Oral evidence: Beef grading, HC 430

Oral evidence, 14 September 2016.

Witnesses

John Dracup, Tom Kirwan and Jim Dobson.

Chair

Gentlemen, welcome to the Committee. Thank you very much for coming to give evidence on beef grading and the supply chain of beef. Starting with Jim, if you would like to introduce yourselves, please, and then we will fire away.

Jim Dobson

I am the managing director of Dunbia. Dunbia is a business that involves myself and my brother, Jack, which was formed back in 1976. It started off as a small butcher’s shop in Dungannon in Northern Ireland. It is still a family business, but we now have nine sites in the UK and two in Southern Ireland. We are a multi-species processor of beef, lamb and pigs from around 23,000 producers over the UK and Ireland. We have approximately 7.5% of the prime kill in GB and 12.5% in Northern Ireland. Customers range from retailers in the domestic market to key export outlets for high value cuts to enable our carcase balance.

Tom Kirwan

Tom Kirwan, managing director of ABP in the UK. Our business is, much like James’s, a retail-focused business slaughtering both beef and lambs in the UK and Northern Ireland.

John Dracup

John Dracup, livestock procurement director for 2 Sisters Red Meat. We have sites in Cornwall, south Wales and Aberdeenshire in Scotland procuring beef and lamb throughout England, Wales and Scotland from approximately 15,000 farmers. Their average size is 57 cattle per annum per farmer and 400 lambs.

Chair

Thank you very much. We appreciate you all coming in this afternoon. I will ask the first question. The purpose of bringing you in is that you have changed the grading system, and we accepted the need for changing the system. We want to first of all ask you why it was changed and how it seems to have had a rather large effect on the value of cattle going through the new grading system. That is certainly something that the farmers in particular charge you with. You may well feel that is not the case, but can you explain it to us? It is a system used on the continent; it is used in France quite a bit. Would you like to explain why you have brought it in and why it seems that suddenly quite a lot of value has been knocked off of certain livestock going through the system? Who wants to start with that one?

Tom Kirwan

The visual imaging analysis—the VIA—basically takes a picture of the carcase; it is a very different way of grading than the manual system. It was not that there was anything wrong with the manual system but it is, by its nature, subjective rather than objective. The new way of grading using the camera system brings a great degree of consistency to the grading. It is bringing science to it and it allows us then to use those pictures as we go forward in our breeding programmes. In terms of the value that we stand accused of taking out of the value chain, we know that the AHDB wrote a report, and rightly so the Committee has taken on the figures. It issues its report in four tranches. The first tranche of the report was very emotive in that it said we took £1 million out of the supply chain in a month. I personally do not recognise that.

Chair

You might recognise it if you were a farmer receiving substantially less for your cattle, I would have thought.

Tom Kirwan

Chair, if I may, if I take the three critical weeks in our operation, the week before we put in the VIA grading £1,095 was the average cost of my animals. The week during installation it was £1,097, and the week after it was £1,100. If there was ever to be a time when the value would be missing in the supply chain, that would have been the period of time. I do not recognise that value as missing.

Chair

In what period was the survey done by the AHDB?

Tom Kirwan

I think it was a month comparing February. I can write to you to clarify that, but I think it was that period.

Chair

Therefore, that survey was done over a longer period.

Tom Kirwan

Yes, but I can only talk about the experience within my organisation. The AHDB figures that they may have reported are for the entire market. I can only speak for my own organisation. The new grid system reflects the business that I have demand for meat for. I do not recognise the £1 million per month missing out of it. I might say that this time last year the cost for cattle was £1,120 and this year it is £1,136, so I question this erosion of value.

Chair

Partly we have had a reduction in the value of the pound and quite a lot has followed on. Therefore, we have got to be a little bit careful about where we are now and where we were when the grading system came in. What I have had is anecdotal evidence and evidence from farmers who have directly lost between £100 and £150 per animal when the system changed. This is what we are trying to drill down on, because the cattle were of a similar quality; it is just that the grading system seemed to downgrade or down-price. It is not so much the grading system that I am in dispute with you over; it is the pricing of the different grades of cattle and how that came about in a reduction to the farmgate price to the farmer. Other witnesses ought to speak as well but, Tom, you answer that one.

Tom Kirwan

Chair, if we go to the AHDB report, the first version was the one in which the figure was reported when you met last on this subject. The final report has been published and it basically says that the new system does not work for either the benefit of the processor or the farmer. It does not work in favour of either/or; that is one of its conclusions at the end. There are other conclusions that we may come onto later, but, from my perspective, it is not punitive for the cattle that we need for our customers.

John Dracup

With regard to the 2 Sisters Food Group, we have not changed the system of grading our stock within our facilities. We have been using exactly the same method, which is the MLC Services Ltd’s carcase classification grading service in all our facilities. Nothing has changed with regard to the methodology of how we establish the grades within the factory. We did change our pricing structure, and that pricing structure was to reflect our customers’ specification and ensure that we as a company could sell more British beef from West Country, Welsh, Scottish and British farms to our customers and ensure that we are selling more rather than less of that product. That is why we changed the system.

Chair

Let us get this clear: are you using the new grading system?

John Dracup

We are not using the new grading system.

Chair

If it is such a good system why did you choose not to use it and Tom and ABP did? Why are one big slaughter house group deciding to use a new system and another not?

John Dracup

It is down to each individual company to make their own commercial decisions as to where they go and how they operate. We as an organisation value the role and independence of the Meat and Livestock Commission’s classification service that not only validates the grade of the animal but also validates the weight and the trimming specification of that animal independently. We are buying the product, the producer is selling it and they are the independent intermediary in the middle that we choose as an organisation to promote.

Chair

Therefore, you would believe that the traditional system that you are using suits you and suits the grading of that carcase that you are buying better than the new scanning system.

John Dracup

It suits our business and suits our relationship currently better with our producer base. However, I would not say that there will not be a time when we look at an alternative method going forwards.

Rishi Sunak

John, you mentioned that you had put in the new payment system. Am I right in saying that you said that was at the request of the retailers?

John Dracup

No. We instigated the pricing structure ourselves. That is my responsibility as the procurement director to manage the payment to producers. What I have to do is ensure that we are delivering the right specification and the right quality to those customers, and I have to have a pricing mechanism that delivers that.

Rishi Sunak

Fine, but you did it in response to changing customer needs. Is that fair?

John Dracup

Yes, that is correct.

Rishi Sunak

Could I very briefly on that point ask the other two gentlemen the same question? Assuming that you have also introduced new payment grids, would you give the same rationale for why you did that as Mr Dracup?

Tom Kirwan

In our business, if we look at what has happened in the last three to four years in the British beef trade, whilst the top line demand figure has not changed by very much, within the total beef consumption we have what I would call a premiumisation of steaks within our supply chain. That premiumisation has come about through dry aging, maturation periods or breed specific. What is most critical is that the new way of promoting steaks at retail level is at fixed weight. When you go to a fixed weight model it is important that the raw material that you bring in is more consistent. Therefore, the change in consumer demand that has happened over a three to four-year period is that we have seen an 8% increase in steak sales with the top line being flat. That increase in steak sales has been driven by and large by a fixed weight packing, greater maturation and enhancement in a premiumisation of the product. That has certainly changed our behaviour and hence we would have changed our pricing mechanism to reflect that change in demand.

Chair

I am conscious that we have not heard from Jim. We will hear from Jim, and then David would like to make a point.

Jim Dobson

We have the VIA machine in Northern Ireland but the MLC graders here on the mainland. We did not put in the VIA on the mainland because we reckon there is going to be more technology, which will be even better than what the VIA machine is, in a very short period of time. A lot of technology is going to be advanced in that way through using the fat depth. The grading system that we have for saleable meat will be something that we will look at in the future very quickly. That is hence why we as a company did not invest in the mainland.

Chair

Am I clear that you are using the new system in Northern Ireland but not on the mainland in the UK? Is that right?

Jim Dobson

That is right.

Chair

What is the difference between a cow in Northern Ireland and a cow on the mainland for you to have two different systems?

Jim Dobson

The Northern Ireland factories all bought the machine at the same time, so the grading people we let off from the MLC at that particular time.

David Simpson

I refer Members to my Member’s interest in the agri‑food sector.

Chair

We will register that.

David Simpson

I will also register my friendship with Jim Dobson for the past 30 years; whether he would want that publically known or not is a different story.

Chair

That is probably very dangerous.

David Simpson

Can I hit on the point of the grading in Northern Ireland? In relation to the new system that has been put in in Northern Ireland, Jim or Tom, what consultation was carried out either with the Ulster Farmers’ Union or the farmers themselves? If it was done what was the feedback on that?

Jim Dobson

Lots of consultation went on. First of all, it had to make all the graders in Northern Ireland at that time redundant. There was quite a bit of consultation on that, and then the Ulster Farmers’ Union were brought in as well to structure the grading system differently. They have lost more grades in Northern Ireland because they say that an O+3 could have been an R3 because they have very similar things, although we would argue that the farmer always would get the benefit of the doubt, which I think the farmers recognise themselves. There has been loads of consultation on it.

David Simpson

On the new system that we have in Northern Ireland, with the old LMC a farmer could have argued for an hour and a half with a grader to try to get the grade up. Is that the same with the new system or is it dead in the water as soon as that grade is given?

Jim Dobson

What we have in our factory is that every farmer is welcome to come into the factory to see his cattle being graded. They go past the grading machine and come to the scale. He sees the grade on a screen and then we have a licensed grader there as well and he can contest it there at that time. At that stage we can change the grade if our grader agrees with that. If he does not get his grades until that night, he can appeal and come in and see the animal. If he is still not happy with our grader he can go to DAERA and have their grader come to clarify the grade.

David Simpson

So the new machines are not infallible. In other words, a farmer could get his grade changed if the qualified grader agreed that the machine was wrong.

Jim Dobson

Beauty is in the eye of the beholder; it is no science.

Chair

You have had consultation with the farmers, but in fairness to the farmers if you are saying that you are bringing in a new grading system then the farmers say, “Fair enough, you are going to bring in a new grading system.” However, when you bring in that new grading system and then you find that your cattle are devalued by £100 a head, that is when you take a lot more interest. I think this is what has happened in this instance, and there is no doubt that the lower grade cattle seem to have had a serious amount of money knocked off them. Was it the system that was at fault or was it you as processors that used that as an opportunity to knock the value back on particular cattle? That is the charge that I make to you; I suspect you want to deny it. Who wants to come in and deny it first?

Tom Kirwan

As I said earlier, Chair, when it comes to the average purchasing of cattle it has not changed. That was the mission we had in our business in ABP.

Chair

What happened to this £1 million, then, that disappeared off the value of cattle? Those figures were not made up so how did it happen? Somehow or the other, there has been a devaluation of those cattle.

Tom Kirwan

I have to go back, Chair, and take you to the conclusion of the report written by AHDB, which quite clearly says that it has not been for the benefit of either the producer or the farmer. Whilst we react to the first report, the report should have been written in a complete manner rather than piecemeal like it was released. The final findings of that report say it has not been for either party’s benefit. In terms of the valuation of the animal that we are talking about, there is a demand for cattle in the middle of the gird. There is no doubt about that. Whilst people will emotively say that there is a devaluation, that we pay less, or the business we run values those animals less, that is true; we have always valued them less, but their value is reflected right from the point of birth where calves vary in value from £45 to £350. There is a difference. The farmers themselves can judge a calf that has just been born that is of poor conformation, poor shape and that “that one is not going to do me that much good” as opposed to a better shaped animal that they put a value of £350 on. There is a different value on the animals right from birth.

Chair

I accept that and different animal conformation will be different, but do not forget that you have got the professional valuers and the auctioneers and others that have been grading cattle and they can no longer grade them under the new system. All the systems that they have been used to in the past have changed and when their grades go through the new system it seems to be totally different. Therefore, not only is it a price reduction but there is surely a need to be able to get the professionals out there to be able to grade under the new system, so that the farmer has some idea what his or her cattle are worth, as well as the finish on those cattle to make sure that they grade as they used to grade. Do not forget that I farm myself. Let us be blunt about it: once you cut the head off of an animal I cannot say, “Let us have that animal back. That is not a good enough price. I did not like the price I got,” because the animal is already dead and you have graded it. This is the issue that we are trying to get to grips with. I do not know whether Jim wants to come is as well or not.

Jim Dobson

I would like to say, on the AHDB report, that, like Tom, I have contested this because it is at one point in time that this has been taken. It would be a good idea to do it again and check it again on different cattle.

Chair

Are you saying that the system needs to be checked?

Jim Dobson

No, this particular report. I would like to do it again on a different set of numbers.

Chair

Why is that? Do you think you can make the numbers look better the second time around?

Jim Dobson

No, but there are no two animals that are the same. They are like human beings. All animals are totally different. There are different jobs for cattle. There are different processes they have to go through. Another thing that I do not think that the report took account of is the fifth quarter that is not in there at all. There has been huge devaluation in the fifth quarter over the last 12 months, so that has to be taken into account as well.

Chair

A devaluation of a particular quarter.

Jim Dobson

The fifth quarter, as I call it—hides.

Chair

Why is it, then, that this change in grading system coincided with a reduction in the value of Holstein beef? Why was it that those particular cattle seemed to get the biggest hit under the new system?

Jim Dobson

They do not yield as well, and this is why we have held off on the VIA system. We think that there is going to be technology that will come and tell us that. Obviously, a sirloin from a Holstein beef is not as valuable as one from an Angus or a Hereford, so they are worth less money.

Chair

When Tesco come here in a minute in front of me, they are going to be absolutely certain that the Tesco steak that is a Holstein steak is substantially less than one that is not from a Holstein? Can you guarantee that?

Jim Dobson

I cannot answer for Tesco.

Chair

No, they will answer for themselves in a minute.

Tom Kirwan

Chair, I come back again to the premiumisation of steaks. Certain retail specifications do not allow the poorer graded animals into the premium ranges of steaks because of their lack of depth and consistency. With the growth in the steak market and the growth in the premium end of the steak market, there is no doubt that the plainer animals are not fitting that growing category of sales.

Chair

Why, then, before the system changed were those cattle worth more than they were afterwards? Because the cattle themselves did not change. Irrespective of the points you have made, those cattle before the new grading system were still worth less in your view for steaks and others, so why did the system changing seem to highlight the situation and devalue those cattle so quickly?

Tom Kirwan

It is not showing in my business.

Chair

That is your view.

Rishi Sunak

We have had representation from farming groups that the new grading system feels to them quite unfair in the sense that the rewards for getting the right grades are set at a certain level but the penalty for not being at those grades is set at a far greater level, so it is an asymmetric reward and punishment system for them. It would be great to get your response to that and whether you think there is anything behind that.

John Dracup

The grid structure itself is designed to reflect the yield and requirement and specification that we are looking to deliver to our customers, and that is how it is entirely designed. Many of us have spent many years trying to work with farmers to encourage them to supply what we are looking for in the marketplace. To do that, the grid adequately communicates what we do and do not want. Unfortunately, farmers respond far more clearly to penalties that they do to premiums. Whenever we go onto a new farm trying to encourage a supply the farmer is always more concerned about what we do not want rather than what we do want. That is part of the reason why we are where we are.

Rishi Sunak

Tom, do you have anything to add?

Tom Kirwan

If we could spend maybe a minute on how some of the relationships are, such as the relationships with our farmers in terms of when they come to look at cattle, they do not sell cattle to large meat companies—there is a relationship between our fieldsmen and our farmer suppliers that is developed around, dare I say it, the most sacred of places, the kitchen table. That relationship is one of trust that has been built up between the farmer and the fieldsmen that represent our businesses going on their farm. They work together to choose those animals and they will help the farmer draw the animals if some farmers feel they have not got the skillset. There are fieldsmen in place who will go into the farmer’s yard and help with drawing those cattle. They will help them to give them the confidence that their cattle will come to the grade and give them indications of what those cattle may grade.

Jim Dobson

I have nothing more to add to that.

Chair

You believe that your relationships with the farmers are strong enough and long-term enough to be able to deal with the change in what you want in your cattle. One of the problems is that you are talking about probably between 18 months to two and a half years to finish a beef animal. If you have reared one 18 months ago and it is not fit to kill for another six months, you are not going to change the breed or much about that animal before it is slaughtered. Do you believe that you are getting close enough to the farmers to be able to give them that advice as to what they should be rearing, what they will sell and what you will give a decent price for?

Jim Dobson

As Tom said, we have a relationship with our fieldsmen talking directly to our farmers. The majority of our animals come in from finish farms, so these farmers keep the animal for six months maximum. They are all very aware of what the customer needs.

Chair

You think that all the information is getting to the farmer. I suppose the argument the farmer will have is that if he produces an animal and then the grading system changes, then how is he or she going to be able to deal with that. You cannot keep changing the system, can you?

Jim Dobson

With respect, I do not think we do change the system that often.

Chair

There seems to be a big effect when you do, and you have got 2 Sisters who are saying that they do not believe it is right to change the system anyway. Perhaps I am putting words into your mouth.

John Dracup

Chair, for clarity we do not feel it is appropriate to change to this system at this moment in time. However, do we believe that there is potential for change that reflects more of what the modern market requires? Yes, we probably do. Is the time for change appropriate now? We do not feel so today. Coming back to your previous statements around relationships with farmers, I have spent the last 20 years evolving farmer relationships. Now, I am in some cases dealing with the third generation of the same family, taking stock and working with them on developing new markets. We have been through crisis after crisis. We have been through BSE, foot-and-mouth, and changes in the common agricultural policy, all of which have placed different demands on the supply chain. We have all had to adapt and move on. That, as part of an effective relationship within a specific supply chain, is what we as an organisation are about. It is about having confidence and regular supply from those producers. That is how we operate. That is through communication, which can always be better. We are a large organisation dealing with a disparate bunch of individuals, but at the end of the day it is about clear communication and it is about regularly talking to those people through whichever means.

Chair

A final point on this before we move on to some more questions is that as the slaughterhouse industry and processing industry has consolidated over the years you have got more and more slaughterhouses that have a virtual monopoly on certain areas of buying cattle and sheep. Therefore, it is necessary to have this very good relationship and one that is to be trusted. It is not easy for the individual farmer to cry foul over when his or her cattle is taken and the grading is wrong and the price is wrong because there are very few other places that you can place those cattle. That is something that I am particularly worried about because there is not perhaps, in given areas, enough competition to make sure there is a fair price.

Tom Kirwan

Chair, if I may respond to that regarding the dynamic in the market that we operate in as processors, the official figures say that the UK is 75% self-sufficient. I would suggest that in certain cuts—and I come back to steaks—it could be as low as 65%. We are very lucky that the British consumer has a very strong demand for our British product. You talk about the dynamic, about the competition and the worry. The reality on the ground is that the demand for British cattle and British meat is very strong. It has manifested itself at the moment in the price paid to our British farmers being the highest in the world, other than maybe a few select ones in Japan that are paid a bit more. In large beef-producing countries of the world, the British farmer is getting one of the highest prices in the world. The dynamic in the market is pretty robust, and the farmers’ interests are well looked after because of the lack of self-sufficiency of British beef.

Chair

All of you are absolutely convinced that it is a good product. It is good to sell. It is British and it has a mark-up on it because it is British in a British market. Therefore, you can all assure me that you as the processor are taking your right amount out of the price of those cattle and the farmers are getting a fair deal when they come through your processing plants. Yes or no?

Tom Kirwan

Yes.

Chair

Do you all say “yes” to that, for the record?

Jim Dobson

Absolutely.

Chris Davies

It is interesting that the three of you just agreed on that. I am wondering whether you thought, if your clients were sitting there, they would agree with you as well. I am not sure that they would be saying that they get the best system out of you and the best relationship. While we are on relationships, if we may, Mr Dobson talked us through the system of the new grading. I am wondering if a farmer complains several times that they were not happy with the grade, how is the relationship with your company and that farmer thereafter?

Jim Dobson

I can say that in Dungannon we have never used the facility of bringing a grader in—never once in the whole time I have been there. Our own grader has sorted it out on the ground. If it comes to that, I would get involved myself. My brother and I visit a farm at least once a week. We are more at home in a farm setting than here.

Chris Davies

Is that the same for the other gentlemen? If we are being realistic, you run some very big businesses, and the farmers in particular would be a lot smaller. They would have to travel far further than their local abattoir, one that you own, so it suits them to come to you. Is it a case of putting up and shutting up as far as they are concerned? They do not want the relationship to be soured with you, so it is easier for them to stay quiet and take the loss.

Tom Kirwan

Trust with farmers is very important to us. It is a very symbiotic relationship. If there are no cattle there are no meat processors, end of story. Our business is very fragmented; there is no doubt. In our case 42% of our farmers supply less than 10 cattle per annum, so that is quite a small number of animals per annum. Those farmers are every bit as important. If they have got a complaint or do not feel that they have been best served on grading then they have absolute full right of appeal, and we take those appeals very seriously.

Chris Davies

Would the relationship stay the same thereafter?

Tom Kirwan

Yes, absolutely. We certainly would not punish a farmer if he made a complaint about a grade, absolutely not.

Chris Davies

I did not say that you would punish them.

Tom Kirwan

I would like to clarify that, just for clarity.

Jim Dobson

To clarify that, the farmers would not come back the next time.

Chris Davies

With the greatest of respect, Mr Dobson, they have not got a choice. You have a much better choice in selecting the farmers than the farmers have in selecting the abattoir.

Jim Dobson

I am not sure that is right. You can go anywhere.

Chris Davies

As you can imagine, there is cost. If they are going to travel 60, 100, or 160 miles to another abattoir, it is cost.

Jim Dobson

To repeat what Tom said earlier on, the relationship is between the fieldsman and the farmer, and that is the key relationship that we have. All of us have fieldsmen that are spread right across the country. We source cattle from all parts of the country into our factories, not just in the neighbourhood.

John Dracup

It is also worth pointing out that, certainly from a 2 Sisters perspective, we spend a lot of time listening to producers. Those producers that have issues are invited to come and see the stock within the facilities. There is an open door policy around that. Not only that but we have the MLC’s carcase classification service that can then step in over the top, and are prepared to come in and reassess cut carcases should a farmer be disgruntled. More importantly, we also spend a lot of time working with the farmers so that they understand what they are producing in the first place. We carry out a lot of what are termed Live to Dead grading days in conjunction with the levy boards, where groups of farmers come in to our lairages, see a group of animals alive and then see them being processed. This has been hugely successful, particularly with those who tend to have the biggest difficulties with what we are doing. It is as much an education process as it is a process of conflict.

Chris Davies

I accept that. Can I also put on the record that I know some of your fieldsmen from your three companies, and they are very good? I must say they have a good relationship with the farmers and a good relationship with myself in my particular patch. As far as your companies are concerned, we have had some witnesses who have told us that there is co-ordination between the prices that you offer between your three companies. Would you say that is true and that is fair, or would you deny that?

Tom Kirwan

I would certainly deny it from ABP’s perspective. If I look at the dynamic in the market at the moment and the fact that the three of us are sat here, we are killing one another in the country—pardon the pun—in terms of our fieldsmen trying to outdo one another for stock at the moment, which is in short supply. I would absolutely deny that.

Chair

Does the same happen when there is plentiful supply?

John Dracup

I would strongly deny that allegation. The reality is that we have a job to do. Certainly from my position as a procurement director I am judged on the number of cattle that are coming through the factory gate. Ultimately, it is very basic economics; it is supply and demand. If I have too many I am paying too much, and conversely if the numbers are not coming through the factory gate I am not paying enough. I have to pull that lever as and when. That is my role. That is what I do, and it is something that I am very proud to be doing; we are spending over £1 million a day on British livestock to British producers supplying our British customers, and I am very proud to be in that position.

Chris Davies

Is that the same for Mr Dobson?

Jim Dobson

If you go into a town and someone puts his price of petrol up, it moves down the town. It is the same thing. That is why the perception is we are all on the same price, but it is whoever has the highest you have to match it or the farmers will move.

Chris Davies

One last question if I may, Chair. You quite rightly mention the word there, Mr Dobson, “perception”. How do the three of you, as some of the biggest companies in the country, get over that perception and the fact that farmers think that there is, forgive me for saying, a cartel? How do you get over that?

Jim Dobson

Look at either of the reports; the LMC report in Northern Ireland says the price of cattle this week went from 340 to 345. There is a variation in there.

Tom Kirwan

I would say, Chair, if I may, that when you look at the market that exists, despite the suspicion that you have outlined the reality is that the farmer community need to grasp that the competition between us is such to satisfy the British consumer demand for British product. That is what drives the market and pushes the market to a place where the British farmer enjoys some of the highest prices in the world.

Rebecca Pow

Can I pick up on the previous question? Some comments have been made to us previously by the National Beef Association that penalties have at times been brought in, for example, for heavier cattle or for this four-movements rule with very little notice and very little warning. How would you respond to that? Is that true or was that just a perception that that was happening and it was not true? I wonder if Mr Dobson would answer that first.

Jim Dobson

I refute that. Everybody got plenty of notice. We have told them about four moves for years and that heavy cattle did not suit us. We have not gone through the change in packaging that there is at the minute. We used to have the gas packaging and we have now got the skin packaging. If you buy your meat in the supermarket now, it is probably in a skin pack. It takes a very tight specification in order to fit that, and there was more flexibility with the older system. That was one of the things. Heavy cattle do not fit the pack anymore.

Rebecca Pow

We were led to believe that you changed your announcement to them within three weeks’ notice. Is that correct?

Jim Dobson

For our company?

Rebecca Pow

Yes.

Jim Dobson

That is right.

Rebecca Pow

That is very short notice for a farmer on a very long lead time to finish a beef animal.

Jim Dobson

As I said earlier, these finishers only keep them for three or four months, and we have been telling them for years. For example, today we are telling all our farmers that our customers do not want young bulls but people still keep producing young bulls. Someday it is going to happen once again, where young bulls are going to be in the same situation as overweight cattle.

Chair

How are you communicating to the farmers? It seems to me the farmers do not understand what you are wanting and yet you say you are communicating. Defra has trouble communicating sometimes with farmers. Do you think you are communicating with them adequately and properly?

Jim Dobson

I do not know what to do, Chair. I was with a farmer of ours the other day producing young bulls. I said to him, “I do not want young bulls”, but he still gives me young bulls because it is the most efficient production for him and the most profitable, so he keeps bringing them.

Rebecca Pow

What would the gentleman in the middle say about this, in terms of changing things very quickly with very little notice, using your grid and then suddenly changing what you are asking the farmer for—for example, asking for a heavy animal and then saying that you want a small one?

Tom Kirwan

We have signed up to the voluntary code, so we give 12 weeks’ notice of any changes to the grid. For the VIA we have given 12 weeks’ notice. In terms of movements, we last changed our movement policy 10 years ago. We have not changed anything recently. With regards to the heavy weights, I have to concur with Jim. The market has been told for three, four or five years that cattle over 420kg are not where the consumer demand is. We have to remember the consumer drives our market and drives the type of animal that we look for. As Jim has described with bulls but certainly on weights, they are a particular problem. With the fixed weight steaks that I have described, these heavy cattle are an issue, but farmers continue to do this. We have lots of discussion groups with our farmers. It is not that we are not telling them. It may be the case that some of them are not listening.

Rebecca Pow

They are blaming the grid for that but you are blaming the fact that they are not listening and should have changed years ago.

Tom Kirwan

The reality is the consumer demand changes quickly. That is a fact.

Rebecca Pow

Not that quickly though.

Tom Kirwan

In the case of steaks it has changed quite quickly. The move into fixed weight steaks has been pretty quick. A lot has happened over two years. Yes, that is the lifecycle of an animal, but we have signed up to giving 12 weeks’ notice. That may not be enough for the lifetime of an animal but we are happy that that is the code of practice.

Rebecca Pow

To get onto the code, which you have mentioned, there is this voluntary code that which is supposed to be bringing about transparency in the industry and notifying the farmers of all these things. You have signed up to the code, have you not, Mr Dracup, and the 2 Sisters?

John Dracup

I was the architect of the code.

Rebecca Pow

Do you think that should be compulsory? It is voluntary at the moment. Do you think it is playing a useful role and that everyone could sign up to it?

John Dracup

Being the architect of the code, I am very proud that we have got to a point where it was rolled out and made available to the industry. Yes, I was slightly disappointed that there was not wider uptake. I personally would welcome it becoming mandatory because it is all about transparency in our industry, which is something that I have been working on for the last 20 years within our own organisation.

Rebecca Pow

Mr Dobson, I believe that Dunbia have not signed up to it. I wonder if you could share with us why.

Jim Dobson

There are many others. I think there are only 20 abattoirs that signed up out of 180. The majority is on the side of not signing. My reason for not signing was I believed that the code of practice should be for the whole chain and not just for us. For example, the rendering situation played a great lip service to it, but they retrospectively charge us at times. Therefore, it was very difficult for us to sign up to it. We would like it to be for the whole chain, not only ourselves, with the supermarkets and farmers.

Rebecca Pow

Would it not send a good message, though, if you did sign up to it? Perhaps then all the others would join you.

Jim Dobson

It is a better message to contest what is not correct.

Chair

Your argument is that there should be a voluntary code through the whole process, from rendering right the way through to your processing to the retailers. Is that what you are saying?

Jim Dobson

That is what I am saying, and I think it would be very successful, having something like that there to police it.

Ms Ritchie

Mr Dobson, you have been talking about the voluntary code and how you prefer that. Do you not think that, because there is that refusal to sign up to the voluntary code, pressure will come from government to implement a mandatory code, and therefore you will be forced to do it?

Jim Dobson

I would welcome that if the whole chain is involved.

Chair

You would welcome a code that is across the whole industry. That would be what you would prefer.

Jim Dobson

Absolutely.

Valerie Vaz

Turning now to determining the grade, and you touched on the different methods earlier, it seems to me that with MLG you have a discussion with the farmer, and with the video imaging analysis you put it into an algorithm or an equation and the result comes out. Mr Dobson, you mentioned you run the two systems. I will hear from both of you, but can you say what the advantages and the disadvantages of each of those are?

Jim Dobson

First of all, the farmer feels he is better off when he can speak to an individual to contest it. At the same time when the machine is there, it is the same for everyone, so it is equal that way.

Valerie Vaz

With the machine it is standardised but with the other system they get a chance to appeal from whatever grade they are given.

Jim Dobson

Every time a farmer contests it, it always goes up; it never comes down. The advantage always goes to the farmer.

Valerie Vaz

Can you plump for one or the other system or not? Which do you think is better?

Jim Dobson

It depends on the MLC grader. There is not consistency within those; that is the problem.

Tom Kirwan

We are in the process of rolling out VIA throughout our factories in the UK. We have not completed the process. The VIA, as far as we are concerned, as I said from the outset, is not as subjective as a human person grading. It is not that the person is right. If you and I were to grade cattle, you might give it one grade and I might give it another. We may both be right, but the VIA brings a degree of science and consistency to it. From a farmer comfort perspective, it has the same rigorous policing by the Rural Payments Agency. Whilst the MLC have the human graders independent, the VIA machine is policed by the Rural Payments Agency. The VIA machine, where we are concerned, is replicating what the grader was doing we think with a degree of greater consistency. What it does for our business as we look at our breeding programmes is the information that it feeds back in terms of using the science and the technology that we can feed in to our breeding programmes and help change the breeding stock coming through and help our farmers. This is where we see the huge benefit coming from VIA. Yes, we can replicate existing grading systems, but we can have a photograph of all the animals going through our abattoirs, feed it back to our breeding stock and get the animals on the ground that are giving the best rewards for both the farmer and the processor.

Valerie Vaz

Do the farmers feel that system is giving them the chance to have the discussion with the grader and appeal from that? Do you think there should be an appeal from that?

Tom Kirwan

The fantastic thing with the VIA is there is a pictorial record there. The carcase may be gone or gone for maturation, but there is a photographic record there that we can go back to, albeit it is a photograph. You cannot touch and feel as you would do with a carcase, but nonetheless, to the trained eye, people can look at it and it does give the farmer comfort. He can come and see, and he can come to the abattoir and watch his animals being graded. He can watch on the screen or he can go to the grading station.

Valerie Vaz

The thing is he cannot do anything about it, can he?

Tom Kirwan

Not there and then, but he can certainly say, “I am not happy with this one”. Every factory, even with a VIA machine, must have a qualified grader.

Chair

There is a division now, so if you will excuse us we will go and vote and we will be back in about 15 minutes. Democracy goes on and we have got to go and vote in the chamber. Thank you very much. Sitting suspended for a Division in the House. On resuming—

Chair

We were in the middle of the question. Tom, had you finished your answer? Valerie, had you finished your questions?

Valerie Vaz

Not quite. I have not come to you, Mr Dracup. Could you give your reasons for what you think the advantages and the disadvantages of the two systems are, particularly on the Video Imaging Analysis? It seems to be a much more proper system where you rely on what is in front of you, rather than a subjective view, and whether there should a right of appeal for the farmers.

John Dracup

As we are not using the VIA I cannot specifically give great detail about the system, how it operates and the complexities of it. What I can say is that the importance to us as a company is the independence that the Meat and Livestock Commission classification services gives to us as a business and to the producers that are supplying us. We are buying it and the producers are selling it. They are an independent supplier in the middle that are carrying out that function and also have their own quality control processes to ensure that the assessment, the weights in the factory and the addressing specifications adhere to the standards that are then further overseen by the Rural Payments Agency, which is what we heard about earlier.

Valerie Vaz

You are completely happy that system is robust.

John Dracup

Yes.

Chair

Could I come back to you, Mr Kirwan? You said about the RPA. Who at the RPA is going to be there examining the scanner, and if I am a farmer that is not happy with the grading that I have been given, how do I go to the RPA and get them to do something about it? It all rolled off your tongue rather well, but I am not that convinced about how the average is going to do it.

Tom Kirwan

The system is policed by the RPA.

Chair

How do they police it?

Tom Kirwan

Through unannounced auditors coming in, checking the carcases in the fridge and checking what grade the VIA system put on those carcases. The farmer, when he comes onsite and wants to dispute a grade, can go onsite to our trained grader. He can go and he can see the carcases or take the picture of the carcase. If the carcase has gone there is a photographic record there. The appeal process is even more robust.

Chair

How quickly is the farmer able to get the picture of the carcase when the animal is graded—immediately?

Tom Kirwan

He can get it immediately. We encourage the farmer to do so. It would help our communication—we spoke about it earlier—if every farmer came in with his livestock; it would be a fantastic thing. We try to encourage this. We pay the farmer on the day to try to get them to come in and attend with their livestock. It would improve our community and they can see for themselves the carcases as they were graded.

Chair

You would be happy for a number of farmers to come in. You would have the grading system up on a screen, would you, because they could not actually go into the slaughterhouse?

Tom Kirwan

Yes.

Chair

They could actually see that.

Tom Kirwan

Absolutely.

Chair

You would be happy for that to happen.

Tom Kirwan

That is what is happening.

Chair

It is actually happening now.

Tom Kirwan

It is happening now.

Chair

Farmers are able to go and see it.

Tom Kirwan

Farmers are able to stand there and watch. We have opened a new abattoir in Ellesmere. It is in a separate area, and absolutely that is exactly how it works.

Chair

How often do the RPA come and visit to see what is happening?

Tom Kirwan

I would say around two to three times a month unannounced. They do not come on the same days. It is policed every bit as strongly. In fact with the VIA system we get more visits. With the introduction of the VIA system, I would say that we have had more visits from the RPA than under the older system.

Chair

I shall make sure we write to the RPA to encourage them to carry on doing precisely that.

Tom Kirwan

We would encourage that.

Chair

You do.

Tom Kirwan

Absolutely. The stronger the policing of it, the greater the farmer can believe in it. That is in our interest also, Chair.

Valerie Vaz

Is this what you are classifying as the in-house inspectors, or is that something else?

Tom Kirwan

No, the RPA do not work onsite. They work offsite and come in unannounced onsite to check the grades that were given to the cattle. It is a separate system.

Valerie Vaz

Are you saying that there are in-house inspectors as well?

Tom Kirwan

Where you have VIA in operation, you must also have a licensed grader onsite in case the camera goes down so that you can continue to slaughter.

Valerie Vaz

This equation that you run the figures through, do farmers understand what that is?

Tom Kirwan

Not the equation. It is a mathematical calculation that has been stress tested not by me but independently by the RPA. Each machine in each factory must be licensed by the RPA. James spoke about the introduction of the VIA in Northern Ireland, and that is when a lot of the very early legwork was done in Northern Ireland to validate the algorithm that the VIA system works to. It was very strenuously done.

Valerie Vaz

Do you think it would help to make it more transparent for farmers so that they understand, because there is concern about this particular system, if someone explains how they get to the final figure?

Tom Kirwan

Yes.

Chair

Regarding the photographs and the imaging on the system, how long is that kept once a farmer’s animal is slaughtered? Do you have to react pretty quickly?

Tom Kirwan

The evidence is there. I am not sure how long they stay on the system, but it is there for at least a month.

Dr Monaghan

The retail price of beef has remained broadly the same whilst the price paid to farmers appears to be reducing. Where is that surplus money going? I will perhaps start with you, John.

John Dracup

I am not quite sure where you are coming from with this question, because at the moment year-on-year we are paying more for beef than we were 12 months ago. Therefore, we are currently in an inflationary situation, both on beef and lamb. From a procurement perspective, we are buying in a marketplace. As I said earlier, my benchmark is whether I have the volumes of stock coming through the factory on the day. We have to buy and wish to buy competitively because we wish to supply British products to our consumers at best value. That is part of the day job as such.

Chair

For clarification, I think the figures that Paul was using are the ones that were previously collated. What we have actually had now is we have seen a huge drop in the value of the pound and we have seen a hike in prices, and that has largely got you off the hook. If you look previously at the figures you will find that that there was a discrepancy between what was being paid to farmers and what the retail price was. That was dropping for farmers and yet the retail price was remaining the same.

John Dracup

This is not my area of specialisation, but the reality is that consistently with a lot of these reports and a lot of this data, there is considerable seasonal and market variation within that. These have fluctuated for very many years. I do not think we are seeing anything that has changed significantly within that.

Dr Monaghan

You are arguing that there is no surplus money and it is clearly not going anywhere else.

John Dracup

There is certainly not surplus money. The market at this moment in time is extremely competitive and particularly challenging in the processing sector.

Dr Monaghan

The evidence that we have taken from the NFU, which has highlighted this issue, has suggested that it applies to a large number of farmers. Is that incorrect or inaccurate?

John Dracup

The market has moved since this inquiry was instigated, and a large chunk of what we were referring to at that time was deflation not in the payment terms but in the actual base price that we were paying. That base price has risen considerably in the last few months since you have been on recess.

Dr Monaghan

Before that period and before that deflation, six months ago what was the issue then?

John Dracup

The issue was a particularly competitive marketplace where we were looking to buy product to supply our customers with quality British product that we have to buy within a market.

Dr Monaghan

The point was that the retail price of beef has stayed the same whilst the price being paid to farmers has reduced. There is a gap, so where is the money going?

John Dracup

For that surplus, I cannot specifically say where the money was or was not going. Was it being made or was it being lost? I do not know. This is outside my area of expertise.

Dr Monaghan

You are saying you are not in a position to dispute it.

John Dracup

I would challenge it.

Dr Monaghan

You just said that you cannot dispute it. You just said that you are not a specialist.

John Dracup

You are right.

Dr Monaghan

You do not know.

John Dracup

That is correct.

Dr Monaghan

Tom, what is your view on that question?

Tom Kirwan

When you look at the retail pricing of beef, it is fixed. It is a function of the fact that whilst it has a relationship with cattle it is also a variable that fixes amongst a huge basket of goods at retail level. At a particular point in time, you could say that what you said is true. However, if you look now, since the Committee last met the price of cattle has jumped dramatically but the retail price has not changed. It is the reverse equation in terms of where we are now. The retail market is a function of competition at retail level alongside the cattle market. They do not move exactly in tandem; there is a lead lag in the relationship.

Dr Monaghan

There is no long-term trend there then in pricing of beef, the retail prices, and the relationship between the retail price and what is paid to the farmer. It fluctuates and there is no longer-term trend.

Tom Kirwan

Certainly, up or down, no. It seems to be on a trend. There is a consistency at retail level on pricing at the moment.

Dr Monaghan

Are farmers getting a fair price?

Tom Kirwan

Yes, and more than last year, as John has already highlighted.

Dr Monaghan

How would you explain the NFU’s concern around this whole relationship?

Tom Kirwan

It was taken at a point in time. I do not know how this calculation of the return to the farmer as a percentage of the retail selling price is actually calculated. I cannot comment on the strength and robustness of the statistical analysis. What I do know is there is a lead lag between cattle pricing and our retail pricing.

Dr Monaghan

The suggestion has been put to us by others, in previous evidence to the Committee, that the fluctuations in price and the reduction of the prices being paid to the farmers, as opposed to the retail price of beef, have taken place in broadly the same period of time as the introduction of the electronic grading scheme. The suggestion or implication is that the introduction of the grading scheme has been used to mask effectively a reduction in the prices being paid to farmers.

Tom Kirwan

I come back to my earlier submission: we have not seen that in ABP. The market and statistical analysis was done in the first report of the AHDB, but in the findings of the last report it quite clearly says it did not favour either farmer or processor. Yes, that was what the first report said; however, that was the conclusion on the fourth report that was put out. Certainly that was the conclusion at the end. Why it was not all put together is beyond me. That was the highlight from version 1 of the report; version 4 and the final report and the conclusion said that it did not benefit either processor or farmer.

Dr Monaghan

So you are clear that the farmers are getting a good deal, a fair deal and that there is no surplus?

Tom Kirwan

I come back to it: “yes” is the answer and it is reflected certainly in Scotland. The Scottish farmer is definitely getting the highest price in the world, and if that is fair, then the system is fair.

Dr Monaghan

Jim, any comments?

Jim Dobson

The only thing I would like to say is that at any one point in time the retail price is only what the retailer buys. There is loads of the carcase that he does not buy—for example flanks, trim and shins, which the consumer does not buy. I would like to see the same thing done, where we take the whole thing into consideration, as with the fifth quarter example, with the hides. I do not understand why the AHDB put out that comparison. The farmer gets what the retailer charges. Some of the farmers come to our place and they are doing farmers’ visits, and they are told the price of fillets. There are only five or 10 pounds of fillet in a beast, in a whole animal. We need to take the whole thing into consideration at one point in time, and then deliver spread.

Dr Monaghan

Thank you. I think you have made your views clear.

Chair

Just for the sake of clarification, I think the AHDB report was from 15 February 2015 to 15 February 2016. During that period there was a drop in the price paid to farmers and a fairly static retail price. That is the proof of the system. One of you—I think it was John—made the point that it is all about supply and demand. You have seen a 15% devaluation of the pound; imports are dearer to buy in and exporting you are getting a better price for. It will drive up the domestic market. That does not prove that you are paying a fair price. All it proves is that at this moment in time there is more pressure on the market and you are paying better for it. Our previous charge was that between February 2015 and February 2016, it was a time when farmers were under huge pressure on price and there was enough beef around. The value of the pound was significantly higher, and that was when the system was not working. That is what we are worried about. You can come here today and say, “Yes, we are giving a fair price”, because you have to give a good price, because the cattle are not out there and you cannot get enough of them. The moment you can get plenty of them, that is when you drive the price down. I am not convinced you have answered that question. The report we are talking about—and I think you know very well what report we are talking about—is between those two periods. We need to be sure, whether it is a voluntary code, a compulsory code or whatever type of code it is. These codes only do their work when there is plenty of beef around, and there is pressure on the price to the farmer. Once you get a hike in demand and the supply is shorter, then quite rightly the supply and demand kicks in. This is what we are concerned about. Do you want to answer, or not?

Tom Kirwan

There is no doubt that we cannot buck the market, Chairman. That is for certain.

Chair

But during that market period you took too much money out of the chain. You took the money. You were charging the retailer the same, and you were giving the farmer less. Do you deny that?

Tom Kirwan

No; what I am saying is that when we look at—

Chair

You do not deny that?

Tom Kirwan

No, no—sorry, no. What I am saying is the market force will operate, and supply and demand will affect price—fact. There is nothing I can do about that. It does. However, the market dynamic that exists as we are now, Chair, is one where there is a demand for beef, British beef.

Chair

That is not the question. We accept supply and demand. We accept the price has gone up. What I am saying to you is that if we get a situation where the pound stabilises and starts to rise, there is plenty of beef on the market and imports are cheap, will you go back to your same practices as you were doing before? That was keeping the price low to the farmer. It is easy to keep the price low to the farmer when you have plenty of beef out there. You cannot keep it low to the farmer now, because the situation has changed completely. What we need to find out is that you will be fair to the farmer when the situation turns around, because it will.

Tom Kirwan

For the last five years, the price paid by the British beef processors to the British farmers has been one of the highest in the world. If that is the market and the benchmark, I would suggest to you, Chair, that the beef industry, in terms of returns to our British farmer suppliers who are critical to us, have served them well over the last five years.

Chair

Thank you. That is not what the report said, but, as I said, we will leave it there. It is something we are really concerned about, because if the situation changes, we do not want you going back to previous practice.

Angela Smith

On the back of what you have just said, you have said something very interesting, Tom: that farmers are critical to you. The farmgate prices report made a very key point about the importance of the integrated supply chain and of producers, processors and purchasers working together as much as possible, developing a relationship based on trust. We know that Morrisons, for example—if you do not mind me quoting Morrisons—often talk about “from field to fork” and the importance of a strong local supply chain. My question to you is: how could clarity around changing conditions, such as grading, carcase specification and penalties, be improved within that supply chain? How can you develop that stronger, more robust relationship built on trust, by improving clarity around those issues?

Tom Kirwan

On the relationship and how we interact, I come back to the fact that our contact point with our farmer suppliers is through our fieldsmen, and there is no doubt that those fieldsmen are well versed in what the market trends are, in terms of our grading system, in terms of the market dynamics by which our business operates. Those fieldsmen are very well versed in all facets of our business. Throughout the year we also have workshops with our farmers, where we bring our farmers into our factories and we may meet them separately—several hundred farmers. We have 9,700 farmer suppliers, and 4,000 of them will have come through our agricultural show stands this summer. They are forums where we can interact with our farmer suppliers. In our own business we run a “farm to fork” introduction for our new colleagues, for our retail customers, and we bring farmers on those “farm to forks”. The farmer obviously knows the farm bit, and we can bring them through to fork. Initiatives that we can work on, like that, certainly will have to bring greater understanding of the supply chain.

Angela Smith

So you are telling me that there is no need for greater clarity around the issues that I mentioned—grading, carcase specification. You are telling me there is no more that needs to be done to improve the situation.

Tom Kirwan

No. I am saying there is no doubt we can all improve how we interact, but I am laying out to you what we currently do. Is there a way of improving it? We may look to a way of improving that, certainly.

Angela Smith

Clearly the farmers themselves, or their representative body, the NFU, does not feel that that relationship is built on trust, and that there is a lack of clarity. There is a bit of a discrepancy here, which has fed through the entire session.

Chair

And not only NFU but the Beef Association as well, very much.

Angela Smith

Can I ask John and Jim to come in, as well?

Jim Dobson

What we do as a company? We have nine dedicated people now for R&D, to help our farmers to be more profitably by using grass more efficiently, and working with the retailers. We have set up an integrated pilot scheme now. We are taking the calves from the milk supply group and running a process right through, so that the farmer can come and see how you can be more profitable. We have run over 100 events this year, as John mentioned earlier, where we bring in AHDB expertise to show Live to Dead grading. We have these nine people to help our fieldsmen to communicate with the farmers right across the country.

Angela Smith

That sounds more like an onus on the farmer to respond to what you are dictating from them, rather than a mutual relationship built on trust and an understanding of how to respond to changing market conditions—not just on the part of the purchasers and the processors, but in the end, the producers as well. They are in danger, with your approach, of being right at the end of the chain, responding to conditions, and decisions made around trading conditions that they have no part and no say in.

Jim Dobson

We have found that some farmers are very profitable, and some are not profitable through inefficient systems. We are trying to educate the bottom tier to get better, and the medium tier to get to the best, to get more graded at that level to make them more efficient. I think the NFU recognises that there are lots of different degrees of efficiency throughout the whole farming process.

Angela Smith

This is not necessarily always about efficiency. Decisions are made very quickly and conditions change very quickly. The point is about how you ensure that farmers are part of the discussions that are needed to respond to changing market conditions?

Chair

The point that Angela is making is: is it a discussion with the farmer, or is it you just saying, “This is what we want. This is what you will deliver. Tough if you have anything else.” Is that what you are saying to them?

Jim Dobson

No. We tell them what the market—

Chair

It sounds a bit like that.

Angela Smith

It sounded like it.

Jim Dobson

I am sorry if I am communicating badly, but we show them best practice, and that is what the market requires. We do not tell them what to do.

John Dracup

Chairman, I think the first thing is that we can only speak for our own respective supply chains. Within our own organisation, before any producer starts to supply them, we give them an information pack that tells them who we are, what the specifications are, and what we are looking for. We tell them what our customers are looking for, but also to get a considerable amount of detail so that we can maximise the marketing opportunity from those farms. Small, traditional family farms are a great opportunity for us as a processor to operate under the West Country PGI, Welsh PGIs, Scottish PGIs, for branding purposes, to build what we do about selling the British product. As part of that, we need considerable information just to trade with these farmers. We now need their bank account details because we pay by Bacs. Therefore, there is a considerable amount of trust and effort that goes into ensuring that the documentation is right, proper and accurate at the start of an agreement, so that the producer fully understands what we are looking for to become a part of our supply chain. It is then about working with them and evolving that relationship, which secures the business for that first, second and third generation. That is about communicating. It is about indicating what we require, and as an organisation we do this, whether it be farmer meetings, grading days—which I have already referred to—carcase competitions, or in attendance at the agricultural shows in conjunction with our retail customers. There is broad breadth of how we communicate, alongside the use of more modern media, in particular email, for which we are feeding back information for each consignment of stock to those producers automatically at the end of the day that it is processed. There is a lot of communication going on there, but then it is about the next step. Where is the industry going, and what are we looking to do for the future? For us, it is about looking at some form of contractual relationship. As a wider organisation, 2 Sisters has over 300 poultry producers, producing chickens on contract, through integrated systems, from the egg right the way through to the retail pack. We are trying to understand the best practice from that model to give confidence to our supply chain. Traditionally contracts have not worked within the livestock sector, for one reason or another. Invariably it is one party or the other has walked away for whatever reason. The reality is that there is nothing to stop us from keeping trying, keeping progressing, and keeping developing that relationship. There are certainly no more producers out there, so therefore we need to be working with those so that they have a secure future, which in turn gives us a secure future, because without the primary production we have empty pantries.

Chair

What it will mean is trust, will it not? There will have to be trust on all sides, because there is a little bit of a breakdown in trust at the moment, and that has to be re‑established. Tom, do you want to make a point?

Tom Kirwan

Just, Chair, if I could, on our own case: in terms of informing our farmers, with the VIA we have now agreed to make, in conjunction with the AHDB, a video that will be made available to our farmers, or to all farmers. It will explain exactly what you have asked—what it is and what it does. In terms of the vertical integration, there is no doubt there is change afoot. We have a business, Blade Farming, where, as John has described, the changing times mean we have 25,000 cattle where we bring new young people in to rear calves. It is a vertical supply chain. What is happening on the supply side is changing, and changing, I would suggest, at pace, Chairman.

David Simpson

On the theme of trust, again, and listening to you three gentlemen, if I were a layman listening to what you are telling me, I would say you guys were definitely doing your job when it comes to the farmers. Yet there is conflicting evidence given to us that that is not the case and that there is a breakdown in trust. Can you explain that, or is it farmers whinging for the sake of it? I am not taking either side. Are you guys not having the relationship the way that you should have it with the farmers? I have listened to what you have said—the shows, the grading, the carcase competitions, all of that—yet we have organisations coming in here and saying the dead opposite. The Committee is in a dilemma about who to believe here, because we are hearing both stories. How can you prove that what you are saying is right and that there is a level of trust there? Has that stumped you?

Jim Dobson

No, can I answer that, David? I refute that there is no trust. We buy 7,000 cattle and 40,000 lambs per week, and we get that repetitively coming in. Obviously people do trust us. No‑one ever discusses whether a cheque comes up or not. I would like to know what the evidence is for this lack of trust.

Tom Kirwan

In our own case, our expenditure with our farmer suppliers—who, as I say, are critical; without them we do not have a business—is in excess of £10 million per week. We have been in the UK now for over 30 years, and we are now on the third generation of suppliers. Yes, there are some farmers who come and go, but we have a core farmer supply base. Yes, we have discussions on price, and we have a robust relationship, but they do trust us. They trust us with their livestock, the value of which has increased dramatically over a number of years. In terms of your earlier point, engaging with the farmer organisations, maybe we have to work harder on that.

John Dracup

The reality is that yes, we are large processors. Personally I have used it on several occasions during the course of this afternoon. We have specifically recruited to improve that trust between the producer, the processor and on to retailers. That has been an ongoing project. At the time when I started, the dynamics of the market and the industry were entirely different, and the level of contention between ourselves and producers was at a different level. There were protests outside factories, and all sorts of suggestions being made about what we were or were not doing. Doing what we have done, working with producers, has enabled us as a company to be the first company to export British beef post both BSE and foot‑and-mouth. That was because of the quality of the systems that we evolved, right the way back through the supply chain, and we did that in conjunction with producers. That relationship has continued to evolve. Is it perfect? No, it is not, by a long way; but it is a darn sight better than what it was. What we are embarked on, as a company, is further extending those relationships, and I have already suggested some of the activities that we are doing to fulfil that. We are not perfect. We are large commercial organisations with relatively small teams, dealing with a very large number of producers. Establishing and maintaining that trust in what is a very dynamic market is extremely challenging.

David Simpson

We will leave the trust issue for a moment. The last question on this point from me is that you will know that the dairy sector has gone through a very difficult period. There is talk of maybe introducing contracts in Northern Ireland from the guys who produce in Northern Ireland. From a beef point of view, are you in favour of moving towards long‑term contracts with farmers, to help the volatility, so that they can look six or 12 months down the road in terms of how they take or pay for land?

John Dracup

Certainly from our perspective, yes, we are.

Tom Kirwan

Yes, I think it is a growing trend within our supply base.

Jim Dobson

I think it is a case of “hurry slowly”. Basically our beef farmer is a trader. The younger generation has to pick this up and go with it, and that is why we have started out with our calf scheme.

Ms Ritchie

Gentlemen, when discussing long‑term contracts at a previous evidence session, Chris Mallon of the National Beef Association argued that more trust was needed before longer contracts would be possible. Do you accept that there is trust standing in the way, or do you agree with what he is saying?

Jim Dobson

I cannot understand where the trust issue is. As I say, we buy loads of cattle every week, and they take our cheques. They must trust something, every week, from every farmer. On long‑term contracts, I think, going back to the basic “calf through to beef” system, we have tried many contracts in the past, and it has been a one‑way street for us. The only contract we will offer now is a minimum price contract.

Tom Kirwan

From a contract perspective, we in our organisation already have long‑term contracts in place. The longest one is in conjunction with a major British retailer. In the West Country we have British veal, and also within our own farming businesses there are contracts on 25,000 cattle. We are already doing substantial contracts. We have lots of contracts annually on organic beef. Those contracts are substantive at the moment, and the trust exists. The farmer suppliers that we buy from trust us with those contracts, and we have never reneged on them.

Chair

Gentlemen, thank you very much for your evidence. I can assure you that we have not fabricated these questions. We have had it from the Beef Association, from the National Farmers’ Union and from others that the prices being paid to farmers had dropped dramatically, especially under the new grading system. What we have drilled down on this afternoon is that you are looking to work with farmers and to build trust. You have also reassured us, and it is in your evidence, that you will not be taking action against farmers who dispute the grading system and what they are being paid for their cattle. It is very important that is down in black and white and absolutely clear. We will now talk to the retailers, and as I said, we will also carry on looking at the situation. What has helped you in your evidence this afternoon is that the market has picked up substantially from when we started this report. I accept that, and I accept market conditions, but what we are interested in is making sure that, if those conditions become poor again, the farmer has trust in you that they get a fair price for their cattle. Thank you very much for your evidence this afternoon. Examination of Witnesses

Witnesses

Tim Smith and Andrew Opie.

Chair

Welcome, gentlemen. The Committee Chair meeting the other day was about the problem that all the witnesses are male and some of them should be female, but we will not hold that against you, because you are here to give us your evidence. Starting with Tim Smith, please would you like to introduce yourselves and we will fire away? Sorry to keep you waiting.

Tim Smith

That is fine. We have probably both learnt a bit this afternoon, thanks to your good questioning. My name is Tim Smith; I am the Group Quality Director for Tesco.

Andrew Opie

I am Andrew Opie. I am the Director of Food and Sustainability at the British Retail Consortium.

Chair

Welcome, gentlemen. Can you give examples of the beef specifications that beef retailers ask from processors, and why do you ask for these particular specifications? I do not know who wants to start with that one.

Tim Smith

I can start with the Tesco view. Our customers drive the specification, pretty much, and, as you heard from the processors, there have been some slight shifts in that specification over the last few years. However, pretty much what they are looking for now are more fixed weight, for specific maturity. It is the age‑old thing of a product that looks good, tastes good, and that you are proud to feed to your family. All the specifications that we have are aimed towards those objectives. Not to one side, important to us, is the relationship with the British beef farmer out there and the welfare concerns that we would have. It is a long list, but most of it starts with customers.

Chair

Are you satisfied that the processors are delivering the specifications that you are asking for?

Tim Smith

We give them lots of notice, so regardless of codes and how all of that works—

Chair

How much notice would you give them?

Tim Smith

We made one change in February that we signalled we would make, and we have given the processors nine months in which to find a way to meet those specs.

Chair

What was that change in February?

Tim Smith

We have three tiers of beef production and beef sales to our customers. Because of the way that the brands within Tesco work, we wanted one of those brands to no longer include young bull meat. That went into the specification of the other part of that tiering. We also wanted to change the age limit, to increase the amount of time that an animal could be alive for before it was slaughtered, to give a broader specification, so that farmers had longer. It went from 30 to 36 for steers and heifers. When we decided to do that, we talked to the processors—two of whom were here—and said, “This is what we have in mind, because we are trying to get to this objective for our customers. We think you will need plenty of time to do that.” So we gave them nine months.

Chair

You have led me very neatly into my next question, because in your contract with dairy farmers, you say clearly—and quite rightly—that you should keep the dairy bull calves. One of the best uses of the dairy bull calf is for bull beef, because they can be reared efficiently and Holsteins are not the easiest to fatten. The point I am trying to make to you is that, if you are in a dairy contract and you are asking for a certain type of calf to be reared, then it would be nice if we could market that through your beef system in the supermarket as well. What can you do to help farmers there?

Tim Smith

There are 700 members of our Tesco dairy supply chain group, and each of them is signed up to the principles that you have just adopted. What would be really good would be if we had a similar sized group of beef farmers and producers, who are working to the same agenda. Most of the time, because of the market signals that we have sent with these specification changes, that is precisely what is happening. It is not quite as joined‑up as we would like. We would like to be in a position, in as short a period as possible, to say that the sustainable supply group for beef has the same weight and power as we have had since 2007 with the dairy one. If those two groups met—and they would—and they talked about the issues that face them as farmers, with no processor in the room at that point, it would be really helpful. There is a degree of collaboration needed, a lot more transparency and a lot more clarity about what it is that our customers are asking for. One of those things would be, in the background, the animal welfare concern for male dairy calves.

Chair

Nine months is quite a long time, and I accept that, but if you are rearing bull beef, you are probably talking about 18 to 20 months. Therefore, if you are going to change a policy, farmers do need a bit longer to adapt. Do you not think you should perhaps have given the industry just a little bit more time?

Tim Smith

The consultation that we did was with our processors, and they with their farmers.

Chair

So how long did that process take?

Tim Smith

I would think the whole month of February, because we announced it in March and we had given an indication to our processors in February that we were thinking of that. If they had said, “Hold on. That will not work for these good agricultural reasons,” then we would not have done it. We phased in the introduction so that if they were unable to meet it, then there were no—

Chair

Was it the processors who said that they could meet that requirement, or was it the farmers? It is quite interesting. When you are consulting, I suppose naturally you do consult through your processing industry. However, it does seem to me, from the evidence we got this afternoon, that the processors are pretty prescriptive, and they are quite happy to move everything quite quickly. I do not think the farmers were perhaps on the same page on this one.

Tim Smith

There is an old naval adage, is there not, that nothing is communicated until it is communicated back? That is why we have an agriculture team within Tesco. What we want to do is to make sure that while we are talking to a very small number of processors, and they are assuring us about the way that they might or might not be able to organise themselves with their farmers, we have agricultural teams as well. They operate with and in collaboration with the processors, but they are independent, so they can give us good, strong advice on whether what we are suggesting is feasible. The only way you can have a sustainable sector in red meat or anything else is—

Chair

The advice coming back from the farmers that you were consulting is that the nine months was long enough; is that right?

Tim Smith

It was surprising to them, because it was a lot longer than the 12 weeks that is in the code, and it happened to coincide with the code coming in. You can draw your own conclusions. We thought nine months was better than 12 weeks.

Chair

What we are learning from this whole process is that there does need to be greater communication, and I think there does need to be greater time, if at all possible. That is what we are particularly looking to get out of this inquiry. I am conscious Andrew has not come in yet.

Andrew Opie

Thank you, Chair. Something very similar to what Tim has talked about is replicated in the major retailers in terms of trained agricultural teams and agricultural development groups, in which all the retailers invest their own funds. These are not always farmers who would necessarily be in their supply chain, because they need a pool of farmers who can meet their specifications. The one thing I would add is that, whilst retailers are by far the largest and most important customers for the processors that you have been talking to, they are not the only customers for those processors. We just need to bear that in mind, while retailers do have important specifications; the other one that I would add is around provenance of goods, whether country of origin or even specific breeds. However, we need to bear in mind there are other customers whom the processors would probably reflect they have to satisfy as well as the retailers. We recognise your point about information; getting out onto farms and giving them information about what the consumer is expecting when they come into the supermarket is really important, so that they can then translate that back, using experts on the farm, to the way that they produce their cattle.

Tim Smith

I think our specification, if I might add, is a very small part of what happens to a beef animal. As Andrew said, the uses of the fifth quarter, as the industry calls it, or just the uses that food service operators might have for the same animal, means that we are never talking in a vacuum. This is not a specification for a single commodity; it is a commodity that has lots of different users, up and down the food supply chain. We have to be careful that we do not tip that balance, and that is why the communication is really important. Getting the farmer to play back what we are telling them is vital.

Rebecca Pow

On the point that you mentioned earlier—and it was only a matter of interest—you said that it was on animal welfare grounds that consumers specified that they did not want bull beef anymore?

Tim Smith

No, I did not say that. Sorry.

Rebecca Pow

Maybe I misheard.

Tim Smith

It is the idea, I think, in any kind of system, that animals are effectively sacrificed because of their gender. The idea that dairy calves might not make it to their first week of life—

Chair

Dairy bull calves.

Rebecca Pow

Yes, so on those grounds, did you decide you did not require so many of them?

Tim Smith

No. It would be morally strange if we thought that killing those animals was the right thing to do, given the animal welfare considerations. Bringing them to successful condition to be utilised in the food chain, which is what they are intended for, is our objective.

Rebecca Pow

Yes, but you changed your mind.

Chair

That is right. On one hand, you are saying that you want those animals to be used, are you not? If the Holstein Friesian is not going to be reared as a bull, it will be reared as a steer. Will there be much Holstein steer meat in your supermarkets? It is no good, on the one hand, saying, “Dairy bull calves must be kept,” then you want them castrated—fine—for various reasons. Will you then make sure that that beef is then in your shops, because if it is not, on one dairy contract you are asking for one thing, and then you are not—

Rebecca Pow

You cannot have milk from somebody and then not think about what they will do with the offspring of those cows, in order for you to have the milk. It is really important that you work with the farmers, is it not?

Tim Smith

I completely agree with you. On the Chair’s point, we are agnostic on the species, unless it is Aberdeen Angus, which is the only claim we make. As far as we are concerned, any idea that we would be against or for a specific species is not right.

Rebecca Pow

But I think that you are not so keen on Holstein bull calves anymore.

Tim Smith

That is not right.

Rebecca Pow

I thought you had downscaled your procurement of young bulls, and it is all going to be cheap offcuts, so those farmers who produce them are not getting so much money, and it is all being graded through this grading system that we are questioning. I will ask you another question as well: have your teams of people who work for Tesco all been out on farms? Do they all understand exactly how the farm system works? This is a really important part of working with our great British industry, which we must not undermine.

Tim Smith

Everybody who is in the red meat supply chain or the poultry supply chain would all spend a lot of time with farmers. There are specific agricultural experts—and this will be true for every retailer—whose primary goal is to better understand the market in which they are asking their processors to operate. It is vital. You cannot understand and work with an agricultural commodity unless you are talking to farmers. It is something we learned a decade or so ago.

Chair

Just before we leave this one, where I think you are not entirely being completely correct with us is that if you put a specification out for the type of beef and type of steaks that you want, that is where, if you are not at all careful, you will exclude the Holstein beef. I am not convinced yet that that is not the situation. I think you are restricting the amount of Holstein beef coming in—be it from steers, be it from bulls—into Tesco. I think you speak with forked tongue, if I may quote a very old Western. You want the bull calves in one instance, and then you cannot have them in the next.

Rebecca Pow

Can I chip in here, Chair? I would like to ask a question. I know we keep talking about contracts, but what tends to happen is that those bull calves are dumped at the markets. No‑one has mentioned at all the role of markets in any of this, and yet they still play a part in your buying, somewhere along the line, do they not? Yet they are potentially being used as dumping grounds.

Chair

The point is that naturally in your dairy contract you are saying that the farmers must keep those bull calves, and I accept that. They must keep the dairy bull calf, and I do not criticise you for that for a moment. What I want to be reassured on is this: if you do not want the bull beef I accept that, but do you want the Holstein beef at all? Are you not ruling out much of the Holstein beef by the specification you are asking your processors to deliver? That is what the situation is.