Studyonthe Competitivenessof the EuropeanMeat ProcessingIndustry

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 Reproduction is authorised, provided the source is acknowledged, save where otherwise stated. For use/reproduction of third-party copyright material specified as such permission must be obtained from the copyright holder(s). This report is financed under the Competitiveness and Innovation Framework Programme which aims to encourage the competitiveness of European enterprises.

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This study was carried out by

in cooperation with

Framework contract on sectoral competitiveness (B1/ENTR/06/054) Specific contract No SI2.544542

ECORYS Nederlands BV, Rotterdam, 29 October 2010

ECORYS Nederland BV P.O. Box 4175 3006 AD Rotterdam Watermanweg 44 3067 GG Rotterdam The Netherlands T +31 (0)10 453 88 00 F +31 (0)10 453 07 68 E netherlands@ecorys.com W www.ecorys.com Registration no. 24316726 ECORYS Macro & Sector Policies T +31 (0)10 453 87 53 F +31 (0)10 452 36 60

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 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 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 4 Further Analysis: Modelling and Measuring Asymmetric Price Transmission 4.1 Introduction 4.2 Price transmission 4.3 Econometric methodology 4.4 Data

9 9 10 10 11 12 13 13 15 15 15 18 21 23 25 26 28 30 31 35 37 37 37 37 42 45 49 53 56

61 61 61 63 65

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 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 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

67 70 71 71 73 74 75 76 76 77 78 78 79 82 83 83 85 87 92 92 96 100 100 100 101 103 103 104 105 115 118 120 124 126 131 131 132 134 135 136 136 137 138 138 138

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 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 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

140 141 142 144 146 147 148 150 150 151 151 152 153 154 159 160 165 165 166 168 169 173 174 174 176 177 177 178 178 181 181 182 183 183 184 185 187 187 187 188 188 189 190 190 191 191

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

192 194 195 195 196 200 200 201 202 203 203 204 205 207 207 209 210 210 211 211 212 212 213 214 214 215 216 218 219 220 221 222 223 224 224 226 229 229 231 231 232 232 233 233 233

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

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 G Data sources for modelling H Further information on the model I Reference List

235 235 236 237 237 241 245 257

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.

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

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 aspectmarket outcomeswas 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 Denmark Pros One of the largest meat exporters, outside of the UK. Netherlands Poland Romania Cons Largest meat exporter outside of EU, presenting problems on how to correct the model. Italy Synergy with existing ASS.I.CA studies; One of the largest meat exporters. Important meat industry; Extensive data already collected; Existing expertise available; Pilot case study. Existing expertise available; Gives new Member States consideration in the study. Gives new Member States consideration in the study. Poor data availability; Consultants would need to 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. Poor data availability. Stark contrast between largescale producers in north and small-scale producers in south.

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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 Overview of the case studies selected

1.3.2

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 criteriain order of importancewere 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.

This seems like an obvious point, but in many cases, the break-down of data by product was limited to a selection.

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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 Germany Pork Cutlets Pork for frying Schnitzels Netherlands General Bacon Porkchops Schnitzel Poland General UK Loin chops Loin steaks Boneless legs Fillet Sausages Minced pork Diced pork Poultry Chicken schnitzel Roaster (fresh and frozen) Turkey schnitzel General Chicken breast Legs Chicken breast Roasters

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.

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.

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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 distantif still significantsecond.
Figure 2.1 Economic accounts for meat; values at current prices in Purchasing Power Standard (PPS)
6

100000.00 90000.00 80000.00 Millions of PPS 70000.00 60000.00 50000.00 40000.00 30000.00 20000.00 10000.00 0.00 2002 2003 2004 2005 2006 2007 2008 2009
Source. Eurostat, DS-072379.

Other animals Poultry Pigs

Meat productionin terms of dead weightis 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 40000

Tonnes (000s)

35000 30000 25000 20000 15000 10000 5000 0 2004 2005 2006 2007 2008

Sheep & Goat Bovine & Calves Poultry Pork

Source: Eurostat, DS-072660 (Slaughtered animals for meat production).

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.

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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 EU-27/ 1,000 Tonnes 22,599 % Production Germany Spain France Poland Denmark Italy Netherlands Belgium United Kingdom Austria 22.6% 15.4% 10.1% 8.4% 7.6% 7.1% 5.8% 4.7% 3.3% 2.3% France United Kingdom Spain Germany Poland Italy Netherlands Hungary Romania Portugal EU-27/ 1,000 Tonnes Poultry 11,130 % Production 15.3% 12.9% 12.4% 10.7% 10.7% 10.0% 6.6% 3.5% 3.1% 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 thatin terms of overall numbersthe 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
50-249 5% above 249 1%

20-49 8%

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

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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 chainwhich is in a broad sense identical to the meat value chainand 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 farmers 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.

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 Industrys 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.

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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 encourageand, in fact, to forceretailers 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

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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 labelsand in this case, retailers themselvesare 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
Committee and the Committee of the Regions: A better functioning food supply chain in Europe. Brussels: Commission of the European Communities. 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.18-25. For a summary of these studies, see Bergs-Sennou et al. (2004). Bontemps, C., Orozco, V., & Rquillart, 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.

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13 14

15

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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 processors 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.

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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, stakeholdersfarmers, producers and retailersperceive 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

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. 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. 22-23.

22

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. b. c. Number and variety of economic actors along the value chain (multinationals, SMEs); Degree of horizontal and vertical integration including consolidation and mergers; 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

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. 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. p. 25.

24

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 1950s 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

Implementing measures and criteria

Specific regulations

Controls

Principles (General regulations)

852/2004
general rules for hygiene of foodstuffs; HACCP.

882/2004
general framework for the organisation of controls

2073/2005 updated by: 1441/2007

microbiological criteria for food safety, for instance :

(former 93/43/EC)

salmonella, listeria onocyt ogenes , staphilococces

Regulation 178/2002 (General Food Law) 853/2004

specific hygiene rules for certain products of animal origin

854/2004
Specific rules for controls of food derived from animals;

2074/2005
Specific implementation measures

i.e. veterinary checks

2002/99/EC Animal health rules

2002/99/EC Import requirements (incl. veterenary border checks) 677/2006 Audit guidelines

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

See Dobson et al., 2008, p. 37

28

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

See for instance COMP/38.784 Wanadoo Espaa vs Telefnica regarding the use of a price squeeze in the Spanish Telecom market, making market entrance almost impossible for competitors.

30

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 Khne, 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 producers 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

See extensively: Ben-Kaabia and J.M. Gil, 2007.

32

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 Mller, 2003). In general, however, the identification of costeffects of FSQSs is problematic due to unclear labelling and diversity (Gellinck and Khne, 2007). The importance of cost-based information has been recognised in the Commissions 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 producers share of the retail price (Kuosamen and Niemi, 2009), as well as explain price transfers (compare: Pellnyi, 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 chainjust like of FSQS-implementation or the absorbance of product liabilityare 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 consumers 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 consumers 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 chainwith 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 supermarkets 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 retailers 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.

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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.

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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 industrys 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 directives 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--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 ombudspersons 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 Supply chain relations 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 gentlemens 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 Boardsone of the government bodies in the Netherlandsdefine 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.

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3.2.3

Spain Supply chain relations 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.

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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 companiestaking into account also that the business strategies of the retail companies differ among themalthough 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

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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 firms 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 Supply chain relations 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 changeconcentration and consolidationin 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 retailersespecially the large firms in the chainhave 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 marketthe price formationis 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 Polands 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

(Urzd Ochrony Konkurencji i Konsumentw - http://www.uokik.gov.pl/. Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentw (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 commissions 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 Improvement41 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

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 zapaty w transakcjach handlowych (Dz.U. 2003, Nr 139, poz. 1323). Midzyresortowy Zesp do spraw Zwikszenia Przejrzystoci Rynku Artykuw Rolno-Spoywczych i Poprawy Funkcjonowania acucha ywnociowego.

52

3.2.5

Germany Supply chain relations 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 arms 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 industrys 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 Lnder. 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 Lnder, 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 United Kingdom Competition law One general regulation on competition, and a second aimed at retailing. Competition judged by Office of Fair Trading. Two primary acts the Competition Act The Netherlands General regulation of competition. Two Acts apply to competition issues, including unfair competition and customer protection. Competition judged by office. Two acts on general competition as well as one on cartels. Poland Germany

56

Spain

United Kingdom 1998 and provisions in the Enterprise Act 2002.

The Netherlands

Poland

Germany

Pricing transparency

Some transparency with price observatory monitored by government

Lack of transparency. Sales price formation and pricing structure particularly problematic for farmers. Reluctance of retailers to talk "prices".

Lack of transparency; no current initiatives.

Lack of transparency. Former price commission terminated, including participation of meat producers and processors.

Lack of transparency, and little willingness to share information.

Structure of the chain

Dual nature at horizontal level Integrated at the production stage Processing largely fragmented serving two types of marketing channels: traditional (small retailers) and modern (larger supermarkets and hypermarkets)

Dual nature at vertical level Largely fractured, but with some integration anchored by the retailers

Horizontal integration in slaughtering and less so in further processing

Little aggregation with several middlemen

Little aggregation with several middlemen However, poultry industry more integrated

(Structural) changes to the chain

Little merger or acquisition

Consolidation at the processor level to counter retail power

Consolidation due to excess capacity and international competition

Some consolidation in progress eg driven by FDI

Huge consolidation / concentration in slaughtering Retail (discount) with increasing bargaining power

Innovation and its drivers

Low, driven largely before 2007 to reduce

Medium, driven largely by desire for

High, driven to a large extent by desire to

Adjustment to international market

Productivity with focus on production

57

Spain

United Kingdom

The Netherlands differentiate

Poland

Germany

costs

efficiency gains Product innovation driven to an extent by government policy and consumer (safety and convenience)

conditions Focus on moderation (technology, facilities and managerial aspects)

technology Quality/food safety increasingly in focus

Contractual arrangements

Generally informal, but formal in some specific cases Contracts with retailers, depending on the retailer

Short term between retailers and processors Informal between farmers and processors

Generally informal, with retailers better able to change conditions

Generally informal

Generally informal, with retailers better able to change conditions Integrated productions systems or contracting relationship in the poultry sector between farmers and industry, but pork production is dominated by repeated market transaction

Views on code of conduct

Against government intervention

Retailers are against the idea in general; processors and producers are hesitant in their views, but pessimistic about impact

Against government intervention

Against the idea

Generally against the idea, but cooperation in terms of quality and hygiene (primarily due to the outbreak 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 consolidatingwhether through co-operatives or other meansto 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 identifiedprimarily 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 time

Pw

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 methods First differences Summation first differences Number of tests Symmetry Asymmetry Asymmetry (%) 197 102 95 48 93 30 63 68 47 36 11 23 31 17 14 45 10 2 8 80 18 17 1 6 Error correction Threshold methods Other methods

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

Peltzmans results are not summarised by Meyer and Von Cramon-Taubadel (2002).

62

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--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:

po,t = o,1 I po ,t >= 0 p i ,t >= 0 / + o,2 I po ,t < 0 p i ,t

s =1 I p T < 0 / s =1 I p
T T T

o , s >= 0 p i , s

>= 0

(1)

o , s < 0 p i , s < 0 o , s < 0 p i ,s

+ o,3 I po ,t < 0 pi ,t >= 0 / + o,4 I po ,t >= 0 p i ,t < 0 /

t = 1,..., T

s =1 I p s =1 I p
T

>= 0

o ,s

>= 0 pi ,s < 0

+ uo,t

pi,t = i,1 I po ,t >= 0 p i ,t >= 0 / + i,2 I po ,t < 0 p i ,t < 0 / + i,3 I po ,t + i,4 I po ,t

t = 1,..., T
i ,t

s =1 I p
T

o , s >= 0 p i ,s

>= 0

(2)

s =1 I p T < 0 p >= 0 / s =1 I p T >= 0 p < 0 / s =1 I p

i ,t

o , s < 0 p i , s < 0 o , s < 0 p i , s

>= 0

o ,s

>= 0 pi ,s < 0

+ ui,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,t1, similarly pi,t pi,t pi,t1 denotes the change in the input price, the 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 us are residual terms with mean zero and finite variance. By subtracting equation (2) from equation (1), giving:

(po, t pi, t) = 1 I p o ,t >= 0 p i ,t >= 0 / + 2 I p o ,t + 3 I p o ,t + 4 I p o ,t

t = 1,..., T
i ,t

s =1 I p T < 0 p < 0 / s =1 I p T < 0 p >= 0 / s =1 I p T >= 0 p < 0 / s =1 I p

T
i ,t i ,t

o , s >= 0 p i , s

>= 0

(3)

o , s < 0 p i ,s < 0 o , s < 0 p i , s

>= 0

o ,s

>= 0 pi ,s < 0

+ ut

where j = o, j i, 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 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 coefficients in equation (3) this definition implies the following hypotheses:

H01: 2 = 0 H02: 1 + 2 = 0

against against

H11: 2 > 0

and

H12: 1 + 2 > 0

which we can test for by one-sided t tests for the regression coefficients 1 and 2 in equation (3). Note that if 1 + 2 = 0 with 1 < 0 and 2 > 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. Jord (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

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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 Farm prices Wholesale prices ZMP ZMP (Slaughter prices) Consumer prices ZMP Netherlands LEI Eurostat (Export prices) GfK
*

Poland

UK (Slaughter prices)

Eurostat

Office National Statistics

Time period

Monthly data: For pork Jan 2000-Dec 2004 For poultry: Jan 2004-Dec 2007

Monthly:

Monthly: Jan 2006-Aug 2009

For poultry monthly data: Jan 2002-Feb 2010 For pork Weekly data Jul 2007-Feb 2010

Jan 2001-Aug2009

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 Germany Pork Cutlets Pork for frying Schnitzels Netherlands General Bacon Porkchops Schnitzel Poland General UK Loin chops Loin steaks Boneless legs Fillet Sausages Minced pork Diced pork Poultry Chicken schnitzel Roaster (fresh and frozen) Turkey schnitzel General Chicken breast Legs Chicken breast Roasters

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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.

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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--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.

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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--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 Spread as % of Average Consumer Price ) Farm-wholesale price spread Germany From -1.42 to 0 Wholesale-retail price spread From -2.21 to 0 Characterisation Products with decreasing margins throughout supply chain Price asymmetry in favour of retailer and/or meatpacker for bacon Price asymmetry in favour of retailer and/or meatpacker Price asymmetry in favour of retailer From 2.69 to 11.4 and/or meatpacker. Shifts in price spread for different parts of pig at wholesale level
1

Netherlands Poland

0 0

Bacon: 2.08

1.91

UK

From -1.94 to 2.77

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.

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Table 4.5

Poultry chain summary (chicken, unless otherwise stated) Average Annual Change in Price Spread as % of Average Consumer Price Farm-wholesale price spread
1)

Wholesale-retail price spread

Characterisation Price asymmetry in favour of

Turkey: 2.42 Germany Chicken: From -1.42 to 0

Turkey: 3.49 Chicken: from -2.13 to 0

slaughterhouses as well as retailers and/or meat packers for turkey Decreasing margins throughout supply chain for chicken

Netherlands

From -2.60 to 0.84

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

Price asymmetry in favour of slaughterhouses as well as retailers and/or meatpackers

UK

From 0 to 1.28

Price asymmetry in favour of 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.

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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.

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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.

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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 causenamely, 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,
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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

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.

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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.

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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 Sample graphic to show index on price asymmetries

5.2.1

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.

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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 Hritier, 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.

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As mentioned in the previous section, monitoring and publishing (for industry) results on dysfunctions in the value chain is critical to show the European Commissions 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.

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The role of the ombudsperson should remain clearto 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 ombudspersons 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 Commissions 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.

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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

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)

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(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 retailers 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--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--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).

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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 imbalancessuch 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).

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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 Poblacin Activa 2008) (INE, 2009).

Table A.1

Main indicators of the Spanish Meat Industry (2007)

Food Industry

Employment (number) Product sales (EUR million) Consumption of Raw Materials (EUR million) Gross Value Added (EUR million) Labour Costs (EUR million) Investments (Million EUR) Product sales / Employment (EUR 1,000) Labour Costs / Product sales (%) Consumption of Raw Materials / Product sales (%) Productivity (Value Added / Employment) (EUR 1,000) Operating Surplus (Value Added - Labour Costs) (EUR million) Gross Operating Margin (Operating Surplus / Product sales) (%)

87,936 16,374 10,552 3,787 2,241 693.0 186.2 13.5 64.4 43.1 1,576.2 9.6

377,897 82,094 45,953 20,137 10,402 3,629 217.2 12.7 56.0 53.3 9,735.2 11.9

2,580,375 512,603 266,037 154,287 83,206 28,121 198.7 16.2 51.9 59.8 71,080.6 13.9

23.27 19.95 22.96 18.81 21.54 19.10

16.2

83

Food industry

Total Industry

Meat Industry

% on

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.

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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.

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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

Source: MARM (Observatorio de precios).

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).

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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

Source: MARM (Observatorio de precios). Figure A.4 Evolution of Relative marketing margin for chicken in Spain (%) (2004-2009)
140

120

100

80

60

40

20

0 Weeks

Source: MARM (Observatorio de precios).

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

Source: MARM (Consumo Alimentario).

Frozen Meat

Processed meat

Table A.2

Evolution of meat consumption in Spain (tonnes) 2004 Total meat Certified meat 2,228.52 278.92 2005 2,233.29 283.84 2006 2,215.09 272.92 2007 2,252.24 283.91 2008 2,275.03 268.599

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2004 Fresh Meat Beef Chicken Lamb Pork Other Fresh meat Frozen Meat Processed meat Cured ham Cured Pork Loin Chorizos Other cured products Cooked sausages Cooked ham Other cooked products 1,724.88 328.62 579.55 117.96 471.92 226.81 29.44 474.19 102.43 12.37 52.76 90.36 35.49 63.34 117.40

2005 1,731.49 332.74 570.05 116.40 469.71 242.58 29.88 471.91 102.38 12.88 51.64 90.67 35.04 60.70 118.48

2006 1,706.83 314.43 564.32 118.15 507.30 202.61 40.58 467.67 101.42 12.57 49.30 87.63 38.84 60.11 117.78

2007 1,724.85 323.11 569.98 119.90 506.77 205.08 38.15 489.23 106.25 12.12 50.35 90.96 42.09 63.45 123.99

2008 1,725.51 321.97 583.88 106.37 519.96 193.32 39.00 510.51 106.14 12.25 49.45 99.48 46.10 64.06 133.00

Source: MARM (Consumo Alimentario).

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

Source: MARM (Consumo Alimentario).

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 (Monogrfico 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 Partially consumed and the rest frozen Cooked and then frozen

Fresh

Processed

Source: MARM (Monogrfico carne y embutidos, 2009).

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 Whole Chicken Chicken Fillets Chicken Pieces Total Source: MARM (Consumo Alimentario). 205 46 333 584 EUR million 589 297 1,520 2,407 EUR/Kg 2.87 6.5 4.56

Table A.4

Consumer attitudes towards meat price and safety (scale from 0 expensive - to 10 cheap-) Price Beef Lamb 3.4 3.4 Safety 6.7 6.3

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Price Pork Chicken Cured ham Other cured meat products Cooked meat products Source: MARM (Monogrfico carne y embutidos, 2009). 4.7 4.7 3.4 4.2 4.5 Safe Indifferent Unsafe

Safety 5.6 7.0 46.0% 38.5% 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.

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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

Source: MARM (Anuario de Estadstica Agraria, 2006).

Export of Live Animals Pork: 67.0 (UE 98.6%) Poultry: 4.7 (UE 93.6%)

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. Catalua 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-Len (13 percent). It is interesting to note that, while in Catalua the relative importance of the processed meat marketing channel is very close to the national value, in Castilla-Len 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.

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Figure A.10

Overview of the Pork Supply Chain in Spain

Source: MARM (Estudio de la Cadena de Valor y Formacin 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)

0 2001 2002 2003 2004 2005 2006 2007 2008

Fresh Meat Channel

Processed Meat Channel

Source: MARM (Anuario de Estadstica 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.

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Figure A.12

Geographical distribution of pork meat production in Spain (2008) (%)

Source: MARM (Anuario de Estadstica Agraria).

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.

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Figure A.13

Types of marketing channels in the pork sector in Spain

Traditional Marketing Channel

Modern Marketing Channel A

Modern Marketing Channel B

Source: MARM (Estudio de la Cadena de Valor y Formacin de Precios del Sector de la Carne de Cerdo de 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.

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Figure A.14

Overview of the Poultry Supply Chain in Spain

Source: MARM (Estudio de la Cadena de Valor y Formacin 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, Catalua is the main producing region (22 percent of the Spanish production) followed by Andaluca (16 percent), Galicia (14 percent) and Castilla Len (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

Source: MARM (Anuario de Estadstica Agraria). Figure A.16 Geographical distribution of chicken production in Spain (2008) (%)

Other 20%

Galicia 14%

Catalua 22% Andaluca 20%

Castilla y Len 8% C. Valenciana 16%

Source: MARM (Anuario de Estadstica Agraria).

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.

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Figure A.17

Evolution of chicken production destination (million tonnes of carcass weight)

1200 1000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008

Whole carcass
Source: Revista ALIMARKET (Mayo, 2009).

Pieced carcass and fillets

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 Formacin 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

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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
A.3.1

Market structure
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 2009

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

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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.

Table A.5

Evolution of the number of firms related to the size of the firm 2004 No employees 1-2 2-5 6-9 10-19 20-49 50-99 100-199 200-499 500-999 1,000-4,999 877 1,000 732 588 580 546 115 53 33 6 4 2005 860 988 735 549 576 539 138 50 33 6 5 2006 853 947 722 561 580 563 137 59 37 6 4 2007 836 928 710 542 579 562 149 59 39 6 4 2008 884 882 696 553 599 560 150 62 39 7 5 2009 936 853 693 522 607 564 146 63 36 9 4 % change 2004-2009 6.73 -14.70 -5.33 -11.22 4.66 3.30 26.96 18.87 9.09 50.00 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 GRUPO BATALLE GRUPO VALL COMPANYS GRUPO SAMPER INDUSTRIAS CARNICAS VILARO GRUPO TERFRISA INDUSTRIAS CARNICAS LORIENTE PIQUERAS 161.0 150.5 142.8 138.0 118.0 115.4 Market share 5.83 5.45 5.17 5.00 4.27 4.18 Accumulated Market share 5.83 11.28 16.46 21.46 25.73 29.91

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1,000 tonnes EL POZO ALIMENTACION CAMPOFRIO GRUPO FAMADESA CARNICAS SOLA 108.0 105.0 89.0 85.0

Market share 3.91 3.80 3.22 3.08

Accumulated Market share 33.83 37.63 40.85 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 CAMPOFRIO EL POZO ALIMENTACION CASA TARRADELLAS GRUPO ALIMENTARIO ARGAL NOEL ALIMENTARIA INDUSTRIAS CARNICAS LORIENTE PIQUERAS EMBUTIDOS MONELLS CORPORACION ALIMENTARIA GUISSONA CASADEMONT GRUPO CAIGUERAL 175.0 87.0 73.3 40,1 30.0 29.5 24.5 22.0 20.5 17.0 Market share 27.65 13.74 11.58 6.33 4.74 4.66 3.87 3.48 3.24 2.69 Accumulated Market share 27.65 41.39 52.97 59.30 64.04 68.70 72.58 76.05 79.29 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.

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Figure A.20

The top ten firms in the poultry industry in Spain (2008) (%)

30 25 20 15 10 5 0
D A CO M PA N YS UV E SA EL TH ER
103

RE N

SA

ES A

O N

ID

ID

EJ

PA D

R AL

CO

IS S

ED O

FL O

UP O

LA

AV IC O

VA LL

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.

AV

IC O

J. L. R

G R

LA

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 2007

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 Caigueral (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.

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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.

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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 (-0.083)-(-0.171)

TOTAL COST

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

Source: MARM (Estudio de la Cadena de Valor y Formacin de Precios del Sector de la Carne de Cerdo de 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

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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 Transport to slaughter Slaughtering cost Other slaughter costs 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

Slaughtering 0.087-0.104 /kg 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

Source: MARM (Estudio de la Cadena de Valor y Formacin de Precios del Sector de la Carne de Cerdo de Capa Blanca) and own elaboration.

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.

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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%)] CONCEPT Transport to slaughter Slaughter costs Other slaughter costs Subproducts (=Income) Cutting costs Cutting losses Sliced costs Sliced losses Other sliced costs Transport to platform Net profit (1%)

COST 1.021- 1.289 0.481 0.322 (-0.083)-(-0.171)

TOTAL COST

1.502-1.611 /kg 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

Slaughtering 0.087-0.104 /kg 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

Source: MARM (Estudio de la Cadena de Valor y Formacin de Precios del Sector de la Carne de Cerdo de Capa Blanca) and own elaboration.

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).

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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 Transport to slaughter 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 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 Formacin de Precios del Sector de Avicultura de Carne) and own elaboration.

TOTAL COST

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

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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 retailers 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 COST 0.04- 0.06 0.15- 0.17 0.16- 0.18 0.19- 0.25 0.03- (-0.04)

TOTAL COST

1.37-1.40 /kg CONCEPT Transport to slaughter Slaughtering and processing Other costs Transport to the distribution platform Profit - Losses (+2%- (-2%)) 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 Formacin de Precios del Sector de Avicultura de Carne) and own elaboration.

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+ 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

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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

-0,01

-0,02

-0,03

-0,04 Average Change in Farm Price Average Change in Retail Price Average Change in Marketing Margin

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Positive changes at farm level

0,04

0,03

0,02

0,01

-0,01

-0,02

-0,03

-0,04 Average Change in Farm Price Average Change in Retail Price Average Change in Marketing Margin

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.

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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 Average Change in Farm Price Average Change in Retail Price Average Change in Marketing Margin

Positive changes at farm level

0,05 0,04 0,03 0,02 0,01 0 -0,01 -0,02 -0,03 -0,04 Average Change in Farm Price Average Change in Retail Price Average Change in Marketing Margin

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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 Fresh Meat Frozen Meat Processed Meat Total IMPORTS Fresh Meat Frozen Meat Processed Meat Total 2004 369,4 159,3 64,6 593,3 2004 26,3 68,5 25,2 120 2005 408,3 189,7 70 668 2005 26,3 60,43 26,9 113,63 2006 393 205,6 75,3 673,9 2006 38,4 72,6 29,4 140,4 2007 411 243,8 81,1 735,9 2007 48 75,8 29,9 153,7 2008 492,9 335,1 92,8 920,8 2008 39,6 58,7 29,6 127,9

Source: Direccin 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 (Direccin 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 Crnicos (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

10

9,7

4,2

3,9 3 2,5

0 France Portugal Italy Germany Hong Kong Russia United Kingdom Denmark Other

Source: Direccin General de Aduanas Database COMTRADE.

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Figure A.31

Main geographical destination of Spanish exports of processed pork (%)

30

25

24,7

20
16,9 17,4

15
11,5 11,3

10

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: Direccin 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 Imports 2007 2008

Source: Direccin General de Aduanas Database DATACOMEX.

Figure A.33

Main geographical destination of Spanish chicken exports (%)

Other Russia Gabon Vietnam China The Netherlands United Kingdom France Benin Portugal

10

15

20

25

30

Source: Direccin General de Aduanas Database DATACOMEX.

In fact, although Portugal is Spains 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

Value chain and industry issues

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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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.;

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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 Ibrica 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

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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

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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 firms 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

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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 Exporters 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 producers 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 firms product investment.

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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 cafs 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 Industry Employment (number) Product sales (EUR million) Value Added at Factor Cost (EUR million) Labour Costs (EUR million) Gross Investments
48

Meat Industry 99,128 19,512 4,598 3,092 1,077 1,505 196 15.8 46.4 7.5

Dairy Industry 26,334 9,065 1,919 937 1,000 982 344 10 73 10

Meat % Food Industry 22.4 17.5 13.9 19.0 12.7 8.9

441,641 111,481 33,139 16,302 8,502 16,837 252 14.6 75.0 14.1

(EUR million)

Gross Operating Surplus (EUR million) Product sales / Employment (EUR 1,000) Labour Costs / Product sales (%) 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.

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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.

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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 animalssuch as foot and mouth diseasehave 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.

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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

45%

of total meat consumption

40% 35% 30% 25% 20% 1 5% 1 0% 5% 0%

Meat : Pigs Meat : Poultry Meat: Other

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.

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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

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: Defra.

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

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.

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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 of meat and poultrymeat products

Production and preserving of poultrymeat

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 2002-2007 -8.6 -28.57 23.57 -37.86 -2.17

2002 1-9 10-19 20-49 50-249 250 and above 638 140 140 243 92

2003 586 136 179 160 103

2004 569 126 179 165 100

2005 567 138 176 173 93

2006 560 129 188 162 84

2007 583 100 173 151 90

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
B.3.1

Market Features
Levels of innovation 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 industrys 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 800 600 400 200 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 total investment EUR million

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 industrys 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.

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Figure B.7

Gross operating rates (1996-2007)

Gross operating surplus/turnover (gross operating rate) (%)

12 10 8 6 4 2 0

Gross operating surplus/turnover (gross operating rate) (%)

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).

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

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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

50 45 40 35 30 25 20 15 10 5 0
19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

8000 7000 6000 5000 4000 3000 2000 1000 0 Gross value added per employee total investment EUR million

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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.

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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

http://www.redmeatindustryforum.org.uk/supplychain/LivestockMarketing.htm.

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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 800 700 600 500 400 300 200 100 0 1998 2000 2002 2004 2006 2008 000 heads

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,

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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 14000 000 heads 12000 10000 8000 6000 4000 2000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total

Source: Slaughterhouse survey, Defra, DARD.

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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 lions 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 1-1,000 1,001-5,000 5,001-10,000 10,001-20,000 20,001-30,000 30,001-100,000 100,001-500,000 500,000+ Total Source: BPEX. Abattoir # 34 55 20 19 9 9 9 7 162 Total Throughput head 12,843 141,814 149,809 282,228 230,819 578,115 2,328,935 4,350,527 8,075,090 Average Throughput head 378 2,578 7,490 14,854 25,647 64,235 258,771 621,504 49,846 Throughput Share % 0.2 1.8 1.9 3.5 2.9 7.2 28.8 53.9 100

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.

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Table B.4

Top 10 Meat Abattoirs in EU 2007 Data Rank Group Country Share of European Market (%) 1 2 3 4 5 6 7 8 9 10 Danish Crown Vion Tnnies Fleisch Westfleisch HK Scan Socopa Cooperl Grampian Foods Vall Companys Smithfield Foods Denmark, UK Netherlands, Germany Germany Germany Finland, Sweden, Baltic France France UK Spain Poland, Romania 8.8 7.4 3.7 2.6 1.6 1.3 1.3 1.2 1.2 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.

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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

Source: BPEX .
59

59

AHDB Monthly Report.

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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 Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Pound/ kg 79,27 95,16 98,03 93,64 103,57 103,84 103,88 104,75 108,00 126,31 145,68 Production costs Pound/kg 113,66 113,58 107,51 105,50 103,40 110,20 104,40 108,60 121,70 136,84 136,84

Source: BPEX.

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Figure B.15

Farm production cost and net margins

Production Costs and net Margins

120 100 80 Pounds/Kg 60 40 20 0 -20 -40 Production cost/head net margin

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.

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Figure B.16

Average Pork Basket Price versus DAPP (English Pound)

800 700 600 500 400 300 200 100 0

Average pork Basket Price

DAPP

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

House of Commons (2009) - The English Pig Industry. P. 30. Environment, Food and Rural Affairs Committee report, produced in 2009.

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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) Chicken Primary Raw convenience Further processed Ready meals Cooked Total 1,263,729 232,439 Duck 31,189 2,148 Turkey 154,365 115,626 Chicken 397,012 48,208 Volume (tonnes) Duck 8,353 337 Turkey 50,380 23,434

488,504 651,409 315,983 2,952,080

n.a. n.a. Na.a 33,337

79,649 8,609 6,647 364,896

113,012 148,124 67,739 774,090

n.a. n.a. n.a. 8,690

18,411 1,717 712 94,654

Source: British Poultry Council.

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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

Savillis Agribusiness & Savillis Research. "A Sustainable Future for British Chicken." NFU Poultry Board and UK Broiler Growers, 2009.

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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.

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.

B.6

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

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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 price65.
63 64 65

Competition Commission (2008) The Supply of Groceries in the UK Market Investigation. P. 7. House of Commons- Environment, Food and Rural Affairs Committee report, produced in (2009) The English Pig Industry. http://www.shropshirestar.com/2009/01/13/pig-farmers-make-case-for-pork-price-rise/.

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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 retailers 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 demand68. 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. House of Commons- Environment, Food and Rural Affairs Committee report, produced in (2009) The English Pig Industry. http://news.parliament.uk/2009/01/english-pig-industry-report/.

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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 industrys 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 supermarkets 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

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detrimental effects on the industry. Bearing the costs of marketing (TV ads, promotion, etc.) is another retailers 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 gentlemens 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 sector70. 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 industryin 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.

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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 Commissions 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

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.

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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 unnecessary74. 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

http://www.just-food.com/article.aspx?id=109700.

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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 life75. 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

Developments and trends 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 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

http://www.just-food.com/article.aspx?id=109700.

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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.

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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

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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.

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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 Employment Product sales Consumption of raw materials Gross value added Labour costs Operating surplus Product sales / Employment (EUR 1,000) Labour costs / Product sales Consumption of raw materials / Product sales Productivity (Value added / Employment; EUR 1,000) Gross operating margin 18,200 9,908 8,177 1,731 897 834 544 9.1% 82.5% 95 8.4% Food industry 122,500 60,176 45,819 14,357 5,825 8,397 491 9.7% 76.1% 117 14.0% Total industry 847,100 294,758 222,991 71,767 40,959 30,401 348 13.9% 75.7% 85 10.3%

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

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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

5,00 Europ per kilo

4,00

3,00

2,00

1,00

0,00 1-1-2000 1-5-2000 1-9-2000 1-1-2001 1-5-2001 1-9-2001 1-1-2002 1-5-2002 1-9-2002 1-1-2003 1-5-2003 1-9-2003 1-1-2004 1-5-2004 1-9-2004 1-1-2005 1-5-2005 1-9-2005 1-1-2006 1-5-2006 1-9-2006 1-1-2007 1-5-2007 1-9-2007 1-1-2008 1-5-2008 1-9-2008 1-1-2009 1-5-2009 1-9-2009

Farm

Consumption

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

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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

5,00

Euro per kilo

4,00

3,00

2,00

1,00

0,00 1-1-2000 1-5-2000 1-9-2000 1-1-2001 1-5-2001 1-9-2001 1-1-2002 1-5-2002 1-9-2002 1-1-2003 1-5-2003 1-9-2003 1-1-2004 1-5-2004 1-9-2004 1-1-2005 1-5-2005 1-9-2005 1-1-2006 1-5-2006 1-9-2006 1-1-2007 1-5-2007 1-9-2007 1-1-2008 1-5-2008 1-9-2008 1-1-2009 1-5-2009 1-9-2009

Farm

Consumption

Wholesale

Figure C.3

Poultry consumer prices in the Netherlands

8

Total Legs 5 Breast Other parts Whole chicken 4

2
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

01

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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 Total Beef and veal Pork Poultry Other meat 86.2 19.2 43.3 21.6 2.1 2001 85.6 18.9 42.4 22.1 2.2 2002 86.3 19.2 42.5 22.5 2.1 2003 85.5 19.1 42.4 21.5 2.5 2004 86.0 19.5 42.3 21.9 2.3 2005 85.6 19.1 41.9 22.2 2.4 2006 84.9 19.0 41.5 21.9 2.5 2007 85.1 19.3 41.0 22.5 2.3 2008 84.7 19.2 40.6 22.5 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 Consumer expenses per household (EUR) 2000 Fresh meat Fresh beef and veal Fresh pork Minced meat (pork and beef) Other meat Frozen meat Poultry Processed meat Smoke-dried meat (rookvlees) Ham Bacon (ontbijtspek) Sausages and like meat products Other meat products 317 69 94 88 39 27 76 202 10 52 12 106 21 2003 330 70 89 96 42 33 96 218 9 59 11 115 23 2004 348 75 99 98 39 37 88 221 9 57 11 120 25 2005 315 70 84 85 46 30 92 197 9 46 12 110 20 2006 298 61 85 85 40 27 85 196 9 47 10 108 23 2007 305 62 86 88 41 28 85 209 9 49 10 119 22

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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.

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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 Pork supply chain

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Figure C.7

Poultry supply chain

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 Poultry 2005 2008

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.

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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% Noord-Brabant; 29,2%

Groningen; 10,6% Friesland; 13,8%

Drenthe; 9,8% Limburg; 7,9% Gelderland; 9,0% Overijssel; 12,0%

Figure C.10

Production development at farm level (1990 = 1)

2,50

2,00

1,50 Beef Veal Pork Poultry 1,00

0,50

0,00 1990 1995 2000 2005 2008

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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 1995 2000 2005 2008

C.5

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.

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Table C.4

Number of firms 2006 Beef production Veal production

*

2007 1,945 2,002 4,225 1,420 275 50 170 1,200 895 50 2,505

2008 1,975 1,943 4,260 1,440 270 50 170 1,195 850 45 2,380

2009 4,130 1,350 270 50 185 1,240 1,035 45 2,330

1,911 1,936 4,365 1,410 280 55 180 1,210 985 45 2,570

Pork production Poultry production Slaughterhouses Slaughterhouses (poultry) Meat processing Wholesale trade animals Wholesale trade meat Supermarkets SME retail
**

Source: Statistics Netherlands and LEI.

*

With at least 30 calves or cows for meat production. With at least 100 employees.

**

Table C.5

Size classes (Number of firms related to Number of employees per firm, 2009) 1 to 10 Slaughterhouses Slaughterhouses (poultry) Meat processing Wholesale trade animals Wholesale trade meat Supermarkets 210 20 110 1215 845 1,855 10 to 20 30 5 30 20 85 390 20 to 50 20 10 20 10 75 540 50 to 100 10 10 10 0 20 105 More than 100 10 10 10 0 10 45

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

Retail

Feed industry

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 Raw materials (fodder) Raw materials (meat) Other intermediary costs Depreciations / Interest Labour costs Net revenues Farm income 51.3 34.3 2.0 9.1 3.3 Pig production 53.0 22.9 17.5 5.3 1.2 Pig fattening 46.3 26.4 10.2 11.8 0.9 4.4 Processing 41.7 42.7 1.8 12.2 1.6 SME 50 13 6 18 12 Super-markets 75.8 7.2 2.2 10.7 4.1 -

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

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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 observations Return on total assets (%) Feed industry Farming Processing Supermarkets 27 77 31 18 7.7 0.1 4.3 7.1 Return on equity (%) 13.2 -4.3 9.1 22.0 48.9 53.0 32.6 19.3 2.8 -15.0 1.2 1.2 Solvability (%) Profit margin (%)

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.

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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

Shares in turnover in the poultry meat supply chain (2008) Feed industry Raw materials (fodder) Raw materials (meat) Other intermediary costs Depreciations / Interest Labour costs Net revenues Farm income 51.3 34.3 2.0 9.1 3.3 Pig fattening 61.6 17.1 1.8 17.4 2.4 0.0 Processing 34.3 42.4 1.8 8.9 12.6 SME 50 13 6 18 12 Retail 75.8 7.2 2.2 10.7 4.1 -

C.7
C.7.1

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,

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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

Evolution of Dutch meat exports (EUR million) % Change 2000-2008 33.6% 49.0%

2000 Fresh and frozen meat Beef and veal 4,309 1,277

2002 3,963 1,192

2004 4,252 1,398

2006 4,828 1,697

2008 5,758 1,903

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2000 Swine Poultry Bovine and swine offal Processed meat 1,322 1,067 621 361

2002 1,029 1,126 577 407

2004 1,173 914 729 390

2006 1,257 1,114 691 412

2008 1,476 1,373 929 580

% Change 2000-2008 11.7% 28.7% 49.5% 60.5%

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 2000-2008 135% 135% 243% 121% 97% 115%

2000 Fresh and frozen meat Beef and veal Swine Poultry Bovine and swine offal Processed meat 1,039 459 127 233 166 296

2002 1,256 540 183 310 156 379

2004 1,520 646 320 358 126 432

2006 1,892 866 361 396 178 475

2008 2,439 1,079 436 515 326 636

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.

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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.

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Figure C.15

Meat import per partner country (2008)

60,0%

50,0%

40,0%

30,0%

Beef Pork Poultry Processed meat

20,0%

10,0%

0,0% Belgium France Germany UK Rest of EU Rest of the World

C.9

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.

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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 20092010, 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.

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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 Industry Meat Industry Dairy industry Meat % Food industry Number of employees Turnover or gross premiums written (EUR million) Value added at factor cost (EUR million) Personnel costs (EUR million) Gross investment (EUR million) Gross Operation surplus (EUR million) Turnover/employment (EUR 1,000) Personnel costs/turnover (%) Productivity (value add/turnover) (%) Gross operating surplus/turnover (gross operating rate) (%) 11.0 2.9 9.0 424,229 43,640 8,527 3,708 1,978 4,800 103 8.5 19.5 125,755 10,597 1,202 890 387 307 84 8.4 11.3 42,095 5,856 966 439 274 527 139 7.5 16.5 29.6% 24.3% 14.1% 24.0% 19.6% 6.4%

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.

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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 25 20 15 10 5 0 2000 2002 2005 2006 2007 2008 Pork Poultry Beef

Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.

D.2.1

Meat price volatility 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.

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Figure D.3

Average retail prices for selected pig product 2000-2008, zl 30,00

25,00

20,00

Pork centre cut loin roast 1kg Pork shoulder, boneless 1kg

15,00 Pork, cooked ham, 1 kg 10,00 Sausage "Myliwska" 1kg

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 2008

Source: Central Statistical Office of Poland, Regional data bank.

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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.

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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

Gross operating surplus/turnover (gross operating rate) (%)

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

Gross operating surplus/turnover (gross operating rate) (%)

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 Polands 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

140 135 130 125 120 115 110 105 100 95 90 2002 2003 2004 2005 2006 2007 Production of meat and poultrymeat products Production and preserving of poultrymeat Production, processing, preserving of meat, meat products Production and preserving of meat

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
110 105 100 95 90 85 80 75 70 2002 2003 2004 2005 2006 2007 Production and preserving of poultrymeat Production of meat and poultrymeat products Production, processing, preserving of meat, meat products Production and preserving of meat

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. Sokow 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.

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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. Sokow) 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).

Figure D.14

The supply chain of pork and pork meat in Poland, 2008 and in 1,000 tonnes

Export

Live bovine animals 424,000 heads

(cooled weight) 423

Production and

consumption

Production for slaughter (live weight)

Production from slaughter (cooled weight)

Consumption (cooled weight)

Import

Live bovine animals

(cooled weight)

Note: Live bovine animals includes others than pork. Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.

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 Polands 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.

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Table D.2

Production, imports, exports and consumption of pork, in thousand tonnes 2003 Production from slaughter Import Export Consumption 1,895 59 132 1,822 2004 1,847 60 81 1,826 2005 1,889 203 294 1,798 2006 2,000 178 314 1,864 2007 2,030 267 338 1,959 2008 1,837 499 432 1,904

Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.

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 in zl Average procurement prices Pigs for slaughter (in live weight) Average prices received by farmers on marketplaces Pigs for slaughter Retail prices of some consumer goods Pork meat. bone-in (centre loin) Pork ham. boiled Sausage "Mysliwaka" Pork frankfurters per kg 13.46 18.89 21.46 7.2 13.48 19.85 23.19 7.76 13.54 19.94 24.32 8.53 13.1 19.64 24.34 8.34 13.43 19.84 24.68 8.72 14.49 20.64 26.06 9.53 3.6 3.65 3.91 3.61 3.59 4.06 3.68 3.57 3.82 3.56 3.46 4.01 2006 2007 2008

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 Pork ham boiled - kg "Baleron" (cervical pork boiled) - kg Sausage "Mysliwska" - kg Sausage "Torunska" kg Raw bacon -kg Pork fat -kg 3.67 5.13 4.63 5.83 3.23 2.36 0.8 3.78 5.56 4.98 6.5 3.48 2.92 1.03 3.54 5.22 4.46 6.37 3.14 2.82 1.13 3.68 5.52 4.58 6.84 3.31 2.88 1.01 3.88 5.73 4.77 7.13 3.44 3.02 0.97 3.61 5.15 4.24 6.5 3.14 2.76 0.98

Note: Mywlinska sausage contents meat from both pig and beef meat . Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.

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 toruska 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 y = 0,0427x + 19,105 12,00

24,00

10,00 y = 0,0407x + 15,049 8,00

20,00

18,00

6,00 y = 0,015x + 3,4436

16,00

4,00

14,00

2,00 I 2005 III V VII IX XI I 2006 III V VII IX XI I 2007 III V VII IX XI I 2008 III V VII IX XI I 2009 III V VII IX XI I 2010

12,00

procurement p rice for pig s

selling price

retail price

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 "Toruska" sausage

7,00 y = 0,0381x + 11,264

15,60

6,00 Procurement prices for pigs

13,20

5,50 y = 0,0323x + 9,0518 5,00

12,00

10,80

4,50

9,60

4,00 y = 0,015x + 3,4436 3,50

8,40

7,20

3,00 I 2005 III V VII IX XI I 2006 III V VII IX XI I 2007 III V VII IX XI I 2008 III V VII IX XI I 2009 III V VII IX XI I 2010

6,00

procuremen t price for pig s

sellin g p rice

retail p rice

Lin er (retail price)

Source: Central Statistical Office (GUS) and Agricultural Market Agency.

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

Selling prices and retail prices for "Toruska" sausage

6,50

14,40

selling price and retail price for pork ham boiled

22,00

procurement price for pigs

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

Poultry supply chain

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.

Figure D.20

The supply chain of poultry in Poland, 2008 and in 1,000 tonnes

Export

Live poultry

(cooled weight) 314

Production and

consumption

Production for slaughter (live weight)

Production from slaughter (cooled weight)

Consumption (cooled weight)

Import

Live poultry 48203 heads

(cooled weight) 42

Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.

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 Production from slaughter Import Export Consumption 621 16 42 595 2004 829 29 55 803 2005 1,086 82 212 956 2006 1,136 79 250 965 2007 1,194 69 280 983 2008 1,252 42 314 980

Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.

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 in zl Average procurement prices Poultry for slaughter (in live weight) Average prices received by farmers on marketplaces live hen - 1,5-2,0 kg per unit Retail prices of some consumer goods Disembowelled chicken 5.76 4.93 5.63 4.9 6.31 6.21 9.07 9.16 11.56 12.34 12.89 15.35 3.27 2.93 3.14 2.76 3.52 3.46 2006 2007 2008

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

Figure D.21

Procurement prices for poultry and selling and retail prices for disembowelled chickens, in z/kg

6,00

8,70

5,50

7,60

5,00

6,50

4,50 y = 0,0226x + 4,4554 4,00

5,40

4,30

3,50 y = 0,0127x + 2,9116 3,00

3,20

2,10

2,50 I 2005 III V VII IX XI I 2006 III V VII IX XI I 2007 III V VII IX XI I 2008 III V VII IX XI I 2009 III V VII IX XI I 2010

1,00

pro curement p rice for po ultry

kurcz patro szone cena zbytu

kurcz patroszo ne cen a detaliczn a

trend

Source: Central Statistical Office (GUS) and Agricultural Market Agency.

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 Production and preserving of meat Turnover or gross premiums written Gross operating surplus Production value Total purchases of goods and services Purchases of energy products (in value) Personnel costs Wages and Salaries Social security costs 5,258 125 4,685 4,834 : 439 357 83 Production and preserving of poultry meat 2,448 112 2,065 2,212 : 165 132 32 Production of meat and poultry meat products 2,891 75 2,411 2,612 : 286 233 53

Source: Eurostat.

202

selling price and retail price for disembowelled chickens

y = 0,0296x + 5,0781

procurement price for poultry

D.9
D.9.1

Value chain and industry issues

Developments and trends 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

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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

Bargaining power issues 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

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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 Polands 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

(Urzd Ochrony Konkurencji i Konsumentw - http://www.uokik.gov.pl/. Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentw (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 zapaty w transakcjach handlowych (Dz.U. 2003, Nr 139, poz. 1323).

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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 commissions 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 Improvement84 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

Midzyresortowy Zesp do spraw Zwikszenia Przejrzystoci Rynku Artykuw Rolno-Spoywczych i Poprawy Funkcjonowania acucha ywnociowego.

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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 Turnover (EUR million) Production value (EUR million) Value added at factor cost (EUR million) Gross operating surplus (EUR million) Labour costs (EUR million) Gross investments** (EUR million) Number of persons employed Gross value added per employee (EUR 1,000) Share of personnel costs in production (%) Gross operating surplus/turnover (%) 36,433.1 34,276.5 6,724.5 2,650.6 4,073.9 1,305.3 194,349 37.5 11.9 7.3 Food* 163,232.0 150,752.7 34,077.7 12,356.4 21,721.3 9,455.3 826,011 43.3 14.4 7.6 Meat % Food 22.3 22.7 19.7 21.5 18.8 13.8 23.5

*: 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.

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Table E.2

Main indicators of the meat processing industry, 2005-2009 2005 Persons employed Turnover (EUR million) 62,621 14,106 2006 62,829 15,680 2007 59,607 15,453 2008 58,977 16,146 2009 60,189 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

Source: Statistiches Bundesamt Deutschland.

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E.1.1

Meat price volatility 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

Source: Statistiches Bundesamt Deutschland.

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

Source: Statistiches Bundesamt Deutschland.

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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 Kg/head Poultry meat Pig meat Other kinds of meat Meat in total 17.5 54.1 15.6 87.2 % 20.1 62.0 17.9 100.0 2006 Kg/head 16.7 54.5 15.4 86.6 % 19.2 62.9 17.9 100.0 2007 Kg/head 17.8 55.4 16.5 89.7 % 19.8 61.8 18.4 100.0 2008 Kg/head 18.8 53.3 16.3 88.4 % 21.2 60.3 18.5 100.0

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 Meat consumption in total Of which processed meat processed meat in % of all meat consumption 87.2 30.3 34.7 2006 86.6 30 34.6 2007 89.7 31 34.6 2008 88.4 30.6 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.

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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.

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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 1-9 employed 10-19 employed 20-49 employed 50-249 employed 250< employed Total Source: Eurostat. 8,879 3,048 609 436 85 13,057 2003 8,183 4,733 591 422 87 14,016 2004 6,840 4,840 616 446 83 12,825 2005 6,171 5,299 596 459 90 12,615 90 11,758 96 11,164 2006 6,502 4,099 1,247 2007 6,751 3,231 1,086

E.3
E.3.1

Market features
Levels of innovation 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.

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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 Land (%) Existing buildings and structures (%) Construction and alteration of buildings (%) Machinery and equipment (%) 0.7 1.2 23.7 74.5 2001 0.6 0.5 19.1 79.7 2002 0.6 2.1 16.0 81.3 2003 0.4 1.7 15.9 82.0 2004 1.2 1.1 19.6 78.1 2005 0.6 0.7 15.5 83.3 2006 1.6 1.3 16.8 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.

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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.

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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.

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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.

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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.

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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 Holdings Fat pigs 85,808 10,096,559 2003 77,671 10,481,910 2005 66,500 10,663,500 2007 62,195 10,958,187

Source: Statistiches Bundesamt Deutschland.

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, Germanys third largest slaughter company, strongly promotes marketing contracts with farmers. Some slaughterhouses are owned by farmers such as EGO Osnabrck 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 Holdings 1 and 99 broilers 100 and 999 broilers 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. 90 11,580 22,030 56,390 90 9,820 23,580 56,760 120 9,000 27,580 61,310 230 14,440 240 15,940 230 15,720 690 19,290 590 16,720 610 17,450 40 280 30 220 40 260 20 70 20 60 20 80 60 110 60 110 60 100 10,000 Broilers* 60 Holdings 8,340 2005 Broilers* 50 Holdings 7,640 2007 Broilers* 60

450

110

450

90

290

70

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 2000 Number of Enterprises Turnover (Million EUR) Persons employed 9,519 8,292 8,163 9,959 10,964 11,115 11,182 11,460 7,816 7,823 7,296 7,990 8,977 9,848 11,105 10,054 2,520 2001 2,253 2002 2,148 2003 2,377 2004 2,430 2005 2,391 2006 2,348 2007 2,299

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.

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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 2005 Number of Enterprises Persons employed Turnover (Tsd. Euro) 155 16,238 9,486,523 2006 160 16,550 10,148,733 2007 164 17,249 10,657,514 2008 175 17,980 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 TnniesFleisch, 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 TnniesFleisch 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
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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 Number of Enterprises Persons employed Turnover (Tsd. Euro) 41 8595 2,473,204 2006 42 8711 2,494,994 2007 42 8414 3,148,280 2008 40 9041 3,888,673

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 (Agrarmrkte 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 Persons employed Turnover (Tsd. Euro) 406 62,621 14,105,843 2006 415 62,829 15,680,129 2007 389 59,607 15,453,051 2008 381 58,977 16,146,066 2009 383 60,189 16,178,594

Source: Statistiches Bundesamt Deutschland.

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 Enterprises Less than 50 persons 588 Persons employed 17,289 Turnover (Mio. Euro) 2,006

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Enterprises employed 50-99 persons employed 100-249 persons employed 250-499 persons employed 500 or more persons employed Total 180 143 40 17 968

Persons employed

Turnover (Mio. Euro)

12,133 21,487 13,888 12,246 77,043

1,893 5,606 4,992 3,630 18,127

Source: Statistiches Bundesamt Deutschland.

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 2000 Enterprises Turnover Persons employed 1,655 12,517 27,328 2001 1,535 13,130 25,546 2002 1,504 11,324 24,781 2003 1,422 14,227 25,775 2004 1,291 14,987 24,653 2005 1,214 14,727 21,798 2006 1,307 16,062 22,648 2007 1,285 15,617 22,514

Source: Statistiches Bundesamt Deutschland.

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

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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 Aldi and Lidl Discount (excluding Aldi and Lidl) Retail with food (Lebensmiddtteleinzelhandel( LEH)) SB-warehouses Butchers Others Total Source: MEG. 29 % 15 % 20 % 23 % 3% 10 % 100 % 2009 31 % 17 % 19 % 21 % 2% 10 % 100 %

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 Enterprises Turnover Persons employed 5,047 2,401 41,723 2001 4,793 2,409 39,688 2002 4,377 2,139 36,480 2003 3,450 2,089 31,393 2004 3,236 1,937 29,219 2005 2,922 1,927 27,988 2006 3,573 2,068 31,998 2007 3,618 2,069 33,109

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.

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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 Producer price - Pork, fresh or chilled - Pork, parts, salted, dried, smoked Norwegian - Poultry meat, fresh or chilled - Poultry meat, frozen Wholesale of meat and meat products Retail sale of meat and meat products 94.1 101.1 101.1 99.9 99.8 100.0 100.8 102.8 106.7 108.9 90.3 89.2 99.4 101.4 96.0 95.6 94.8 93.9 96.4 96.8 100.0 100.0 98.1 101.6 113.6 100.7 127.8 107.4 127.6 107.2 100.0 100.0 101.2 104.9 103.0 85.3 92.9 103.2 106.4 94.0 100.6 91.8 95.4 98.9 97.1 100.0 100.0 105.8 103.1 100.4 100.7 110.7 104.8 102.2 102.5 2001 2002 2003 2004 2005 2006 2007 2008 2009

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.

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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.

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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 preserving of meat Production and preserving of poultry meat Material consumption Energy cost Use of commodity goods Costs for contract work Gross wages and salaries Social cost Other inputs Tax expense Rents and leases Temporary workers Depreciation Borrowing costs 81.9 1.1 1.2 2.3 3.9 0.8 0.6 0.3 0.6 4.9 0.7 0.4 59.3 2.5 16.4 0.6 6.0 1.3 1.2 0.3 1.4 9.0 1.4 0.7 57.2 2.0 6.7 0.8 10.3 2.2 1.7 0.6 2.0 9.7 2.0 0.5 Production of meat and poultry meat products

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 preserving of meat Production and preserving of poultry meat Turnover or gross premiums written 11,187.1 3,497.2 2,1748.8 Production of meat and poultry meat products

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Production and preserving of meat

Production and preserving of poultry meat

Production of meat and poultry meat products

Gross operating surplus Production value Total purchases of goods and services Purchases of energy products (in value) Personnel costs Wages and Salaries Social security costs

410.8 11,088.1 10,215.0

161.1 2,935.4 3,088.9

2,078.8 20,252.9 16,342.7

121.5 567.7 466.2 101.5

86.8 256.3 212.2 44.1

447.3 3,249.9 2,664.8 585.1

Source: Eurostat.

E.5

Value chain and industry issues

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

Bargaining power issues 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.

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Lack of Transparency The pork industry in Germany has traditionally been characterised by arms 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). 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 industrys 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 (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).

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E.6

Code of Conduct
Regulations are mostly a matter between the EU and the German Lnder, 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 Lnder. 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.

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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.

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E.7
E.7.1

Developments and trends

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 Qualitt 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. Germanys top food retailers, have a strong demand for QS goods.

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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--vis customers (retail concentration, listing fees) that you have identified in your desk research, and get the interviewees 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 interviewees ability to compete. For example, if a firm forces the

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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 interviewees 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 regulationswhether national or EUare 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?

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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 companys 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 Association of Independent Meat Suppliers NPA, National Pig Association part of NFU British Meat Manufacturers Association Bpex Environment Agency British Poultry Council Contact person Norman Bagley Barney Kay Stephen Rossides Andrew Knowles Tricia Henton Peter Bradnock

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DEFRA Rattlerow Farms Chief Poultry Advisor NFU Anglia Quality Meat Association

Mike Roper Robin Brice Robert Newbry Richard Doel

Spain
Company/Institution Grupo Batalle Jorge Sa (Grupo Samper) Patel Sa (Grupo Vall Companys) Casa Tarradellas Casademont Corporacion Agroalimentaria Guissona Grupo Sada Campofrio Ministry Of Environment, Rural And Marine Affairs Asocarne Propollo Comision Nacional De La Competencia FECIC Contact person Josep Batall Jorge Samper Rivas Enrique Gil Burgos / Albert Morera Josep Tarradellas Arcarons Adriana Casademont Teresa Alsina Cornellana Pedro Padilla Pulido (Vicep) Pedro Jos Ballv Carlos Escribano Fernando Pascual ngel Martn Alfredo Gonzlez-Panizo Tamargo Josep Collado

The Netherlands
Company/Institution Van Rooi Meat, Helmond Vion Food Group, Boxtel Vleeshandel Hilckmann Nijmegen B.V., Abattoir Westfort, Gorinchem Egbert Kruiswijk Vleesproducten Interchicken Storteboom Plukon Heijsgroep Contact person Mr. M. van Rooi, director Mr. S. Korver, director public affairs Mrs. D. Hilckmann, director Mr. J. de Wit, director Mr. E. Kruiswijk, director

Poland
Name Ministry of Agriculture and Rural Development, Poland Agricultural Market Agency Radoslaw Lewandowski Expert on Meat Markets Office of Competition and Consumer Protection Nikodem Szadkowski Contact Joanna Trybus, Ph.D.

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Deputy Director Market Analysis Department Office of Competition and Consumer Protection Sokolow Secretariat

Main invester: Danish Crown Nove

Interview with Projectchef Sren Tinggaard CEO Max Srensen Alexandra (secretary)

Germany
Name Ministry of Food, Agriculture and Consumer Protection Bundesverband der Deutschen Fleischwarenindustrie Tnnies Fleisch Wiesenhof Contact Dr. Hermann Josef Schlder Ministerialrat Thomas Vogelsang Manager Dr. Timmermann Oliver Kaufmann

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G Data sources for modelling

Germany - Pork Farm price:

Wholesale prices:

Retail prices:

Prices paid by slaughterhouses to farmers. Auszahlungspreise der Versandschlachtereien und Fleischwarenfabriken fr Schweine und Schlachtsauen (M1): Gesamtdeutschland, Monatsmittel (EUR/kg Schlachtgewicht, frei Schlachtsttte, 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. Grohandelsabgabepreise fr Schweinefleisch am Hamburger Fleisch-gro markt (obere Notierungsstufe, EUR/kg); Selected products: Schultern, rund geschnitten; Kotelettstrnge (ohne Nacken), Schinken, rund geschnitten; Data source: ZMP-Marktbilanz Vieh und Fleisch 2002, Seite 118, 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 fr Schweinefleisch (EUR/kg, einschl. MwSt.), 2000:01 2004:12; Selected products: Schweinekotelett, Stiel oder Nacken/Kamm, ohne Filet; Schweinefleisch zum Braten; Schweineschnitzel; Data source: ZMP-Marktbilanz Vieh und Fleisch 2005, Seite 120, Tabelle 71, Durch-schnittliche Verbraucherpreise fr Schweinefleisch (EUR/kg, einschl. MwSt.), 2000:01 2004:12.

Germany - Turkey Farm price:

Wholesale price:

Retail price:

Prices paid to turkey farmers. Auszahlungspreise an die Putenmster Bundesdurchschnitt -, Hhne schwerer Rassen, Leitgewicht 18,5 kg, Euro/kg, 2003:01 2008:12; Data source: MEG-Marktbilanz Eier und Geflgel 2009, page 159, Tabelle 121. Prices received by slaughterhouses. Schlachtereiabgabepreise fr deutsches Putenfleisch, Euro/kg, Frische Putenschnitzel (bulk), 2003:01 2008:12; Data source: MEG-Marktbilanz Eier und Geflgel 2009, page 161, Tabelle 122b. Consumer prices for fresh turkey schnitzels. Verbraucherpreise fr Putenschnitzel frisch, natur in Deutschland, Euro/kg, 2003:01 2008:12; Data source: MEG-Marktbilanz Eier und Geflgel 2009, page 162, Tabelle 123.
241

Germany Poultry Farm price:

Wholesale prices:

Retail prices:

Prices paid to broiler producers. Auszahlungspreise an die Hhnchen-mster, Bundesdurchschnitt, Euro/kg LG, 1900 g, 2004:01 2007:12; Data source: ZMP-Marktbilanz Eier und Geflgel 2008, page 148, Tabelle 102. Prices received by slaughterhouses. Schlachtereiabgabepreise fr deutsche Hhnchen, Durchschnitt aller Gewichte, Euro/kg frei Empfnger, 2002:01 2007:12; Data source: ZMP-Marktbilanz Eier und Geflgel 2008, Tabelle 104. Consumer prices. Verbraucherpreise in Deutschland, Euro/kg, 2002:01 2007:12; Selected products: gefrorene Hhnchen, frische Hhnchen and Hhnchenschnitzel frisch, natur in Deutschland, Euro/kg; Data source: ZMP-Marktbilanz Eier und Geflgel 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:

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.

Poland - Poultry Farm price: Wholesale price: Retail price:

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.

UK - Pork Farm price: Wholesale price: Retail price: UK - Poultry Farm price:
242

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 1 > 0; 2. the wholesale (retail) price decreases less than the farm (wholesale) price decreases, i.e., 2 > 0; 3. the wholesale (retail) price increases while the farm (wholesale) price decreases, giving 4 > 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--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 1 < 0; 2. the wholesale (retail) price decreases more than the farm (wholesale) price does so that 2 < 0; 3. the wholesale (retail) price decreases whereas the farm (wholesale) price increases, giving 3 < 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--vis the wholesalers (retailers) if it appears that 1 > 0 and 2 > 0 (and hence, 1 + 2 > 0) and 3 + 4 > 0. In contrast, if we find that 1 < 0 and 2 < 0 (and hence, 1 + 2 < 0) as well as 3 + 4 < 0, then farmers (wholesalers) might be too powerful vis--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 tables 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 2 and 3 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 (1 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 (4 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 (1 is not significant), while if both price decrease, then the retail price does only partially follow the downturn in the wholesale price (2 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 1 is not significant while 2 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--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 Loin Schnitzel Wholesale-Retail Pork for Loin Coefficients Frying

1
Std. error t-value p-value

0.016 0.010 1.653 0.108 0.069 0.028 2.493 0.018 0.030 0.007 3.987 0.000

0.057 0.023 2.449 0.020 0.081 0.027 2.974 0.005 0.023 0.003 6.750 0.000

0.003 0.017 0.143 0.887 0.087 0.037 2.414 0.022 0.023 0.007 3.085 0.004

0.011 0.005 2.348 0.025 0.061 0.049 1.244 0.223 0.022 0.005 4.691 0.000

0.092 0.014 6.534 0.000 0.086 0.053 1.613 0.117 0.066 0.013 4.878 0.000

0.021 0.018 1.194 0.241 0.025 0.046 0.546 0.589

2
Std. error t-value p-value

3
Std. error t-value p-value

4
Std. error t-value p-value

0.011 0.001 8.212 0.000 0.103 0.032 0.003 0.085 0.031 0.009 0.018 0.007

0.038 0.005 7.610 0.000 0.024 0.034 0.481

0.055 0.024 2.258 0.031 0.075 0.042 0.084 0.091

0.046 0.002 194.7 0.000 0.039 0.063 0.538 0.072 0.049

0.073 0.029 2.531 0.017 0.160 0.056 0.008 0.178 0.055 0.040 0.067 0.555 0.047 0.049

j =1 a j
4 Std. error p-value

1 + 2
Std. error p-value

see

0.041

0.033
0.016 0.006 0.032 0.024

0.154
0.018 0.005

0.003
0.007 0.030

0.346

3 + 4
Std. error

248

Price Relationships (Sample: 02:01-04:12 = 36 obs, EUR/kg) p-value 0.016 0.016 0.187 0.001 0.817

Table H.2

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 FarmWholesale Frozen WholesaleRetail Fresh FarmWholesale Chicken Roasters (Whole Turkey Breast) Roaster (Breast Turkey - Schnitzel) Roaster Schnitzel Sample No. of Obs 06:01-08:12 36 Coefficients 06:01-08:12 36 05:01-07:12 36 05:01-07:12 36 05:01-07:12 36

1
Std. error t-value p-value

0.258 0.050 5.135 0.000 0.034 0.007 4.798 0.000 0.066 0.025 2.687 0.011

0.078 0.074 1.052 0.300

0.147 0.022 6.829 0.000 0.009 0.001 6.197 0.000

0.097 0.022 4.406 0.000 0.006 0.004 1.509 0.138

0.092 0.032 2.896 0.006 0.050 0.013 3.889 0.000 0.014 0.001 14.59 0.000

2
Std. error t-value p-value

0.028 0.002 16.26 0.000

3
Std. error t-value p-value

4
Std. error t-value p-value

0.123 0.017 0.000

0.037 0.007 0.000

0.017 0.004 0.000

0.004 0.002 0.093

j =1 a j
4 Std. error p-value

0.158 0.056 0.008

0.228 0.078 0.006

0.175 0.023 0.000

0.107 0.023 0.000

0.032 0.034 0.343

1 + 2
Std. error p-value

0.224 0.051 0.000 see 3

0.138 0.021 0.000 see 4

0.138 0.021 0.000 see 4

0.091 0.022 0.000 see 4

0.042 0.033 0.214 0.010 0.002 0.000

3 + 4
Std. error p-value

249

Table H.2

Continued Price Relationships (EUR/kg) Roasters Frozen Fresh Chicken Roaster Sample No. of Obs. Coefficients 1 Std. error t-value p-value 2 Std. error t-value p-value 0.138 0.024 0.008 3.038 0.005 0.008 2.465 0.019 0.001 0.001 1.522 0.000 0.021 0.013 3.698 0.004 0.034 -3.111 0.009 0.107 0.020 0.054 0.011 2.777 0.185 0.019 1.096 0.281 0.050 1.356 0.015 05:01-07:12 36 05:01-07:12 36 05:01-07:12 36 Wholesale-Retail Roaster Schnitzel

0.002 0.001

0.010 0.017 7.313

3
Std. error t-value p-value

4
Std. error t-value p-value

0.009 0.001 6.328 0.000 0.129 0.037 0.001 0.105 0.034 0.004 0.021 0.013 0.044 0.019 0.029 0.012 0.008 0.155 0.108 0.000 0.057 0.030 0.525 0.034 0.013

0.103

7.762

j =1 a j
4 Std. error p-value

0.019

1 + 2
Std. error p-value

0.020

3 + 4
Std. error p-value

see 3

0.053 0.017 0.003

250

Table H.3

Parameter estimates and tests regarding Equation (3) for several price relationships in the pork chain in The Netherlands (H = 12) Price Relationships (EUR/kg) FarmWholesale WholesaleRetail General Sample Pork chops Bacon Schnitzel

01:01-09:08
Coefficients

02:01-09:08

07:01-09:08

07:01-09:08

07:01-09:08

No. of Obs

1
Std. error t-value p-value 2 Std. error t-value p-value 3 Std. error t-value p-value 4 Std. error t-value p-value

0.010 0.012 0.820 0.414 0.011 0.013 0.833 0.407 0.009 0.002 5.643 0.000

0.006 0.008 0.671 0.504

0.028 0.019 1.458 0.156 0.050 0.015 3.379 0.002 0.031 0.010 3.049 0.005

0.013 0.023 0.559 0.580

0.010 0.027 0.375 0.711

0.006 0.012 0.546 0.587 0.025 0.006 4.092 0.000

0.012 0.005 2.403 0.023

0.003 0.014 0.245 0.808 0.067

0.016 4.100 0.005

0.018 0.002 8.165 0.000

0.050 0.012 4.161 0.001

0.021 0.005 4.156 0.000

0.101 0.019 5.203 0.000

0.065 0.017 3.787 0.001

j =1 a j
4 Std. error p-value 1 + 2 Std. error p-value 3 + 4 Std. error p-value

0.009 0.019 0.640 0.000 0.018 0.979

0.038 0.022 0.088 0.012 0.015 0.406

0.031 0.025 0.215 0.022 0.023 0.355 0.009 0.011 0.415

0.126 0.031 0.000

0.011 0.041 0.788

0.025 0.024 0.303

0.013 0.030 0.656 0.002

0.009 0.003 0.003

0.025 0.013 0.058

see 4

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) Price Relationships (EUR/kg) FarmWholesale Boneless Legs General Chicken Legs Sample No. of Obs Coefficients 1 Std. error t-value p-value 2 Std. error t-value p-value 3 Std. error t-value p-value 4 Std. error t-value p-value 0.057 0.012 4.757 0.000 0.108 0.025 4.374 0.000 0.126 0.020 6.302 0.000 0.054 0.020 2.714 0.009 0.029 0.010 2.965 0.005 0.006 0.001 4.486 0.000 0.052 0.019 2.702 0.009 0.003 0.007 0.362 0.719 0.027 0.008 3.372 0.001 0.027 0.011 2.323 0.024 0.026 0.028 0.903 0.370 05:01-09:07 55 05:01-09:10 58 05:01-09:07 55 05:01-09:07 55 05:01-09:11 59 WholesaleRetail Cuts Breast

0.064 0.030 2.170 0.035 0.068 0.011 6.032 0.000

0.004 0.008 0.468 0.642 0.046 0.010 4.810 0.000

0.017 0.002 9.744 0.000

0.033 0.006 5.877 0.000

0.074 0.013 5.877 0.000

0.066 0.012 5.420 0.000

0.059 0.017 3.425 0.001

j =1 a j
4 Std. error p-value 1 + 2 Std. error p-value 3 + 4 Std. error p-value

0.161 0.040 0.000 0.051 0.028 0.075 0.109 0.020 0.000

0.052 0.022 0.024 0.025 0.022 0.252

0.008 0.026 0.758 0.055 0.021 0.011 0.047 0.014 0.001

0.035 0.038 0.356

0.009 0.035 0.808 0.022 0.030 0.459

0.038 0.030 0.213 0.003 0.018 0.888

0.027 0.006 0.000

0.013 0.020 0.500

252

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 FarmWholesale FarmWholesale Sample No. of Obs Coefficients 1 Std. error t-value p-value 2 Std. error t-value p-value 3 Std. error t-value p-value 4 Std. error t-value p-value 0.050 0.014 0.036 3.476 0.002 0.057 0.112 0.511 0.613 0.000 0.007 0.047 0.963 0.125 0.158 0.088 1.794 0.083 0.287 0.061 4.716 0.000 0.037 0.009 4.253 0.000 0.060 0.013 4.646 0.000 0.507 0.131 3.866 0.001 0.329 0.037 9.004 0.000 0.080 0.013 6.808 0.000 0.478 0.061 7.850 0.000 07:01-09:07 31 WholesaleRetail 07:01-09:07 31 Whole chicken breast 07:01-09:08 32 07:01-09:08 32 Chicken WholesaleRetail Chicken Breast 07:01-09:08 32

0.162 0.021 7.721 0.000 0.080 0.000 0.000

0.096 0.055 6.676

0.166 0.000

0.017

0.057 0.015

3.018 0.005

3.715 0.001

j =1 a j
4 Std. error p-value 1 + 2 Std. error p-value 3 + 4 Std. error p-value

0.028 0.124 0.822

0.324 0.125 0.014

0.206 0.065 0.004

0.098 0.134 0.473

0.689 0.072 0.000

0.057 0.113 0.618 0.029 0.039 0.465 see 4 see 1

0.249 0.063 0.001 0.043 0.013 0.002

0.178 0.133 0.191

0.640 0.066 0.000

0.049 see 3 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 Loins Sample No. of Obs Coefficients 1 Std. error t-value p-value 2 Std. error t-value p-value 3 Std. error t-value p-value 4 Std. error t-value p-value 14.78 2.873 5.143 0.000 1.524 0.002 786.8 0.000 1.524 0.002 786.8 0.000 4.759 2.647 1.798 0.076 3.642 0.198 18.41 0.000 3.642 0.198 18.41 0.000 6.643 2.626 2.530 0.014 2.645 0.268 9.875 0.000 2.645 0.268 9.875 0.000 14.76 3.541 4.167 0.000 5.081 0.495 10.26 0.000 5.081 0.495 10.26 0.000 51.05 7.888 6.472 0.000 4.892 0.982 4.982 0.000 4.892 0.982 4.982 0.000 08:30-09:51 74 Legs 08:30-09:51 74 Bellies 08:30-09:51 74 Wholesale-Retail Loin Chops 08:30-09:51 74 Loin Steaks 08:30-09:51 74

3.203 0.005 657.6 0.000

4.378 0.029 149.6 0.000

4 j =1

aj

13.25 2.873 0.000

1.118 2.634 0.673

9.288 2.650 0.001

12.88 3.566 0.001

12.88 7.823 0.001

Std. error p-value 1 + 2 Std. error p-value 3 + 4 Std. error p-value

see 1

see 1

see 1

see 1

see 1

1.878 see 3 see 3 see 3 0.495 0.000

0.514 0.982 0.603

254

Table H.6

Continued Price Relationships (pence/kg) Farm-Wholesale Legs-Legs Boneless Legs-Fillet Bellies Sausages 08:30-09:51 74 08:30-09:51 74 Wholesale-Retail BelliesMinced Pork 08:30-09:51 74 Bellies- Diced Pork 08:30-09:51 74

Sample
No. of Obs Coefficients 1 Std. error t-value p-value 2 Std. error t-value p-value 3 Std. error t-value p-value 4 Std. error t-value p-value

08:30-09:51 74

47.08 5.479 8.593 0.000

23.19 3.197 7.253 0.000

28.96 3.729 7.765 0.000 0.122

38.77 5.847 6.631 0.000

46.86 7.593 6.172 0.000

0.000

1.716 0.561 3.061 0.003

2.068 0.707 2.923 0.005

7.135 1.091 6.540 0.000

9.203 0.851 1.779 0.000

10.43 0.851 5.354 0.000

3.649 0.575 6.351 0.000

9.811 1.529 6.418 0.000

5.851 1.779 3.289 0.002

j =1 a j
4 Std. error p-value 1 + 2 Std. error p-value 3 + 4 Std. error p-value

54.57 5.647 0.000

31.55 3.847 0.000

25.35 3.925 0.000

48.58 6.251 0.000

52.72 8.572 0.000

28.84 see 1 see 1 3.729 0.000 3.486 1.180 0.004 see 4 see 4 see 1 see 1

7.486 1.019 0.000

8.365 8.365 0.000

255

Table H.7

Parameter estimates and tests regarding Equation (3) for several price relationships in the poultry (chicken) chain in the United Kingdom Price Relationships (pence/kg) FarmWholesale (H = 52) Broilers15502050g Sample No. of Obs Coefficients 1 Std. error t-value p-value 2 Std. error t-value p-value 3 Std. error t-value p-value 4 Std. error t-value p-value 4.566 0.966 4.726 0.000 3.064 0.472 6.498 0.000 3.127 0.425 7.359 0.000 4.573 1.120 4.083 0.000 3.139 0.524 5.985 0.000 4.215 0.494 8.531 0.000 20.01 3.202 6.250 0.000 9.876 1.578 6.257 0.000 8.261 1.838 4.495 0.000 3.096 1.976 1.567 0.121 2.976 2.396 1.242 0.218 03:01-09:48 357 Roasters> 2450g 03:01-09:48 357 Skinless Breast Fillet 03:01-09:48 357 Roasters20502450g 03:01-09:11 83 Roasters 20502450g 03:01-09:11 83 FarmWholesale WholesaleRetail(H=12)

2.241 1.205 1.860 0.067 8.133 1.078 7.544 0.000

2.964 0.745 3.981 0.000 8.072 1.098 7.351 0.000

4.752 0.532 8.931 0.000

5.168 0.708 7.301 0.000

4.328 0.840 5.155 0.000

6.675 1.672 3.991 0.000

6.976 1.481 4.709 0.000

j =1 a j
4 Std. error p-value 1 + 2 Std. error p-value 3 + 4 Std. error p-value

3.127 1.276 0.015

2.288 1.489 0.110

6.203 3.935 0.116

3.880 3.626 0.288

4.843 3.705 0.195

1.502 1.076 0.164

1.434 1.237 0.247

10.14 3.570 0.005 3.933 2.015 0.052

5.337 2.238 0.020 1.458 2.019 0.472

5.940 2.507 0.020 1.096 1.875 0.561

1.625 0.679 0.017

0.953 0.862 0.270

256

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