a preliminary analysis of the uk food chain

Reports A preliminary analysis of the UK food chain Agriculture is increasingly referred to as a link in a wider food chain which extends from the manufacture of agricultural inputs through to food retailing and catering. Preliminary empirical findings on the size, structure and corporate characteristics of these sectors in the UK are discussed along with possible future trends.

In spite of farming’s small and dimi- nishing economic role in the food chain,’ most enquiry continues to focus on the farm, leading to calls for a reappraisal of agriculture as part of a wider agro-industrial complex.’ Nonetheless, the UK food chain in its totality remains poorly investigated.’ The collation of information is made difficult by the complexity of the food chain, by the lack of published data on its corporate structure, and its increasingly integrated nature.

Major sectors

The size of the main sectors of the UK food chain are described in Figure 1 in terms of their turnover for 1986. The value of off-farm inputs represents more than half the turnover of the farming industry, which in turn represents only one-third that of the food- processing sector and one-fifth of consumer expenditure on food and drink.

The corporate structure of the food chain is summarized in Table 1. All the major non-farming sectors are characterized by high degrees of concentration. At first sight the food manufacturing sector appears to be the least concentrated, but the figures are for the sector as a whole. In reality the sector is highly diversified and the data conceal much higher levels of concentration in some sub-sectors. For example, according to the Census of Production for 1986, which breaks down the manufacture of food into 11 Standard Industrial Classifications (SICs), the percentages of total sales held by the five largest enterprises are 73% for organic oils and fats (SIC 411)

FOOD POLICY October 1990

and 69% for grain milling (SIC 416).’ The figures for food retailing suggest a slightly lower degree of concentration, but this partly results from excluding the Co-operative Society which has a 12.1% share of the market but is arranged as a cooperative group of companies rather than a single cor- poration.

Key corporations

Twenty-five companies, considered to be the most important in the UK in terms of their size of turnover and market share, were selected for further analysis.” Together they are responsible for 45% of animal feed sales, 77% of agricultural machinery, 65% of agrochemicals, 90% of fertilizers, 44% of the turnover of all food manufacturing and 47% of food retail sales.

The size of the companies is striking when viewed in the context of the national economy. The 25 companies, 15 of which rank among the largest 100 industrial corporations in the UK,6 have a combined annual turnover within the UK food chain of almost f30 billion, equivalent to more than 8% of the Gross Domestic Pro- duct.

Some assessment has been made of the importance of the corporations’ UK food-chain activities to their overall economic interests. Of the 25 companies, the input manufacturers had the greatest geographical spread of activities, with their UK agricultural supply activities providing only a very small proportion of their total global turnover. For example, all four

machinery manufacturers are owned by North American parents, but even in the case of Ford New Holland, Ford Motor Company’s agricultural machinery manufacturer based in the UK, under 28% of sales were to UK farmers. Similarly, in the case of agrochemicals manufacturers which, with the exception of ICI, are owned by European and North American parents, supplying the UK market play- ed only a small part in their overall operations.

The scale of the food manufacturing companies’ international activities is smaller, with turnover in the UK food chain being of relatively greater importance. All the food manufacturers in the sample are predominantly UK- owned, and approximately two-thirds of their total world sales are generated from within the UK food chain. The operations of the four food-retailing companies are even more highly focused on the UK. All four are British companies, with on average 95% of their sales occurring within the UK.

The degree to which the companies are vertically integrated within the food chain can also be examined. Most have not engaged in land-based food production itself, primarily because of the greater risk and lower rates of return obtained from agriculture compared to industrial activities. However, the intense industrialization of some forms of agricultural production over the past 50 years, where the importance of land can be minimized, has led to the direct involvement of corporate capital.

One good example in the UK is Hillsdown Holdings, a rapidly growing, diversified food company with a total turnover in 1987 of over f3 billion. It owns Buxted Poultry, Daylay Eggs and Ross Poultry among its 1.50 subsidiaries. As a major producer of red meat and bacon, poultry and eggs, Hillsdown supplies the majority of its own animal feed requirements from its ten mills and its own chicks from its commercial hatcheries. Similarly, downstream processing activities are integrated within the group, through the control of 25 abattoirs and several food processing, distributing and meat trading companies.’

The other major examples of verti-

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Reports

Total inputs to agriculture - f6.6

Feedstuffs

L2.7

(41%)

Fertilizers

f0.8

(12%)

Pesticides

LO.3

(5%)

Machinery

61 .o

(15%)

Others

El .8

(27%)

+

Agriculture

E11.6

I

Food

imports

E10.4

t Food and drink manufacturing

f34.4

I

Food

exports

f5.4

t

Consumer expenditure on food and drink - 654.2

Catering

t5.3

(10%)

Food retailing Alcoholic drink E32.3 f16.5

(60%) (30%)

Figure 1. 1986 food chain turnover (f ‘000 million).

Sources: MAFF, Annual Review of Agriculture, HMSO, London, UK, 1988; Business Monitor, op cif, Ref 4; National Income and Expenditure, HMSO, London, UK, 1987.

cal integration also involve food- Among the upstream food-chain manufacturing companies. For exam- companies in the sample, similar ple, Dalgety and Unilever together levels of integration are less evident. account for 45% of the sales of animal The machinery manufacturers have no feedstuffs and are also major food substantial interests in other sectors of processors. These two companies also the food chain, and of the manufactur- have interests in the seeds sector. In ers of agrochemicals and fertilizers 1987 Unilever acquired the AFRC’s only ICI holds important market Plant Breeding Institute, demonstrat- shares in both these sub-sectors. The ing the company’s growing interest in four largest food retailers also have plant biotechnology. Biotechnology relatively small interests in other food- innovations are likely to increase the chain sectors, despite their influence levels of vertical integration in the being increasingly felt upstream in the food chain. food-production process.

It is more common among the largest food-manufacturing companies to have vertically integrated interests in the food distribution, wholesaling, catering and retailing sectors. Exam- ples include AB Foods, Grand Metro- politan and Unigate, and an analysis of the dairying and baking sub-sectors suggests that the two leading manufacturers (Unigate and Grand Metropoli- tan, RHM and AB Foods) control a significant proportion of the distribution channels for their pr0ducts.s Similarly, Grand Metropolitan is an important force in the food-catering sector, owning chains of hotels and restaurants.

Dynamics of the food chain

Analysis of the changing nature of the food chain is very limited and the empirical evidence contained in this report provides only a ‘snapshot’. Lang and Wiggins’ venture no further upstream than the agricultural sector, but do provide a useful starting point for an analysis of change. They iden- tify three distinct periods since the 19th century. Agriculture was the dominant sector up until the late 19th century, and was replaced by food manufacturing. This sector retained its position until the 196Os, only to be-

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come dominated in turn by the food retailers. The continuing significance of the retail sector is illustrated by the multiple retailers’ imposition of stric- ter regulations for the quality of food produce. The influence of retailers is also increasing in the storage and distribution sectors of the food chain, with retailing multiples now estab- lishing their own centralized distribution systems to replace the deliveries direct to stores by food manufacturers. l0

This increasing influence has corre- sponded with further concentration in the retailing sector, a feature of which has been a series of corporate mergers and acquisitions since the early 19705, drawing the attention of the government’s regulatory bodies.” The main reason for this restructuring is the relatively low potential for growth in total food sales. The stifling effects on rates of profit growth of the inelastic demand for food have been offset to some degree by the increasing use by retailers of ‘own-label’ sales and ‘ex- clusive brands’. However, with own- label sales already accounting for 55% of turnover, and with many analysts predicting the approach of saturation levels of store space, opportunities for further growth within the UK food chain appear limited.

The greater integration of Euro- pean markets following 1992 could provide opportunities for both UK retailers and manufacturers to expand through acquisition, particularly as seven of Europe’s ten largest food manufacturers are British.” However, the conflict between the highly local- ized nature of many food-product markets and the large international corporations’ requirements for effi- ciency has been cited as presenting one potential obstacle to this oppor- tunity.‘”

Conclusions

The evidence reveals widely differing levels of dependence among the largest corporations on their food- chain activities. Generally, companies involved in supplying agriculture with its inputs operate on a global scale, with sales to UK agriculture contribut- ing only a very small proportion of


Reports

agricultural elements to achieve ‘a co- ordinated food industry approach’;” and this report represents a contribu- tion to this evolving debate by providing an initial attempt to assess the size, structure and corporate characteristics of the UK food chain.

Table 1. The corporate structure of the UK food chain in 1987.

Total sales Sector (f000) Concentration

Agricultural machinery 1 .o Four largest companies hold 77% of market.

Animal feedstuffs 2.7 Four largest companies hold 57% of market.

Fertilizers 0.8 Three largest companies hold 90% of market.

Agrochemicals 0.3 Five largest companies hold 65% of market.

Agriculture 11.6 144 100 full-time holdings produce 97.4% of total output.

Food manufacturing 26.4 Ten largest companies hold 44% of market.

Food retailing 32.3 Four largest companies hold 47% of market.

Key corporations (nationality, market share %)

Ford (US, 25); Case (US, 21); Massey-Ferguson (Canada, 17); John Deere (US, 15)

Unilever (UK/Dutch, 30); Dalgety (UK, 15); Pauls (UK, 7); J. Bibby (UK, 5)

ICI (UK, 40); Norsk Hydro (Norway, 25); Kemira (Fin- land, 25)

ICI (UK, 19); Schering (FR Germany, 16); Ciba-Geigy (Swiss, 12); Monsanto (US, 9); Bayer (FR Germany, 9)

Unilever (UWDutch, 5.8); Allied-Lyons (UK, 2.9); Dalgety (UK, 2.8); Grand Metropolitan (UK, 3.1); Hills- down (UK, 6.9): AB Foods (UK, 5.5): Unigate (UK, 5.6); RHM (UK, 4.5): Northern (UK, 3.8): United Biscuits (UK, 3.1)

Tesco (UK, 14); Sainsbury (UK, 14); Gateway (UK, 12); Argyll (UK, 8)

Note: The figures for the food-manufacturing sector were obtained from an analysis of the annual reports of the ten largest food-manufacturing companies, but as some of them do not disaggregate their figures for turnover geographically and by sector simultaneously, some estimation has been required. The percentage of total world sales generated by food-manufacturing operations is multiplied by the figure for total UK sales. This assumes that the proportion of UK turnover generated by food manufacturing is approximately equal to the world average.

Sources: financial Times, 19 September 1988; company annual reports; Keynote Industry Sector Overviews, Keynote Publications, Hampton, Middlesex, UK, 1988; MAFF, Annual Review of Agricul- ture, HMSO. London, 1988.

turnover. By implication, and espe- cially as a result of the highly concentrated nature of the agricultural supply sectors, minor shifts in corporate strategy could have widespread implications for UK agriculture.

Companies operating downstream in the food manufacturing and retailing sectors are more dependent on UK food-chain activities. Other than through acquisition and merger, the key to developing market share and maintaining profit growth lies with research and development. New tech- nologies such as cook-chill and irradia- tion will enable markets to expand even though the volume of food con- sumed may decline. Marketing of more highly processed foods means that the trend of increasing value- added beyond the farm gate is main-

tained. However, consumers’ ability to exert power over food producers was illustrated by the rate at which sales of some food products dropped as a result of the food hygiene scandals over salmonella and listeria in 1988 and 1989.

To many farmers, concentration in the non-farming sectors of the food chain may appear to pose less immedi- ate problems than the general decline in their incomes during the 1980s. Nonetheless, they are increasingly aware of the importance of their links with non-farming sectors, leading to a widening of the horizons of agricultural debates. The National Farmers’ Union, for example, intends to establish a Food Policy Group to ‘examine all parts of the food chain’ including upstream and downstream non-

Neil Ward Rural Studies Research Centre

Department of Geography University College

London, UK

‘Agriculture’s share of total food-chain em- ployment declined from 13.0% to 11 .l% between 1981 and 1988: This Food Busi- ness, New Statesman and Society, Lon- don, UK, 1989. *Eg P.J. Atkins, ‘Redefining agricultural geography as the geography of food’, Area, Vol 20, 1988, pp 281-283; D.E. Goodman, B. Sorj and J. Wilkinson, from Farming to Biotechnology: A Theory of Agro-industrial Development, Basil Black- well, Oxford, UK, 1987. 3But see J.A. Burns, J.D. Mclnerney and A. Swinbank, The Food Industry: Economics and Policies, Heinemann, London, UK, 1983. 4Business Monitor, Report on the Census of Production 1986: Summary Volume, HMSO, London, UK, 1988. ‘The 25 were: Ford, Case, Massey- Ferguson, John Deere, ICI, Norsk Hydro, Kemira. Scherina, Ciba-Geiav. Monsanto, Bayer, Unilever,-Allied-Lyons; Grand Met- ropolitan, Dalgety, Hillsdown, Associated British Foods, Unigate, Rank-Hovis- McDougall, Northern Foods, United Bis- cuits, Tesco, Sainsbury, Gateway, Argyll. e’The Business 1 000’, Business, Novem- ber 1988. 7CompanyAnnua/ Report, Hillsdown Hold- ings, London, UK, 1987. 8Economist Intelligence Unit, Retail Busi- ness, EIU, London, UK, 1976. ‘T. Lang and P. Wiggins, ‘The indus- trialisation of the UK food system: from production to consumption’, pp 4557 in M.T. Healey and B.W. Ilbery, eds, The lndustrialisation of the Countryside, Geobooks, Norwich, UK, 1985. ““Financial Times survey: the food industry’, Financial Times, 18 April 1989, pp 1317. “Monopolies and Mergers Commission, Discounts to Retailers, MMC, London, UK, 1981; Office of Fair Trading, Competition and Retailing, HMSO, London, UK, 1985. “‘Fat boys have more fun’, Economist, 29 April 1989, p 79. 130p tit, Ref 10. 14’New NFU Food Policy Group’, National Farmers’ Union press release, 1989.

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Food policy and the NFU Legislative pressures and heightened public interest in the UK’s food supply has prompted the National Farmers’ Union to broaden its involvement in post-farmgate food issues. A Food Policy Group, chaired by its Deputy President, draws upon expertise both within and outside the NFU to address a wide range of issues, ranging from the safety of our food supply to enforceable standards for producers seeking to fulfil niche markets. An important role of the group is to liaise with consumer organizations and thus to address consumer demands and gain better understanding of the public’s perception of, and concern about, the way we produce our food.

During 1989 the National Farmers’ Union (NFU) established a Food Poli- cy Group (FPG). This action was prompted by the combination of heightened media interest in the state of the nation’s food, plus the continuing growth in European and national legislation which, though aimed primarily at the food manufacturing, processing and retailing indus- tries, also had important implications for food producers. Although the NFU has always had an obvious and important role in food matters, repre- senting as it does over 80% of the farmers and growers in England and Wales, its main concerns have rested with production rather than post- farmgate issues. Therefore, FPG represents a significant increase in resources devoted to ‘food’, as opposed to ‘agricultural’, concerns.

The highest decision making body in the NFU is its Council, comprising elected members from each county. The Council, in turn, elects four of its members as full-time ‘office holders’ (President, Deputy and Vice Presi- dents, and Treasurer). The profes- sional staff of the NFU are organized into departments consisting of advis- ers who are specialists in their own field. The importance of food policy is reflected in the membership of the FPG which is chaired by the Deputy President and consists of four Council members plus the heads of each department and specialists in pesticides, legislation, animal welfare and the environment

From the outset FPG has under- taken various roles of which the most urgent was to build contacts with other organizations working in the field. Its policy role involves both making an

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input into the rest of the NFU’s main- stream policy making and taking the lead in forming the NFU’s policy on issues such as food labelling, diet and health, etc. It is also responsible for writing the NFU’s response to government consultation papers such as the recent Department of Health docu- ment on ‘Hygiene training for food handlers’ (December 19X9), and the Food Advisory Committee’s paper on food labelling. FPG is, therefore, a nexus within the organization as well as a link to external bodies.

The FPG’s work has concentrated on four broad themes, though this is likely to expand. First, food safety has been a high priority following the spate of media interest and government’s response to this via legislation and/or voluntary codes of practice, Indeed, dealing with extant or pro- posed legislation covering all aspects of food production and marketing forms the bulk of FPG’s activities and is its second broad theme.

Organic agriculture forms the third. Although a relatively small market niche, it has posed many questions about the public perception of food quality, the relationship between production and the environment and the design and implementation of appropriate standards to ensure that consumers’ demands are fulfilled. Fourthly, understanding the relationship between diet and health and the implications for the industry of implementing dietary guidelines is a growing component of the FPG’s work. Under this heading it is developing its policy on issues such as nutritional labelling.

To date, however, the most important task performed by the FPG has

been bridge building with other interested bodies. There are many organizations with whom the NFU has traditionally had close links, but the FPG’s greater interest in food policy has either initiated new contacts, or provided a different focus for existing ones. The FPG has identified three broad groups to be approached: consumer organizations, the food industry and legislators (traditional contacts have been with the ‘agriculture’ rather than the ‘food’ side of the Ministry of Agriculture, Fisheries and Food, MAFF, and rarely with the Depart- ment of Health). Initial meetings with these organizations have been largely educational as the FPG has sought to explore areas of common policy or to understand where and why they differ.

The next step will be to develop joint initiatives and to pool resources and expertise with these organizations. Often these initiatives arise in response to new legislation such as the Food Safety Bill. One example which illustrates this is the ‘due diligence’ defence clause (Clause 22) in the Bill which states: ‘it shall be a defence for the person charged to prove that he took all reasonable precautions and exercised all due diligence to avoid the commission of the offence’. What this means in practice is of considerable interest. For example, will retailers impose more stringent specifications on agricultural produce? What are the implications for record keeping? Be- cause of the importance of this clause discussions have started with the industry and consumer representatives to try and establish guidelines accept- able to all interested parties.

The FPG acts as an information broker in order to inform the NFU’s policy makers of the significance of their decisions from the perspective of the ultimate consumer. For example, the debate surrounding methods of animal production has always had a welfare dimension, but it also has a food dimension because of the growing campaign that meat products be labelled with details of how the ani- mals in question were raised. This has recently received new impetus from the British Veterinary Association (BVA). Similarly, lobbyists are asking that food products be labelled with the


pesticides that have been used on the growing crops. This has enormous practical consequences for the industry.

The FPG is also concerned with the standards that apply to the production and marketing of produce. It supports the development of niche markets provided they can be properly reg- ulated. In this regard, it has supported the United Kingdom Register of Organic Food Standards (UKROFS) initiative to set standards for organic produce, but is concerned that there may not be enforceable standards for some of the other niche markets that are being discussed such as ‘conserva- tion grade’ food. Clearly, in these and similar issues, the traditional production interests of the NFU merge into the activities of FPG.

One result of all this activity has

been to demonstrate the breadth of subjects which fall under the heading of food policy. As a result the FPG’s allocation of resources to this is once more under scrutiny and is to be in- creased. FPG will, therefore, be one component of an extended food remit though decisions have yet to be made on the final structure. The difficulty will be in deciding which issues it should (as opposed to could) be involved with and, of those, which de- serve most attention. Nevertheless, with FPG as a first step the NFU is much better able to tackle these important issues than before.

Nicholas Read Food Policy Group

National Farmers ’ Union Eynsham, Oxford, UK

Book reviews A competitor’s view of US agricultural policies US GRAIN POLICIES AND THE WORLD MARKET

by Ivan Roberts, Graham Love, Heather Field and Nice Klijn

published for the Australian Bureau of Agricultural and Resource Economics by the Australian Government Printing Office, Canberra, Australia, 1989, 286

PP

This timely book presents a general overview of US agricultural policies and an analysis of their effects on US national welfare and international trade. It is valuable because it focuses on social welfare, as opposed to effects on a particular sector, and because it is written from the perspective of a foreign competitor.

Roberts, Love, Field and Klijn assert that US agricultural policy is an example of the ‘fallacy of composi- tion’, whereby optimal choices of indi- viduals add up to a less than optimal result. They argue that the policy system is constructed of fragmented poli-


ties designed to benefit particular sectors or constituencies, and that the policy as a whole does not maximize social welfare. The same argument can be made about critiques of agricultural policy; they are often politi- cally motivated and focused on a particular area or sector. There is a need for the broad review represented by this volume.

The book is clearly organized into three parts and a large appendix. Each main point is summarized in notes at the margins. There are boxes contain- ing examples and specific information, while more general data are summarized in graphs. There is a glossary at the beginning to aid readers with the specific programme definitions and jargon.

Part one describes the nature of policies, their historical importance and the consistency of their applica- tion. The authors conclude that com- modity price supports have, over the past 38 years, resulted in higher-than- market-clearing prices being paid to farmers for considerable periods of

ReportslBook reviews

time. During these periods, the feder- al government has built up public stocks of grain. Eventually, however, this has always been followed by a period of readjustment to world market conditions that has resulted in the government releasing public stocks to the market. These policies cause welfare losses to the US as a whole because ‘large US stocks and the supply responses of other exporters virtually ensure that the surplus US stocks will have to be disposed of on an oversup- plied market’ (p 27).

Part two analyses the international trade implications of US policies. One of the conclusions is that the combination of production subsidies and acreage reduction programmes has resulted in an area devoted to cropland that approximately equals the amount that would be tilled in the absence of farm programmes. ‘The production reducing effects of the area reduction arrangements approximately offset the short-term production stimulating effects of the deficiency payments’ (p 64). The authors argue further that long-term stimuli of decreased risk and technological incentives go largely unchecked, creating trends to over- production.

There is also an effort to attribute the decline in US agricultural competi- tiveness and market share in the early 1980s to macroeconomic forces within the US rather than the protectionist policies of other exporters, principally the EC. Appreciation of the US dollar and ‘inflexibility in the setting of loan rates in terms of US currency’ (p 72) are singled out.

The discussion of ‘optimal’ trade policies is generally quite good. The authors note that given the size of the US wheat sector in relation to the world market, the ‘optimal’ policy would be a small tax on exports, yet the existing policy is an export sub- sidy. This policy was applied as an effort to increase the world market share of the US wheat producers, a goal, they argue, of little economic justification. ‘The real purpose may merely have been to correct an obvious supply imbalance’ (p 87).

Part three looks to the future with a discussion of some policy alternatives and the politics involved. They discuss

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a preliminary analysis of the uk food chain

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