The Observer view on supermarket prices | Observer editorial

Large retailers have a duty to help small producers

The list of casualties from the supermarket price wars is growing by the day. This month came a Red Flag Alert warning from a major insolvency specialist that more than 1,400 small- to medium-size food suppliers are experiencing “significant distress” and 100 may be pushed over the edge into financial collapse,as the supermarket chains, four of which dominate much of the market, squeeze suppliers and stretch payment terms. Asda and Sainsbury’s have promised £450m worth of cuts, while Tesco has pledged to cut stores and Morrisons is likely to follow a similar strategy. For shoppers struggling to make ends meet, it’s good news that prices are dropping. In the long term, in the cause of fairer play to suppliers and in defence of issues such as sustainability and locally sourced suppliers, the story might not be so bright, a story best illustrated by the current struggle over the price of our daily pint.

Last week, Sainsbury’s launched a national print campaign that signals the supermarket chains are very aware their customers are also concerned at the plight of the nation’s dairy farmers, the majority of whom have an average herd of 150 cows, unlike the giant agribusiness farms in the US and China. The ad puts Marks & Spencer at the top of the league, paying 78p for four pints to farmers for milk that costs 68p to produce. Sainsbury’s pays 72p for four pints while, at the bottom of the league, Lidl, Aldi and Iceland pay 56p to 59p. It’s not enough.

Yo-yoing prices are nothing new to the dairy industry, but the current unpredictability has been exacerbated by global events including reduced demand from China and a Russian trade ban with the European Union. The Russian ban has resulted in a loss of £350m to UK dairy farming. In the past, stability was helped by the Milk Marketing Board (“Does your man get enough?”), which promoted dairy products and set a minimum price for farmers. It was axed in 2002. Ever since, for a variety of reasons, volatility has become the norm.

In 2012, for instance, milk prices dropped to 26p a litre. A year later, they had risen to 35p. Last year, prices had snaked down again. Some farmers took direct action, blockading processing plants. The swings in fortune are taking an irreversible toll. In 1995, there were 35,741 dairy producers in the UK. Now, according to the National Farmers’ Union, the figure may have dropped to under 10,000. As the Observer reports today, prices are being further undercut by dairy farmers in the Baltic states, including Lithuania and Estonia, willing to sell their milk for just 16p a litre. From April, the EU milk quotas that have been in place since 1984 will be lifted. Farmers across Europe will then be free to produce as much milk as they wish, without penalty.

The outlook appears dire but there is cause for optimism. Worldwide demand for dairy products is expected to increase at a rate of around 2% to 3% a year. Overall, the total value of UK dairy exports – liquid milk, cheese, powders and butter – has risen 39% since 2009, reaching £1.3bn in value last year. As the middle classes in areas such as Brazil and China mushroom, so British dairy farmers should experience better returns, but a clearer long-term export strategy also needs to be developed by the government or the only surviving dairy farmers will be the monster companies.

Last week, the House of Commons environment food and rural affairs committee published a report that contains an excellent set of recommendations. It proposes, for example, the establishment of producer organisations (POs) that let farmers negotiate collectively over contract terms, conditions and prices. The lobbying group Farmers for Action is not keen since POs elsewhere in Europe have not had marked success. However, as the select committee says, POs address the major imbalance in the market in which a small number of major retailers are significant buyers but the majority of sellers are small-scale producers; together, they will have more clout.

What also matters – and not just because of the price of a pint – is that the major supermarket chains are better regulated. Among the unfairnesses imposed on suppliers is fees demanded for shelf space, compensation when profit margins are less than expected and late payments for produce already delivered and sold. All potentially crippling for small to medium providers. In a global market, who gets what in the food chain, as is well known, is also distorted.

A 2012 study by the campaigning group Consumers International demonstrated this, from field to supermarket. It gave the example of a pineapple from Costa Rica. Only 4% of the end price goes to workers; 17% goes to plantation owners and 41% to the retailer. Different products may be split differently, but such is the dominance of a few major retailers, theirs will most often represent the fattest slice. Of course, supermarkets have brought choice, cheapness and, in some areas, improved quality to millions of customers, but the power of the chains has become too great – and, as Tesco has shown, this can be its own undoing.

In 2013, the role of the Groceries Code Adjudicator (GCA) was created and the Groceries Supply Code of Practice established to regulate how the top 10 UK supermarkets deal with suppliers, processors and producers. However, the adjudicator, currently Christine Tacon, has very limited powers – for instance, she has no remit on those who are not direct suppliers to a retailer – and the role is not due for review until 2016. The Observer agrees with the committee that the GCA should be able to accept complaints from indirect as well as direct suppliers and to launch proactive investigations, not just respond to complaints. It is also extraordinary that while the GCA can fine a retailer in breach of the groceries code, the government has spent more than a year failing to set a maximum level of fine; Tacon has recommended up to 1% of an offending retailer’s turnover.

This milk crisis will pass, but the fate of the small producer and the rewards to the man and woman toiling on the land to grow what the consumer desires will not improve without more strenuous measures. Change will only come when retailers are properly held to account and consumers continue to exercise their purchasing power with as much integrity as they can afford. It is a plus that people on all incomes benefit from low-cost food, but retailers also have a responsibility to ensure that cut price does not become synonymous with unfair commercial practices and the destruction of the small- to medium-scale producer.


Observer editorial

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