Study on the Competitiveness of the European Meat

Transcription

Study on the Competitiveness of the European Meat Processing Industry
European Commission
Enterprise and Industry
Disclaimer
Neither the European Commission nor any person acting on its behalf may be held
responsible for the use to which information contained in this publication may be put, nor for
any errors which may appear despite careful preparation and checking. This publication does
not necessarily reflect the view or the position of the European Commission.
Luxembourg: Publications Office of the European Union, 2011
ISBN 978-92-79-19003-2
catalogue number: NB-32-11-640-EN-N
doi: 10.2769/11795
© European Union, 2011
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Table of contents
1 Introduction
1.1 General context
1.2 Study purpose and objective
1.3 Methodology for this study
1.3.1 Country selection
1.3.2 Product selection
1.3.3 Interview procedures
1.4 Reading this report
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2 The state of the industry
2.1 Introduction
2.2 An overview of the food and meat industry
2.3 An overview of the value chain
2.3.1 Imbalances along the food value chain
2.3.2 Bargaining power
2.4 External factors that influence the meat industry
2.5 The legal situation
2.5.1 Impact of EU competition law on the supply chain
2.5.2 Product liability and its effect on the supply chain
2.5.3 Specific problem areas
2.5.4 Main observations
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3 Further Analysis: Five Case Studies
3.1 Introduction
3.2 Short summary of issues in each country
3.2.1 The United Kingdom
3.2.2 The Netherlands
3.2.3 Spain
3.2.4 Poland
3.2.5 Germany
3.3 A typology for the five countries
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4 Further Analysis: Modelling and Measuring Asymmetric Price
Transmission
4.1 Introduction
4.2 Price transmission
4.3 Econometric methodology
4.4 Data
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4.5 Results
4.6 Conclusion
4.6.1 Advantages of the method
4.6.2 Drawbacks of the approach
5 Policy recommendations
5.1 Previous efforts of the Commission
5.2 Primary recommendation: introducing a voluntary code of conduct
5.2.1 The reasoning behind a voluntary code of conduct
5.2.2 Challenges for a European-wide code of conduct
5.2.3 Designing a monitoring tool and publishing results
5.2.4 Improved data gathering
5.2.5 Enforcement mechanisms
5.3 Fallback recommendations: regulatory options
5.4 Additional recommendation: strengthening weak actors
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A Spain
A.1 Description of the Industry
A.1.1 Food Price Volatility
A.1.2 Consumption levels
A.2 The Pork and Poultry Supply Chain in Spain
A.2.1 The Pork Supply Chain
A.2.2 The Chicken Supply Chain
A.3 Market structure
A.3.1 The number of firms
A.3.2 Number of firms related to size of firm
A.3.3 Concentration within the industry
A.4 Market features
A.4.1 Levels of innovation
A.4.2 Profitability
A.4.3 Added value
A.4.4 International competitiveness
A.5 Value chain and industry issues
A.5.1 Bargaining power issues
A.5.2 Code of conduct
A.5.3 Development and trends
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B The United Kingdom
B.1 Introduction
B.1.1 Significant events from the last decade
B.1.2 Consumption levels
B.1.3 Meat price volatility
B.2 Market Structure
B.2.1 Number of firms
B.2.2 Size Structure
B.3 Market Features
B.3.1 Levels of innovation
B.3.2 Profitability
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B.3.3 Added value & Productivity
B.4 Pork Supply Chain
B.4.1 Farming
B.4.2 Slaughterers / Abattoirs (Primary Processors)
B.4.3 Processors (Secondary / specialised Processing)
B.4.4 Distribution
B.4.5 Price Structure
B.5 Poultry Supply Chain
B.5.1 Farming
B.5.2 Processing
B.5.3 Distribution
B.5.4 Cost Structure
B.6 Value Chain and Industry Issues
B.6.1 Exercise of Buyer Power
B.6.2 Code of conduct
B.6.3 Developments and trends
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C The Netherlands
C.1 Introduction
C.2 Food price volatility
C.3 Consumption
C.4 The meat supply chain
C.5 Market structure, business dynamics and economic impact
C.6 Pricing and value added
C.6.1 The pork supply chain
C.6.2 Poultry
C.7 Price transmission
C.7.1 Pork
C.7.2 Poultry
C.8 International trade
C.9 Dutch Food Law
C.9.1 Dutch competition law
C.9.2 Code of conduct
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D Poland
D.1 Introduction
D.2 Consumption level
D.2.1 Meat price volatility
D.3 The market structure
D.3.1 Number of enterprises
D.3.2 Size structure
D.4 Market feature
D.4.1 Level of innovation and investments
D.4.2 Profitability
D.4.3 Added value – productivity
D.5 The meat supply chain – the overall industrial structure
D.5.1 Farming
D.5.2 Middleman procurement of livestock
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D.6
D.7
D.8
D.9
D.5.3 Meat industry
D.5.4 Distribution – wholesale and retail
Pork supply chain
D.6.1 Pig meat and consumer product of pigs
D.6.2 Prices structure for pig products
Poultry supply chain
D.7.1 Consumption and production levels
D.7.2 Prices structure for poultry products
The cost structure
Value chain and industry issues
D.9.1 Developments and trends
D.9.2 Bargaining power issues
D.9.3 Code of conduct
E Germany
E.1 Introduction
E.1.1 Meat price volatility
E.1.2 Consumption levels
E.2 Market structure
E.2.1 Number of firms
E.2.2 Number of firms related to size
E.3 Market features
E.3.1 Levels of innovation
E.3.2 Profitability
E.3.3 Added value
E.3.4 Productivity
E.4 The structure of the supply chain
E.4.1 An overview of the supply chain
E.4.2 Farming
E.4.3 Pig farmers
E.4.4 Poultry farmers
E.4.5 Livestock traders
E.4.6 Slaughterhouses
E.4.7 Processors
E.4.8 Meat wholesalers
E.4.9 Retailers
E.4.10
Prices and cost along the chain
E.5 Value chain and industry issues
E.5.1 Bargaining power issues
E.6 Code of Conduct
E.6.1 German Food Law
E.6.2 Competition Law
E.6.3 Voluntary agreements
E.7 Developments and trends
E.7.1 Focus on exports
E.7.2 Focus on food quality
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F Guidelines for interviews and interviewee list
F.1 Interview guidelines
F.2 What to do with requests for questions
F.3 Industry-association-specific questions
F.4 Table of interviewees
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G Data sources for modelling
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H Further information on the model
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I Reference List
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1 Introduction
1.1
General context
The agriculture industry, understandably, attracts attention and scrutiny. Rightly or
wrongly, the stability and safety of a European-grown food supply is considered to be
important both economically and politically. This is one reason why, under the protective
umbrella of the Common Agricultural Policy (CAP), agriculture and rural development
represented more than EUR 54 billion in the 2009 budget of the European Union.
Maintaining a stable European food supply means ensuring the economic health of the
industry, preferably outside of the confines of CAP. Past studies have made clear,
however, that the industry faces increasing turbulence. For example, a 2007 study on the
competitiveness of the EU food industry expressed concern that the competitiveness of
the industry lags behind Canada and the United States. In fact, it only manages to reach
the level of efficiency of Brazil and Australia.1
Further problems in the industry were highlighted between 2007 and 2009, when food
prices briefly soared worldwide due to rising oil prices and a declining US dollar, and
then slowly receded. 2 From a public policy perspective these developments increased
concern over price transmission within the supply chain. Price increases closely reflected
rising energy prices, but decreases failed to transmit their way through to the consumer at
the same pace.
In its final report of 17 March 2009 the High Level Group on the Competitiveness of the
Agro-Food Industry (HLG)3 in Europe recommended establishing a European forum with
the aim of adopting a code of conduct that would enhance the good functioning of the
food chain in the EU. To allow the forum to address the relationships among the players
and identify parameters to monitor the functioning of the chain, this “Study on the
Competitiveness of the EU Meat Processing Industry” intends to identify potential
dysfunction of the food supply chain and propose policy options to address such
dysfunction.
1
2
3
Wijnands, J.H.M., B.M.J. van der Meulen, and K.J. Poppe. "Competitiveness of the European Food Industry: An Economic
and Legal Assessment." 2007.
Timmer, C. Peter. "Reflections on Food Crises Past." Food Policy 35, (2010): 1-11.
http://ec.europa.eu/enterprise/sectors/food/competitiveness/high-level-group/documentation/index_en.htm
9
1.2
Study purpose and objective
The primary aim of this study has been to identify potential dysfunction within specific
value chains of the pork and poultry industry. To achieve this aim, the following aspects
of the supply chain were assessed:
•
the potential for abuse of market power in relation to the market structure;
•
the actual behaviour of chain participants; and
•
market outcomes.
The first two aspects of this study were analysed using primarily qualitative techniques,
conducting desk research and holding interviews with stakeholders, such as government
officials, industry associations, and individual companies. The final aspect—market
outcomes—was analysed using a model of price formation.
From this analysis, a number of policy recommendations have been formulated on how
the value chain might function better. One specific focus of the policy recommendations
is on the possible efficacy of a European-wide voluntary code of conduct.
The requirements and approach set for the study have dictated that the focus be on the
value chains of five products within five Member States (for more information on which
products and Member States, see the section Methodology for this study).
1.3
Methodology for this study
The starting point for the study has been an inventory of previous results. A literature
review has been used to describe the market structure of food and meat processing
industries at a European level. In addition, a legal review was conducted to determine the
main regulations affecting the industry. Smaller reviews of the industry within five
Member States have also been conducted, which form the basis of case studies to analyse
the research questions at hand. (More information on country selection is available in
section 1.3.1, below).
Answering the research questions has relied on a combination of qualitative and
quantitative techniques. First, based on the results gathered from the literature review,
case study researchers interviewed members of industry, associations, and relevant
government agencies. The purpose of these interviews was to gain a more in-depth
understanding of issues that have already been elucidated in previous reports.
Second, an empirical model was used to examine the fluidity of price transmission along
different levels of the value chain, one important aspect of a properly functioning value
chain. The purpose of the model was to demonstrate empirically bottlenecks, and see if
these align with what were identified during interviews. As well, the model can also
provide a basis for future analyses of the value chain to help increase transparency within
the industry (this will be explored further in the policy recommendations in Chapter 5).
The original intent was to process the model for five products in the pork and poultry
industry in the five case countries; however, due to data limitations, we were only able to
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process the model in four of the country cases. (More information on product selection is
available in section 1.3.2). A full description of the model and the results are available in
chapter 4.
1.3.1
Country selection
Our interest has been to select cases that both represent particular types of market
conditions and have data that is readily available. First, two countries were selected on
the basis that they represented ‘extremes’ in terms of market conditions: Germany, which
is extremely price sensitive, and the UK, which is focussed on service. In between these
“most different” cases, initial discussions with the European Commission services and
stakeholders identified a short-list of potential countries to complete the sample, namely:
Spain, Italy, Denmark, Poland, the Netherlands, and Romania. Considerations for each
country are summarised in the following table.
Table 1.1
A summary of pros and cons to study particular Member States
Country
Pros
Denmark
•
Cons
One of the largest meat
•
exporters, outside of the UK.
Largest meat exporter outside
of EU, presenting problems
on how to correct the model.
Italy
•
•
Netherlands
Synergy with existing
•
Stark contrast between large-
ASS.I.CA studies;
scale producers in north and
One of the largest meat
small-scale producers in
exporters.
south.
•
Important meat industry;
•
Extensive data already
collected;
Poland
•
Existing expertise available;
•
Pilot case study.
•
Existing expertise available;
•
Gives new Member States
•
Poor data availability.
Gives new Member States
•
Poor data availability;
consideration in the study.
•
Consultants would need to
consideration in the study.
Romania
•
spend time finding expertise
in the region.
Spain
•
Unified market, with 92% of
poultry industry being
vertically integrated;
•
Vertical integration stretches
to retail level;
•
Reliability of data;
•
Expert immediately available.
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On the basis of this summary the UK, Germany, the Netherlands, Spain, and Poland were
selected as case study countries.
Figure 1.1
1.3.2
Overview of the case studies selected
Product selection
The first criterion used for product selection was that the products to be analysed should
be classified as “processed”; essentially anything that is not fresh meat. Regulation
853/2004 provided two critical definitions:
“Fresh meat” means meat that has not undergone any preserving process other than
chilling, freezing or quick-freezing, including meat that is vacuum-wrapped or wrapped
in a controlled atmosphere.
and
“Meat products” means processed products resulting from the processing of meat or
from the further processing of such processed products, so that the cut surface shows that
the product no longer has the characteristics of fresh meat.
Having identified “processed” products, the following additional criteria—in order of
importance—were used to further narrow the selection:
•
Availability of data;4
•
Relatively high consumer expenditure / turnover;
•
Relatively high consumer willingness to pay; and
•
Comparability across countries.
Comparability is an issue for some products (ham in Germany is not he same as ham in
Spain), and we have used a relatively loose definition. Essentially, comparable products
are ones that come from the same part of the animal and have similar characteristics.
An initial inventory of the available data indicated quite early on that obtaining data
would be extremely difficult for processed poultry products and that, where data exist,
they are not necessarily for the most relevant products. Accordingly, following discussion
with the European Commission services and stakeholders, a looser definition of
processed chicken product has been used. For example, products such as skinless,
boneless breast are classified as “processed” for the sake of this project.
4
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This seems like an obvious point, but in many cases, the break-down of data by product was limited to a selection.
The following table outlines the products and countries for which the analysis was
completed. A more complete discussion of the data and its sources is available in
chapter 4.
Table 1.2
Meat products studied
Pork
Germany
Netherlands
Poland
UK
Cutlets
General
General
Loin chops
Pork for frying
Bacon
Loin steaks
Schnitzels
Porkchops
Boneless legs
Schnitzel
Fillet
Sausages
Minced pork
Diced pork
Poultry
Chicken schnitzel
General
Roaster (fresh and
Chicken breast
frozen)
Legs
Chicken breast
Roasters
Turkey schnitzel
1.3.3
Interview procedures
Interviews represented one of the main methods to collect data on the functioning of the
value chain. The interviews represent only a small sampling of the organisations involved
in the value chain, and as such, it was important to try to get a representative sample of
15 stakeholders. The following criteria were used:
•
3-6 interviews with associations, namely the main associations for pork and poultry,
and one to four other associations along the food chain;
•
5-10 interviews with companies along the value chain; and
•
2-4 interviews with the appropriate government agencies.
Interviews were carried out in a semi-structured format. Given that we were probing for
data rather than testing tightly generated hypotheses, it made more sense to give the
researchers the freedom to explore particular paths with different interviewees and also to
give the interviewees themselves the freedom to expand on the answers they consider to
be the most relevant.
For more information on the exact methods, please see Appendix F.
1.4
Reading this report
Chapter 2 of this report outlines the meat industry in the European Union, and adds some
context to the preliminary findings. Readers already familiar with the general workings of
the industry will probably want to skim or even skip this chapter. Chapter 3 offers a
summary of the findings from the various case studies and offers a “typology”, which
compares and contrasts the five Member States studied. Chapter 4 presents a description
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of the model and its results in terms of price transmission. The report concludes with
Chapter 5, which outlines our policy recommendations.
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2 The state of the industry
2.1
Introduction
The European Commission has commissioned several studies about the competitiveness
of the food sector in the EU. Based on these studies, the EU High Level Group (HLG) on
the competitiveness of the agro-food industry has published a report on the food chain
structure in the EU, highlighting gaps and imbalances.
The EU meat industry, an important component of the overall food supply, has also been
analysed. Past studies have described the meat industry to be less competitive than other
international players in the global market. Its cost and productivity have been the major
issues hindering its competitiveness. Building on this, in its fifteenth recommendation,
the HLG recommended a European Forum be created to improve the relationships and
interactions among different actors along the supply chain, including adoption of a code
of conduct.5
To understand how these relationships can be helped, and the codes of conduct that need
to be adopted, contractual relationships must be unpacked between the different tiers of
the supply chain. Costs and margins also offer clues as to where some parts of the chain
are dysfunctional, whether in terms of price transmission or profit taking.
In the following chapter, we summarise the most important findings and discussions in
this debate as well as the main imbalances that brought about the commissioning of this
study. While the topics discussed apply to the food industry in general, the meat and meat
processing industries are no exception to the problems (as will be shown in Chapter 3).
The intent of this chapter is to lay a broad background before delving deeper into the
processed meat value chain within a number of the Member States.
2.2
An overview of the food and meat industry
The agriculture industry contributed EUR 85.7 billion to the European economy, with the
meat sector providing nearly 25 percent of that total. Looking at trends for the sector, one
can see some variation in the overall contribution to the European economy of the
industry, but nothing that is statistically significant.
5
High Level Group on the Competitiveness of the Agro-Food Industry. "Final Recommendations of the High Level Group on
the Competitiveness of the Agro-Food Industry." 2009.
15
Digging slightly deeper into the figures for animal production, pork and poultry are
clearly vital to the industry in general. The pork industry is, in fact, the most significant
meat producing industry with poultry in a distant—if still significant—second.
Figure 2.1
Economic accounts for meat; values at current prices in Purchasing Power Standard (PPS)
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100000.00
90000.00
Millions of PPS
80000.00
70000.00
60000.00
Other animals
50000.00
Poultry
40000.00
Pigs
30000.00
20000.00
10000.00
0.00
2002 2003 2004 2005 2006 2007 2008 2009
Source. Eurostat, DS-072379.
Meat production—in terms of dead weight—is also highest for pork and poultry. The
percentage share of pork and poultry are a much higher percentage of the total for meat
than their share of turnover. So, in 2008, while pork and poultry represented 55 percent of
the total turnover, the overall dead weight of pork and poultry represented 77 percent in
that share.
Figure 2.2
Tonnes of animals slaughtered in EU-27
50000
45000
Tonnes (000s)
40000
35000
Sheep & Goat
30000
Bovine & Calves
25000
20000
Poultry
Pork
15000
10000
5000
0
2004
2005
2006
2007
2008
Source: Eurostat, DS-072660 (Slaughtered animals for meat production).
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Purchasing power standard (PPS) is the name Eurostat gives to an artificial currency unit in which the Purchasing Power
Parities expenditures are expressed. This is an index for comparison sake only.
At the Member State level, population size generally determines the level of meat
production. The table below gives an overview of biggest producer countries of
slaughtered pork and poultry for the group EU-27 for the year 2008.
Table 2.1
Meat Production in EU-27 in 2008
Pork
Poultry
EU-27/ 1,000 Tonnes
22,599
EU-27/ 1,000 Tonnes
% Production
11,130
% Production
Germany
22.6%
France
15.3%
Spain
15.4%
United Kingdom
12.9%
France
10.1%
Spain
12.4%
Poland
8.4%
Germany
10.7%
Denmark
7.6%
Poland
10.7%
Italy
7.1%
Italy
10.0%
Netherlands
5.8%
Netherlands
6.6%
Belgium
4.7%
Hungary
3.5%
United Kingdom
3.3%
Romania
3.1%
Austria
2.3%
Portugal
2.6%
Source: Eurostat.
One of the other significant characteristics of the food industry in general is the structure
of the individual enterprises. Statistics show that—in terms of overall numbers—the food
industry is dominated by enterprises employing less than 20 employees, representing
86 percent of the industry.
Figure 2.3
Percentage of enterprise by size (by number of employees) in the food sector
20-49
8%
above 249
1%
50-249
5%
less than 20
86%
less than 20
20-49
50-249
above 249
Source: Eurostat.
The meat industry is no exception to this rule, with SMEs accounting for a large
percentage of firms within the sector. Wijnands et al. have related the relatively low
17
competitiveness of the industry in terms of cost to the relatively small scale of
production.7
The size and market share of small vs. large size firms will have a significant influence on
how actors interact in the value chain. Clearly, two large corporations will interact
differently than two small farmers. The interaction becomes all the more complicated
when small actors interact with large ones, with small actors either suffering, combining,
or joining collectives to increase their bargaining power. These issues will be explored
further in the case studies and the policy recommendations later in this report.
2.3
An overview of the value chain
In this section, we give an overview of the most important actors in the food value
chain—which is in a broad sense identical to the meat value chain—and the practices
they use to strengthen their position in the chain.
This summary includes only the most important levels in terms of the model, and those
levels that can be generalised across the industry and across the continent. Even within an
individual Member State, as will be shown in Chapter 3, the structure of the value chain
is fractured and inconsistent depending on the actors. For example, some Member States
have vertically integrated chains working along side relatively fractured ones. Moving
beyond relatively broad brush strokes is extremely difficult, and variations will be
handled within the individual case studies.
Farmers
Unless farmers are part of a horizontally integrated supply chain with long term relations
with other actors, their ability to enter in direct negotiations with retailers is very minimal
because of their fragmentation. Farmers influence on the downstream industry is
therefore very small. However, farmers also indicated that they could strengthen their
bargaining position through joint marketing and cooperative groups, who negotiate with
processors or retailers and sell farmer’s products to buyers.
Cooperatives, in fact, already play an important role in the market for meat. One study of
the German meat industry found that cooperatives played two critical roles:8
•
They helped to offset the power of rapidly growing and internationalizing abattoirs,
giving farmers the more centralised marketing activities that they preferred, hoping to
obtain for better prices;
•
Sharp conflicts over sharing limited resources between different parts of the value
chain, market intermediaries helped save transaction costs and smoothed conflicts.
7
8
18
Wijnands, J. H. M., Bremmers, H. J., Meulen, B. M. J. v. d., & Poppe, K. J. (2008). An Economic and Legal Assessment of
the EU Food Industry’s Competitiveness. Agribusiness, 24(4), 417-439.
Theuvsen, L., & Franz, A. (2007). The Role and Success Factors of Livestock Trading Cooperatives: Lessons from German
Pork Production International Food and Agribusiness Management Review 10(3), 2007.
Processors
The EU processing sector is highly concentrated where a small number of large
processors dominate the market, especially multinational companies. However, a large
number of SMEs operate in the market, competing on price and variety of products rather
than their big competitors competing on brand name. Processors negotiate directly with
retailers. SME processors bargaining power decreases against retailers’. In order to
increase their bargaining power, processors adopt these practices:9
Cartels, and resale price maintenance. Recent investigations carried out by National
Competition Authorities pointed to increasing cartel activities by processors. Examples of
these are cartels in poultry in Czech Republic and beef processors in Ireland. These
practices increase the bargaining power of processors against retailers, with the intent to
keep food prices at a certain level, regardless of price changes along other tiers of the
value chain.
Single branding obligations and tying refers to schemes adopted by suppliers to
encourage—and, in fact, to force—retailers to purchase products that are not necessarily
in demand (either by the retailer or the consumers) by tying them to other “must-carry”
products. The practice may lead to higher prices and less bargaining power of retailers,
but also downstream producers.
Joint selling is a practice adopted by processors to strengthen their position in the market.
Although approved by the Common Agricultural Policy as a means of strengthening
farmers’ cooperation, concerns around price (fixing or increasing) are perceived by the
industry.
Retailers
In the EU, a small number of large retailers dominate the market. The concentration of
retailers, however, is not uniform across the Member States, with some showing higher
concentration than others. A study on the evolution of the high-volume retail sector for
food and clothing in the EU (though in a selected number of countries) between 20032008 concluded that five major firms dominate the retail sector in each European
country.10 Concentration is highest in the UK and has increased for all countries in the EU
except for France and Germany, where it has remained constant over the same period.
Recent EU reports give more insight on the concentration of the food retail sector and
concluded that, for example, in the UK, four top retailers account for 56 percent of the
market and in Finland, the top two retailers account for 75 percent of the market.
A working document from Commission Staff described retailers as “fiercely competitive”
and engage constantly in price wars for the final purpose of consumer satisfaction, and
naturally lower their own margins. 11 By extension, they also exercise their buyer power
9
10
11
Commission of the European Communities (2009). Communication from the Commission to the European Parliament, The
Council, The European Economic And Social Committee and the Committee of the Regions: A better functioning food
supply chain in Europe. Brussels: Commission of the European Communities. pp.25-27.
London Economics (2008). The evolution of the high-volume retail sector in Europe over the past 5 years: Consultative
Commission on Industrial Change.
Commission of the European Communities (2009). Competition in the food supply chain. An Accompanying Document to
the Communication from the Commission to the European Parliament, The Council, The European Economic And Social
19
over their suppliers. However, retailers are weaker versus their bigger suppliers, and
similar to suppliers’ behaviour, they also adopt a number of practices to face the
increasing power of their stronger suppliers.12 These practices can be summarised as
follows:
Joint purchasing agreements originated as practices where retailers would pull together
the purchase volumes required for their stores so as to build a critical mass that would
allow them to obtain better prices. The practices have recently evolved and its purpose
was somehow altered to include obtaining stronger bargaining power and negotiation
margins from suppliers. A potential impact resulting from these alliances is that financial
benefits resulting from mass procurement and achievement of economies of scale may
not necessarily pass on to consumers.
Increased use of private label products. Private labels are often produced by small and
medium sized suppliers and used by retailers under their own brand names, usually at 20
to 30 percent lower prices. The practice is used by retailers to satisfy consumer demand
by providing supplies at cheaper prices. In the processed food industry, the private
labels—and in this case, retailers themselves—are considered to be competitors of
established brands. The rise of private labels also has a clear impact on the functioning of
value chains, changing relationships and potentially causing further rationalisation. In
terms of prices, studies have shown that they potentially have the following effects:13
•
An increase (or no change) in consumer price of national brands;
•
A decrease (or no change) in consumer price of private labels;
•
A decrease or no change of average consumer price; and
•
A decrease in advertising activity for national brands.14
Exclusive supply agreements tie a supplier exclusively to a certain buyer. These
agreements cause concern because they reduce competition. However, so far, neither
buyers nor suppliers in the food value chain reported such impact.
Certification schemes have risen recently in part because private-sector organisations
have wanted to mitigate reputational and commercial risks associated with food safety
(though other certification schemes exist, such as certification of organic product).15 The
number of schemes and their specificities may compel producers/suppliers to trade with
only one retailer, since the costs of change are relatively high. The obvious result from
that is a possible increase of buyer power of retailers over suppliers.
Slotting allowances are fixed payments made by suppliers to retailers to ensure an
optimum positioning of their supplies on retail store shelves. The use of such practices
12
13
14
15
20
Committee and the Committee of the Regions: A better functioning food supply chain in Europe. Brussels: Commission of
the European Communities.
supply chain in Europe. Brussels: Commission of the European Communities. pp.18-25.
For a summary of these studies, see Bergès-Sennou et al. (2004).
Bontemps, C., Orozco, V., & Réquillart, V. (2008). Private Labels, National Brands and Food Prices. Review of Industrial
Organisation, 33(1), 1-22.
Henson, S., & Reardon, T. (2005). Private agri-food standards: Implications for food policy and the agri-food system. Food
Policy, 30(3), 241-253.
may have adverse results if suppliers choose to channel their products to a limited number
of retailers. The opposite may also be true if suppliers are unable to pay the slotting
allowance to retailers.
Unfair trading practices are other practices reported as seriously affecting suppliers
bargaining power, examples of which include late payments, unilateral or ad-hoc changes
to contractual relations, and upfront entry fees to negotiations.
2.3.1
Imbalances along the food value chain
Past studies have indicated that the main issues within the European food value chain are
related to asymmetric price transmission. Prices downstream rose quickly with input
prices, but took much longer to fall when price pressures were relieved.
Price transmission problems have two dimensions: (1) how much of a price change is
transmitted from one node in the supply chain to another, and (2) how quickly these
changes occur. In a perfect world, price changes would be instantly and evenly
transmitted from one node to another.
From 2007 to 2009, even though agricultural prices generally decreased, consumer prices
remained relatively high. On average, agricultural commodity prices recorded a
16 percent increase between May 2007 and February 2008, accompanied by an increase
of nine percent at the processor’s level and five percent at the consumer level.
When food prices started to decrease by almost five percent after six months time,
producer and consumer prices continued to increase, although at a lower pace of only two
percent. Even when the commodity prices sharply declined by 10 percent in early 2009,
food consumer prices were still rising.16
These asymmetries are also apparent even outside of the 2007 to 2009 window. Further
studies revealed that from 2000 to 2009, only four percent of agricultural commodity
price increases were transmitted from farmers to producers. When prices decreased,
however, the ratio of price transmission was as low as three percent. Not only was the
proportion of price variations small, they also occurred over six months time.
In a similar manner, 72 percent of price increases were transmitted from producers to
retailers, with a lag of three months. Based on that, price transmission was much stronger
towards the end of the value chain than the beginning (in other words, downstream
transmission was stronger than upstream). In addition, transmission of price changes was
stronger in the case of price increases than in the case of price decreases.
Independent countries assessments in Denmark, Belgium and France concurred with
these findings where price asymmetry are more likely to occur on a short-term basis, than
on a long-term basis. This means that price changes seem to be transmitted along the
16
Commission of the European Communities (2009). Analysis of price transmission along the food supply chain in the EU.
Brussels: Commission of the European Communities. p.12.
21
value chain over a long period of time, while on a short period of time, these changes may
not necessarily be transmitted from one node to another along the value chain17. The
figure below explains the extent to which price changes were transmitted along the value
chain and the time lag it took them to be transmitted from one node to another along the
value chain.
Source: EC COM (2009) 591, p. 22.
With that said, the benefits resulting from reduced input prices are not necessarily and
instantly passed on to consumers through cheaper food and that “profits” are caught at a
certain stage of the supply chain, a phenomenon called in economics terms “price
stickiness”. In that sense, decreases in agricultural commodities could take up to one year
before they are felt on the consumer level. Although, in the processed food case, the
picture is a little different because the price of agricultural input in the processed product
is minimal compared to other input costs such as energy, labour, marketing and logistics
associated costs.18
According to a recent fact finding exercise conducted by the European Commission,
stakeholders—farmers, producers and retailers—perceive that overall consumer prices are
affected more by regulatory and quasi-regulatory measures, especially in what concerns
food safety import controls and environmental concerns, than industry input, which is
rather limited compared to the overall price of the final product. Therefore, the general
17
18
22
Commission of the European Communities (2009). Analysis of price transmission along the food supply chain in the EU.
Brussels: Commission of the European Communities. pp. 8-9.
supply chain in Europe. Brussels: Commission of the European Communities. pp. 22-23.
perception is that this gap in price is a result of structural factors rather than market
factors. This, however, should not exclude market factors and the functioning of the value
chain itself, which might also cause this kind of imbalance, such as for example long
contractual relations among various actors along the value chain. 19
In general terms, both theoretical and empirical evidence suggests that several factors
determine price transmission along the value chain. The most relevant to this study is
structure and bargaining power issues within the value chain, which we explore further in
the coming section. We, however, summarise the factors affecting price transmission as
identified by the EC COM (2009) 591 in
Box 2.1 below. 20
Box 2.1
Factors affecting price transmission along the value chain
The most important factors affecting price transmission along the value chain are the following:
1.
Cost structure of the food production:
Research indicates that product costs structure are changing rapidly. The product price paid
by the consumer is affected by labour costs, logistics, marketing and energy cost rather than
the cost of the agriculture product;
2.
Value Chain Structure:
a.
Number and variety of economic actors along the value chain (multinationals, SMEs);
b.
Degree of horizontal and vertical integration including consolidation and mergers;
c.
Imbalances in bargaining power within the value chain resulting into more favourable
bargaining position of one party compared to another.
3.
Adjustment constraints (adjustment to a price change may result into high costs by
economic actors):
o
Costs associated with price change (in marketing and advertising): Depending on the
nature of change in prices, be it temporary or permanent, economic agents make their
choice between absorbing price changes or transmitting the price change to the following
node in the chain;
o
Nature of food products: when products are perishable, economic agents may choose
not to increase prices so as not to be left out with expired products;
o
Internalisation of price variation: although input prices may increase, agents may choose
to keep the output prices constant, in order to keep their market shares or to fulfil a long
term contract;
o
Retail management practices: for example, stock availability may result into delays in
price transmission; also accounting methods such as first in last out method could have
the same effect on price transmission.
2.3.2
Bargaining power
While buyers and suppliers are bound together by common interests, their relationship is
shaped by their relative power. Larger and more influential organisations can gain
concessions from their partners. On one level, this is the reason why large organisations
19
20
Idem p. 13.
Idem pp. 5-7.
23
have lower costs over small ones. Taken too far, however, it can lead to a situation where
one actor can dominate the chain to the detriment of others or even the consumer.
The general perception about the food supply chain is that retailers have the greatest
bargaining power. Indeed, in most Member States, the five largest retail chains account
for over 50 percent of the market.21 Recent research findings have revealed, however, that
power balances vary across food value chains and depend on various factors, such as the
position of actors long the value chain (being suppliers or buyers, where buyers usually
have the higher degree of bargaining power), the type of product, introduction of private
labels, consolidation along the value chain, and internationalisation of actors, particularly
retailers.22
Market shares, private labels and the product type are, in fact, interlinked. Research has
found that the market share for private labels in frozen and prepared meat is much lower
(19.7 percent) than for producers, who dominate 31.2 percent of market share. The
picture is reversed in the case of bread, where private labels represent 22.7 percent of
market share versus 12 percent for producers.
Market structure, including consolidation and concentration along the value chain,
considerably affect the bargaining power of different actors. Consolidation of actors
anywhere along the value chain leaves few outlets with which to negotiate. If parts of the
value chain are more concentrated than others, it follows that bargaining power for those
less well integrated is much reduced. The open question remains, of course, of whether
the solution is greater consolidation of parts of the value chain, or enforced competition.
In addition to concentration, the number of players in each node along the value chain,
their exit and entry rates, and the level of differentiation and technological content are
important factors that impact negotiations.
Increasing consolidation has been matched by new corporate strategies. Retailers, for
example, are no longer simply outlets for suppliers, but they play a much stronger role in
forming consumer preferences. This is important for bargaining because retailers are
making themselves a more indispensable link between producer and consumer.
As well, retailers have been making different demands of producers and wholesalers with
a new “lean retailing” approach adopted. This means that retailers no longer want to have
storehouses, but they want to order goods “on demand” from producers. This forces
suppliers to adopt systems and processes that would comply with retailer requirements,
requiring significant investment. The corollary of this investment is a degree of lock-in.
Changing retailers becomes a more expensive proposition, and becomes less likely.
Recent reports, research and consultations with stakeholders along the food value chain
have referred to unfair trading practices resulting from the imbalance of bargaining
21
22
24
Bukeviciute, L., Dierx, A., Ilzkovitz, F., & Roty, G. (2009). Price transmission along the food supply chain in the European
Union. Paper presented at the 113th EAAE Seminar “A resilient European food industry and food chain in a challenging
world”.
supply chain in Europe. Brussels: Commission of the European Communities. p. 25.
power. Powerful actors often reap additional profit at the expense of weaker ones by
forcing contractual arrangements in their advantage. This in turn limits the ability of some
parts of the value chain to invest and innovate, causing them to become less competitive
and eventually exit the market. The most detrimental manifestations of power imbalance
is the possession of a certain buyer of monopsony power, thus becoming a sole buyer in
the market or when the same buyer has power over both upstream and downstream
market. Unbalanced bargaining power is equally unhealthy when benefits of reduced
prices (resulting from economies of scale) are not passed to consumers.
It must be noted however that the exercise of buyer power is not necessarily detrimental
to industry. It could have positive impacts on the sellers if it meets two conditions: (1)
reducing upstream prices and improving contracting terms with suppliers and passing
savings to consumers, (2) increasing output in the upstream markets and therefore
increase the welfare of consumers on the long run.23
2.4
External factors that influence the meat industry
The following section summarises some of the conditions that affect the food industry in
general and the meat industry in particular. The influence that these factors will have on
the meat industry will vary considerably and will be elaborated in the case studies.
Demographics. An aging population means a general change in food preferences. Older
generations tend to focus on fresh foods over processed foods, as health becomes a larger
concern.24 Governments, interested in promoting the trend toward healthy eating, have
also pushed manufacturers on labelling.
Consumer preferences. Food safety scares, environmental concerns, and a growing
awareness of animal welfare in some circles have changed how food is purchased. This
has led governments to intervene in the market on several levels. For example, the
traceability of products has been on the agenda.25 This means increased transparency with
the consumer and implies upgrades to value chain management and processes.
In addition, consumer “shopping” behaviour continues to evolve. Consumers are shifting
from the traditional “one-shop-stop” approach for their weekly grocery shopping and now
visit more than three shops in average for their food purchases, implying increased
competition for retailers as well. 26
23
24
25
26
Ibid.
EC (2009) Analysis of price transmission along the food supply chain in the EU- A better functioning food supply chain in
Europe. P. 5. Communication from the Commission to the European Parliament, the Council, the European Economic and
Social Committee and the Committee of the regions {Com (2009) 591}.
A recent study by Brian L. Buhr, argued that adopting traceability is likely to decrease transaction costs associated with
information communication among various actors along the value chain, and therefore facilitates vertical communication
and contracting.
EC (2009) A better Functioning food supply chain in Europe. P. 9.
25
Technological development. Changes in technology involve both process and product,
both of which have a potential influence on the value chain. Many of these processoriented innovations surround the need for traceability, mentioned earlier.
Product development in the last few years has often been related to biotechnology.
Biotechnology has a number of potential influences on relationships within the value
chain. First, they potentially add a whole new layer to the value chain, as farmers
purchase biotechnologies. Second, the need to provide transparency over the use of these
technologies places another burden on all levels of the value chain.
Competition from third country imports on EU Markets and trade negotiations.
According to the latest EU study on the food industry competitiveness in the EU, the EU
meat industry faces competition from third countries like Brazil and Argentina that
benefit from a comparative advantage inputs in land, feed, and labour. For example, in
2004, the supply price of chicken breast meat imported from Brazil to Germany was 1015 percent lower than the price of EU producers. Imports place additional pressure on EU
producers.
Increasing costs of inputs. Increasing energy prices affect all levels of the value chain.
At the farming level, it influences feed prices. For processors, refrigeration and
equipment usage cost more. And, of course, increased transportation affects all levels.
2.5
The legal situation
The current legal environment for the food industry results from both complementary and
competing lines of law and policy. In the Treaty of Lisbon, a broad range of purposes are
defined. They stretch from preserving a well-functioning internal market to consumer
protection, social development, and protection of human rights (OJ C83/2010).
Regulatory activity regards, among others, the creation of a system of Food Law (see
extensively: Van der Meulen and Van der Velde, 2008). It is founded on the General
Food Law (GFL, regulation (EC) 178/2002) as well as of Competition Law (TFEU Title
VII, ch. 1 – rules on competition) that aim to create a level playing field and foster
consumer interests.
The installment of a European (Economic) Community from the 1950’s onwards had as a
principal aim to remove barriers for and sources of unfair competition. To enhance
competition, transaction costs and other tariff or technical barriers should be removed.
The occurrence of several food safety crises (of which the BSE-problem has had the most
impact) has leveraged the attention to food safety, hygiene and control of the food supply
chain (Article 17 GFL). It led to the enactment of the General Food Law (178/2002). This
contains general principles for food safety and has established the European Food Safety
Authority as well as a Rapid Alert System for Food and Feed.
The GFL has sparked a continuous stream of regulatory activity. For the pork and poultry
industry the ‘hygiene package’ included in regulations 852/2004, 853/2004 and 854/2004
are of special importance. A summary of key results of this regulatory activity which is
relevant for meat supply chains is included in Figure 2.4. below.
26
Figure 2.4
Key components of EU-law with respect to Food Safety
Specific
regulations
Principles
(General regulations)
852/2004
general rules for hygiene
of foodstuffs; HACCP.
(former 93/43/EC)
Controls
Implementing
measures and criteria
2073/2005 updated
by: 1441/2007
882/2004
general framework
for the organisation
of controls
microbiological criteria
for food safety, for instance :
salmonella, listeria
onocyt ogenes , staphilococces
Regulation 178/2002
(General Food Law)
853/2004
specific hygiene rules
for certain products of
animal origin
2002/99/EC
Animal health rules
854/2004
Specific rules for
controls of food derived
from animals;
i.e. veterinary checks
2002/99/EC
Import requirements
(incl. veterenary
border checks)
677/2006
Audit guidelines
2074/2005
Specific implementation measures
-
food chain information
testing methods
lists of establishments
model health certificates
derogation for food with
traditional characteristics
2075/2005
Trichinella in meat
2076/2005
Transitional arragements
Source. European Commission, Guidance Document (I), 2006; Foreign Agricultural Service
http://useu.usmission.gov/agri/foodsafe.html); Food safety regulation on
http://ec.europa.eu.food/biosafety/hygienelegislation/comm_rules_en.htm; Guidance Document (II), 2009;
included in: Bremmers et al., 2010.
The HACCP-requirements laid down in Regulation 853/2004 (as well as 852/2004)
extensively impact meat supply-chains, leading to changed management structures and
increased cost burdens for processors (Bremmers et al., 2010a). The General Food Law
(GFL) — and food law27 in general — affects the entire supply chain ‘from farm to fork’.
Specific requirements induce costs along different parts of the value chain, which may
increase selling prices depending on chain and market configurations.
Food law aims to protect consumers based on the assumption that many characteristics of
food — especially its quality and safety — cannot be objectively observed. Food is
therefore called a ‘credence good’. Quality assurance is required to provide valid
information to consumers (compare: Heyder et al., 2010). The GFL protects consumers
against risks due to incomplete scientific knowledge. In this respect, the precautionary
principle laid down in Article 7 GFL takes on a disputed and thoroughly questioned place
(Trouwborst, 2007). It allows safety measures to take effect without full scientific proof.
In general, risk analysis, risk assessment, management and communication should be
based on scientific evidence (for instance: Szajkowska, 2009; Mulder and Hupkes, 2007).
The precautionary principle overrules this logic. As stated in Article 6 GFL: ‘where it is
not appropriate to the circumstances or the nature of the measure’. The precautionary
principle could be seen in the early stages of the BSE-crisis.
27
The General Food Law defines the concept of food law as: ‘food law’ means the laws, regulations and administrative
provisions governing food in general, and food safety in particular, whether at Community or national level; it covers any
stage of production, processing and distribution of food, and also of feed produced for, or fed to, food producing animals
(Article 3(1) GFL).
27
EU-food law is not static, but dynamic of a kind. It will expand further due to an
increasing desire to protect and control consumer interests (Article 8 GFL) and to regain
consumer trust after major food scares. Next to BSE, E-coli, Dioxine contaminants,
Salmonella and Campylobacter infections have drawn attention to regulatory activity
(Knowles and Moody, 2007; Arienzo et al., 2008, p. 23-32; Dwinger et al., p. 632).
Article 14(1) of the GFL states very clearly that unsafe food shall not be placed on the
market. At the same time, adjacent and subsequent regulatory requirements aim to
prevent and seek sanction against foods incidents. For this reason, traceability systems for
food, feed and food-producing animals have been adopted. Although not their main
purpose, traceability systems could be used to improve the informed choice of the
consumer. 28
European food law fosters transparency, especially to allow consumers to be able to make
‘informed choices’ (Article 8 GFL) on issues such as the origin of food, its effects on
sustainability, its composition, as well as health characteristics (like, for instance, the
publication of nutrient contents of foodstuffs, 90/496/EEC).
The responsibility of compliance with food and feed regulations lies primarily with the
food and feed business operators (Article 17(1) GFL). This puts the primary and
industrial meat producers in a dependent position, as asset-specific investments combined
with the short durability of produce, makes them increasingly reliant on long-term
relations with their buyers. The burden of compliance most likely stimulates
concentration and the development of long-term dependencies. For example, Food Law
also fosters the installment of hygiene measures. For the meat industry this requires the
development of a HACCP-based system, in concordance with the Codex-guidelines, as
well as the implementation of traceability and information storage. Traceability stretches
not only upward, but also downward the supply chain.
2.5.1
Impact of EU competition law on the supply chain
Next to food law, competition law influences meat supply chain structures and pricing
dynamics. The original goal of the European Communities to guarantee a window of free
and fair trade has been supplemented and partly competes with a vast system protecting
consumer and other interests. Harmful business practices should be avoided according to
Articles 101/102 TFEU. Art. 101 TFEU declares incompatible with the internal market
“all agreements between undertakings, decisions by associations of undertakings and
concerted practices which may affect trade between Member States and which have as
their object or effect the prevention, restriction or distortion of competition within the
internal market….”, for instance as in sub (e) by: “the conclusion of contracts subject to
acceptance by the other parties of supplementary obligations which, by their nature or
according to commercial usage, have no connection with the subject of such contracts”.
This is the basic rule on which exemptions are possible. It should be noted that
‘undertaking’ is to be taken broadly in the application of the article. Article 101 TFEU
28
28
See Dobson et al., 2008, p. 37
not only refers to horizontal, but also to vertical agreements — like in Consten SACommission 1966 — which have had negative trade or competition consequences in an
international context (Berry and Hargreaves, 2007, p. 262; Lence et al., 2007).
Article 101(3) TFEU provides the conditions under which exemptions are granted for
agreements between actors in the supply chain which limit competition in the market
(Berry and Hargreaves, 2007, p. 278):
• The agreement contributes to better production and/or economic progress;
• It benefits consumers;
• The agreement cannot be substituted for other instruments which come up to the same
goal;
• A reasonable amount of competition remains in the market; and,
• The agreement is proportional to the (beneficiary) purposes which are put forward.
The above-mentioned cumulative requirements show that just like food law, competition
law generally allies itself with consumer interests. It takes as a benchmark for exemptions
the effect of competitive structures on consumer welfare. This can be realised through
price cuts, increased productivity, and efficiency. The consumer orientation of
competition law may lead competition authorities to largely ignore the detrimental effects
of increased concentration in the retail sector on food processing businesses. The fact that
concentration has occurred in the final stages of the supply chain where retailers act as
“gatekeepers” for access to consumers strengthens their buyer power (Dobson et al.,
2003). However, concentration in itself should not be regarded as negative; abuse of
market power in international business relations is. In this context it should be noted that
many countries have adopted the European system of competition law and implemented it
in their own legislation for national competition governance. Some countries have
introduced other restrictions for national markets than those which govern international
transactions. The diversity of such rules across Europe is a limiting factor in the
assessment and comparability of legal effects on price transformation throughout national
supply chains.
Excessive market power and its abuse are dealt with under European Law, Article 102
TFEU, in so far as it may affect trade between Member States. Article 102 TFEU states
that “any abuse by one or more undertakings of a dominant position within the internal
market or in a substantial part of it shall be prohibited as incompatible with the internal
market in so far as it may affect trade between Member States”. This abuse can consist of,
among other “(b) limiting production, markets or technical development to the prejudice
of consumers”. Within this legal context, reference is made to unfair buying or selling
prices and the imposition of contractual conditions which intend to distort competition.
While market dominance by big food retailers in itself cannot be classified as an abuse of
EU-law, it could have positive but also negative consequences for consumers and/or for
other actors in the supply chain, like industry. For example, market power (through
private labels, for instance) can influence margins across supply chains. For consumers,
private labels can bring advantages in the short run as they put pressure on retail prices.
Slee and Kirwan (2007) report that in the UK moves to monopoly are taking hold at the
local level as the exercise of buying power drives down prices, and small independent
food retailers are driven out. While intense competition in case law often is valued
29
positive for consumer welfare, leading to short-run price cuts, higher productivity and
scale advantages, the long-term effects of market concentration may be heavily
underestimated.
Nowadays, meat supply-chains are characterised by hot spots of power, which are
thought to be located at the end point of the supply chain. While legally speaking, the
number of competitors is important, only the economic effects are taken into account
(Gronden and Hertog, 2008). For instance, only if critical resources are monopolised or
an actual monopoly exists are there sound legal grounds to intervene.29 From this
perspective, slotting fees can effectively create a barrier to market entrance. Slotting fees
can make products excessively expensive compared to the price of competing products on
the shelf. Intentions to limit access to the market to competitors with slotting fees are hard
to prove. A simple defense would be the argument that fees are legitimised because of
incremental and opportunity costs of the provided shelf-space. Only clear cases of abuse
of market power would allow for legal proceedings, like predatory pricing, tie-in
arrangements, refusal to supply, or refusal of access to an essential facility (Berry and
Hargreaves, 2007, p. 301). As Dobson (2003) summarises, increased concentration can
have positive and negative effects: positive effects include improved economics of scale,
efficient logistics, investments in new technology, while the discerned disadvantages
concern the decline in traditional retailing and greater homogenisation of food.
2.5.2
Product liability and its effect on the supply chain
The primary actor within the supply chain for safeguarding food and feed safety is the
processor (Dwinger et al. 2009). If a food or feedstuff can be traced back to the original
producer, retailers stay unaffected. If, however, retailers sell under private label, they can
be addressed using product liability as an instrument. In that case, the retailer could use
contractual agreements or tort law to shift the burden upward the supply chain. It is
obvious that in a dependency relationship a contractual agreement will include clauses
which result in such a shift. This can have major impact in case of recalls. While the
technical execution of a recall in many instances will be done by the retailer, the costs of
the operation will possibly be carried upstream in the supply chain. So ex-post liability is
to a large extent vested on the shoulders of operators upward the supply chain. As a
response they will implement hazard control systems to avoid risks or limit consequences
of incidents.
As the ultimate consequences of product liability will be borne upward the supply chain,
this shift strengthens the positions of retailers and consumers towards producers. If the
producers could organise themselves to form a “countervailing power”, their bargaining
position in contractual agreements would improve. It would make it possible to negotiate
on a fair basis the acceptance of a part of the risk and costs by all the chain partners.
However, in principle competition law does not support the creation of a ‘countervailing
power’ towards powerful retailers, with the intention to force them to take their share of
the burden (see section 2.5.1).
29
30
See for instance COMP/38.784 Wanadoo España vs Telefónica regarding the use of a ‘price squeeze’ in the Spanish
Telecom market, making market entrance almost impossible for competitors.
2.5.3
Specific problem areas
System implementation
As mentioned earlier, processors are required to implement a HACCP-system to protect
food hygiene. Likewise, retailers have to comply with the same set of HACCP rules, but
the number of critical control points (and therefore the implementation costs) is normally
less. In recent years we have seen the emergence of private next to public standard
systems. Public standards are set as a response to perceived market failure, while private
standards are set mainly for risk and quality control reasons as well as improving
transparency and thus reducing transaction costs (Hobbs 2010; Barcala et al., 2010).
The implementation of private standards forms a cost burden for the companies which are
involved. Although many price changes find their cause in commodity markets, price
moves could also be induced by changes in size and composition of cost prices to which
burdens to implement food safety and quality systems (FSQSs) contribute. Costs with
respect to intangible assets (like FSQSs) could be included in the costs per product. Due
to the uncertain nature of connected benefits, they could also be administered as losses.
Freedom in the attribution of costs can occur if cost items refer to intangible assets, like
quality systems, investments in R&D, or built-up goodwill. It creates the opportunity to
push the burdens to future periods by recognising expenditures (like paid goodwill) as
assets, or to book immediate losses, instead of including them in product costing. This
‘slack’ can be used as a cushion to soften the effect of price volatility of inputs or soften
the pressure on profit margins exercised by retail organisations. While such cushions have
a softening effect in the short run, in the long run their opportunistic use could be
detrimental, as costs which should be recovered are no longer reimbursed.
The installment of FSQSs is the responsibility of two different regulatory actors: public
and private (Hutter and Jones, 2007). They could be used to protect the home market
against foreign low cost producers (Gellinck and Khüne, 2004). Both public and private
actors can behave in complementary ways, creating hybrid forms of governance (Barcala,
2009). However, in implementing FSQSs like Global-G.A.P., BRC or IFS, 30 new
dependencies without public control are created, which can be exploited to let absorb
input price movements upward the supply chain. Such dependencies can result from
asset-specific investments in contractual relations (production for a single buyer) and/or
long term contracts.
Another consequence of the mandatory introduction in the meat sector of HACCP and
other systems for food safety and quality are fixed financial burdens. These may not
influence the supply curve and in that case are not reimbursed through price adjustments.
In many cases, they are the result of asset-specific investments connected to private
(self-) regulation. Despite the advantages connected to agreements like Global G.A.P.,
BRC, SQF31 or IFS in the relationship between producer and retailer, such ‘voluntary’
30
31
Global Good Agricultural Practice (Global GAP), British Retail Consortium (BRC), International Food Standard (IFS).
Safe Quality Food (SQF).
31
agreements strengthen the power position of the retailer in the supply chain. This power
position is re-enforced because sales, not production, is generally the output bottleneck in
meat supply chains. Surplus producer’s capacity has no shadow price and will therefore
not be priced.
(Non-)transparency
The factual composition of food prices is largely hidden because of firm secrecy and the
diversity of applied accounting rules among Member States. Applied accounting rules are
diverse because they stem from directives that offer freedom at their inclusion in national
legislation (Fourth Council Directive 78/660/EEC and supplementary directives for banks
and insurance companies, as well as amending acts). Revealing the composition of food
prices would contribute to improving macro- and micro research which now mainly uses
aggregate price information as input in econometric models.
There is a need to look deeper into the composition of prices. Price and margin
distribution are interrelated and influenced by many factors at different levels:
•
at global level, e.g. through price development of commodities;
•
at supply chain level, e.g. power distribution and logistics;
•
at sector and firm level, e.g. investments in assets and systems, available stocks; and
•
at product level, e.g. through the perishibility and composition of the product.32
Within the regulatory system of the EU, provisions have been made to increase
transparency of rulemaking, its execution and publication of motives, grounds and
effects. However, information of the composition of prices and profit margins is only
scarcely available. Such information could be of key importance for sound decision
making, especially within the context of competition law.
Several circumstances aggravate the lack of transparency of sources of value added
within the supply chain:
•
•
•
Many companies involved in food supply chains are small to medium-sized and
bound to specific vending channels by means of contracts;
Companies which actually publish their costs and revenues on a regular basis (which
are according to EU law limited companies) do so in an aggregated way or
consolidate their figures with those of the group to which they belong; as a
consequence, profitability on a product level is not visible. Public scrutiny of pricing
anomalies like predatory pricing, price fixing or price squeezes will be hard to
substantiate;
Companies apply costing systems which are firm-specific and aggregate. In other
words, application of uniform accounting systems revealing the composition of
product prices is not mandatory.
Overall, the information revealed under the present European regulatory reporting
framework is limited in terms of its usefulness for price transmission disclosure and
research on structural elements of the supply chain: it fosters aggregation and diversity in
32
32
See extensively: Ben-Kaabia and J.M. Gil, 2007.
reporting. The information is generally financial of a kind and primarily serves the
information needs of key financial stakeholder groups.
Other instruments than corporate financial reporting can be considered to unlock
information. To reveal the information enclosed in the price at which products are
brought to the market labelling can be of value. The label information on the composition
of foodstuffs (Directive 2000/13/EC of the European Parliament and the Council)
provides information which — as a side effect — can be used in the calculation of the
nominal effect of price changes, which could be compared with the real impact. In the
near future, the present labelling directive will probably be replaced by a regulation (as
proposed by the Commission in COM(2008) 40), which integrates nutrient with
information on food composition and condition. However, the information still lacks the
necessary level of detail that would allow one to derive the components of a product.
Detailed information could be useful to assess the effect on cost prices of input price
volatility. For instance, the inclusion of information on the weight of separate ingredients
included in food that is brought to the market is only mandatory in a limited amount of
cases. Examples include reference to an ingredient in the name of the product, picture on
the package, etc. The main focus of information on the package is, next to traceability and
differentiating products (Verbeke and Roosen, 2009), to enable consumers to make
‘informed choices’.
Labels do not only differentiate, but also homogenise, especially in the case of production
under private label. Private labels can hide the origin of the content of a package and the
used systems, skills and scarce resources which have been brought in by the intermediate
producer.
Cost structure disproportionality
HACCP-implementation in the US meat industry has led to a 1.1 percent increase in total
costs, which is observed to be substantial, as 50-80% of the price consists of costs of raw
material (Ollinger and Müller, 2003). In general, however, the identification of costeffects of FSQSs is problematic due to unclear labelling and diversity (Gellinck and
Kühne, 2007). The importance of cost-based information has been recognised in the
Commission’s guidelines on the application of sanctions in case of alleged exercise of
market power.
Knowledge of costs and benefits is important from a regulatory perspective since many
formal requirements lead to fixed cost burdens which are not included in the structure and
elasticities of demand and supply. Capacity usage levels, for instance, could explain the
relative power of food retailers towards the processing industry. Spare capacity has no
shadow price and thus negotiated prices could — in the short run — drop to the marginal
cost level. In that case they do not cover increased fixed costs. This fortifies the position
of the retailer, who on legal grounds can ask for measures to prevent hazards from
becoming immanent risks, and force the price down to marginal costs, at the expense of
the long-term survival of producers and their innovation efforts (Dobson et al., 2003).
Cost price composition, differences and effects of price changes and regulatory activity
could be measured using accounting techniques, if detailed information were made
33
available (Crutchfield et al., 1997; Ragona and Mazzocchi, 2008). It coul reveal possible
disproportionalities in cost reimbursement by small plants (Roberts et al., 1996), Using
longitudinal analysis, it also can identify productivity growth, which affects the
producer’s share of the retail price (Kuosamen and Niemi, 2009), as well as explain price
transfers (compare: Pellényi, 2007).
The basic question therefore is: Why is information on cost structures only scarcely
available? A probable reason is secrecy considerations in the publication of financial
figures. Firm-specific information could negatively affect the competitiveness of
individual firms. Another is the focus on consumer interests in food law after the BSEcrisis. In this respect, it looks as if the internal composition of food prices and the
distribution of value added over the supply chain participants are of less importance from
a policy perspective than the price level itself and the microbiological specificities of
foodstuffs.
Free riding on innovation
The White Paper on Food Safety of the Commission (2000) expresses the ambition to
make the European food industry competitive while promoting innovation. Product
innovation induces incremental costs which adversely could lead to burdens for producers
while at the same time retailers benefit from the innovation activity. For many processors,
product and process innovation are permanent necessities, increasing the fixed burdens of
these firms.
From an accounting perspective pressure put on the industry by retail firms to stabilise
price levels in periods in which sourcing expenses increase may be absorbed at the
expense of covering innovation expenditures. This could be the case if there is accounting
‘slack’ because of the expenditures for intangible assets. R&D-expenditures could be
considered as assets and activated on the balance sheet. In doing so taking losses is
postponed to future periods. If however uncertainty pertains with respect to the capacities
to earn back these expenditures, they should be taken as a loss. Likewise, investments in
licenses and patents can be considered as assets if payments have been made to acquire
them. The existence of research and development expenditures, which can be considered
as either assets, losses, or gradually as costs through depreciation, create the possibility to
calculate product costs and set prices in an opportunistic way. The free space in
accounting could be used to mitigate the effect of input price movements on accounting
profits.
Referring to private labelling it may be posed that the hidden character of innovation at
the industry stage of the supply chain may induce behavior which we call “free riding on
innovation”. This means that benefits of innovation activities upstream in the supply
chain—just like of FSQS-implementation or the absorbance of product liability—are
harvested by means of ‘anonymous’ private label products at the final stage of the supply
chain.
Consumer centrality
We have described food law and competition law as ultimately fostering the preservation
and promotion of consumer’s welfare. In this way, the law of the European Union has
incorporated consumer concerns in the –from origin- economically oriented community
34
system. The BSE-crisis marks not only a major turning point in food policy, but also the
empowerment of the consumer. It has brought us safer food and stimulated process and
product innovation. Supply chain optimisation has created dependencies within the food
channels to enhance traceability, quality control and reliability. It also has induced
dependencies and concentration in the food supply chains and has made producers
(whether it be pork, poultry or any other product) prefer long-term business relations.
On the other hand economic reality is a tendency towards short-term contracting.
Adversely, such short term contracts are primarily in the interest of powerful players in
the supply chain, as this increases the opportunities to switch from one supplier to the
other. This brings the production sectors in a double squeeze: on the one side they are
inclined to engage in long-term contracts, to be able to reimburse costs connected to longterm investments on behalf of specific producers. On the other hand, they are confronted
with short term contracts which increase the uncertainty. Or simply stated: there are in a
very uncomfortable position.
2.5.4
Main observations
On the basis of the previous elaborations the following problem areas can be discerned
from the perspective of price transfers within supply chains.
1. Lack of visibility of added value upward the supply chain, especially as a result of
private labels;
•
private labels lack the brand name of the producer
2. Private regulation makes producers dependent on retail;
•
specific investments in quality systems will have to be earned back
3. Product liability results in dependencies upward the supply chain;
•
liabilities can be shifted upward the supply chain using contractual agreements
4. Strong position of consumer interests in competition law;
•
exemptions in competition law on agreements if consumer’s interest are regarded
5. Lack of transparency with respect to the content of end products;
•
labelling/reporting does not reveal the factual composition of food and its price
6. Limited available information on cost structures of food processing;
•
cost structures are virtually unknown and kept secret
7. Opportunity of free riding on innovation;
•
retailers could benefit from dependency relationships and get innovation for free
35
3 Further Analysis: Five Case Studies
3.1
Introduction
Chapter 2 gives a good indication that the policy-makers and researchers have a good
idea of how the industry functions in general. The focus of the further analysis presented
in this report is based on examining the pork and poultry industries in five countries.
Many of the previous analyses focus either on the European Union as a whole or on
individual Member States. In this chapter, we focus on the peculiarities of five Member
States (see the section Country selection on page 11), and compare them. The goal here is
to get a more in-depth look at the commonalities and differences between different
regions of the EU, so that policy recommendations can be better focussed.
3.2
3.2.1
Short summary of issues in each country
The United Kingdom
Supply chain relations
The pork supply chain is fragmented and adversarial between producers, processors,
retailers and manufacturers; however, the largest concerns being raised occur on the two
ends of the value chain—with farmers and retailers. According to the English Pig
Industry Report, few examples of “integrated” supply chains exist; however, in cases
where they do exist, they are very powerful because they are anchored with the large
“hypermarket” retailers. In a sense, the UK can be seen as having two different types of
supply chains.33
Many of the complaints that arise within the industry can come because of tensions
between actors within those integrated chains and those outside. Those outside of the
integrated chains can complain about the relationship between retailers and other parts of
the chain.
While for the pork industry, imbalance of power is consistently prominent, the picture
was less adversarial in the case for poultry. The main reason appears to be the higher
level of integration in the chain, leading to fewer nodes for price transmission. In the
poultry sector, processors usually own farms; therefore there is less tension observed
between processors and farmers.
33
This fact has clear implications for what we can draw from the modelling, given that our price data will be made up of
organisations within and outside these integrated chains.
37
What follows are a list of the most important issues identified in both reports and
interviews.
Contracting issues. Relationships between farmers and processors are not necessarily
formalised and can rely on a rather informal basis. Business is built on trust and longterm business relations. For example, one interviewee indicated that a certain supermarket
has meat suppliers entering into a competitive bidding process every three months before
it buys their product.
Listing fees. Fees paid by suppliers to retailers in advance before they are guaranteed a
place on the supermarket’s list of suppliers.
Risk transfer. Unexpected costs are often passed from retailers to their suppliers. the
extent of risk transferred to the supplier was found to be “excessive”, which is a strong
indication of the tilting of power balance towards retailers. The impact of such practices
on innovation levels has not been obvious and there were no evidence to confirm or deny
it, but the general consensus is that leaving these practices unchecked may result into
detrimental effects on the industry.
Marketing costs. Bearing the costs of marketing (TV ads, promotion, etc…) is another
retailer’s practice highlighted by several sources. In their quest to achieving economies of
scale, retailers offer promotions on meat products at the expense of suppliers against
longer contracts, bigger purchase volumes and loyalty bonuses.
It must be noted that the poultry appears to have garnered far less attention in the UK than
pork. Nonetheless, some of the same complaints outlined in the pork industry can also be
found for poultry.
Developments and trends
In the face of fierce competition, stakeholders interviewed have been noticing a new trend
occurring in the industry, although not yet captured by the literature. To balance the
bargaining power of retailers, a process of consolidation and mergers is happening at the
processors level. According to interviewees, if the numbers of processors decrease,
retailers will have fewer choices, which may restore the balance of power in the market
between retailers and processors.
Various stakeholders interviewed in this study have confirmed that the issues around the
value chain imbalances are very important issues that affect the prices and profitability of
the industry in general. But, it would be too simplistic to look at price imbalances only
from a supply chain perspective because there are several other factors that interact
together to finally form the current picture of the industry. These are combined market
factors: supply and demand, imports from other countries, input costs, as well as policy
issues.
38
Interviewees have equally highlighted two important issues 34 inherent in the pork industry
that have a strong influence on the industry. The first is the ambiguity about meat
labelling, which was at the centre of public debate until the end of 2009. Much of the
meat available in supermarkets with a British label did not necessarily originate in the
UK. In February 2010, the UK introduced a new country of origin labelling (COOL) code
of practice for pork, which is a voluntary code that aims to give clear information about
countries of origin on packs for pork, bacon and ham. 35
The second is the efficient use of the pig carcass. In the UK, the most used parts of the
pig are the legs and loins, which, at the current level of pig production in the UK, does
not meet the current demand and leads to imports from other countries. The remaining
parts are exported to other countries at cheaper prices. The challenge now for the UK is to
find innovative cuts of the pig carcass for more efficiency gains.
In addition to the above mentioned factors, two external factors affect the competitiveness
of the industry and which have been highlighted by both pig and poultry stakeholders:
The first factor is represented by the administrative and financial costs associated with the
implementation of new environmental regulations, in particular the Integrated Pollution
Prevention and Control (IPPC) directive, which stipulates environmental standards. Many
complain of the cost burdens associated with this directive, which stakeholders attributed
to two points. First, they viewed the UK as a “starter” in terms of the application of EU
policies, introducing policies before other countries. An example of that is the early
introduction of bans on stalls and tethers ahead of most EU countries. The second is that,
while the UK national policies stem originally from EU policies, they are considered to
be transposed in a stricter manner than in other EU countries. Regulators do not agree
with this view and believe that regulators in other EU countries are doing more or less the
same as the UK regulators.
Second, the UK faces difficult competition from cheaper imports from other EU
countries. The British pork industry is smaller and less efficient, producing less than its
EU counterparts and, as a result, part of the retail hospitality and public sector choose to
buy the cheaper products from oversees producers.
Innovation
Innovation and investment decisions by processors very much depend on their
relationship with retailers: the stronger the relation, the more willingness to invest for
innovation. Given the current short term relations and uncertainties surrounding it,
investment decisions become very difficult for processors. The industry has witnessed
strong developments both at the process and the product level and there is no evidence of
“negative impacts” on innovation due to unstable contracting relations, however, had
these contractual relations been for longer terms, innovation levels could have been
higher.
34
35
These findings are consistent with the House of Commons- Environment, Food and Rural Affairs Committee report on the
English Pig industry. See House of Commons; Environment; Food and Rural Affairs Committee (2008). The English pig
industry.
http://www.foodnavigator.com/Legislation/UK-introduces-voluntary-COOL-code-for-pork.
39
Similar findings were referred to by the House of Common report in 2009, which also
confirmed that the absence of effective contractual relations between farmers, processors
(and retailers) are key issues that hindered industry’s willingness to invest.
In addition, innovation depends on the extent to which retailers are willing to support
suppliers in their “new adventure”. Some of the interviewees of this study have
emphasised that it is always difficult for a supplier to make new investments beforehand,
simply because their new product may not necessarily be well received by consumers
and, therefore, retailers will be reluctant to buy the product and consequently contribute
in investment costs. Therefore, the retailers being the link between consumers and
processors need to give the first signals to suppliers before any decision on further
investment is taken.
It seems that, while the stressful environmental regulations, including the IPPC Directive,
Waste Directive and the Nitrate Directive are perceived to have burdened farmers in both
pigs and poultry sector, the regulations have created positive innovative responses.
Farmers’ representatives and industry experts interviewed confirmed that, although the
dominant reaction to environmental regulations has been negative due to the financial and
administrative burden, the regulations themselves led to observable positive signs.
Improvements have been noticed at the livestock production level, fertiliser use on
pasture, animal feed production, and animal waste and its treatment. Examples included
the introduction of incinerators and waste disposal systems, which reduces odours and are
subsequently friendlier to environment.
Legal environment
Recently introduced regulations have a strong impact on the industry particularly at the
farm, and processors levels. The most frequently reported in this study is the IPPC
directive, according to which farms have to comply to environmental standards aiming at
reducing green house gas emissions. In a similar manner, slaughterers and processors,
need to take into account waste disposal and odours resulting from their operations.
The introduced directive necessitates obtaining permits, renewable on a yearly basis, that
are associated with substantial administrative procedures. While the Department for
Environment, Food and Rural Affairs (DEFRA) is involved in stakeholder dialogue in an
effort to introduce the directive procedures and to create buy-in and acceptance among
the different stakeholders, interviewees have expressed concerns about the directive’s
associated costs and administrative burden. Total permit costs of GBP 3,000 were viewed
to be rather high. Arguably, the regulation further decreases the profit margins of the
average farm. At the same time, however, stakeholders partially acknowledged the
potential of the regulation to spark investments for further long term benefits.
Regulations on animal welfare, particularly those related to housing and density of
animals, were reported to be burdensome to farmers due to the large amounts of
investment needed to comply with the requirements. Various stakeholders felt that the
UK government has the tendency to transpose EU policies and “coin” them with little
sensitisation to the local context. The general perception is that these regulations are
usually applied even earlier than in other European countries. This places the UK meat
40
industry at a disadvantaged position vis-à-vis its European Competitors, who have longer
time to adjust to the new policies, and thus incur lower costs and have better profit
opportunities.
Code of conduct
To address the issues of buyer power exercised by supermarkets and suppliers over other
organisations in the supply chain, the UK Competition Commission has, in 2004,
published a draft code of conduct, which was officially launched in early 2010. The code
was consulted on and the Competition Commission published the final version of the
Order setting out the GSCOP in August 2009. The Competition Commission sought the
large supermarkets’ voluntary agreement to the establishment and funding of an
Ombudsman to enforce the code.
The code will be administered by the Office of Fair Trade and will give suppliers
opportunities to appeal to an independent arbitrator in the cases of disputes arising from
exercise of buyer power and any associated abusive practices, such as retrospective
adjustments to terms and conditions of supply or entering into arrangements with
suppliers that result in suppliers being held liable for losses due to shrinkage.
Consultations are currently being held about the establishment of an ombudsman office to
enforce the code.
In interviews conducted to date, retailers have responded positively to the code. In one
interview in the mainstream press, it was stated that “we think it will help demonstrate the
strength of the relationship between food retailers and their suppliers. It should help
overcome some of the myths. If it produces the results we expect, it will demonstrate that
a costly ombudsman – that would skew the negotiating balance in favour of suppliers – is
unnecessary”.36
Processors and farmers representatives interviewed for this study, however, did not share
this positive outlook. The majority of interviewees agreed that fear of harming relations
with the big four retailers meant that few wanted to risk reporting abuses to the
ombudsperson’s office. And unless the ombudsman office takes a “proactive” approach
to find out about abuses of power, the instruments (the code and the ombudsman office)
would not be as effective as they should be. Similarly, there was a belief that the code
was relatively “toothless”.
When stakeholders were asked about the potential role of regulations to manage the
relationships between producers, suppliers and retailers, the majority answered that this
relationship cannot be governed by the law, except in the cases where parties would
exercise anti-competitive behaviours that are by law illegal and for which the National
Competition Authority has found no evidence so far.
Despite clear difficulties in the value chain, our assessment is that many along the value
chain believe that further intervention from government could be overly clumsy, and
therefore worse than the existing problem. Despite showing concern over abuse, some
interviewees agreed that solutions still needed to come from industry itself.
36
http://www.just-food.com/article.aspx?id=109700.
41
3.2.2
The Netherlands
A wide variety of business practices governs relations between meat processors and
retailers. These practices depend on the market share of both retail organisations and meat
processors, and on the way the supply chains for fresh and processed meat are sliced up in
subsequent stages.
Written contracts between the meat industry and retailers are uncommon, except in cases
where contracting partners want to formalise a general business relationship. Sometimes,
volumes and assortments can be specified, but not in detail. In a similar manner, if prices
are mentioned, they only point to a price reference. Some of the meat processors
interviewed said that, if contracts would be used, they would not trust them, since
retailers are able to change the contract terms during the life of the contract.
In contrast, interviewees also indicated that retailers prefer at least some stability in their
relationship with their suppliers. In a sense, both sides have a gentlemen’s agreement.
Because retailers promote fresh pork products, volume sales per product item vary wildly.
For regular volumes, the preferred supplier is used. For special offers, with high volumes
and low prices, other suppliers are requested to give a price proposal. In these situations,
price is the major decision criterion. And because price is so critical, low-cost suppliers
from abroad are also considered in these competitive bids. Since sales of promotional
activities amount to 40 percent of total turnover in pork, the role of the preferred supplier
is less important than it seems. Prices of the structural volumes end up fluctuating with
the prices in these competitive bids, to which the preferred supplier has to adapt. Price
offers are favourable to overall retail turnover, but they are detrimental to the meat supply
chain player.
Listing fees are uncommon for meat in the Netherlands (nor for other products, such as
fruits, vegetables and bread). However, Dutch meat processors have experience with the
practice when exporting to foreign countries: two interviewees mentioned a retailer in
Greece; the Czech Republic and Romania were also mentioned. Whether demands for
payment terms and entrance fees were met depended on the importance of the
relationship between supplier and retailer.
Payment terms are increasing according to each of the interviewees. Examples include the
extension from 15 to 60 days. One of the interviewees argues that the delay of payments
creates smaller margins in meat processing. Delay in payments is a real concern to the
interviewees, since at least smaller processors have little opportunity to increase finance
opportunities for working capital, certainly given the smaller margins. An example has
been given of a medium-sized Dutch retailer expanding the number of stores financed by
(at least partly) late payments.
Since almost no written contracts are used, no provisions for conflict exist. The majority
of interviewees perceive themselves to be the weaker party, and always have to give way
42
to their sales partners. One interviewed party expressed it as follows: ‘the trade between
meat suppliers and retailers is not very professional’.
One of the interviewees expressed the need for transparency, both in business-to-business
and business to consumer relationships. Transparency is meant in terms of product
quality, cost break-down, cost drivers at each of the trade partners, cost effect of price
offers, etc. If a retailer gives space for an open cost calculation as the basis for price
building, at least some room is left for a margin, even if the margin is small and
controlled. It, however, fully depends on the retailer whether an open cost calculation
base is used.
A system where sales prices below the cost prices are not allowed would be favourable,
according to one interviewee. However, he admits that this is a tricky problem, since it
would be difficult to monitor.
Innovation
The interviewees indicated that innovations are pursued with respect to sustainability,
product development (meat shelf life and packaging technology) and production
efficiency. Animal welfare has become the major societal concern in the pork supply
chain. Environmental care as well as human and animal health are also important,
especially for primary producers (farmers). For processors, traceability of products is the
major concern, mainly due to problems due to feed contamination and zoonoses. The
Dutch Minister of Agriculture actively promotes sustainable production including
environmental and animal welfare features.
Innovation takes place, even though profit margins decline. Innovation takes place neither
‘thanks to’ nor ‘despite’ smaller margins. Processors are trying to find ways to
differentiate themselves from other suppliers. Innovation plays a key role in this respect.
With respect to product innovations, the development of value added products is taken
up, for example special Eastern or Christmas assortments and complete ready-to-cook- or
ready-to-(h)eat-meals. To meet the demand for sustainable products, all the companies
interviewed have been involved in developing sustainable products, in particular products
that are neither regular nor organic. The development of sustainable products influences
the whole supply chain. Market development in emerging countries China and Africa is
also mentioned as an innovation.
Legal environment
The Dutch Food and Goods Law is a framework law to which new guidelines and
decisions may be added. The Law contains prescriptions for food ingredients, food
processing and distribution. The Product Boards—one of the government bodies in the
Netherlands—define additional product specific norms.
Food Law is controlled by the Dutch Goods Authority (VWA). Following EU legislation,
the General food Law, food companies have to develop and implement their own food
safety and traceability mechanisms such as HACCP. HACCP compel firms to assess
risks, to identify critical control points and to control these points. Food companies are
also obliged to introduce traceability mechanisms.
43
Dutch Competition Law is enforced by the Netherlands Competition Authority (NMa).
The Act came into effect on January 1st, 1998. The Competition Act has seen several
amendments since then. The Competition Act was amended as a result of European
Regulation 1/2003. Another amendment was made on July 1st, 2005, when the NMa
became an Autonomous Administrative Authority (ZBO). The NMa received additional
powers in 2007 as a result of the evaluation of the Competition Act. Section 6 of the
Competition Act prohibits agreements between undertakings distorting competition.
Section 24 prohibits abuse of a dominant position. Section 34 requires notification of
mergers.
The NMa considered about 30 merger cases in food processing and food retail in the
2000s. In 25 of the 30 concentration cases notified to the NMa, no permission was
necessary according to the NMa. In the other four cases, permission was granted. One
case is still pending. Most concentration cases in the supermarket channel refer to a
limited number of outlets. If the NMa decides that permission for a merger is required
(NMa, Visiedocument inkoopmacht, 2004), mergers are not always put through (For
example, Campina and Zuiver Zuivel as well as Schuitema and Sperwer were denied).
Mergers may also be permitted under predetermined conditions (for instance, Vendex
Food and De Boer Unigro as well as Jumbo and SDB).
The NMa designated the food and agro-processing industry as a priority industry in its
2008-2009 Agenda. Supply is highly concentrated in the Netherlands. This holds for most
supply chain levels: the farm supply industries, marketing boards, food processing and
food retail. That is why the NMa has been quite active in this industry recently. In 2009, a
NMa study looked into price formation in the Dutch food supply chain. The study
concludes that retail prices reflect supply chain costs and that price changes in the
respective of the supply chain follow each other.
With respect to supplier-retailer relations the following observations are made:
•
Dependency in the Dutch food supply chain has a reciprocal nature.
•
There are no major differences among suppliers and retailers in terms of contract
conditions other than those related to differences in volume and quality.
•
The bargaining position of suppliers is relatively weak due to excess capacity.
•
Supermarket chains impose requirements on supply chain partners in terms of
product specifications, logistics and planning.
•
Differences in contract duration are product specific: bread versus fresh produce.
Code of conduct
None of the interviewees favoured a code of conduct governing the relationship between
meat processors and retailers. The argument from each was essentially the same: free
competition should not be distorted by extra regulation. In addition, one interviewee
expressed the view that European and national competition authorities already had the
authority and ability to guarantee fair business practices. However, the continuous delay
of payments is still worrying all the interviewees. They would all prefer a maximum
payment terms of 30 days.
44
3.2.3
Spain
Horizontal concentration at the retail level, even though it is lower than in other countries
analysed in this study, is higher in the pork and poultry sectors. One part of the pork and
poultry industry is controlled by a few firms that can operate at national or trans-regional
level. These firms are the only ones large enough to negotiate with the modern retail
sector. A second part of the industry is more fragmented, with around one hundred firms
operating at a regional level. Only some of these firms are capable of supplying modern
distribution. Finally, around 2,000 smaller firms operate at local markets, which mainly
operate directly or through a wholesaler with traditional retailers. The market share of the
last two groups is approximately equal to that of the highly integrated group. With such a
structure, the larger retailers have a clear advantage when bargaining with the meat and
poultry industry, a position that is reinforced by the direct access retailers have to
information about consumers’ behaviour.
Although most of the interviewees agree that the processing sector has to progress
towards horizontal concentration, they also feel very sceptical about the process. With the
exception of the larger two firms in the processed meat sector and one firm in the poultry
sector (that have a “multinational strategic business approach”), most firms belong to
traditional families. Interviewees’ indicated that they wanted maintain their identity.
Mergers and acquisition did not seem possible in the short-run.
Because many firms rely on family ties, decreasing numbers of smaller firms will result
as one generation fails to continue the business from the last. In many cases, these small
firms could be overtaken by the larger ones. In some cases, contractual arrangements
already exist between smaller and larger processing firms by which the smaller ones
supply products to the larger to satisfy volume needs from modern distribution.
In non-integrated parts of the chain, most of the studies, reports and comments from
interviewees highlight the market power of retailers, focussing on two issues: the higher
degree of horizontal concentration at the retail level and information asymmetry through
direct contact with the consumer (trends, shopping behaviour, new products’ impact,
private labels, etc.). Retailers exercise this market power through two instruments: price
negotiations and practices related to risk transfer to processors.
Feed price increases in 2007 and 2008 also had a relatively large effect on producers and
processors, though this varied somewhat between the pork and poultry sectors. These
differences also demonstrate the relative power of the retail industry. This variation can
be explained by structural characteristics and the previous market conditions.
In general terms, the impact on the poultry sector was lower than in the pork sector.
Poultry associations highlighted significant decreases in poultry consumption and
production after the avian influenza in 2006. As demand in 2007 had been higher than
supply, retail prices were already relatively high, allowing producers to compensate for
costs increases. In addition, for integrated farmers the impact was relatively low as the
risk was assumed by the integrated companies.
45
All interviewees agreed, however, that retail companies exercised their bargaining power
in those years by delaying price negotiations. As the 2007 prices had been already
negotiated, it was not possible to pass cost increases to selling prices. This was not very
problematic up to the end of the year when fattened animals fed with more expensive feed
were started to be sold at the market. Negotiations for 2008 contracts were signed by
April, so 2007 negotiated prices were kept constant up-to-the-month. However, when
cereal prices started to decrease, retailers immediately demanded price revisions.
At least two interviewees mentioned substantial changes in their relationships with larger
retailing companies—taking into account also that the business strategies of the retail
companies differ among them—although interviewees agreed that larger retail company,
the more difficult the relationship.
These bargaining power developments have been relatively recent. Ten years ago,
variable prices were negotiated following a reference price based on yields and margins
(with up to 10 price intervals). Five years ago, bilaterally fixed prices were agreed
annually with each distributor. This strategy was viewed as fair in the context of
increasing demand and costs stability.
In the pork sector, the impact of feed price increases was higher, generating significant
cuts in the number of animals produced. One of the meat associations interviewed
estimated the costs to be approximately EUR 20 per animal. However, due to excess
capacity and supply, most of these prices were absorbed at the top of the value chain.
Farmers were generally saved by the significant increase in exports.
In the case of processed meat, the issue of price transmission is less relevant as the
number of references is relatively high. In this case, retailing bargaining power is
exercised through contract negotiations. While some retail companies prefer to work with
one or two firms for a group of meat products to reduce logistic costs, others prefer to
have at least four to five suppliers to guarantee provisioning. Usually, agreements apply
for a list of references (“plantilla”). Some retailers have a unique person in charge for a
whole family of products (fresh and processed meat) while others have different people
for each type of product. A usual strategy is to change the person responsible for buying
every two years in order to avoid “friendships” between processing and retailing.
Five years ago, more or less long term agreements were signed between the industry and
the retailers with prices to be negotiated each year. However, two interviewees pointed
out that in recent years the exercise of the bargain power by retailers has generated an
increasing uncertainty about medium-term contracts. One strategy mentioned by some of
the interviewees from the industry is the growing trend among retailers to organise a kind
of auction among suppliers every year. This practice has started to work for specific
products and periods, and mainly applied for private labels, but there is a big concern
about its potential generalisation.
Processed meat industry managers from larger firms managed these risks through
diversification (alternative marketing channels, exports, deeper and lengthier product
mix, alternative retailers, own brands). Medium-sized firms tended to pursue deeper
46
cooperation with the retail sector (exchange of information, strategies to reduce
transaction costs).
A final common concern about the exercise of the bargain power among retailers refers to
private labels. All the interviewees in our study sell products under private labels
although the relative importance within the total turnover varies a lot. Private labels are
viewed as a necessary condition to keep customers’ needs satisfied and to guarantee the
presence of brand labelled products in retailers’ shelves.
Innovation
There is a common agreement among processors that innovation decisions are key for
future business success, and that these decisions are highly dependent on their
relationships with the retailers. Under the current situation of increasing uncertainty about
the length of the contracts, processors are concerned about its impact on future
investment decisions. Moreover, there is also a concern that the higher importance of the
private level, the lower incentive to innovate. The increased price competition among
retailers is observed as short term benefit for consumers but the long run impact on
consumers’ welfare is difficult to assess.
In any case, there is also a consensus along the meat chain that there is a huge range of
potential innovations (processes, product mix, new products, management, etc). The
financial crisis has stimulated innovation in managing products within the firm trying to
increase the efficiency of information flows in order to save costs. In relation to
innovation in meat products all processed firms devote a significant share of their
resources to new products based on new trends observed in domestic and international
markets. However, except in a limited number of cases, there is not a significant
collaboration between retailers and the industry about new potential products. In this
context there are asymmetric information flows along the mat supply chain. Some of the
interviewees also complain about the Looks-a-like strategy followed by some retailers.
Once the new branded product is on the market, in 4 to 5 month there appears the private
label counterpart.
Two main issues arise when talking with the processors: The first one is the importance
assigned to investments to improve efficiency of products management within the firm as
a key factor to reduce costs. The second issue is related to the uncertainty about the future
impact of private labels on innovation. As mentioned before, some interviewees
expressed their concerns about the negative impact that the increasing market share of
private labels at retailing on firm’s product investment.
Legal environment
Currently, vertical relationships along the food value chain are regulated by two main
horizontal laws: the Law of Competition Defence (2007) and the Law of Retailing (1996)
reformulated in 2010. These laws are applied to all sectors of the economy.
The reform of the Law of Retailing is the response of the Government to one of the main
concerns of food industries in general and meat industries in particular: the terms of
payment. The new law has established 30 days for perishable products and 60 days for
47
non-perishable products. Although the law is very new, there is a wide consensus among
the people interviewed that its application will be smooth and that this is a good step in
improving contractual relationships between processors and retailers. However, two
interviewees were concerned about the potential increase of the discounts by retailers to
compensate for part of the financial losses derived from the new regulation.
The main Law regulating vertical and horizontal relationships along the food value chain
is the Law of Competition Defence (Law 15/2007). This law deals with horizontal
concentration issues (mergers and acquisitions). When involved firms surpass a threshold
value related to market share or turnover in a specific market as an immediate result of
the merger, the Competition Commission has to be informed. The Competition
Commission then takes a month to research in detail the potential implications of this
market share for the overall balance in the chain. This period is usually extended when
the findings point to possible imbalances that might lead to rejection of the merger.
During the last five years, the number of cases affecting the meat sector has been very
low indicating that business practices by retailers are not illegal, mainly because the
exercise of the market power by retailers affects the bilateral relationships between
industries and retailers but does not affect the public interest. In short, it seems that
consumers have benefited from lower prices to stimulate consumption during the
economic crisis.
In relation to conducts, the only noticeably case was the punishment to PROPOLLO, the
association of poultry industries, in 2008 after sending an internal communication to
members to fix rising prices.
Interesting to note is that despite the increasing concern about the bargaining power along
the food chain, no specific regulations exist up to date. However, the Ministry of
Environment and Rural and Marine Affairs (MARM) is actively working in three main
axes:
•
The Observatory of Prices. Aiming to increase transparency along the food chain,
the MARM publishes weekly prices at different stages of the food chain. Only
perishable products are considered. In most products three levels are considered:
farm, wholesale and retail;
•
The Law of the Quality of the Food Chain. This proposal aims to update some
previous laws that have become obsolete (i.e. The Law of Contracts (2000) and the
Law of Inter-professional associations (1994)).
As mentioned, the meat industry stakeholders interviewed are against any kind of strict
regulation. Competition rules are harder than before but they have been adapting to the
new framework. They are aware of the competitive situation and that this situation arises
for the different bargaining Power along the food chain due to the higher horizontal
concentration rate at the retail level. They do not think that relationships between
processors and retailers can be regulated by law except when some practices are against
the existing Law of Competition Defence. Processors know that the potential solutions
are in their hands: better cooperation with retailers, higher degree of horizontal
integration and further and continuous innovation are key factors. However, they strongly
48
believe that these goals are difficult to achieve taking into account the current structure
and the idiosyncrasy of the meat processing sector.
Code of conduct
The MARM is elaborating a Code of Conduct. In 2009 a working group was formed to
elaborate the first draft, which is under discussion now among main representatives of the
different stages along the food chain. No information is available yet, but it seems that it
will be voluntary, aiming to improve information flows up and down the food chain and
promote cooperation between producers, processing industries and retailers.
In the course of the interviews, however, none of the interviewees knew anything about
the code. All were against any regulation about marketing margins. They were in favour
of voluntary agreements, codes of conduct or the establishment of a common general
framework under which bilateral contracts can be signed. As one informed clearly
indicated: “less regulation and more transparency”. Finally, some of the interviewees also
raised the concern about the potential influence of lobby groups when developing the
Code.
3.2.4
Poland
Production of pig and poultry meat takes place in fragmented value chains characterised
by low-scale production of pigs and poultry for slaughtering with a huge number of
producers and processing enterprises. To make the value chain function, middlemen play
an important role, especially at the lower end of the value chain. Vertical integration is
still low.
Within the last decade, structural changes have taken place with a tendency towards:
•
Larger holdings, a transformation that will probably take years;
•
Increasing concentration within meat production and processing, initiated by large
(foreign-owned) industrial groupings. None of the groupings have achieved a
dominating market position;
•
Increasing concentration in retail as larger foreign-owned supermarkets and
hypermarkets chains enter the market, gaining strong market positions.
After these new large and strong players entered the value chain, one of the results has
been further integration. At a farm level, the farmers have tried to strengthen their market
position by establishing producer marketing groups that deliver to the slaughterhouses.
The prevalence and impact of these groups will probably be felt more in the future, as at
the moment, their relatively recent market entry precludes any further analysis.
The large industrial groups with production and processing often develop along
production lines, which include slaughtering and processing of meat products. In some
cases, we even observe further integration as these industrial groups have their own farms
for feeding pigs or poultry, purchasing units, contracting farmers, and also distributing
some product.
49
The middlemen, the wholesaler, the small producers and retailers are facing increasing
competition and an increasing number of businesses will be squeezed out of the market.
However, vertical integration is still low, although growing.
In the light of the structural changes, the value chains are facing some challenges. These
challenges differ depending on whether we are talking about larger, more integrated firms
versus smaller and less integrated ones.
Quality pressure. Even though some consider Polish meat to be very advanced (with an
excellent assortment of products), the market is met by increasing demand for improved
quality and standards. An increasing quality pressure is contributing to more formalised
business relationship, such as more written, long-term agreements in favour of the larger
enterprises.
Existence of middlemen. To offset the pressure for formalised contracts, middlemen
have played an important role as mediator between various firms within the value chain.
Middlemen tend to be used by the smaller and more traditional firms where business
relationships are more important than written contracts.
Trust. Trading relationships in the value chain may to a large extent be based on trust.
Personal relationship are also an important factor supporting the building of repeating
business transactions, such as through middlemen. However, the value chain seems also
to be influenced by distrust among the partners, as many are unwilling to share
information with a trading partner or entre into closer business relationships. According
to interviewees, this clearly hampers integrations, as well as e.g. joint R&D activities.
The situation is somewhat different when it comes to large retailers and manufacturers as
business relations become much more sophisticated and complicated. More often,
partners will need to establish long written agreement specifying e.g. quality standard,
prices, conditions for delivery (guarantee the delivery), listing fees etc.
All in all, there is a pressure for structural change—concentration and consolidation—in
the value chain which have increased institutionalisation of the trading relationship in the
value chain.
Bargaining power. Even though we see structural changes taking place, the market is
still dominated by short-term repeated agreement and the spot market. The fragmented
structure is still a limitation for developing tighter relationships between the farmer,
producers, and distributors.
The farmers seem to be in the weakest bargaining position as they typically only are able
to deliver small quantities of meat (animal for slaughtering). As well, price formation at
the spot market follows the price level in the neighbouring countries. An attempt to
increase prices exclusively in Poland will probably be met by an increasing. The large
production and processing industries follow the prices in these countries and will on short
notice be able to enlarge the foreign supply of pigs for slaughtering or cut meat.
50
In the distribution of fresh meat or processed meat products, the retailers—especially the
large firms in the chain—have strong bargaining power. Especially when it comes to
fresh meat, the retailers can choose between many suppliers and price formation will to a
large extent depend on the supply (the price at the spot market). Some of the larger
groupings have established their oven distribution network to have tighter relationships,
especially with the small retailers, but the impact on prices is unknown.
Few of the larger processing industry have established their own brands (quality
products) as a market strategy to obtain higher prices. The industry stresses that it is very
costly to establish a brand and the existing low profit margins is a hindrance for such
investments. As a response to brands, the retailers could introduce private labels but the
impression is that private labels are not widespread.
All in all, short term repeated agreements and the spot market still dominate the market.
Some argue that the market—the price formation—is very transparent but retailers still
have a strong bargaining position. Trading agreements are often on a weekly basis and
with short term condition for payment. In rare cases and with larger consumers, the
agreements can last up four to eight weeks.
Innovation
In the period of 2000 to 2007, investment increased until 2004 from EUR 184 million to
EUR 344 million as an indication of the industry – and foreign investors – have been
dedicate to modernise the meat industry. After the European accession in 2004, we find
that the investment in the meat industry stabilise at a level for investment at about EUR
400 million per year. A closer look into the investment in 2005-2007 reveals that 58
percent of the investments are within in machinery and equipment and 37 percent within
construction and alteration of buildings. These investments have, as indicated above,
contributed to reduce the technological gab between the Polish and the EU-industry and
to the adaption of modern methods of production.
Legal environment
Today, the Polish regulatory regime is generally based on provisions from the EU
(Common Agricultural Policy) and Poland’s entry into EU has involved adjustment in
animal production and processing, aimed at ensuring food quality. These requirements
have led to investment/FDI in improved or new production facilities followed by
restructuring, tendencies to concentration in the food sector.
When it comes to price formation, the Common Agricultural Policy does not interfere
directly with the market (no intervention procurement but subsides for storage and
export) which might the impact of more fluctuating price. The Office of Competition and
Consumer Protection37 exerts control over the observance of market competition rules
and is in charge of consumer rights protection in Poland. Two basic legal acts concerning
competition rules and consumer protection are “The Act of 16 February 2007 on
competition and consumer protection” (Journal of Laws of 2007, No. 50, item 331, as
amended)38 and “The Act of 16 April 1993 on combating unfair competition” (Journal of
37
38
(Urz•d Ochrony Konkurencji i Konsumentów - http://www.uokik.gov.pl/.
Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentów (Dz.U. 2007, Nr 50, poz. 331 ze zm.).
51
Laws of 2003, No. 154, item 1503 as amended)39. Another general act that regulates
market functioning in Poland is “The Act of 12 June 2003 on payment terms in
commercial transactions” (Journal of Laws of 2003, No. 139, item 1323)40.
In relation to the meat sector, the authorities express that so far there have not been any
significant problems related to price formation and mergers. Some larger industrial
groups have been established in the pork and poultry processing industry but the value
chain is still to be characterised as fragmented and firm seems to have any dominating
position in the value chain large enough to affect the price formation.
However, political initiatives have been taken in order to monitor the prices in the food
market.
A price commission was an initiative by the former Polish government. The initiative
involved the formation of working groups with the participation of meat producers and
processors, whose main goal was to overview the meat market by gathering and
publicizing information on average weekly meat prices in the value chain in order to
provide the market with more transparent and updated price information. The price
commission’s work has been terminated probably due to political reasons.
A new initiative was launched in February 2010 by establishing an “Intersectoral Group
on Strengthening of the Agri-Food Products Market Transparency and Food Supply
Chain Functioning Improvement”41 under the Ministry of Agriculture and Rural
Development. The Group is to overview and estimate commercial practices within the
food supply chain, recommend how to constantly monitor prices and margins, look for
the possibilities of reaching consent among participants of the food supply chain, and
prepare a code of good commercial practice in relation to trade in food.
Code of conduct
The overall impression based on literature and interviews is that the commercial actors,
the associations and the public institutions are very keen on developing the value chain as
well as the institutional and regulatory set-up. A key issue is to develop the value chain to
meet the competitive challenge followed by the transition to a market economy and the
accession to EU. The main consideration seems to pursue the economic opportunities in
the market rather than to discuss whether regulation or a voluntary code of conduct would
be a better solution to problems in the value chain.
Based on our interviews, however, the impression is that no real tradition for voluntary
agreements exists in Poland, and we have been able to identify any voluntary agreement
having a real impact on the market.
39
40
41
52
Ustawa z dnia 16 kwietnia 1993 r. o zwalczaniu nieuczciwej konkurencji (Dz.U. 2003, Nr 154, poz. 1503 ze zm.).
Ustawa z dnia 12 czerwca 2003 r. o terminach zap•aty w transakcjach handlowych (Dz.U. 2003, Nr 139, poz. 1323).
Mi•dzyresortowy Zespó• do spraw Zwi•kszenia Przejrzysto•ci Rynku Artyku•ów Rolno-Spo•ywczych i Poprawy
Funkcjonowania •a•cucha •ywno•ciowego.
3.2.5
Germany
The German meat market is characterised by a low degree of vertical integration, as many
livestock traders and wholesalers tie the value chain together. This is particularly the case
for the pork sector. The low integration in the value chain is followed by business
relationships characterised by repeated market transaction which means that the prices are
negotiated typically on short-term contracts (e.g. weekly basis) or fixed by the spot
market. Longer term contracts are relatively rare. The main competitive factor is price,
but with some tendency that other competitive factors such as quality/food safety
becomes more important for the meat market.
There is strong competition at every stage of the supply chain. Neither food retailers nor
processing companies or farmer associations dispose of sufficient market power to take
on the role of a comprehensive chain coordinator or to set industry standards.
Nevertheless, the retailers without doubt have the upper hand in terms of bargaining
power. Due to the retailers’ important market share, they do play a crucial role in
determining prices along the chains. Through increased engagement in private labels, and
backward integration of some chains such as EDEKA and REWE, which run their own
slaughterhouses, they considerably influence the meat market. In terms of the relation
between processors and retailers, the fierce competition and the increasingly sophisticated
demand and price senility of German consumers are the main driving forces for the
development of relationships between processors and retailers. This development has in
general led to a higher dependency of processors towards distributors (Reynolds et al.
2009).
Three factors creating imbalances are highlighted: Firstly, lack of transparency, secondly,
lack of coordination and thirdly, retail power.
Lack of Transparency. The pork industry in Germany has traditionally been
characterised by “arm’s length” transactions. In a highly competitive surrounding, the
supply chain shows a certain level of distrust, which leads to distinctive inefficiencies.
Partly doubtful grading processes and a lack of price transparency in the market cause
conflicts and lead farmers to question the credibility of their buyers (Schulze et al. 2006).
A major provision for conflict in relation to the pork chain is missing transparency
regarding rating and accounting of farmers’ products by their buyers (traders and
slaughterhouses). Traders and slaughterhouses, on the other hand, see a central problem
in their relationship to farmers in hidden information regarding the quality of supply
(Reynolds et al. 2009).
One reason for the generally reserved willingness to share information across the chain
may also be that there is hardly any incentive to establish transparency. On spot markets
farmers and livestock dealers but also processors and meat wholesalers sometimes even
benefit from the obscure marketing channels since competitive advantages are also
achieved by means of opportunistic behaviour. For fear of disintermediation livestock
dealers also have a strong interest in concealing information about their suppliers
(Bahlmann & Spiller 2008).
53
Lack of transparency can potentially lead to anti-competitive practices. In August 2009,
19 companies from the meat industry, including leading brands, came under investigation
by the Bundeskartellamt suspected for price fixing. This investigation follows an initial
investigation, begun in mid July 2009, which unearthed “substantial evidence” of price
fixing between the years 2003 and 2008. However, according to sources inside and
outside the industry, it is not expected that the investigation will unveil any wrongdoing.
Lack of coordination. The low level of trust also affects coordination in the chain. One
major problem has been coordination in relation to the industry’s response to diseases
such as Salmonella and BSE. There has been no company or institution in the meat chain
which efficiently coordinates chain information, harmonises the different IT systems or
takes on professional public relations in charge of the whole sector. In cases of food
crises, up- and downstream information slowly flows across the chain which hinders both
seamless traceability and the harmonisation of production processes between the various
stages of the supply chain (Bahlmann & Spiller 2008).
Retail power. Due to the fierce competition and increasing concentration at the retail
level, more market power is shifted to the retail sector potentially leading to market
imbalance in the chains. This situation is amplified as retailers are increasingly backward
integrating into the processing sector and introducing private labels. Private labels are
widespread in the German retailing sector. These products, introduced as alternatives to
national brands, represent a crucial element in food retailers’ marketing and pricing
strategies (Stiegert & Kim 2009).
The prevalence of private labels in the retail stores combined with a strong focus on food
safety, means the retailers has become more demanding and preferring “control” to
“trust”, regarding processors (Fiscer et al. 2007).
Innovation
Over the period 2000 to 2007, investment has followed consumer prices for meat. Form a
high investment level in 2002 , the investments go down in 2001 along with the decline in
consumer and stabilise at an investment level at EUR 600 million per year. As the prices
tend to increase in the end of the period, the investment also increases from 2005 and
onwards.
Split by types of investment, the entire meat industry invests about 80 percent of the total
investment in machinery and equipment which indicates that the investment is done in
order to obtain an increase in productivity, see Table E.6. German processors have also a
good reputation for building and innovation in the meat processing industry, largely due
to their expertise in engineering (goliath.ecnext.com, 2007). However, the investment
figures do also signal that improvement and modernisation of the production facility to a
large extent can take place within the existing facilities as investment in construction and
buildings are declining.
Legal environment
The German Food Law consists of about 230 different ordinances, including the Food
Labelling Ordinance, Packaging Ordinance, Dietetic Foods Ordinance, various hygienic
54
and veterinary requirements, as well as numerous other special product or product group
rules and regulations.
Basic regulations of the German food law are laid down in 61 articles of the Lebensmittel- und Bedarfsgegenstaendegesetz (LMBG), last amended September 1997. In
addition to the LMBG, in 2005 Germany developed a central Food and Feed Law Book
(Lebensmittel-, Bedarfsgegenstaende- und Futtermittelgesetzbuch - LFGB), providing
basic definitions, procedural rules and goals of the German food law. Both acts define
general food safety and health protection rules, address labelling requirements, regulate
inspection, detention and seizure rules of suspect food. These rules apply to domestically
produced as well as to imported food products.
The German Food Law is a federal law whose enforcement is the responsibility of the
Länder. This implies that on occasion, a minor infraction to the food law may be tolerated
in one state but not in another. However, major violations are persecuted in all federal
states.
The responsible agency for monitoring compliance with German food law regulations is
The Federal Office of Consumer Protection and Food Safety (BVL). It is under the
supervision of the Federal Ministry of Food, Agriculture and Consumer Protection. The
BVL was established as an independent higher federal authority and is also responsible
for risk management. BVL, inter alia, exercises authority over sub-stances and products
that harbour potential risks and that are directly or indirectly related to food safety (such
as plant protection products and veterinary drugs). It is involved in formulating general
administrative rules to implement laws in the fields of consumer health protection and
food safety, as well as in the preparation and monitoring of surveillance schemes and
plans by the Laender. In addition, BVL acts as coordinator in the run-up to inspections
carried out by the European Food and Veterinary Office (FVO). It is responsible for
implementing the European rapid alert system in the fields of consumer health protection
and food safety in Germany. The national reference laboratory for the detection of
residues and the Community reference laboratory for the detection of residues are also
part of BVL.
Alongside EU competition law, national rules also ensure that competition is sustainable
and fair. These rules are contained in the Restraint of Competition Act (GWB) and the
Unfair Competition Act (UWG).
The Cartel Act (GWB) does not prohibit market dominance as such. However, there is a
danger that a firm dominating a market will impose its business targets largely as its sees
fit. Anti-trust controls over dominant market positions and, in Germany as well, over
firms with a strong market presence (i.e. a strong position in relation to their customers or
suppliers) are designed to stop firms not sufficiently kept in check by competition from
abusing their position of dominance to the detriment of competitors or
customers/suppliers and against the general interest. The following are prohibited:
Unfair hindrance of competitors, i.e. a firm with a dominant market position denies, for
example, a competing firm access to its networks and infrastructures, or attempts to oust a
competitor from the market through an aggressive pricing strategy. This category also
55
includes forced tie-ups (e.g. a product is sold only under an obligation to purchase spare
parts from the same firm) and exclusivity provisions (a retailer is obliged to obtain
specific products solely from the market-dominant producer).
Exploitative conduct, i.e. a firm demands inappropriate prices or conditions from its
customers or suppliers.
Non-discrimination, i.e. competing firms may not be disadvantaged or treated differently
without material reason.
The Unfair Competition Act (UWG) determines which unfair commercial practices
against competitors, consumers or other market participants are improper.
The Federal Cartel Office (Bundeskartellamt) – together with the relevant cartel
authorities in the federal states – is responsible for the protection of competition. Branchspecific decisions on cartels are taken by the Federal Cartel Office's legal departments.
The Centre for Protection against Unfair Competition and the Federation of German
Consumer Organisations are the two biggest national institutions in terms of
implementing Germany's unfair competition legislation. In addition, the law entitles
competitors, fellow associations and Chambers of Commerce and Industry to pursue
action on breaches of fair competition. The Federal Office of Consumer Protection and
Food Safety (BVL) is responsible for cross-border legal violations.
Code of conduct
Regulations are mostly a matter between the EU and the German Länder, because the
Federal State is not involved with the implementation of European law.
The tendency has gone towards liberalisation. According to our sources, both farmers and
industry are happy with deregulation.
It should be noted also that voluntary agreements are not very common on the Germany
market as repeated market transactions dominate the market.
3.3
A typology for the five countries
From the above summaries and some additional information provided by our researchers,
it is possible to summarise a few cross-cutting issues that affect all case countries.
Table 3.1
Cross-cutting issues in the five Member State countries studied
Spain
56
United
The
Poland
Germany
Kingdom
Netherlands
Competition
One general
Competition
General
Two Acts apply
Competition
law
regulation on
judged by
regulation of
to competition
judged by
competition,
Office of Fair
competition.
issues,
office. Two acts
and a second
Trading. Two
including unfair
on general
aimed at
primary acts—
competition and
competition as
retailing.
the
customer
well as one on
Competition Act
protection.
cartels.
Spain
United
The
Kingdom
Netherlands
Poland
Germany
1998 and
provisions in
the Enterprise
Act 2002.
Pricing
Some
Lack of
Lack of
Lack of
Lack of
transparency
transparency
transparency.
transparency;
transparency.
transparency,
with price
Sales price
no current
Former price
and little
observatory
formation and
initiatives.
commission
willingness to
monitored by
pricing structure
terminated,
share
government
particularly
including
information.
problematic for
participation of
farmers.
meat producers
Reluctance of
and processors.
retailers to talk
"prices".
Structure of
Dual nature at
Dual nature at
Horizontal
Little
Little
the chain
horizontal level
vertical level
integration in
aggregation
aggregation
Integrated at
Largely
slaughtering
with several
with several
the production
fractured, but
and less so in
middlemen
middlemen
stage
with some
further
However,
Processing
integration
processing
poultry industry
largely
anchored by
fragmented
the retailers
more integrated
serving two
types of
marketing
channels:
traditional
(small retailers)
and modern
(larger
supermarkets
and
hypermarkets)
(Structural)
Little merger or
Consolidation
Consolidation
Some
Huge
changes to the
acquisition
at the
due to excess
consolidation in
consolidation /
processor level
capacity and
progress eg
concentration in
to counter retail
international
driven by FDI
slaughtering
power
competition
chain
Retail
(discount) with
increasing
bargaining
power
Innovation and
Low, driven
Medium, driven
High, driven to
Adjustment to
Productivity
its drivers
largely before
largely by
a large extent
international
with focus on
2007 to reduce
desire for
by desire to
market
production
57
Spain
costs
United
The
Poland
Germany
Kingdom
Netherlands
efficiency gains
differentiate
conditions
technology
Product
Focus on
Quality/food
innovation
moderation
safety
driven to an
(technology,
increasingly in
extent by
facilities and
focus
government
managerial
policy and
aspects)
consumer
(safety and
convenience)
Contractual
Generally
Short term
Generally
Generally
Generally
arrangements
informal, but
between
informal, with
informal
informal, with
formal in some
retailers and
retailers better
retailers better
specific cases
processors
able to change
able to change
Contracts with
Informal
conditions
conditions
retailers,
between
Integrated
depending on
farmers and
productions
the retailer
processors
systems or
contracting
relationship in
the poultry
sector between
farmers and
industry, but
pork production
is dominated by
repeated
market
transaction
Views on code
Against
Retailers are
Against
Against the
Generally
of conduct
government
against the idea
government
idea
against the
intervention
in general;
intervention
idea, but
processors and
cooperation in
producers are
terms of quality
hesitant in their
and hygiene
views, but
(primarily due
pessimistic
to the outbreak
about impact
of diseases)
What is interesting to pull from the typology is the high similarities in the structure of
meat industries across the five case countries as well as the problems that each chain
faces. In all five countries, contractual agreements are generally informal and retailers are
generally able to take advantage of these contractual informalities because they hold the
power in the value chain relationship.
58
From a legal perspective, regulations in regards to food safety and traceability can vary
quite substantially from country to country, though no evidence suggests that it plays
much of a role in price asymmetries. Competition issues, however, play a large role with
varying rules in regards to keeping any single firm from dominating the market.
However, it remains unclear how effective these regulations have been.
In terms of pricing transparency, only two member states have worked towards some
publication of pricing, and notably only Spain has managed to succeed in maintaining this
transparency.
What is probably most interesting to pull from this typology is the structural changes in
the chain and their drivers. In countries such as the United Kingdom and the Netherlands,
other levels of the chain have been consolidating—whether through co-operatives or
other means—to rebalance power along the value chain. Yet, in other countries, these
structural changes have not been taking place. This issue will be addressed further in the
policy recommendations, in chapter 5.
59
4 Further Analysis: Modelling and Measuring
Asymmetric Price Transmission
4.1
Introduction
In the previous chapter, we addressed the similarities and differences between the five
case studies chosen for analysis. In these case studies, disparities in bargaining power
were identified—primarily at the retail level. The purpose of this chapter is to assesses
whether these power disparities lead to price asymmetries in the supply chains of these
Member States. Moreover, we will also try to investigate at what stage of the supply
chain price asymmetry occurs in order to identify what stage may have market power.
4.2
Price transmission
Price transmission is about the relationship between prices at the respective stages of the
supply chain. Do changes in farm prices lead to changes in consumer prices and vice
versa? More specifically, are price changes at one level of the supply chain fully
transmitted into prices at other stages and how much time does price transmission take?
Price transmission may be imperfect for the following three reasons:
1. Prices are not always fully transmitted. This problem may hold for the short and
the long run. If price changes are not fully transmitted in the long run, firms in
one stage of the supply chain are likely to make excess profits. In that case, the
gap between farm, wholesale and retail prices deserves special attention;
2. It always takes some time before prices are transmitted from one level of the
supply chain to another. In principle, this is a short run problem. Nevertheless,
adjustment may take months;
3. There may be an asymmetry between the reaction to price increases and
decreases in other stages of the supply chain. The reaction of e.g. retailers to an
increase in wholesale prices may differ from their response to a decrease in
wholesale prices. The asymmetry may apply to the adjustment size, but also to
the adjustment speed. Figure 2.1A gives an example of a difference in the
adjustment size. A positive price shock at the wholesale level is fully transmitted
into consumer prices, while a price decrease is not. Figure 2.1B gives an example
of a difference in the adjustment speed. The consumer price Pc reacts more
quickly to increases in the wholesale level Pw than to price decreases. Price
asymmetry is primarily a short-run problem. However, again, the short run may
take a long time.
61
Figure 4.1
Asymmetry in adjustment size (A) and speed (B)
Pc
Pc
Pw
Pw
time
time
The economic literature has presented extensive research on asymmetric price
transmission in production and marketing chains. Overview articles on this literature are
those of Frey and Manera (2007), Meyer and Von-Cramon Taubadel (2004) and Peltzman
(2000). Meyer and Von Cramon-Taubadel (2004) have summarised the results of 38
studies, 25 of which refer to agricultural products. In these studies, 197 estimations have
been performed. These estimations are based on different methods, among other things
because estimation methods have been improved through time. Table 1 summarises the
estimation results. Table 1 shows that price asymmetry is a recurrent phenomenon. Note,
however, that the estimation results seem to depend on the estimation method employed.
Peltzman (2000) also establishes asymmetry in two thirds of the 242 product chains
analysed.42
Table 4.1
Results of price asymmetry studies
Test method
All
First
methods
differences
Summation
Error
Threshold
Other
first
correction
methods
methods
differences
Number of tests
197
93
47
31
10
18
Symmetry
102
30
36
17
2
17
Asymmetry
95
63
11
14
8
1
Asymmetry (%)
48
68
23
45
80
6
Source: Meyer and Von Cramon-Taubadel, 2004.
There are several studies analysing price transmission for European meat supply chains
including Vavra and Goodwin (2005).
There are several theoretical explanations for imperfections in price transmission, among
other things market power and adjustment costs. Market power may explain why prices
are not fully transmitted. Oligopolistic and oligopsonistic interdependence may give rise
to lags in price adjustment. The risk of invoking a price war may make firms reluctant to
lower prices. This may cause an asymmetry in the price reaction to positive versus
negative price shocks. Due to several adjustment costs (labelling, advertising and
goodwill) remarking prices may be expensive. Adjustment costs thus give rise to response
42
62
Peltzman’s results are not summarised by Meyer and Von Cramon-Taubadel (2002).
lags. In combination with other arguments, such as inflation (Ball and Mankiw 1994),
stock building (Blinder 1982) and perishability (Ward 1982), adjustment costs may also
cause price asymmetries. Adjustment costs thus give rise to price levelling. The
marketing literature forwards several other arguments for this phenomenon. Apart from
market power and adjustment costs, non-linearities in demand and supply may give rise
to apparent imperfections in price transmission.
4.3
Econometric methodology
The estimation methods reviewed by Meyer and Von Cramon Taubadel (2004) and Frey
and Manara (2007) estimate price asymmetry indirectly. Price asymmetry is assumed if
certain coefficient restrictions may be rejected. If the restrictions are not rejected, then the
question remains whether there really is no asymmetric price transmission. Indeed, it
might as well be that the restrictions are not rejected because the underlying model does
not provide a good fit of the empirical data resulting in a low power of the coefficient
test. And vice versa, if the restrictions are to be rejected in favour of asymmetric price
transmission, one may be suspicious whether the model has probably become too flexible
in fitting the data as a result of which it is describing noise instead of economic laws. In
that case the asymmetry found might well be a consequence of a few outliers rather than
capturing the representative pattern for the price transmission behaviour of the vertical
chain participants.
In this part of the study we elaborate a method for detecting asymmetric price
transmission in agricultural marketing channels that makes use of secondary time-series
observations, but now in conjunction with a semiparametric estimation method. This
method - due to Newey and West (1987) - allows for a partially parametric regression
model whose specification hardly affects the coefficient restrictions to be tested in order
to test for the absence of asymmetric price transmission. Because the method does not
require processes of model specification, which can be very time-consuming, it is well
suitable for performing a large number of analyses as is required in this part of the project
where we wish to assess the asymmetry of price transmission in the pork and poultry
chains in the case study countries.
We consider the prices of two consecutive stages in the marketing chain and compute
their changes between the current and the previous time period. Let us denote the price
received by the upstream stage and paid by the downstream stage as the “input price” and
the price obtained by the downstream stage as the “output price”. Now four different
situations may arise: 1. both prices rise; 2. both prices fall; 3. the input price increases
while the output price decreases; and 4. the input price decreases and the output price
increases. Consequently, in situation 1 both price changes are positive; in situation 2 they
are negative; in situation 3 the change in the input price is positive while the output price
change is negative; and, in situation 4, the change in the input price is negative and the
output price change is positive. For each of the two prices we can perform a summation
of its changes over a number of time periods. If the outcomes of the two summations are
equal, then price transmission is concluded to be symmetric. In case the outcomes
significantly differ, asymmetric price transmission is diagnosed. Then, a greater sum for
the output price compared with the sum for the input price enlarges the price spread while
63
a smaller sum diminishes the price spread. The former situation could indicate market
power of the downstream stage vis-à-vis the upstream stage, while a diminishing spread
may be due to growing competition among the firms downstream.
In fact, the model that we may use to find out about the significance between the two
price changes comes down on the following system of “dummy” regressions:
∑ s =1 I ∆p
T
< 0 Τ / ∑ s =1 I ∆p
T
∆po,t = βo,1 I ∆po ,t >= 0 ∧ ∆p i ,t >= 0 Τ /
+ βo,2 I ∆po ,t < 0 ∧ ∆p i ,t
o , s >= 0 ∧ ∆p i , s
(1)
>= 0
o , s < 0 ∧ ∆p i , s < 0
+ βo,3 I ∆po ,t < 0 ∧ ∆pi ,t >= 0 Τ /
∑ s =1 I ∆p
o , s < 0 ∧ ∆p i ,s
+ βo,4 I ∆po ,t >= 0 ∧ ∆p i ,t < 0 Τ /
∑ s =1 I ∆p
o ,s
T
T
>= 0
>= 0 ∧ ∆pi ,s < 0
+ uo,t
∀t = 1,..., T
∑ s =1 I ∆p
T
∆pi,t = βi,1 I ∆po ,t >= 0 ∧ ∆p i ,t >= 0 Τ /
∑ s =1 I ∆p
T
< 0 ∧ ∆p >= 0 Τ / ∑ s =1 I ∆p
T
>= 0 ∧ ∆p < 0 Τ / ∑ s =1 I ∆p
T
+ βi,2 I ∆po ,t < 0 ∧ ∆p i ,t < 0 Τ /
+ βi,3 I ∆po ,t
+ βi,4 I ∆po ,t
o , s >= 0 ∧ ∆p i ,s
i ,t
i ,t
(2)
>= 0
o , s < 0 ∧ ∆p i , s < 0
o , s < 0 ∧ ∆p i , s
o ,s
>= 0
>= 0 ∧ ∆pi ,s < 0
+ ui,t
∀t = 1,..., T
where po,t is the output price in period t, pi,t is the input price in period t, ∆po,t is the
change in the output price, defined as ∆po,t ≡ po,t − po,t−1, similarly ∆pi,t ≡ pi,t − pi,t−1
denotes the change in the input price, the β’s are unknown coefficients, Ia = 1 if a is true,
else Ia = 0, T is the number of observations (time periods) in the sample, and the u’s are
residual terms with mean zero and finite variance.
By subtracting equation (2) from equation (1), giving:
∑ s =1 I ∆p
T
< 0 ∧ ∆p < 0 Τ / ∑ s =1 I ∆p
T
< 0 ∧ ∆p >= 0 Τ / ∑ s =1 I ∆p
T
>= 0 ∧ ∆p < 0 Τ / ∑ s =1 I ∆p
∆(po, t − pi, t) = α1 I ∆p o ,t >= 0 ∧ ∆p i ,t >= 0 Τ /
+ α2 I ∆p o ,t
+ α3 I ∆p o ,t
+ α4 I ∆p o ,t
T
o , s >= 0 ∧ ∆p i , s
i ,t
o , s < 0 ∧ ∆p i ,s < 0
i ,t
o , s < 0 ∧ ∆p i , s
i ,t
o ,s
(3)
>= 0
>= 0
>= 0 ∧ ∆pi ,s < 0
+ ut
∀t = 1,..., T
where αj = βo, j − βi, j and ut = uo,t − ui,t, the hypothesis of symmetric price transmission can
be simplified to
∑ j =1 a j = 0
4
64
and being tested by single-equation estimation of the α coefficients in equation (3). In
addition, according to the narrow definition of asymmetric price transmission a negative
change in the input price is only partially adopted by a negative change in the output price
while a positive change in the input price is followed by a positive change in the output
price such that the positive change in the input price does not exceed the positive change
in the output price by more than the absolute value of the negative change in the input
price is larger than the absolute value of the negative change in the output price. In terms
of the α coefficients in equation (3) this definition implies the following hypotheses:
H01: α2 = 0
against
H11: α2 > 0
H02: α1 + α2 = 0
against
H12: α1 + α2 > 0
and
which we can test for by one-sided t tests for the regression coefficients α1 and α2 in
equation (3). Note that if α1 + α2 = 0 with α1 < 0 and α2 > 0, the output price is smoothing
the fluctuations in the input price without generating any profit for the output stage at all
under the narrow definition of asymmetric price adjustment.
So, our analysis is not much more than a regression of price changes on four dummies,
where each dummy represents one the four combinations of input and output price
changes. Such a model leaves the dynamics of the price changes unmodelled. Even
though the estimator (OLSE) is consistent, its variances will be biased. This implies that
the F-test which measures whether the model results are significant will have large type I
or type II errors. Fortunately, by using the Newey-West (1987) HAC robust estimator,
only small second-order moment estimation biases result, cf. Jordà (2005). Several wellknown econometric software packages, like EViews6, the one we used for our
computations, offer the option of computing the Newey-West HAC covariance estimates
(e.g. EViews6, 2007: 36).
4.4
Data
For this study, we made use of publicly available price data for the pork and poultry
supply chains in Germany, the Netherlands, Poland and the UK. Due to inadequacies in
the data, an analysis of Spain was excluded because at the product level, only retail-level
was available (from GfK). The Ministry of the Environment and Rural and Marine
Affairs (MARM) did have additional data at all levels (from the Observatory mentioned
in the case studies), but only for a few perishable products at the farm, wholesale and
retail levels. This data did not prove adequate for our analysis.
Our researchers had also gathered some pricing data from the MARM, and some data was
made available during the interviews from select agents along the food chain. But again,
this data was not systematic enough for the analysis.
In most cases, again due to data collection issues, data refer to fresh meat. Despite
repeated attempts to obtain data from various private sources and stakeholders
65
themselves, the necessary data for processed products were simply not released to our
research team. For the UK, however, we have obtained data on (fresh) sausages.
The data refer to the most recently available price data for pork and poultry. Most times
series are monthly data except for the UK for which we have weekly price data for pork.
For Germany, price data are old, especially for pork. The main problem is that ZMP has
stopped recording (wholesale) price data after 2005. Moreover, there is a change in
definition between 2004 and 2005 for pork. For the UK, we have weekly price data
except for consumer prices for poultry.
Table 4.2
Data sources
Germany
Netherlands
Poland
UK
Farm prices
ZMP
LEI
…
Wholesale prices
ZMP
Eurostat
…
(Slaughter prices)
(Export prices)
ZMP
GfK
Consumer prices
(Slaughter prices)
Eurostat
Office National
Statistics
Time period
*
Monthly data:
Monthly:
Monthly:
For poultry
For pork
Jan 2001-Aug2009
Jan 2006-Aug
monthly data:
2009
Jan 2002-Feb 2010
Jan 2000-Dec 2004
For poultry:
For pork
Jan 2004-Dec 2007
Weekly data
Jul 2007-Feb 2010
For NL, consumer data for specific pork products are available from 2006 onwards.
The analysis applies to farm prices, prices for slaughtered parts of pork and poultry and
consumer prices. We do not have data for packaged meat. This implies that the price gap
between the farm and wholesale levels refers primarily to the slaughter phase (but also to
wholesale trade in meat the Netherlands). The gap between wholesale and consumer
prices refers to two phases of the supply chain: meatpacking and retail trade.
The table below presents the products that were analysed in each country.
Table 4.3
Meat products studied
Pork
Germany
Netherlands
Poland
UK
Cutlets
General
General
Loin chops
Pork for frying
Bacon
Loin steaks
Schnitzels
Porkchops
Boneless legs
Schnitzel
Fillet
Sausages
Minced pork
Diced pork
Poultry
Chicken schnitzel
General
Roaster (fresh and
Chicken breast
frozen)
Legs
Turkey schnitzel
66
Chicken breast
Roasters
4.5
Results
We consider time series of farm, wholesale and retail prices in the pork and poultry
chains in four EU Member States: Germany, The Netherlands, Poland and the United
Kingdom. Having these three prices available, we can evaluate the farm-wholesale price
spread, which is simply the wholesale price minus the farm price, and the wholesale-retail
price spread, given by subtracting the wholesale price from the retail price. One should
take into account that the farm-wholesale price spread captures primarily the slaughtering
phase. The wholesale-retail price spread captures two activities: meat packing and retail
trade. The data do not allow us to make a distinction between both activities.
Changes of the price spread can be analysed by estimating equation (3). The estimates of
equation (3) are given in Annex 2. In this section, we interpret the results.
Germany
In the German pork supply chain, the farm-wholesale price spread is decreasing.
Wholesale prices decrease even when farm prices increase. This result could suggest a
weak position for the wholesalers in the supply chain, but on the other hand, if we look at
the wholesale-retail price spread, we see that this price spread is also decreasing while a
weak position of the wholesalers in the supply chain would rather comply with an
increasing wholesale-retail price spread. A strong position for the wholesale has not been
found either, because for two of the three pork products (schnitzel and loins) the decrease
in the wholesale-retail price spread is not significant. Consequently, the results may
probably reveal a general situation of decreasing margins in the pork sector rather than
power imbalances in the chain.
In the German turkey supply chain, both the farm-wholesale price spread and the
wholesale-retail price spread increase. The farm-wholesale price spread increases because
wholesale prices increase more when farm prices increase. The wholesale-retail price
spread rises, because retail prices also rise at times that the wholesale price decreases.
Moreover, we also observe asymmetric price behaviour conform its narrow definition: if
both wholesale and retail prices rise, then both price changes do not significantly differ,
while if both prices decrease, then the retail price does only partially follow the downturn
in the wholesale price. Consumer prices are not related to slaughterhouse prices. Either
meat packers or retailers are able to set prices independently from price developments
upstream in the supply chain.
For poultry, the estimates show that for whole chickens (fresh and frozen) the wholesalers
manage to increase the farm-wholesale prices spread in particular because the wholesale
price increases more when the farm price increases. The wholesale-retail price spread
decreases because the wholesale price also increases more when the retail price increases.
This result suggests that slaughterhouses for poultry have a strong bargaining position. In
case of chicken schnitzels, however, no significant price-spread changes occur.
67
Netherlands
In the Dutch pork chain, the only price spread which increases significantly is the
wholesale-retail price spread for bacon (or rather “spek”). The increase is particularly
generated by increasing retail prices at times that wholesale prices decrease. In addition,
we see some slight, but significant increase caused by asymmetric price transmission.
Increases in wholesale prices are fully transmitted in higher retail prices while decreases
in wholesale prices are only partially followed by retail price reductions. The increase in
the price spread may be due to the increase in sales of ready-to-use bacon cuts
(“spekblokjes”). If this is indeed the case, the price spread has probably benefited meat
packers rather than food retail.
In the Dutch poultry chain, we see a significant decrease of the farm-wholesale price
spread for boneless cuts by 16.1 eurocents/kg/year, which is somewhat compensated by a
significant increase with 5.2 eurocents/kg/year of the farm-wholesale price spread for
legs. In both cases wholesale prices increase more when farm prices increase, but also
decrease more when farm prices decrease. And in case of boneless cuts wholesale prices
are also decreasing if farm prices are rising. These results point to a competitive situation
in the wholesale sector in getting farmers under contract. Vis-à-vis the retailers there are
no significant changes in the (wholesale-retail) price spread.
Poland
In Poland, the wholesale-retail price spread is increasing for both pork and poultry. Retail
prices increase more than wholesale prices do at the same time, whereas they decrease
less when wholesale prices decrease. Moreover, in the poultry chain situations in which
the retail price rises while the wholesale price falls also significantly contribute to the
increase of the wholesale-retail price spread. Nevertheless, in the poultry chain, at least,
in case of whole chickens, the wholesalers also face an increasing farm-wholesale price
spread as wholesale prices increase more than farm prices do.
UK
The results for the pork chain in the UK are mixed for the farm-wholesale part of the
chain, but quite uniform for the wholesale-retail channel. While the farm-wholesale price
spread is increasing for loins, it is not significantly changing for legs and significantly
decreasing for bellies. The relative profitability of animal parts has changed in the UK. In
the wholesale-retail part of the chain, however, for all products considered the retailwholesale price spread is increasing in particular because the retail price is increasing
much more than the wholesale price at times both prices are increasing. Moreover, the
wholesale-retail price spread is also significantly widened by the occurrence of situations
in which the retail price is increasing whereas the wholesale price is decreasing. Such a
combination of results suggest that changes in consumer prices are not related to price
developments elsewhere in the supply chain.
While retailers may behave independently in the UK pork chain, no significant changes
are observed in the UK wholesale-retail poultry price spread. This is also true for the two
main wholesale products in the farm-wholesale part of the channel (roasters and fillets).
Consequently, no possible imbalances are detected in the UK poultry chain.
68
Summary
To summarise the results and to allow for cross-country comparison, Tables 4a and 4b
provide the impact of the price transmission patterns estimated on the price spread in the
meat supply chain for the respective countries. For example, the annual decrease in the
farm-wholesale price spread due to price asymmetry is 0-1.42 percent of the retail price in
the German pork supply chain. A zero indicates absence of asymmetric price
transmission. The table also interprets the results found (column 4). Table 4a reveals that
in three of the four countries changes in retail prices are not related to price developments
elsewhere in the supply chain. With respect to the poultry chain, see Table 4b, this applies
for two of the four countries. In Poland retailers (or meat packers) are benefiting from
increasing wholesale-retail price spreads in both chains, increases that amount to 1.91 per
cent of the retail price in the pork chain and 4.12 per cent of the retail price in the poultry
chain. In the UK this percentage even reaches a level of 11.4 per cent in case of boneless
cuts of pork legs. Consequently, our results support the hypothesis that retailers, but
possibly also meat packers have a strong bargaining position vis-à-vis consumers and
suppliers. In Germany, prices are under pressure throughout the supply chain for both
pork and chicken (but not for turkey).43
Table 4.4
Pork chain summary
Impact of Price Asymmetry on Price Spread
(Impact on Average Annual Change in Price
1
Spread as % of Average Consumer Price )
Farm-wholesale
Wholesale-retail
price spread
price spread
From -1.42 to 0
From -2.21 to 0
Netherlands
0
Bacon: 2.08
Poland
0
Germany
UK
1.91
From -1.94 to 2.77
Characterisation
Products with decreasing margins
throughout supply chain
Price asymmetry in favour of retailer
and/or meatpacker for bacon
and/or meatpacker
From 2.69 to 11.4
and/or meatpacker. Shifts in price
spread for different parts of pig at
wholesale level
Consumer Price Germany concerns the price of a schnitzel; Bacon for the Netherlands; Pork general in case of
Poland; and Sausages for the UK.
43
In the individual case study for Spain, a brief analysis of price asymmetry based on publicly available data at the Price
Observatory and “price stickiness” was conducted. The case study found that the pork industry was relatively symmetric,
while poultry was more asymmetric, favouring those in the value chain involved with marketing (retailers, for example). It
should be noted that these results are not on specific products nor do they rely on modelling, and as such, were not
included in this discussion. For more information, please see the discussion of price asymmetry in Annex A.
69
Table 4.5
Poultry chain summary (chicken, unless otherwise stated)
Average Annual Change in Price Spread as %
1)
of Average Consumer Price
Farm-wholesale
Wholesale-retail
price spread
price spread
Turkey: 2.42
Turkey: 3.49
Chicken: From -1.42 to
Chicken: from -2.13 to
0
0
From -2.60 to 0.84
0
Characterisation
Price asymmetry in favour of
Germany
slaughterhouses as well as retailers
and/or meat packers for turkey
Decreasing margins throughout supply
chain for chicken
Netherlands
No price asymmetry at retail stage;
Shifts in price spread for different parts
of chicken at wholesale level
Poland
From 0 to 1.23
4.12
slaughterhouses as well as retailers
and/or meatpackers
UK
From 0 to 1.28
0
slaughterhouses
** Consumer Prices Germany concerns the price of a turkey schnitzel or a chicken schnitzel; Chicken breast for
the Netherlands and Poland; and roaster for the UK.
4.6
Conclusion
This chapter identifies possible price asymmetry in the fresh pork and poultry supply
chains in Germany, the Netherlands, Poland and the UK and the impact on gross margins
(price spread). In Germany, gross margins decline throughout the entire pork and chicken
supply chain, but they increase in the turkey supply chain. In Germany, price asymmetry
benefits consumers. This result confirms the hypothesis that Germany is a price market.
For pork, retailers and/or meatpackers see profits increase due to price asymmetry in
Poland and the UK and - to some extent - the Netherlands. For chicken, this is only the
case for Poland. Slaughterhouses are able to increase profit margins on broilers in Poland
and the UK through asymmetric price transmission. In both countries, retailers and/or
meatpackers have bargaining power in the pork supply chain, while slaughterhouses have
not. In the chicken supply chain, however, slaughterhouses have bargaining power in
Poland and the UK.
Given the data restrictions, it is not possible to identify whether meat packers or retailers
are able to apply price asymmetry and to increase gross margins. Germany may be
identified as a price market. As noted by European Commission (2009), asymmetric price
transmission is more prevalent in central Europe – in this case Poland – rather than the
EU15. Retailers’ probably have more bargaining power in the pork supply chain rather
than the vertically integrated poultry supply chains. Poultry slaughterhouses perform
relatively well.
70
Any statistical method necessarily involves generalising reality, and if this tool is going to
be used for evaluation purposes or to create transparency, if one is to draw proper
conclusions, it is important to understand the advantages and disadvantages of this
method.
4.6.1
Advantages of the method
First, the method requires little data: price series, which are publicly available for some
levels of the food supply chain, notably the farm and the consumer level. It is more
difficult to obtain price series for other levels as we found out. The analysis does not
depend on information about costs, market structure, et cetera.
Second, there is substantial body of econometric literature. Even though econometric
results are not robust in all respects (see below), the methodology is well advanced. If
there really is price asymmetry, you observe it using all possible approaches.
Third, the econometric models do not depend on behavioural assumptions with respect to
pricing, oligopolistic and oligopsonistic interaction, and demand and supply conditions in
general. There is little a priori structure in the analysis. This is also a drawback, because
economic theory may also be used to find structure in the price data. Economic theory
also enables one to find possible causes of price asymmetry and to test for them (see
below). The econometric approaches used for testing price asymmetry are a good start for
finding out whether there is problem: does pricing divert from pricing under perfect
competition?
4.6.2
Drawbacks of the approach
First, different econometric methods may lead to different results: rejection of the null
hypothesis of symmetry.
Second, asymmetry tests behave differently in the presence of data anomalies. Structural
breaks in the underlying price series are common. All methods lead to a significant overrejection of the null hypothesis of symmetry in the presence of structural breaks. For this
reason, one should test for structural breaks prior to tests for asymmetry.
Third, there is the issue of data frequency: using monthly versus weekly or daily data.
Use of monthly data is inappropriate if the actual adjustment process takes place within a
month.
Fourth, there may be a divergence between the stability of prices at the micro level and
dynamics at the macro level and vice versa, differences in the variability of prices at the
national level versus individual firms or even outlets.
Fifth, the price asymmetry literature establishes price patterns, but does not explain them.
There are only few studies that taken explanatory factors into account. So far asymmetry
test are more useful in describing how markets look than how they work.
71
Sixth, related to the previous point, the literature and methodology focus on econometric
characteristics (statistically significant) rather than economical meaning (see, for
example, OECD 2005). The econometric approach should look for a way to distinguish
between asymmetry caused by (short run) transaction costs and use of market power.
72
5 Policy recommendations
Previous studies presented in Chapter 2 as well as the case studies presented in Chapter 3
have pointed to potential power asymmetries, particularly leaning towards retailers. In the
vast majority of cases, the modelling exercise presented in Chapter 4 has served to
confirm price asymmetries in places where power imbalances also said to exist, thus
partly corroborating the relationship between a lack of bargaining power and price
asymmetry. These problems, our case studies have shown, are exacerbated by the
informal nature of contracting, which makes these asymmetries all the more evident and
immediate.
Some policymakers have focused their attention on the results of these power
asymmetries. For example, recommendations and policies have already been developed
to prevent stronger partners from taking advantage of weaker ones over payment terms in
contracts. Evidence in Spain has already shown, however, that strong partner can be
creative and find other ways to extract rents from the value chain.
Rather than focus on the result of these power imbalances, the policy recommendations in
this report will focus on the cause—namely, excessive power within one particular part of
the chain (again, as indicated by the model and case studies).
Clearly, imbalances along the value chain can be confronted in one of two ways. Either
large partners need to be broken up, or smaller partners need to be given assistance to
gain strength and become more equal partners. Our recommendations focus on the latter.
The reason that these recommendations do not focus on breaking up large partners is
three-fold. First and foremost, proving excessive power and consolidation has proven
difficult on a practical level. Second, it remains unlikely that Member States will want to
break up their most powerful organisations, especially since it may have consequences for
their competitiveness across the European Union and also internationally. Third, this
study provides no concrete evidence to support such a break-up.
The focus must be, then, on giving smaller enterprises a vehicle with which to gain a
competitive advantage in their bargaining.
The primary vehicle for changing patterns of behaviour and rebalancing bargaining power
in the value chain will be a voluntary code of conduct. Adopting a voluntary code of
conduct lies very much inline with the direction of EU policy-making, as envisioned for
instance in the Open Method of Co-ordination (OMC).
The underlying assumption of the OMC is bottom-up policy making, relying on the actors
themselves to present solutions to problems. Of course, the mere existence of a written,
73
voluntary code of conduct, in and of itself, will not address power imbalances in the value
chain. Its success essentially depends on powerful partners honestly agreeing not to use
their market power to extract “excess” profits from the value chain. And here, the
European Commission can play an important role in convincing actors that their best
interest lies in addressing these imbalances, and issues that will be addressed in this
chapter.
5.1
Previous efforts of the Commission
Before proceeding with the recommendations based on this research, it is worth
emphasising the current efforts of the European Commission, as illustrated by the
Communication entitled “A better functioning food supply chain in Europe”. It is worth
noting that the communication was developed under the Spanish presidency, and that
Spain remains a leader in terms of trying to carry out the recommendations. The typology
from Chapter 3, for example, points to the fact that Spain is the only country which
makes much of an attempt at achieving transparency of pricing within the value chain of
meat products (though not specifically meat processing products, as has been pointed
out).
In brief, the Communication outlines the following five recommendations:
1. The improvement of the structure and consolidation of the agro-food sector,
favouring the vertical integration of primary producers and SME processors with
other links of the supply chain (through widening the scope of activities of interbranch associations, restructuring the role of cooperatives or training farmers in
strategic planning);
2. Increasing transparency through, for instance, Food Price Monitoring;
3. Combating unfair trading policies mainly related to payment periods and
discounts and promotions;
4. Encouraging self-regulation initiatives: standard contracts or codes of good
commercial practices, which have to be voluntary from the interviewees’
perspective; and,
5. Making CAP and Competition Policy compatible.
The recommendations of this report strongly emphasise recommendation four as the key
to achieving the underlying goals of some of the other recommendations, most
importantly to combat unfair trade policies and also to achieve transparency.44 As shall be
shown in this chapter, we favour restructuring the value chain, but only in those cases
where restructuring is not already occurring, as demonstrated in the typology.
In parallel, the High Level Group on the Competitiveness of the Agro-Food
Industry (HLG) issued a report with 30 recommendations in March 2009
44
74
It should be noted, however, that we are argue for transparency towards the Commission, and not necessarily towards all
stakeholders and the public. We feel that full transparency may be too difficult to achieve, and in some sense, is
unnecessary to achieve accountability in terms of solving price asymmetries. This issue will be addressed further later in
this chapter.
aiming to enhance the competitiveness of this sector. The recommendations aimed
to achieve a more balanced distribution of power in the food chain to
preserve and improve consumer choice, product quality and innovation. Moreover
they sought to enhance the competitiveness of the food and retailing sectors as well as
the agricultural sector.
In particular, recommendation 15 focused on the contractual relationships in the
food supply chain and aimed to “ensure the proper and optimal functioning of the
entire food chain by addressing the relationships among the food chain players”
This recommendation is in line with the Commission Communication “a better
Functioning food supply chain in Europe” (COM(2009)591).
To further discuss these questions, the European Commission will set up an
“Experts Platform on B2B contractual practices in the food supply chain” which
aim is to address the business-to-business contractual relationships along the food
chain and more specifically the case of alleged unfair commercial practices”.
5.2
Primary recommendation: introducing a voluntary code of conduct
(1) Our recommendation is that the European Commission could continue to pursue
a voluntary code of conduct, where it is made clear to actors that the primary focus
be on reducing price asymmetry. A voluntary code of conduct, by its nature, is not one
in which a central authority will impose conditions. While the European Commission
may use evidence from various reports to suggest the focus of a code of conduct, the main
message that needs to be imparted to stakeholders is the desired result.
Nor need a government body impose its will on stakeholders. In this case, the European
Commission needs to make clear the reasons for the new code of conduct. In any
discussions, we feel that the European Commission should come with a fairly strong
message, saying that perceived inequities between levels of the value chain and price
asymmetries are the problem that the Commission wants addressed. If industry cannot
solve the problem, then the European Commission will be forced into a more proactive,
and regulatory approach. As mentioned earlier, actors are concerned about further
government intervention, and this is an important tool that the European Commission
could exploit.
(2) More importantly, however, we would recommend regular monitoring and
publishing of progress on indicators that both the European Commission and
stakeholders agree upon to measure asymmetries in the value chain. This would give
the code of conduct greater scope for success, as the monitoring function allows the
Commission to extend its shadow, so to speak, and make clear that it expects some
results from the code. Figures should be given as a single number index and should
indicate graphically whether they are trending up, down, or holding steady. Regular,
quarterly updates of this figure should be relatively easy to accomplish. Information could
be provided in a format that offers a forum by which stakeholders can directly offer their
comments or critiques of the figures, e.g. a Wiki.
75
Below is an example of a simple graphic that could be included on the site. Its simplicity
will be a powerful feature and one which will be more difficult to contend.
Figure 5.1
5.2.1
Sample graphic to show index on price asymmetries
The reasoning behind a voluntary code of conduct
Implementing a voluntary code of conduct to govern industry implies a change in the
function of government. Rather than focussing on guiding industry, the government
works like a referee, loosely interpreting the rules provided by members of the network.
In this regime, governments walk quietly and carry big sticks.
Voluntary codes of conduct are appealing to governments because, in situations where
they are appropriate, they can be extremely effective. Members of a particular industry or
network are better aware of the dynamics of the industry and can know better the effects
of certain actions than governments who are working reactively and from the outside.
Voluntary codes of conduct also have an inherent legitimacy because the codes have been
defined by industry themselves. This legitimacy leads to less shirking, and as such, means
that compliance will tend to be higher.
The effectiveness of the voluntary agreement, however, depends on the mutual interests
of the parties concerned. These mutual interests can be reinforced by an outside threat,
such as competition from another industry or decreasing demand. In some cases,
however, the government can represent this “threat” (in a positive sense). In effect,
members of industry come together to form codes of conduct presupposing that if
industry does not change their business, then governments will. Governments govern
through a “shadow of hierarchy”.
Codes of conduct for the chemical industry in response to the disaster in Bhopal, India in
1984 are a classic example of this form of governing. While an extreme example, this is a
classic response of industrial action following a legitimate threat of government
intervention. In this case, members of the chemical industry came together to develop an
effective code of conduct, which all members agreed to follow. This code of conduct met
the concerns of governments, and has generally been considered to be an effective
deterrent to further problems in the industry.
5.2.2
Challenges for a European-wide code of conduct
Two fundamental issues stand in the way of an effective code of conduct at the European
level.
76
First, if governing in the shadow of hierarchy is going to be sustainable, the government
needs to have the legitimate ability to revoke the status of any one network. In other
words, a fall-back regulatory option needs to exist (Knill & Lenschow, 2004, p. 223). The
threat of intervention keeps companies from acting against the public good. These
networks must feel that unless they act in good faith, the government will intervene. To
use the words of Adrienne Héritier, companies are allowed to participate in voluntary
accords and these new modes of governance, but are kept “on a leash” (2002, p. 202).
So, a tension remains between networks and government. On one side, governments need
to feel restrained enough to allow the governance structure to work independently of the
government; on the other side, network structures need to believe that the government
truly represents a threat to their independence, and they must follow unwritten rules
regarding their activities.
The problem for a European-wide code of conduct is that it remains unclear whether the
European Commission represents the immediate and present “threat” that it would need
to be. While the EU clearly has a profound influence on food policy and by extension
value chain structures, this influence is one-level removed, as Member States interpret the
code of conduct according to their own presuppositions.45
A second problem for this “shadow-of-hierarchy” is the bureaucracy casting the shadow
needs to remain strong and competent enough to step in when the public interest is not
being followed. Governments can end up ceding competencies to other organisations, and
the state loses.
This, of course, is a long-term problem to be monitored, but not something with
immediate implications for implementing a code of conduct.
Finally, voluntary codes of conduct tend to work more effectively in situations where
actors are equal in size, and as is clear from the research for this study, this simply is not
always the case. For a voluntary code of conduct to be effective, either weaker levels of
the value chain need to be consolidated or stronger levels broken apart. To ensure the
effectiveness of voluntary agreements for the meat (processing) industry, competition
policy at the Member State level also needs to be applied adequately.
5.2.3
Designing a monitoring tool and publishing results
(3) We would recommend to use the model developed for this study to monitor price
asymmetries. The model can be the basis to produce one of the indices that were
recommended above.
45
True, the voluntary code of conduct could offer suggested interpretations. Nonetheless, no guarantee exists that Member
States will follow these guidelines. In fact, we would argue that the adoption of a voluntary code of conduct lays very much
inline with the idea of the Open Method of Co-ordination (OMC). The underlying assumption of the OMC is that Member
States should be the primary source of interpretation, and as such, the Member State should remain the primary interpreter
of a code of conduct.
77
As mentioned in the previous section, monitoring and publishing (for industry) results on
dysfunctions in the value chain is critical to show the European Commission’s continuing
interest in the subject, and they apply indirect pressure for industry to rectify the situation.
We would recommend quantitative indicators because they will be less susceptible to
complaint than qualitative ones.
The model developed for this study could be such a tool given its focus on both pricing
and concentration levels, the former of which is the primary result of concern and the
latter of which is the primary causal factor.
5.2.4
Improved data gathering
(4) We would recommend that the European Commission instruct Eurostat to focus
on collecting representative data (not from the whole industry, as this would be too
costly) that would address the following variables: (1) pricing and (2) concentration
levels. For the first year, it seems fairly clear that any published figures would
concentrate on aggregate figures, which will probably give a distorted picture of how the
value chain is functioning. It seems likely that some players of industry would need to
provide additional data to get the desired level of disaggregation. These figures should be
clearly presented to the stakeholders, including the existing limitations on data. It should
also be made clear to stakeholders that evaluations of the success or failure of a voluntary
agreement will be based on these figures, and if industry is unable to provide additional
figures, then unnecessary government intervention becomes more likely.
While some researchers have identified information asymmetries between various levels
of the value chain as being an important issue, the case studies have shown varying levels
of transparency without much effect on the issues along the value chain. This does not
mean, however, that transparency is not an issue. What remains important is that industry
remains highly aware of issues along the value chain, and has the data to back it up. This
makes the “threat” of government intervention more credible.
One of the fundamental issues facing this study has been the lack of pricing data that is
appropriately broken up into constituent parts. Data is primarily aggregated along an
industry or country, which makes conducting a proper value chain analysis rather
imprecise. In the United Kingdom and the Netherlands, for example, value chains were
identified as having a “dual nature”, meaning that the chains were highly integrated for
some products and producers, while others were not integrated at all. This leads to
misleading data results showing a middle ground, which may not give an accurate enough
picture for analysis.
5.2.5
Enforcement mechanisms
(5) We would recommend that some form of arbitration be set up in the form of an
ombudsperson. This office should remain reactive, responding to complaints
received from organisations within the chain.
78
The role of the ombudsperson should remain clear—to enforce the code of conduct when
complaints are received by the office. When this office is being formed, the European
Commission and various stakeholders should focus their attention on the level of
penalties that should be levied on organisations found to contravene those rules. The
Commission should be clear that the penalties must be high enough to work as a
deterrent.
While SMEs and even some larger organisations feel pressure to not register complaints
for fear of losing market share, we still believe the option should remain reactive. Given
that this office would be policing a voluntary agreement, it would appear excessive to
give this office the power to actively seek out offences.
The ombudsperson should be appointed by the government, but agreed to by a group of
stakeholders.
5.3
Fallback recommendations: regulatory options
The assumption of a voluntary code of conduct is that the actors will progress towards
levelling asymmetries themselves. However, if actors are unwilling to genuinely change
their patterns of behaviour, then either the European Commission or the Member States
need to step in with regulatory action. Of course, the voluntary code of conduct can
remain in place, but regulations can and should be formulated to ensure the results that
the actors themselves have set forward.
Changed role of ombudsperson
(1) We would recommend that a European ombudsperson be created solely under
the jurisdiction of the European Union, and that he or she be given proactive powers
to investigate potential abuses of power within the Member States.
The role of the ombudsperson would vary depending on whether a voluntary code of
conduct had been agreed upon. In cases where this voluntary code of conduct exists, the
ombudsperson’s role simply becomes stronger and more proactive in enforcing good
behaviour on the part of actors. In cases where a code of conduct may not have even been
agreed to, the European Commission’s role will be to create a code of conduct,
potentially drawing on the findings of this report and others.
Contents of this code could include:
•
Mandatory transparency in pricing;
•
Mandatory contracting and payment terms of a set period (i.e. 30 days);
•
Banning unfair trade practices, such as excessive late payments, unilateral or ad-hoc
changes to contractual relations, and upfront entry fees to negotiations; and
•
Mandatory information about product and cost price composition.
As mentioned in the discussion of voluntary agreements, the problem for governments
here is that powerful players will continually find new and innovative ways to pressure
weaker actors in the value chain.
79
Information sharing
(2) Food labelling changes should be considered to make it easier to infer the reasons
for price changes along the value chain.
Current food labelling enables consumers to make informed choices and protects them
against hazards, as with GMO- and allergy-labelling.46 This labelling, however, cannot be
used to analyse prices and price transfers in the supply chain. Revealing the specific
percentage content of products would better enable policy-makers and researchers to infer
how price increases for particular components of a product should influence the overall
product price. This “labelling” could be provided in confidence to an independent
authority, to belay any competition concerns.
(3) Companies should be obliged to provide pricing data and cost structure
information.
Current reporting requirements, laid down in directives, serve the interests of financial
stakeholders and do not provide transparency on pricing for individual products. Without
this information, the Commission is left with inadequate, aggregated data.
With respect to costing information, data should focus on long-term, integral costs as well
as short-term, differential costs. Again, this information should be collected under the
strictest confidence, possibly by an independent institution. Regulation 1/2003 (Article
17-21) provides the Commission with the option of asking national governments and
competition authorities to provide information in the interests of fair competition (Berry
and Hargreaves, 2007, p. 251-269). An argument can be found in Article 102 TFEU. It
prohibits lowering prices under marginal product costs when the intention is to exclude or
eliminate competition (Berry and Hargreaves, 2007, p. 287).
If regulation 1/2003 is deemed to be inadequate for the present purpose, pricing data
could be made available by means of pin-pointed new regulation.
Competition policy
(4) We would recommend that the European Commission examine options for
changing food and competition law to protect suppliers by addressing dependency
relations, which can force companies out of the market. As indicated in the legal
analysis in Chapter 2, the burden of compliance to food law is to a large extent vested on
companies up the supply chain as compared with the retail phase (see in this context:
Cumbers et al., 1995). Examine the options for changes of law to allow for the creation of
countervailing power by producers, and reveal the circumstances under which this may be
enacted.
(5) The European Commission should define economic dependency and integrate
this concept in competition law.
Currently, economic dependency is considered in some competition cases, but it remains
an ill-defined concept. It is advised to set rules for assessing dependency and integrate the
concept within competition law.
46
80
See in this context regulation 1829/2003 of the European Parliament and of the Council of 22nd September 2003 on
genetically modified food and feed (OJ L 268, 18/10/2003)
(6) The European Commission should also address the dual role of retailers as both
customers and direct competitors of their suppliers.
Retailers get information as customers from their suppliers and may abuse this
information as private label producers. In the Kesko/Tuko merger case, the European
Commission also evaluated the impact of the retailer’s information with respect to
industrial brands on the competition with private labels. The information retailers obtain
on the marketing strategies of all suppliers may be used to market private labels in such a
way that their competitiveness is enhanced. Private label development is a key element in
the power wielded by retailers vis-à-vis branded daily consumer-goods producers. It
enables retailers, who are inevitably privy to commercially sensitive details regarding the
branded good producers’ product launches and promotional strategies, to act as
competitors as well as key customers of the producers. This privileged position increases
the leverage enjoyed by retailers over branded-good producers.
The use of commercial information from upstream suppliers to optimise the marketing
strategy and market share of private labels is a concern of the European Commission.
This holds for instance for pegging private label prices to the prices of branded products.
In principle, Article 101 TFEU may be used to address this issue. The European
Commission has not done this yet.
In this respect, private labels are a challenge to the dichotomy between horizontal and
vertical competition in European competition law. Private labels comprise both elements.
Competition law and practice should take into account that the world is more complex
than the dichotomy assumes.
Retail buyer power is here to stay, as retailers carry a large range of products, control the
shelf (access to the consumer), and act both as supplier and customer. Only as far as
competition policy addresses these issues, there may be a substantial change in bargaining
relations.
Producer indications
(7) Consider introducing a system of compulsory producer indications on private
labels
In this way innovative companies will be visible to the consumer as their brands are
revealed. It will help to improve the bargaining position of producers in the middle part of
the chain, that often find themselves squeezed from the side of their suppliers as well as
by their buyers. Producer indications on private labels enhance the visibility of producers
in the eyes of consumers. If consumers attach value to specific food processors, this could
enhance the bargaining position of processors vis-à-vis retailers as well as competition
among processors. However, if producers supply both industrial brands and private
labels, as many of them do, the introduction of producer indications could also influence
consumer perceptions of industrial brands. It may influence competitive relation between
industrial brands and private labels. It could also enhance transparency towards the
consumer to assess the difference between the industrial brand and the private label if
both are supplied by the same processor (or vice versa) (Poppe et al. 2007).
81
5.4
Additional recommendation: strengthening weak actors
As mentioned on numerous occasions, power imbalances between actors are one of the
causes of dysfunctions in the value chain. In the introduction to this chapter, we pointed
out that one solution to power imbalances is to increase the strength of weak actors (in
this case, normally farmers, but also in other parts of the chain in some Member States).
In some cases, market forces are progressing to rectify those imbalances—such as in the
UK case. However, in Member States where farming is considered part of the cultural
heritage, such as Spain (as noted in the typology), small enterprises have been hesitant to
combine to meet the challenges posed by larger actors in the value chain.
(1) In this case, we would recommend that the European Commission encourage
and promote the further creation of associations or co-operatives in those Member
States where structural changes are not taking place. However, these organisations
should work as more than simply vessels for price negotiation, but should also
provide a form of “capacity building” for smaller actors. This capacity building could
include developing centralised systems for traceability of meat products.
This recommendation remains very much inline with what has been envisioned the
improvement of the structure and consolidation of the agro-food sector, favouring the
vertical integration of primary producers and SME processors with other links of the
supply chain (through widening the scope of activities of inter-branch associations,
restructuring the role of cooperatives or training farmers in strategic planning).
82
A Spain
A.1
Description of the Industry
The food industry is the main industrial sector in Spain, as it is also within the EU-27.
The Spanish food industry occupies the fifth position among EU countries, just behind
France, Germany, Italy and United Kingdom. The “Encuesta Industrial de Empresas,
2007” (INE, 2009) shows that the Food Industry in Spain generates 16.02 percent of total
industry sales, 17.3 percent of total consumption of raw materials, 14,7 percent of the
employment, 12.5 percent of labour costs, 12.9 percent of total investment and 13.1
percent of the Value Added.
Within the Food Industry, the Meat Industry is the main industrial sector in Spain,
generating around 20 percent of the Product sales and 23 percent of total employment
(Table A.1). In relation to the Food Industry, the Meat sector is more intensive in labour
than other industrial sectors, as labour costs represent 13.5 percent of total sales, while for
the food industry this percentage is 12.7 percent. However, the consumption of raw
materials represents almost two thirds of total sales while for the Food Industry is 56
percent. As can be observed in Table A.1, the productivity level is lower as well as the
Gross Operating Margin. Finally, in relation to employment, the rate of unemployment
was lower than for the food industry (6.6 percent and 7.2 percent, respectively) (Encuesta
de Población Activa 2008) (INE, 2009).
% on
Food industry
Total Industry
Food Industry
Main indicators of the Spanish Meat Industry (2007)
Meat Industry
Table A.1
Employment (number)
87,936
377,897
2,580,375
23.27
Product sales (EUR million)
16,374
82,094
512,603
19.95
Consumption of Raw Materials (EUR million)
10,552
45,953
266,037
22.96
Gross Value Added (EUR million)
3,787
20,137
154,287
18.81
Labour Costs (EUR million)
2,241
10,402
83,206
21.54
Investments (Million EUR)
693.0
3,629
28,121
19.10
Product sales / Employment (EUR 1,000)
186.2
217.2
198.7
Labour Costs / Product sales (%)
13.5
12.7
16.2
Consumption of Raw Materials / Product sales (%)
64.4
56.0
51.9
Productivity (Value Added / Employment) (EUR 1,000)
43.1
53.3
59.8
1,576.2
9,735.2
71,080.6
9.6
11.9
13.9
Operating Surplus (Value Added - Labour Costs) (EUR million)
Gross Operating Margin (Operating Surplus / Product sales) (%)
16.2
83
The Meat sector in Spain is very complex in nature and includes both fresh and processed
products. It is composed by different species, each of them following different supply
chains. While in the case of beef, pork and poultry intensive production systems with a
high degree of vertical integration dominates, in the lamb sector, production systems, in
general, are more extensive in nature, although some changes have taking place towards
more intensive production systems in the last decade. In this study, we will focus our
attention to the pork and poultry subsectors. Although we will analyze deeper the supply
chain in Section 1.2, we can anticipate that the main characteristic of both sectors is a
clear differentiation between the production of young animals and fattening farms. The
feed companies have played a capital role in the vertical integration and, in general, they
own the fattening animals, while farmers are hired through contracts to manage the farm.
Feed and veterinary controls are also supplied by feed companies.
While a significant part of the production is sold as fresh products in pieces or slices (one
of the major investment issues in the last 5 years to accommodate the increasing market
share of self-services (supermarkets and hypermarkets), the meat industry also includes a
very active processing activity. The processed meat sector uses mainly pork meat as the
raw material although with a marginal but increasing contribution of beef, poultry and
turkey.
Pork meat production increased by 1.3 percent in 2008 with respect to 2007 while in the
previous year the increase was 10 percent. This decreasing growth rate was the result of
the existing high feed prices in Spain by the end of 2007 and the beginning of 2008, as it
happened worldwide. Meat prices also increase by 11 percent during 2008 (the highest
increase over the last ten years), although this trend has changed in 2009 as a
consequence of the economic crisis and its impact on private consumption. The pork
sector has partially overcome this situation by increasing exports. In 2008, exports
increased by 26 percent which represents around one quarter of the total slaughtered meat
(17 percent, in 2004). Similar trends have been observed in the processed meat. While
domestic consumption in 2008 increased by 1.8 percent, (following Nielsen, or 4.4
percent, following MARM (Ministry of Environment and Rural and Marine Affairs)),
exports increased by 14.5 percent. Some mergers and acquisitions have taken place to
consolidate the exporting position. New investments have decreased substantially and
have been oriented to the production of sliced products to face the increasing demand for
supermarkets and hypermarkets.
The poultry sector has suffered a hard period in 2008. High production levels and a
decreasing demand led to a significant cut of prices, while feed costs (representing 70
percent of total production costs) increased due the aforementioned cereals price
increases. The situation in 2009 is observed as more optimistic as production has slightly
reduced but feed and energy costs have reduced significantly, which has generated an
expected profitability increase. However, those optimistic expectations have been reduced
in the last month due to the increased pressure by retails chains to cut down prices due the
decreasing demand as a result of the economic crisis that has whipped the world economy
during the last one and a half years.
84
A.1.1
Food Price Volatility
Figure A.1 shows the evolution of weekly pork farm and retail prices in the period 20042009. Prices are from the Observatory of Prices elaborated by the Spanish Ministry of
Environment and Rural and Marine Affairs (MARM)47. While farm prices seem to be
quite stable along the considered period (no significant differences are found when
comparing average values between years, although during the five years analysed an
alternation of higher and lower prices is observed), retail prices exhibit a slight upward
trend up to 2008 and a downward slope during 2009. The seasonal component is not
evident at the retail level. However, some seasonality can be observed at farm level.
Figure A.1 clearly shows also that the retail price is stickier than the farm price. Then, the
evolution of the marketing margin (in absolute values) is closely related to the evolution
of farm prices. Increasing (decreasing) farm prices are associated to decreasing
(increasing) marketing margins. The overall trend is, on the other hand, very close to that
exhibit by the retail price.
Figure A.1
Evolution of farm price, retail price and marketing margin for pork meat in Spain (EUR/Kg) (2004-2007)
7,00
6,00
5,00
4,00
3,00
2,00
1,00
0,00
Weeks
Farm
Retail
Marketing Margin
Source: MARM (Observatorio de precios).
Figure A.2 shows the evolution of the marketing margin as a percentage of the retail
price. While in absolute terms the marketing margin exhibits an upward trend, percentage
changes have been quite stable on average (between 70 to 80 per cent of the retail price)
during the analysed period, with some seasonal component related to the behaviour of the
farm price.
47
Conversion factors have not been used to transform farm prices into equivalent retail prices. The marketing margin, then,
includes processing and losses throughout the supply chain.
85
Figure A.2
Evolution of Relative marketing margin for pork in Spain (%) (2004-2009)
82
80
78
76
74
72
70
68
66
64
Weeks
Figure A.3 and Figure A.4 are related to the poultry sector. As in the pork sector, the
retail price shows a clear upward trend and exhibit lower volatility than the farm price.
When observing the evolution of the farm price, two main periods are identified. Between
2004 and 2007, its evolution is very close to that of the retail price. In 2006, the retail
price decreased slightly in order to incentive the demand after the appearance of the avian
influenza in the mass media. The marketing margin during this period remained quite
stable with the above mentioned reduction in 2006 due to the retail price reduction.
During the last two years of the analysed period (2008 and 2009), the situation changed
dramatically, generating structural problems at farm level. As mentioned above, 2008 is
characterised by excess supply, pushing prices down. Decreasing farm prices together
with the increase of production costs (due to the increase of the cereal prices) generated a
struggling situation at the farm level. Although in 2009 the production level decrease as
well as the feed cost, the demand also decreases due to the economic crisis. Retail chains
have pressured farmers to decrease prices in order to stimulate consumption. As a
consequence, the marketing margin has diminished substantially during the last two
years, both in absolute (Figure A.3) and relative terms (Figure A.4).
86
Figure A.3
Evolution of farm price, retail price and marketing margin for chicken in Spain (EUR/Kg) (2004-2007)
3,50
3,00
2,50
2,00
1,50
1,00
0,50
0,00
FarmWeeks Retail
Marketing Margin
Figure A.4
Evolution of Relative marketing margin for chicken in Spain (%) (2004-2009)
140
120
100
80
60
40
20
0
Weeks
A.1.2
Consumption levels
This section is structured as follows. First, we will describe the relative importance of the
consumption of fresh and processed meat. Next, we will analyse the evolution, during the
87
last five years, of the different types of meat and meat products. Finally, we will analyse
some issues related to shopping and consumption behaviour as well as some attitudes
towards meat prices and safety.
Figure A.5 shows the relative importance of the consumption of processed meat products
in relation to fresh meat. As can be observed fresh meat products still represent a
significant share of total meat consumption (76 percent). Processed meat products
represent 22 percent while the remaining 2 percent corresponds to frozen meat. Table
A.2, additionally, shows the evolution of the consumption of different types of meat and
processed products from 2004 to 2008, while in Figure A.6 changes in the meat
consumption patterns over the analysed period are considered. Data suggest a number of
issues:
•
The relative position of the different products shown in Table A.2 has remained
relatively stable along the 5 years of study;
•
Among the fresh meat, poultry and pork are the most consumed products representing
together around 60 percent of total fresh meat consumption;
•
Total meat consumption has increased slightly along the analysed period (around 2
percent). However, while fresh meat consumption has remained stable, the
consumption of processed meat has increased;
•
Among fresh products, only pork consumption has increased significantly while that
of beef, lamb and other meat has decreased (the consumption of chicken has
increased by 1 percent).
Figure A.5
Distribution of meat consumption in Spain (%)
22%
2%
76%
Fresh Meat
Frozen Meat
Processed meat
Source: MARM (Consumo Alimentario).
Table A.2
Evolution of meat consumption in Spain (tonnes)
Total meat
Certified meat
88
2004
2005
2006
2007
2008
2,228.52
2,233.29
2,215.09
2,252.24
2,275.03
278.92
283.84
272.92
283.91
268.599
2004
2005
2006
2007
2008
1,724.88
1,731.49
1,706.83
1,724.85
1,725.51
Beef
328.62
332.74
314.43
323.11
321.97
Chicken
579.55
570.05
564.32
569.98
583.88
Lamb
117.96
116.40
118.15
119.90
106.37
Pork
471.92
469.71
507.30
506.77
519.96
Other Fresh meat
226.81
242.58
202.61
205.08
193.32
Fresh Meat
Frozen Meat
29.44
29.88
40.58
38.15
39.00
Processed meat
474.19
471.91
467.67
489.23
510.51
Cured ham
102.43
102.38
101.42
106.25
106.14
Cured Pork Loin
12.37
12.88
12.57
12.12
12.25
Chorizos
52.76
51.64
49.30
50.35
49.45
Other cured products
90.36
90.67
87.63
90.96
99.48
Cooked sausages
35.49
35.04
38.84
42.09
46.10
Cooked ham
63.34
60.70
60.11
63.45
64.06
117.40
118.48
117.78
123.99
133.00
Other cooked products
In 2006, the consumption slightly decreased as a consequence of the appearance in mass
media of the avian influenza, having recovered since then (mainly in 2008). Pork meat
was the most benefited from this food scare. Lamb consumption has remained quite
stable from 2004 to 2007. However, the economic crisis at the end of 2008 generated a
significant reduction in lamb consumption as it is the most expensive meat in Spain.
Figure A.6
Changes in meat consumption in Spain between 2004 and 2008
Other cooked products
Cooked ham
Cooked sausages
Other cured products
Chorizos
Cured Pork Loin
Cured ham
Processed meat
Frozen Meat
Other Fresh meat
Pork
Lamb
Chicken
Beef
Fresh Meat
Certified meat
Total meat
-20,00
-10,00
0,00
10,00
20,00
30,00
40,00
89
•
•
•
•
As in the case of lamb, the consumption of certified meat has decreased in 2008;
As mentioned above, processed meat products are divided in two main groups: cured
and cooked, representing 52 percent and 48 percent of total consumption of processed
products, respectively. However, from 2004 and 2008, cooked products are the main
responsible of the overall increase of the consumption of processed products;
Among cured products, ham is still keeping a leading position. Together with
“chorizo” they represent 60 percent of the consumption of cured products. However,
while the consumption of cured ham has increased, that of “chorizo” has decreased;
Among cooked products, ham and sausages are the more relevant with the second one
showing a significant increase in consumption between 2004 and 2008.
Having observed main trends in the consumption of fresh and processed meat products,
we will focus our attention in some aspects related to shopping and consumption
behaviour. Figure A.7 show the relative importance of the convenience attribute when
buying pork meat (both fresh and processed). While in fresh pork meat, the relative
importance of pre-packaged product is around 17 percent, in the case of processed
products this importance arrives at 30 percent. As we will mention below, main
investments in the meat sector in the last 5 years have been addressed towards sliced
products.
Pork meat products are consumed relatively quickly at home after shopping (Figure A.8).
However, some differences are observed when comparing fresh and processed products.
While in the case of processed products, the consumption takes place after a few days
after shopping, in the case of fresh products, around 60 percent is frozen totally or
partially at home. In many cases, after shopping the quantity bought is divided in
packages according to household size or life styles and is frozen.
Figure A.7
Types of pork meat consumed in Spain (%)
90
80
70
60
50
40
30
20
10
0
Fresh
Pre-packaged
Processed
Directly from the butcher to be cut
Source: MARM (Monográfico carne y embutidos, 2009).
90
Figure A.8
Consumption behaviour of pork meat in Spain
80
70
60
50
40
30
20
10
0
Inmediately
In the next 2/3
days
Frozen at
home
Fresh
Partially
consumed and
the rest frozen
Cooked and
then frozen
Processed
In the case of chicken, the relative importance of processed products is still very small,
although its consumption has increased during the last years for two main reasons: (1)
adequacy to children; and (2) its image as the healthiest meat. Consumption habits in
Spain are addressed to buy packaged cut products (legs, breasts, etc) for a total of 60
percent of total consumption (Table A.3). Chicken fillets, on the other hand, represent 12
percent of total chicken consumption.
Beef and lamb are perceived as the more expensive meat products (Table A.4). Among
processed products cured ham has the same image. Finally, as mentioned above, chicken
is perceived as the most healthy meat product. In the case of processed products the
general attitude is positive in relation to their safety. Around 46 percent of consumers
perceive processed meat products as safe while 38 percent are indifferent. Only 15
percent declare that processed meat products are unsafe.
Table A.3
Distribution of chicken meat consumption in Spain (2008)
1,000 tonnes
EUR million
EUR/Kg
Whole Chicken
205
589
2.87
Chicken Fillets
46
297
6.5
Chicken Pieces
333
1,520
4.56
Total
584
2,407
Table A.4
Consumer attitudes towards meat price and safety (scale from 0 – expensive - to 10 – cheap-)
Price
Safety
Beef
3.4
6.7
Lamb
3.4
6.3
91
Price
Safety
Pork
4.7
5.6
Chicken
4.7
7.0
Cured ham
3.4
Safe
46.0%
Other cured meat products
4.2
Indifferent
38.5%
Cooked meat products
4.5
Unsafe
15.5%
A.2
The Pork and Poultry Supply Chain in Spain
In this section, we will describe the pork and poultry supply chains in Spain. We will
introduce this topic by analysing the meat balance for the last year the information is
available. Then, this section is structured in two subsections, each of them devoted to the
description of the respective supply chains. Some numbers are provided when possible.
The structure of both supply chains will be settled down as the framework to analyse the
value added along the supply chain which will be considered in section 1.4.
Figure A.9 provides an overall view of the poultry and meat balance sheets. As can be
observed, Spain is a net exporter on live animals and meat in the case of pork. Moreover,
Spanish production represents around 23 percent of total EU production. The EU also
concentrates a significant share (around 85 percent) of Spanish imports and exports.
In the case of poultry, Spain can be considered self-sufficient, with exports and imports
playing a marginal role. France is by far the main partner from both an exporting and
importing points of view. Spain is also the second larger producer within the EU.
However, its share only arrives at 13 percent.
A.2.1
The Pork Supply Chain
The pork supply chain in Spain is structured in three main phases and includes various
steps in which a variable number of agents participate. Figure A.10 describes the three
phases and the different agents that can play a role in each of them. Vertical integration is
a big issue between feed companies and farms (70 percent of total production) and
between the sow production farms and the piglet and fatten farms. However, it is very
limited at the other phases of the supply chain.
At the production level, three main farming systems coexist. Sow production farmers
handle feed for sows and piglets. When piglets weigh 7Kg (20Kg), they are sold to prefatten (fatten farms). In both cases, animal are slaughtered when they arrive at 105Kg on
average. Close cycle farms handle the whole process.
92
Figure A.9
Balance sheet of pork and chicken in Spain (1,000 tonnes)
Meat Imports
Pork: 86.5 (UE 86.8%)
Poultry: 125.0 (UE 76%)
Consumption
Pork: 2580.9
Poultry: 1360.6
Live Animal Imports
Pork: 24.2 (UE 100%)
Poultry: 3.2 (UE 100%)
Slaughtering and Precessing
Pork: 3233.8
Poultry: 1309.7
Meat exports
Pork: 694.5 (UE 85.1%)
Poultry: 72.7 (UE 65.5%)
Live Animal Production
Pork: 3191.0
Poultry: 1308.3
Export of Live Animals
Pork: 67.0 (UE 98.6%)
Poultry: 4.7 (UE 93.6%)
Source: MARM (Anuario de Estadística Agraria, 2006).
In the slaughtering and processing phase, different agents can participate. At the slaughter
houses animals are scarified and carcasses are prepared and classified. Slaughters can be
independent or integrated. In the first case, animals are bought directly to farmers.
Carcasses are sold to wholesalers, cutting factories or processing factories to elaborate
cured or cooked meat products. Slaughter houses belonging to vertically integrated
companies usually include cutting and/or sliced rooms to be ready for distribution to
supermarket and hypermarket chains. In some cases, slaughter houses can also sacrifice
animals for other farmers who have to pay the corresponding fee (this is called
“maquila”). Figure A.11 shows the evolution of pork production in carcass weight. The
differentiation between carcasses going to the fresh and processed markets is also
considered. In 2008, approximately 60 percent of the slaughtered meat went to the fresh
marketing channel. This percentage has been reduced slightly since the beginning of the
21st Century. Cataluña is the leading region, as far as pork production is concerned,
accounting for about 35 percent of the Spanish production (Figure A.12), followed by
Castilla-León (13 percent). It is interesting to note that, while in Cataluña the relative
importance of the processed meat marketing channel is very close to the national value, in
Castilla-León this channel concentrates almost 80 percent of the pork production, which
is mainly oriented to the production of cured products (ham, pork loin and “chorizo”)
covered by Protected Designation of Origin (PDO).
Wholesalers use to buy whole or pieced carcasses and sell them to traditional butchers.
Most of the meat wholesalers are located in MERCAS (wholesale markets of perishable
products located in the main urban agglomerations, being MERCAMADRID (Madrid)
and MERCABARNA (Barcelona), the most relevant.
93
Figure A.10
Overview of the Pork Supply Chain in Spain
Source: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de la Carne de Cerdo de
Capa Blanca).
Figure A.11
Evolution of pork meat production (million tonnes of carcass weight)
4
3
2
1
0
2001
2002
2003
2004
Fresh Meat Channel
2005
2006
2007
2008
Processed Meat Channel
Source: MARM (Anuario de Estadística Agraria).
The transport of both live animals and meat also play an important role. In the first case,
animal welfare regulation is increasingly relevant, although main concerns here arise
mainly when we refer to exports (long distance transport).
At the retail level, traditional outlets and supermarkets and hypermarkets coexist. Their
market share is balanced, accounting each system for about 45 percent of the market
share.
94
Figure A.12
Geographical distribution of pork meat production in Spain (2008) (%)
Taking into account the different agents participating in the supply chain, two different
marketing channels can be identified in Spain (Figure A.13): 1) Traditional Marketing
Channel; and 2) Modern Marketing Channel. The Traditional Marketing Channel is
characterised by:
•
Vertical integration between sowing and fattening farms either because both activities
are done under closed cycle farms or because feed companies integrate both types of
farms. In the latest, farm size is larger;
•
Reduced vertical integration between animal production and the meat industry;
•
Logistics are assumed by different agents depending on the contract conditions (feed
companies, piglet producers, fattening farms, slaughter houses or wholesalers). In the
processing phase, transport and storage are hold by the agent in charge of the
industrial activities;
•
Relative importance of the wholesaler, who buy entire or pieced carcasses to be sold
to traditional butchers who, additionally, can also be supplied directly by the meat
industry;
•
Butchers buy pieced carcasses and the meat is sliced in the point of sale.
The increasing shopping capacity of the distribution channels has motivating a deeper
horizontal concentration, larger farms and an increasing vertical coordination along the
supply chain including production protocols. This has generated a more modern
marketing channel characterised by:
•
Higher level of vertical integration;
•
Higher dimension to benefit from economies of scale;
•
Higher importance of the convenience attribute (packaged sliced meat) to satisfy new
customers needs buying at supermarket and hypermarket chains. However, sliced
product coexist with butchers located in the same supermarkets and hypermarkets;
•
The increasing importance of distribution platforms associated to retail chains;
•
Disappearance of wholesalers.
95
Figure A.13
Types of marketing channels in the pork sector in Spain
Traditional Marketing Channel
Modern Marketing Channel A
Modern Marketing Channel B
Capa Blanca).
A.2.2
The Chicken Supply Chain
The Spanish poultry sector is characterised by an intensive production system, more
fundamental than in the pork sector. As in the previous case, Figure A.14 provides an
overall picture about the different agents participating along the three main phases of the
supply chain. While in the pork sector vertical integration only took place in the first
phase, here vertical contracts extend along the three phases. Around 90 percent of total
chicken production is performed under any type of vertical contract.
96
Figure A.14
Overview of the Poultry Supply Chain in Spain
Source: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de Avicultura de Carne).
At the production stage, layer farms and hatcheries belong to the integrated companies.
They are in charge of incorporating new layer hens, by replacement or buying them
outside, feed them, removing residuals and corpses, transporting eggs to the hatcheries,
quality control and traceability and transporting chicks to the fattening farms. At this
stage, the farmer works for the integrated company. Farmers take care of chicks for
around 50 days when they get enough weight to be sent for slaughtering. All farms
maintenance costs (including labour) are supported by the farmer, which account for
about EUR 0.20-0.35 per broiler. Farmers receive a payment from the integrated
company, which has two components: one fixed and the other variable depending on
productivity. Main factors determining productivity use to be farm size, technological
level, labour skills and feed quality. Other factors can be: densities, fattening days or
weights that usually are fixed by the integrated companies and vary across them.
Transport costs to the slaughtered houses are supported by the integrating companies.
At the slaughtering and processing stage, as mentioned above, the degree of vertical
integration is also very high. At the slaughter house, animals are sacrificed, carcasses are
cleaned (gutted), cooled and classified. Also, quality controls and traceability activities
are undertaken. Integrated companies are responsible for transporting carcasses to cutting
factories, distribution platforms or traditional butchers. In Spain, there exist around 150
slaughter houses. More of them are rather small generating around 5,000 tonnes of
carcass weight annually. On the other hand, the slaughter houses owned by the 10 more
important companies in Spain generated 65 percent of meat production. Production
capacity of such slaughter houses reaches 21,000 tonnes of carcass weight per year.
Figure A.15 shows the evolution of chicken production from 2001 to 2008. Production
levels have remained relatively stable around 1.1 million tonnes, with some oscillation
between years. The minimum production level was reached in 2006, due to the effect of
97
avian influenza. Again as in the pork case, Cataluña is the main producing region (22
percent of the Spanish production) followed by Andalucía (16 percent), Galicia (14
percent) and Castilla León (8 percent) (Figure A.16).
Figure A.15
Evolution of chicken production (million tonnes of carcass weight)
1,22
1,20
1,18
1,16
1,14
1,12
1,10
1,08
1,06
1,04
1,02
1,00
2001
2002
2003
2004
2005
2006
2007
2008
Figure A.16
Geographical distribution of chicken production in Spain (2008) (%)
Galicia
14%
Other
20%
Cataluña
22%
Andalucía
20%
Castilla y León
8%
C. Valenciana
16%
Traditionally, a significant share of chicken production was marketed as whole carcasses.
However, the relative importance of pieced carcasses and fillets has increased. Figure
A.17 shows the evolution of the production of the two types of meat. As can be observed,
while in 2001, 36 percent of the production was marketed as pieced carcasses and fillets,
this percentage reached 45 percent in 2008.
98
Figure A.17
Evolution of chicken production destination (million tonnes of carcass weight)
1200
1000
800
600
400
200
0
2001
2002
2003
Whole carcass
2004
2005
2006
2007
2008
Pieced carcass and fillets
Source: Revista ALIMARKET (Mayo, 2009).
Summing up, as in the pork sector, two main marketing channels can be identified (with
different cost structures, as we will show below) in the Spanish Chicken Supply Chain: 1)
Traditional; and 2) Modern. Differences are not based on the level of vertical integration,
which is very high in both cases, but on the products marketed and the type of retail
companies that are addressed (Figure A.18).
Figure A.18
Types of marketing channels in the poultry sector in Spain
Traditional Marketing Channel
Modern Marketing Channel
Source: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de Avicultura de Carne).
The traditional marketing channel is very short and only two agents participate. The
poultry companies integrate the production and slaughtering processes. Whole carcasses
are sold to traditional butchers who cut the carcasses at the shop. The modern marketing
99
chain is addressed to the supermarkets and hypermarkets. Under this channel carcasses
are pieced at the transformation process. Cutting rooms within the slaughter houses of
new cutting factories have been developed to satisfy supermarkets and hypermarkets
requirements for convenience products. In these retail outlets, however, there is
coexistence between packaged meat, sold in refrigerated shelves, and butchers who cut
the meat according to customer requirements.
A.3
Market structure
A.3.1
The number of firms
The meat industry is the most important food sector in Spain. In 2004, there was 4534
firms, while in 2009, this number decrease by 100, to reach 4433 (Figure A.19).
However, there are not data available about the factors explaining this slight decrease
(i.e., disappearance or mergers). This decrease represents only a negative percentage of
2.23 percent over the situation in 2004.
Figure A.19
Number of firms in the Spanish meat industry
4560
4540
4520
4500
4480
4460
4440
4420
4400
4380
4360
4340
2004
2005
2006
2007
2008
Source: INE (Directorio Central de Empresas).
A.3.2
Number of firms related to size of firm
Table A.5 shows the evolution of the number of firms related to the size. Three main
conclusions can be obtained:
•
The Spanish meat sector is a dual industry. There is a significant number of small
firms (81.46 percent of the firms have less than 20 employees). On the other hand,
only 2.5 percent of the firms have more than 100 employees;
•
The meat industry has suffered a slow but continuous concentration process, which
has generated an increase of the firm size. In fact, comparing 2004 and 2099, it is
easy to observe than the number of smaller firms has decreased, while the opposite
100
2009
•
Table A.5
has taken place for the larger ones. It is interesting to note the significant increase in
two size segments: those employing between 50 and 99 employees and those
employing between 100 and 199 people;
The number of firms without employees has remained quite steadily with a positive
increase of about 6 percent.
Evolution of the number of firms related to the size of the firm
No employees
2004
2005
2006
2007
2008
2009
% change 2004-2009
877
860
853
836
884
936
6.73
1-2
1,000
988
947
928
882
853
-14.70
2-5
732
735
722
710
696
693
-5.33
6-9
588
549
561
542
553
522
-11.22
10-19
580
576
580
579
599
607
4.66
20-49
546
539
563
562
560
564
3.30
50-99
115
138
137
149
150
146
26.96
100-199
53
50
59
59
62
63
18.87
200-499
33
33
37
39
39
36
9.09
500-999
6
6
6
6
7
9
50.00
1,000-4,999
4
5
4
4
5
4
0.00
Source: INE (Directorio Central de Empresas).
A.3.3
Concentration within the industry
The measurement of the concentration ratio in the meat industry is not an easy task.
Literature review has not shed light about this issue. On the other hand, there are not any
official data. We have calculated a proxy with two main databases: ALIMARKET and
MARM. Second, we have differentiated three markets: fresh pork, processed pork and
poultry.
Table A.6 shows the market share for the top ten firms in the fresh pork market. Firms’
output has been obtained from the magazine ALIMARKET, while total market
consumption has been obtained from MARM (Consumo Alimentario) by adding the
consumption of fresh pork at home and away-from-home. As can be observed in the fresh
pork market the concentration level is relatively low. The top ten only represent 44
percent of the market share. Individually, market shares are also quite low. The most
important firm hardly arrives at a market share of 6 percent.
Table A.6
The top ten firms in the fresh pork industry in Spain (2008)
1,000 tonnes
Market share
Accumulated Market share
GRUPO BATALLE
161.0
5.83
5.83
GRUPO VALL COMPANYS
150.5
5.45
11.28
GRUPO SAMPER
142.8
5.17
16.46
INDUSTRIAS CARNICAS VILARO
138.0
5.00
21.46
GRUPO TERFRISA
118.0
4.27
25.73
INDUSTRIAS CARNICAS LORIENTE PIQUERAS
115.4
4.18
29.91
101
1,000 tonnes
Market share
EL POZO ALIMENTACION
108.0
3.91
33.83
CAMPOFRIO
105.0
3.80
37.63
GRUPO FAMADESA
89.0
3.22
40.85
CARNICAS SOLA
85.0
3.08
43.93
Source: Revista ALIMARKET (Abril, 2009) and MARM (Consumo Alimentario).
The picture is totally different in the processed meat sector (Table A.7). In this case, the
most important firm (CAMPOFRIO) gets a 27.65 percent of the market share, and the top
ten arrives at the 82 percent. In any case, these figures have to be interpreted with caution
as in some cases firms’ output (i.e. CAMPOFRIO) includes Portugal.
Table A.7
The top ten firms in the processed pork industry in Spain (2008)
1,000 tonnes
Market share
CAMPOFRIO
175.0
27.65
27.65
EL POZO ALIMENTACION
87.0
13.74
41.39
CASA TARRADELLAS
73.3
11.58
52.97
GRUPO ALIMENTARIO ARGAL
40,1
6.33
59.30
NOEL ALIMENTARIA
30.0
4.74
64.04
INDUSTRIAS CARNICAS LORIENTE PIQUERAS
29.5
4.66
68.70
EMBUTIDOS MONELLS
24.5
3.87
72.58
CORPORACION ALIMENTARIA GUISSONA
22.0
3.48
76.05
CASADEMONT
20.5
3.24
79.29
GRUPO CAÑIGUERAL
17.0
2.69
81.97
Source: Revista ALIMARKET (Abril, 2009) and MARM (Consumo Alimentario).
In the poultry sector GRUPO SADA concentrates 26.2 percent of the market (Figure
A.20). The other top ten do not reach 10 percent individually, but jointly considered they
concentrate around 88 percent of the market. This situation has been quite stable in the
last 5 years.
102
Figure A.20
The top ten firms in the poultry industry in Spain (2008) (%)
30
25
20
15
10
5
TH
ER
O
ED
O
N
D
EJ
J.
L.
R
O
M
LA
AV
IC
O
O
A
A
R
AL
R
FL
O
M
EL
ID
ID
A
A
LA
G
AV
IC
O
U
IS
S
O
N
ES
A
PA
D
SA
UV
E
RE
N
CO
VA
LL
G
R
UP
O
SA
D
A
CO
M
PA
N
YS
0
Source: Revista ALIMARKET (Mayo, 2009).
A.4
Market features
In this section, we will describe some issues related to the performance of the Meat
Supply Chain. When possible, data will refer to the pork or poultry sectors; otherwise, the
meat industry as a whole will be considered. Four main issues will be briefly considered.
First, the level of innovation, which will be assessed by the evolution of investments
during the last five years information is available. Second, we will analyse the evolution
of profits of the meat industry as a whole. The third section is the most important and
relevant for the purposes of this study, as it will aim at providing a description of the
main costs and profits that are generated along the supply chain. The study will
differentiate among the alternative marketing channels that were described for pork and
poultry in Section 1.2. We will end with an analysis of the competitive position of the
Spanish meat and poultry sectors in external markets.
A.4.1
Levels of innovation
As mentioned in Section 1.1, the meat industry in Spain is the most important food
industry. Total investments accounted for EUR 700 million, in 2007, representing around
19 percent of total investments in the food industry. Figure A.21 shows that investments
have significantly increased from 2001, following a sort of cyclical movement. However,
we have to note that data refer to the whole meat industry, including beef, lamb and other
meats apart from pork and poultry. As can be observed, it took two years to the meat
industry to recover from BSE (in Spain the outbreak took place in November 2000). After
reaching a maximum in 2003, average investments were around EUR 650 million
annually, with a small drop in 2006 due to the impact of the avian influence. As we will
show in the next section investments are closely related to profits in the meat sector.
103
Figure A.21
Evolution of Meat Industry investments in Spain (EUR million)
800
750
700
650
600
550
500
450
400
2001
2002
2003
2004
2005
2006
Source: INE (Encuesta Industrial de Empresas).
From a qualitative point of view, the major part of investments in the meat industry has
been addressed to satisfy the requirements of the big retail chains. In fact, when analysing
main facts of the pork and poultry sectors, periodically reviewed in professional
magazines such us ALIMARKET, we can conclude that main investments were due to
acquisitions or for building new cutting and slicing rooms. The same trend has been
observed for the processed meat industry. In Embutidos Monells (ranked 7th in Table A.7)
the percentage of sliced products on total turnover was 39 percent; 44 percent in
Casademont (ranked 9th); or 65 percent, in Grupo Cañigueral (ranked 10th). Percentages
are higher in smaller firms as their businesses are more concentrated in this market, while
larger firms also participate in the fresh meat market.
A.4.2
Profitability
Figure A.22 shows the evolution of profits in the meat sector. As mentioned above, it
took two years to start recovering from the BSE. From 2004 and 2007, the meat industry
has benefited from a reduction of farm prices but no information is still available to assess
quantitatively the impact of increasing prices in 2008 and the economic crisis of 2009-09.
These issues will be addressed qualitatively in Section 2.
104
2007
Figure A.22
Evolution of Meat Industry profits in Spain (EUR million)
600
500
400
300
200
100
0
2001
2002
2003
2004
2005
2006
2007
Source: INE (Encuesta Industrial de Empresas).
A.4.3
Added value
One of the main issues in this report is to describe the cost structure of the pork and
poultry supply chains in order to understand main changes that have taken place during
the last 2-3 years, namely the impact of the increasing commodity prices during the end
of 2007 up to mid 2008, and that of the economic crisis in 2008 and 2009. Moreover, the
analysis of the cost structure will help us to understand to what extent improving the
bargaining power of the meat industry will benefit producers and consumers.
Once we have understood how marketing margins are determined, the next step in our
analysis will be to understand their dynamics. In other words, how marketing margins
change when supply and demand conditions along the food chain also change. This leads
us to the concept of price transmission along the food chain and the potential appearance
of asymmetries, an issue which has generated a lot of literature in the past 15 years (both
from a methodological and empirical points of view).
Let us start when the analysis of the costs structure along the supply chain for each
marketing channel and product we described in Section 2.
+ Cost structure
- Pork
In pork, we distinguished three marketing channels. The first one was named traditional,
as the final destination were traditional butchers, while the second and third ones were
called modern, as the final destination were the larger retailers’ stores. In the following
figures, we will show the different costs along the supply chain referred to 2008. We will
compare accumulated costs in each of the three stages of the supply chain with the prices
perceived at the end of each stage. All prices and costs are offered in intervals.
105
Figure A.23 shows the cost structure along the traditional marketing channel. Production
costs account for 1.5 to 1.6 EUR/Kg, representing around 30 percent of total costs. The
farm price ate this stage is between 1.42 and 1.44, indicating that in 2008 market prices
have not compensating production costs at farm level.
Figure A.23
Cost structure along the traditional pork marketing channel
CONCEPT
Feed
Other costs
PROFIT - LOSS
[(-0,6%)- (-12%)]
COST
1.021- 1.289
0.481 – 0.322
TOTAL COST
(-0.083)-(-0.171)
1.502-1.611 €/kg
CONCEPT
Transport to slaughter
Slaughtering cost
Other slaughter costs
By-products (=Income)
Cutting costs
Cutting losses
Other cutting costs
Transport to wholesaler
Net Profit (2%- 1%)
Other costs
Transport top butcher
Net profit (1%)
COST
0.023-0.025
0.059-0.061
0.040-0.055
-(0.035- 0.037)
0.175-0.190
0.355- 0.360
0.181- 0.200
0.035- 0.042
0.048- 0.014
0.04- 0.07
0.14- 0.16
0.02- 0.02
TOTAL COST
Slaughtering 0.087-0.104 €/kg
Cutting 0.746- 0.792 €/kg
Wholesaler 0.180- 0.230 €/kg
CONCEPT
Labour costs
Retail losses (2%)
Other costs
Net profit (5%)
COST
0.920- 1.200
0.045- 0.052
0.822- 1.066
0.213- 0.282
TOTAL COST
1.787-2.318 €/kg
Capa Blanca) and own elaboration.
Slaughtering and processing costs account for 0.087-0.104 and 0.746-0.792 EUR/Kg,
respectively. Figure A.23 shows the main costs sources (by-products are considered
positively as they constitute a revenue source). Net profit (margin) at the slaughter is
estimated to be between 1 and 2 percent of total costs. Total accumulated costs at this
stage lies between 2.33 and 2.51 EUR/kg, while the price perceived at this stage range
between 2.3 and 2.35 EUR/Kg. If we add the wholesaler costs (including its margin or net
profit), who, as mentioned in Section 2, plays an important role in this marketing channel
(0.18-0.23 EUR/Kg), total accumulated costs are between 2.515 and 2.737 EUR/kg,
which are very close to perceived prices (2.5-2.6 EUR/kg).
Finally, retailing costs range between 1.787 and 2.32 EUR/Kg, which represent 47
percent of total costs. Main costs are labour and other fixed costs. Retail margin is set at 5
106
percent. Total accumulated costs are 4.302-5.055 EUR/kg while consumers pay between
4.82 and 5.56 EUR/kg.
Figure A.24 shows the cost structure corresponding to what we called modern marketing
channel A (Figure A.24). It is oriented to the same type of products than in the traditional
channel (i.e. pieced carcasses), but addressed to the larger retail companies instead of to
traditional butchers. As can be observed, production and slaughtering costs remain the
same. The wholesaler has disappeared and its role is substituted by distribution platforms
belonging to retail companies. Thus, retail costs account under this scheme for 52 percent
of total costs.
Figure A.24
Cost structure along the modern pork marketing channel A
CONCEPT
Feed
Other costs
Profit - Losses [(-0,6%)- (-12%)]
COST
1.021- 1,289
0.81 – 0.322
(-0.083)-(-0.171)
TOTAL COST
1.502-1.611 €/kg
CONCEPT
Slaughtering cost
Subproducts (=Income)
Cutting costs
Cutting losses
Other cutting costs
Transport to platform
Net profit (2%- 1%)
COST
0.023-0.025
0.059-0.061
0.040-0.055
-(0.035- 0.037)
0.175-0.190
0.355- 0.360
0.181- 0.200
0.035- 0.042
0.048- 0.014
TOTAL COST
Cutting 0.746- 0.792 €/kg
CONCEPT
Platform costs
Transport to retail shops
Retail shop costs
Retails shop losses
Net profit (3%)
COST
0.160- 0.178
0.095- 0.140
1.780- 2.270
0.045- 0.104
0.120- 0.158
TOTAL COST
Platform costs 0.255- 0.318 €/kg
Retail shop costs 1.825- 2.374 €/kg
Platform costs are higher that wholesaler costs in the previous scheme (0.255-0.318
EUR/kg). Retailer costs (more precisely shop costs) are very similar under the two
marketing channels but, in this case, the margin is lower (3 percent instead of 5 percent).
Total accumulated costs range between 4.415 and 5.199 EUR/kg while prices paid by the
consumer at supermarkets and hypermarkets lies between 4.82 and 5.56 EUR/Kg.
107
The main difference between modern marketing channels A and B lies in the degree of
meat transformation. While channel A is oriented towards the production of pieced
carcasses to be sliced at the retail shops, channel B is oriented to the presentation of
packaged sliced products to be located in refrigerated shelves at the retail shop.
Incorporating slicing costs, in this channel total costs increase. Thus, in this case,
production costs only account for 28 percent of total costs.
Figure A.25
Cost structure along the modern pork marketing channel B
CONCEPT
Feed
Other costs
Profits - Losses
[(-0,6%)- (-12%)]
COST
1.021- 1.289
0.481 – 0.322
TOTAL COST
(-0.083)-(-0.171)
1.502-1.611 €/kg
CONCEPT
Slaughter costs
Subproducts (=Income)
Cutting costs
Cutting losses
Sliced costs
Sliced losses
Other sliced costs
Transport to platform
Net profit (1%)
COST
0.023-0.025
0.059-0.061
0.040-0.055
-(0.035- 0.037)
0.175-0.190
0.355- 0.360
1.190- 1.300
0.071- 0.072
0.181- 0.200
0.040-0.060
0.032- 0.024
TOTAL COST
Cutting 0.530- 0.550 €/kg
Slicing 1,482- 1,632 €/kg
CONCEPT
Platform costs
Transport to retail shop
Retail shop costs
Retail shop losses
Net profit (5%- 3%)
COST
0.081- 0.090
0.120- 0.130
0.665- 0.810
0.335- 0.371
0.249- 0.149
TOTAL COST
Platform 0.201- 0.220 €/kg
Retail shop 1.00- 1.181 €/kg
In channel B, the slaughtering and processing phases includes the slicing costs, which
also account for meat losses during the processing (those costs and losses were
incorporated at the retail stage in channel A). Total costs at this stage account for 43
percent of total costs (between 3.601 and 3.887 EUR/Kg) while prices perceived by the
meat firms range between 3.55 and 3.897 EUR/kg).
108
Finally, retail costs are much lower than in the previous case as labour costs are reduced
substantially. The only cost component that is higher refers to losses due to perish ability,
robberies, etc. Summing up, along the marketing channel B, total associated costs range
between 4.802 and 5.298 EUR/Kg, while prices paid by consumers are slightly higher
(5.35-5.67 EUR/kg). As can be observed along this study, in 2008, in the pork sector the
main losers were farmers. The meat industry has been able to compensate costs and the
retailers have benefited for a profit of about 0.5 EUR/kg.
Poultry
A similar analysis has been carried out for the two marketing channels described in
earlier. The main distinction between the two channels is the final customer. While in the
traditional marketing channel the meat industry sell products to traditional butchers, in the
modern one, the larger retail chains are the final destination. In both cases, we already
mentioned that the level of vertical integration is very high, reaching 90 percent at the
production and slaughtering stages.
Figure A.26 shows the costs structure along the traditional marketing channel. Production
costs account for 48 percent of total costs and include the payment for chicks, feed costs
and the price paid to integrated farmers. Total costs at this stage range from 1.37 to 1.40
EUR/Kg. There is not market price at this stage as the whole process is owned by the
meat industry.
Figure A.26
Cost structure along the traditional poultry marketing channel
CONCEPT
Chick Price
Feed costs
Price to Integrated Farmers
Other costs
COST
0.246- 0.266
0.892- 0.938
0.185- 0.140
0.046- 0.056
TOTAL COST
1.37-1.40 €/kg
CONCEPT
Slaughtering
Other costs
Transport to traditional retail shop
Profit (+1%)
COST
0.04- 0.06
0.15- 0.17
0.16- 0.18
0.34- 0.38
0.03-0.02
TOTAL COST
0.69-0.79 €/kg
CONCEPT
Labour Costs
Losses at the retail shop
(2%)
Other expenditures
Net profit (3%- 5%)
COST
0.46-0.61
TOTAL COST
0.05-0.06
0.02- 0.03
0.08- 0.14
0.53-0.70 €/kg
Source: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de Avicultura de Carne) and
own elaboration.
Slaughtering costs lie between 0.69 and 0.79 EUR/Kg, with main costs components
described in Figure A.26 (losses account here for 35 percent of the live animal weight).
Accumulated costs at this stage arrives at 2.06-2.19 EUR/Kg while prices perceived by
109
the meat industry are between 2.08 and 2.21 EUR/Kg (or between 3.53 and 3.73
EUR/carcass). Retail costs under this scheme range between 0.53 and 0.70 EUR/kg,
accounting for 25 percent of total costs along the supply chain. Total costs, thus, are
estimated to lie between 2.59 and 2.89 EUR/kg while prices paid by the consumers are
slightly higher (2.89-3.26 EUR/kg). So, there is still a small margin to reduce prices at the
consumer level.
Costs associated to the modern poultry supply chain are lower than in the former case
(Figure A.27). Production costs are the same but under this scheme represent 54 percent
of total costs. Slaughtering costs are slightly lower as the transport costs to distribution
platforms are lower than those associated to traditional butchers (0.19-25 EUR/kg and
0.34-0.38 EUR/kg, respectively). Thus, total accumulated costs at this stage ranges from
1.91 to 2.06 EUR/kg, while prices perceived by the poultry industry go from 1.94 to 2.02
EUR/kg.
Retail costs in the modern channel are also lower than in the previous case (0.39-0.57
EUR/kg) and includes both platform costs and retail shop costs. Total costs associated to
this channel range from 2.30 to 2.63 EUR/kg. Consumer prices at the retail level lies
between 2.57 and 2.99 EUR/kg. We have to note that under both schemes we have not
considered the pieced and sliced products that are increasingly present in the retailer’s
shelves.
Figure A.27
Cost structure along the modern poultry marketing channel
CONCEPT
Chick Price
Feed costs
Price to Integrated farmers
Other costs
COST
0.246- 0.266
0.892- 0.938
0.185- 0.140
0.046- 0.056
TOTAL COST
1.37-1.40 €/kg
CONCEPT
Slaughtering and processing
Other costs
Transport to the distribution platform
Profit - Losses (+2%- (-2%))
COST
0.04- 0.06
0.15- 0.17
0.16- 0.18
0.19- 0.25
0.03- (-0.04)
TOTAL COST
0,54-0.66 €/kg
CONCEPT
Distribution Platform costs
Transport costs to the retail outlet
Labour
Losses at the retail outlet (5% - 7%)
Other expenditures
Net profit (3%- 7%)
COST
0.05-0.06
0.10- 0.12
0.072- 0.140
0.120- 0.196
0.048- 0.056
0.07- 0.21
TOTAL COST
Platform
0.15- 0.18 €/kg
Retail outlet 0.24- 0.39 €/kg
Source: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de Avicultura de Carne) and
own elaboration.
110
+ Price transmission along the supply chain
The issues of marketing margins and price transmission along the food marketing chain
have traditionally been the subject of considerable research interest among agricultural
economists, as they are considered to be relevant to structure, conduct and performance
analyses. Recently, however, researchers have paid increasing attention to these analyses,
mainly as a response to social and political concerns about the extent and speed with
which price shocks are transmitted between different levels of the marketing chain. In the
last two decades, markets and business practices have changed at a considerable speed.
These changes may have modified the competitive positions of different economic agents
participating in the market and altered price transmission processes, which in turn may
have had potentially relevant welfare and policy implications.
Although the analyses of the evolution of margins over time and price transmission are
related topics, and have been considered indistinctly in the literature, they are not
identical as they are designed to respond to different, although complementary, questions.
In spite of structural models are better than price time-series analyses in identifying the
sources of imperfections in price transmission, in most papers there exists a gap between
the theoretical model and the empirical application, as some of the marketing margin
determinants are unobservable. Partly for this reason, much of the empirical literature
dealing with price transmission is concerned with the application of time-series modelling
techniques to price data alone. The main focus of this approach has been to characterise
vertical price relationships by the extent, speed and nature of the adjustments through the
supply chain to market shocks that are generated at different levels of the marketing
process.
Market efficiency often suggests an equilibrium relationship between prices at different
levels of the marketing chain. Some authors have hypothesised that a variety of economic
and institutional factors may result in the long-run relationship between prices being
asymmetric. This may occur, for example, if middlemen in the marketing chain pass input
price increases to customers more quickly and completely than input price reductions.
Particular importance has been given to assess this issue. Different methodological
alternatives have been proposed in the literature to analyse price transmission
asymmetries along the food chain. Although the author of this report is aware of such
methodological approaches, it is out of the scope of this study to present such analysis. As
an alternative, we will make a simpler exercise taking the data series presented in below
into account. The approach consists of the following steps:
•
For each price (farm and retail) and the marketing margin, weekly changes are
calculated;
•
We have split the sample period in two subperiods depending on the behaviour of the
farm price. The first subperiod corresponds to weeks where the price change with
respect to the previous one has been negative. The second subperiod includes positive
variations of the farm price;
•
For both subperiods, weekly changes of the retail price and the marketing margin are
also calculated;
•
Finally, for each subperiod, average values are calculated.
Results from this analysis are presented in Figures A.28 and A.29 for the pork and poultry
sectors, respectively. As can be observed, in both cases, retail prices are sticker than farm
111
prices. In the pork sector (Figure A.28), when farm prices decrease (first subperiod), retail
prices remain constant, making the marketing margin to increase. The opposite takes
place in the second subperiod. The second interesting result is that in both subperiods
changes are of similar magnitude (slightly higher in the first subperiod, that is, when the
farm price diminishes). This would indicate that the price transmission seems to be fairly
symmetric in the Spanish pork sector. In any case, we have carried out the same analysis
by comparing farm price changes in week t with retail price changes in week t+1 and t+2.
Results are very similar.
Figure A.28
Average changes of the retail price and the marketing margin as a response to negative and positive changes at
the farm price in the Spanish pork sector (EUR/Kg) (2004-2009)
Negative changes at farm level
0,04
0,03
0,02
0,01
0
-0,01
-0,02
-0,03
-0,04
Average Change in Farm Price
112
Average Change in Retail Price
Average Change in Marketing Margin
Positive changes at farm level
0,04
0,03
0,02
0,01
0
-0,01
-0,02
-0,03
-0,04
In the case of the poultry sector (Figure A.29), the same patterns have been found with
two differences. First, the magnitude of the changes is higher in this case even though the
price per Kg for poultry is lower than for pork. Average farm price changes are around
0.04 EUR/Kg when in the pork sector were 0.03 EUR/Kg. The second change is that in
this case the resulting average change, in absolute values, in the marketing margin is
higher when farm prices decrease than when they increase. This asymmetry is able to
explain the increasing marketing margin that has taken place over the last two years in the
poultry sector.
113
Figure A.29
Average changes of the retail price and the marketing margin as a response to positive and negative changes at
the farm price in the Spanish poultry sector (EUR/Kg) (2004-2009)
Negative changes at farm level
0,05
0,04
0,03
0,02
0,01
0
-0,01
-0,02
-0,03
-0,04
-0,05
Positive changes at farm level
0,05
0,04
0,03
0,02
0,01
0
-0,01
-0,02
-0,03
-0,04
114
A.4.4
International competitiveness
At the beginning of Section 2 we provided an outline of main characteristics of the pork
and poultry international trade. In this section we will provide an overall picture about the
evolution of exports and imports as well as the geographical distribution of Spanish
exports. To be consistent with the rest of this study, we will differentiate between pork
and poultry.
Spain has been traditionally a net exporter of pork exporting between 15 and 20 percent
of the slaughtered meat. However, 2008 has broken all previous expectations with an
exporting record. Total meat exports (Table A.8) reached 0.9 million tonnes, when in
2004 they were 0.6 million (50 percent increase). Although fresh, frozen and processed
product have increased their presence in EU and international markets, the most
spectacular increase has taken place in the frozen meat, which currently represent around
36 percent of total exports. The main reason for this spectacular increase is the demand
from Russia and Hong Kong (Figure A.29). In the latter case, the increasing demand in
the Chinese market and the Olympic games could explain this phenomenon.
Table A.8
Evolution of Spanish pork imports and exports (thousands tonnes)
EXPORTS
2004
2005
2006
2007
2008
Fresh Meat
369,4
408,3
393
411
492,9
Frozen Meat
159,3
189,7
205,6
243,8
335,1
Processed Meat
64,6
70
75,3
81,1
92,8
Total
593,3
668
673,9
735,9
920,8
IMPORTS
2004
2005
2006
2007
2008
Fresh Meat
26,3
26,3
38,4
48
39,6
Frozen Meat
68,5
60,43
72,6
75,8
58,7
Processed Meat
25,2
26,9
29,4
29,9
29,6
Total
120
113,63
140,4
153,7
127,9
Source: Dirección General de Aduanas Database COMTRADE.
Exports of fresh meat have increased also significantly in 2008 (more than 20 percent
with respect 2007), ranking Spain in the fourth position worldwide after China, USA and
Germany. France, Portugal, Germany and Italy are our main customers. Interestingly,
there has been an increase in the demand coming from EU eastern countries, in which
increase cereals prices has generated a sharp decrease of meat production. Spain has bet
for international markets. In 2008, an Exporters’ List has been created. The main aim is to
unify the requisites that our main customers are imposing in terms of food safety in order
to make exports smoother.
In spite of the important increase in pork exports, our potential is much higher, as for the
same period EU exports increase by 33.5 percent, with also a significant increase in
exports to Hong Kong, Russia, Ukraine and South Corea. Exports’ increase has aliviated
the problems that the pork sector has in the domestic market which is mature and highly
competitive.
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Exports of processed products only represent 10 percent of total exports but in 2008 grew
up 14.5 percent with respect to 2007 mainly due to the exports of cured ham which
increased by 33 percent, while exports of cooked products decreased by 10 percent
(Dirección General de Aduanas database). As the domestic market is almost saturated,
exports have become crucial for future success. The recent agreement between the private
sector and the public administration on the “Plan de Mejora de las Exportaciones de
Productos Cárnicos” (Plan for improvement of meat exports) aiming at stimulating
exports outside the EU, which is one of the main weaknesses of the Spanish sector.
Figure A.30
Main geographical destination of Spanish exports of fresh and frozen pork (%)
30
28,5
25
22
20
15
14,3
11,9
9,7
10
5
4,2
3,9
3
2,5
0
France
Portugal
Italy
Germany
Hong Kong
Source: Dirección General de Aduanas Database COMTRADE.
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Russia
United
Kingdom
Denmark
Other
Figure A.31
Main geographical destination of Spanish exports of processed pork (%)
30
25
24,7
20
17,4
16,9
15
11,5
11,3
10
5
3,4
3,4
3,2
3,1
2,6
2,5
0
France
Portugal Germany Russia
Italy
Greece
United
Czech Belgium
The
Other
Kingdom Republic
Netherlands
Source: Dirección General de Aduanas Database DATACOMEX.
In fact, as observed in Figure A.30, with the exception of Russia, the most important
customers are EU countries (77.1 percent of total exports). Campofrio is also the leading
exporting company in Spain (10,149 tonnes) followed by El Pozo and Casademont
(Alimarket, 2009).
In the poultry sector, as mentioned in Section 1.2, external trade is not very relevant.
Imports and exports accounted, in 2008, for about 7 percent and 6.8 percent of total
production, respectively. Figure A.31 shows the evolution of Spanish imports and
exports. As in the case of pork, poultry exports increased significantly in 2008. However,
while most of the pork exports are sold in EU countries, in the case of poultry African
and Asian countries are relevant (Figure A.32).
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Figure A.32
Evolution of Spanish chicken imports and exports (1,000 tonnes)
100
90
80
70
60
50
40
30
20
10
0
2004
2005
2006
Exports
2007
2008
Imports
Figure A.33
Main geographical destination of Spanish chicken exports (%)
Other
Russia
Gabon
Vietnam
China
The Netherlands
United Kingdom
France
Benin
Portugal
0
5
10
15
20
25
In fact, although Portugal is Spain’s main customer, concentrating 26.5 percent of
Spanish exports, Benin occupies the second position (19.2 percent). China, Vietnam and
Gabon jointly concentrate 11.4 percent of total exports.
A.5
The context in which vertical relationships along the Spanish Meat Supply Chain takes
place has changed dramatically in the last 4 to 5 years. While commodity price increases
during the end of 2007 and the first half of 2008 can be considered as part as the market
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30
conjuncture evolution (with important consequences due to the magnitude of price
changes), the financial and economic crisis from 2008 up to date has generated deeper
changes in all stages of the food chain, with special impact at the consumption level.
Literature review and interviewees all agree that the impact of such economic crisis in
Spain has been deeper than in any other EU countries with which trade relationships are
undertaken due to the specific characteristics of the Spanish economy (most interviewees
consider that increasing exports in the last two years has compensated the decreasing
demand in domestic markets). Unemployment rate in Spain has increased from 9 percent,
in 2005, to 20 percent, in March 2010, with significant impacts on food consumption.
Second, the analysis is somewhat different if we refer to the pork or poultry sectors and,
in the former, the impact has been different at different stages of the processing chain
(fresh or processed meat industries). Structural characteristics are also important to
understand what has happened in the last years. In the pork sector, Spain is a net exporter
and has excess capacity and supply. Second, the production stage is highly integrated but
integration is lower between animal production and processing. The processing market is
heavily fragmented, with two large and 10 medium size firms, able to operate at national
level with larger retailers in a wide range of processed products, and a few thousands of
small firms operating in local markets. However, the market share of the smaller firms,
jointly considered, is higher than that of the largest firms. A third characteristic is that
except for the two larger processed firms the rest uses to belong to families with large
tradition in the sector. In the case of the poultry sector, only the largest firm is able to
supply the whole Spanish market.
The third main characteristic is the complexity of business models existing in the market,
mainly in the pork sector, although the trend is to form bigger groups by vertically
integrating all stages of the Meat Chain. While some firms are specialised in producing
fresh meat (whole carcasses, pieced meat, pre-packaged fresh meat) with agreements with
both livestock producers, as main suppliers, and processed meat industries, as main
customers, others focus on the processed meat sector with backwards integration to early
stages of the food chain. In the poultry sector, the business relationships are lesser
complex as the degree on integration along the food supply chain is higher, as mentioned
in Section 1.
At the end of the food chain, the retailing sector has suffered also some changes in the
last years. It is difficult to give an exact figure (different information sources (market
research companies) provide different figures) but, currently, we can say that the market
is equally divided between traditional and modern retailers (the importance of the last one
to increase in processed products). Focussing on the larger retailer companies, and
contrary to other European countries, the degree of horizontal concentration is lower. The
last report from ALIMARKET (March 2010) estimates that 6 groups concentrates 50
percent of the total selling surface. In spite of this fragmentation, the horizontal
concentration is higher than in the processing sector, which generates disequilibrium in
the bargaining power along the food chain in favour of the distribution chains.
However, the distribution sector is also suffering deep transformations during the last
years. First, it continues the gradual decrease on the number of retailing outlets (mainly
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due to the progressive disappearance of traditional outlets). Second, in 2009, the selling
surface only increased by 1.1 percent while the average growth between 2006 and 2008
was 2.5 percent. Moreover, the number of outlets opened in 2009 was 30 percent lower
than in 2008 (only 4 new hypermarkets were opened, the lowest figure since 2000). The
main business strategy of the retail sector has been oriented to a better rationalisation of
their marketing structures pivoting around prices and private labels (i.e. restructuring the
currently existing outlets instead of expanding the number of outlets). These features will
help us to understand changes that have taken place in the vertical relationships along the
Spanish Meat Chain.
A.5.1
Bargaining power issues
Most of the studies, reports and comments from interviewees highlight the issue of the
exercise of market power by retailers due to two main factors: the higher degree of
horizontal concentration at the retail level and information asymmetry, as they have direct
contact with the consumer (trends, shopping behaviour, new products’ impact, private
labels). Retailers seem to exercise market power through two main instruments: price
negotiations and practices related to transfer of risk and unexpected costs to processors
(discounts, promotions).
In relation to price transmission, many studies, including some carried out by the authors
of this report in relation to meat products in Spain, have analysed price transmission
along the food chain as it is considered a good indicator of market efficiency in vertically
related markets. Market efficiency often suggests an equilibrium relationship between
prices at different levels of the marketing chain. Some authors have hypothesised that a
variety of economic and institutional factors may result in the long-run relationship
between prices being asymmetric. Although asymmetries have been linked to noncompetitive behaviour, this is not necessarily true. In presence of market power, price
changes could be greater or less than the competitive benchmark case depending on the
interaction between such market power and returns to scale.
Moreover, one has to be very careful about results from these studies taking into account
the nature of data (in most of them, prices analysed are referred to broad food groups) and
the consideration of dynamics (in most cases dynamics are analysed based in pure
statistical methods while biological factors are hardly taken into account). In any case,
some of the studies carried out recently with more sophisticated methodological
approaches allowing for non linear adjustments and asymmetries, highlight two main
issues, which have been corroborated by the interviewees in this study.
First, price relationships differ at different stages of the food chain. For instance, in the
case of pork and poultry the relationship between feed prices and live animal prices has
been fairly symmetric (with 6 and 2 month lags in the case of pork and poultry,
respectively). In other words, costs increases are passed to live animal prices when those
animals fattened with more expensive feed are sold in the market. This is consistent with
the degree of vertical integration existing at the earlier production stages in which
companies provide feed and technical assistance to farmers and pay afterwards a margin
per fattened animal. For non integrated farmers, usually transactions made by pork meat
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processors rely on prices at a reference market (Mercolleida), which everybody has
agreed that reflects quite accurately the existing market supply and demand conditions. In
poultry, it does not seem to be a reference market as vertical integration also includes
processing.
On the other hand, the relationships between farm and retail prices are fairly asymmetric.
There is a consensus that price increases are passed through the supply chain, although
most interviewees coincide stating that during 2007-08 only two-thirds of cost increases
could be passed to the retail price. However, when production cost decreases, marketing
margins at the retail level increases as retail prices remain quite stable. Marketing margin
gains at the retail level are taken place when farm prices show a downward trend.
The second agreement is that price transmission is demand-pull oriented instead of costpush, and that this trend has been reinforced due to the increasing competition that has
taken place at the retail level, which has faced to a global decreasing demand due the
financial and economic crisis. Most market research reports agree that sales have slightly
increased in volume in 2009 with respect to 2008, but have decreased in value. We will
turn back to this later in this report.
Taking this into account, the impact of the feed price increases in 2007 and 2008 on
producers and processors varied somewhat in the pork and poultry sectors as the
structural characteristics and the previous market conditions were different in both
markets. Moreover, the impact was different at the production and processing levels.
In general terms, the impact on the poultry sector was lower than in the pork sector.
Poultry associations highlighted the fact that the avian influenza in 2006 had generated a
significant decrease in poultry consumption and production. As the demand in 2007 had
been higher than the supply, retail prices were already relatively high, allowing producers
to compensate for costs increases. For integrated farmers the impact was relatively low as
the risk was assumed by the integrated companies. The impact at the processing level
depended, to a certain extent, on the business strategy. In Spain, there is one firm that
integrates all the stages of the supply chain, including retailing (this is an exceptional case
that has been the focus of case studies in a number of business schools). This group is
composed by two main firms: one cooperative (dealing with animal production farms)
and a commercial firm which include feed, slaughtering, cutting and processing factories
and retailing (mostly in a franchised regime). In this case, cost increases were assumed by
the commercial firm although the impact was lower than in other firms as they controlled
the whole chain. In the rest, as mentioned, the impact differed according to the business
strategy of each firm, the relative importance of the modern distribution channel within
their total turnover and the firm size. But all interviewees agree that the retail companies
exercise their bargaining power in those years by delaying price negotiations. As the 2007
prices had been already negotiated, it was not possible to pass cost increases to selling
prices. This was not very problematic up to the end of the year when fattened animals fed
with more expensive feed were started to be sold at the market. Negotiations for 2008
contracts were signed by April, so 2007 negotiated prices were kept constant up to this
month. However, when cereal prices started to go down price revisions were required
immediately by retailers.
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At least two of the interviewees mentioned deep changes that had been taken place in
their relationships with the larger retailing companies (taking into account also that the
business strategies of the retail companies differ among them), although a consensus exist
that as the larger the retail company is, the harder are the vertical relationships with the
poultry industry. As mentioned above, prices have become the key competitive issue
among food retailers. While ten years ago, variable prices were negotiated following a
reference price, yields and margins (up to 10 price intervals were defined), five years ago
bilateral fix prices were agreed annually with each distributor. This strategy was viewed
as fair in a context of increasing demand and costs stability. However, the second larger
retail company in Spain (MERCADONA) started to change its policy towards cost
reduction by eliminating many references, eliminating suppliers and reinforcing its own
label together with an aggressive campaign on new openings. Nowadays, some retailers
use to take retail prices at MERCADONA as the reference price from which negotiations
with the industry start. Some big concerns have been mentioned by the industry about the
potential consequences of this “price war” among the larger retail companies. All
interviewees have mentioned diversification (marketing channels and firms) as the main
strategy to tackle with this issue.
In the pork sector the impact was higher, which have generating significant cuts in the
number of animals. One of the meat associations has estimated the impact on about
20EUR per animal. However, due to the excess capacity and the excess supply that
characterises the pork sector, the pass through of increasing costs to farm and retail prices
were very limited due to the existing low prices in 2008. Fortunately, the significant
exports increase (as mentioned in section 1) alleviated domestic market tensions. In any
case, the impact was different at different levels of the marketing chain and for different
marketing channels.
Stakeholders working in the fresh sector declare that from their own point of view
markets behave as competitive where prices are more or less determined by supply and
demand conditions. They buy live animals taking into account reference prices in
Mercolleida. On the other hand, their customers are somewhat diversified. Customers can
be: processed firms, for which fresh meat is the raw material; importers in other EU and
non EU countries; domestic wholesalers distributing to small butchers; or retailers for
which sliced and pre-packaged meat is sold. In the first two cases, the customers’
portfolio has been quite stable based on long term contracts. Prices were negotiated
following reference prices. In the case of pieced meat for industrial uses, the Lonja de
Barcelona market is used as the reference price at the domestic market while foreign
wholesale markets are used for exports (Rungis, for France; Frankfort, for Germany;
Milano, for Italy; etc.). It seems that, at least at this stage, markets are relatively
transparent.
In the case of the processed meat, the issue of price transmission is less relevant as the
number of references is relatively high. In this case, the exercise of bargaining power by
retailers is through contract negotiations. The type of agreement are rather complex as
each distributor has its own business strategy. However, as mentioned above, a common
trend is towards a reduction in the number of suppliers. In any case, while some retail
companies prefer to work with one or two firms for a group of meat products (to reduce
logistic costs), other prefer to have at least 4 to 5 suppliers to guarantee provisioning.
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Usually, agreements apply for a list of references (“plantilla”). Some retailers has a
unique person in charge for a whole family of products (fresh and processed meat) while
other have different people for each type of product. A usual strategy is to change the
responsible of buying in each retailer every two years in order to avoid “friendship”
relationships between processing and retailing.
Five years ago, more or less long term agreements were signed between the industry and
the retailers with prices to be negotiated each year. However, two interviewees point out
that in recent years the exercise of the bargain power by retailers has generated an
increasing uncertainty about medium term contracts. One strategy, specially mentioned
by some of the interviewees from the industry is the growing trend among retailers to
make a kind of auctions among suppliers every year, as this would increase significantly
the risk when making long term decisions. This practice has started to work for specific
products and periods, and mainly applied for private labels, but there is a big concern
about its potential generalisation. Processed meat industry managers managed these risks
through diversification (alternative marketing channels, exports, deeper and lengthier
product mix, alternative retailers, own brands) (mainly the bigger firms) or, in some
cases, through deeper cooperation with the retail sector (exchange of information,
strategies to reduce transaction costs) (mainly medium size firms).
The issue of promotions and discounting strategies has to do with the more general issue
of how manufacturers and retailers adjust prices over time. This is an important issue
from both a macroeconomic and industrial organisation perspective. Pricing behaviour of
firms is also important from an industrial organisation perspective in understanding the
dynamics of competition in highly concentrated markets. Again the role of discounting is
an important phenomenon, although the literature has not yet found a satisfactory
approach to reconcile the theoretical models with the empirical evidences. However, in
this literature the empirical analyses have been mostly carried out considering monthly
data related to product groups. In this case, the availability of high frequency data at the
barcode level should lead to a more careful evaluation of the role of discounting practices.
Moreover, the detail of the data on pricing strategies allows the identification of retail
chains which can therefore be employed to provide a detailed analysis of the nature of
price competition between retail chains.
Interviewees have declared that the use of price discounts to finance promotions, new
openings, re-structuring of existing outlets and so on, is a common practice. In the poultry
sector, firms are trying to keep these discounts up to a 12-13 percent of the final price,
while in the processed meat can arrive up to 16 percent depending of the specific firm and
type of product.
A final common concern about the exercise of the bargain power among retailers refers to
private labels. All the interviewees in our study sell products under private labels
although the relative importance within the total turnover varies a lot. Private labels are
view as a necessary condition to keep customers’ need satisfied and to guarantee the
presence of brand labelled products in retailers’ shelves. In any case, none of the
interviewees was explicit enough on what are the exactly contract conditions related to
this issue.
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There is a common agreement among processors that innovation decisions are a key
factor for future business success, and that these decisions are highly dependent on their
relationships with the retailers. Under the current situation of increasing uncertainty about
the length of the contracts, processors are concerned about its impact on future
investment decisions. Moreover, there is also a concern that the higher importance of the
private level, the lower incentive to innovate. The increased price competition among
retailers is observed as short term benefit for consumers but the long run impact on
consumers’ welfare is difficult to assess.
In any case, there is also a consensus along the meat chain that there is a huge range of
potential innovations (processes, product mix, new products, management, etc). The
financial crisis has stimulated innovation in managing products within the firm trying to
increase the efficiency of information flows in order to save costs. In relation to
innovation in meat products all processed firms devote a significant share of their
resources to new products based on new trends observed in domestic and international
markets. However, except in a limited number of cases, there is not a significant
collaboration between retailers and the industry about new potential products. In this
context there are asymmetric information flows along the mat supply chain. Some of the
interviewees also complain about the Looks-a-like strategy followed by some retailers.
Once the new branded product is on the market, in 4 to 5 month there appears the private
label counterpart.
A.5.2
Code of conduct
Currently, vertical relationships along the food value chain are regulated by two main
horizontal laws: the Law of Competition Defence (2007) and the Law of Retailing (1996)
reformulated in 2010. These laws applied to all sectors of the economy.
The reform of the Law of Retailing is the response of the Government to one of the main
concerns of food industries, in general, and meat industries, in particular: the terms of
payment. The new law has established 30 days for perishable products and 60 days for
non-perishable products. Although the new law is very new, there is a wide consensus
among the people interviewed that there will not be problems with its application and that
this is a good step in improving contractual relationships between processing and
retailing. However, two interviewees were concerned about the potential increase of the
discounts by retailers to compensate part of the potential financial losses derived from the
new regulation.
The main Law regulating vertical and horizontal relationships along the food valueChain
is the Competition Law (Law 15/2007). There are two main aspects covered by the Law.
The first one relate to Competition conducts. In particular, the Law differentiate between:
•
Anti-competitive agreements: agreements to raise prices or to retract production or
recommendations made by industry associations to fix a common price;
•
Abuse of Dominant Position: price discrimination, to sell below buying price (but
oriented to affect the competitive position of a competitor), to create artificial barriers
to entry to eliminate competitors, etc.;
124
•
Unfair Competition: provided that this conduct affect the public interest (which is not
always easy to demonstrate).
The Competition Commission is in charge of solving any potential conflict. It usually
takes a maximum of 18 months to take a decision.
The second one relates to horizontal concentration (mergers and acquisitions). When
involved firms surpass a threshold value related to market share or turnover in a specific
market, the Competition Commission has to be informed and takes the decision in 1
month. If the decision is negative, the process takes much more time.
During the last five years the number of cases affecting the meat sector has been very low
indicating that business practices by retailers are not illegal, mainly because the exercise
of the market power by retailers affects the bilateral relationships between industries and
retailers but does not affect the public interest (in short, it seems that consumers have
benefited from lower prices to stimulate consumption during the economic crisis). There
have been only five mergers of acquisitions. The three more important were the
acquisition of DOUX Ibérica by VALLS COMPANYS (feed and poultry sector), the
acquisition of GRUPO FUERTES of the logistic Meat Platforms belonged to
CARREFOUR, and the third one the acquisition of SMITHFIELD by CAMPOFRIO.
In relation to conducts, the only noticeably case was the punishment to PROPOLLO, the
association of poultry industries, in 2008 after sending an internal communication to
members to fix rising prices.
Apart from this horizontal regulation, there exists a specific regulation applied to the food
sector for which the Ministry of Environmental, Rural and Marine Affairs (MARM) is
responsible. However, in Spain food industries depend on two different Ministries. First
transformation food industries depend on the MARM. Second and further transformation
food industries depend on the Ministry of Industry, Energy and Commerce (the retailing
sector also is regulated by this Ministry). In any case, there exist continuous contacts
between the two ministries to regulate the whole sector.
What it is interesting to note is that in spite of the increasing concern about the bargain
power issues along the food chain, no specific regulation exist up to date. However, the
MARM is actively working in three main axes:
•
The Observatory of Prices. Aiming at increasing the transparency along the food
chain, the MARM is publishing, on a weekly basis, prices at different stages of the
food chain. Only perishable products are considered. In most products three levels are
considered: farm, wholesale and retail. In the case of meat, only fresh meat is
included at two levels (farm and retail). Up to now, main efforts have been addressed
to publish in a unique web site prices that were recorded by the MARM and the
Ministry of Industry. Recently, the Observatory has been reinforced with the
inclusion of some studies about the cost structure along specific Food Value Chains.
In relation to meat, there is a lack of information at the wholesale level. As mentioned
above, however, there is some information published daily in the Lonja de Barcelona
for specific carcass cuts to be sold to the processing industry, which could be
incorporated. The second limitation is that published prices have been spatially
125
•
•
aggregated and over retailers, making impossible to differentiate the behaviour of
traditional butchers and larger retailer firms;
Self-regulation. The MARM is working in the elaboration of a Code of Conduct. In
2009 a working group was formed to elaborate the first draft, which is under
discussion now among main representatives of the different stages along the food
chain. No information is still available but it seems that it will be voluntary aiming at
improving information flows up and down the food chain and promote cooperation
between producers, processing industries and retailers. In any case, none of the
people interviewed knew anything about the code. All of them were against any
regulation about marketing margins. They were in favour of voluntary agreements,
codes of conduct or the establishment of a common general framework under which
bilateral contracts can be signed. As one informed clearly indicated: “less regulation
and more transparency”. Finally, some of the interviewees also raise the concern
about the potential influence of lobby groups when developing the Code;
The Law of the Quality of the Food Chain. It is still a proposal aiming to update some
previous laws that have become obsolete (i.e. The Law of Contracts (2000) and the
Law of Inter-professional associations (1994)).
As mentioned, the meat industry is against any kind of strict regulation. Competition rules
are harder than before but they have been adapting to the new framework. They are aware
about the competitive situation and that this situation arises for the different bargaining
Power along the food chain due to the higher horizontal concentration rate at the retail
level. They do not think that relationships between processors and retailers can be
regulated by law except when some practices are against the existing Law of Competition
Defence. Processors know that the potential solutions are in their hands: better
cooperation with retailers, higher degree of horizontal integration and further and
continuous innovation are key factors. However, they strongly believe that these goals are
difficult to achieve taking into account the current structure and the idiosyncrasy of the
meat processing sector.
A.5.3
Development and trends
As a summary, in this section, we will review main factors that can have an impact on
future developments on the Meat Value Chain in Spain and also main concerns that
interviewees have expressed about them.
Structure of the sector and bargain power
As mentioned above, the horizontal concentration level at the retail level (even though it
is lower than in other countries analysed in this study) is higher than in the pork and
poultry sectors. In the latter case, both are dual sectors, although this situation is clearer in
the poultry sector as this Value Chain is simpler. On one hand, there are only few firms
that can operate at national level or, at least, at a wider regional level (covering between
one third and half of the Spanish market). These types of firms are the only ones that are
large enough to negotiate with the modern retail sector. On the other, there are around one
hundred firms that operate at regional level (only in some cases and in some specific
conjunctures, these firms can supply to the modern distribution) and, finally, there are
around 2000 smaller firms operating at local markets, which mainly operate directly or
126
through a wholesaler with traditional retailers. However, as mentioned above, the market
share of the last two groups, jointly considered, is almost equal or slightly higher than that
of the larger ones. With such structure, the larger retailers have a clear advantage when
bargaining with the meat and poultry industry, position that is reinforced by the direct
access retailers have to information about consumers’ behaviour.
Although most of the interviewees agree that the processing sector has to walk towards a
progressive horizontal concentration, they also feel very sceptical about progressing
towards such direction. With the exception of the larger two firms, in the processed meat
sector, and one firm, in the poultry sector, which have a “multinational strategic business
approach”, most of the firms belong to traditional families that started in this sector many
years ago. Interviewees’ perception indicates that those firms will want to maintain their
own identity and that mergers and acquisition among the larger firms are no longer
possible in the short run.
The number of firms will decrease following a natural process among the smaller firms
(i.e. due to the lack of continuity of the next generation), which, in many cases, could be
overtaken by the larger ones (in some cases there exists already contractual arrangements
between smaller and larger processing firms by which the smaller ones supply products to
the larger to satisfy volume needs from the modern distribution).
Impact of changes in market conditions
In Spain, the poultry sector is much sensitive to changes in supply and demand conditions
than the pork sector due to three main factors: 1) the poultry market is clearly a domestic
market with exports and imports playing a marginal role (some of the interviewees
characterise this market as even regional); 2) due to the above condition, the poultry
sector is mainly a “fresh market” sector where the frozen technology has not been
developed; 3) brands are significantly less important than in the processed meat sector.
As a consequence, changes in demand, due to, for instance, a food scare can be easily
accommodated if it lasts less than four days (live animals are usually sold between 2.3
and 2.7 Kg and this difference (400 grams) can be achieve in four days). If the impact is
larger, the whole production process has to be accommodated and it will take 4 to 5
months to compensate losses due to the food scare (obviously the effect will be higher
depending on the impact of the food scare on the public or mass media).
In the case of the pork sector, there are more opportunities to alleviate the potential
impact of changes in supply and demand conditions (again, if changes are not very deep).
The specific impact will be firm specific depending on: 1) the relative importance of live
animals own suppliers (or with long-term contracts); 2) if the firm operates in the fresh or
processed market (or both); 3) on the relative importance of large retailers on its total
turnover; 4) the firm’s exporting propensity; and 5) the relative importance of the
production addressed to brand/private labels on total turnover; among others. In any case,
all interviewees agree to perceive the future with uncertainty if the aggressive price
competition among retailers goes on into the future. Particular concerns arise in relation
to the potential generalisation in the future of annual auctions.
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Regulation
After the Communication from the Commission to the European Parliament, the Council,
the European Economic and Social Committee and the Committee of the Regions entitled
“A better functioning food supply chain in Europe”, under the Spanish Presidency of the
Council of the European Union some further steps have been developed to increase
transparency along the food chain. With some exceptions (UK, Denmark and Sweden)
some preliminary agreements (18 measures) have been reached in relation to 5 main axes:
1. the improvement of the structure and consolidation of the agro-food sector,
favouring the vertical integration of primary producers and SME processors with
other links of the supply chain (through widening the scope of activities of interbranch associations, restructuring the role of cooperatives or training farmers in
strategic planning);
2. increasing transparency through, for instance, Food Price Monitoring. Although
this can be a good idea, its implementation is not exempt of difficulties. Taking
into account the Spanish experience, several issues arise: homogenisation on the
definition of primary producers’ prices among countries (what prices have to be
chosen: at farm level, at the entrance of the wholesaler, etc); higher spatially
disaggregation of farm level prices; higher disaggregation at wholesale level (per
specific pieces to be sold at the processing firms); higher disaggregation at the
retail level (the challenge here is to monitoring retail prices from scan data). In
any case, a trade off has to be made in order to balance existing information
sources and the potential costs of making the needed information available;
3. Combating unfair trading policies mainly related to payment periods and
discounts and promotions;
4. Encouraging self-regulation initiatives: standard contracts or codes of good
commercial practices, which have to be voluntary from the interviewees’
perspective. Agents in the meat chain are strongly against strict regulation and are
also quite sceptical about the usefulness of these agreements and codes if there is
not any authority able to manage dysfunctions that may arise in their
implementation. Most of the interviewees rely more on markets own regulation
although they are willing to participate in negotiations to reach to agreements in
relation to standard contracts and codes;
5. Making compatible CAP and Competition Policy. It seems that, taking into
account literature review and interviewees’ opinions, there is a lot of concern
about the CAP beyond 2013. As substantial reductions of subsidies are expected,
there have been many efforts to generate new mechanisms to offset its potential
reduction (i.e. new income insurances). Any measure affecting primary producers
can have an effect on competition along the meat chain and the Competition
Commission is going to pay special attention to these issues to assure that new
CAP regulations are not going to generate anti-competitive agreements prohibited
by law. In my personal opinion, this is going to be one of the future main
challenges from a regulation point of view.
External trade
This is an issue related to the previous one. Although most of interviewees are in favour
of market own regulation, they have shown some concern about external trade
regulations. As it is well known imports are regulated at EU level, while exports are
negotiated on a bilateral basis. Importing countries are grouped in three main categories
128
which depend on how technical audits are undertaken and by who (Spanish or imported
countries auditors). While there are some concerns about China and Russia, it seems that
everybody is satisfied with the situation as the rules are of general application for any
other EU member (some differences have been observed, however, when exporting to the
two above mentioned countries as technical audits are undertaken by those countries
auditors and conditions may change slightly from country to country). Moreover, all
interviewees agree that the Spanish Government initiative of creating the Exporter’s list
can be a positive one in the near future but it is soon to assess its impact as it has passed
only one year since its implementation.
Main concerns arise in relation to imports. All interviewees claim for a stricter regulation
about the food safety and animal welfare characteristics of the imported fresh meat,
mainly from North and South America. Some concerns are also expressed in relation to
re-exporting imported products from one EU country to another. This generate a decrease
of domestic prices in importing countries which stimulate exports to Spain affecting
downwards Spanish prices
Food safety and animal welfare issues
In relation to food safety and animal welfare issues, in general terms, there are three main
concerns. The first one is their impact on primary producer’s costs and the loss of
competitiveness in relation to imports coming from third countries. The second concern is
about the application of rules that can affect differently to different EU countries. In the
case of Spain, the two main concerns are measures related to the long distance transport
of live animals and those related to temperature conditions (as this country is warmer that
the other and energy costs could be higher). The final concern is the potential subjectivity
of some measures. The meat industry associations are particularly concerned about the
outcome of the EU funded project “Welfare Quality”. A formal communication has been
addressed to highlight the potential subjectivity of some measures.
Innovation strategies
As mentioned above, innovation is considered a key factor for business success.
Innovation strategies differ depending on the type of company, being more productoriented in those companies working at the latest stages in the food chain and with a
significant share of their turnover addressed to modern retailers or the food service. In
those cases, it is expected to work deeper in the product mix by both adding new
attributes to existing products (product width) (health and convenience as the key
elements) or by extending the product lines (i.e. pre-cooked products).
However, in relation to innovation strategies, two main issues arise when talking with the
processors: The first one is the importance assigned to investments to improve efficiency
of products management within the firm as a key factor to reduce costs. The second issue
is related to the uncertainty about the future impact of private labels on innovation. As
mentioned before, some interviewees expressed their concerns about the negative impact
that the increasing market share of private labels at retailing on firm’s product
investment.
129
B The United Kingdom
B.1
Introduction
The UK food sector contributed GBP 80.5 billion to the UK economy in 2007. As the
largest manufacturing sector in the country, it employs nearly 3.6 million people in food
and farming. Approximately 196,000 food chain enterprises ranging from large retailers
to small cafés existed in 2007. In addition, GBP 13.2 billion worth of food was exported
in 2008 while nearly GBP 31.6 billion worth of food was imported (DEFRA, 2010).
Meat as subsector represents a significant component of the industry as a whole. For
example, nearly one quarter of all employment in the food industry is provided by the
meat sector. The industry also generates approximately 17.5 percent of the total product
sales in food sector. Both ratios are substantially higher than the dairy industry in the
same sector (5 percent and 8 percent respectively).
Table B.1, further highlights the size and importance of the food industry UK meat
industry as well as the meat subsector.
Table B.1
Main indicators of the UK Food and Meat industry, 2007
Indicators
Food
Meat
Dairy
Meat % Food
Industry
Industry
Industry
Industry
Employment (number)
441,641
99,128
26,334
22.4
Product sales (EUR million)
111,481
19,512
9,065
17.5
Value Added at Factor Cost (EUR million)
33,139
4,598
1,919
13.9
Labour Costs (EUR million)
16,302
3,092
937
19.0
Gross Investments
48
(EUR million)
8,502
1,077
1,000
12.7
16,837
1,505
982
8.9
252
196
344
Labour Costs / Product sales (%)
14.6
15.8
10
75.0
46.4
73
14.1
7.5
10
Gross Operating Surplus (EUR million)
Productivity (Value Added / Employment)
(EUR 1,000)
Gross Operating Surplus / Turnover (%)
Source: Eurostat.
48
Gross investments include gross investments in tangible goods, land, existing buildings and structures, construction and
alteration of buildings, machinery and equipment.
131
The large size of the industry, as evidenced in the figures above, does not lead to leading
class figures in terms of productivity and profitability. Again, comparing dairy to the
meat industry, productivity and profitability figures are both lower for the meat industry.
B.1.1
Significant events from the last decade
During the last ten years, the meat industry has suffered the outbreak of various animal
diseases including Foot and Mouth disease, Mad Cow disease, Blue Tongue disease,
Swine Flu, and H1N1. In addition, increasing competition within the UK and abroad,
increasing activity from pressure groups, higher consumer standards, and product
innovation have all increased the pressure on price. The meat industry has been hit on
both supply and demand.
For all of the turbulence, the most pressing factor mentioned repeatedly in previous
studies has been the impact of rising feed prices on the industry. Feed prices started to
increase in October 2006, when unfavourable weather conditions affected cereal and
wheat feed in the producing countries, particularly Brazil and Australia. This caused a
price hike of 19 percent compared to the previous year. Feed prices continued to rise for
the next years, with feed wheat prices more than doubling from GBP 83 in 2006 to GBP
166 in 2008. For producers, feed costs constitute the largest portion of animal production
costs (approximately 55 percent for pork), and these increases affected behaviour of the
whole industry.
Implications for the pork industry
Against this background, the pork industry has faced serious challenges in the past ten
years. First, production costs increased dramatically. Figure B.1 below shows the pace of
feed price increase and its impact on production costs, where feed have the largest share
of production costs, rising from 45 percent in 2006 to 59 percent in 2007. This share
dwarfs all other costs including financing, which presumably impacts investment as well.
Figure B.1
Price of Producing Pig in 2006 versus 2007
Source: BPEX 2007 the Impact of Feed Prices on the British Pig Industry.
132
Feed prices increases were not the only reasons behind the increase in production costs;
high animal welfare standards and their associated costs contributed to the increased
production costs as well. It was estimated that most English pig producers are producing
pigs at a loss (estimated at GBP 25/pig in 2007 and GBP 7/pig in 2009), the result of such
crisis was that many farmers went bankrupt.
Second, production decreased almost by 40 percent between 1998 and 2007. This decline
was not only attributed to the decline in the UK national herd, but was viewed by experts
as a symptom of long tem erosion of the competitiveness of the industry The local
production could not meet the high level of demand for pork meat and resulted in
increasing imports from other EU countries like Denmark and the Netherlands. 49
Implications for the poultry industry
The poultry industry is one of the most regulated industries in the UK and is equally
subject to public hygiene and animal welfare regulations. As opposed to the pork
industry, poultry production has grown by approximately 25 percent over the last two
decades with 167.7 million birds in production at any one time in 2007. This growth rate
was a result of an increase of over 50 percent in the number of birds kept for poultry meat
production. In 2009, around 23kg of chicken was consumed per head per year,
representing one third of total meat consumption50.
In the course of this study, we have not come across literature that explained the reasons
behind the pork and poultry industries diversion over the last decade, though one could
surmise that health concerns could be an important factor. Poultry is considered a healthy
meat option and has recently constituted an important part of the western diet. Localised
diseases that have affected British animals—such as foot and mouth disease—have also
focussed on the pig and cattle industries.
The two industries
Despite the divergence, the pork and poultry industries share some of the same problems.
First, all industries have been equally affected by the increased feed prices and experience
similar price pressures. Special interest in animal welfare is creating pressure on
producers and processors from retailers so as to meet consumers’ standards. 51 English
consumers seem to be keen to trace the origin of the meat they consume and want to
know the level of welfare the animal or bird has gone through during its lifetime, without
compromising costs.
49
50
51
House of Commons- Environment, Food and Rural Affairs Committee report, produced in (2009) The English Pig Industry.
P. 5.
British Poultry Council.
In February 2010, the Guardian ran a series of articles based on Jonathan Safran Foer's Eating Animals, describing
practices of industrial farming. Celebrity chefs such as Jamie Oliver have also had high profile campaigns to reveal
negative aspects of the industry, though in this case, Oliver highlights lower standards from outside the country.
133
B.1.2
Consumption levels
Meat consumption in the UK is relatively high with an average of 82 kg of meat
consumed per person in 2007. Consumption levels, however, have fluctuated
considerably over the years. For instance, in 2004, the level of consumption reached
85 kg per person, yet was as low as 68kg and 69kg in 2003 and 2005 respectively. These
huge fluctuations, interestingly, have been caused almost solely by variation in pork and
cattle consumption. Poultry figures were constant over these years.
Looking at longer-term trends, independently, pork and poultry consumption have
diverged, with poultry consumption as a percentage of overall meat consumption on the
rise and falling for pork. Figure B.2 demonstrates this divergence.
Figure B.2
Meat Consumption Trends 1999-2007
Meat Consumption Trends UK
of total meat consumption
45%
40%
35%
30%
25%
20%
15%
Meat : Pigs
Meat : Poultry
Meat: Other
10%
5%
0%
Eurostat Data: ECORYS Calculation.
While overall meat consumption trends may be relatively steady, the recent economic
crisis has severely impacted where consumers are eating their meat i.e eating out or at
home, with significant declines in dining. An industry study of November 2009 titled
Pork: A meat for all occasions in November 2009 suggests that “while the recession has
impacted significantly the catering market and consumers have adapted their eating-out
habits according to their circumstances, so too have they adjusted their spending priorities
when shopping for home consumption.” In this respect, pork is found to be the only one
of the red meats to show an increase in consumption at home over the past year measured
by the number of occasions where pork is used (See Figure B.3 for the number of
occasions where different types of meat are consumed). While sales of meat and poultry
have remained relatively stable during this period (2007-2009), consumers have changed
their behaviour and how they buy in the category.
134
Figure B.3
In-home consumption: Total beef, lamb and pork (cuts)
Source: BPEX, 2009.
B.1.3
Meat price volatility
Figure B.4 below depicts the average weekly market price of poultry in the UK market.
According to the graph, poultry prices have fluctuated considerably from 1996 to 2009,
while showing relative stability between 1999 and 2007. In 1997, we observe a price hike
from 59 pence per kg to more than 64 pence per kg. After 1997, prices go down until they
reach lowest points between 2001 and 2002, with a 30 percent decline compared to 1997.
In 2007, average prices started to rise again reaching their peak in 2009 and stabilizing
afterwards.
Figure B.4
Poultry- Average Weekly Market Price (GBPence)
69
64
59
54
49
44
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: DEFRA.
Pork meat prices from the 1996 to 2009 have fluctuated considerably according to the
graph presented below, suffering much more dramatic shifts than for poultry. Following
the outbreak of BSE (Mad Cow disease) in 1996, the UK pig prices soared reaching GBP
150/kg. During 1997, pig price crash was offset due to strengthening EU prices following
Classical Swine Flu (CSF) outbreak in the Netherlands. In 1999, the UK introduced
135
unilateral welfare legislations- which increased costs of production by 10 percent, causing
the UK pig meat to be less competitive in the UK market. In addition, herd contraction
and the introduction of EU imports into the UK market contributed in price wekening.
This resulted in heavy losses in the pork sector and consequent decline in pig numbers. In
2000, the CSF outbreak in East Anglia (largest UK pig region), caused the the loss of the
UK exports markets. Between 2001 and 2004, the UK pig herd continued to decline due
to low demand, because retailers switched to lower cost EU imports. From these lows in
1999 and 2000, a gradual recovery have been in the period 2005-2006, where producers
made profits for the first time since 1997 due to low feed prices 52. The further increase in
prices in 2009 is attributed to the further tightening of supply and the shift in
consumption away from beef and lamb to pork. In addition, the UK pound appreciation
versus the Euro contributed to the price increase.
Figure B.5
Pigs- Average Weekly Market Price
Pigs - Average Weekly Market Price
pence/kg dw
150
130
110
90
70
50
1996
Source: Defra.
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
53
The comparison between the two graphs reveals that in general terms, the two industries
followed a similar trend, but with pork influenced by much higher levels of volatility.
B.2
B.2.1
Market Structure
Number of firms
In this section, we present the number of meat manufacturing firms in the UK in general
regardless of their positioning within the value chain. The purpose of the section is to
provide an overview of the size of the industry and its evolution overtime. The supply
chain market structure will be further detailed in the supply chain explanation section
below.
52
53
136
UK Pig and Breeding Herd Size, document provided to researcher by BPEX. Not publicly available.
Note: d.w. refers to Dead Weight. In 2003 the Meat and Livestock Commission, with the support of the British Pig
Executive, launched a new deadweight pig price reporting survey – the Deadweight Average Pig Price (DAPP). The DAPP
replaced the Adjusted Euro Spec Average (AESA), the price formally reported. In March 2004 the AESA ceased to be
calculated and the DAPP became the official pig price indicator.
As observed from the graph presented below, the number has gradually declined
between1998-2007. In 1998, 1,294 firms were involved in the meat manufacturing
industry. This figure declined to under 1,000 in 2007. Although the literature does not
provide adequate analysis of the reasons behind the decreasing numbers of firms, it
provides enough evidence about the current restructuring of the sector which includes
mergers, acquisitions, but also closure of small firms that could not keep up with the new
developments in the business.
The available data does not provide a segregation of the meat manufacturing firms
according to the type of meat produced apart from poultry, which represented 12 percent
of total number of manufacturing firms in 2007.
30%
58%
12%
Production and preserving of meat
Production and preserving of poultrymeat
Production of meat and poultrymeat products
Source: Eurostat.
B.2.2
Size Structure
The table below shows the number of firms in the meat industry related to the size of the
firm in terms of its employees.
Table B.2
Number of Firms related to size of firm
% change
2002
2003
2004
2005
2006
2007
1-9
638
586
569
567
560
583
-8.6
10-19
140
136
126
138
129
100
-28.57
20-49
140
179
179
176
188
173
23.57
50-249
243
160
165
173
162
151
-37.86
250 and above
92
103
100
93
84
90
-2.17
2002-2007
Source: Eurostat.
The changes in the number of firms as exhibited above further confirms our initial
observation in section 7.2.1 where the decreasing numbers of firms could largely be
attributed to mergers, acquisitions and further consolidation of the sector. We have not
137
come across literature explaining the rising numbers of firms size (20-49), but it could be
attributed to “new entrants” in the markets.
B.3
Market Features
B.3.1
Total investments in the meat industry amounted to EUR 1,077 million in 2007,
representing 12.7 percent of investments in overall food industry. The graph below shows
that the levels of investment in absolute terms have decreased considerably after 2000. It
is noteworthy to mention, however, that the greatest share of investments have been in
machinery and equipment which represented 71 percent of total investment in the
industry in 2007. Although, we have not encountered literature that extensively addressed
innovation and its relationship with the current levels of investment, interviews with
various stakeholders in the industry confirm that investment in new machinery, have
important implications on the improvement of the industry’s efficiency and productivity.
An example of that was given by one interviewee who mentioned that the introduction of
robots at poultry slaughtering line is an important step towards efficiency for the industry.
Figure B.6
Total Investment (EUR Million) (1998-2007)
1600
1400
1200
1000
800
total investment EUR million
600
400
200
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
Source: Eurostat.
B.3.2
Profitability
Profitability is defined as gross operating rates of the industry (gross operating
surplus/turnover). In general terms, the meat industry’s profitability declined considerably
over the period 1996 to 2007 reaching from 11 percent in 1996 to 7.5 percent in 2007 as
per the graph below.
138
Gross operating rates (1996-2007)
Gross operating surplus/turnover (gross operating rate) (%)
12
10
8
6
4
Gross operating
surplus/turnover (gross
operating rate) (%)
2
0
19
96
A0
0
19
97
A0
0
19
98
A0
0
19
99
A0
0
20
00
A0
0
20
01
A0
0
20
02
A0
0
20
03
A0
0
20
04
A0
0
20
05
A0
0
20
06
A0
0
20
07
A0
0
Figure B.7
Source: Eurostat.
On a more detailed level, i.e. looking at the farm level income, the profitability of the
sector for both pork and poultry fluctuated considerably.
Figure B.8 below depicts farm level income from 1006 to 2009 (taking into account
shareholders capital investment). In comparison to poultry farm, pig farms suffered low
income levels due to the outbreak of swine flu, which led to the banning of pork imports
from the UK in many countries, Between 1998 and 2008, the value of British pork
exports has fallen by 67 percent (Agriculture UK, 2008). This has largely been replaced
by imports from the Netherlands and Denmark, which has kept the price of pork low. In
2001, there was an increase in the number of countries that banned pork imports from
Britain. However, a recent increase in pig meat prices due to tighter supplies and a
weaker Sterling Pound has been could be reflected in a rise in the profitability of pig
farms in 2008/09.
The price of poultry has risen by 24 percent in 2009. Agricultural analysis states that the
average income of specialist poultry farms has remained the same over the past year. The
dip in poultry farm income in 2009 could be explained by the fact that there was a mass
re-classification of broiler fowl between 2007 and 2008. The higher prices in poultry
farms were offset by increased costs, which resulted in an insignificant income increased.
In 2007, H1N1 (avian flu) scare, resulted in a massive fall in poultry exports from the
UK. However, poultry profitability has generally been higher than pork. This may be
explained by the substitution effect between poultry and beef/pork (such as during the
BSE outbreak of 2001).
139
Figure B.8
Net Income pig and poultry farms
Source: Defra.
B.3.3
Added value & Productivity
In absolute terms, the value added at factor cost of the meat industry has slightly
increased from EUR 4,200,000 in 1998 to EUR 4,598,000 in 2007 with an average of
16^percent increase over the same period. In a similar manner, labour productivity
(defined here as: the value added per employee) in the sector has slightly increased to
reach from EUR 30,000 in 1996 to EUR 47,000 in 2007 with an average of 4.2 percent
over the same period. Observing the investment trends in relation to the sector
productivity we observe that there is a close relation between the two variables where
increases in investment is accompanied by an increased productivity and vice versa.
Figure B.9
Gross Value Added per Employee and Total Investment in EUR million
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
50
45
40
35
30
25
20
15
10
5
0
140
8000
7000
6000
5000
4000
3000
2000
1000
0
Gross value added
per employee
total investment EUR
million
B.4
Pork Supply Chain
Poor efficiency and lack of transparency along the UK pork value chain are major issues
addressed by the UK government in the last few years. In general terms, the UK pork
supply chain has been described as “fragmented” and characterised by adversarial
relations between producers, suppliers and retailers.
The pork meat value chain is composed of the following nodes and can be visualised as
per figure:
•
Farming;
•
Primary Processing (Abattoirs);
•
Secondary Processing;
•
Distribution.
Figure B.10
Structure of the Pork Value Chain
54
Farmers
# of holdings 11,730 ( in
2007)
Primary Processors
(Abattoir)
# 285 (in 2007)
Secondary Processors
Caterer
Retailer
Butcher
In this section, we will describe in details the structure of the pork value chain. We will
describe the production levels of each node of the value chain, its relationships with the
upstream and downstream industry, its market structure and finally how costs are
distributed among the different stakeholders along the value chain.
54
According to EUROSTAT the number of manufacturing firms in the UK was 997 in 2007. However, the number may not be
giving an accurate picture of the size of the sector due to the lack of definition of what nodes of the value chain
“manufacturing includes”. In that sense, the data may be aggregate, thus referring to both primary and secondary
processing and it could also be referring to either nodes of the value chain.
141
B.4.1
Farming
Description
Farming is the first node of the pork meat supply chain where livestock is bred and
fattened. Pork meat production goes through two main stages; breeding and finishing.
There are three types of farms in the UK; breeding farms, finishing farms (bringing the
animal to an appropriate weight and condition for slaughtering) and integrated farms,
where farmers perform both activities in their farms. Farmers buy animal feeds from
agricultural feed providers, and they sell their produce to abattoirs, individual butchers
and resellers. Farmers utilise various marketing channels to sell their produce:
•
Auction Markets;
•
On farm sales;
•
Producers marketing groups (cooperatives and private sector).
Auctioning in the UK market used to be a common approach for selling slaughter
animals, its history goes back to the nineteenth century, where animals are transported by
farmers and are bid for by representatives of buyers. Several types of buyers join auction
rings for animal purchases, these could be; representatives of abattoirs, butchers and
independent agents/resellers. Auctions sell livestock on commission basis usually
between 3 to 4 percent of sales price.
The importance of auctioning in the UK is declining considerably, as in 2006, only 1
percent of pigs were sold through auctions. According to online resources, the number of
auction rings in the UK decreased due to improved means of communication as a result of
ICT development and the use of internet for information acquisition and consulting.
Producers marketing groups still play an important role in the value chain, they would
undertake the task of communicating and negotiating directly with processors on behalf
of farmers since in general terms, farmers have little influence on the downstream value
chain and therefore have little bargaining power against their bigger buyers. Joining
marketing cooperatives is one of the practices that have been resorted to by farmers in
order to increase their bargaining power against their biggest buyers, and where they
would sell “collectively” and directly to processors and butchers. In a similar manner,
joining a marketing cooperative helps farmers to overcome one or two middlemen along
the value chain and capture returns resulting from this shortcut. Marketing groups also
offer “credit insurance” which serves as a leverage for small producers if they want to
invest. According to online resources, marketing cooperatives in the UK pig market are
very important as their largest 8 groups account for 8 percent of sales to butchers and
processors55. Some argue however, that the future of marketing groups is not likely to be
sustainable, especially with further vertical integration, which will restrict the role of
marketing groups to small farmers.
Farming Production
The pig farming production declined sharply from 1999 to 2009 where the pig breeding
herd dropped by 40 percent. As mentioned in a previous section of this study, the decline
of the UK pig herd is largely attributed to various diseases that considerably affected the
55
142
http://www.redmeatindustryforum.org.uk/supplychain/LivestockMarketing.htm.
industry and by feed price pressure as well as “long term erosion of the competitiveness
in the industry” (See section 7.1.1). In addition to these two factors some sources refer to
a lack of confidence in the industry56.
Figure B.11
UK breeding herds (1998-2008)
Breeding herd 000 heads
800
700
600
500
400
000 heads
300
200
100
0
1998
2000
2002
2004
2006
2008
Source: BPEX.
Farming Structure
Three types of farms co exist simultaneously, feeding farms, finishing farms and the more
integrated farms. There is no integration between the farming sector and the agricultural
feed sector. Recent discussions by the government with various stakeholders along the
value chain raised the question of the integration between these two sectors for the
purpose of creating more efficient and cost effective sector.
According to the most recent data (2007), there were 11,730 57 holdings in the UK
producing pork meat compared to 14,040 holdings in 1997.
The evolving structure of the meat market in the UK increased direct communication
between farmers and buyers. According to literature, the meat industry in the UK has
become more concentrated, where the number of small abattoirs decreased due to over
capacity and/or the imposition of tight regulations with which small abattoirs could not
comply. Accompanied by an increase in number and “power” of large meat processing
companies, a trend of bypassing the physical auction and the diversion of sales to
electronic auctioning developed. Information technology, is contributing to shortening the
value chain, and facilitating direct contact between farmers and meat processing
companies58.
56
57
58
Nicolas M, Innovation in the Pig Supply Chain. P. 2.
EUROSTAT data DS-072622-Number of agricultural holdings growing crops or rearing animals, by crop and category of
livestock.
http://homepages.ed.ac.uk/grahami/research/LIVESTOK.HTM,
143
B.4.2
Slaughterers / Abattoirs (Primary Processors)
Description
The second large node of the pork meat value chain is the “primary processing” which
takes place at abattoirs and includes three distinguished processes:
•
Slaughtering and dressing the animal;
•
Further cutting of the carcasses into primal and deboning. Some of the products
resulting from this operation end up being consumer goods and are sold directly to
retailers, which in this case involves also packaging, boxing and packing of the
product;
•
In a third stage, minced meat is produced and further cutting of primal takes place for
the preparation of special products. Some of these products end up being direct
consumer products sold to retailers.
Abattoirs supply their produce to other agents including independent butchers and other
further processing plants where further alteration to their produce takes place. Abattoirs
could also provide slaughter services for others, that is “they may not own” the animal,
but they may slaughter animals owned by farmers who would then sell directly to
consumers. They also supply farmers who sell directly to consumers.
Slaughtering output
As per the graph shown below, pork slaughtering trend declined sharply from 1997 to
2008. There are several factors that could have contributed to the decreasing numbers of
slaughtered animals, the most prominent of which is the outbreak of foot and mouth
disease in 2001 that resulted in a loss of around 436,000 pigs slaughtered which did not
enter the food chain and thus were excluded from the figures.
Figure B.12
Clean pigs slaughtered in the UK during 1997-2008 (1,000 heads)
Slaughtered Animals
18000
16000
000 heads
14000
12000
10000
Total
8000
6000
4000
2000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Slaughterhouse survey, Defra, DARD.
144
Slaughtering Sector Structure
The number of slaughterhouses in the UK has been on the decline since 1985; from 1,000
abattoirs servicing 21,000 retail butchers reaching 285 abattoirs servicing only 6,800
retail butchers in 2006 and reaching 162 abattoirs in 2008. In general terms, the abattoir
sector is highly concentrated, where only 7 companies have the lion’s share in market
throughput at approximately 54 percent. The table below shows the breakdown and
output share of the abattoir sector as per the latest data available 2008. Small and medium
size abattoirs are multi-species, which means, they could be involved in pig as well as in
other meat production.
Table B.3
Breakdown and output shares- Abattoir Sector 2008
Size Group- # head
Abattoir #
Total Throughput head
Average Throughput head
Throughput Share %
1-1,000
34
12,843
378
0.2
1,001-5,000
55
141,814
2,578
1.8
5,001-10,000
20
149,809
7,490
1.9
10,001-20,000
19
282,228
14,854
3.5
20,001-30,000
9
230,819
25,647
2.9
30,001-100,000
9
578,115
64,235
7.2
100,001-500,000
9
2,328,935
258,771
28.8
500,000+
7
4,350,527
621,504
53.9
162
8,075,090
49,846
100
Total
Source: BPEX.
Since the nineties, the abattoir sector in the UK is massively restructuring. The drop in
livestock supplies led to less slaughtering and an overcapacity of the existing abattoirs.
Much of the industry struggled over that period, however the direct result of the crisis
was the closure of small and medium size abattoirs. This was accompanied by mergers
and acquisitions, where small companies for sale were purchased by larger companies.
On one hand, the restructuring of the sector resulted into a higher concentration of the
industry where in 2006, the largest 10 companies had a 75 percent share of pig . On the
other hand, the roles of high street supermarket increased dramatically, where their shares
in retail sales increased from 29 percent in 1985 to 80 percent in 2007 of the UK retail
sales of meat.
The abattoir sector is undergoing a rationalisation process and currently shows vertical
and horizontal integration, especially with the downstream industry (processing and
further processing); some of the larger abattoirs own and operate several abattoirs, while
some own and operate “further processing” plants. The following table shows typical
examples of large slaughtering companies and owners of processing plants. The UK has
two of the largest European Slaughtering companies; the “Danish Crown” and “Grampian
Food” which was recently purchased by the Dutch company “Vion”.
145
Table B.4
Top 10 Meat Abattoirs in EU – 2007 Data
Rank
Group
Country
Share of European
Market (%)
1
Danish Crown
Denmark, UK
8.8
2
Vion
Netherlands, Germany
7.4
3
Tönnies Fleisch
Germany
3.7
4
Westfleisch
Germany
2.6
5
HK Scan
Finland, Sweden, Baltic
1.6
6
Socopa
France
1.3
7
Cooperl
France
1.3
8
Grampian Foods
UK
1.2
9
Vall Companys
Spain
1.2
10
Smithfield Foods
Poland, Romania
1.0
Source: Pig International- E-News Letter July 2007.
B.4.3
Processors (Secondary / specialised Processing)
Description
One of the important buyers of animal parts and smaller meat cuts are “processors”, who
would perform further processing of the meat cuts before they are finally sold to retailers
and food caterers (hospitals, schools, prisons, etc.). Processors rely heavily on imported
meat from outside the UK and produce mainly these types of products:
•
Controlled packs and cuts designated to specific caterers and food service providers,
which include works canteens, hotels, hospitals and restaurants;
•
Production of packaged and labelled meat intended for sale in supermarkets (retail
packing);
•
Uncooked meat products such as sausages and burgers as well as “convenience
products” such as breaded meat, with seasoning and flavouring;
•
Manufactured meat, including drying/smoking and canning of meat;
•
Ready made meals in which meat is an ingredient.
The chart below shows the shares of products as consumed by type of product and type of
buyer. The chart shows the importance of the processing sector representing 38 percent of
pig meat consumption at retailers’, followed by bacon at 25 percent.
146
Figure B.13
Pork Usage Share- by product and buyer (as percentage of total consumption)
UK porc usage Share- 2008
Food service bacon
Food service fresh pork and
processed
Retail processed pork
Retail bacon
Retail fresh pork
0%
5%
10%
15%
20%
25%
30%
35%
40%
Source: BPEX.
B.4.4
Distribution
Description
Various distribution channels exist for the sales of the pig meat products, these include,
supermarkets, caterers and butchers. Figure B.14 below highlights the increasing role of
supermarkets (particularly the top 4 retailers in the UK market) which are the main
distribution channel for pork meat with an average of 70 percent of market .The diagram
below depicts the shares of groceries in expenditure per product type in the UK in early
2010. As per the diagram, the sector is highly concentrated, where for all the products,
top 4 multiple retailers dominate the market.
Figure B.14
Total UK Meat expenditure- segregated by product and sellers
59
Source: BPEX .
59
AHDB Monthly Report.
147
The pork value chain in general terms is structured in a fragmented manner and
characterised by a lack of long term commitment between producers and retailers. At the
level of retail, there are very few examples of integrated value chains especially with
large retailers, who according to literature have rationalised their meat supply chains and
their buyer power has ‘forced’ many of the large abattoir companies which supply them
to do so through dedicated plants.
B.4.5
Price Structure
In this section, we will project price development along the value chain based on the data
collected so far. On the producers’ side, it is obvious from the table presented below that
the cost of production has increased dramatically from 1999 to 2009, but was not
necessarily accompanied by an increase in sales prices, in several instances farmers were
operating at huge losses without being compensated. This picture is clearer inFigure B.5
which shows fluctuation of profit margins for farmers reaching close to -23 percent in
1999. According to the graph, farmers were operating at a loss for a substantial period of
time. The relative better performance in 2009 has been attributed to the appreciation of
the English pound versus the Euro.
Table B.5
Pork Production costs versus Deadweight Average Pig Price
DAPP
Production costs
Year
Pound/ kg
Pound/kg
1999
79,27
113,66
2000
95,16
113,58
2001
98,03
107,51
2002
93,64
105,50
2003
103,57
103,40
2004
103,84
110,20
2005
103,88
104,40
2006
104,75
108,60
2007
108,00
121,70
2008
126,31
136,84
2009
145,68
136,84
Source: BPEX.
148
Farm production cost and net margins
Production Costs and net Margins
120
100
80
Pounds/Kg
Figure B.15
60
40
20
Production cost/head
net margin
0
-20
-40
Source: BPEX.
The further examination of the relation between the Pork Basket prices60 versus what
farmers actually received from retailers reveals that, farmers received a relatively stable
amount (averaging 23 percent) of the total pork price. And which has not changed much
despite of the increase in production costs. Both remain stable to a great extent in 2009.
(However the period 2009 should not be taken as indicative, because farmers faired better
during that year operating at a margin of approximately 8 percent per kg).
In Table B.5 above, we have observed that increase in production costs was not
accompanied by an increase in sales price in the same year. But a slight increase in sales
prices can be felt from one year to another, which in the context of this study confirms the
lag in price transmission from producers to the next node in the value chain.
The initial observation we made about price structure is that in the period 1999- 2009
farmers were operating at a loss, which in the context of this study would mean that the
changes in prices at the producers level were not transmitted to the next node of the chain.
Our second observation, based on the examination of the relationship between the DAPP
and Pork Basket Price Increasing cost of production is that this relationship was quite
stable and not much change occurred (based on 2009 data). This would mean that indeed,
not much price change has occurred beyond the producers’ level and that production costs
were born mainly by producers with limited contribution from buyers.
The third observation is that although sales prices increased to a certain extent, increases
did not occur at the same year where production costs increased, which refers to a
possible time lag between the occurrence of price increase at the production level and its
transmission to the next node of the chain. It must be noted however that it is somehow
expected that sales prices do not show an increase at the same year of production due to
prior agreements on sales price before the time of sales. Therefore the testing of the price
transmission model will shed more light on this aspect.
60
Basket Price is intended for tracking the prices of consumer goods and service, which in this case is Pork.
149
Figure B.16
Average Pork Basket Price versus DAPP (English Pound)
800
700
600
Average pork Basket Price
500
400
300
200
DAPP
100
0
Source: BPEX.
B.5
Poultry Supply Chain
In general terms, the poultry value chain consists of three major nodes:
•
Farming (breeders/rearing);
•
Processing (includes slaughtering and further processing);
•
Distribution.
In general terms, reports refer to a rather consolidated poultry chain when compared to
the pork value chain in the UK 61. Interviewees interviewed in the course of this study
have referred to a certain level of consolidation and integration between the two levels;
farming and processing.
B.5.1
Farming
The poultry supply chain in the UK commonly starts at layer farms, where parent
chickens are reared to lay eggs. The eggs are then supplied to hatcheries in so called
“flocks” of eggs. These are subsequently incubated electronically and, after
approximately 21 days, the chicks hatch. The hatched chicks are sorted and sexed
electronically and transported to the rearing farms. Here, the day old chicks are reared for
39-44 days, depending on desired slaughter weight (Pearson, 1996). Notably, slaughter
weight in the UK is slightly below the slaughter weight of competing nations such as
Brazil, which is considered a disadvantage in the industry (Poultry World, 2008).
At slaughter weight, the chickens are slaughtered and cut at the slaughterhouses. The UK
poultry industry is dominated by very large scale units in which broiler production was
distributed over 3,100 units in 2005. (RBR, 2008a).
61
150
House of Commons (2009) - The English Pig Industry. P. 30. Environment, Food and Rural Affairs Committee report,
produced in 2009.
Figure B.17
UK poultry numbers between 1988 and 2007
Source: DEFRA.
B.5.2
Processing
Despite the fact that the number of poultry processing companies in the UK has been
relatively stable, literature indicates that the processing sector is characterised by
increasing consolidation (Poultry World, 2005). Having been cut for fresh meat or further
processed for cooked, pre-made meat the products are transferred to wholesales and
retailers and commonly reach the consumer within 3 days.
B.5.3
Distribution
Retail sales of poultry meat in the UK are worth around GBP3.7 billion annually. Table
B.6 shows the distribution of poultry meat sales over poultry types and product type.
Table B.6
Retail sales in the UK for 2006
Value (GBP 1000)
Primary
Raw
convenience
Further
processed
Volume (tonnes)
Chicken
Duck
Turkey
Chicken
Duck
Turkey
1,263,729
31,189
154,365
397,012
8,353
50,380
232,439
2,148
115,626
48,208
337
23,434
488,504
n.a.
79,649
113,012
n.a.
18,411
Ready meals
651,409
n.a.
8,609
148,124
n.a.
1,717
Cooked
315,983
Na.a
6,647
67,739
n.a.
712
2,952,080
33,337
364,896
774,090
8,690
94,654
Total
Source: British Poultry Council.
151
B.5.4
Cost Structure
Retailers obtain a proportionally high share of profit margins (50 percent) in comparison
to processors, obtaining only a quarter of total margins.62 Increases in electrical and water
costs, and comparatively high wages have considerably decreased margins for processors,
effectively doubling the price of production over the last 10 years.
Figure B.18
Input costs versus Growers Margins in the UK poultry meat Industry
Source: http://www.thepoultrysite.com/articles/1645/a-sustainable-future-for-british-chicken-2009.
Breeders, Hatchers and Broilers face a similar decline in margins with profits dropping
from 3,0 pence of profit per boiler chicken in 2002 to 1.9 pence of profit in 2005
(Sheppard and Edge, 2006). This has resulted in a lack of investment in these sectors
(Poultry World, 2008). Suppliers and processors struggled with the bargaining power of a
few large retailers dominating the consumer market and new market entrants attacking
the low-cost segment, which is favoured by the current economic situation. This has
resulted in an elevated need for new product development among processors in order to
stay competitive (Pickernell, 1999):
•
There is little available margin to share between integrator and grower;
•
A fundamental problem faced by the sector is the high margin expectation of
retailers;
•
A disproportionate margin expectation in the chain leaves significantly less margin to
share between the integrator and the grower.
62
152
Savillis Agribusiness & Savillis Research. "A Sustainable Future for British Chicken." NFU Poultry Board and UK Broiler
Growers, 2009.
Figure B.19
Estimated average poultry prices
Source: Defra & Savillis Research.
Figure B.20
Estimated share of average total retail price in 2008
Source: Defra & Savillis Research.
•
B.6
The broiler chicken market has seen value growth of five per cent in 2008 compared
with 2007, but sales by volume have fallen two per cent indicating rising prices at the
retail level.
Value Chain and Industry Issues
In the recent years, the UK market has been characterised by an increasing power of
retailers. The latest investigation conducted by the Competition Commission in 2006
regarding the supply of groceries by retailers in the UK found two important findings; the
first is that several retailers have a strong position in some local markets, which
153
constitutes barriers to entry to smaller grocery shops, and the second finding concerns the
transfer of excessive risk and unexpected costs by grocery retailers to their suppliers
through various supply chain practices. The findings confirm that if these practices are
not checked, they might have adversarial effects on investment and innovation in the
supply chain. Depending on the size of retailers (also wholesalers and buying groups),
“all” large buyers have buyer power in relation to some of their suppliers, however, their
power might very well be offset by the market power possessed by suppliers of branded
goods63.
Whereas the second finding is more relevant to this study, the first finding is equally
important because it highlights the fact that retail power is not to be underestimated in the
UK market.
In response to the increasing power of retailers, the Competition authority has suggested a
few remedies to offset it, the most relevant of which to this study is the tightening of the
Supply Code of Practice (SCOP) together with an Ombudsman to ensure effective
enforcement of the new provisions for suppliers and retailers.
Bargaining power along the supply chain of the meat industry has been heavily addressed
by authorities and stakeholders along the value chain in the UK. In the below section we
have extracted from literature and reports the most relevant subjects to this study and we
have backed them up by evidence provided from interviewees interviewed in the course
of this study.
B.6.1
Exercise of Buyer Power
The literature review provided at the beginning of this study highlighted issues of price
transmission asymmetry along the value chain in the food industry in the EU as a whole.
The UK meat sector is not very different from that picture because asymmetries of price
transmission along the value chain have been a hot topic of discussion by the public and
media.
The Department for Environment Food and Rural Affairs (DEFRA) has estimated that in
2007 the rise of animal feed cost resulted into a rise of 20 percent in pig meat production
costs for farmers, but only with a rise of 3 percent for processors and 4 percent for
retailers. This meant that the spread between the retail and the producer price has
narrowed, but that primary producers are currently carrying more of the burden of
increased production costs64. First hand information emphasised issues of price
transmission asymmetry along the pork value chain especially on the side of producers
who have been voicing the increasing cost of pig farming with no consequent sales price
rise and the need for appropriate action from the processors and retailers sides. In that
context, DEFRA mentioned that: “most of the evidence it received suggested English
pig farmers are not receiving a fair share of the retail price”65.
63
64
65
154
Competition Commission (2008) The Supply of Groceries in the UK Market Investigation. P. 7.
http://www.shropshirestar.com/2009/01/13/pig-farmers-make-case-for-pork-price-rise/.
The pig meat supply chain is considered to be fragmented and “adversarial” between
producers, processors, retailers and manufacturers. Farmers’ representatives interviewed
during the course of this study have confirmed that retailers’ competition in the UK
market is ruthless. The exercise of retailer’s buyer power, for them, was exemplified in
the price pressure they faced during the food crisis and the aftermath of the animal feed
prices increase. While they were faced with increasing production costs in response to
policy requirements such as the Integrated Prevention & Pollution Control directive
(IPPC), Nitrate directive and Waste Directive, their selling prices did not increase in
return, therefore they were faced with incredible losses. In 2008, while the National Pig
Association estimated that producers could break even at USD1.34 per pound carcass
weight and advocated for sales price increase, their efforts managed to increase pig prices
to only USD 1.20 66. It is obvious as well that the situation has not much improved, even
in the past year, when producers were able to earn more money, it was due to the UK
pound appreciation versus the Euro, which is not a sustainable way of making money.
There is hardly any direct communication between farmers and retailers, because they
deal mainly with processors. Therefore, farmers need to squeeze their prices based on the
arguments given to them by processors, which in most cases, is the increasing price
pressure by retailers. Farmers are not sure where the pressure is, in reality, stemming
from: is it coming from processors themselves or from retailers?- said one interviewee.
The same question was raised by farmers interviewed in the course of the inquiry
conducted and reported to the House of Common on the Pig Industry67 : “BPEX claimed
that consumers had seen prices increase by 90p but producers' prices had only
increased by 27 pence. It was not apparent where the difference in increase had
gone”.
It is noteworthy to mention that the exercise of buyer power by retailers and/or processors
was not the only factor behind price pressure over farmers. Other factors contributed to
price pressure as well, various resources refer to the fact that, while pig meat production
prices increased in response to compliance with regulations, English farmers did not
succeed in promoting their products among consumers. They did not sufficiently inform
consumers or increase their awareness about the high standard welfare that English pigs
are bred in. Therefore, for consumers, there was no “apparent” reason why they would be
paying more than they did before the application of regulations.
It appears from various internet resources that processors are less vocal in expressing
their concerns than farmers, and that both retailers and processors are under the spot light
(although less for processors) to make sure that a fair price is paid to farmers.: “Retailers
and processors must look again at their supply chain relationships to ensure that
they deliver a fair price to the producer while responding to consumer demand”68.
Contracting relations between farmers and processors are not necessarily formalised and
may sometimes not be governed by contracts, but they are rather informal and are built on
66
67
68
http://www.porkmag.com/pcvad.asp?ts=pca&pgID=770&ed_id=6548&component_id=948.
http://news.parliament.uk/2009/01/english-pig-industry-report/.
155
trust and long term business relations. Similar findings were referred to by the House of
Common report in 2009, which also confirmed that the absence of effective contractual
relations between farmers, processors (and retailers) are key issues that hindered
industry’s willingness to invest.
Uncertainty about the longer term relations between processors and retailers due to the
lack of long term relations between the two parties was an issue of particular attention
both in literature and in interviews. In practice, one interviewee indicated that
[Supermarket X] meat suppliers have to enter every three months into a competitive bid
before [Supermarket X] can buy their product. The 2009 House of Common Report on
the pig meat industry referred to the fact that: “Retailers often relied on short term
buying initiatives which were not conducive to the long term stability” (The English
pig Industry: p. 30). The same source indicated that the same issues were highlighted by
large retailers themselves who highlighted the fact that the lack of long-term committed
relationships is a key problem for the industry, but which is also an issue that to a certain
extent can not be regulated. Although the practice itself is not illegal, it still might affect
the stability of the chain.
Innovation and investment decisions by processors are very much dependent on their
relationship with retailers, the stronger the relation, the more willingness to invest for
innovation. Given the current short term relations and uncertainties surrounding it,
investment decisions become very difficult for processors. The industry has witnessed
strong developments both at the process and the product level and there is no evidence of
“negative impacts” on innovation due to unstable contracting relations, however, had
these contractual relations been for longer terms, innovation levels could have been
higher than observed.
In addition, innovation is much dependent on the extent of which retailers are willing to
support suppliers in their “new adventure”. Some of the interviewees of this study have
emphasised that it is always difficult for the supplier to make new investments on
forehand, simply because their new product may not necessarily be well received by
consumers and therefore, retailers will be reluctant to buy the product and consequently
contribute in investment costs. Therefore, the retailers being the link between consumers
and processors need to give the first signals to suppliers before any decision on further
investment is taken.
Processors representatives confirmed abusive practices by retailers in the UK meat
market. However, when asked about specific practices, interviewees were less “detailed”
in their description and did not refer to specific practices, but some described these
practices as “evil” and “barely legal”, such as for example, listing fees, which are fees
paid by suppliers to retailers in advance before they are guaranteed a place on the
supermarket’s list of suppliers. Similarly, reports refer to examples of practices
particularly related to transfer of excessive risk and unexpected costs by retailers to their
suppliers. Although there are cases where these risks were allocated on forehand, the
extent of risk transferred to the supplier was found to be “excessive”, which is a strong
indication of the tilting of power balance towards retailers. The impact of such practices
on innovation levels has not been obvious and there were no evidence to confirm or deny
it, but the general consensus is that leaving these practices unchecked may result into
156
detrimental effects on the industry. Bearing the costs of marketing (TV ads, promotion,
etc.) is another retailer’s practice highlighted by several sources (interviewees, but less
literature). In their quest to achieving economies of scale, retailers offer promotions on
meat products at the expense of suppliers against longer contracts, bigger purchase
volumes and loyalty bonuses. The practice impacts profitability of the industry for
processors.
Through the interviewees conducted, processors perceive themselves as the most
vulnerable in the value chain. On one hand, they have no guarantee of business continuity
from the farmers’ side- even though it is on a “gentlemen’s agreement”, but with no legal
commitment between them, and on the other hand, they commit with retailers to provide
them with continuous supply (even though on short term basis). Processors position along
the value chain was regarded as very risky.
The level of integration of the pig meat industry is one of the important issues associated
with the obvious imbalances of power along the nodes of the value chain. According to
the English Pig Industry Report, there are few examples of “integrated” supply chains
where all the parties along the chain work together for the benefit of all. “Few examples
exist of integrated supply chains (either partial or completely) where all the parties
work together and add value for the benefit of all in the supply chain, thereby
driving sales of English pig meat where profitability is respected and delivered for
all the parties involved.”69 In most cases the big retailers have their value chains.
Farmers and suppliers integrated in big suppliers value chains stand a better chance to
survive in the business than others, who, if not integrated in a value chain, would hardly
even “come near” a retailers shop. Therefore, farmers are keen on being “inserted in the
supply chain” of big retailers hoping they would also bear with them the increasing costs
of production and investment innovation for processors.
While for the pork industry, imbalance of power was consistently prominent, the picture
was less cynical in the case for poultry meat. The main reason given behind that was the
higher level of integration of poultry if compared to pork supply chain and therefore there
are lower numbers of nodes for price transmission. Recent information confirms that
“many British chains have been building closer links with farmers and primary
producers. In particular, Morrisons, which holds fourth place in the market share
stakes behind Tesco, Asda and Sainsbury, is teaming up with the NFU [National
Farm Union] and several agricultural colleges and is planning to open two research
farms, where it will create centres of excellence for applied farming research. It is
also helping to improve communications across the supply chain by launching
farmer groups, including several in the poultry sector”70.
In the poultry sector, processors usually own farms; therefore the tension observed
between processors and farmers in the pig sector case is almost non existent in the poultry
sector. Farmers interviewed in the course of the production of the “English Pig Industry
report” stated: it would help if processors and supermarkets got to know farmers and
the issues facing the industry—in the same way that processors appeared to
69
70
House of Commons, ibid, p. 30.
http://www.thepoultrysite.com/articles/1568/poultry-industry-in-the-forefront-of-supermarket-price-war.
157
understand the costs of the poultry industry71, which implies the higher level of
integration of the poultry sector versus the pork sector.
In practice, it must be noted that the poultry industry in the UK has not been sufficiently
studied and information sources around bargaining power issues along it are very scarce.
In the context of this study, we have examined some of the submissions addressed by
several processors to the Competition commission in the course of the Commission’s
“Supply of Groceries in the UK market Investigations” report72 in order to better
understand the relations between processors and retailers. The examination of some of the
submissions showed that for example, the UK biggest poultry processor “Two Sisters
food group” have actually praised the “partnership” relations that it had with various big
retailers in the UK market, with references to the impact of such relation on innovation
and investment levels of the company. Two Sisters also confirmed the contribution of
retailers in investment for product development at a reasonable consumer price.
Contribution of retailers in investment for product development has also been confirmed
by the “poultry processing” representatives interviewed in the study. Interviewees of this
study referred to the fact that, processors do not invest “independently” from retailers.
Because retailers are the link between consumers and processors, processors work hand in
hand with retailers in order to produce products that would meet consumer satisfaction
and would be at a reasonable price as well.
The above example is not meant to be for generalizing purposes because no other
submissions by meat processors were found. But in general terms, complaints submitted
against retailers’ behaviour came from smaller producers (although not necessarily in the
meat industry).
It must be noted however that despite of the above, the poultry meat suppliers have not
escaped the increasing power of retailers. In a recent media report, the excess of retailers
bargaining power is also extending to the poultry industry and will very much likely lead
to unreasonable sales prices that would affect the competitiveness of the sector: “Such is
the ferocity of the high street war that the big retailers are squeezing suppliers’
margins as never before by seeking cheaper priced products. And this has resulted
in some controversial items, including a GBP1.99 chicken offer.”73
Conclusion
To conclude this section, for the pig industry, three important features characterise the
chain: the first is the fragmentation of the industry with very few examples of integration,
where the processors are at arms’ length from the retailers, implying that contractual
arrangements between the two parties are self centred and do not consider mutual benefits
of the two parties. The second is the lack of long term contractual arrangements between
producers, processors and retailers. In general terms, the value chain as a whole was
described as “adversarial”. The third feature is represented in practices utilised by
retailers emphasising their stronger position versus their suppliers. These took various
71
72
73
158
House of Common, ibid, p. 30.
http://www.competition-commission.org.uk/inquiries/ref2006/grocery/third_party_submissions_suppliers.htm.
http://www.thepoultrysite.com/articles/1568/poultry-industry-in-the-forefront-of-supermarket-price-war.
forms, among which is the transfer of excessive risk and unexpected costs by retailers to
their suppliers as well as processors bearing promotion costs.
The poultry sector, although less pessimistic than the pig sector, it has already been
facing an increase in production costs, and will likely experience similar squeeze as
processors in the pig sector.
B.6.2
Code of conduct
In order to address the issues of buyer power exercised by supermarkets and suppliers
over other stakeholders in the upstream food supply chain, the UK Competition
Commission has, in 2004, published a draft code of conduct, which was officially
launched in early 2010. The code was consulted on and the Competition Commission
published the final version of the Order setting out the GSCOP in August 2009. The
Competition Commission sought the large supermarkets’ voluntary agreement to the
establishment and funding of an Ombudsman to enforce the code. The code will be
administered by the Office of Fair Trade and will give suppliers opportunities to appeal to
an independent arbitrator in the cases of disputes arising from exercise of buyer power
and any associated abusive practices, such as retrospective adjustments to terms and
conditions of supply or entering into arrangements with suppliers that result in suppliers
being held liable for losses due to shrinkage. Consultations are currently being held about
the establishment of an ombudsman office to enforce the code.
UK media have, to a certain extent, hinted at various stakeholders’ perceptions about the
new code and whether or not it is considered to be an effective means to solve the
problems along the value chain. Perceptions varied considerably across the value chain;
retailers’ representative hinted at the “strong” relation between suppliers and retailers and
questioned whether an expensive ombudsman office is necessary to tilt power balances
towards processors. Retailers spokesman said: “We think it will help demonstrate the
strength of the relationship between food retailers and their suppliers. It should help
overcome some of the myths. If it produces the results we expect, it will demonstrate
that a costly ombudsman – that would skew the negotiating balance in favour of
suppliers – is unnecessary”74.
Processors and farmers representative interviewed for this study did not have a positive
view about the introduction of the new code of conduct. The majority of interviewees
agreed that the number of largest retailers in the UK is rather small; only 4 big retailers
dominate the market. Every producer wants to have a good commercial relation with their
buyer for business continuity and will very much likely be reluctant to report abuses to
the ombudsman office fearing retaliation by retailers. And unless the ombudsman office
takes a “proactive” approach to find out about abuses of power, the instrument (the code
and the ombudsman office) would not be as effective as they should be. Similarly, if the
code is “toothless”, there is little hope that it can change any thing.
74
159
In the same line, media reported that processors were pessimistic about possible changes
that the new code of conduct may bring about to this skewed relation: “Nothing is going
to change. It is the nature of life. Big suppliers bully small retailers and big retailers
bully small suppliers. It is a fact of life”75.
When stakeholders were asked about the potential role of regulations to manage the
relationships between producers, suppliers and retailers, interviewees agreed that this
relationship can not be governed by the law, except in the cases where parties would
exercise anti-competitive behaviours that are by law illegal and for which the National
Competition Authority has found no evidence so far. Other than that, the relation is
mainly governed by market factors where supply and demand are the main factors driving
the balance of power; wherever suppliers outnumber buyers, the balance of power tilts
towards buyers and vice versa.
Overall, there was no consensus among interviewees and interviewees about what could
be possible policy solutions that would effectively address power imbalances issues. But
some interviewees agreed that the solutions should come from the industry itself. Two of
the interviewees referred to the need for dialogue between farmers, processors and
suppliers. Consumers are demanding and they have many options in the market, so if
retailers are not able to provide consumers with their needs and “preferences”, consumers
would search and find another high street supermarket. Retailers, therefore compete
fiercely in the market to retain their consumers, and in doing that, they also need their
suppliers in order to guarantee the business continuity. Therefore, dialogue and
transparency are needed so that parties can understand each other. One interviewee from
the retail sector informed the researchers that he established a “partnership” scheme
gathering farmers, suppliers and retailers, where meetings and dialogues were held on
frequent basis for better communication and transparency among the different
stakeholders.
B.6.3
The interviewees of this study interviewed so far agreed that the current structure of the
meat industry in the UK is the main reason behind the increased bargaining power of
retailers versus producers and producers versus producers. Publicly available data on the
number of units at each level (farmers and processors) is scarce, but interviewees gave a
rough estimation of these numbers as follows: for the pork market, there are 1500 farms,
10 companies responsible for producing ½ of the slaughtered pig meat; 10 large
processing companies, and 4 large retailers. The current structure translates into higher
level supply if compared to demand, i.e. one retailer has 10 options of processors to
choose from, while processors have to compete for a small number of retailers. The same
is true for the relation between farmers and processors. In the face t he fierce competition,
interviewees to this study (at least two) of the industry have been noticing a new trend
occurring in the industry, although not yet captured by literature. In order to balance the
bargaining power of retailers, a process of consolidation and merging is happening at the
processors level. According to interviewees, if the numbers of processors decrease,
75
160
retailers will have fewer choices and which might at the end restore the balance of power
in the market between retailers and processors.
Various stakeholders and interviewees interviewed in this study have confirmed that the
issues around the value chain imbalances are very important issues that affect the prices
and profitability of the industry in general. But, it would be too simplistic to look at price
imbalances only from a supply chain perspective because there are several other factors
that interact together to finally form the current picture of the industry. These are
combined market factors: supply and demand, imports from other countries, input costs,
as well as policy issues.
Interviewees have equally highlighted two important issues 76 inherent in the pig industry,
not necessarily related to the supply chain as such but have a strong influence on the
industry: The first issue is the ambiguity about pig meat labelling, which was at centre of
public debate until end of 2009. Much of the meat available in supermarkets including the
big retailers, although had a British label, did not necessarily originate in the UK. In
February 2010, the UK has introduced a new country of origin labelling (COOL) code of
practice for pork, which is a voluntary code that aims to give clear information about
countries of origin on packs for pork, bacon and ham77. The introduction of the new code
is not only about providing information, but it has a lot to do with benefiting the local
industry particularly production. Recent research found that there is a strong connection
between country of origin and consumers willingness to pay. According to Davies,
MacPherson and Froud, 2010, “COOL was used by consumers as a means of
providing economic benefits for local producers and local economies. The NatCen
(2010) survey found that amongst the 52 percent of consumers who looked for
COOL, they were mainly doing so out of a preference to buy British/support British
farmers (34 percent)”78.
The second is the efficient use of the pig carcass. In the UK, the most used parts of the
pig are the legs and loins, which, at the current level of pig production in the UK, does
not meet the current demand and leads to imports of these parts from other countries. The
remaining parts of the UK are exported to other countries at cheaper prices. The challenge
now for the UK is to find innovative cuts of the pig carcass for more efficiency gains.
One of the interviewees in the course of this research raised the issues of Strategic
Management across the meat supply chains as an important factor for the industry to
remain competitive. The comment does not imply the poor management of the chain, and
can no way be generalised, but the success of few players in the meat market versus the
failure/exit of others is largely attributed to their ability to adapt and absorb shocks in a
sustainable manner. For example, Grampian Food, which was one of the largest food
producers in the UK did not manage to make the business as profitable, since they
produced a surplus which on one hand distorted the market and on the other hand caused
huge losses to the company. The company was recently acquired by the Dutch Company
76
77
78
These findings are consistent with the House of Commons- Environment, Food and Rural Affairs Committee report,
produced in (2009) The English Pig Industry. P. 8.
http://www.foodnavigator.com/Legislation/UK-introduces-voluntary-COOL-code-for-pork.
In Oxford Evidentia (2010) Country of Origin Labelling: A Synthesis of Research Executive Summary. P.5. Social Science
Research Unit Food Standards Agency. January 2010.
161
Vion, which due to their viable management strategy; could make it a profitable
business”.
In addition to the above mentioned factors, two external factors affect the competitiveness
of the industry and which have been highlighted by both pig and poultry stakeholders:
The first factor is represented by the administrative and financial costs associated with the
implementation of new environmental regulations, the IPPC directive in particular which
stipulates the adoption of environmental standards that would for many farmers and
producers incur huge costs. Although the regulators interviewed have highlighted the fact
that the introduction of the IPPC directive was not a surprise to the industry, because it
was introduced 10 years ago for implementation to all industries with meat being one of
the latest.
Stakeholders interviewed in this research exercise had a two general observations, the
first is that the UK is a “starter” in terms of the application of EU policies. An example of
that is the early introduction of bans on stalls and tethers ahead of most EU countries. The
second is that, while the UK national policies stem originally from EU policies, they are
always transposed in a stricter manner than in other EU countries. Regulators do not
agree with this view and believe that regulators in other EU countries are doing more or
less the same as the UK regulators.
Competition from cheaper imports from other EU countries. The English pig industry has
lower and less efficient, production than its EU counterparts and as a result, part of the
retail hospitality and public sector choose to buy the cheaper products from oversees
producers.
The meat Market in the UK has undergone a number of developments (Eurostat Data, on
innovators companies). The literature review conducted at the outset of this study pointed
out to the fact that innovation within the food sector has been relatively low compared to
other industries due to the nature of the industry, due to the limited sources of food
supplies.
On a different level of innovation, it seems that there are observable advancement in the
industry at several levels, both at the process and the product level. These have been
observed at the three levels of stakeholders along the value chain (farmers, processors and
retailers).
Farming innovation
It seems that, while the stressful environmental regulations, including the IPPC
(Integrated Prevention & Pollution Control) Directive, Waste Directive and the Nitrate
Directive have burdened farmers in both pigs and poultry sector, the regulations have
created positive innovative responses. Farmers representatives and industry experts
interviewed confirmed that, although the dominant reaction to environmental regulations
is negative due to the financial and administrative burden, the regulations themselves led
to observable positive signs. At the livestock production level, fertilizers use on pasture,
animal feed production, animal waste an its treatment. Responses we exemplified in the
upgrade of farms to comply with regulations, especially the introduction of incinerators
162
and waste disposal systems, which reduces odours and are subsequently friendlier to
environment.
One of the most important innovations referred to by interviewees in the poultry sector is
the introduction of new poultry feeds which reduced water usage and increased poultry
weight in an efficient manner, where for example one kilo of poultry meet is produced by
1.6 Kg of feed. The evolution in breeding techniques had a strong effect on the industry
where “selective” breeding improves genetics of the produced meat.
Technology has supported the industry quite strongly in the past few years (especially
poultry), where it helped the prevention of various diseases and the reduction of
“salmonella” infection in flocks at different levels.
Slaughtering and Processing
For the poultry sector, innovation is represented in the introduction of robots along the
slaughtering line, which resulted into more efficiency and cleanliness.
For processors, innovation occurred at the level of process as well as product. In response
to the heterogeneity of market demand and ethnic diversity in the UK, meat products are
diversified and in the face of the economic downturn that faced the industry, ready meals
(of which meat is an ingredient) and meat sandwiches, are a new trend of production
emerging in the UK market as well.
The reuse of animal unused parts for animal feed is one of the new developments in the
industry as well. Recent investment in new equipment is facilitating the processing of byproducts into organic matter, which can then be used as fertilisers and the use of tallow
extracted in this process to produce bio-fuel.
Information technologies helped to improve communication between suppliers and
retailers, as a means of increasing supply chain efficiency, through right in time supply.
Retailers are less willing to store groceries and they currently rely on “just in time”
supply by their suppliers.
Information technologies play an important role in product traceability which will
improve communication with end consumer about the product, which was an issue highly
debated in the past couple of years. In the case of pork industry, traceability of products is
expected to increase sales of local products versus imported products and lighten the
impact of competition of cheaper meat.
163
C The Netherlands
C.1
Introduction
The Dutch food industry is one of the most important industrial sectors in the
Netherlands. The food industry has a share of 20 percent in industry turnover,
intermediary inputs and value added. It has a share of 14 percent in industry labour costs
and of 28 percent in gross operating surplus. The Netherlands are one of the larger
exporters of agricultural commodities and food and beverages. The Netherlands are a
large producer and exporter of pork, poultry and veal.
Within the food industry, the meat industry is the largest employer (18,200 employees)
after the bread and pastry industry (38,900 employees). The industry generates 15 percent
of total employment in food processing and 16 percent of turnover in food processing.
Meat processing is less labour intensive than the food industry and manufacturing in
general. Productivity in the Dutch food industry is high relative to total manufacturing in
the Netherlands or for instance the Spanish food industry. In the meat industry
productivity is below other parts of the food industry. The share of intermediary inputs in
turnover is very high: 82 percent. This is much higher than elsewhere in the food industry
or manufacturing or e.g. Spain.
Table C.1
Main indicators of the Dutch meat supply chain
Meat industry
Food industry
Total industry
Employment
18,200
122,500
847,100
Product sales
9,908
60,176
294,758
Consumption of raw materials
8,177
45,819
222,991
Gross value added
1,731
14,357
71,767
Labour costs
897
5,825
40,959
Operating surplus
834
8,397
30,401
544
491
348
Labour costs / Product sales
9.1%
9.7%
13.9%
Consumption of raw materials / Product sales
82.5%
76.1%
75.7%
95
117
85
8.4%
14.0%
10.3%
Productivity (Value added / Employment; EUR 1,000)
Gross operating margin
The meat supply chain is specialised per meat category: poultry, veal and to a lesser
extent pork and beef. Slightly less than a half of all economic activities refers to
slaughtering; the rest to meat processing. Most meat produced in the Netherlands is fresh
rather than processed meat. Meat processing refers primarily to slicing fresh meat for
165
Dutch and foreign retailers. Poultry and veal production are vertically integrated. This is
not the case for pork and beef production. Vertical relations have been intensified in pork
production after the outbreak of animal diseases in the 1990s and the early 2000s, but
they do not involve long term contracts. There is little specialised beef production in the
Netherlands. Most beef refers to cows from the dairy industry. There is little lamb
production in the Netherlands. In this study we focus on the pork and poultry supply
chain.
C.2
Food price volatility
The following figures show pork and poultry prices for the Netherlands. Farm prices are
reported by LEI, wholesale prices refer to export price data as reported by Eurostat and
consumer data are obtained from GfK. For pork, prices at all levels exhibit seasonal
patterns. Consumer prices for pork are higher in the summer and in December, among
other things due to differences in consumption patterns. Fluctuations in farm and
wholesale prices are clearly related. This is less evident, but possibly also the case for
consumer prices. The gap between wholesale prices – primarily carcasses – and consumer
prices is substantial. However, wholesale prices for sausages are not that much higher
than wholesale prices for pork carcasses.
Figure C.1
Pork prices in the NL
8,00
7,00
6,00
Europ per kilo
5,00
4,00
3,00
2,00
1,00
Farm
Consumption
1-9-2009
1-5-2009
1-1-2009
1-9-2008
1-5-2008
1-1-2008
1-9-2007
1-5-2007
1-1-2007
1-9-2006
1-5-2006
1-1-2006
1-9-2005
1-5-2005
1-1-2005
1-9-2004
1-5-2004
1-1-2004
1-9-2003
1-5-2003
1-1-2003
1-9-2002
1-5-2002
1-1-2002
1-9-2001
1-5-2001
1-1-2001
1-9-2000
1-5-2000
1-1-2000
0,00
Wholesale
Figure C.2 shows poultry prices in the Netherlands. Farm prices are reported by LEI,
wholesale prices refer to export price data as reported by Eurostat and consumer data are
obtained from GfK. Farm prices refer to contract prices concluded between farmers and
the slaughterhouses. Farm prices are stable, while export prices and consumer prices
fluctuate due to supply and demand fluctuations on international wholesale markets and
due to promotional activities of supermarket chains. At the macro level, prices are more
166
or less stable at all three levels of the supply chain. Farm prices and wholesale prices are
relatively high in 2009. Figure C.2 shows that a lower level, there is more dynamics in
consumer prices. Consumer prices for chicken breast have fallen from 2001 till 2009,
while consumer prices for other chicken products have risen. Chicken breast is becoming
a commodity, while prepared whole chickens, chicken schnitzels and cordon bleus (other
parts) are increasingly marketed as high value products.
Figure C.2
Poultry prices in the NL
7,00
6,00
Euro per kilo
5,00
4,00
3,00
2,00
1,00
Farm
1-9-2009
1-5-2009
1-1-2009
1-9-2008
1-5-2008
1-1-2008
1-9-2007
1-5-2007
1-1-2007
1-9-2006
1-5-2006
1-1-2006
1-9-2005
1-5-2005
1-1-2005
1-9-2004
Consumption
Wholesale
Poultry consumer prices in the Netherlands
8
7
6
Total
Legs
5
Breast
Other parts
Whole chicken
4
3
01
01 -01
17 04
01 -01
33 20
01 -01
49 36
02 -01
13 52
02 -02
29 16
02 -02
45 32
9- -02
12 48
-2
25 00
-2 3
41 8/ 0
-4 3
5- 4/0
8- 3
2
21 00
-2 4
37 4/0
-4 4
1- 0/0
4- 4
2
17 0 0
-2 5
33 0/ 0
-3 5
49 6/ 0
-5 5
13 2/0
-1 5
29 6/0
-3 6
45 2/0
- 6
9- 48/
12 06
-2
25 00
-2 7
41 8/0
-4 7
5- 4/0
8- 7
2
21 00
-2 8
37 4/ 0
-4 8
1- 0/0
4- 8
2
17 00
-2 9
33 0/0
-3 9
6/
09
2
01
Figure C.3
1-5-2004
1-1-2004
1-9-2003
1-5-2003
1-1-2003
1-9-2002
1-5-2002
1-1-2002
1-9-2001
1-5-2001
1-1-2001
1-9-2000
1-5-2000
1-1-2000
0,00
167
C.3
Consumption
Meat consumption in the Netherlands refers primarily to beef, pork and poultry. Per
capita meat consumption in the Netherlands falls. Consumers eat less meat, in particular
pork. Consumption of poultry and other meat still rises. The rise in poultry consumption
is among other things due to the fact that consumer prices for poultry rise less than those
for beef and pork. Beef consumption remains constant due to the relatively high income
elasticity. The demand for other meat rises due to immigration and changes in
consumption patterns.
Table C.2
Consumption per capita (kg)
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total
86.2
85.6
86.3
85.5
86.0
85.6
84.9
85.1
84.7
Beef and veal
19.2
18.9
19.2
19.1
19.5
19.1
19.0
19.3
19.2
Pork
43.3
42.4
42.5
42.4
42.3
41.9
41.5
41.0
40.6
Poultry
21.6
22.1
22.5
21.5
21.9
22.2
21.9
22.5
22.5
Other meat
2.1
2.2
2.1
2.5
2.3
2.4
2.5
2.3
2.4
In terms of expenses, fresh and frozen meat including poultry refers to two thirds of
consumer expenses and one third to meat products. Minced meat is popular in the
Netherlands. Ham and sausages are the most popular types of processed meat. Expenses
on fresh pork and poultry declined from 2000 till 2007 by 4 percent. The decline is due to
a decline in the expenses on fresh beef and veal (10 percent) and pork (9 percent) when
minced beef and pork is taken out. Expenses on poultry and processed meat increased by
12 percent and 4 percent respectively.
Table C.3
168
Consumer expenses per household (EUR)
2000
2003
2004
2005
2006
2007
Fresh meat
317
330
348
315
298
305
Fresh beef and veal
69
70
75
70
61
62
Fresh pork
94
89
99
84
85
86
Minced meat (pork and beef)
88
96
98
85
85
88
Other meat
39
42
39
46
40
41
Frozen meat
27
33
37
30
27
28
Poultry
76
96
88
92
85
85
Processed meat
202
218
221
197
196
209
Smoke-dried meat (rookvlees)
10
9
9
9
9
9
Ham
52
59
57
46
47
49
Bacon (ontbijtspek)
12
11
11
12
10
10
Sausages and like meat products
106
115
120
110
108
119
Other meat products
21
23
25
20
23
22
Figure C.4
Percent changes in household consumption in the Netherlands (%)
Fresh pork and beef (Total)
Fresh beef and veal
Fresh pork
Minced pork and beef
Other pork and beef
Frozen pork and beef
Poultry
Processed meat (Total)
Smoke-dried meat (rookvlees)
Ham
Bacon (ontbijtspek)
Sausages and like meat products
Other meat products
-20,0%
-15,0%
-10,0%
-5,0%
0,0%
5,0%
10,0%
15,0%
The 2,420 butchers in the Netherlands have a share of 23 percent in consumer expenses
on meat, while supermarkets have a 71 percent share and other distribution channels a 7
percent share (HBD 2009). Supermarkets have a relatively high market share in fresh
meat rather than meat products. Aggregate turnover of butchers declined by 12.5 percent
from 2003 till 2008. In this respect, they are outperformed by other SMEs and
supermarkets. Turnover of Dutch food SME retailers declined by 5 percent in the same
period, while turnover in supermarkets increased by 17.5 percent.
C.4
The meat supply chain
The Netherlands is a net exporter of both life animals and meat. This holds notably for
pork, poultry and veal. The self sufficiency ratio for pork, poultry and veal is about 200
percent. For beef, the Netherlands are self sufficient. However, because Dutch beef
production primarily refers to milk cows, there is substantial import of premium beef in
the Netherlands. Dutch meat production and processing are relatively big. The
Netherlands has a 5.8 percent share in European animal production (5.5 percent for beef,
7.8 percent for pork and 4.6 percent for poultry).79 Most pork and poultry is exported to
neighbouring EU countries, notably Germany and the UK. Veal is also exported to France
and Italy.
79
The Dutch population has a 3.3% share in the population of the EU27.
169
Figure C.5
The Dutch meat supply chain (2008)
The self sufficiency ratio for beef has fallen since the 1990s. Production of beef and veal
has fallen while consumption still grows with the Dutch population. The self sufficiency
ratio also fell for pork since 1990s, but has risen again from 2005 onwards. The self
sufficiency for poultry declined in the 2000s in the aftermath of avian influenza, but
recovered after 2005.
At the farm level, poultry production doubled since 1990, while production of veal and
pork remained more or less constant and production of beef fell by 50 percent. At the
level of the slaughterhouses, we see more or less the same picture for poultry and beef.
Poultry production doubled and beef production halved. The number of pork carcasses
has fallen by 28 percent. The Netherlands export more live animals. This development is
related to the existence of excess capacity in European slaughtering. Dutch producers
export more pigs to Germany, because German slaughterhouses pay higher prices. Excess
capacity has induced Dutch slaughterhouses to rationalise production. According to
Backus et al. (2007), the scale of slaughterhouses has grown. However, the number of
firms remained more or less constant in the Netherlands. The number of veal carcasses
has risen by 35 percent. The Netherlands import more calves in order to slaughter and
export them.
Figure C.6
170
Pork supply chain
Figure C.7
Figure C.8
Self sufficiency ratios for meat
3,00
2,50
2,00
1,50
1,00
0,50
0,00
1990
1995
2000
Beef and veal
Pork
2005
2008
Poultry
Pork production is concentrated in the South and the East of the Netherlands. Of all farms
fattening pigs, 43.4 percent is located in the province of Noord-Brabant and 13.1 percent
in the province of Limburg (South) and 19.1 percent and 13.9 percent in the provinces of
Gelderland and Overijssel respectively (East). Poultry production is more dispersed. 29
percent of all vleeskuikens are held in Noord-Brabant and the provinces of Limburg,
Gelderland, Overijssel, Drenthe, Friesland and Groningen all hold 8-14 percent of the
poultry livestock.
Farmers are increasingly specialised. The largest 300 farmers have a share of 20 percent
in pig fattening. Halve of all breeding pigs and one third of all fattening pigs are held on
specialised farms.
171
Figure C.9
Regional dispersion of livestock production
Pork production
Other; 10,4%
Overijssel; 13,9%
Gelderland; 19,1%
Noord-Brabant;
43,4%
Limburg; 13,1%
Poultry production
Other; 7,6%
Groningen; 10,6%
Friesland; 13,8%
Noord-Brabant;
29,2%
Drenthe; 9,8%
Limburg; 7,9%
Figure C.10
Gelderland; 9,0%
Overijssel; 12,0%
Production development at farm level (1990 = 1)
2,50
2,00
1,50
Beef
Veal
Pork
Poultry
1,00
0,50
0,00
1990
172
1995
2000
2005
2008
Figure C.11
Production development slaughterhouses (1990 = 1)
2,50
2,00
1,50
Beef
Veal
Pork
Poultry
1,00
0,50
0,00
1990
C.5
1995
2000
2005
2008
Market structure, business dynamics and economic impact
The number of firms is still large throughout the entire meat supply chain. The number of
farms and SME retailers falls. (This also holds for beef and veal production if all farmers
would be taken into account.) The number of slaughterhouses diminishes slightly. The
number of wholesalers and meat processors increases. Most firms are SMEs. The number
of supermarket remains constant. The number of firms with more than 100 employees is
relatively small.
173
Table C.4
Number of firms
2006
2007
2008
2009
*
1,911
1,945
1,975
-
*
Beef production
Veal production
1,936
2,002
1,943
-
Pork production
4,365
4,225
4,260
4,130
Poultry production
1,410
1,420
1,440
1,350
280
275
270
270
55
50
50
50
Slaughterhouses
Slaughterhouses (poultry)
Meat processing
Wholesale trade animals
Wholesale trade meat
Supermarkets
**
SME retail
180
170
170
185
1,210
1,200
1,195
1,240
985
895
850
1,035
45
50
45
45
2,570
2,505
2,380
2,330
Source: Statistics Netherlands and LEI.
*
With at least 30 calves or cows for meat production.
**
Table C.5
With at least 100 employees.
Size classes (Number of firms related to Number of employees per firm, 2009)
1 to 10
10 to 20
20 to 50
50 to 100
More than 100
Slaughterhouses
210
30
20
10
10
Slaughterhouses (poultry)
20
5
10
10
10
Meat processing
110
30
20
10
10
Wholesale trade animals
1215
20
10
0
0
Wholesale trade meat
845
85
75
20
10
1,855
390
540
105
45
Supermarkets
Source: Statistics Netherlands.
The number of firms may be still large, concentration is important in meat processing and
food retail. In pork slaughtering the six largest processors have a market share of about 95
percent. VION has a share of 57 percent and dominates the industry. In veal slaughtering
and processing, VanDrie as well as Plukon and Storteboom have large shares of poultry
slaughtering.
C.6
C.6.1
Pricing and value added
The pork supply chain
Supermarket chains obtain 24 percent of the consumer euro spent on meat and meat
products, the processing industry obtains 44 percent, farmers 13 percent and the feed
industry 19 percent. SME retail outlets have a larger share of the consumer euro: 50
percent. A large part of the processors’ share of the consumer euro is spend on
intermediary inputs other than livestock. 43 percent of processor turnover is spend on
174
intermediary costs other than livestock. Intermediary costs are also high in the feed
industry and pig production. Farming is capital intensive. Depreciation and interest are a
substantial part of farmer costs. Paid labour costs are low in farming because most labour
is being done by farmer. Revenues are high in supermarket chains followed by the feed
industry. Farmer income is low when one takes into account that is both a reward for
labour and capital. Revenues seem high in SME retail outlets (butchers) but they include
a reward for the labour of the owner and his relatives as well.
Figure C.12
Pork consumer euro spent in supermarkets chains and SME retail outlets
Supermarket chains
Feed industry
Retail
Pig production
Pig fattening
Processing
SMEs
Feed industry
Pig production
Pig fattening
Retail
Processing
Table C.6
Shares in turnover in the meat supply chain (2008)
Feed industry
Pig production
Pig fattening
Processing
SME
Super-markets
Raw materials (fodder)
51.3
53.0
46.3
-
-
-
Raw materials (meat)
-
-
26.4
41.7
50
75.8
Other intermediary costs
34.3
22.9
10.2
42.7
13
7.2
Depreciations / Interest
2.0
17.5
11.8
1.8
6
2.2
Labour costs
9.1
5.3
0.9
12.2
18
10.7
Net revenues
3.3
-
-
1.6
12
4.1
Farm income
-
1.2
4.4
-
-
-
Source: LEI, CBS, HBD, Rabobank.
Backus et al provide an overview of return on investment in Dutch pork supply chain
(Table C.7). The returns on investment have been calculated on the basis of Amadeus. In
line with the results in Table C.6, Table C.7 shows that supermarket chains obtain the
175
highest returns on investment followed by the feed industry. If the labour input of farmers
is evaluated at contract wages, the return on investment in farming is negative.
In fodder production, the six largest companies have a return on total equity of 8 percent.
These six companies make up 75 percent of the Dutch fodder industry. The returns of the
six largest companies (turnover of more than EUR 50 mln.) exceed the returns (6 percent)
of the smallest companies in the industry, the ones with a turnover below EUR 10 mln.
Returns for medium sized companies (turnover of EUR 10 mln.-EUR 50 mln,) are
approximately equal to the returns of the six largest companies.
In meat processing, returns on equity equalled 9 percent and returns on total assets 4
percent. The profit margin equalled 1 percent of turnover. The largest companies had a
return on total assets of 1 percent and where outperformed by the 24 smaller meat
processors in the panel which obtained a return of 9 percent.
Table C.7
Financial performance in the Dutch pork supply chain (2005)
Link
Number of
Return on
Return on
Solvability
Profit
observations
total assets
equity
(%)
margin (%)
(%)
(%)
Feed industry
27
7.7
13.2
48.9
2.8
Farming
77
0.1
-4.3
53.0
-15.0
Processing
31
4.3
9.1
32.6
1.2
Supermarkets
18
7.1
22.0
19.3
1.2
Source: Backus et al. (2007).
C.6.2
Poultry
Consumer prices of poultry are comparable to those of pork. The share of the processing
industry is bigger. Profits in the poultry processing are higher than those in pork
processing. Raw materials – in particular poultry - are much cheaper in poultry
processing than they are in pork processing.
176
Figure C.13
Poultry consumer EUR spent in supermarkets chains and SME retail outlets
Supermarket chains
Feed industry
Retail
Pig fattening
Processing
SMEs
Feed industry
Pig fattening
Retail
Processing
Table C.8
C.7
C.7.1
Shares in turnover in the poultry meat supply chain (2008)
Feed industry
Pig fattening
Processing
SME
Retail
Raw materials (fodder)
51.3
61.6
-
-
-
Raw materials (meat)
-
17.1
34.3
50
75.8
Other intermediary costs
34.3
1.8
42.4
13
7.2
Depreciations / Interest
2.0
17.4
1.8
6
2.2
Labour costs
9.1
2.4
8.9
18
10.7
Net revenues
3.3
-
12.6
12
4.1
Farm income
-
0.0
-
-
-
Price transmission
Pork
We draw the following conclusions from the price transmission analyses:
•
Price transmission occurs relatively quickly, in 1-3 months;
•
There is no direct relation between farm price and consumer prices. There is an
indirect relation between farm and consumer prices. Farm and wholesale prices are
linked; and wholesale and retail prices are linked;
•
Pricing at all three levels of the supply chain is pretty independent of pricing at the
other levels. Prices are limitedly transmitted. If there is price shock at one level,
177
prices in the links directly upstream or downstream rise a little as well. Basically only
the link where the price shock occurs profits from the shock.
C.7.2
Poultry
We draw the following conclusions from the price transmission analyses.
•
Price transmission occurs relatively quickly, in 1-3 months. Wholesale prices adjust
quickly to changes in supply and demand conditions. This holds to a lesser extent
also for retail prices. Farm contract prices adjust slowly to changes in supply and
demand conditions. Processors react to increases in farm prices, but not to decreases
in farm prices;
•
There is no direct relation between farm price and consumer prices. This is among
other things due to the fact that farm prices are contract prices. There is an indirect
relation between farm and consumer prices. Farm and wholesale prices are linked;
and wholesale and retail prices are linked;
•
The wholesale sector makes money out of a shock in supply and demand conditions as measured by price shocks - at either the farm or the wholesale level. When the
farm price changes with one cent, the wholesale gross margin changes by more than
10 cents. When the wholesale price changes by 1 cent, the wholesale gross margin
changes by 1 cent because the farm price is not influenced. These results are probably
due to the use of long term contracts between farmers and processors. Wholesale
prices reflect supply and demand conditions, while farm prices are contracted.
However, when the retail price changes by 1 cent, the wholesale gross margin
declines a little;
•
Both retailers and farmers do not profit from supply and demand shocks. Retailers’
gross margins decline when a price shock occurs at the farm or wholesale level. They
profit a little when there is a shock at the consumer level. Farmers profit from a price
shock at the farm level, but do not become better off when demand increases at the
wholesale or retail level.
C.8
International trade
The Netherlands are a large (net) exporter of meat. Dutch exports of fresh and frozen
meat amounts to EUR 5,750 million. Exports refer to both beef and veal (33 percent),
pork (26 percent) and poultry (24 percent). In euro terms, exports of processed meat
equals 10 percent of exports of fresh and frozen meat. The Netherlands export raw
materials rather than processed products. Exports increased by one third from 2000 till
2008. Exports of beef and veal and offal increase by 50 percent. Exports of poultry
increased by nearly 30 percent and exports of pork by a little more than 10 percent.
Table C.9
178
Evolution of Dutch meat exports (EUR million)
% Change
2000
2002
2004
2006
2008
Fresh and frozen meat
4,309
3,963
4,252
4,828
5,758
33.6%
Beef and veal
1,277
1,192
1,398
1,697
1,903
49.0%
2000-2008
% Change
2000
2002
2004
2006
2008
Swine
1,322
1,029
1,173
1,257
1,476
11.7%
Poultry
1,067
1,126
914
1,114
1,373
28.7%
Bovine and swine offal
621
577
729
691
929
49.5%
Processed meat
361
407
390
412
580
60.5%
2000-2008
Dutch imports of fresh and frozen meat is much smaller than Dutch exports. Imports
equalled EUR 2,440 million in 2008. Most imports refer to beef and veal (44 percent)
followed by poultry (21 percent) and pork (18 percent). Imports of processed meat is
nearly a quarter of fresh and frozen meat imports. Imports more than doubled between
2000 and 2008. Beef and veal imports and poultry imports increased by 135 percent and
120 percent respectively. Pork imports even increased by almost 245 percent. Net exports
of fresh and frozen meat remained constant at EUR 3.3 billion. Net exports of pork
decreased by 12.5 percent. Net exports of offal increased by 32.5 percent. Net exports of
beef and veal, and poultry remained more or less constant. Net exports of processed meat
decreased from a surplus of EUR 65 million in 2000 to a deficit of nearly EUR 60 million
in 2008.
Table C.10
Evolution of Dutch meat imports (EUR million)
% Change
2000
2002
2004
2006
2008
1,039
1,256
1,520
1,892
2,439
135%
Beef and veal
459
540
646
866
1,079
135%
Swine
127
183
320
361
436
243%
Poultry
233
310
358
396
515
121%
Bovine and swine offal
166
156
126
178
326
97%
Processed meat
296
379
432
475
636
115%
Fresh and frozen meat
2000-2008
The Netherlands export meat primarily to other EU15 countries. Veal is exported to
France and Italy, beef to Germany. Pork is exported to Germany and Italy, poultry to
Germany and the UK. Processed meat is exported to Belgium, Germany and the UK.
179
Figure C.14
Meat export per partner country (2008)
40,0%
35,0%
30,0%
25,0%
Beef and veal
Pork
Poultry
Processed meat
20,0%
15,0%
10,0%
5,0%
0,0%
Belgium
France
Germany
Italy
Spain
UK
Rest of the
EU
Rest of the
world
The Netherlands import most meat from Belgium and Germany. Beef and processed meat
are imported from non-EU15 countries.
180
Figure C.15
Meat import per partner country (2008)
60,0%
50,0%
40,0%
Beef
Pork
Poultry
Processed meat
30,0%
20,0%
10,0%
0,0%
Belgium
C.9
France
Germany
UK
Rest of EU
Rest of the World
Dutch Food Law
The Dutch Food and Goods Law is a framework law to which new guidelines and
decisions may be added. The Law contains prescriptions for food ingredients, food
processing and distribution. The Product Boards – one of the government bodies in the
Netherlands - define additional product specific norms. Food Law is controlled by the
Dutch Goods Authority (VWA). Following EU legislation, the General food Law, food
companies have to develop and implement their own food safety and traceability
mechanisms such as HACCP. HACCP compel firms to assess risks, to identify critical
control points and to control these points. Food companies are also obliged to introduce
traceability mechanisms.
C.9.1
Dutch competition law
Dutch Competition Law is enforced by the Netherlands Competition Authority (NMa).
The Act came into effect on January 1st, 1998. The Competition Act has seen several
amendments since then. The Competition Act was amended as a result of European
Regulation 1/2003. Another amendment was made on July 1st, 2005, when the NMa
became an Autonomous Administrative Authority (ZBO). The NMa received additional
powers in 2007 as a result of the evaluation of the Competition Act. Section 6 of the
Competition Act prohibits agreements between undertakings distorting competition.
Section 24 prohibits abuse of a dominant position. Section 34 requires notification of
mergers.
181
The NMa considered about 30 merger cases in food processing and food retail in the
2000s. In 25 of the 30 concentration cases notified to the NMa, no permission was
necessary according to the NMa. In the other 4 cases permission was granted. 1 case is
still pending. Most concentration cases in the supermarket channel refer to a limited
number of outlets. If the NMa decides that permission for a merger is required (NMa,
Visiedocument inkoopmacht, 2004), mergers are not always put through (Campina –
Zuiver Zuivel; Schuitema – Sperwer). Mergers may also be permitted under conditions
(Vendex Food – De Boer Unigro; Jumbo - SDB).
The NMa has not studied vertical cases involving supermarkets after 2003. Quality
control mechanisms in the food supply chain have been scrutinised.
The NMa designated the food and agro-processing industry as a priority industry in its
2008-2009 Agenda. The supply is highly concentrated in the Netherlands. This holds for
most supply chain levels: the farm supply industries, marketing boards, food processing
and food retail. That is why the NMa has been quite active in this industry recently. In
2009, a NMa study looked into price formation in the Dutch food supply chain. The study
concludes that retail prices reflect supply chain costs and that price changes in the
respective of the supply chain follow each other.
With respect to supplier-retailer relations the following observations are made:
•
Dependency in the Dutch food supply chain has a reciprocal nature.
•
There are no major differences among suppliers and retailers in terms of contract
conditions other than those related to differences in volume and quality.
•
The bargaining position of suppliers is relatively weak due to excess capacity.
•
Supermarket chains impose requirements on supply chain partners in terms of
product specifications, logistics and planning.
•
Differences in contract duration are product specific: bread versus fresh produce.
C.9.2
Code of conduct
So far, there is no or little law regulating supplier – retailer relations other than the
Competition Act. In December 2009, the Dutch Minister of Economic Affairs proposed
to introduce a Conduct Code following the British example in this respect and to neglect
French and German legislation for the moment (Tweede Kamer, vergaderjaar 2009–2010,
32 123 XIII, nr. 46). There is also no prohibition to sell below purchasing prices. On the
basis of an evaluation in 2005, the Dutch government decided not to pursue the
prohibition.
182
D Poland
D.1
Introduction
In Poland, the food manufacturing sector is the largest manufacturing sector which
employees 17 percent of all employees in the manufacturing sector and has a turnover
equal to 18 percent of the total turnover in manufacturing.
The food industry is based on large agricultural production. Poland is among the EUcountries with the largest agricultural population. The number agricultural holdings are
also very high indicating that some structural changes in favour of a more industrial
and/or service oriented economy might take in the years.
Within the food manufacturing industry, the meat sector represents a significant industrial
sector employing 30 percent of all employees and having a turnover equal to 24 percent
of the total turnover, as shown in Table D.1. The meat sector is also significantly larger
sector than another food sectors as dairy sector.
Table D.1
Main indicators for the Polish meat industry, 2007
Indicators
Food
Meat
Dairy
Meat %
Industry
Industry
industry
Food
industry
Number of employees
424,229
125,755
42,095
29.6%
Turnover or gross premiums written (EUR million)
43,640
10,597
5,856
24.3%
Value added at factor cost (EUR million)
8,527
1,202
966
14.1%
Personnel costs (EUR million)
3,708
890
439
24.0%
Gross investment (EUR million)
1,978
387
274
19.6%
Gross Operation surplus (EUR million)
4,800
307
527
6.4%
Turnover/employment (EUR 1,000)
103
84
139
Personnel costs/turnover (%)
8.5
8.4
7.5
Productivity (value add/turnover) (%)
19.5
11.3
16.5
11.0
2.9
9.0
Gross operating surplus/turnover (gross operating
rate) (%)
Source: Eurostat.
Table D.1 highlights also some other economic indicators illustrating the role and
important of the meat sector in Poland. Even though the meat sector is a very large sector
183
it is remarkable that the economic performance of the entire meat sector is lagging
significantly behind the entire food sector as well as the dairy sector when is comes to
value added, productivity and profitability.
Poland has for two decades been through a transition process form a planned economy to
a market economy.
In 2004, Poland joined EU which has had some impact on the competitive situation in the
following years. The enlargement of EU has been prepared for some years and the Polish
industry has been adjusted to an increasing European competition. However, 2004 was a
remarkable year, which changed in the competitive situation leading to an increasing
internationalisation (e.g. removal of tariffs and non-tariff barriers) which has lead to
market and structural changes. Development programmes have been implemented in
order to encourage a modernisation process of food industry. This process has resulted in
a reduction of the technological gab between the Polish and the EU-industry, adaption of
modern methods of management and marketing as well as inward investment has
included the Polish industry into international business networks. In the end the Polish
food industry has experienced a significant increase in export having significant impact
on growth. This improvement of the export orientation remain mainly to a competitive
advantage in terms of cost and prices
However, the general positive impact on the Polish industry after the accession to the
European Union has been challenged due to the international financial and economic
crises which have had an impact on both supply and demand situation.
D.2
Consumption level
The meat consumption in Poland is slightly low compare to other EU-countries e.g. UK.
In 2007 a Polish citizens consumed 73 kg of meat compare to a UK consumption of 82
kg. In Poland, we observe that the meat consumption has been increasing since 2000
picking up in 2007 followed by a decrease indicating an impact of the general economy
crises from 2008 onwards.
Figure D.1
Total consumption of meat per capita, kg.
80
78
76
74
72
70
68
66
64
62
60
2000
2002
2005
2006
2007
2008
Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.
184
Looking into the composition of the meat consumption, we find that pork meat has the
largest market share but the consumption trend is relatively stable, cf. exhibit 3. The
observed increase in meat consumption has taken place within poultry both in absolute
term and in marked share. The marked share has increase from 24 percent to 34 percent.
For beef meat we find a decrease in consumption as well as the market share is falling.
Figure D.2
Consumption per capita, kg
50
45
40
35
30
Pork
25
Poultry
20
Beef
15
10
5
0
2000
2002
2005
2006
2007
2008
D.2.1
The market prices is based on an average price per year which might hide some for price
fluctuation over the period but under all circumstance Figures D.3 and D.4 give an overall
picture of the trends in market prices.
The market (retail) prices for pig meat has in period 1999 to 2008 been somehow
fluctuating with an overall trends of increasing prices for the selected pig meat products.
From 1999-2001 we observe significantly increasing prices followed by a decline in the
prices up till Poland join EU in 2004. In the following period the prices are relatively
stable, but from 2007 to 2008 prices have increased again.
185
Figure D.3
Average retail prices for selected pig product 2000-2008, zl
30,00
25,00
Pork centre cut loin roast 1kg
20,00
Pork shoulder, boneless 1kg
15,00
Pork, cooked ham, 1 kg
Sausage "My•liwska" 1kg
10,00
5,00
0,00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Central Statistical Office of Poland, Regional data bank.
The market (retail) price for gutted poultry has been fluctuating considerable in the same
manner as pig meat as illustrated above. However, the overall impression is that the
prices has been relative stable without been affected by Poland joining EU and by a
significantly increase in consumption (demand) as shown above. The increasing
consumption has, as seen below, been followed by an increasing production.
Figure D.4
Average retail prices for gutted chickens (1kg), 2000-2008, zl
6,00
5,00
4,00
3,00
2,00
1,00
0,00
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: Central Statistical Office of Poland, Regional data bank.
186
2008
D.3
D.3.1
The market structure
Number of enterprises
Figure D.5 presents the number of enterprises in the entire meat manufacturing sector.
These numbers include independent companies as well as workplaces or firms which are
part of or member of larger company groups.
In 2003/2004, there is about 18,000 meat producing enterprises in Poland which seems to
quite high compare to other western countries, e.g. UK. After 2004, the number of
enterprises starts to decline and reach 15,500 in 2007 indicating a process of structural
change continuing after Poland has join EU.
Figure D.5
Number of enterprises, 2007
18500
18000
17500
17000
16500
16000
15500
15000
14500
14000
2003
2004
2005
2006
2007
Source: Eurostat.
D.3.2
Size structure
Figures on size classes is only available for 2001, and here we observe that a 72 percent
of the enterprise has less than 9 employees occupying 12 percent of the employees with
the meat industry. Enterprises with more than 250 employees counts for 2 percent of the
enterprises employing 42 percent of the employees.
187
Figure D.6
Number of enterprises by size classes, 2001
1 and 9
10 and 19
20 and 49
50 and 99
100 and 249
250 and over
Source: Eurostat.
Figure D.7
Number of employees by size classes of enterprises, 2001
1 and 9
10 and 19
20 and 49
50 and 99
100 and 249
250 and over
Source: Eurostat.
After joining EU, we have good reason to believe that a concentration has taken place and
the average size of the enterprises has increased as the number of enterprises has been
declining while we in the same period observe an increase in the number of employees by
15,000 persons.
D.4
D.4.1
Market feature
Level of innovation and investments
As an indication for innovation we have here used figures for investment as it indicates
some kind of improvement of the production facilities but we cannot for sure assume that
new products or production processes has been development or organisational
development has taken place.
In the period of 2000 to 2007, we find that the investment has been increasing until 2004
from EUR 184 million to EUR 344 million as an indication of the industry – and foreign
investors – have been dedicate to modernise the meat industry. After the European
accession in 2004, we find that the investment in the meat industry stabilise at a level for
188
investment at about EUR 400 million per year. A closer look into the investment in 20052007 reveals that 58 percent of the investments are within in machinery and equipment
and 37 percent within construction and alteration of buildings. These investments have, as
indicated above, contributed to reduce the technological gab between the Polish and the
EU-industry and to the adaption of modern methods of production.
Figure D.8
Gross investment in tangible goods in the meat sector
500
450
400
350
300
250
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
Source: Eurostat.
D.4.2
Profitability
Profitability is here defined as the gross operating rate (Gross operating surplus/turnover).
According to Figure D.9, the profitability has, except for 2001 (?) been rather stable at a
relatively low level or even negative. However, after 2004 the profitability stabilises at a
quite low level of 3 percent indicating than the industry has not been affected by some
dramatic industrial or economy changes.
Figure D.9
30
25
20
15
10
5
0
-5
2000
2001
2002
2003
2004
2005
2006
2007
Source: Eurostat.
189
D.4.3
Added value – productivity
Figure D.10 presents the trend in value added – and the productivity - by the meat sector.
We observe that the values added have been decreasing before the accession to EU in
2004, which could express that technological improvement/adjustment compared to the
EU-industry is taken place, but have not be capitalised until Poland joined EU in 2004
given better access to larger markets.
Figure D.10
12,0
10,0
8,0
6,0
4,0
2,0
0,0
2002
2003
2004
2005
2006
2007
Source: Eurostat.
D.5
The meat supply chain – the overall industrial structure
In this section we will look into the overall industrial structure of producing and
delivering meat products to the market in order to reveal characteristics than might have
an impact of the competitive power in the value chain.
In this section we will describe the structure in the value chain for meat production and
distribution which first of all will focus at the industrial structure and structural changes:
•
Farming;
•
Middleman procurement of livestock;
•
Slaughtering and meat processing industry;
•
Wholesale; and
•
Distribution.
The section will include both pig and poultry production as there in some industries is
horizontal integration of these two value chains. The subsequent section will focus
explicitly at pig and poultry analyzing the flow of products and the prices structure.
All in all we observe a dispersed low-scale production of animal (e.g. pig and poultry)
and very fragmented values chains as the level of vertical integration of farm production
and meat production and processing is low, although growing.
190
D.5.1
Farming
Looking into the farming structure, we observe that the Polish agriculture is characterised
by an average size of agricultural holdings at 10.15 ha of agricultural land. More than half
of the holdings produce only or mainly for their own use, thus reducing their expenses on
the purchase of food as well as other family expenses (a no-commercial market).
However, structural changes are taken place as the number of small holdings is declining
and then number of larger holdings is increasing. The no-commercial market seems to
represent about 10 percentage of the production but is in a process of being squeeze out
of the market. In 2008 11 percent of the holdings have more 15 ha and these larger farms
have a predominant share of agricultural land at 47 percent.
Even though we observe tendencies to restructuring rearing of pigs is still dispersed on
huge number of holdings. The total number of holding rearing pigs have been declining
from about 700,000 holdings in 2005 to 664,000 in 2007 of which about 85 percent have
20 animal or more.
Up till Poland’s accession to EU, the number of holdings with boilers increased reaching
a peak in 2005 of about 665,000 holdings of which about 10,000 holdings have more than
100 boilers. In 2007 the number holdings have been reduced to 633,000 of which 6,400
have more than 100 boilers. Holdings with more than 100,000 boilers represent about 25
percentage of the production and this share has been declining.
D.5.2
Middleman procurement of livestock
Most transactions occur on the spot market or as loose contractual arrangements where
middlemen play a role.
Different initiatives or actions are taken to develop functioning wholesale markets e.g.
supported by public programs or by initiative from the market. Among pig producers we
observe the formation of producer marketing groups delivering to the slaughterhouses.
These producer groups can represent bargaining power (longer term contract and ability
to achieve higher prices) against the meat industry but the all impression is that these
groups are only progressing slowly (the exact number of these producer groups is
unknown).
Among the large meat production industries, we observe some downwards integration as
the companies typically have their own middlemen procuring livestock as well as some of
the larger companies have close relationship with farmers (agreements) or some have
even their own farms delivering to the manufacturing entities.
Overall, there seems to be a tendency to increase the share and the scope of contracts as a
growing concentration is taken place in pig production.
191
D.5.3
Meat industry
For the meat manufacturing industry as a whole we find an increased employment, but
the increase takes first of all place within the poultry sector, as an outcome of increasing
demand and production.
Figure D.11
Employment in meat processing industry, 2002 – 2007, Index 2002 =100
140
135
130
Production, processing,
preserving of meat, meat
products
125
Production and preserving of
meat
120
115
poultrymeat
110
105
Production of meat and
poultrymeat products
100
95
90
2002
2003
2004
2005
2006
2007
Source: Eurostat.
The number of enterprises has been falling and most significantly for the sector producing
and preserving meat, as per Figure D.12.
Figure D.12
Number of enterprises in meat processing industry, 2002 – 2007, Index 2002 =100
110
105
Production, processing,
preserving of meat, meat
products
100
95
meat
90
poultrymeat
85
80
poultrymeat products
75
70
2002
2003
2004
2005
2006
2007
Source: Eurostat.
From 2002 to 2007 the average size of a meat producing enterprise increases from 27
employees to almost 40 employees. Within the production and preserving of poultry meat
enterprises have in average 71 employees in 2007 which is much higher than the meat
processing industry as a whole.
192
As to vertical integration, large meat processors do have integrated abattoirs indeed in
their capital groups, though some of them slaughter more animals than they process (in
effect selling half-products on to other processors), others have less slaughtering than
processing capacity and buy half-products in the market. Leading processors often have
their own breeding facilities, though they usually account for much less than their
processing needs. Some processors are also integrated into retail (through meat shop
chains).
The concentration within the meat processing industry is driving by structural change in
the sector as well as by FDI. The foreign investors have not only focused at
modernisation and restructuring the industry but has also lead to formation of industrial
groups and hereby to a concentration. Some of the meat-industry firm which has attracted
foreign investment or larger industrial concentrations are:
•
The Animex Capital Group (holding 13 companies in Poland) working in four basic
areas:
o production and processing of meat ( red and venison);
o production and processing of poultry;
o agriculture and factories of fodders;
o foreign trade and national sale.
•
Soko•ów S.A. is the biggest meat-firm noted on Valuable Papers Stock S.A. in
Warsaw. In its structures are 7 companies and the main activities of the group are:
o production, processing and conserving meat and meat – products;
o production of oils, fats, instant fodders for animals;
o activity of agents concerning sale of farming products, live animals, materials for
textile industry and semi-manufactured articles;
o sale of live animals and leathers;
o retail sale of meat and meat – articles;
o activity of canteens and catering;
o agriculture, hunting, and related activities.
•
Capital Group Morliny consisted of four companies working within:
o slaughtering of cattle and swine;
o production and meat processing;
o foreign trade and national wholesale and retail;
o fattening and purchasing live animals;
o renting of machines and devices.
•
Capital Group Drosed was formed by three companies having focus at:
o slaughtering and processing of poultry;
o processing of farm and grocery articles;
o hatch of nestlings and production of poultry;
o wholesale, retail and mediation.
•
Indykpol Group (a group of five companies) is the greatest producer of meat and
turkey products in Poland having a large market share in national market. The Group
is specializing in farming and industrial fattening of turkeys and production and sale
of turkey meat and turkey products.
193
D.5.4
Distribution – wholesale and retail
Wholesale markets are an important link in the distribution system and almost 40 percent
of the total sales of fresh fruit and vegetables in Poland take place on the wholesale
markets. Other products offered on those markets include flowers, eggs and dairy
products, meat, fish, preserves and flower accessories. The currently functioning
wholesale markets were created under departmental and government programmes for
creating and development of wholesale markets with a substantial support from public
funds.
However, within meat production we observe that traditional wholesalers with meat are
squeezed out and replaced by “functional” wholesaler working on behalf for meat plants
or the larger retailers.
In the retail sector we observe also a tendency to a higher concentration as the numbers of
players are declining, as per Figure D.13.
Figure D.13
Retail industry, 2002 – 2007, Index 2002 =100
Source: Eurostat.
Large supermarkets and hypermarkets retail networks (often foreign own; e.g. German or
France retail groups) continue to increase their market share especially in the large urban
areas. In the value chain the large retailers seems to have a strong bargaining power in a
very competitive market.
However, the number of other retailers (e.g. groceries, specialised meat shops and
catering outlets) is still very high but declining. Distribution of meat to these shops takes
place through wholesalers but to an increasing extent also through direct sales from the
slaughterhouse and the processing industry.
Some of the meat processers have their own brands (e.g. Soko•ów) in order to obtain a
stronger market position but generally the cost for establishing own brands are too high
for most of the processing industry.
194
D.6
Pork supply chain
In this section we will focus at trade and consumption and the price structure.
D.6.1
Pig meat and consumer product of pigs
In 2008, Poland has a huge domestic production, but Poland is also integrated in
international supply chain. In 2008 Poland is a net-importer of pig meat as the production
is lower than the consumption (see below).
consumption
Production and
Export
The supply chain of pork and pork meat in Poland, 2008 and in 1,000 tonnes
Import
Figure D.14
Live bovine animals
(cooled weight)
424,000 heads
423
Production for
Production from
Consumption
slaughter
slaughter
(cooled weight)
(live weight)
(cooled weight)
Live bovine animals
(cooled weight)
Note: Live bovine animals includes others than pork.
In period of 2003-2008, the Polish market for pig meat production becomes much more
integrated in the international market. In general, the entire production and consumption
is rather stable in the period while import and export especially after 2004 increase from
representing about 5 percent of the production/consumption to more than 25 percent.
After Poland’s accession to EU, export to CIS-countries to very low price (subsided)
where replaced by an increasing export to (and import from) EU-countries as the value
chain (e.g. larger foreign industrial groups) has been an integrated part of the EU-value
chain buying raw material from other countries and supplying the EU-market. Further,
Poland has been a net-export until 2007, but in 2008 the import exceeds the export.
195
Table D.2
Production, imports, exports and consumption of pork, in thousand tonnes
2003
2004
2005
2006
2007
2008
1,895
1,847
1,889
2,000
2,030
1,837
Import
59
60
203
178
267
499
Export
132
81
294
314
338
432
1,822
1,826
1,798
1,864
1,959
1,904
Production from slaughter
Consumption
D.6.2
Prices structure for pig products
Through the value chain we will expect that the processing of the meat will increase the
value of the product and hereby the market prices of the product. Table D.3 clearly
illustrates this value creating process.
A first examination of the prices of pig meat in the period 2003 – 2008 reveals increasing
prices at all stage in the values chain from 2003 to 2004 and again from 2007 to 2008 and
rather stable prices between 2004 and 2007, but the growth rate differs between
procurement prices, producers prices and retail process.
The procurement prices – the payment to the farmers – have in some year even been
failing and a more significant increase in the procurement prices are only seen from 2007
to 2008. We have here some indication of an increasing price gab which to some extent
has been reduces from 2007 to 2008.
Table D.3
Price volatility for pig meat through the value chain, per kg in zl, 2003-2008
2005
2003
2004
per kg
2006
2007
2008
in zl
Average procurement prices
Pigs for slaughter (in live weight)
3.68
3.57
3.82
3.56
3.46
4.01
3.6
3.65
3.91
3.61
3.59
4.06
Pork meat. bone-in (centre loin)
13.46
13.48
13.54
13.1
13.43
14.49
Pork ham. boiled
18.89
19.85
19.94
19.64
19.84
20.64
Sausage "Mysliwaka"
21.46
23.19
24.32
24.34
24.68
26.06
7.2
7.76
8.53
8.34
8.72
9.53
Average prices received by farmers on
marketplaces
Pigs for slaughter
Retail prices of some consumer goods
Pork frankfurters per kg
Note: Mywlinska sausage contents meat from both pig and beef meat .
Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland and GUS-data from the
Central Statistical Office.
196
The changes in the producers and retail prices are to some extent difficult to compare as
the product might not be completely comparable. However the price volatility follows the
same pattern, but a closer examination might reveal that the producer prices increase
slightly more than retail prices.
Comparing the procurement prices of pigs for slaughter and the retail prices, we find in
for most of the products that the procurement prices have been relatively high in 2004 and
2008 compared to the retail prices while the retail prices have been relatively increasing
in 2005-2007.
Table D.4
Relations between retail prices of some consumer products of pigs and procurement prices of pigs for slaughter
2003
2004
2005
2006
2007
2008
Procurement price of 1 kg of pigs for slaughter = 1.00
Pork meat bone-in (centre lion) - kg
3.67
3.78
3.54
3.68
3.88
3.61
Pork ham boiled - kg
5.13
5.56
5.22
5.52
5.73
5.15
"Baleron" (cervical pork boiled) - kg
4.63
4.98
4.46
4.58
4.77
4.24
Sausage "Mysliwska" - kg
5.83
6.5
6.37
6.84
7.13
6.5
Sausage "Torunska" kg
3.23
3.48
3.14
3.31
3.44
3.14
Raw bacon -kg
2.36
2.92
2.82
2.88
3.02
2.76
0.8
1.03
1.13
1.01
0.97
0.98
Pork fat -kg
Note: Mywlinska sausage contents meat from both pig and beef meat .
There seems to be an increasing price-gab between procurement prices and retail prices
and a closer examination of the development in prices in the period 2005-2009 reveals
that the procurement prices for pigs for slaughter were rising two times slower than the
selling prices (producer prices) and retail prices for boiled pork ham and “toru•ska”
sausage while retail prices have only increase slightly more than the selling.
197
Figure D.15
Procurement price for pigs and selling and retail prices for pork ham boiled [in z•/kg]
14,00
24,00
12,00
22,00
10,00
20,00
y = 0,0407x + 15,049
8,00
18,00
6,00
16,00
y = 0,015x + 3,4436
4,00
14,00
2,00
selling price and retail price for pork ham boiled
procurement price for pigs
y = 0,0427x + 19,105
12,00
I 2005 III
V
VII IX
XI I 2006 III
V
VII IX
procurement p rice for pig s
XI I 2007 III
V
VII IX
XI I 2008 III
V
selling price
VII IX
XI I 2009 III
V
VII IX
retail price
XI I 2010
trend
Source: Central Statistical Office (GUS) and Agricultural Market Agency.
Figure D.16
Procurement price for pigs (in z•/kg) and selling and retail prices for "Toru•ska" sausage
7,00
15,60
6,50
14,40
6,00
13,20
5,50
12,00
y = 0,0323x + 9,0518
5,00
10,80
4,50
9,60
4,00
8,40
y = 0,015x + 3,4436
3,50
7,20
3,00
Selling prices and retail prices for "Toru•ska" sausage
Procurement prices for pigs
y = 0,0381x + 11,264
6,00
I 2005 III
V
VII IX
XI I 2006 III
procuremen t price for pig s
V
VII IX
XI I 2007 III
V
sellin g p rice
VII IX
XI I 2008 III
V
VII IX
retail p rice
XI I 2009 III
V
VII IX
XI I 2010
Lin eær (retail price)
An international comparison of the procurement prices in Poland with Germany shows
that the procurement prices has been lower in Poland, but in 2008 and 2009 the price
level converge or even merged to the same prices level. Special attention should be pay to
2007 and 2008 while the procurement price goes from index 94 to 109 without the same
increase in producer prices and retail prices. The Agricultural Market Agency
(Informative Bulletin 10/2008) argues that the increase in procurement prices is caused
by sharp drop in livestock caused by oversupply and increase in feed prices lowering the
level of a profitable production.
198
Figure D.17
Farmers’ price for pig meat delivered to slaughter houses, prices per week
In any case, it is very interesting to notice that the procurement prices in 2006 in Poland
have be lover compared to Germany and Denmark, but in 2009 the procurement prices
has been higher in Poland, shown below.
Figure D.18
Procurement prices in Poland, Germany and Denmark in 2006
199
Figure D.19
Procurement prices in Poland, Germany and Denmark in 2009
In general, we observe that rather radical changes in the Polish market for both pig meat
products and poultry where the Polish industry has taken advantage of their competitive
edge, mainly in terms of pricing.
D.7
D.7.1
Consumption and production levels
For poultry, we observe that the consumption in 2008 is much lower than the production
which makes Poland a net-exporter of poultry, Figure D.20.
The supply chain of poultry in Poland, 2008 and in 1,000 tonnes
Export
Figure D.20
Live poultry
(cooled weight)
Import
consumption
Production and
314
Production for
Production from
Consumption
slaughter
slaughter
(cooled weight)
(live weight)
(cooled weight)
Live poultry
(cooled weight)
48203 heads
42
In the period 2003 to 2008, the poultry industry in Poland experiences some radical
changes in the market situation. On the one hand, the consumption increases by 65
200
percent. On the other hand the production doubles and after 2004 the export increases
heavily and is eight time higher in 2008 than in 2003.
Table D.5
Production, imports, exports and consumption of poultry meat, in thousand tonnes
2003
2004
2005
2006
2007
2008
621
829
1,086
1,136
1,194
1,252
Import
16
29
82
79
69
42
Export
42
55
212
250
280
314
595
803
956
965
983
980
Production from slaughter
Consumption
D.7.2
Prices structure for poultry products
Through the value chain we find that the processing of meat increase the value of the
product and as expected the retail prices are higher than the procurement prices but we
also observe that the producer prices are very close to the retail prices.
Table D.6
Price volatility for poultry through the value chain, per kg in zl, 2003-2008
2005
2003
2004
per kg
2006
2007
2008
in zl
Average procurement prices
Poultry for slaughter (in live weight)
3.27
2.93
3.14
2.76
3.52
3.46
9.07
9.16
11.56
12.34
12.89
15.35
5.76
4.93
5.63
4.9
6.31
6.21
Average prices received by farmers on
marketplaces
live hen - 1,5-2,0 kg per unit
Retail prices of some consumer goods
Disembowelled chicken
Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland and GUS-data from the
Central Statistical Office.
In 2004, the price formation seems somewhat strange in 2004 probably due to change in
the regulatory regime, In the following years the procurement, producers and retail prices
are fluctuating following the same patent of increase and decrease in prices.
However, a closer examination reveals that the rise of the procurement prices for poultry
for slaughter was two times smaller than the rise of selling prices and retail prices for
disemboweled chickens.
201
Procurement prices for poultry and selling and retail prices for disembowelled chickens, in z•/kg
6,00
8,70
procurement price for poultry
y = 0,0296x + 5,0781
5,50
7,60
5,00
6,50
4,50
5,40
y = 0,0226x + 4,4554
4,00
4,30
3,50
3,20
y = 0,0127x + 2,9116
3,00
2,10
2,50
selling price and retail price for disembowelled chickens
Figure D.21
1,00
I 2005 III
V
VII
IX
XI I 2006 III
V
VII
pro curement p rice for po ultry
IX
XI I 2007 III
V
VII
IX
XI I 2008 III
kurcz• patro szone cena zbytu
V
VII
IX
XI I 2009 III
V
VII
kurcz• patroszo ne cen a detaliczn a
IX
XI I 2010
trend
D.8
The cost structure
Some very general figures about the cost structure in the meat production and processing
industry are presented in exhibit 25 (see also the annex). In all sector the main cost is
purchases of goods and services mainly animals for slaughtering and meat for processing
which counts for about 90 percent of turnover.
The overall impression is that the meat manufacturing industry with pigs and poultry
products only comes out with a small surplus (see also exhibit 10) which might indicate a
strong competition and/or a pressure for further structural change.
Table D.7
Actual cost within the meat production, millions Euro, 2007
Turnover or gross premiums written
Gross operating surplus
Production and
Production of
preserving of
preserving of
meat and poultry
meat
poultry meat
meat products
5,258
2,448
2,891
125
112
75
Production value
4,685
2,065
2,411
Total purchases of goods and services
4,834
2,212
2,612
Purchases of energy products (in value)
:
:
:
Personnel costs
439
165
286
Wages and Salaries
357
132
233
Social security costs
83
32
53
Source: Eurostat.
202
Production and
D.9
D.9.1
Production of pig and poultry meat trend is taken place in fragmented value chains
characterised by low-scale production of pigs and poultry for slaughtering as well as we
observe huge number of production and processing enterprises. In order to make the
value chain functioning, middlemen are playing an important role especially in the lower
end of the value chain. All in all the vertical integration is still low.
Within the last decade, structural changes have taken place as we observe a tendency
towards:
•
larger holdings even though this transformation probably will take years;
•
increasing concentration within production and processing of meat among other
initiated by the establishment of large (foreign own) industrial groupings but no one
of the groupings have so far a dominating position in the market;
•
increasing concentration in retail as larger retail (foreign own supermarket and
hypermarket) chains are entering the market gaining strong market positions.
These new large and strong player in the value have also been followed by some vertical
integration. At farm level, the farmers try to strengthening their market position by
establishing producer marketing groups delivering to the slaughterhouses. The prevalence
and impact of these groups are probably to be seen.
The large industrial groups with production and processing are often developing
production lines which include slaughtering and processing of meat products. In some
case we even observe further downwards and upwards integration as these industrial
groups have their own farms for feeding pigs and/or poultry, purchasing units contracting
the farmers as well as some also have their own distribution facilities.
The middlemen, the wholesaler, the small producers and retailers are facing increasing
competition and an increasing number of businesses will be squeeze out of the market.
However, the vertical integration is still low, although growing.
In the light of the structural changes, the value chains are facing some challenges.
Quality pressure
Even though some consider the Polish meat to be very advanced (excellent assortment of
products), the market is met by increasing demand for improved quality and standards.
An increasing quality pressure would contribute to more formalised business relationship
e.g. more use of written and long lasting probably agreement/contacts in favour of the
larger enterprises.
Existence of middlemen
The middlemen do play an important role and do not exclude transmission of information
from costumers (e.g. about quality) or the use of formal contractual relationships.
However, trading through middlemen will typically be based on less formal type of
business relationships as repeated market transaction. Further, the middlemen trend to
203
lower the prices e.g. to the farmers as they may capture a part of the margin e.g. for
implementing better quality.
Trust
Trading relationships in the value chain may to a large extent be based on trust. Personal
relationship is also an important factor supporting the building of repeating business
transactions e.g. through middlemen.
However, the value chain seems also to be influence by distrust among the partners as
many have unwillingness to share information with trading partner or entre closer
business relationships.
The situation is somewhat different when it comes to large retailers and manufactories as
the business relations becomes much more sophisticated and complicated. More often the
partners will need to establish long written agreement specifying e.g. quality standard,
prices, conditions for delivery (guarantee the delivery), listing fees etc.
All in all, there is a pressure for structural change – concentration and consolidation - in
the value chain which have increased institutionalisation of the trading relationship in the
value chain.
D.9.2
Even though we see structural changes taken place, the market is still dominated by short
term repeated agreement and the spot market. The fragmented structure is still a
limitation for developing more tight relationship between the farmer, the industry and
distribution.
The farmers seems to be in the weakest bargaining position as they typically only are able
to deliver small quantity of meat (animal for slaughtering) as well as the price formation
at the spot market follows the price level in the neighbouring countries. An attempt to
increase prices exclusively in Poland will probably be met by an increasing import (if
there is sufficient supply of pigs and poultry for slaughtering). The large production and
processing industry do following the prices in these countries and will within a short
notice be able to enlarge the foreign supply of pigs for slaughtering or cut meat.
In the distribution of raw meat (cut meat) or processed meat products, the retailers and
especially the large chain have a strong bargaining power. Especially when it comes to
raw meat, the retailers can choose between many suppliers and the prices formation will
to a large extent depend on the supply (the price at the spot market). Some of the larger
groupings have established their oven distribution network in order to have more tight
relationship especially with the small retailers but the impact on prices is unknown to us.
Few of the larger processing industry have established their own brands (quality
products) as a market strategy to obtain higher prices. The industry stresses that it is very
costly to establish a brand and the existing low profit margins is a hindrance for such
204
investments. As a responds to brands, the retailers could introduce private labels but the
impression is that privet labels are not widespread.
All in all, short term repeated agreement and the spot market is still dominating the
market. Some argue that the market – the price formation - is even very transparent but
retailers having the strong bargaining position. Trading agreements are often on a weekly
basis and with short term condition for payment. In rare cases and with larger consumers,
the agreements can last up 4 to 8 weeks.
D.9.3
Code of conduct
The overall impression bases on literature and interviews is that the commercial actors,
the associations and the public institutions are very keen on developing the value chain as
well as the institutional and regulatory set up. A key issue is to develop the value chain to
meet the competitive challenge followed by the transition to a market economy and the
accession to EU. The main consideration seems to pursue the economic opportunities in
the market rather to discuss whether regulation or a voluntary code of conduct as a better
solution to problems in the value chain.
Polish Food Law
Today, the Polish regulatory regime is generally based on provisions from the EU
(Common Agricultural Policy) and Poland’s entry into EU has involved adjustment in
animal production and processing, aimed at ensuring food quality. These requirements
have led to investment/FDI in improved or new production facilities followed by
restructuring, tendencies to concentration in the food sector.
When it comes to price formation, the Common Agricultural Policy do not interfere
directly with the market (no intervention procurement but subsides for storage and
export) which might the impact of more fluctuating price. The Office of Competition and
Consumer Protection80 exerts control over the observance of market competition rules
and is in charge of consumer rights protection in Poland. Two basic legal acts concerning
competition rules and consumer protection are “The Act of 16 February 2007 on
competition and consumer protection” (Journal of Laws of 2007, No. 50, item 331, as
amended)81 and “The Act of 16 April 1993 on combating unfair competition” (Journal of
Laws of 2003, No. 154, item 1503 as amended)82. Another general act that regulates
market functioning in Poland is “The Act of 12 June 2003 on payment terms in
commercial transactions” (Journal of Laws of 2003, No. 139, item 1323)83.
In relation to the meat sector, the authorities express that there so far has not been
encountered any significant problems when is goes for prices formation and merges.
Some larger industrial groups have been established in the pork and poultry processing
industry but the value chain is still to be characterised as fragmented and not industrial
80
81
82
83
(Urz•d Ochrony Konkurencji i Konsumentów - http://www.uokik.gov.pl/.
Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentów (Dz.U. 2007, Nr 50, poz. 331 ze zm.).
Ustawa z dnia 16 kwietnia 1993 r. o zwalczaniu nieuczciwej konkurencji (Dz.U. 2003, Nr 154, poz. 1503 ze zm.).
Ustawa z dnia 12 czerwca 2003 r. o terminach zap•aty w transakcjach handlowych (Dz.U. 2003, Nr 139, poz. 1323).
205
concentration seems to have any dominating position on in the value chain to affect the
prices formation.
However, political initiatives have been taken in order to monitor the prices in the food
market.
A price commission was an initiative by the former Polish government. The initiative
involved the formation of working groups with the participation of meat producers and
processors, whose main goal was to overview the meat market by gathering and
publicizing information on average weekly meat prices in the value chain in order to
provide the market with more transparent and updated price information. The price
commission’s work has been terminated probably due to political reason.
A new initiative was launched in February 2010 by establishing an “Intersectoral Group
on Strengthening of the Agri-Food Products Market Transparency and Food Supply
Chain Functioning Improvement”84 under the Ministry of Agriculture and Rural
Development. The Group has among others to overview and estimation of commercial
practices within food supply chain, working out an idea of how to constantly monitor
prices and margins, looking for the possibilities of reaching consent among participants of
the food supply chain and preparing a code of good commercial practice in relation to
trade in food.
Voluntary agreements
The impression is that there is no real tradition for voluntary agreement in Poland and we
have been able to identify any voluntary agreement having a real impact on the market.
However, the price commission, mentioned above, was an initiative by the former Polish
government but the initiative had involved a working group with the participation of meat
producers and processors.
84
206
Mi•dzyresortowy Zespó• do spraw Zwi•kszenia Przejrzysto•ci Rynku Artyku•ów Rolno-Spo•ywczych i Poprawy
Funkcjonowania •a•cucha •ywno•ciowego.
E Germany
E.1
Introduction
Within the manufacturing industry, the food sector is a dominating sector which
accounted for 11 percent of the employees in Germany in 2007. The food sector
represents about 800,000 persons employed in total and when including farming and
trading, the food sector increases its important in the economy.
Table E.1 highlights the size and the economic importance of the food sector in Germany
as well as of the entire meat sector. The meat sector represents a significant importance in
the economy accounting for about one quarter of the employment and turnover in the
food sector. The large size (employment share) of the meat sector does not lead to relative
high scores on the economic performance indicators such as value added, profitability and
productivity.
Table E.1
Main indicators of the German meat and food industry, 2007
Meat
Food*
Meat % Food
Turnover (EUR million)
36,433.1
163,232.0
22.3
Production value (EUR million)
34,276.5
150,752.7
22.7
Value added at factor cost (EUR million)
6,724.5
34,077.7
19.7
Gross operating surplus (EUR million)
2,650.6
12,356.4
21.5
Labour costs (EUR million)
4,073.9
21,721.3
18.8
Gross investments** (EUR million)
1,305.3
9,455.3
13.8
Number of persons employed
194,349
826,011
23.5
Gross value added per employee (EUR 1,000)
37.5
43.3
Share of personnel costs in production (%)
11.9
14.4
7.3
7.6
Gross operating surplus/turnover (%)
*: Including beverages.
**: In tangible goods, existing buildings and structures, machinery and equipment.
Source: Eurostat.
When looking specifically at the subsector meat processing (excluding slaughtering), the
sector has experienced increasing turnovers and fairly stable employment numbers since
2005, see Table E.2.
207
Table E.2
Main indicators of the meat processing industry, 2005-2009
2005
2006
2007
2008
2009
Persons employed
62,621
62,829
59,607
58,977
60,189
Turnover (EUR million)
14,106
15,680
15,453
16,146
16,179
Source: Destatis.
Germany has experienced growth in the production of meat during the last decade –
especially when it comes to pig meat, see figure 1. Germany is now the leading producer
of pig meat in the EU and the third largest producer in the world.
Figure E.1
Production of meat in commercial slaughterhouses
Source: Statistiches Bundesamt Deutschland.
Traditionally, the Germany has been a net-importer of pork meat, but the production has
increased without an increase in the national demand. In 2006, the production pass the
consumption at the home marked and Germany becomes an exporting country. In the last
couple of years, the average monthly difference between the value of exports and the
value of imports has been EUR 87 million, see Figure E.2. To meet increasing demands,
imports of slaughter pigs has increased throughout the years from 1.5 million pigs in
2000 to 4.4 million in 2008 (ZDS 2009). The the imports of pigletts have also increaed
followed by an increased in the domestic production. In 2000, the stock of pigs for
slaughter in Germany was 10.1 million compared to 11.2 million in 2008 (ZDS 2009).
Figure E.2
Foreign trade in pig meat
208
E.1.1
For selected pig and poultry meat products, the development in the consumer (market)
prices is shown in figure 3 and 4. As can be seen, price volatility is most noticeable in
relation to poultry. For 2000 to 2009, the overall picture is that the prices for pig meat
products have been rather stable, see Figure E.3. However, in 2001 the prices rise
remarkable from a relatively low level and peaked in the same year followed by a gradual
decline. In the middle of the decade the prices have been very stable but in the end of
2007 the prices gradual begins to rise and since the end of 2008 the prices have stabilised
at a slightly higher level.
Figure E.3
Consumer prices for selected pig products, index 2000-2009
The consumer prices for poultry products have been fluctuating considerable from 2000
to 2009, see figure 4. The prices peak in 2001 followed by a decline, a minor peak in
2004 followed by stable prices in 2005 and 2006. In the end of 2007, the prices starts to
increase dramatically and reaches a significantly higher level in 2008 follow by a
stabilisation at a lower level in 2009 – though at remarkable higher level than seen for
most of previous years.
Figure E.4
Consumer prices for selected poultry products, index 2000-2009
209
E.1.2
Consumption levels
The meat consumption in Germany is about 88 kg per capita which is quite high
compared to other European countries (e.g. UK 82 kg per capita), see Table E.3. We also
observe that the composition of the meat consumption has developed steadily, where the
share of pig meat consumption is about 62 percent with a tendency to declining
consumption while poultry is steady about 17-18 percent of the entire meat consumption.
Table E.3
Consumption of meat (kg/head), 2005-2008
2005
2006
2007
2008
Kg/head
%
Kg/head
%
Kg/head
%
Kg/head
%
Poultry meat
17.5
20.1
16.7
19.2
17.8
19.8
18.8
21.2
Pig meat
54.1
62.0
54.5
62.9
55.4
61.8
53.3
60.3
Other kinds of meat
15.6
17.9
15.4
17.9
16.5
18.4
16.3
18.5
Meat in total
87.2
100.0
86.6
100.0
89.7
100.0
88.4
100.0
Source: BVDF.
When looking specifically at the consumption of processed meat (all kinds of meat), it
has also developed very steadily at around 30 kg per capita, see table 4.
Table E.4
Consumption of processed meat (kg/head)
2005
2006
2007
2008
Meat consumption in total
87.2
86.6
89.7
88.4
Of which processed meat
30.3
30
31
30.6
processed meat in % of all meat consumption
34.7
34.6
34.6
34.6
Source: BVDF.
The fact that per capita consumption has remained fairly stable, while production has
increased, makes the export business of particular importance for the future
competitiveness of the meat industry (Bahlmann & Spiller 2008).
E.2
Market structure
In this section, the market structure of the meat industry in general (production,
preserving and processing of meat) will be highlighted based on data from namely
Eurostat. Later on in relation to the description of the supply chain, the structure of the
different subsectors will be addressed more thoroughly.
210
E.2.1
Number of firms
The development in the total number of enterprises in the meat sector is presented in in
Figure E.5.
Figure E.5
Number of enterprise in the entire meat industry
Source: Eurostat.
The number of enterprises falls from 2000 to 2002 and in the following years the number
of enterprise has been stabilised, but some structural changes is hidden behind these
figure. First, the largest subsector within the meat industry is production of meat and
poultry meat products representing 91 percent of the enterprises, but the main reduction
of enterprises is to be found here while the number of enterprises is reduced by 40
percent. Secondly, we observe an increase in the number of enterprises within production
and preserving of meat (slaughtering) representing an increase from 425 to 841
enterprises.
E.2.2
Number of firms related to size
In the entire meat industry, small enterprises dominate the sector in term of number of
enterprises, see Figure E.6, but a high concentration in term of turnover and employment
is found as enterprise with more than 250 person employed counts for 47 percent of total
turnover and one third of the total employment.
211
Figure E.6
Number of enterprise by size classes in the entire meat industry, 2007
1086
96
Between 1 and 9
Between 10 and 19
3231
Between 20 and 249
250 or more
6751
Source: Eurostat.
In the period 2002 to 2007, we find that the decrease in number of enterprise takes place
in the group of micro enterprise (1-9 employees) where the number of enterprises
declines by more than 2000. The other size classes the number of enterprise is more
stable with some minor peaks in the period; see table.
Table E.5
Enterprises by size in the entire meat industry, in percent
2002
2003
2004
2005
2006
2007
1-9 employed
8,879
8,183
6,840
6,171
6,502
6,751
10-19 employed
3,048
4,733
4,840
5,299
4,099
3,231
20-49 employed
609
591
616
596
1,247
1,086
50-249 employed
436
422
446
459
250< employed
Total
85
87
83
90
90
96
13,057
14,016
12,825
12,615
11,758
11,164
Source: Eurostat.
E.3
Market features
E.3.1
The level of innovation is here represented by the investment in tangible good in the
entire meat industry, se Figure E.7. Over the period 2000 to 2007 the investment seems to
follow the same fluctuation as the meat prices (consumer prices). Form a high investment
level in 2002, the investments go down in 2001 along with the decline in consumer (see
above) and stabilise at an investment level at EUR 600 million per year. As the prices
tend to increase in the end of the period, the investment also increases from 2005 and
onwards.
212
Figure E.7
Gross investment in tangible goods
Source: Eurostat.
Split by types of investment, the entire meat industry invests about 80 percent of the total
investment in machinery and equipment which indicates that the investment is done in
order to obtain an increase in productivity, see Table E.6. German processors have also a
good reputation for building and innovation in the meat processing industry, largely due
to their expertise in engineering (goliath.ecnext.com, 2007). However, the investment
figures do also signal that improvement and modernisation of the production facility to a
large extent can take place within the existing facilities as investment in construction and
buildings are declining.
Table E.6
Type of investment in the meat industry, 2000-2006
2000
2001
2002
2003
2004
2005
2006
Land (%)
0.7
0.6
0.6
0.4
1.2
0.6
1.6
Existing buildings and structures (%)
1.2
0.5
2.1
1.7
1.1
0.7
1.3
Construction and alteration of buildings (%)
23.7
19.1
16.0
15.9
19.6
15.5
16.8
Machinery and equipment (%)
74.5
79.7
81.3
82.0
78.1
83.3
80.4
Source: Eurostat.
E.3.2
Profitability
In the period 2000 to 2007, the profitability – the gross operating rate – in the entire meat
industry is fluctuating in an interval from 5 to above 7 percent, see Figure E.8. These
fluctuations are to a very large extent following the prices volatility, but the relative
differences between peaks and bottoms seems to by larger.
213
Figure E.8
Gross operating rate in the meat industry, 2000-2007
Source: Eurostat.
E.3.3
Added value
Figure E.9 presents the trend in value add per employees. The overall trend is that value
added has been gradually increasing over the entire period with some minor decline en in
2001-2003 and more dramatic drop back in 2005 following by increasing value added in
2006 and 2007 which is very much in line with the development in consumer prices.
Figure E.9
Gross value added per employee in the meat industry, 2000-2007
Source: Eurostat.
E.3.4
Productivity
The following Figure E.10 presents the production value. We observe that the production
value is about EUR 25,000 million in the beginning of the period, but peaks in 2004 at
more than EUR 40,000 million and declining to about EUR 35,000 million in the
following years.
214
Figure E.10
Production value in the meat industry, 2000-2007
Source: Eurostat.
E.4
The structure of the supply chain
In the following section an analysis of the supply chains will be provided. Firstly, a
general picture of the meat supply chain will be presented and afterwards are more
detailed analysis of each level of the supply chain will be provided focused on pork and
poultry.
As will be seen, in almost all parts of both the pork and poultry supply chains
concentration is taking place. Concentration in the chains is driven by intensified
competition at all levels, but especially at the retail level (Reynolds et al. 2009). Small
units tend to survive longer in the pork chain than in the poultry chain and concentration
is more pervasive downstream than upstream. The structure of the pork chain is more
complex than the poultry chain, due to a lower degree of vertical integration (Bahlmann
& Spiller 2008). In the pork chain, the most typical relationship between business
partners is repeated market transactions (RMT), while relations tend to be more formal
downstream than upstream (FOODCOMM 2006).
In the poultry chain both independent and integrated models are practiced, but the main
players are working as integrations. In contrast to the pig value chain, relations in the
poultry chain between business partners are in general more formalised and based on
long-term contracts.
Another major trend is that export since 2006 has been a main driver for expanding the
production (economics of scale). Within the industry we have not only seen an increasing
consolidation in term of establishing very large enterprises build on modern production
technology but also an increasing international market orientation. In order to utilise the
production capacity access to pigs for slaughtering becomes more critical and the
competition becomes more intense at the home market, but the export business is of
particular importance for the (future) competitiveness of the industry. The consequence is
215
that the German meat production both at the supply side of pig (animals) for slaughtering
and sale of process and produced meat is becoming more integrated in global chains.
E.4.1
An overview of the supply chain
Based on data from Eurostat, FOODCOMM and Statistiches Bundesamt Deutschland, we
get an overview of the supply chain in terms of number of enterprises in figure 11. Some
numbers are estimates from 2004 (marked with ˜).
Noticeable is the fairly large numbers of intermediaries, i.e. livestock traders (2,299) and
meat wholesalers (1,285), active in the chain. It can also be noted, that pig meat
processing is very dominating at the processing level as a whole. The estimated number
of pig meat processers (estimation by FOODCOMM), leaves less than 15 enterprises left
for processors specializing in poultry or other kinds of meat. This primarily reflects the
extremely high degree of concentration at this stage in the poultry supply chain. The same
tendency is not as profound at the slaughterhouse level though. We also see a low number
of retailers specialised in meat sales (3,618). This number has been decreasing throughout
the years, as will be shown later.
Figure E.11
Number of enterprises in the value chain for pig and poultry products, 2007
Source: Eurostat, 2007; FOODCOMM, 2006, Statistiches Bundesamt Deutschland, 2007.
Based on figures from the comprehensive analysis of the German meat supply chain,
conducted by the now closed Zentrale Markt- und Preisberichtstelle in 2006, we get,
even though the figures are from 2006, a good impression of the flows of meat in the
meat chain (ZMP 2006).
In the first part of the supply chain from slaughtering to processing, we see again the
importance of intermediaries with in pig meat as 18 percent of the pig meat for further
processing is provided by meat wholesalers. Of all unprocessed pig meat entering the
German market from both domestic and foreign sources, 54 percent is processed by the
processing industry while 44 percent of the meat is sold as fresh or process meat by the
slaughter houses. Within poultry production the wholesalers with fresh are not a part of
the supply chain as well as only 30 percent of the fresh meat is processed.
216
Figure E.12
Flows of pig meat from slaughtering to processing, 2004
Figure E.13
Flows of poultry meat from slaughtering to processing, 2004
Source: ZMP Warenstromanalyse Fleisch 2006.
In Figure E.14, we see the flows of processed meat from processing to consumers. 79
percent of processed meat entering the German market is processed by the domestic
processing industry. The processed meat leaving the industry goes out to several different
distributers primarily the retailers (61 percent). 19 percent is going through meat
wholesalers (this eventually spreads out to chain participants further downstream.
217
Figure E.14
Flows of all kind of meat from processing to consumers, 2004
Source: ZMP Warenstromanalyse Fleisch 2006.
After this introduction to the meat supply chain, we turn to the different levels of the
supply chain, i.e. farmers, livestock traders, slaughterhouses, processors, meat
wholesalers and retailers, and we focus our attention specifically on pork and poultry
meat.
E.4.2
Farming
There is one common trend in the farm structure, which goes for both pig and poultry
holdings. The number of farms decreases steadily, while remaining farms are expanding,
i.e. more animals per farm are kept.
In terms of poultry holdings, the concentration on farm level is very high. While farming
in relation to poultry is often integrated up- and downstream in the supply chain. Poultry
farmers often deliver directly to the large integrated poultry companies such as PHWGruppe.
The pig farmers are less integrated with the slaughterhouses and pig processing industry
which is illustrated by pig farmers choosing between several different marketing
channels.
218
E.4.3
Pig farmers
In Germany, pig farms have traditionally been small, often family owned and managed
part-time. Three main production systems characterise pig farms in Germany: specialised
breeding units, specialised finishing units and integrated units where both breeding and
fattening takes place (FOODCOMM 2006).
The main trend in the German pig production is that the farmers increasingly are
concentration there production on fattening pigs. The production of pig for slaughtering is
increasing, while the production piglets have been declining. In order to compensate for
the declining supply of piglets but increasing prices for piglets, Germany has a
significantly increasing import of piglets from among other from Denmark (2000: about 1
million piglets; 2009: 9 million piglets) and the Netherlands as the German market is very
attractive.
Looking specifically at fattening, during the last years, there has been an increased
concentration resulting in fewer and larger fat pig farms. The production of fat pigs
increased significantly during the last decade from a stock totalling 10.1 million in 2001
to 11 million in 2007, see table 7. At the same time, the number of holdings has decreased
from 85,808 in 2001 to 62,195 in 2007. Accordingly, there is a tendency towards larger
farms. In the period from 1996 to 2003, the number of farms with 199 fat pigs or more
increased with 10.5 percentages in the old Federal States and 12.1 percentages in the new
ones and each farm unit had 9 percent more pigs in 2008 than in 2007 (FOODCOMM)85.
Table E.7
Holdings with fat pigs
2001
2003
2005
2007
Holdings
85,808
77,671
66,500
62,195
Fat pigs
10,096,559
10,481,910
10,663,500
10,958,187
Pig producers can choose between different marketing channels. A small minority of
farmers have established direct marketing relationships with consumers based on on-farm
slaughtering, cutting and in some cases even processing. Another group of farmers rely
on private or cooperative livestock traders when selling their fat pigs (two-tier system). A
large share of these transactions is done with farmer cooperatives engaged in trading. A
third group of farmers deliver directly to slaughterhouses (single-tier system). The pig
farmers’ relationships with the slaughterhouses can by and large be described as informal
repeated market transactions. A major reason for this is that the farmers generally have a
high preference for commercial independence. At the same time tradition and trust play a
central role for them. As a consequence, the farmers primarily engage in informal, at first
sight short-term oriented, business transactions, which are, however, rather stable, and
often carried out with well-known partners (FOODCOMM 2006). While spot-market or
85
The German pig production is compared to the Denmark characterised by relative smaller farms, where the typical German
pig producer have space for 176 pigs for fattening while a typically Danish farmer have space for 750 pigs. However, there
is a large diversity in size of the farm among the German farmers and the average sizes of the farms are increasing.
219
informal long-term relationship with slaughterhouses tends to dominate, Westfleisch,
Germany’s third largest slaughter company, strongly promotes marketing contracts with
farmers. Some slaughterhouses are owned by farmers such as EGO Osnabrück owned by
approximately 700 farmers. EGO slaughters 448,000 pigs on a yearly basis.
E.4.4
Poultry farmers
The production of broilers is highly concentrated in Germany. In 2007, 99 percent of all
broilers were kept by 960 (or 11 percent) of the holdings (Eurostat). The concentration
has been increasing during the last decade. While the stock has gone up, the number of
holdings has been stable or decreasing – except when looking at the largest holdings. The
number of holdings with 100,000 or more broilers has increased from 80 in 2000 to 120
in 2007, see table 8. In other words, the level of concentration is high and rising.
Table E.8
Holdings with broilers
2003
1 and 99
broilers
100 and 999
broilers
2005
2007
Holdings
Broilers*
Holdings
Broilers*
Holdings
Broilers*
10,000
60
8,340
50
7,640
60
450
110
450
90
290
70
60
110
60
110
60
100
20
70
20
60
20
80
40
280
30
220
40
260
690
19,290
590
16,720
610
17,450
230
14,440
240
15,940
230
15,720
90
22,030
90
23,580
120
27,580
11,580
56,390
9,820
56,760
9,000
61,310
1,000 and
2,999
broilers
3,000 and
4,999
broilers
5,000 and
9,999
broilers
10,000 and
49,999
broilers
50,000 and
99,999
broilers
100,000 or
more broilers
Total
Source: Eurostat.
*: 1,000 heads.
The leading farmers sometimes develop integrated production systems including own
mills for feed stuff production, animal production, abattoirs, sizing and packaging as well
as shipping and some farmers negotiate directly with retailers. It is very common that
farms are either subsidiaries of large integrated companies or contracted by them. For
220
instance, approximately 800 farmers produce broilers for PHW-Gruppe, the largest
poultry company in Germany (www.phw-gruppe.de). Approximately 20 percent of PHWfarms are owned and 80 percent is contracted.86 Contracts are usually quite strict, for
instance the type of feed stuff is prescribed by the companies.
E.4.5
Livestock traders
Specific to the German pig market is the intermediate between the farmer and
slaughterhouse level, i.e. livestock traders. The number of livestock traders in Germany is
decreasing, while turnover is increasing. In 2000, 2,520 enterprises operated in the sector
and the turnover was EUR 7.8 million. In comparison, 2,299 enterprises operated in the
sector in 2007 generating EUR 10 million in turnover (Eurostat). In other words, a
concentration is taking place at this level too, even though the average size of enterprises
still remains very small.
Table E.9
Livestock traders
Number of
Enterprises
2000
2001
2002
2003
2004
2005
2006
2007
2,520
2,253
2,148
2,377
2,430
2,391
2,348
2,299
7,816
7,823
7,296
7,990
8,977
9,848
11,105
10,054
9,519
8,292
8,163
9,959
10,964
11,115
11,182
11,460
Turnover
(Million
EUR)
Persons
employed
Source: Eurostat.
Concentration can be explained by concentration happening downstream. According to
Schulze (2009), mergers and acquisitions are the most competitive strategy in this sector
and the concentration at the slaughterhouse level leads to increased competition among
livestock dealers.
Livestock traders play an important role in relation to pigs due to relatively large numbers
of farms and the need to “bundle” large quantities of pigs. Framework agreements are
negotiated generally once every year, with penalties for delivering too few animals per
week. Sometimes bonuses are granted as well if the trader is able to flexibly deliver more
than the stipulated quantity in weeks with special needs. Livestock traders play a less
important role in relation to poultry, due to the high degree of vertical integration
prevailing.
86
http://www.ishii-co-ltd.jp/High.pdf.
221
E.4.6
Slaughterhouses
The slaughterhouse level is less concentrated when it comes to pigs compared to poultry.
Many small companies operate in the pig slaughtering industry and the number of
enterprises has actually gone up in recent years. Nevertheless, the largest companies are
increasing their share of the total production. In terms of poultry, the slaughterhouse level
is extremely concentrated. Only around 40 enterprises are active and the largest three
companies generate 82 percent of turnover. In both cases, the large companies are
integrated forward into processing.
Pig slaughterhouses
Traditionally, the pig slaughtering sector in Germany has been quite fragmented. A large
part of the industry has been regional enterprises with relatively small shares of the
market. The industry still comprises many small and middle sized enterprises and
enterprises that call themselves “Fleischhandwerk”. When looking at the number of
enterprises, it has actually gone up in the period from 2005 to 2008 (notice, that the
number of slaughterhouses includes all kinds of meat but poultry), see Table E.10.
Table E.10
Slaughterhouses excluding poultry
Number of Enterprises
Persons employed
Turnover (Tsd. Euro)
2005
2006
2007
2008
155
160
164
175
16,238
16,550
17,249
17,980
9,486,523
10,148,733
10,657,514
12,539,892
Source: Destatis.
Nevertheless, the largest slaughter companies are increasing their share of the production.
In 2008, the ten largest slaughter companies did 38.7 percent of the slaughtering in
Germany, compared to 33 percent in 2006 (Hamann 2009). In the recent years we have
seen an increase in production and at the same time a consolidation in the sector. The
slaughtering processes have been concentrated to a number of production facilities in a
smaller number of very large companies operating all over the country but still vertical
disintegrated. However, some of the larger companies have developed to be vertical
integrated, e.g. as some companies are owned by the farmers.
There are relatively few large enterprises in the industry, whereas B & C TönniesFleisch,
Westfleisch, and the newcomer, Vion Food Group, are the largest (“the big three”). The
largest slaughter companies have increased their production in the last couple of years. B
& C TönniesFleisch has increased production with 1 million pigs each year. Westfleisch,
for the first time, slaughtered more than 6 million pigs in 2008. Vion has not increased its
pig production in as significant numbers as the other large slaughterhouses. The reason
for this is that Vion has consolidated after buying Grampian in the autumn of 2008.
There is a trend towards forward integration, i.e. slaughterhouses extending their
production into processing (FOODCOMM 2006). Slaughterhouses in Germany have
traditionally conducted the processes from killing (stunning, sticking and bleeding) to
cutting (splitting carcass and cutting into smaller pieces), but, especially for large-scale
slaughterhouses, there is a trend towards forward integration, and thus extensions into
222
processing. This holds for the ten largest meat processors in Germany which generate
around half of the total revenue of this sector.
Poultry slaughterhouses
In terms of poultry slaughterhouses, the number of enterprises and persons employed are
remarkably stable, see table 9. Turnover is rising, while the structure in terms of
enterprises and employment has been unchanged.
Table E.11
Poultry slaughtering
2005
2006
2007
2008
41
42
42
40
8595
8711
8414
9041
2,473,204
2,494,994
3,148,280
3,888,673
Number of Enterprises
Persons employed
Source: Destatis.
The largest poultry slaughter companies are PHW-Gruppe, Sprehe and Stolle. Of the total
turnover in 2008, approximately 50 percent was generated by PHW-Gruppe, 17 percent
by Sprehe and 15 percent by Stolle (Agrarmärkte 2009). In other words, approximately
82 percent of total turnover was generated by the three largest companies. These
companies are large integrated companies covering the supply chain from farming to
processing.
E.4.7
Processors
On the processing stage, there is also a tendency towards concentration, with the number
of enterprises falling from 406 in 2005 to 383 in 2009, while turnover increased. The
number of persons employed has been falling, indicating higher productivity.
Table E.12
Meat processors
2005
Enterprises
2007
2008
2009
406
415
389
381
383
62,621
62,829
59,607
58,977
60,189
14,105,843
15,680,129
15,453,051
16,146,066
16,178,594
Persons employed
2006
Looking at the size structure, the processing stage is numerically dominated by
enterprises with less than 50 persons employed, but in terms of both persons employed
and turnover, the processing stage is dominated by enterprises with 100-249 persons
employed, see Table E.13.
Table E.13
Meat processors by size classes
Less than 50 persons
Enterprises
Persons employed
Turnover (Mio. Euro)
588
17,289
2,006
223
Enterprises
Persons employed
Turnover (Mio. Euro)
50-99 persons employed
180
12,133
1,893
143
21,487
5,606
40
13,888
4,992
500 or more persons employed
17
12,246
3,630
Total
968
77,043
18,127
employed
Pig processors
54 percent of the unprocessed pig meat entering the German market is processed by the
domestic processing industry. 67 percent is provided directly by slaughterhouses, 18
percent by wholesalers and 15 percent through imports.
Poultry processors
Only 30 percent of the unprocessed poultry meat is used for further processing. 50
percent of the meat for further processing is supplied by slaughterhouses, 7 percent by
wholesalers and 43 percent through imports.
E.4.8
Meat wholesalers
As can be seen in Table E.14, the number of enterprises involved in meat wholesale (all
kind of meat) has been decreasing, but reaching a more stable period in 2004-2007.
Turnover has gone up except for year 2001 and 2007.
Table E.14
Wholesale of meat and meat products
Enterprises
Turnover
Persons
employed
2000
2001
2002
2003
2004
2005
2006
2007
1,655
1,535
1,504
1,422
1,291
1,214
1,307
1,285
12,517
13,130
11,324
14,227
14,987
14,727
16,062
15,617
27,328
25,546
24,781
25,775
24,653
21,798
22,648
22,514
E.4.9
Retailers
Over the last four decades, the German food-retailing sector has been subject to
continuous structural change. Most important have been the combination of increasing
concentration, with rising store size, and the growing role of discounters implementing an
aggressive “every-day-low-price” (EDLP) strategy (Stiegert & Kim 2009) which is
changing the shopping environment in favor of large hypermarkets and discount stores.
Aldi and Lidl are the market leaders, and act as the driving force in retail competition.
In 1997, when Wal-Mart entered the German market, it spurred increased consolidation
and merger activity in the sector. Hence, the concentration ratio of the leading ten firms
224
increased from 81.3 percent in 1996 to 86 percent in 2002 and has since remained stable.
Outlooks predict that the top-5 German retailers will have a market share of nearly 75
percent in 2010 (Schulze 2009).
Within the last decade there has been a trend to market the meat product under private
labels and the traditional way of buying meat from butchers or service sales department in
the larger shops seem to be replaced by an increased sale of pre-packed product (SBmeat: Selbst bedienung).
The introduction of packaged meat products we find an enforced competition pressure
within the sector, given that the discounters control significant shares in red meat and
poultry sales, see Table E.15 for consumer poultry purchasing behavior.
Table E.15
Poultry, consumer purchasing behaviour
2008
2009
Aldi and Lidl
29 %
31 %
Discount (excluding Aldi and Lidl)
15 %
17 %
Retail with food (Lebensmiddtteleinzelhandel( LEH))
20 %
19 %
SB-warehouses
23 %
21 %
3%
2%
Butchers
Others
10 %
10 %
Total
100 %
100 %
Source: MEG.
Retailers specialised in meat and meat products (e.g. butchers or specialised departments
in larger shops) are increasingly squeezed out, as indicated in Table E.16.
Table E.16
Retailers specialised in meat and meat products
2000
2001
2002
2003
2004
2005
2006
2007
Enterprises
5,047
4,793
4,377
3,450
3,236
2,922
3,573
3,618
Turnover
2,401
2,409
2,139
2,089
1,937
1,927
2,068
2,069
41,723
39,688
36,480
31,393
29,219
27,988
31,998
33,109
Persons
employed
Source: Eurostat.
These trends of moving the retailing of meat toward larger retail chains and especially
discount shops and private labels will set lower prices (and cost) and the ability to deliver
larger quantity on the top of the agenda. Smaller (regional) slaughterhouse and butchers
and smaller retailer is challenged by these changes in the market.
In these years, food retailers align their firms’ strategies to make them more
distinguishable for consumers. This “diversification” affects their relationships with their
suppliers. Today, business relationships between distributors and processors embrace
many relationship types and include ad hoc online transactions, annual negotiations,
integration as well as short term and long-term contracts (FOODCOMM 2006). Some
retailers are integrating into the meat processing industry, including REWE and EDEKA.
225
An increasing focus at quality and especially on food safety and traceability (also a
preference for German produced meat in the Germany market) seems also to put a
pressure on the private labels (Aldi and Lidl has recently reduced the number of private
labels) and new openings in the market for new innovative product which can be
foreseen.
E.4.10
Prices and cost along the chain
Within the last decade, the price index illustrate how the price have developed the value
chain for meat and meat products. A closer examination reveals:
•
Peaking prices in 2001 and again in 2008/2009;
•
Producers prices for selected pig meat products have a relatively high price level in
2001 compared to wholesale and retail prices, but in the following year the retail
prices do not follow the relatively falling producers and wholesale prices;
•
In 2005 and again in 2008 we see that the producer prices for some selected pig
products increase. In 2006 the wholesale and retail prices seems to be effected by the
relatively increasing prices. I 2007 the wholesale and retail prices follow the
increasing producer prices, but remain at a relative high price level when the producer
prices go down in 2009 (expect for frozen poultry meat).
During the last decade we observe rather fluctuating producer prices while the especially
the retail prices have been rather stable except for 208 an 2009, where the retail and
whole sale prices do not follow the falling producer prices.
Table E.17
Price index for meat products in the value chain, Index 2005 = 100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
- Pork, fresh or chilled
85.3
103.2
94.0
91.8
98.9
100.0
105.8
100.4
110.7
102.2
- Pork, parts, salted, dried,
92.9
106.4
100.6
95.4
97.1
100.0
103.1
100.7
104.8
102.5
100.0
100.0
101.2
104.9
103.0
Producer price
smoked Norwegian
- Poultry meat, fresh or
chilled
- Poultry meat, frozen
90.3
99.4
96.0
94.8
96.4
100.0
98.1
113.6
127.8
127.6
Wholesale of meat and
89.2
101.4
95.6
93.9
96.8
100.0
101.6
100.7
107.4
107.2
94.1
101.1
101.1
99.9
99.8
100.0
100.8
102.8
106.7
108.9
meat products
Retail sale of meat and
meat products
Source: Federal Statistical Office of Germany.
Pig meat prices
A closer look at the pig meat prices in value chain over the period 2006- 2009 shows a
very parallel prices development between farmers and wholesale prices but to the same
extent for the consumer prices, see figure 16. Over the period 2006-2009, the consumer
prices seems to have increased be the end of 2006 and remained at this level.
226
Figure E.15
Pig meat prices in the value chain, euro/kg, 2006-2009
Source: AMI-Marktbilanz: Vieb und Fleisch 2010.
The differences between the farmers, wholesales and consumer prices indicate that the
costs, value add/profit per kilo meat are relative lower by the farmers and in the
production. Between wholesale and consumers prices we observe the largest “jump” in
the pries per kilo and since the consumer prices are fluctuating different manner that the
previous level in the value chain, we may assume that the consumer prices are influenced
by another cost structure and competition pattern.
Poultry meat prices
In the period 2004-2009, the prices formation and the prices development for poultry
meat is somewhat different to the development for pig meat. From 2004 and onwards the
prices have l been rather stable at all level in the value chain but in 2007 the prices
increase rather dramatic and stabilise in 2008 and 2009 at a higher level. However, the
prices from the farmer have a falling tendency and the consumer prices are very
fluctuating in this period.
Figure E.16
Chicken meat prices in the value chain, euro/kg, kg 2004-2009
Source: AMI-Marktbilanz: Vieb und Fleisch 2010.
227
Figure E.16 indicates that the main part of the costs of the final product is placed by the
processor which indicate that the main part of the cost and value add are placed at this
level in the value chain.
Table E.18
Cost structure within meat production, Percent of gross output
Production and
Production and
preserving of meat
preserving of poultry
poultry meat products
meat
Material consumption
81.9
59.3
57.2
Energy cost
Use of commodity goods
1.1
2.5
2.0
1.2
16.4
6.7
Costs for contract work
2.3
0.6
0.8
3.9
6.0
10.3
Social cost
0.8
1.3
2.2
Other inputs
0.6
1.2
1.7
Tax expense
0.3
0.3
0.6
Rents and leases
0.6
1.4
2.0
Temporary workers
4.9
9.0
9.7
Depreciation
0.7
1.4
2.0
Borrowing costs
0.4
0.7
0.5
Gross wages and
salaries
Source: Federal Statistical Office of Germany.
Cost Structure
The cost within meat production and processing (primarily pig meat) indicate that the
main and dominating cost factor is material used in the production (pigs for slaughtering).
All other prices have a miner impact on the total cost which can explain the relatively
closeness and parallel development the farmers process and the wholesale prices.
For poultry meat, the cost structure in production and processing is quite different as the
cost to poultry for slaughtering (material) is much lover and the cost for commodity
goods and labour cost represent a larger share of the costs. These figures underline the
above assumption that a main part of value added is generate in the production and
processing by the production and processing activities.
We have not been able to identify more detailed information about the cost structure (e.g.
per kilo meat) at each level in the value chain, but Table E.19 gives some figures of the
actual cost in production and processing of meat. These figures seem to be I line with the
above assumption of the cost structure in the value chain.
Table E.19
Actual cost within meat production, 2007, millions of Euro
Production and
Production and
preserving of meat
meat
Turnover or gross
premiums written
228
11,187.1
3,497.2
2,1748.8
Production and
Production and
preserving of meat
meat
Gross operating surplus
410.8
161.1
2,078.8
11,088.1
2,935.4
20,252.9
10,215.0
3,088.9
16,342.7
121.5
86.8
447.3
Personnel costs
567.7
256.3
3,249.9
Wages and Salaries
466.2
212.2
2,664.8
Social security costs
101.5
44.1
585.1
Production value
Total purchases of
goods and services
Purchases of energy
products (in value)
Source: Eurostat.
E.5
The German meat market is, as highlighted above, especially with the pig meat value
chain characterised by low degree of vertical integration and many livestock traders and
wholesalers to tie the value chain together. The low integration in the value chain is
follow by business relationships characterised by repeated market transaction which
means that the prices are negotiated typically on short term contract (e.g. weekly basis) or
fix by the spot market. Longer term contracts seem to relative rare. The main competitive
factor is the prices but with some tendency that other competitive factors such as quality
might have an increase impact on the market.
E.5.1
There is strong competition on every stage of the supply chain. Neither food retailers nor
processing companies or farmer associations dispose of sufficient market power to take
on the role of a comprehensive chain coordinator or to set industry standards.
Nevertheless, the retailers without doubt have the upper hand in terms of bargaining
power. Due to the retailers’ important market share, they do play a crucial role in
determining prices along the chains. Through increased engagement in private labels, and
backward integration of some chains such as EDEKA and REWE, which are running own
slaughterhouses, they considerably influence the meat market. In terms of the relation
between processors and retailers, the fierce competition and the increasingly sophisticated
demand and price senility of German consumers are the main driving forces for the
development of relationships between processors and retailers. This development has in
general led to a higher dependency of processors towards distributors (Reynolds et al.
2009).
Imbalances
Three factors creating imbalances are highlighted: Firstly, lack of transparency, secondly,
lack of coordination and thirdly, retail power.
229
Lack of Transparency
The pork industry in Germany has traditionally been characterised by “arm’s length”
transactions. In a highly competitive surrounding, the supply chain shows a certain level
of distrust, which leads to distinctive inefficiencies. Partly doubtful grading processes and
a lack of price transparency in the market cause conflicts and lead farmers to question the
credibility of their buyers (Schulze et al. 2006). A major provision for conflict in relation
to the pork chain is missing transparency regarding rating and accounting of farmers’
products by their buyers (traders and slaughterhouses). Traders and slaughterhouses, on
the other hand, see a central problem in their relationship to farmers in hidden
information regarding the quality of supply (Reynolds et al. 2009).
One reason for the generally reserved willingness to share information across the chain
may also be that there is hardly any incentive to establish transparency. On spot markets
farmers and livestock dealers but also processors and meat wholesalers sometimes even
benefit from the obscure marketing channels since competitive advantages are also
achieved by means of opportunistic behaviour. For fear of disintermediation livestock
dealers also have a strong interest in concealing information about their suppliers
Lack of transparency can potentially lead to anti-competitive practices. In August 2009,
19 companies from the meat industry, including leading brands, came under investigation
by the Bundeskartellamt suspected for price fixing. This investigation follows an initial
investigation, begun in mid July 2009, which unearthed “substantial evidence” of price
fixing between the years 2003 and 2008. However, according to sources inside and
outside the industry, it is not expected that the investigation will unveil any wrongdoing.
Lack of coordination
The low level of trust also affects coordination in the chain. One major problem has been
coordination in relation to the industry’s response to diseases such as Salmonella and
BSE. There has been no focal company in the meat chain which efficiently coordinates
chain information, harmonises the different IT systems or takes on professional public
relations in charge of the whole sector. In cases of food crises, up- and downstream
information slowly flows across the chain which hinders both seamless traceability and
the harmonisation of production processes between the various stages of the supply chain
Retail power
Due to the fierce competition and increasing concentration at the retail level, more market
power is shifted to the retail sector potentially leading to market imbalance in the chains.
This situation is amplified as retailers are increasingly backward integrating into the
processing sector and introducing private labels. Private labels are widespread in the
German retailing sector. These products, introduced as alternatives to national brands,
represent a crucial element in food retailers’ marketing and pricing strategies (Stiegert &
Kim 2009).
The prevalence of private labels in the retail stores combined with a strong focus on food
safety, means the retailers has become more demanding and preferring “control” to
“trust”, regarding processors (Fiscer et al. 2007).
230
E.6
Code of Conduct
Regulations are mostly a matter between the EU and the German Länder, because the
Federal State is not involved with the implementation of European law.
The tendency has gone towards liberalisation. According to our sources, both farmers and
industry are happy with deregulation.
E.6.1
German Food Law
The German Food Law consists of about 230 different ordinances, including the Food
Labelling Ordinance, Packaging Ordinance, Dietetic Foods Ordinance, various hygienic
and veterinary requirements, as well as numerous other special product or product group
rules and regulations.
Basic regulations of the German food law are laid down in 61 articles of the Lebensmittel- und Bedarfsgegenstaendegesetz (LMBG), last amended September 1997. In
addition to the LMBG, in 2005 Germany developed a central Food and Feed Law Book
(Lebensmittel-, Bedarfsgegenstaende- und Futtermittelgesetzbuch - LFGB), providing
basic definitions, procedural rules and goals of the German food law. Both acts define
general food safety and health protection rules, address labelling requirements, regulate
inspection, detention and seizure rules of suspect food. These rules apply to domestically
produced as well as to imported food products.
The German Food Law is a federal law whose enforcement is the responsibility of the
Länder. This implies that on occasion, a minor infraction to the food law may be tolerated
in one state but not in another. However, major violations are persecuted in all federal
states.
The responsible agency for monitoring compliance with German food law regulations is
The Federal Office of Consumer Protection and Food Safety (BVL). It is under the
supervision of the Federal Ministry of Food, Agriculture and Consumer Protection. The
BVL was established as an independent higher federal authority and is also responsible
for risk management. BVL, inter alia, exercises authority over sub-stances and products
that harbour potential risks and that are directly or indirectly related to food safety (such
as plant protection products and veterinary drugs). It is involved in formulating general
administrative rules to implement laws in the fields of consumer health protection and
food safety, as well as in the preparation and monitoring of surveillance schemes and
plans by the Laender. In addition, BVL acts as coordinator in the run-up to inspections
carried out by the European Food and Veterinary Office (FVO). It is responsible for
implementing the Euro-pean rapid alert system in the fields of consumer health protection
and food safety in Germany. The national reference laboratory for the detection of
residues and the Community reference laboratory for the detection of residues are also
part of BVL.
231
E.6.2
Competition Law
Alongside EU competition law, national rules also ensure that competition is sustainable
and fair. These rules are contained in the Restraint of Competition Act (GWB) and the
Unfair Competition Act (UWG).
The Cartel Act (GWB) does not prohibit market dominance as such. However, there is a
danger that a firm dominating a market will impose its business targets largely as its sees
fit. Anti-trust controls over dominant market positions and, in Germany as well, over
firms with a strong market presence (i.e. a strong position in relation to their customers or
suppliers) are designed to stop firms not sufficiently kept in check by competition from
abusing their position of dominance to the detriment of competitors or
customers/suppliers and against the general interest. The following are prohibited:
Unfair hindrance of competitors, i.e. a firm with a dominant market position denies, for
example, a competing firm access to its networks and infrastructures, or attempts to oust a
competitor from the market through an aggressive pricing strategy. This category also
includes forced tie-ups (e.g. a product is sold only under an obligation to purchase spare
parts from the same firm) and exclusivity provisions (a retailer is obliged to obtain
specific products solely from the market-dominant producer).
Exploitative conduct, i.e. a firm demands inappropriate prices or conditions from its
customers or suppliers.
Non-discrimination, i.e. competing firms may not be disadvantaged or treated differently
without material reason.
The Unfair Competition Act (UWG) determines which unfair commercial practices
against competitors, consumers or other market participants are improper.
The Federal Cartel Office (Bundeskartellamt) – together with the relevant cartel
authorities in the federal states – is responsible for the protection of competition. Branchspecific decisions on cartels are taken by the Federal Cartel Office's legal departments.
The Centre for Protection against Unfair Competition and the Federation of German
Consumer Organisations are the two biggest national institutions in terms of
implementing Germany's unfair competition legislation. In addition, the law entitles
competitors, fellow associations and Chambers of Commerce and Industry to pursue
action on breaches of fair competition. The Federal Office of Consumer Protection and
Food Safety (BVL) is responsible for cross-border legal violations.
E.6.3
Voluntary agreements
Voluntary agreements seems not to very common on the Germany market as by repeated
market transaction is dominating the market.
232
E.7
E.7.1
Focus on exports
While domestic consumption is fairly stable and stakeholders expect it to decrease in the
future, exports markets has become more important to the German processing industry.
E.7.2
Focus on food quality
New initiatives indicates a stronger willingness to cooperate and coordinate across the
chain. QS Qualität und Sicherheit GmbH was established in 2001 by a cross-section of
six influential organisations of the German meat industry in response to the BSE crisis.
The initial objectives were to regain consumer trust by means of a holistic quality
assurance system for food supply chains. During the last 9 years since its foundation, QS
has seen a remarkable development and become the most important certification approach
in German agrobusiness. All in all, approximately 101,249 system partners of the meat
industry are affiliated to QS (Bahlmann & Spiller 2008) and QS almost represent the
whole supply chain, including 100 percent of the feed industry, 90 percent of the
livestock traders in pig meat and 95 percent of the livestock traders in poultry, 85 percent
of the slaughterhouses, 50 percent of the processors and 90 percent of the food retailers.
QS’ high market penetration is also a matter of downstream acceptance. Germany’s top
food retailers, have a strong demand for QS goods.
233
F Guidelines for interviews and interviewee list
The following is the document that was provided to researchers to guide the open-ended
interview they would be conducting.
F.1
Interview guidelines
We would anticipate that the interview should take approximately one hour (depending,
of course, on how talkative the interviewee is). These interviews are semi-structured, and
as such, the following are guidelines that you should use in your discussion with the
interviewee.
General (5-10 minutes)
You should use the first part of the interview to build a rapport with the
interviewee. Describe the purpose of the study, and get some general facts on their
business:
1. Ask about the how the business has been proceeding for the past five years. After
you have received some information, raise the issue of prices increases in 2007
and subsequent decreases. Ask about what the impact that was on profits, and
also on the character of the changes.
Bargaining power (20-30 minutes)
Questions on bargaining power in the value chain are one of the main drivers for
this study. You want to show some knowledge of the subject:
1. Summarise one potential business practice and characteristic influencing the
bargaining position of suppliers vis-à-vis customers (retail concentration, listing
fees) that you have identified in your desk research, and get the interviewee’s
opinion as to its validity. This business practice should NOT be attributed to the
type of individual that you are interviewing. From this initial discussion, probe
for other points of abuse, making mention of any of the following issues:
o Length and conditions of contracts with people above and below in the chain;
o Listing fees, terms of payment;
o Ability to change contracts during the contract period;
o Provisions for conflict.
The interviewee should refer to areas of concern for themselves, but it is OK if they
identify other parts of the chain with which they have no direct connection:
2. Once the business practices have been summarised, discuss how this might
influence the interviewee’s ability to compete. For example, if a firm forces the
235
interviewee to sign exclusivity agreements, it could influence their behaviour.
This should include issues such as:
o Productivity / growth / investment;
o Ability to “add value” to the product / innovation / time to valorise
innovations.
3. In the discussion above, you should also ask how these influence the
interviewee’s ability to innovate. You should ask for specific examples of what
the interviewee could do differently (and better) if the value chain looked
different (i.e. the bargaining positions were different);
4. If there are business practices that you can identify that could be attributed to the
interviewee, and you feel you have built up the proper rapport, ask about their
own situation.
Feasibility of EU-wide code of conduct (5-10 minutes)
One of the research questions that needs to be answered is about the feasibility of an
EU-wide code of conduct. Essentially, you should briefly be looking to see how
regulation or voluntary agreements can best improve the functioning of the value
chain:
1. Begin the discussion with a broad question about possible policy solutions.
Should the competition authority be more active, e.g. in terms of merger control?
Is there a role for regulation or voluntary agreements? Do they believe that
voluntary agreements, for example, are strong enough to solve problems that they
face in the value chain? Try to discover which regulations—whether national or
EU—are adding the greatest burden (without resulting benefit) to the
interviewee;
2. Related to the above discussion, also engage the interviewee in national vs. EU
regulations. On what level did they feel that problems should generally be faced?
Developments and trends (5-10 minutes)
This section should be used to fill out some of the data on your desk research on the
state of the industry. In our proposal:
1. Ask the interviewee about changes that they have seen in the industry over the
last five or ten years, potentially drawing on some of your desk research. You
may wish to draw on any of the following developments in your discussion:
o Traceability of products;
o Animal welfare;
o Environmental concerns.
2. Ask what they consider to be the most important change over the next five years
to remain competitive.
F.2
What to do with requests for questions
We would prefer NOT to send a questionnaire in advance, given that we want the
interviews to be relatively open; however, if the interviewees request in advance a list of
questions, you can offer the following:
1. Can you describe how price changes since 2005 (particularly the rise in
commodity prices in 2007) have influenced your profitability?
236
2. Can you summarise business practices that influence your bargaining power with
your contactors?
3. How does your bargaining position influence your ability to grow and add value
to the product?
4. Does your bargaining position influence your ability to innovate?
5. Should the competition authority be more active, e.g. in terms of merger control?
6. Is there a role for regulation or voluntary agreements? For example, do you
believe that voluntary agreements are strong enough to solve problems that they
face in the value chain?
7. What changes have you seen in the industry in the last five to ten years,
specifically in terms of the traceability of products, animal welfare, and
environmental concerns?
8. What changes do you anticipate for the future to remain competitive?
F.3
Industry-association-specific questions
Use the standard questionnaire as a guideline for the interview. In addition to the
discussion above, we would also like you to keep in mind the following for discussion:
1. List the five following types of innovation, and ask the interviewee if they could
prioritise which are most important to their members. If clarification is required,
you can offer the examples in brackets:
o Product (improving the quality of an existing product);
o Process (new method of production);
o Marketing (opening new markets;
o Organisational (co-operatives);
o New source of supply of raw materials.
The interviewee may wish to specify that the ordering is different according to the
location within the chain:
2. Once the interviewee has prioritised these innovations, get 2-3 concrete examples
of the first two;
3. Also in reference to the top-two priorities for innovation, probe the factors that
might influence a company’s ability to achieve these innovations. You may refer
back to issues in the value chain, regulation, or other issues not yet raised.
F.4
Table of interviewees
United Kingdom
Company/Institution
Contact person
Association of Independent Meat Suppliers
Norman Bagley
NPA, National Pig Association part of NFU
Barney Kay
British Meat Manufacturer’s Association
Stephen Rossides
Bpex
Andrew Knowles
Environment Agency
Tricia Henton
British Poultry Council
Peter Bradnock
237
DEFRA
Mike Roper
Rattlerow Farms
Robin Brice
Chief Poultry Advisor NFU
Robert Newbry
Anglia Quality Meat Association
Richard Doel
Spain
Company/Institution
Contact person
Grupo Batalle
Josep Batallé
Jorge Sa (Grupo Samper)
Jorge Samper Rivas
Patel Sa (Grupo Vall Companys)
Enrique Gil Burgos / Albert Morera
Casa Tarradellas
Josep Tarradellas Arcarons
Casademont
Adriana Casademont
Corporacion Agroalimentaria Guissona
Teresa Alsina Cornellana
Grupo Sada
Pedro Padilla Pulido (Vicep)
Campofrio
Pedro José Ballvé
Ministry Of Environment, Rural And Marine Affairs
Carlos Escribano
Asocarne
Fernando Pascual
Propollo
Ángel Martín
Comision Nacional De La Competencia
Alfredo González-Panizo Tamargo
FECIC
Josep Collado
The Netherlands
Company/Institution
Contact person
Van Rooi Meat, Helmond
Mr. M. van Rooi, director
Vion Food Group, Boxtel
Mr. S. Korver, director public affairs
Vleeshandel Hilckmann Nijmegen B.V.,
Mrs. D. Hilckmann, director
Abattoir Westfort, Gorinchem
Mr. J. de Wit, director
Egbert Kruiswijk Vleesproducten
Mr. E. Kruiswijk, director
Interchicken
Storteboom
Plukon
Heijsgroep
Poland
Name
Contact
Ministry of Agriculture and Rural Development,
Joanna Trybus, Ph.D.
Poland
Agricultural Market Agency
Radoslaw Lewandowski
Expert on Meat Markets
Office of Competition and Consumer Protection
238
Nikodem Szadkowski
Deputy Director
Market Analysis Department
Office of Competition and Consumer Protection
Sokolow
Secretariat
Main invester: Danish Crown
Interview with Projectchef Søren Tinggaard
Nove
CEO Max Sørensen Alexandra (secretary)
Germany
Name
Contact
Ministry of Food, Agriculture and Consumer
Dr. Hermann Josef Schlöder
Protection
Ministerialrat
Bundesverband der Deutschen
Thomas Vogelsang
Fleischwarenindustrie
Manager
Tönnies Fleisch
Dr. Timmermann
Wiesenhof
Oliver Kaufmann
239
G Data sources for modelling
Germany - Pork
Farm price:
Wholesale prices:
Retail prices:
Germany - Turkey
Farm price:
Wholesale price:
Retail price:
Prices paid by slaughterhouses to farmers. Auszahlungspreise der
Versandschlachtereien und Fleischwarenfabriken für Schweine
und Schlachtsauen (M1): Gesamtdeutschland, Monatsmittel
(EUR/kg Schlachtgewicht, frei Schlachtstätte, gewogene Mittel),
Durchschnitt aller Klassen (E-P);
Data source: ZMP-Marktbilanz Vieh und Fleisch 2006, Seite 84,
Tabelle 55, 2000:01 – 2005:12.
Wholesale prices for pork on Hamburg wholesale market for
selected products. Groβhandelsabgabepreise für Schweinefleisch
am Hamburger Fleisch-groβmarkt (obere Notierungsstufe,
EUR/kg);
Selected products: Schultern, rund geschnitten; Kotelettstränge
(ohne Nacken), Schinken, rund geschnitten;
Tabelle 70, 1999:01 – 2001:12, ZMP-Marktbilanz Vieh und
Fleisch 2005, Seite 118, Tabelle 70, 2002:01 – 2004:12, ZMPMarktbilanz Vieh und Fleisch 2006, Vieh und Fleisch 2006, Seite
86, Tabelle 58, 2003:01 – 2005:12.
Average consumer prices for selected products (including VAT;
EUR/kg). Durchschnittliche Verbraucherpreise für
Schweinefleisch (EUR/kg, einschl. MwSt.), 2000:01 – 2004:12;
Selected products: Schweinekotelett, Stiel oder Nacken/Kamm,
ohne Filet; Schweinefleisch zum Braten; Schweineschnitzel;
Tabelle 71, Durch-schnittliche Verbraucherpreise für
Schweinefleisch (EUR/kg, einschl. MwSt.), 2000:01 – 2004:12.
Prices paid to turkey farmers. Auszahlungspreise an die
Putenmäster – Bundesdurchschnitt -, Hähne schwerer Rassen,
Leitgewicht 18,5 kg, Euro/kg, 2003:01 – 2008:12;
Data source: MEG-Marktbilanz Eier und Geflügel 2009, page
159, Tabelle 121.
Prices received by slaughterhouses. Schlachtereiabgabepreise für
deutsches Putenfleisch, Euro/kg, Frische Putenschnitzel (bulk),
2003:01 – 2008:12;
161, Tabelle 122b.
Consumer prices for fresh turkey schnitzels. Verbraucherpreise
für Putenschnitzel frisch, natur in Deutschland, Euro/kg, 2003:01
– 2008:12;
162, Tabelle 123.
241
Germany – Poultry
Farm price:
Wholesale prices:
Retail prices:
Prices paid to broiler producers. Auszahlungspreise an die
Hähnchen-mäster, Bundesdurchschnitt, Euro/kg LG, 1900 g,
2004:01 – 2007:12;
Data source: ZMP-Marktbilanz Eier und Geflügel 2008, page
148, Tabelle 102.
Prices received by slaughterhouses. Schlachtereiabgabepreise für
deutsche Hähnchen, Durchschnitt aller Gewichte, Euro/kg frei
Empfänger, 2002:01 – 2007:12;
Data source: ZMP-Marktbilanz Eier und Geflügel 2008, Tabelle
104.
Consumer prices. Verbraucherpreise in Deutschland, Euro/kg,
2002:01 – 2007:12;
Selected products: gefrorene Hähnchen, frische Hähnchen and
Hähnchenschnitzel frisch, natur in Deutschland, Euro/kg;
Data source: ZMP-Marktbilanz Eier und Geflügel 2008, Tabelle
107- 109.
The Netherlands - Pork
Farm price:
Price of hogs per kilo live weight. Data source: LEI.
Wholesale price:
Eurostat export data: Dutch exports in euro divided by Dutch
exports in 1,000 tonnes for selected product categories.
Consumer prices:
Price per kilo for selected products: pork, bacon, pork chops and
schnitzels. Data source: GfK Budget panel.
The Netherlands – Poultry
Farm price:
Price of chickens per kilo live weight. Data source: LEI.
Wholesale price:
Eurostat export data: Dutch exports in euro divided by Dutch
exports in 1,000 tonnes for selected product categories.
Consumer prices:
Price per kilo for selected products: chicken, chicken legs and
chicken breast. Data source: GfK Budget panel.
Poland - Pork
Farm price
Wholesale price:
Retail price:
Poland - Poultry
Farm price:
Wholesale price:
Retail price:
UK - Pork
Farm price:
Wholesale price:
Retail price:
UK - Poultry
Farm price:
242
Farm gate PLN/kg live weight.
Wholesale PLN/t (pork lion with bone) / 1000.
Price indices Eurostat. Consumer price PLN/kg (pork lion with
bone) in 2008:03 = 16.25. The index is corrected by factor
16.25/99.4.
Slaughterhouse PLN/kg live weight.
Wholesale PLN/kg deadweight-whole chicken and chicken
breast.
Price indices Eurostat. Consumer price PLN/kg (chicken breast))
in 2008:03 = 16.5. The index is corrected by factor 16.5/103.5.
Wholesale prices:
Retail price:
Average retail price of selected items (pence) per kg. Selected
items: chicken: roasting, oven ready, fresh or chilled. Data
source: ONS.
243
H Further information on the model
Changes of the price spread can be analysed by equation (3). According to equation (3)
the farm-slaughterhouse (slaughterhouse-retail) price spread increases if:
∑ j =1 a j > 0
4
which can arise if:
1. the wholesale (retail) price increases more than the farm (wholesale) price
increases so that α1 > 0;
2. the wholesale (retail) price decreases less than the farm (wholesale) price
decreases, i.e., α2 > 0;
3. the wholesale (retail) price increases while the farm (wholesale) price decreases,
giving α4 > 0.
At constant cost levels the first situation is not so worrying as it implies that the
wholesalers (retailers) are profiting more from the economic growth than the farmers
(wholesalers) do. The second situation deserves more attention as it may indicate market
power of the wholesalers (retailers) vis-à-vis the farmers (wholesalers) in a climate of
economic stagnation or phase of market saturation. The third situation, however, is rather
alarming as it could be the result of wholesalers (retailers) who are taking advantage of
the relatively weak market position of the individual farmers (wholesalers).
Farm-wholesale (wholesale-retail) price spread decreases are revealed by:
∑ j =1 a j < 0
4
which can happen if:
1. the wholesale (retail) price increases less than the farm (wholesale) price in
which case α1 < 0;
2. the wholesale (retail) price decreases more than the farm (wholesale) price does
so that α2 < 0;
3. the wholesale (retail) price decreases whereas the farm (wholesale) price
increases, giving α3 < 0.
The situations 4-6 could be the result of increasing competition among the companies in
the output stage in which case there are no concerns from an anti-trust point of view. In
contrast, situations 4-6 may also arise because of increasing concentration levels at the
farm (co-ops) or wholesale stages (horizontal concentration by mergers or acquisitions) or
245
both (e.g. forward integration by farmers into processing/wholesaling activities).
Therefore, discovery of a price spread decrease always deserves further inquiry into time
series observations of industry concentration ratios.
Combination of results may also give an indication of the power balance in the chain.
Farmers (wholesalers) could find themselves in a rather weak position vis-à-vis the
wholesalers (retailers) if it appears that α1 > 0 and α2 > 0 (and hence, α1 + α2 > 0) and α3
+ α4 > 0. In contrast, if we find that α1 < 0 and α2 < 0 (and hence, α1 + α2 < 0) as well as
α3 + α4 < 0, then farmers (wholesalers) might be too powerful vis-à-vis the wholesalers
(retailers).
The estimates and tests of the coefficients of equation (3) are displayed in Tables 1-7. In
each column of results we first look at the estimate of
∑ j =1 a j . If its p value is smaller
4
than 0.05 (5 percent significance level), then the estimate is concluded to be significantly
different from zero. The other results in the table’s column reveal which coefficients
drive the
∑ j =1 a j estimate. In all cases we analyse annual changes. We shall first discuss
4
the results per country and then perform cross-country comparisons afterwards.
Table 1 displays the estimates for the pork sector in Germany. According the significantly
negative estimates of
∑ j =1 a j (in case of shoulder the estimate is not significant), the
4
farm-wholesale price spread is decreasing. The significant negative estimates for α2 and
α3 appear to be responsible for this result, implying that wholesale prices decrease less
than farm prices decrease and it also occurs that farm prices increase while, at the same
time, wholesale prices decrease. This result could suggest a weak position for the
wholesalers in the supply chain, but on the other hand, if we look at the wholesale-retail
price spread, we see that this price spread is also decreasing while a weak position of the
wholesalers in the supply chain would rather comply with an increasing wholesale-retail
price spread. A strong position for the wholesale has not been found either, because for
two of the three pork products (schnitzel and loin) the decrease in the wholesale-retail
price spread is not significant. Consequently, the results may probably reveal a general
situation of decreasing margins in the pork sector rather than power imbalances in the
chain.
The first two columns with estimates in Table 2 concern the turkey chain in Germany.
The farm-wholesale price spread increases ( ∑ j =1 a j is significantly greater than zero) in
4
particular because the wholesale prices increase more when the farm prices increase (α1 is
significantly greater than zero). In addition, the wholesale-retail price spread is increasing
as well. In this case the increase comes from increasing retail prices at times that the
wholesale price decreases (α4 is significant). Moreover, we also observe asymmetric price
behaviour conform its narrow definition: if both wholesale and retail prices rise, then both
price changes do not significantly differ (α1 is not significant), while if both price
decrease, then the retail price does only partially follow the downturn in the wholesale
price (α2 is significantly greater than zero). Consequently, these results give rise to the
suggestion that retailers set prices independently from price developments elsewhere in
the supply chain.
246
The other columns in Table 2 present the estimates for the chicken chain in Germany.
There we see that for whole chickens (fresh and frozen) the wholesalers manage to
increase the farm-wholesale prices spread in particular because the wholesale price
increases more when the farm price increases, while the wholesale-retail price spread
decreases because the wholesale price also increases more when the retail price increases.
This result suggests that slaughterhouses set prices without taking price developments
elsewhere in the supply chain into account. In case of chicken schnitzels, however, no
significant price-spread changes occur.
Table 3 collects the estimation results for the pork chain in the Netherlands. There we
observe that the only significantly changing price spread is the increasing wholesale-retail
price spread for bacon. The increase is particularly generated by increasing retail prices at
times that wholesale prices decrease. In addition, we see some slight, but significant
increase caused by asymmetric price transmission since α1 is not significant while α2 is
significantly greater than zero indicating that increases in wholesale prices are fully
transmitted in higher retail prices while decreases in wholesale prices are only partially
followed by retail price reductions.
The estimates for the poultry chain in the Netherlands are displayed in Table 4. Looking
at these results we see a significant decrease of the farm-wholesale price spread for
boneless cuts by 16.1 eurocents/kg/year, which is somewhat compensated by a significant
increase with 5.2 eurocents/kg/year of the farm-wholesale price spread for legs. In both
cases wholesale prices increase more when farm prices increase, but also decrease more
when farm prices decrease. And in case of boneless cuts wholesale prices are also
decreasing if farm prices are rising. These results point to a competitive situation in the
wholesale sector in getting farmers under contract. Vis-à-vis the retailers there are no
significant changes in the (wholesale-retail) price spread.
Table 5 presents the estimation results for the pork and poultry chains in Poland. For both
chains the results suggests that retail prices develop independent from changes elsewhere
in the supply chain. The wholesale-retail price spread is increasing because retail prices
increase more than wholesale prices do at the same time, whereas they decrease less when
wholesale prices decrease. Moreover, in the poultry chain situations in which the retail
price rises while the wholesale price falls also significantly contribute to the increase of
the wholesale-retail price spread. Nevertheless, in the poultry chain, at least, in case of
whole chickens, the wholesalers also face an increasing farm-wholesale price spread as
wholesale prices increase more than farm prices do.
The results for the pork chain in the UK, see Table 6, are mixed for the farm-wholesale
part of the chain, but quite uniform for the wholesale-retail channel. While the farmwholesale price spread is increasing for loins, it is not significantly changing for legs and
significantly decreasing for bellies. In case of loins wholesale prices increase more than
farm prices increase while in case of bellies wholesale prices increase less than farm
prices increase. In the wholesale-retail part of the chain, however, for all products
considered the retail-wholesale price spread is increasing in particular because the retail
price is increasing much more than the wholesale price at times both prices are
increasing. Moreover, the wholesale-retail price spread is also significantly widened by
247
the occurrence of situations in which the retail price is increasing whereas the wholesale
price is decreasing. Such a combination of results suggest that changes in consumer
prices are not related to price developments elsewhere in the supply chain.
While retailers may behave independently in the UK pork chain, no significant changes
are observed in the UK wholesale-retail poultry price spread. This is also true for the two
main wholesale products in the farm-wholesale part of the channel (roasters and fillets).
Consequently, no possible imbalances are detected in the UK poultry chain.
Table H.1
Parameter estimates and tests regarding Equation (3) for several price relationships in the pork chain in
Germany (H = 12)
Price Relationships (Sample: 02:01-04:12 = 36 obs, EUR/kg)
Farm-Wholesale
Leg
Shoulder
Wholesale-Retail
Loin
Schnitzel
Pork for
Frying
Loin
Coefficients
α1
−0.016
0.057
−0.003
−0.011
−0.092
−0.021
Std. error
0.010
0.023
0.017
0.005
0.014
0.018
t-value
−1.653
2.449
−0.143
−2.348
−6.534
−1.194
p-value
0.108
0.020
0.887
0.025
0.000
0.241
α2
−0.069
−0.081
−0.087
−0.061
−0.086
−0.025
Std. error
0.028
0.027
0.037
0.049
0.053
0.046
t-value
−2.493
−2.974
−2.414
−1.244
−1.613
−0.546
p-value
0.018
0.005
0.022
0.223
0.117
0.589
α3
−0.030
−0.023
−0.023
−0.022
−0.066
Std. error
0.007
0.003
0.007
0.005
0.013
t-value
−3.987
−6.750
−3.085
−4.691
−4.878
p-value
0.000
0.000
0.004
0.000
0.000
α4
248
0.011
0.038
0.055
0.046
0.073
Std. error
0.001
0.005
0.024
0.002
0.029
t-value
8.212
7.610
2.258
194.7
2.531
p-value
0.000
0.000
0.031
0.000
0.017
∑ j =1 a j
4
−0.103
−0.024
−0.075
−0.039
−0.160
−0.040
Std. error
0.032
0.034
0.042
0.063
0.056
0.067
p-value
0.003
0.481
0.084
0.538
0.008
0.555
α1 + α2
−0.085
−0.091
−0.072
−0.178
−0.047
Std. error
0.031
0.041
0.049
0.055
0.049
p-value
0.009
0.033
0.154
0.003
0.346
α3 + α4
−0.018
0.016
0.032
0.018
0.007
Std. error
0.007
0.006
0.024
0.005
0.030
see Σα
Price Relationships (Sample: 02:01-04:12 = 36 obs, EUR/kg)
p-value
Table H.2
0.016
0.016
0.187
0.001
0.817
Parameter estimates and tests regarding Equation (3) for several price relationships in the turkey and poultry
(roasters) chain in Germany (H = 12)
Price Relationships (EUR/kg)
Turkey
Roasters
Farm-
Wholesale-
Farm-
(Whole Turkey
(Breast Turkey
Wholesale
Retail
Wholesale
Breast)
- Schnitzel)
Frozen
Fresh
Chicken
Roaster
Roaster
Schnitzel
Sample No. of Obs
06:01-08:12
06:01-08:12
05:01-07:12
05:01-07:12
05:01-07:12
36
36
36
36
36
Coefficients
α1
0.258
0.078
0.147
0.097
0.092
Std. error
0.050
0.074
0.022
0.022
0.032
t-value
5.135
1.052
6.829
4.406
2.896
p-value
0.000
0.300
0.000
0.000
0.006
α2
−0.034
0.028
−0.009
−0.006
−0.050
0.007
0.002
0.001
0.004
0.013
t-value
−4.798
16.26
−6.197
−1.509
−3.889
p-value
0.000
0.000
0.000
0.138
0.000
α3
−0.066
Std. error
Std. error
−0.014
0.025
0.001
t-value
−2.687
−14.59
p-value
0.011
0.000
α4
0.123
0.037
0.017
0.004
Std. error
0.017
0.007
0.004
0.002
t-value
0.000
0.000
0.000
0.093
p-value
∑ j =1 a j
4
0.158
0.228
0.175
0.107
0.032
Std. error
0.056
0.078
0.023
0.023
0.034
p-value
0.008
0.006
0.000
0.000
0.343
α1 + α2
0.224
0.138
0.138
0.091
0.042
Std. error
0.051
0.021
0.021
0.022
0.033
p-value
0.000
0.000
0.000
0.000
0.214
α3 + α4
see α3
see α4
see α4
see α4
−0.010
Std. error
0.002
p-value
0.000
249
Table H.2
Continued
Roasters
Frozen
Fresh
Wholesale-Retail
Chicken
Roaster
Schnitzel
−0.054
−0.015
Roaster
Sample
No. of Obs.
05:01-07:12
05:01-07:12
05:01-07:12
36
36
36
Coefficients
α1
Std. error
−0.107
0.034
t-value
p-value
0.004
p-value
0.001
0.138
0.000
0.008
0.005
α4
0.001
t-value
6.328
p-value
0.000
∑ j =1 a j
4
250
−3.698
0.001
0.009
Std. error
−0.129
−0.050
0.013
−2.465
0.019
−1.096
0.281
−0.021
0.008
−3.038
−0.019
0.017
7.313
−0.024
t-value
p-value
0.001
−1.356
0.185
0.010
1.522
α3
Std. error
0.009
0.002
t-value
0.011
−2.777
-3.111
α2
Std. error
0.020
0.103
0.013
7.762
0.000
−0.057
Std. error
0.037
0.021
0.030
p-value
0.001
0.013
0.525
α1 + α2
−0.105
−0.044
−0.034
Std. error
0.034
0.019
p-value
0.004
0.029
0.108
α3 + α4
see α3
−0.012
0.053
Std. error
0.008
0.017
p-value
0.155
0.003
0.019
0.020
Table H.3
Parameter estimates and tests regarding Equation (3) for several price relationships in the pork chain in The
Netherlands (H = 12)
Farm-
Wholesale-
Wholesale
Retail
General
Pork chops
Bacon
Schnitzel
Sample
01:01-09:08
02:01-09:08
07:01-09:08
0.010
0.006
Std. error
0.012
t-value
p-value
α2
07:01-09:08
07:01-09:08
No. of Obs
0.028
0.013
0.010
0.008
0.019
0.023
0.027
0.820
0.671
1.458
0.559
0.375
0.414
0.504
0.156
0.580
0.711
−0.011
0.006
−0.050
0.012
0.003
0.013
0.012
0.015
0.005
0.014
t-value
−0.833
0.546
−3.379
2.403
0.245
p-value
0.407
0.587
0.002
0.023
0.808
α3
−0.009
−0.025
−0.031
0.002
0.006
0.010
t-value
−5.643
−4.092
−3.049
p-value
0.000
0.000
0.005
0.005
α4
Coefficients
α1
Std. error
Std. error
−0.067
0.016
−4.100
0.018
0.050
0.021
0.101
0.065
Std. error
0.002
0.012
0.005
0.019
0.017
t-value
8.165
4.161
4.156
5.203
3.787
p-value
0.000
0.001
0.000
0.000
0.001
∑ j =1 a j
0.009
0.038
−0.031
0.126
0.011
Std. error
0.019
0.022
0.025
0.031
0.041
p-value
0.640
0.088
0.215
0.000
0.788
α1 + α2
4
−0.000
0.012
−0.022
0.025
0.013
Std. error
0.018
0.015
0.023
0.024
0.030
p-value
0.979
0.406
0.355
0.303
0.656
α3 + α4
0.009
0.025
−0.009
Std. error
0.003
0.013
0.011
p-value
0.003
0.058
0.415
−0.002
see α4
0.026
0.932
251
Table H.4
Parameter estimates and tests regarding Equation (3) for several price relationships in the poultry (roasters)
chain in The Netherlands (H = 12)
Boneless
Farm-
Wholesale-
Wholesale
Retail
Legs
General
Cuts
Breast
Chicken Legs
Sample
05:01-09:07
05:01-09:10
05:01-09:07
05:01-09:07
05:01-09:11
55
58
55
55
59
0.057
0.054
−0.052
−0.027
−0.026
Std. error
0.012
0.020
0.019
0.011
0.028
t-value
4.757
2.714
−2.702
−2.323
−0.903
p-value
0.000
0.009
0.009
0.024
0.370
α2
−0.108
−0.029
−0.003
0.064
0.004
No. of Obs
Coefficients
α1
Std. error
0.025
0.010
0.007
0.030
0.008
t-value
−4.374
−2.965
−0.362
2.170
0.468
p-value
0.000
0.005
0.719
0.035
0.642
α3
−0.126
−0.006
−0.027
−0.068
−0.046
Std. error
0.020
0.001
0.008
0.011
0.010
t-value
−6.302
−4.486
−3.372
−6.032
−4.810
p-value
0.000
0.000
0.001
0.000
0.000
α4
0.017
0.033
0.074
0.066
0.059
Std. error
0.002
0.006
0.013
0.012
0.017
t-value
9.744
5.877
5.877
5.420
3.425
p-value
0.000
0.000
0.000
0.000
0.001
−0.161
0.052
−0.008
0.035
−0.009
Std. error
0.040
0.022
0.026
0.038
0.035
p-value
0.000
0.024
0.758
0.356
0.808
α1 + α2
−0.051
0.025
−0.055
0.038
−0.022
Std. error
0.028
0.022
0.021
0.030
0.030
p-value
0.075
0.252
0.011
0.213
0.459
α3 + α4
∑ j =1 a j
4
252
−0.109
0.027
0.047
−0.003
0.013
Std. error
0.020
0.006
0.014
0.018
0.020
p-value
0.000
0.000
0.001
0.888
0.500
Table H.5
Parameter estimates and tests regarding Equation (3) for several price relationships in the pork and poultry
(roasters) chain in Poland (H = 12)
Price Relationships (PLN/kg)
Pork General
Poultry
Farm-
Wholesale-
Wholesale
Retail
Chicken
Chicken
Farm-
Wholesale-
Whole chicken
Wholesale
Retail
breast
07:01-09:07
07:01-09:07
07:01-09:08
07:01-09:08
07:01-09:08
31
31
32
32
32
0.057
0.158
0.287
0.507
0.478
Std. error
0.112
0.088
0.061
0.131
0.061
t-value
0.511
1.794
4.716
3.866
7.850
p-value
0.613
0.083
0.000
0.001
0.000
α2
−0.000
−0.037
−0.329
0.162
Sample
No. of Obs
Breast
Coefficients
α1
Std. error
0.007
0.009
0.037
0.021
t-value
−0.047
−4.253
−9.004
7.721
p-value
0.963
0.000
0.000
0.000
−0.060
−0.080
−0.080
α3
Std. error
−0.125
0.036
0.013
0.013
0.000
t-value
−3.476
−4.646
−6.808
−∞
p-value
0.002
0.000
0.000
0.000
0.096
0.166
0.017
0.057
0.055
0.000
α4
Std. error
0.014
t-value
6.676
0.015
3.018
3.715
p-value
0.050
∑ j =1 a j
4
0.028
0.324
0.206
0.098
0.689
Std. error
0.124
0.125
0.065
0.134
0.072
p-value
0.822
0.014
0.004
0.473
0.000
α1 + α2
0.057
0.249
0.178
0.640
Std. error
0.113
0.063
0.133
0.066
p-value
0.618
0.001
0.191
0.000
α3 + α4
−0.029
Std. error
0.039
p-value
0.465
0.005
see α1
0.001
−0.043
see α4
0.013
0.002
0.049
see α3
0.015
0.003
253
Table H.6
Parameter estimates and tests regarding Equation (3) for several price relationships in the pork chain in the
United Kingdom (H = 52)
Price Relationships (pence/kg)
Farm-Wholesale
Sample
No. of Obs
Wholesale-Retail
Loins
Legs
Bellies
Loin Chops
Loin Steaks
08:30-09:51
08:30-09:51
08:30-09:51
08:30-09:51
08:30-09:51
74
74
74
74
74
Coefficients
14.78
4.759
−6.643
14.76
51.05
Std. error
α1
2.873
2.647
2.626
3.541
7.888
t-value
5.143
1.798
−2.530
4.167
6.472
p-value
0.000
0.076
0.014
0.000
0.000
α2
−1.524
−3.642
−2.645
−5.081
−4.892
Std. error
0.002
0.198
0.268
0.495
0.982
t-value
−786.8
−18.41
−9.875
−10.26
−4.982
p-value
0.000
0.000
0.000
0.000
0.000
α3
−1.524
−3.642
−2.645
−5.081
−4.892
Std. error
0.002
0.198
0.268
0.495
0.982
t-value
−786.8
−18.41
−9.875
−10.26
−4.982
p-value
0.000
0.000
0.000
0.000
0.000
3.203
4.378
Std. error
0.005
0.029
t-value
657.6
149.6
p-value
0.000
0.000
α4
∑
4
aj
13.25
1.118
−9.288
12.88
12.88
Std. error
2.873
2.634
2.650
3.566
7.823
p-value
0.000
0.673
0.001
0.001
0.001
see α1
see α1
see α1
see α1
see α1
−1.878
−0.514
see α3
see α3
see α3
0.495
0.982
0.000
0.603
j =1
α1 + α2
Std. error
p-value
α3 + α4
Std. error
p-value
254
Table H.6
Continued
Farm-Wholesale
Legs-Legs
Wholesale-Retail
Legs-Fillet
Boneless
Sample
No. of Obs
Bellies
Bellies-
Bellies- Diced
Sausages
Minced Pork
Pork
08:30-09:51
08:30-09:51
08:30-09:51
08:30-09:51
08:30-09:51
74
74
74
74
74
Coefficients
α1
47.08
23.19
28.96
38.77
46.86
Std. error
5.479
3.197
3.729
5.847
7.593
t-value
8.593
7.253
7.765
6.631
6.172
p-value
0.000
0.000
0.000
0.000
0.000
α2
−0.122
Std. error
0.000
t-value
p-value
α3
Std. error
−1.716
−2.068
−7.135
0.561
0.707
1.091
t-value
−3.061
−2.923
−6.540
p-value
0.003
0.005
0.000
α4
9.203
10.43
3.649
9.811
5.851
Std. error
0.851
0.851
0.575
1.529
1.779
t-value
1.779
5.354
6.351
6.418
3.289
p-value
0.000
0.000
0.000
0.000
0.002
∑ j =1 a j
54.57
31.55
25.35
48.58
52.72
Std. error
5.647
3.847
3.925
6.251
8.572
p-value
0.000
0.000
0.000
0.000
0.000
see α1
see α1
see α4
see α4
4
α1 + α2
Std. error
28.84
see α1
see α1
p-value
3.729
0.000
α3 + α4
7.486
8.365
−3.486
Std. error
1.019
8.365
1.180
p-value
0.000
0.000
0.004
255
Table H.7
Parameter estimates and tests regarding Equation (3) for several price relationships in the poultry (chicken)
chain in the United Kingdom
Farm-
Farm-
Wholesale-
Wholesale (H =
Wholesale
Retail(H=12)
52)
Sample
No. of Obs
Broilers1550-
Roasters>
Skinless
Roasters2050-
Roasters 2050-
2050g
2450g
Breast Fillet
2450g
2450g
03:01-09:48
03:01-09:48
03:01-09:48
03:01-09:11
03:01-09:11
357
357
357
83
83
4.566
4.573
20.01
3.096
2.976
0.966
1.120
3.202
1.976
2.396
Coefficients
α1
Std. error
t-value
4.726
4.083
6.250
1.567
1.242
p-value
0.000
0.000
0.000
0.121
0.218
α2
−3.064
−3.139
−9.876
2.241
2.964
0.472
0.524
1.578
1.205
0.745
t-value
−6.498
−5.985
−6.257
1.860
3.981
p-value
0.000
0.000
0.000
0.067
0.000
α3
−3.127
−4.215
−8.261
−8.133
−8.072
0.425
0.494
1.838
1.078
1.098
t-value
−7.359
−8.531
−4.495
−7.544
−7.351
p-value
0.000
0.000
0.000
0.000
0.000
α4
Std. error
Std. error
4.752
5.168
4.328
6.675
6.976
Std. error
0.532
0.708
0.840
1.672
1.481
t-value
8.931
7.301
5.155
3.991
4.709
p-value
0.000
0.000
0.000
0.000
0.000
∑ j =1 a j
3.127
2.288
6.203
3.880
4.843
Std. error
1.276
1.489
3.935
3.626
3.705
p-value
0.015
0.110
0.116
0.288
0.195
α1 + α2
1.502
1.434
10.14
5.337
5.940
Std. error
1.076
1.237
3.570
2.238
2.507
p-value
0.164
0.247
0.005
0.020
0.020
α3 + α4
1.625
0.953
−3.933
−1.458
−1.096
Std. error
0.679
0.862
2.015
2.019
1.875
p-value
0.017
0.270
0.052
0.472
0.561
4
256
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Study on the Competitiveness of the European Meat

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