to drive better behaviour in the supply chain we have showcased several examples of good business practice in the report. The NFU makes several recommendations that, if taken up, we believe will reduce growers risk, improve relationships and enable a more equitable share of profits in the horticulture supply chain. These include: Greater price certainty for growers, which could be achieved through, for example, transparent pricing calculations, price formulas, market trackers and / or fixed prices agreed in advance for a specified volume of crop or for the season. Reports of over riders, verbal margin agreements, a lack of price certainty and late payment. Many of 2

3 A more collaborative approach to scheduling promotions throughout the year, which are production led as much as possible with greater flexibility shown by retailers to change promotional plans (length, timing, frequency) in collaboration with growers to reflect changes in supply and demand. Long term supply contracts between retailers, intermediaries and growers to reduce the frequency of retendering cycles and inject stability into the supply chain. Production programmes should ideally be included as part of a contract, underwritten by a commitment from the customer to purchase the crop once grown and offered well in advance of a crop being required (ideally one year). In addition to our strategic recommendations, we recognise the need for urgent and immediate action to address the bad practice behaviour that is damaging growers businesses. To this end we have launched a Fruit and Veg Pledge and are inviting retailers, packers and processors to sign up to it. A copy of the Pledge is provided in Annex 1 and is available at to download. The NFU will regularly publish on its website a list of those companies who have endorsed the Pledge. In producing this report we want to provide a desperately needed Catalyst for Change and help secure a profitable and productive British horticulture and potatoes sector; one that is able to meet the growing consumer demand for home grown fruit and vegetables - today and for the long term. We also hope that this report serves as a wakeup call to the fresh produce supply chain, else risk providing interesting reading for the Groceries Supply Code of Practice (GSCOP) Adjudicator, when appointed horticulture & potatoes contributes 3 billion to UK GDP and employs 37,000 people in England plus a further 56,000 seasonal workers every year 3

4 Introduction This document sets out the NFU s vision for a strong, fair and profitable horticulture and potatoes supply chain. It seeks to expose and address some of the supply chain obstacles that currently exist in the fresh produce sector and, ultimately, forge strong, long term relationships between growers and their customers. This work is intended to show leadership to the sector by offering recommendations for better ways of doing business that we firmly believe, if acted upon, will enable the sector to fulfil its genuine potential to increase production and meet the growing consumer demand for British fruit and vegetables, as well as take advantage of new market opportunities abroad. As part of the research for this report the NFU held 12 grower discussion groups across the country (attended by over 100 growers), interviewed a further thirty growers and packers on a one to one basis and discussed supply chain issues more broadly with a number of individual organisations and associations operating across the fresh produce sector. The NFU also met with processors and major retailers to ensure a well-rounded and balanced view of the issues. Elements of this work may be controversial, however, Catalyst for Change is intended to push the boundaries of current thinking and challenge the supply chain. In this work we describe a positive future for the fresh produce industry in Great Britain and set out the vital ingredients for achieving it. Above all else, we want to spark a debate in the industry about whether the way the supply chain currently operates is in the best long term interests of consumers or whether there might be better ways of doing business that would benefit all. Vision for the British Horticulture & Potatoes Sector: Hallmarks of success Our vision is of a thriving, productive and profitable horticulture sector that is able to meet the demands of consumers, both today and in future. Here we set out the hallmarks of a successful British horticulture and potatoes sector: Growing a sector that is increasing production, meeting consumer demand and boosting self-sufficiency. Profitable every part of the supply chain is making a sustainable profit that rewards effort and enables reinvestment. Profit comes from control of costs and fair returns from the marketplace. Lean a culture of continual business improvement, cost reduction and productive use of resources throughout the supply chain, with minimal waste and responsive to the consumer. Competitive food is produced to the highest quality, safety and efficiency at a price that can be favourably benchmarked against others operating in the marketplace. Market share is gained and not lost. Collaborative retailers and growers have aligned, long term business objectives and shared ambitions for the category with a vested interest in ensuring that all parts of the chain are profitable. Innovative British horticulture is at the forefront of new product development, keeping pace with changing consumer demands. There is strong communication throughout the supply chain and joint investment in research into new varieties, production techniques and products that consumers want to buy. Strategic all parts of the supply chain are working towards common, long term goals that are well communicated, mutually dependent and aligned. Opportunistic, short term business models are uncharacteristic of the industry. Market orientated growers have access to relevant, accurate and insightful market intelligence and information and are able to make informed production decisions be that for the home market or for export abroad. Responsive the sector is able to manage supply and demand in a way that is rapidly responsive to changes in production or consumer demand. 4

5 The sector The horticulture and potatoes sector is one of the most diverse in British agriculture, with over , growers in Britain together producing over 9 million tonnes and 300 types of fruit, vegetable and potato. Nationally, the value of the horticulture sector in terms of its contribution to UK GDP is in the region of 3 billion ( 2.8 billion in England 2 ); underlining its importance to job creation. In 2010 the horticulture sector in England employed 37,000 people on a permanent basis and a further 56,000 temporary seasonal workers. The UK horticulture sector has lost considerable market share to imports over the last ten years. Imports of vegetables have risen virtually every year for a decade, reaching 1.8 million tonnes in Imports of fresh fruit stand at approximately 3.2 billion tonnes. Over the same period UK exports have declined to just 78 thousand tonnes 3. One driving factor behind the rise in imports over the last decade has been the growth in consumer demand for exotic fruits and vegetables that either cannot be produced in the UK, or are consumed out of season. The economics With the fresh produce sector encompassing such a multitude of crops, all with different levels of perishability, investment requirements, routes to market and import pressures there will naturally be a range of financial performances and profitability levels. Yet, there are some serious financial pressures to highlight that are impacting on all British growers. Input prices for horticultural production are currently at record levels and have surpassed the previous peaks recorded in 2008 (figure 1). Most notably since January 2010 the cost of fuel has risen by 30% and fertiliser by 60%. While other farming sectors have experienced an increase in average prices over the last two years (most notably in cereals and beef), which has helped to offset rises in input costs, average fruit and vegetable farmgate prices have remained relatively static. Figure 2 reveals the significant gap that has emerged between average input costs and average horticultural prices. It is this inability to recover the cost of higher inputs from the market place that has contributed to the poor profitability levels the horticulture sector experienced in 2010/11, as shown in figure 3. According to Defra s Farm Business Income (FBI) data 24% of horticulture businesses failed to make a profit in 2010/11, with a further 39% making an income of less than 30,000. By comparison, the profitability of cereal production (such as wheat and oil seed rape) has been much higher (figure 4). Considering that growing cereal crops also requires significantly less labour than horticultural production, offers a simple, transparent and less risky route to market and provides the option to contract hire specialist equipment (rather than purchase it) it is increasingly likely that fruit, vegetable and potato producers will move into cereal production unless margins and profitability levels in horticulture improve, and are sustained. 1 AHDB levy payer information. For non-potato crops HDC estimates that 1600 businesses represent an estimated 80-90% of UK horticultural production. 2 University of Reading Rural Business Research, Horticultural Production in England, 2010/11 3 Agriculture in the UK 2010, Defra 5

6 350 All means of agricultural production Energy and lubricants Plant protection products Seeds Fertilizers and soil improvers 300 INDEX (2005=100) Figure 1: Trends in input costs for horticultural businesses Fresh Fruit Fresh vegetables Input costs INDEX (2005=100) Jan 06 Sep 06 May 07 Jan 08 Sep 08 May 09 Jan 10 Sep 10 May 11 Jan 12 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Figure 2: Average farmgate fruit and vegetable prices and input cost trends, Sources: Defra Agricultural Price Indices June, 2012 Defra Farm Business Survey,

7 PERCENTAGE OF FARMS Less than (<) 0 0 to < 10k 10k to < 20k 20k to < 30k 30k to < 40k 40k to < 50k 50k to < 75k 75k to < 100k 100k and over Figure 3: Distribution of Farm Incomes on Horticulture Units 2010/11 (k = thousand) Fresh Vegetables Feed Wheat Oilseed Rape Index (2005=100) Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Figure 4: Average farmgate vegetable price and average cereal crop returns

8 Self-Sufficiency and Market Share Self-sufficiency provides a measure of how much of the food that is consumed in the UK is domestically produced. Monitoring changes in self-sufficiency over a period of time helps to provide an indication of our competitive performance in the marketplace and reveals where any gaps, weaknesses and opportunities exist in the production of home grown crops. The UK is relatively self-sufficient in the production of carrots, potatoes, peas (fresh and frozen), blackcurrants, cider apples and perry pears. Interestingly, the majority of these crops are grown for a committed buyer, usually on a contractual agreement, which offers the grower some degree of certainty and stability on price and volume. Elsewhere, there have been definite winners and losers of market share and self-sufficiency over the last decade. The NFU has identified four distinct trends in domestic production and consumption and has categorised a range of crops based on their performance over the period 2000 to 2010; the categories are: These categories are presented in Table 1. A more detailed breakdown of consumption, production and self-sufficiency data for each of the crops included in Table 1 is provided in appendix 1. Of notable significance are the endangered crops that have been identified. Each of these crops has fallen significantly in terms of its production and self-sufficiency since 2000, despite a rise in consumer demand. They are; Cucumbers self-sufficiency fallen 25% to just 30%. Tomatoes self-sufficiency fallen 10% to just 19%. Salad (spring) onions self-sufficiency fallen 40% to just 22%. Broad, runner and dwarf beans self-sufficiency down 161% to 47%. Mushrooms self-sufficiency down 15% to 42%. Growing - production, consumption and selfsufficiency have all increased over ten year period; Potential production is moving in the right direction, but has not been able to keep pace with a more rapid rise in consumption; therefore self-sufficiency is stable or lower than ten years ago. At risk production is falling at a faster rate than consumption, resulting in a lower self-sufficiency as produce is imported to meet consumer demand. Endangered domestic production has fallen significantly despite a rise in consumption; selfsufficiency is lower and will continue to fall if production continues to decline in a growing market. 8

9 1. Growing 2. Potential 3. At Risk 4. Endangered Crop characteristics: Crop characteristics: Crop characteristics: Crop characteristics: Production and consumption have increased strongly. Self-sufficiency is higher today than 10 years ago as imports are being displaced. Continued investment in research, new varieties and planting technologies coupled with sustainable profits will be vital to maintaining this growth and driving further increases in market share. Strawberries Pears Asparagus Sweet peppers Plums APPLES Table 1: 10 year trends Production, consumption and self-sufficiency One exception to this is the growth in market share for British plums, which is a result of a decline in consumption and a rise in domestic production. Dessert and culinary Production has increased, but consumption has risen more rapidly largely driven by out of season demand. Despite the rise in production selfsufficiency remains stable or lower today than 10 years ago due to the expansion of the market, but British production is at least moving in the right direction. There is real potential for British growers to harness a greater share of a growing market if the current increase in production can be accelerated through continued investment. Blackberries Raspberries Celery Broccoli Production and consumption have both declined, but British production is falling faster than consumer demand. Self-sufficiency is either stable or lower today than 10 years ago, resulting in higher levels of imported produce to fill the demand gap. Growers are choosing to produce other crops where there is market growth and more buoyant demand, or are exiting the sector. Product innovation to entice consumers towards these crops could stimulate demand (such as prepared, processed and added value products). Brussel sprouts Cauliflower Lettuce Leeks British production has decreased by more than 20% over the last ten years, despite a strong rise in consumer demand. Self-sufficiency is significantly lower today than 10 years ago as British growers lose ground in a growing market. Where British growers are not responding to a rise in demand it is likely that high capital expenditure (in glasshouses for example), long term investment decisions and pressure from importers - who are able to supply product all year round - have contributed to a decline in domestic production. If British production continues to decline as demand continues to grow the proportion of available British produce could reach critically low levels. Cucumber Salad onions Broad, runner and dwarf beans Tomatoes Mushrooms 9

10 The need for change The bottom line is that growers, packers, processors and retailers need each other. Each part of the supply chain should therefore have a vested interest in ensuring that the other is profitable and in good shape to deliver high class British produce to consumers for the long term. For growers, retailers provide the largest route to market and have encouraged an increase in productivity. For retailers, the fresh produce category is highly attractive and profitable. The retail market for all UK fresh fruit and vegetables was worth an estimated 9.2 billion in 2010, and is predicted to rise in value to 11.7 billion by Several grocery retailers overtrade on fruit and vegetables on the back of a reputation for freshness, quality, value and strong British provenance - all of which help to generate consumer loyalty. It is growers and packers who provide this consistent and reliable supply of high quality, assured, traceable, innovative and fresh food that consumers increasingly demand. Yet, despite the category s clear value and importance, the supply chain is not working cohesively. Horticulture is often described as a high risk, low reward industry, where confidence and trust are in short supply. Producers in most sectors of horticulture often take a gamble by investing in the production of fruit and vegetables renting land, buying seed and planting crops - without any commitment on price or volume from their customer. This is all taking place against a backdrop of escalating farmgate costs, diminishing grower margins and falling self-sufficiency in fruit and vegetable production. Most recently, the West Midlands Heart of Horticulture Report (2012) signalled that a lack of trust and confidence within the horticulture supply chain was the most significant factor impacting on the sector s performance and identified an urgent need for a more strategic approach to supply chain relationships. In fact, several studies published over the last two years have highlighted this grave and worsening situation: EFFP s 2010 report Driving Change in the Fresh Produce Sector reported grower margins of less than 2.5% on average and stated an urgent need for supply chain relationships in the horticulture sector to become less transactional and more collaborative 5. Defra research in 2010 revealed that fruit growers had received an unfavourable return on capital and negative incomes over the last 6 years, which was 4 Key Note Ltd. Fruit and Vegetables Market Report, European Farming and Food Partnerships (EFFP), 2010 discouraging reinvestment. The Grow East Midlands report (2010) suggested that retail margins were being maintained while those at the farmgate were squeezed; 77% of the growers surveyed felt that the current level of profitability did not allow for reinvestment. Plimsoll 6 reported that businesses in fresh produce industry made 440 million less profit in 2010 than in In its 2010 Outlook 7 for the field vegetable and roots sector, Anderson s concluded that the profitability of the fresh produce sector is inadequate to sustain investment. The 2011 Farm Business Income (FBI) figures revealed that 24% of horticultural businesses failed to turn a profit in 2010, more than in any other sector. In recommending ways to improve the prospects for the UK food chain and offer stronger protection against the food supply challenges ahead, a report by Chatham House in identified the need for a new supply chain system, and concluded that: Collaborative relationships around the supply chain will need to take on new importance; Retailers in particular will need to adapt their practices to alter the balance of risk and reward throughout the chain; It is currently unclear whether the sector can move from its current ingrained short termism in order to develop the more strategic focus required. British growers want to do business with retailers, yet the sector is being driven to its limits and is evidently not coping with the strain. We suggest there is an urgent need to develop strong, long lasting, partnerships in the fresh produce sector where all parties are justly remunerated and where there is trust, fairness and transparency throughout. Without this solid foundation, supply chains are often characterised by a culture of fear, mistrust, poor practice and, often, an unfair distribution of profit. It s only fair to point out that some supermarkets are already making positive efforts to work constructively with their suppliers and invest in the long-term health of British farming. However, it would appear that retailers remain inclined to undo this good work by focusing on their own short-term financial performance, which all too often means abusing their position. 6 Plimsoll, Andersons Outlook Report The UK s Role in Protecting our Future Supply Chain,

11 Getting our own green house in order It would be wrong of course to suggest that all the problems in the fresh produce supply chain lie at the feet of the grocery retailers. In the interests of presenting a balanced case for change there are several issues highlighted here that other parts of the chain will have to address if we are to achieve our Vision for the sector. According to EFFP, the UK horticulture sector has not reacted to, or embraced, the need for structural change in the way that has been witnessed in countries such as Holland therefore hindering our ability to compete. Furthermore, the Producer Organisation Scheme 9 has not been used to achieve the same level of concentration of supply and efficiency gains in the UK as it has in other member states. Even within the UK there are certain sectors of horticulture where growers have not sought out opportunities to collaborate and consolidate to increase their negotiating power and competitive position in the market. In the vegetable sector for example the number of POs has reduced markedly in recent years, to be replaced by a number of privately owned businesses. In contrast, the top and soft fruit sectors have achieved much greater levels of grower collaboration and co-operation. The structure of the fresh produce supply chain has developed over time to include a large number of intermediaries (known in the industry as packers or marketing agents) which sit between the grower and the end customer. Intermediaries can play a very useful role in taking responsibility for packing and marketing a crop and, where necessary, sourcing and transporting imported produce into the UK. A number of intermediary businesses have invested in production units abroad so that they are able to supply their customers all year round. Many of the roles provided by intermediaries would be beyond the capability of individual growers to fulfil 10. However, some growers have reported a lack of transparency in the financial arrangements they have with their intermediary, and can also feel distanced from the end customer. Some of these concerns are explored in more detail later in this report. Furthermore, there is a view that, in some sectors of horticulture, more consolidation is needed at an intermediary level to reduce ruthless competition for a limited market share. Specifically, the practice of marginal costing is reported to be undermining the fresh produce market and giving unrealistic price expectations to retail buyers. Marginal costing occurs when a company chooses to aggressively market a small proportion of produce at a very low price in an attempt to win more business. While this tactic is arguably just an example of market forces at work those who adopt it should be mindful of the damaging impact it has on the profitability and stability of the entire chain. This practice also illustrates the different economic drivers that growers and packers have. Packers will generally seek out opportunities to sell higher volumes of a product at a fixed margin to achieve a level of profit; whereas growers generally need to achieve a more positive margin on their crop, because it is difficult to escalate volumes once the crop is established. More positively, the efficiency of intermediaries has improved greatly in recent years. Several processors and packers have adopted LEAN 11 business principles, which have created massive efficiency gains by stripping out wastage and reducing costs. Yet, by comparison, less work has focused on maximising and monitoring competitiveness at grower level through, for example, farm benchmarking tools. Many more growers could arguably benefit from analysing their costs of production and benchmarking this against their competitors at home and abroad. There can be considerable differences between the highest and lowest cost producers that cannot always be explained by geography or farming systems. In the horticulture sector, despite several attempts in recent years to encourage greater participation, benchmarking has not yet reached a critical mass of growers. The majority of farm benchmarking is carried out on an informal basis through a small network of business clubs, with very little data sharing between growers on a national scale. Barriers to participation may be overcome if there was a renewed effort by the industry s levy bodies to promote and facilitate collaboration and education on the commercial benefits of analysing and sharing financial data. 9 To help growers increase their competitiveness in the supply chain, the European Union (EU) Fruit and Vegetables Regime provides financial support to producer co-operatives, which must meet certain EU criteria to be recognised as Producer Organisations (POs). 10 EFFP, IGD / Food Chain Centre 11

12 The consequences of a do nothing approach British growers, the supply chain and consumers need to decide whether a strategy of sourcing the cheapest possible food today is in anyone s long term best interests. But, what might the consequences be of adopting a do nothing approach? 1. Customers increasingly want to see retailers supporting British farming, both in terms of sourcing local, fresh and seasonal produce and fair treatment of suppliers. A continuation of the status quo could see consumers expectations in these crucially important areas unmet. 2. Taste, freshness and quality are often compromised when a British product is substituted by an imported one. 3. The same levels of traceability, consistency and quality that are available in Britain can be harder to guarantee when buying from abroad. 4. By adopting strong British sourcing policies retailers can offer consumers greater assurances over security of supply, especially given on-going market volatility and concerns about global trade flows, which are moving increasingly away from Europe. 5. A lack of investment by growers in new product development and modern varieties due to unsustainable profit levels could reduce product choice and limit innovation for consumers. 6. Retailers that commit to British farming can protect brand integrity and give consumers a stake in the debates that will shape the long term future of agricultural and horticultural production. 7. Opportunities to drive further efficiency gains and eliminate unnecessary costs from the supply chain will be lost without the long term security that farmers (and increasingly banks) need to invest in modern production facilities. 8. With a contribution to UK GDP of 3 billion and a provider of over 37,000 jobs in England alone a decline in British horticultural production would have a negative knock on impact on the national economy. Alternatively, a boost in British productivity would create jobs, expand trade, encourage investment and facilitate growth. The GSCOP Adjudicator At a regulatory level the Groceries Supply Code of Practice (GSCOP) includes a Principle of fair dealing and stipulates that a Retailer must at all times deal with its suppliers fairly and lawfully. This includes a requirement for the retailer to conduct trading relationships in good faith, without duress and in recognition of the Suppliers need for certainty, particularly in relation to production, delivery and payment issues. Yet, anecdotal evidence provided to the NFU suggests that these principles are not being adhered to in all areas of horticulture currently. The announcement in the Queen s Speech in May 2012 of the introduction of an Adjudicator to ensure fairness in the supply chain and monitor retailers compliance with the GSCOP will come as a welcome relief to farmers and growers and has support from all the main political parties. A swift passage could mean that an Adjudicator would be up-and-running before the third anniversary of the GSCOP in early The ability of third parties, such as the NFU, to provide credible evidence for launching an investigation will be paramount to the effectiveness of the Adjudicator. The evidence and information provided in this report should serve as a wakeup call to the fresh produce supply chain, else risk providing interesting reading for the Adjudicator, when appointed. If we want a healthy farming industry it really depends on us as consumers going into shops and supermarkets wanting to buy quality British products. if you want healthy farming, you want consumers saying British food is the best, I want to demand the best and I want to go out to buy the best. That would be good for British agriculture. David Cameron, Prime Minister, 9th May

13 The Fresh Produce Supply Chain: poor practice exposed Each of the issues addressed in the report have been identified through first hand discussions between the NFU, growers and intermediaries operating across all sectors of horticulture. 1. Price and payment Growers across all sectors of horticulture need to achieve a sustainable return on capital that enables profit and reinvestment if we are to secure a thriving horticulture sector. Yet, several pricing issues appear to be dogging the horticulture supply chain and taking value away at present: Over-riders The GSCOP states that suppliers should not be expected to make payments as a condition for being a supplier, yet, in reality some packers and growers have come to accept that supplying a major retailer carries a price tag in the form of sales support. Over-riders are already described as being in the region of 3% of a supplier s total business to a retailer. This requirement alone is reported to be taking millions of pounds out of the horticulture supply chain every year. However, growers are now reporting that retailers are requesting substantial increases in over-riders of over 5% in some cases. The majority of growers and intermediaries who contributed to this report admitted to agreeing to meet retailers over-rider demands out of fear of losing business with their customer. Lack of price certainty Growers are increasingly concerned at the lack of certainty offered to them over the price they will receive for their produce. The lack of stability in prices during a crop season also makes budgeting a big challenge for growers who state that significant pressure is being placed on them to regularly lower prices and contribute to the cost of retail promotions at short notice. Verbal margin agreements The GSCOP states that any agreement with a supplier of groceries is to be in writing. However, it has been alleged to the NFU that retailers commonly request that growers and packers guarantee them a minimum profit margin, which is to be maintained even during periods of promotion. These requests are referred to in the industry as verbal margin agreements, as they are usually not documented in a contract, or stipulated in writing. Some of the margin expectations quoted to the NFU exceed fifty per cent. Late payments Discussions with growers have revealed a growing problem of late payment, which is becoming a major drain on finances. Recent research by the payment body BACS showed that late payment to small businesses (mainly originating from large companies at the head of supply chains) has hit an all-time high. Growers are understandably reluctant to publically identify the companies that routinely fail to pay them on time and in full, or who change payment terms and conditions retrospectively with little or no consultation with suppliers. Often, the reason for this reluctance is fear of reprisals in the form of lost business with a large company. If small firms are not being paid on time and in full many will have little choice but to withhold payments to suppliers themselves in order to preserve the little cash they have, creating a vicious supply chain circle of poor payment. In turn, we believe that, if large companies commit to paying on time it will lead to prompt payment being passed right down the supply chain. 2. the true cost of retail price promotions Retail promotions on fruit and vegetables are a double edged sword for growers and packers. For growers promotions offer the opportunity to drive demand when production of a crop is strong, build retailer good will and combat competition from another supplier. For retailers promotions can increase volume sales, raise overall basket spends and encourage customers through the door. However, while promotions are effective at stimulating purchasing, their impact on the supply chain can be detrimental if not managed closely. One impact of the recession is that retail promotions have increased in length, frequency and depth. The GSCOP is explicit in stating that suppliers should not be expected to predominantly fund the costs of a promotion. So, it is of massive concern that growers claim to be incurring huge losses through (what they describe as) excessive, unplanned and irresponsible promotional activity that they are being pressured to shoulder the cost of. The timing of promotions can also be sporadic and seemingly illogical. Evidence from the IGD 14 suggests that promotional spend by a retailer is often based on the previous year s activity (and in many cases up-weighted) without any strategic input. For example, growers and intermediaries report that retail promotional activity is being driven to excessive levels during times of high consumer demand or short supply, which takes unnecessary value out of the chain that cannot be recovered. 14 IGD,

14 3. production programmes For the majority of horticultural production shelf life is limited, which is a major issue when dealing with a fresh product. Supply must therefore be carefully managed to meet demand. Growers supplying the processed and retail markets will usually be working to a programme of supply which will specify delivery periods and volumes of produce to be received. This is intended to prevent wastage, increase efficiency, improve planning and budgeting and provide a degree of certainty to customers on product supply 15. However, production programmes in their current form are not fulfilling these criteria and are arguably creating more risk in the supply chain for two main reasons. Firstly, there is a climate of fear that exists on all sides to ensure that there will be a plentiful supply of product on the shelf this leads to vast oversupply of some crops. Ultimately it is the grower who carries the risk and cost of planting a crop that may not be required come harvest time. Secondly, programmes are generally offered very late in the growing season. In fact, if a grower were to wait for the programme to arrive before planting, the likelihood is that it would be too late to grow a crop for that season. The lateness of programmes being awarded is symptomatic of short term decision making further up the supply chain and reluctance to commit to a supplier. This results in decisions and investments further down the supply chain being based on assumptions and expectations of an order being placed at some point. 4. Wastage in the supply chain While there are no accurate figures available on wastage in the supply chain it is reasonable to predict that hundreds of thousands of tonnes of perfectly edible fruit and vegetables never reach the consumer. The following supply chain practices are adding cost and stripping value out of the supply chain: Cancelled retail orders due to unforeseen changes in consumer demand can result in crops being left un-harvested in the field or destroyed; An oversupply of product in the market, caused by growers being offered programmes to produce more than the market needs; A limited number of outlets for imperfect or class II produce, which could be better utilised in processed foods or value ranges; Retail product specifications have become a lot higher over time in the pursuit of aesthetic perfection. This unrealistic expectation is resulting in large proportions of British fruit and vegetable crops being destroyed, unharvested or sold as animal feed because they simply don t make the grade. One grower reported that 25% of their apple crop was left unpicked in 2010 due to inadequate size. 5. the role of contracts in the fresh produce sector A supply contract is critical to determining the business relationship that exists between a grower, intermediary and retailer. However, our discussions with growers and packers indicate that (with the exception of food processing) very few supply arrangements are underpinned by contracts in the fresh produce sector. Short-term trading still prevails because of the inherent level of competition that exists to supply products to retailers. A priority for the sector will be to move away from this approach to allow long term relationships to develop. Retendering of business Retendering in itself is not an unreasonable practice as it ensures competition in a market. However, frequent retendering of business creates a climate of uncertainty for suppliers that goes against the long term investment required for horticultural production. There has also been a reported increase in the number of online auctions (so called e-auctions) for supermarket contracts, which is compromising the ability to establish meaningful business partnerships in the fresh produce sector. Encouraging suppliers to bid for pockets of business only entrenches a price focused, short term trading culture. Processing contracts Around 75% of Britain s potatoes are grown on contract for a committed buyer 16. In the top and soft fruit sectors there are also examples of long term contracts that exist for juicing and pressing. Similarly, in the vining pea sector the majority of the crop is sold on a contract for freezing or further processing. These contracts offer processors security of supply for a specified volume of produce. For growers, these contracts offer clarity and certainty on how much of their crop will be purchased, and usually with an indication of the price that will be paid, if not a fixed price for the season. However, where any supply contract exists it must be balanced and fair for both parties with an equitable share of risk and reward. Where pricing models are included in a contract they should be mutually agreed, fairly negotiated and transparent. Several issues have been raised by growers in relation to processing contracts across the horticulture and potatoes sector, which need to be addressed: 1. Pressure to sign growers have reported their discomfort at being asked to sign long term processing contracts very close to harvest. Growers need contracts in sufficient time to allow them to make informed business decisions about the viability of growing a specific crop before commitments to renting land and planting crops are made. 2. Price formulas while the offer of a fixed price contract offers price certainty it is vital for any price formula to be transparent, open to scrutiny and encompassing of a mutually agreed set of criteria. Growers claim that certain price models incorporated into contracts 15 Grow East Midlands Report, Potato Council estimate 14

15 are not sufficiently transparent, lag behind production costs and fail to offer a year round competitive price. In some instances, the option for a price review on a twice yearly basis would help to ensure that the price agreed remained competitive and sustainable for both parties. 3. Negotiation and communication it is common for grower representatives to negotiate directly with company executives on contractual and pricing issues. Yet growers can sometimes feel dictated to in negotiations, with pricing decisions being made unilaterally by the processor. It is vital that grower representatives who form part of a negotiating team are properly supported, trained, highly skilled and have the ability to manage large and complex negotiations. These requirements are not easy to find when most growers are accustomed to running successful single operations or sole trading businesses. 4. Growers would like to see better communication between supply groups and purchasers. For example, more structured grower representation at a national or local level brings growers together, facilitates information exchange, improves professionalism and generally gives growers a stronger negotiating position. Greater cooperation and collaboration between growers would put producers in a stronger position to challenge supply chain obstacles. 6. Relationships and communication While some good attempts have been made by retailers to get closer to farmers and growers in recent years - with the dairy sector perhaps leading the field in terms of the depth of contact - all too often these relationships are either superficial or simply about additional standards with no premium or extra commitment for the grower. Few retailers appear to explicitly recognise the need to ensure that higher standards (which imply higher production costs) are reflected in either higher prices to producers or consumers. As yet, the additional costs of sustainability have not been fully internalised by retailers and so it seems that growers are simply being asked to do more, without any additional remuneration. Growers also complain of there being a severe disconnect between the actions of retail buyers on the ground and the sourcing principles promoted by the corporate arms of the retailers. The former being incentivised by price and margin, the latter being focused on meeting corporate social responsibility targets. Arguably, while a supermarket buyer s performance is measured purely on the profit margins they achieve a true partnership approach with collaboration and shared objectives throughout the supply chain won t be possible. There is also reported to be a very mixed level of knowledge and experience amongst retail buyers about the basics of horticultural production and the challenges that growers face on a day to day basis. For example, some buyers don t appear to appreciate the planning and investment time that goes into producing a crop or the lead in time required to bring a new variety to market. 7. Transparency Intermediaries can undoubtedly provide a useful role in the horticulture industry; however, growers report a lack of transparency in some relationships. In the worst examples, growers are given no prior indication as to the price they can expect to receive for a crop, nor are they provided with any transparent breakdown of how the price they receive is calculated. Growers often have no knowledge of the margin being made by the intermediary, or any clear unit charge for the services provided (such as washing, packing, labelling and marketing the product), which are deducted from the growers price. In the potato packing sector specifically, growers would like an open debate about transparency and clarity in relation to weighbridge weight charges. Growers are paid on the packed potato weight, which is based on the weight of the crop supplied minus a deduction for excess soil and wastage. Most packers absorb a certain amount of wastage, but above a certain level the grower is expected to pay. However, growers have expressed concern at a lack of clarity or documentation to substantiate where wastage has occurred during processing and would like to see a clearer breakdown of the difference between the volume of potatoes supplied and the potatoes processed. Growers are accepting the packer s deductions in good faith; however, figures provided are often averaged across a number of growers and disputes regularly occur. 8. preferred suppliers and complaint charges Third party suppliers The GSCOP states that a retailer should not tie a supplier to third party goods and services in order to receive payment. However, the NFU has been made aware of several situations where retailers are reported to be dictating which hauliers, packers and suppliers of materials and services (such as labels, plastics and trays) growers and intermediaries must use. In many cases these preferred suppliers are reported to be charging higher costs than could be sourced elsewhere through a competitive tender process. It has been reported to the NFU that these preferred suppliers will offer retailers a volume driven cash rebate, which growers and packers are effectively paying for by being tied in to using a particular service provider. Customer complaints It is common practice for growers to be fined by retailers for any customer complaints received about a product they have supplied. The GSCOP states that retailers should not levy unjustified payments on suppliers for consumer complaints and that, for complaints that can be resolved in store by refunding the retail price or replacing the product, the supplier should not be expected to pay more than the retail price. Yet, growers claim that a typical charge can range from anything between 20 up to a staggering 50 per complaint. This appears excessive, and would certainly seem to exceed the costs to the retailer of resolving a complaint in store. One grower reported being charged for over 1,500 customer complaints at 30 each from a major retailer totalling 45,000 in fines during a single season. 15

16 Strategic Recommendations and Good Business Practice There are several recommendations made here that the NFU believes will improve price transmission, reduce risk, improve relationships and enable a more equitable share of profits throughout the supply chain. All of which will be vital for securing our Vision for a productive, profitable sector that is able to meet consumers demands for high quality British fruit and vegetables. While we don t expect all of our recommendations to be taken up in their entirety, we want to generate a much needed debate about the solutions and opportunities that are available for the industry to consider. We also want to encourage immediate action from the supply chain in response to growers concerns. To this end we have launched the Fruit and Veg Pledge which offers retailers, packers and processors the opportunity to pledge their commitment to the British horticulture and potatoes sector and publically show their desire to act on growers concerns. A list of the companies that have signed up to the Fruit and Veg Pledge will be available at and will be reviewed and monitored regularly. We also take this opportunity to showcase examples of good business practice that already exist in the fresh produce sector. While we have endeavoured to highlight a good cross section of case studies in this report, our list is not exhaustive and there are likely to be other good practice examples in operation that are not covered here. 1. greater price certainty Greater price certainty could be achieved for growers through a variety of commercial arrangements, including: i. Prices agreed in advance for an entire season, or programme of supply. The price could be agreed for an entire output, or at least a proportion of a crop programme. This reduces financial risk and gives growers certainty that a proportion of the costs associated with planting a crop will be recovered. Examples of this arrangement exist successfully in several sectors of agriculture including the dairy and pig sectors. ii. The use of transparent price calculations and formulas in contracts that reflect the cost of production and are based on an agreed set of criteria or market indicators. Good practice McCain Price Index and Payment Terms In order to secure 100% supply of British potatoes McCain launched a new grower contract in 2008 that indexes the cost of production. An independent firm of business consultants tracks all vital costs for potato growers, including pesticides, fertiliser, fuel, labour, land rents and storage costs, especially electricity and the average cost then forms the minimum contract price. In addition to the price formula McCain produces and supplies potato seed for its growers, for which growers are not charged until the product has been sold, which helps growers to budget. McCain also offers growers reliable payment terms of 21 days and commits to pay its growers on time. 16