Study on the Competitiveness of the European Meat Processing ...

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Study on the Competitiveness of the European Meat Processing ...

This study was carried out byin cooperation withFramework contract on sectoral competitiveness (B1/ENTR/06/054)Specific contract No SI2.544542ECORYS Nederlands BV,Rotterdam, 29 October 2010


ECORYS Nederland BVP.O. Box 41753006 AD RotterdamWatermanweg 443067 GG RotterdamThe NetherlandsT +31 (0)10 453 88 00F +31 (0)10 453 07 68E netherlands@ecorys.comW www.ecorys.comRegistration no. 24316726ECORYS Macro & Sector PoliciesT +31 (0)10 453 87 53F +31 (0)10 452 36 60


B.3.3 Added value & Productivity 140B.4 Pork Supply Chain 141B.4.1 Farming 142B.4.2 Slaughterers / Abattoirs (Primary Processors) 144B.4.3 Processors (Secondary / specialised Processing) 146B.4.4 Distribution 147B.4.5 Price Structure 148B.5 Poultry Supply Chain 150B.5.1 Farming 150B.5.2 Processing 151B.5.3 Distribution 151B.5.4 Cost Structure 152B.6 Value Chain and Industry Issues 153B.6.1 Exercise of Buyer Power 154B.6.2 Code of conduct 159B.6.3 Developments and trends 160C The Netherlands 165C.1 Introduction 165C.2 Food price volatility 166C.3 Consumption 168C.4 The meat supply chain 169C.5 Market structure, business dynamics and economic impact 173C.6 Pricing and value added 174C.6.1 The pork supply chain 174C.6.2 Poultry 176C.7 Price transmission 177C.7.1 Pork 177C.7.2 Poultry 178C.8 International trade 178C.9 Dutch Food Law 181C.9.1 Dutch competition law 181C.9.2 Code of conduct 182D Poland 183D.1 Introduction 183D.2 Consumption level 184D.2.1 Meat price volatility 185D.3 The market structure 187D.3.1 Number of enterprises 187D.3.2 Size structure 187D.4 Market feature 188D.4.1 Level of innovation and investments 188D.4.2 Profitability 189D.4.3 Added value – productivity 190D.5 The meat supply chain – the overall industrial structure 190D.5.1 Farming 191D.5.2 Middleman procurement of livestock 191


F Guidelines for interviews and interviewee list 235F.1 Interview guidelines 235F.2 What to do with requests for questions 236F.3 Industry-association-specific questions 237F.4 Table of interviewees 237G Data sources for modelling 241H Further information on the model 245I Reference List 257


1 Introduction1.1 General contextThe agriculture industry, understandably, attracts attention and scrutiny. Rightly orwrongly, the stability and safety of a European-grown food supply is considered to beimportant both economically and politically. This is one reason why, under the protectiveumbrella of the Common Agricultural Policy (CAP), agriculture and rural developmentrepresented 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 theindustry, 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 thecompetitiveness of the EU food industry expressed concern that the competitiveness ofthe industry lags behind Canada and the United States. In fact, it only manages to reachthe level of efficiency of Brazil and Australia. 1Further problems in the industry were highlighted between 2007 and 2009, when foodprices briefly soared worldwide due to rising oil prices and a declining US dollar, andthen slowly receded. 2 From a public policy perspective these developments increasedconcern over price transmission within the supply chain. Price increases closely reflectedrising energy prices, but decreases failed to transmit their way through to the consumer atthe same pace.In its final report of 17 March 2009 the High Level Group on the Competitiveness of theAgro-Food Industry (HLG) 3 in Europe recommended establishing a European forum withthe aim of adopting a code of conduct that would enhance the good functioning of thefood chain in the EU. To allow the forum to address the relationships among the playersand identify parameters to monitor the functioning of the chain, this “ong>Studyong> on theCompetitiveness of the EU Meat Processing Industry” intends to identify potentialdysfunction of the food supply chain and propose policy options to address suchdysfunction.123Wijnands, J.H.M., B.M.J. van der Meulen, and K.J. Poppe. "Competitiveness of the European Food Industry: An Economicand 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.htm9


1.2 ong>Studyong> purpose and objectiveThe primary aim of this study has been to identify potential dysfunction within specificvalue chains of the pork and poultry industry. To achieve this aim, the following aspectsof 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 governmentofficials, industry associations, and individual companies. The final aspect—marketoutcomes—was analysed using a model of price formation.From this analysis, a number of policy recommendations have been formulated on howthe value chain might function better. One specific focus of the policy recommendationsis 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 thevalue chains of five products within five Member States (for more information on whichproducts and Member States, see the section Methodology for this study).1.3 Methodology for this studyThe starting point for the study has been an inventory of previous results. A literaturereview has been used to describe the market structure of food and meat processingindustries at a European level. In addition, a legal review was conducted to determine themain regulations affecting the industry. Smaller reviews of the industry within fiveMember States have also been conducted, which form the basis of case studies to analysethe research questions at hand. (More information on country selection is available insection 1.3.1, below).Answering the research questions has relied on a combination of qualitative andquantitative techniques. First, based on the results gathered from the literature review,case study researchers interviewed members of industry, associations, and relevantgovernment agencies. The purpose of these interviews was to gain a more in-depthunderstanding of issues that have already been elucidated in previous reports.Second, an empirical model was used to examine the fluidity of price transmission alongdifferent levels of the value chain, one important aspect of a properly functioning valuechain. The purpose of the model was to demonstrate empirically bottlenecks, and see ifthese align with what were identified during interviews. As well, the model can alsoprovide a basis for future analyses of the value chain to help increase transparency withinthe 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 poultryindustry in the five case countries; however, due to data limitations, we were only able to10


process the model in four of the country cases. (More information on product selection isavailable in section 1.3.2). A full description of the model and the results are available inchapter 4.1.3.1 Country selectionOur interest has been to select cases that both represent particular types of marketconditions and have data that is readily available. First, two countries were selected onthe basis that they represented ‘extremes’ in terms of market conditions: Germany, whichis extremely price sensitive, and the UK, which is focussed on service. In between these“most different” cases, initial discussions with the European Commission services andstakeholders identified a short-list of potential countries to complete the sample, namely:Spain, Italy, Denmark, Poland, the Netherlands, and Romania. Considerations for eachcountry are summarised in the following table.Table 1.1A summary of pros and cons to study particular Member StatesCountry Pros ConsDenmark • One of the largest meatexporters, outside of the UK.• Largest meat exporter outsideof EU, presenting problemson how to correct the model.Italy • Synergy with existingASS.I.CA studies;• Stark contrast between largescaleproducers in north and• One of the largest meatexporters.small-scale producers insouth.Netherlands • Important meat industry;• Extensive data alreadycollected;• Existing expertise available;• Pilot case study.Poland • Existing expertise available; • Poor data availability.• Gives new Member Statesconsideration in the study.Romania • Gives new Member States • Poor data availability;consideration in the study. • Consultants would need tospend time finding expertisein the region.Spain • Unified market, with 92% ofpoultry industry beingvertically integrated;• Vertical integration stretchesto retail level;• Reliability of data;• Expert immediately available.11


On the basis of this summary the UK, Germany, the Netherlands, Spain, and Poland wereselected as case study countries.Figure 1.1Overview of the case studies selected1.3.2 Product selectionThe first criterion used for product selection was that the products to be analysed shouldbe classified as “processed”; essentially anything that is not fresh meat. Regulation853/2004 provided two critical definitions:“Fresh meat” means meat that has not undergone any preserving process other thanchilling, freezing or quick-freezing, including meat that is vacuum-wrapped or wrappedin a controlled atmosphere.and“Meat products” means processed products resulting from the processing of meat orfrom the further processing of such processed products, so that the cut surface shows thatthe product no longer has the characteristics of fresh meat.Having identified “processed” products, the following additional criteria—in order ofimportance—were used to further narrow the selection:• Availability of data; 4• Relatively high consumer expenditure / turnover;• Relatively high consumer willingness to pay; and• Comparability across countries.Comparability is an issue for some products (ham in Germany is not he same as ham inSpain), and we have used a relatively loose definition. Essentially, comparable productsare 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 datawould be extremely difficult for processed poultry products and that, where data exist,they are not necessarily for the most relevant products. Accordingly, following discussionwith the European Commission services and stakeholders, a looser definition ofprocessed chicken product has been used. For example, products such as skinless,boneless breast are classified as “processed” for the sake of this project.4This seems like an obvious point, but in many cases, the break-down of data by product was limited to a selection.12


The following table outlines the products and countries for which the analysis wascompleted. A more complete discussion of the data and its sources is available inchapter 4.Table 1.2Meat products studiedPorkPoultryGermany Netherlands Poland UKCutletsGeneralGeneralLoin chopsPork for frying BaconLoin steaksSchnitzelsPorkchopsBoneless legsSchnitzelFilletSausagesMinced porkDiced porkChicken schnitzel GeneralChicken breast RoastersRoaster (fresh and Chicken breastfrozen)LegsTurkey schnitzel1.3.3 Interview proceduresInterviews represented one of the main methods to collect data on the functioning of thevalue chain. The interviews represent only a small sampling of the organisations involvedin the value chain, and as such, it was important to try to get a representative sample of15 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 fordata rather than testing tightly generated hypotheses, it made more sense to give theresearchers the freedom to explore particular paths with different interviewees and also togive the interviewees themselves the freedom to expand on the answers they consider tobe the most relevant.For more information on the exact methods, please see Appendix F.1.4 Reading this reportChapter 2 of this report outlines the meat industry in the European Union, and adds somecontext to the preliminary findings. Readers already familiar with the general workings ofthe industry will probably want to skim or even skip this chapter. Chapter 3 offers asummary of the findings from the various case studies and offers a “typology”, whichcompares and contrasts the five Member States studied. Chapter 4 presents a description13


14of the model and its results in terms of price transmission. The report concludes withChapter 5, which outlines our policy recommendations.


2 The state of the industry2.1 IntroductionThe European Commission has commissioned several studies about the competitivenessof the food sector in the EU. Based on these studies, the EU High Level Group (HLG) onthe competitiveness of the agro-food industry has published a report on the food chainstructure in the EU, highlighting gaps and imbalances.The EU meat industry, an important component of the overall food supply, has also beenanalysed. Past studies have described the meat industry to be less competitive than otherinternational players in the global market. Its cost and productivity have been the majorissues hindering its competitiveness. Building on this, in its fifteenth recommendation,the HLG recommended a European Forum be created to improve the relationships andinteractions among different actors along the supply chain, including adoption of a codeof conduct. 5To understand how these relationships can be helped, and the codes of conduct that needto be adopted, contractual relationships must be unpacked between the different tiers ofthe supply chain. Costs and margins also offer clues as to where some parts of the chainare dysfunctional, whether in terms of price transmission or profit taking.In the following chapter, we summarise the most important findings and discussions inthis debate as well as the main imbalances that brought about the commissioning of thisstudy. While the topics discussed apply to the food industry in general, the meat and meatprocessing 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 theprocessed meat value chain within a number of the Member States.2.2 An overview of the food and meat industryThe agriculture industry contributed EUR 85.7 billion to the European economy, with themeat sector providing nearly 25 percent of that total. Looking at trends for the sector, onecan see some variation in the overall contribution to the European economy of theindustry, but nothing that is statistically significant.5High Level Group on the Competitiveness of the Agro-Food Industry. "Final Recommendations of the High Level Group onthe Competitiveness of the Agro-Food Industry." 2009.15


Digging slightly deeper into the figures for animal production, pork and poultry areclearly vital to the industry in general. The pork industry is, in fact, the most significantmeat producing industry with poultry in a distant—if still significant—second.Figure 2.1 Economic accounts for meat; values at current prices in Purchasing Power Standard (PPS) 6Millions of PPS100000.0090000.0080000.0070000.0060000.0050000.0040000.0030000.0020000.0010000.000.002002 2003 2004 2005 2006 2007 2008 2009Other animalsPoultryPigsSource. Eurostat, DS-072379.Meat production—in terms of dead weight—is also highest for pork and poultry. Thepercentage share of pork and poultry are a much higher percentage of the total for meatthan their share of turnover. So, in 2008, while pork and poultry represented 55 percent ofthe total turnover, the overall dead weight of pork and poultry represented 77 percent inthat share.Figure 2.2Tonnes of animals slaughtered in EU-27Tonnes (000s)500004500040000350003000025000200001500010000500002004 2005 2006 2007 2008Sheep & GoatBovine & CalvesPoultryPorkSource: Eurostat, DS-072660 (Slaughtered animals for meat production).6Purchasing power standard (PPS) is the name Eurostat gives to an artificial currency unit in which the Purchasing PowerParities expenditures are expressed. This is an index for comparison sake only.16


At the Member State level, population size generally determines the level of meatproduction. The table below gives an overview of biggest producer countries ofslaughtered pork and poultry for the group EU-27 for the year 2008.Table 2.1 Meat Production in EU-27 in 2008PorkPoultryEU-27/ 1,000 Tonnes 22,599 EU-27/ 1,000 Tonnes 11,130% Production % ProductionGermany 22.6% France 15.3%Spain 15.4% United Kingdom 12.9%France 10.1% Spain 12.4%Poland 8.4% Germany 10.7%Denmark 7.6% Poland 10.7%Italy 7.1% Italy 10.0%Netherlands 5.8% Netherlands 6.6%Belgium 4.7% Hungary 3.5%United Kingdom 3.3% Romania 3.1%Austria 2.3% Portugal 2.6%Source: Eurostat.One of the other significant characteristics of the food industry in general is the structureof the individual enterprises. Statistics show that—in terms of overall numbers—the foodindustry is dominated by enterprises employing less than 20 employees, representing86 percent of the industry.Figure 2.3Percentage of enterprise by size (by number of employees) in the food sector20-498%50-2495%above 2491%less than 2086%less than 20 20-49 50-249 above 249Source: Eurostat.The meat industry is no exception to this rule, with SMEs accounting for a largepercentage of firms within the sector. Wijnands et al. have related the relatively low17


ProcessorsThe EU processing sector is highly concentrated where a small number of largeprocessors dominate the market, especially multinational companies. However, a largenumber of SMEs operate in the market, competing on price and variety of products ratherthan their big competitors competing on brand name. Processors negotiate directly withretailers. SME processors bargaining power decreases against retailers’. In order toincrease their bargaining power, processors adopt these practices: 9Cartels, and resale price maintenance. Recent investigations carried out by NationalCompetition Authorities pointed to increasing cartel activities by processors. Examples ofthese are cartels in poultry in Czech Republic and beef processors in Ireland. Thesepractices increase the bargaining power of processors against retailers, with the intent tokeep food prices at a certain level, regardless of price changes along other tiers of thevalue chain.Single branding obligations and tying refers to schemes adopted by suppliers toencourage—and, in fact, to force—retailers to purchase products that are not necessarilyin 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 strengtheningfarmers’ cooperation, concerns around price (fixing or increasing) are perceived by theindustry.RetailersIn the EU, a small number of large retailers dominate the market. The concentration ofretailers, however, is not uniform across the Member States, with some showing higherconcentration than others. A study on the evolution of the high-volume retail sector forfood and clothing in the EU (though in a selected number of countries) between 2003-2008 concluded that five major firms dominate the retail sector in each Europeancountry. 10 Concentration is highest in the UK and has increased for all countries in the EUexcept 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 andconcluded that, for example, in the UK, four top retailers account for 56 percent of themarket 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, andnaturally lower their own margins. 11 By extension, they also exercise their buyer power91011Commission of the European Communities (2009). Communication from the Commission to the European Parliament, TheCouncil, The European Economic And Social Committee and the Committee of the Regions: A better functioning foodsupply 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: ConsultativeCommission on Industrial Change.Commission of the European Communities (2009). Competition in the food supply chain. An Accompanying Document tothe Communication from the Commission to the European Parliament, The Council, The European Economic And Social19


over their suppliers. However, retailers are weaker versus their bigger suppliers, andsimilar to suppliers’ behaviour, they also adopt a number of practices to face theincreasing power of their stronger suppliers. 12 These practices can be summarised asfollows:Joint purchasing agreements originated as practices where retailers would pull togetherthe purchase volumes required for their stores so as to build a critical mass that wouldallow them to obtain better prices. The practices have recently evolved and its purposewas somehow altered to include obtaining stronger bargaining power and negotiationmargins from suppliers. A potential impact resulting from these alliances is that financialbenefits resulting from mass procurement and achievement of economies of scale maynot necessarily pass on to consumers.Increased use of private label products. Private labels are often produced by small andmedium sized suppliers and used by retailers under their own brand names, usually at 20to 30 percent lower prices. The practice is used by retailers to satisfy consumer demandby providing supplies at cheaper prices. In the processed food industry, the privatelabels—and in this case, retailers themselves—are considered to be competitors ofestablished brands. The rise of private labels also has a clear impact on the functioning ofvalue chains, changing relationships and potentially causing further rationalisation. Interms 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. 14Exclusive supply agreements tie a supplier exclusively to a certain buyer. Theseagreements cause concern because they reduce competition. However, so far, neitherbuyers nor suppliers in the food value chain reported such impact.Certification schemes have risen recently in part because private-sector organisationshave wanted to mitigate reputational and commercial risks associated with food safety(though other certification schemes exist, such as certification of organic product). 15 Thenumber of schemes and their specificities may compel producers/suppliers to trade withonly one retailer, since the costs of change are relatively high. The obvious result fromthat is a possible increase of buyer power of retailers over suppliers.Slotting allowances are fixed payments made by suppliers to retailers to ensure anoptimum positioning of their supplies on retail store shelves. The use of such practices12131415Committee and the Committee of the Regions: A better functioning food supply chain in Europe. Brussels: Commission ofthe European Communities.Commission of the European Communities (2009). Communication from the Commission to the European Parliament, TheCouncil, The European Economic And Social Committee and the Committee of the Regions: A better functioning foodsupply chain in Europe. Brussels: Commission of the European Communities. pp.18-25.For a summary of these studies, see Bergès-Sennou et al. (2004).Bontemps, C., Orozco, V., & Réquillart, V. (2008). Private Labels, National Brands and Food Prices. Review of IndustrialOrganisation, 33(1), 1-22.Henson, S., & Reardon, T. (2005). Private agri-food standards: Implications for food policy and the agri-food system. FoodPolicy, 30(3), 241-253.20


have lower costs over small ones. Taken too far, however, it can lead to a situation whereone 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 greatestbargaining power. Indeed, in most Member States, the five largest retail chains accountfor over 50 percent of the market. 21 Recent research findings have revealed, however, thatpower balances vary across food value chains and depend on various factors, such as theposition of actors long the value chain (being suppliers or buyers, where buyers usuallyhave the higher degree of bargaining power), the type of product, introduction of privatelabels, consolidation along the value chain, and internationalisation of actors, particularlyretailers. 22Market shares, private labels and the product type are, in fact, interlinked. Research hasfound 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. Thepicture is reversed in the case of bread, where private labels represent 22.7 percent ofmarket 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 actorsanywhere along the value chain leaves few outlets with which to negotiate. If parts of thevalue chain are more concentrated than others, it follows that bargaining power for thoseless well integrated is much reduced. The open question remains, of course, of whetherthe 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 areimportant factors that impact negotiations.Increasing consolidation has been matched by new corporate strategies. Retailers, forexample, are no longer simply outlets for suppliers, but they play a much stronger role informing consumer preferences. This is important for bargaining because retailers aremaking themselves a more indispensable link between producer and consumer.As well, retailers have been making different demands of producers and wholesalers witha new “lean retailing” approach adopted. This means that retailers no longer want to havestorehouses, but they want to order goods “on demand” from producers. This forcessuppliers 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 chainhave referred to unfair trading practices resulting from the imbalance of bargaining2122Bukeviciute, L., Dierx, A., Ilzkovitz, F., & Roty, G. (2009). Price transmission along the food supply chain in the EuropeanUnion. Paper presented at the 113th EAAE Seminar “A resilient European food industry and food chain in a challengingworld”.Commission of the European Communities (2009). Communication from the Commission to the European Parliament, TheCouncil, The European Economic And Social Committee and the Committee of the Regions: A better functioning foodsupply 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 byforcing contractual arrangements in their advantage. This in turn limits the ability of someparts of the value chain to invest and innovate, causing them to become less competitiveand eventually exit the market. The most detrimental manifestations of power imbalanceis the possession of a certain buyer of monopsony power, thus becoming a sole buyer inthe market or when the same buyer has power over both upstream and downstreammarket. Unbalanced bargaining power is equally unhealthy when benefits of reducedprices (resulting from economies of scale) are not passed to consumers.It must be noted however that the exercise of buyer power is not necessarily detrimentalto 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 passingsavings to consumers, (2) increasing output in the upstream markets and thereforeincrease the welfare of consumers on the long run. 232.4 External factors that influence the meat industryThe following section summarises some of the conditions that affect the food industry ingeneral and the meat industry in particular. The influence that these factors will have onthe meat industry will vary considerably and will be elaborated in the case studies.Demographics. An aging population means a general change in food preferences. Oldergenerations tend to focus on fresh foods over processed foods, as health becomes a largerconcern. 24 Governments, interested in promoting the trend toward healthy eating, havealso pushed manufacturers on labelling.Consumer preferences. Food safety scares, environmental concerns, and a growingawareness of animal welfare in some circles have changed how food is purchased. Thishas led governments to intervene in the market on several levels. For example, thetraceability of products has been on the agenda. 25 This means increased transparency withthe consumer and implies upgrades to value chain management and processes.In addition, consumer “shopping” behaviour continues to evolve. Consumers are shiftingfrom the traditional “one-shop-stop” approach for their weekly grocery shopping and nowvisit more than three shops in average for their food purchases, implying increasedcompetition for retailers as well. 2623242526Ibid.EC (2009) Analysis of price transmission along the food supply chain in the EU- A better functioning food supply chain inEurope. P. 5. Communication from the Commission to the European Parliament, the Council, the European Economic andSocial 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 withinformation communication among various actors along the value chain, and therefore facilitates vertical communicationand 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 processorientedinnovations 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 valuechain. First, they potentially add a whole new layer to the value chain, as farmerspurchase biotechnologies. Second, the need to provide transparency over the use of thesetechnologies 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 EUmeat industry faces competition from third countries like Brazil and Argentina thatbenefit from a comparative advantage inputs in land, feed, and labour. For example, in2004, the supply price of chicken breast meat imported from Brazil to Germany was 10-15 percent lower than the price of EU producers. Imports place additional pressure on EUproducers.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 andequipment usage cost more. And, of course, increased transportation affects all levels.2.5 The legal situationThe current legal environment for the food industry results from both complementary andcompeting lines of law and policy. In the Treaty of Lisbon, a broad range of purposes aredefined. They stretch from preserving a well-functioning internal market to consumerprotection, social development, and protection of human rights (OJ C83/2010).Regulatory activity regards, among others, the creation of a system of Food Law (seeextensively: Van der Meulen and Van der Velde, 2008). It is founded on the GeneralFood Law (GFL, regulation (EC) 178/2002) as well as of Competition Law (TFEU TitleVII, ch. 1 – rules on competition) that aim to create a level playing field and fosterconsumer interests.The installment of a European (Economic) Community from the 1950’s onwards had as aprincipal aim to remove barriers for and sources of unfair competition. To enhancecompetition, 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 mostimpact) has leveraged the attention to food safety, hygiene and control of the food supplychain (Article 17 GFL). It led to the enactment of the General Food Law (178/2002). Thiscontains general principles for food safety and has established the European Food SafetyAuthority 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 poultryindustry the ‘hygiene package’ included in regulations 852/2004, 853/2004 and 854/2004are of special importance. A summary of key results of this regulatory activity which isrelevant for meat supply chains is included in Figure 2.4. below.26


Figure 2.4Key components of EU-law with respect to Food SafetySpecificregulationsControlsImplementingmeasures and criteriaPrinciples(General regulations)852/2004general rules for hygieneof foodstuffs; HACCP.(former 93/43/EC)882/2004general frameworkfor the organisationof controls2073/2005 updatedby: 1441/2007microbiological criteriafor food safety, for instance :salmonella, listeriaonocytogenes , staphilococcesRegulation 178/2002(General Food Law)853/2004specific hygiene rulesfor certain products ofanimal origin2002/99/ECAnimal health rules854/2004Specific rules forcontrols of food derivedfrom animals;i.e. veterinary checks2002/99/ECImport requirements(incl. veterenaryborder checks)677/2006Audit guidelines2074/2005Specific implementation measures- food chain information- testing methods- lists of establishments- model health certificates- derogation for food withtraditional characteristics2075/2005Trichinella in meat2076/2005Transitional arragementsSource. European Commission, Guidance Document (I), 2006; Foreign Agricultural Servicehttp://useu.usmission.gov/agri/foodsafe.html); Food safety regulation onhttp://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 andincreased cost burdens for processors (Bremmers et al., 2010a). The General Food Law(GFL) — and food law 27 in general — affects the entire supply chain ‘from farm to fork’.Specific requirements induce costs along different parts of the value chain, which mayincrease selling prices depending on chain and market configurations.Food law aims to protect consumers based on the assumption that many characteristics offood — especially its quality and safety — cannot be objectively observed. Food istherefore called a ‘credence good’. Quality assurance is required to provide validinformation to consumers (compare: Heyder et al., 2010). The GFL protects consumersagainst risks due to incomplete scientific knowledge. In this respect, the precautionaryprinciple 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 bebased 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 isnot appropriate to the circumstances or the nature of the measure’. The precautionaryprinciple could be seen in the early stages of the BSE-crisis.27The General Food Law defines the concept of food law as: ‘food law’ means the laws, regulations and administrativeprovisions governing food in general, and food safety in particular, whether at Community or national level; it covers anystage 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 anincreasing desire to protect and control consumer interests (Article 8 GFL) and to regainconsumer 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 themarket. At the same time, adjacent and subsequent regulatory requirements aim toprevent and seek sanction against foods incidents. For this reason, traceability systems forfood, feed and food-producing animals have been adopted. Although not their mainpurpose, traceability systems could be used to improve the informed choice of theconsumer. 28European 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 onsustainability, its composition, as well as health characteristics (like, for instance, thepublication of nutrient contents of foodstuffs, 90/496/EEC).The responsibility of compliance with food and feed regulations lies primarily with thefood and feed business operators (Article 17(1) GFL). This puts the primary andindustrial meat producers in a dependent position, as asset-specific investments combinedwith the short durability of produce, makes them increasingly reliant on long-termrelations with their buyers. The burden of compliance most likely stimulatesconcentration and the development of long-term dependencies. For example, Food Lawalso fosters the installment of hygiene measures. For the meat industry this requires thedevelopment of a HACCP-based system, in concordance with the Codex-guidelines, aswell as the implementation of traceability and information storage. Traceability stretchesnot only upward, but also downward the supply chain.2.5.1 Impact of EU competition law on the supply chainNext to food law, competition law influences meat supply chain structures and pricingdynamics. The original goal of the European Communities to guarantee a window of freeand fair trade has been supplemented and partly competes with a vast system protectingconsumer and other interests. Harmful business practices should be avoided according toArticles 101/102 TFEU. Art. 101 TFEU declares incompatible with the internal market“all agreements between undertakings, decisions by associations of undertakings andconcerted practices which may affect trade between Member States and which have astheir object or effect the prevention, restriction or distortion of competition within theinternal market….”, for instance as in sub (e) by: “the conclusion of contracts subject toacceptance by the other parties of supplementary obligations which, by their nature oraccording 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 TFEU28See Dobson et al., 2008, p. 3728


not only refers to horizontal, but also to vertical agreements — like in Consten SA-Commission 1966 — which have had negative trade or competition consequences in aninternational context (Berry and Hargreaves, 2007, p. 262; Lence et al., 2007).Article 101(3) TFEU provides the conditions under which exemptions are granted foragreements 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 samegoal;• 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, competitionlaw generally allies itself with consumer interests. It takes as a benchmark for exemptionsthe effect of competitive structures on consumer welfare. This can be realised throughprice cuts, increased productivity, and efficiency. The consumer orientation ofcompetition law may lead competition authorities to largely ignore the detrimental effectsof increased concentration in the retail sector on food processing businesses. The fact thatconcentration 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 ofmarket power in international business relations is. In this context it should be noted thatmany countries have adopted the European system of competition law and implemented itin their own legislation for national competition governance. Some countries haveintroduced other restrictions for national markets than those which govern internationaltransactions. The diversity of such rules across Europe is a limiting factor in theassessment and comparability of legal effects on price transformation throughout nationalsupply chains.Excessive market power and its abuse are dealt with under European Law, Article 102TFEU, in so far as it may affect trade between Member States. Article 102 TFEU statesthat “any abuse by one or more undertakings of a dominant position within the internalmarket or in a substantial part of it shall be prohibited as incompatible with the internalmarket 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 prejudiceof consumers”. Within this legal context, reference is made to unfair buying or sellingprices 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 ofEU-law, it could have positive but also negative consequences for consumers and/or forother actors in the supply chain, like industry. For example, market power (throughprivate 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 thelocal level as the exercise of buying power drives down prices, and small independentfood retailers are driven out. While intense competition in case law often is valued29


positive for consumer welfare, leading to short-run price cuts, higher productivity andscale advantages, the long-term effects of market concentration may be heavilyunderestimated.Nowadays, meat supply-chains are characterised by hot spots of power, which arethought to be located at the end point of the supply chain. While legally speaking, thenumber of competitors is important, only the economic effects are taken into account(Gronden and Hertog, 2008). For instance, only if critical resources are monopolised oran actual monopoly exists are there sound legal grounds to intervene. 29 From thisperspective, slotting fees can effectively create a barrier to market entrance. Slotting feescan make products excessively expensive compared to the price of competing products onthe shelf. Intentions to limit access to the market to competitors with slotting fees are hardto prove. A simple defense would be the argument that fees are legitimised because ofincremental and opportunity costs of the provided shelf-space. Only clear cases of abuseof market power would allow for legal proceedings, like predatory pricing, tie-inarrangements, refusal to supply, or refusal of access to an essential facility (Berry andHargreaves, 2007, p. 301). As Dobson (2003) summarises, increased concentration canhave positive and negative effects: positive effects include improved economics of scale,efficient logistics, investments in new technology, while the discerned disadvantagesconcern the decline in traditional retailing and greater homogenisation of food.2.5.2 Product liability and its effect on the supply chainThe primary actor within the supply chain for safeguarding food and feed safety is theprocessor (Dwinger et al. 2009). If a food or feedstuff can be traced back to the originalproducer, retailers stay unaffected. If, however, retailers sell under private label, they canbe addressed using product liability as an instrument. In that case, the retailer could usecontractual agreements or tort law to shift the burden upward the supply chain. It isobvious that in a dependency relationship a contractual agreement will include clauseswhich result in such a shift. This can have major impact in case of recalls. While thetechnical execution of a recall in many instances will be done by the retailer, the costs ofthe operation will possibly be carried upstream in the supply chain. So ex-post liability isto a large extent vested on the shoulders of operators upward the supply chain. As aresponse they will implement hazard control systems to avoid risks or limit consequencesof 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 theproducers could organise themselves to form a “countervailing power”, their bargainingposition in contractual agreements would improve. It would make it possible to negotiateon 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 ‘countervailingpower’ towards powerful retailers, with the intention to force them to take their share ofthe burden (see section 2.5.1).29See for instance COMP/38.784 Wanadoo España vs Telefónica regarding the use of a ‘price squeeze’ in the SpanishTelecom market, making market entrance almost impossible for competitors.30


2.5.3 Specific problem areasSystem implementationAs mentioned earlier, processors are required to implement a HACCP-system to protectfood hygiene. Likewise, retailers have to comply with the same set of HACCP rules, butthe number of critical control points (and therefore the implementation costs) is normallyless. In recent years we have seen the emergence of private next to public standardsystems. Public standards are set as a response to perceived market failure, while privatestandards are set mainly for risk and quality control reasons as well as improvingtransparency and thus reducing transaction costs (Hobbs 2010; Barcala et al., 2010).The implementation of private standards forms a cost burden for the companies which areinvolved. Although many price changes find their cause in commodity markets, pricemoves could also be induced by changes in size and composition of cost prices to whichburdens to implement food safety and quality systems (FSQSs) contribute. Costs withrespect to intangible assets (like FSQSs) could be included in the costs per product. Dueto 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, likequality systems, investments in R&D, or built-up goodwill. It creates the opportunity topush the burdens to future periods by recognising expenditures (like paid goodwill) asassets, 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 softenthe pressure on profit margins exercised by retail organisations. While such cushions havea softening effect in the short run, in the long run their opportunistic use could bedetrimental, as costs which should be recovered are no longer reimbursed.The installment of FSQSs is the responsibility of two different regulatory actors: publicand private (Hutter and Jones, 2007). They could be used to protect the home marketagainst foreign low cost producers (Gellinck and Khüne, 2004). Both public and privateactors 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 newdependencies without public control are created, which can be exploited to let absorbinput price movements upward the supply chain. Such dependencies can result fromasset-specific investments in contractual relations (production for a single buyer) and/orlong term contracts.Another consequence of the mandatory introduction in the meat sector of HACCP andother systems for food safety and quality are fixed financial burdens. These may notinfluence 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, SQF 31 or IFS in the relationship between producer and retailer, such ‘voluntary’3031Global 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 powerposition is re-enforced because sales, not production, is generally the output bottleneck inmeat supply chains. Surplus producer’s capacity has no shadow price and will thereforenot be priced.(Non-)transparencyThe factual composition of food prices is largely hidden because of firm secrecy and thediversity of applied accounting rules among Member States. Applied accounting rules arediverse because they stem from directives that offer freedom at their inclusion in nationallegislation (Fourth Council Directive 78/660/EEC and supplementary directives for banksand insurance companies, as well as amending acts). Revealing the composition of foodprices would contribute to improving macro- and micro research which now mainly usesaggregate price information as input in econometric models.There is a need to look deeper into the composition of prices. Price and margindistribution 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. 32Within the regulatory system of the EU, provisions have been made to increasetransparency of rulemaking, its execution and publication of motives, grounds andeffects. However, information of the composition of prices and profit margins is onlyscarcely available. Such information could be of key importance for sound decisionmaking, especially within the context of competition law.Several circumstances aggravate the lack of transparency of sources of value addedwithin the supply chain:• Many companies involved in food supply chains are small to medium-sized andbound to specific vending channels by means of contracts;• Companies which actually publish their costs and revenues on a regular basis (whichare according to EU law limited companies) do so in an aggregated way orconsolidate their figures with those of the group to which they belong; as aconsequence, profitability on a product level is not visible. Public scrutiny of pricinganomalies like predatory pricing, price fixing or price squeezes will be hard tosubstantiate;• Companies apply costing systems which are firm-specific and aggregate. In otherwords, application of uniform accounting systems revealing the composition ofproduct prices is not mandatory.Overall, the information revealed under the present European regulatory reportingframework is limited in terms of its usefulness for price transmission disclosure andresearch on structural elements of the supply chain: it fosters aggregation and diversity in32See extensively: Ben-Kaabia and J.M. Gil, 2007.32


eporting. The information is generally financial of a kind and primarily serves theinformation needs of key financial stakeholder groups.Other instruments than corporate financial reporting can be considered to unlockinformation. To reveal the information enclosed in the price at which products arebrought to the market labelling can be of value. The label information on the compositionof 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 thenominal effect of price changes, which could be compared with the real impact. In thenear future, the present labelling directive will probably be replaced by a regulation (asproposed by the Commission in COM(2008) 40), which integrates nutrient withinformation on food composition and condition. However, the information still lacks thenecessary 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 pricevolatility. For instance, the inclusion of information on the weight of separate ingredientsincluded in food that is brought to the market is only mandatory in a limited amount ofcases. Examples include reference to an ingredient in the name of the product, picture onthe package, etc. The main focus of information on the package is, next to traceability anddifferentiating 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 productionunder private label. Private labels can hide the origin of the content of a package and theused systems, skills and scarce resources which have been brought in by the intermediateproducer.Cost structure disproportionalityHACCP-implementation in the US meat industry has led to a 1.1 percent increase in totalcosts, which is observed to be substantial, as 50-80% of the price consists of costs of rawmaterial (Ollinger and Müller, 2003). In general, however, the identification of costeffectsof FSQSs is problematic due to unclear labelling and diversity (Gellinck andKühne, 2007). The importance of cost-based information has been recognised in theCommission’s guidelines on the application of sanctions in case of alleged exercise ofmarket power.Knowledge of costs and benefits is important from a regulatory perspective since manyformal requirements lead to fixed cost burdens which are not included in the structure andelasticities of demand and supply. Capacity usage levels, for instance, could explain therelative power of food retailers towards the processing industry. Spare capacity has noshadow price and thus negotiated prices could — in the short run — drop to the marginalcost level. In that case they do not cover increased fixed costs. This fortifies the positionof the retailer, who on legal grounds can ask for measures to prevent hazards frombecoming immanent risks, and force the price down to marginal costs, at the expense ofthe long-term survival of producers and their innovation efforts (Dobson et al., 2003).Cost price composition, differences and effects of price changes and regulatory activitycould be measured using accounting techniques, if detailed information were made33


available (Crutchfield et al., 1997; Ragona and Mazzocchi, 2008). It coul reveal possibledisproportionalities in cost reimbursement by small plants (Roberts et al., 1996), Usinglongitudinal analysis, it also can identify productivity growth, which affects theproducer’s share of the retail price (Kuosamen and Niemi, 2009), as well as explain pricetransfers (compare: Pellényi, 2007).The basic question therefore is: Why is information on cost structures only scarcelyavailable? A probable reason is secrecy considerations in the publication of financialfigures. Firm-specific information could negatively affect the competitiveness ofindividual 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 thedistribution of value added over the supply chain participants are of less importance froma policy perspective than the price level itself and the microbiological specificities offoodstuffs.Free riding on innovationThe White Paper on Food Safety of the Commission (2000) expresses the ambition tomake the European food industry competitive while promoting innovation. Productinnovation induces incremental costs which adversely could lead to burdens for producerswhile at the same time retailers benefit from the innovation activity. For many processors,product and process innovation are permanent necessities, increasing the fixed burdens ofthese firms.From an accounting perspective pressure put on the industry by retail firms to stabiliseprice levels in periods in which sourcing expenses increase may be absorbed at theexpense 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 beconsidered as assets and activated on the balance sheet. In doing so taking losses ispostponed to future periods. If however uncertainty pertains with respect to the capacitiesto earn back these expenditures, they should be taken as a loss. Likewise, investments inlicenses and patents can be considered as assets if payments have been made to acquirethem. The existence of research and development expenditures, which can be consideredas either assets, losses, or gradually as costs through depreciation, create the possibility tocalculate product costs and set prices in an opportunistic way. The free space inaccounting could be used to mitigate the effect of input price movements on accountingprofits.Referring to private labelling it may be posed that the hidden character of innovation atthe industry stage of the supply chain may induce behavior which we call “free riding oninnovation”. This means that benefits of innovation activities upstream in the supplychain—just like of FSQS-implementation or the absorbance of product liability—areharvested by means of ‘anonymous’ private label products at the final stage of the supplychain.Consumer centralityWe have described food law and competition law as ultimately fostering the preservationand promotion of consumer’s welfare. In this way, the law of the European Union hasincorporated consumer concerns in the –from origin- economically oriented community34


system. The BSE-crisis marks not only a major turning point in food policy, but also theempowerment of the consumer. It has brought us safer food and stimulated process andproduct innovation. Supply chain optimisation has created dependencies within the foodchannels to enhance traceability, quality control and reliability. It also has induceddependencies 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 inthe supply chain, as this increases the opportunities to switch from one supplier to theother. This brings the production sectors in a double squeeze: on the one side they areinclined to engage in long-term contracts, to be able to reimburse costs connected to longterminvestments on behalf of specific producers. On the other hand, they are confrontedwith short term contracts which increase the uncertainty. Or simply stated: there are in avery uncomfortable position.2.5.4 Main observationsOn the basis of the previous elaborations the following problem areas can be discernedfrom the perspective of price transfers within supply chains.1. Lack of visibility of added value upward the supply chain, especially as a result ofprivate labels;• private labels lack the brand name of the producer2. Private regulation makes producers dependent on retail;• specific investments in quality systems will have to be earned back3. Product liability results in dependencies upward the supply chain;• liabilities can be shifted upward the supply chain using contractual agreements4. Strong position of consumer interests in competition law;• exemptions in competition law on agreements if consumer’s interest are regarded5. Lack of transparency with respect to the content of end products;• labelling/reporting does not reveal the factual composition of food and its price6. Limited available information on cost structures of food processing;• cost structures are virtually unknown and kept secret7. Opportunity of free riding on innovation;• retailers could benefit from dependency relationships and get innovation for free35


3 Further Analysis: Five Case Studies3.1 IntroductionChapter 2 gives a good indication that the policy-makers and researchers have a goodidea of how the industry functions in general. The focus of the further analysis presentedin 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 onindividual Member States. In this chapter, we focus on the peculiarities of five MemberStates (see the section Country selection on page 11), and compare them. The goal here isto get a more in-depth look at the commonalities and differences between differentregions of the EU, so that policy recommendations can be better focussed.3.2 Short summary of issues in each country3.2.1 The United KingdomSupply chain relationsThe pork supply chain is fragmented and adversarial between producers, processors,retailers and manufacturers; however, the largest concerns being raised occur on the twoends of the value chain—with farmers and retailers. According to the English PigIndustry Report, few examples of “integrated” supply chains exist; however, in caseswhere 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 ofsupply chains. 33Many of the complaints that arise within the industry can come because of tensionsbetween actors within those integrated chains and those outside. Those outside of theintegrated chains can complain about the relationship between retailers and other parts ofthe chain.While for the pork industry, imbalance of power is consistently prominent, the picturewas less adversarial in the case for poultry. The main reason appears to be the higherlevel of integration in the chain, leading to fewer nodes for price transmission. In thepoultry sector, processors usually own farms; therefore there is less tension observedbetween processors and farmers.33This fact has clear implications for what we can draw from the modelling, given that our price data will be made up oforganisations within and outside these integrated chains.37


What follows are a list of the most important issues identified in both reports andinterviews.Contracting issues. Relationships between farmers and processors are not necessarilyformalised and can rely on a rather informal basis. Business is built on trust and longtermbusiness relations. For example, one interviewee indicated that a certain supermarkethas meat suppliers entering into a competitive bidding process every three months beforeit buys their product.Listing fees. Fees paid by suppliers to retailers in advance before they are guaranteed aplace on the supermarket’s list of suppliers.Risk transfer. Unexpected costs are often passed from retailers to their suppliers. theextent of risk transferred to the supplier was found to be “excessive”, which is a strongindication of the tilting of power balance towards retailers. The impact of such practiceson innovation levels has not been obvious and there were no evidence to confirm or denyit, but the general consensus is that leaving these practices unchecked may result intodetrimental effects on the industry.Marketing costs. Bearing the costs of marketing (TV ads, promotion, etc…) is anotherretailer’s practice highlighted by several sources. In their quest to achieving economies ofscale, retailers offer promotions on meat products at the expense of suppliers againstlonger contracts, bigger purchase volumes and loyalty bonuses.It must be noted that the poultry appears to have garnered far less attention in the UK thanpork. Nonetheless, some of the same complaints outlined in the pork industry can also befound for poultry.Developments and trendsIn the face of fierce competition, stakeholders interviewed have been noticing a new trendoccurring in the industry, although not yet captured by the literature. To balance thebargaining power of retailers, a process of consolidation and mergers is happening at theprocessors level. According to interviewees, if the numbers of processors decrease,retailers will have fewer choices, which may restore the balance of power in the marketbetween retailers and processors.Various stakeholders interviewed in this study have confirmed that the issues around thevalue chain imbalances are very important issues that affect the prices and profitability ofthe industry in general. But, it would be too simplistic to look at price imbalances onlyfrom a supply chain perspective because there are several other factors that interacttogether to finally form the current picture of the industry. These are combined marketfactors: supply and demand, imports from other countries, input costs, as well as policyissues.38


Interviewees have equally highlighted two important issues 34 inherent in the pork industrythat have a strong influence on the industry. The first is the ambiguity about meatlabelling, which was at the centre of public debate until the end of 2009. Much of themeat available in supermarkets with a British label did not necessarily originate in theUK. In February 2010, the UK introduced a new country of origin labelling (COOL) codeof practice for pork, which is a voluntary code that aims to give clear information aboutcountries of origin on packs for pork, bacon and ham. 35The second is the efficient use of the pig carcass. In the UK, the most used parts of thepig are the legs and loins, which, at the current level of pig production in the UK, doesnot meet the current demand and leads to imports from other countries. The remainingparts are exported to other countries at cheaper prices. The challenge now for the UK is tofind innovative cuts of the pig carcass for more efficiency gains.In addition to the above mentioned factors, two external factors affect the competitivenessof 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 theimplementation of new environmental regulations, in particular the Integrated PollutionPrevention and Control (IPPC) directive, which stipulates environmental standards. Manycomplain of the cost burdens associated with this directive, which stakeholders attributedto two points. First, they viewed the UK as a “starter” in terms of the application of EUpolicies, introducing policies before other countries. An example of that is the earlyintroduction 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 tobe transposed in a stricter manner than in other EU countries. Regulators do not agreewith this view and believe that regulators in other EU countries are doing more or less thesame as the UK regulators.Second, the UK faces difficult competition from cheaper imports from other EUcountries. The British pork industry is smaller and less efficient, producing less than itsEU counterparts and, as a result, part of the retail hospitality and public sector choose tobuy the cheaper products from oversees producers.InnovationInnovation and investment decisions by processors very much depend on theirrelationship with retailers: the stronger the relation, the more willingness to invest forinnovation. Given the current short term relations and uncertainties surrounding it,investment decisions become very difficult for processors. The industry has witnessedstrong 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, hadthese contractual relations been for longer terms, innovation levels could have beenhigher.3435These findings are consistent with the House of Commons- Environment, Food and Rural Affairs Committee report on theEnglish Pig industry. See House of Commons; Environment; Food and Rural Affairs Committee (2008). The English pigindustry.http://www.foodnavigator.com/Legislation/UK-introduces-voluntary-COOL-code-for-pork.39


industry at a disadvantaged position vis-à-vis its European Competitors, who have longertime to adjust to the new policies, and thus incur lower costs and have better profitopportunities.Code of conductTo address the issues of buyer power exercised by supermarkets and suppliers over otherorganisations 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 codewas consulted on and the Competition Commission published the final version of theOrder setting out the GSCOP in August 2009. The Competition Commission sought thelarge supermarkets’ voluntary agreement to the establishment and funding of anOmbudsman to enforce the code.The code will be administered by the Office of Fair Trade and will give suppliersopportunities to appeal to an independent arbitrator in the cases of disputes arising fromexercise of buyer power and any associated abusive practices, such as retrospectiveadjustments to terms and conditions of supply or entering into arrangements withsuppliers that result in suppliers being held liable for losses due to shrinkage.Consultations are currently being held about the establishment of an ombudsman office toenforce the code.In interviews conducted to date, retailers have responded positively to the code. In oneinterview in the mainstream press, it was stated that “we think it will help demonstrate thestrength of the relationship between food retailers and their suppliers. It should helpovercome some of the myths. If it produces the results we expect, it will demonstrate thata costly ombudsman – that would skew the negotiating balance in favour of suppliers – isunnecessary”. 36Processors and farmers representatives interviewed for this study, however, did not sharethis positive outlook. The majority of interviewees agreed that fear of harming relationswith the big four retailers meant that few wanted to risk reporting abuses to theombudsperson’s office. And unless the ombudsman office takes a “proactive” approachto 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 codewas relatively “toothless”.When stakeholders were asked about the potential role of regulations to manage therelationships between producers, suppliers and retailers, the majority answered that thisrelationship cannot be governed by the law, except in the cases where parties wouldexercise anti-competitive behaviours that are by law illegal and for which the NationalCompetition Authority has found no evidence so far.Despite clear difficulties in the value chain, our assessment is that many along the valuechain believe that further intervention from government could be overly clumsy, andtherefore worse than the existing problem. Despite showing concern over abuse, someinterviewees agreed that solutions still needed to come from industry itself.36http://www.just-food.com/article.aspx?id=109700.41


3.2.2 The NetherlandsSupply chain relationsA wide variety of business practices governs relations between meat processors andretailers. These practices depend on the market share of both retail organisations and meatprocessors, and on the way the supply chains for fresh and processed meat are sliced up insubsequent stages.Written contracts between the meat industry and retailers are uncommon, except in caseswhere 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 pricesare mentioned, they only point to a price reference. Some of the meat processorsinterviewed said that, if contracts would be used, they would not trust them, sinceretailers 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 theirrelationship with their suppliers. In a sense, both sides have a gentlemen’s agreement.Because retailers promote fresh pork products, volume sales per product item vary wildly.For regular volumes, the preferred supplier is used. For special offers, with high volumesand 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 suppliersfrom abroad are also considered in these competitive bids. Since sales of promotionalactivities amount to 40 percent of total turnover in pork, the role of the preferred supplieris less important than it seems. Prices of the structural volumes end up fluctuating withthe prices in these competitive bids, to which the preferred supplier has to adapt. Priceoffers are favourable to overall retail turnover, but they are detrimental to the meat supplychain player.Listing fees are uncommon for meat in the Netherlands (nor for other products, such asfruits, vegetables and bread). However, Dutch meat processors have experience with thepractice when exporting to foreign countries: two interviewees mentioned a retailer inGreece; the Czech Republic and Romania were also mentioned. Whether demands forpayment terms and entrance fees were met depended on the importance of therelationship between supplier and retailer.Payment terms are increasing according to each of the interviewees. Examples include theextension from 15 to 60 days. One of the interviewees argues that the delay of paymentscreates smaller margins in meat processing. Delay in payments is a real concern to theinterviewees, since at least smaller processors have little opportunity to increase financeopportunities for working capital, certainly given the smaller margins. An example hasbeen 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 majorityof interviewees perceive themselves to be the weaker party, and always have to give way42


to their sales partners. One interviewed party expressed it as follows: ‘the trade betweenmeat suppliers and retailers is not very professional’.One of the interviewees expressed the need for transparency, both in business-to-businessand business to consumer relationships. Transparency is meant in terms of productquality, cost break-down, cost drivers at each of the trade partners, cost effect of priceoffers, etc. If a retailer gives space for an open cost calculation as the basis for pricebuilding, at least some room is left for a margin, even if the margin is small andcontrolled. It, however, fully depends on the retailer whether an open cost calculationbase 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 itwould be difficult to monitor.InnovationThe interviewees indicated that innovations are pursued with respect to sustainability,product development (meat shelf life and packaging technology) and productionefficiency. Animal welfare has become the major societal concern in the pork supplychain. Environmental care as well as human and animal health are also important,especially for primary producers (farmers). For processors, traceability of products is themajor concern, mainly due to problems due to feed contamination and zoonoses. TheDutch Minister of Agriculture actively promotes sustainable production includingenvironmental 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 todifferentiate themselves from other suppliers. Innovation plays a key role in this respect.With respect to product innovations, the development of value added products is takenup, for example special Eastern or Christmas assortments and complete ready-to-cook- orready-to-(h)eat-meals. To meet the demand for sustainable products, all the companiesinterviewed have been involved in developing sustainable products, in particular productsthat are neither regular nor organic. The development of sustainable products influencesthe whole supply chain. Market development in emerging countries China and Africa isalso mentioned as an innovation.Legal environmentThe Dutch Food and Goods Law is a framework law to which new guidelines anddecisions may be added. The Law contains prescriptions for food ingredients, foodprocessing and distribution. The Product Boards—one of the government bodies in theNetherlands—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 foodsafety and traceability mechanisms such as HACCP. HACCP compel firms to assessrisks, to identify critical control points and to control these points. Food companies arealso 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 severalamendments since then. The Competition Act was amended as a result of EuropeanRegulation 1/2003. Another amendment was made on July 1st, 2005, when the NMabecame an Autonomous Administrative Authority (ZBO). The NMa received additionalpowers in 2007 as a result of the evaluation of the Competition Act. Section 6 of theCompetition Act prohibits agreements between undertakings distorting competition.Section 24 prohibits abuse of a dominant position. Section 34 requires notification ofmergers.The NMa considered about 30 merger cases in food processing and food retail in the2000s. In 25 of the 30 concentration cases notified to the NMa, no permission wasnecessary according to the NMa. In the other four cases, permission was granted. Onecase is still pending. Most concentration cases in the supermarket channel refer to alimited number of outlets. If the NMa decides that permission for a merger is required(NMa, Visiedocument inkoopmacht, 2004), mergers are not always put through (Forexample, Campina and Zuiver Zuivel as well as Schuitema and Sperwer were denied).Mergers may also be permitted under predetermined conditions (for instance, VendexFood and De Boer Unigro as well as Jumbo and SDB).The NMa designated the food and agro-processing industry as a priority industry in its2008-2009 Agenda. Supply is highly concentrated in the Netherlands. This holds for mostsupply chain levels: the farm supply industries, marketing boards, food processing andfood retail. That is why the NMa has been quite active in this industry recently. In 2009, aNMa study looked into price formation in the Dutch food supply chain. The studyconcludes that retail prices reflect supply chain costs and that price changes in therespective 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 contractconditions 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 ofproduct specifications, logistics and planning.• Differences in contract duration are product specific: bread versus fresh produce.Code of conductNone of the interviewees favoured a code of conduct governing the relationship betweenmeat processors and retailers. The argument from each was essentially the same: freecompetition should not be distorted by extra regulation. In addition, one intervieweeexpressed the view that European and national competition authorities already had theauthority and ability to guarantee fair business practices. However, the continuous delayof payments is still worrying all the interviewees. They would all prefer a maximumpayment terms of 30 days.44


3.2.3 SpainSupply chain relationsHorizontal concentration at the retail level, even though it is lower than in other countriesanalysed in this study, is higher in the pork and poultry sectors. One part of the pork andpoultry industry is controlled by a few firms that can operate at national or trans-regionallevel. These firms are the only ones large enough to negotiate with the modern retailsector. A second part of the industry is more fragmented, with around one hundred firmsoperating at a regional level. Only some of these firms are capable of supplying moderndistribution. Finally, around 2,000 smaller firms operate at local markets, which mainlyoperate directly or through a wholesaler with traditional retailers. The market share of thelast two groups is approximately equal to that of the highly integrated group. With such astructure, the larger retailers have a clear advantage when bargaining with the meat andpoultry industry, a position that is reinforced by the direct access retailers have toinformation about consumers’ behaviour.Although most of the interviewees agree that the processing sector has to progresstowards horizontal concentration, they also feel very sceptical about the process. With theexception of the larger two firms in the processed meat sector and one firm in the poultrysector (that have a “multinational strategic business approach”), most firms belong totraditional 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 resultas one generation fails to continue the business from the last. In many cases, these smallfirms could be overtaken by the larger ones. In some cases, contractual arrangementsalready exist between smaller and larger processing firms by which the smaller onessupply 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 frominterviewees highlight the market power of retailers, focussing on two issues: the higherdegree of horizontal concentration at the retail level and information asymmetry throughdirect contact with the consumer (trends, shopping behaviour, new products’ impact,private labels, etc.). Retailers exercise this market power through two instruments: pricenegotiations and practices related to risk transfer to processors.Feed price increases in 2007 and 2008 also had a relatively large effect on producers andprocessors, though this varied somewhat between the pork and poultry sectors. Thesedifferences also demonstrate the relative power of the retail industry. This variation canbe 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 andproduction after the avian influenza in 2006. As demand in 2007 had been higher thansupply, retail prices were already relatively high, allowing producers to compensate forcosts increases. In addition, for integrated farmers the impact was relatively low as therisk was assumed by the integrated companies.45


All interviewees agreed, however, that retail companies exercised their bargaining powerin those years by delaying price negotiations. As the 2007 prices had been alreadynegotiated, it was not possible to pass cost increases to selling prices. This was not veryproblematic up to the end of the year when fattened animals fed with more expensive feedwere started to be sold at the market. Negotiations for 2008 contracts were signed byApril, so 2007 negotiated prices were kept constant up-to-the-month. However, whencereal prices started to decrease, retailers immediately demanded price revisions.At least two interviewees mentioned substantial changes in their relationships with largerretailing companies—taking into account also that the business strategies of the retailcompanies differ among them—although interviewees agreed that larger retail company,the more difficult the relationship.These bargaining power developments have been relatively recent. Ten years ago,variable prices were negotiated following a reference price based on yields and margins(with up to 10 price intervals). Five years ago, bilaterally fixed prices were agreedannually with each distributor. This strategy was viewed as fair in the context ofincreasing demand and costs stability.In the pork sector, the impact of feed price increases was higher, generating significantcuts in the number of animals produced. One of the meat associations interviewedestimated the costs to be approximately EUR 20 per animal. However, due to excesscapacity 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 thenumber of references is relatively high. In this case, retailing bargaining power isexercised through contract negotiations. While some retail companies prefer to work withone or two firms for a group of meat products to reduce logistic costs, others prefer tohave at least four to five suppliers to guarantee provisioning. Usually, agreements applyfor a list of references (“plantilla”). Some retailers have a unique person in charge for awhole family of products (fresh and processed meat) while others have different peoplefor each type of product. A usual strategy is to change the person responsible for buyingevery 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 andthe retailers with prices to be negotiated each year. However, two interviewees pointedout that in recent years the exercise of the bargain power by retailers has generated anincreasing uncertainty about medium-term contracts. One strategy mentioned by some ofthe interviewees from the industry is the growing trend among retailers to organise a kindof auction among suppliers every year. This practice has started to work for specificproducts and periods, and mainly applied for private labels, but there is a big concernabout its potential generalisation.Processed meat industry managers from larger firms managed these risks throughdiversification (alternative marketing channels, exports, deeper and lengthier productmix, alternative retailers, own brands). Medium-sized firms tended to pursue deeper46


cooperation with the retail sector (exchange of information, strategies to reducetransaction costs).A final common concern about the exercise of the bargain power among retailers refers toprivate labels. All the interviewees in our study sell products under private labelsalthough the relative importance within the total turnover varies a lot. Private labels areviewed as a necessary condition to keep customers’ needs satisfied and to guarantee thepresence of brand labelled products in retailers’ shelves.InnovationThere is a common agreement among processors that innovation decisions are key forfuture business success, and that these decisions are highly dependent on theirrelationships with the retailers. Under the current situation of increasing uncertainty aboutthe length of the contracts, processors are concerned about its impact on futureinvestment decisions. Moreover, there is also a concern that the higher importance of theprivate level, the lower incentive to innovate. The increased price competition amongretailers is observed as short term benefit for consumers but the long run impact onconsumers’ welfare is difficult to assess.In any case, there is also a consensus along the meat chain that there is a huge range ofpotential innovations (processes, product mix, new products, management, etc). Thefinancial crisis has stimulated innovation in managing products within the firm trying toincrease the efficiency of information flows in order to save costs. In relation toinnovation in meat products all processed firms devote a significant share of theirresources to new products based on new trends observed in domestic and internationalmarkets. However, except in a limited number of cases, there is not a significantcollaboration between retailers and the industry about new potential products. In thiscontext there are asymmetric information flows along the mat supply chain. Some of theinterviewees 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 privatelabel counterpart.Two main issues arise when talking with the processors: The first one is the importanceassigned to investments to improve efficiency of products management within the firm asa key factor to reduce costs. The second issue is related to the uncertainty about the futureimpact of private labels on innovation. As mentioned before, some intervieweesexpressed their concerns about the negative impact that the increasing market share ofprivate labels at retailing on firm’s product investment.Legal environmentCurrently, vertical relationships along the food value chain are regulated by two mainhorizontal 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 mainconcerns of food industries in general and meat industries in particular: the terms ofpayment. The new law has established 30 days for perishable products and 60 days for47


non-perishable products. Although the law is very new, there is a wide consensus amongthe people interviewed that its application will be smooth and that this is a good step inimproving contractual relationships between processors and retailers. However, twointerviewees were concerned about the potential increase of the discounts by retailers tocompensate for part of the financial losses derived from the new regulation.The main Law regulating vertical and horizontal relationships along the food value chainis the Law of Competition Defence (Law 15/2007). This law deals with horizontalconcentration issues (mergers and acquisitions). When involved firms surpass a thresholdvalue related to market share or turnover in a specific market as an immediate result ofthe merger, the Competition Commission has to be informed. The CompetitionCommission then takes a month to research in detail the potential implications of thismarket share for the overall balance in the chain. This period is usually extended whenthe 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 verylow indicating that business practices by retailers are not illegal, mainly because theexercise of the market power by retailers affects the bilateral relationships betweenindustries and retailers but does not affect the public interest. In short, it seems thatconsumers have benefited from lower prices to stimulate consumption during theeconomic crisis.In relation to conducts, the only noticeably case was the punishment to PROPOLLO, theassociation of poultry industries, in 2008 after sending an internal communication tomembers to fix rising prices.Interesting to note is that despite the increasing concern about the bargaining power alongthe food chain, no specific regulations exist up to date. However, the Ministry ofEnvironment and Rural and Marine Affairs (MARM) is actively working in three mainaxes:• The Observatory of Prices. Aiming to increase transparency along the food chain,the MARM publishes weekly prices at different stages of the food chain. Onlyperishable 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 someprevious laws that have become obsolete (i.e. The Law of Contracts (2000) and theLaw of Inter-professional associations (1994)).As mentioned, the meat industry stakeholders interviewed are against any kind of strictregulation. Competition rules are harder than before but they have been adapting to thenew framework. They are aware of the competitive situation and that this situation arisesfor the different bargaining Power along the food chain due to the higher horizontalconcentration rate at the retail level. They do not think that relationships betweenprocessors and retailers can be regulated by law except when some practices are againstthe existing Law of Competition Defence. Processors know that the potential solutionsare in their hands: better cooperation with retailers, higher degree of horizontalintegration and further and continuous innovation are key factors. However, they strongly48


elieve that these goals are difficult to achieve taking into account the current structureand the idiosyncrasy of the meat processing sector.Code of conductThe MARM is elaborating a Code of Conduct. In 2009 a working group was formed toelaborate the first draft, which is under discussion now among main representatives of thedifferent stages along the food chain. No information is available yet, but it seems that itwill be voluntary, aiming to improve information flows up and down the food chain andpromote cooperation between producers, processing industries and retailers.In the course of the interviews, however, none of the interviewees knew anything aboutthe code. All were against any regulation about marketing margins. They were in favourof voluntary agreements, codes of conduct or the establishment of a common generalframework under which bilateral contracts can be signed. As one informed clearlyindicated: “less regulation and more transparency”. Finally, some of the interviewees alsoraised the concern about the potential influence of lobby groups when developing theCode.3.2.4 PolandSupply chain relationsProduction of pig and poultry meat takes place in fragmented value chains characterisedby low-scale production of pigs and poultry for slaughtering with a huge number ofproducers and processing enterprises. To make the value chain function, middlemen playan important role, especially at the lower end of the value chain. Vertical integration isstill 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 adominating market position;• Increasing concentration in retail as larger foreign-owned supermarkets andhypermarkets chains enter the market, gaining strong market positions.After these new large and strong players entered the value chain, one of the results hasbeen further integration. At a farm level, the farmers have tried to strengthen their marketposition 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 atthe moment, their relatively recent market entry precludes any further analysis.The large industrial groups with production and processing often develop alongproduction lines, which include slaughtering and processing of meat products. In somecases, we even observe further integration as these industrial groups have their own farmsfor feeding pigs or poultry, purchasing units, contracting farmers, and also distributingsome product.49


In the distribution of fresh meat or processed meat products, the retailers—especially thelarge firms in the chain—have strong bargaining power. Especially when it comes tofresh meat, the retailers can choose between many suppliers and price formation will to alarge extent depend on the supply (the price at the spot market). Some of the largergroupings 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 (qualityproducts) as a market strategy to obtain higher prices. The industry stresses that it is verycostly to establish a brand and the existing low profit margins is a hindrance for suchinvestments. As a response to brands, the retailers could introduce private labels but theimpression is that private labels are not widespread.All in all, short term repeated agreements and the spot market still dominate the market.Some argue that the market—the price formation—is very transparent but retailers stillhave a strong bargaining position. Trading agreements are often on a weekly basis andwith short term condition for payment. In rare cases and with larger consumers, theagreements can last up four to eight weeks.InnovationIn the period of 2000 to 2007, investment increased until 2004 from EUR 184 million toEUR 344 million as an indication of the industry – and foreign investors – have beendedicate to modernise the meat industry. After the European accession in 2004, we findthat the investment in the meat industry stabilise at a level for investment at about EUR400 million per year. A closer look into the investment in 2005-2007 reveals that 58percent of the investments are within in machinery and equipment and 37 percent withinconstruction and alteration of buildings. These investments have, as indicated above,contributed to reduce the technological gab between the Polish and the EU-industry andto the adaption of modern methods of production.Legal environmentToday, the Polish regulatory regime is generally based on provisions from the EU(Common Agricultural Policy) and Poland’s entry into EU has involved adjustment inanimal production and processing, aimed at ensuring food quality. These requirementshave led to investment/FDI in improved or new production facilities followed byrestructuring, tendencies to concentration in the food sector.When it comes to price formation, the Common Agricultural Policy does not interferedirectly with the market (no intervention procurement but subsides for storage andexport) which might the impact of more fluctuating price. The Office of Competition andConsumer Protection 37 exerts control over the observance of market competition rulesand is in charge of consumer rights protection in Poland. Two basic legal acts concerningcompetition rules and consumer protection are “The Act of 16 February 2007 oncompetition and consumer protection” (Journal of Laws of 2007, No. 50, item 331, asamended) 38 and “The Act of 16 April 1993 on combating unfair competition” (Journal of3738(Urz•d Ochrony Konkurencji i Konsumentów - http://www.uokik.gov.pl/.Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentów (Dz.U. 2007, Nr 50, poz. 331 ze zm.).51


Laws of 2003, No. 154, item 1503 as amended) 39 . Another general act that regulatesmarket functioning in Poland is “The Act of 12 June 2003 on payment terms incommercial 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 anysignificant problems related to price formation and mergers. Some larger industrialgroups have been established in the pork and poultry processing industry but the valuechain is still to be characterised as fragmented and firm seems to have any dominatingposition 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 foodmarket.A price commission was an initiative by the former Polish government. The initiativeinvolved the formation of working groups with the participation of meat producers andprocessors, whose main goal was to overview the meat market by gathering andpublicizing information on average weekly meat prices in the value chain in order toprovide the market with more transparent and updated price information. The pricecommission’s work has been terminated probably due to political reasons.A new initiative was launched in February 2010 by establishing an “Intersectoral Groupon Strengthening of the Agri-Food Products Market Transparency and Food SupplyChain Functioning Improvement” 41 under the Ministry of Agriculture and RuralDevelopment. The Group is to overview and estimate commercial practices within thefood supply chain, recommend how to constantly monitor prices and margins, look forthe possibilities of reaching consent among participants of the food supply chain, andprepare a code of good commercial practice in relation to trade in food.Code of conductThe 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 aswell as the institutional and regulatory set-up. A key issue is to develop the value chain tomeet the competitive challenge followed by the transition to a market economy and theaccession to EU. The main consideration seems to pursue the economic opportunities inthe market rather than to discuss whether regulation or a voluntary code of conduct wouldbe a better solution to problems in the value chain.Based on our interviews, however, the impression is that no real tradition for voluntaryagreements exists in Poland, and we have been able to identify any voluntary agreementhaving a real impact on the market.394041Ustawa z dnia 16 kwietnia 1993 r. o zwalczaniu nieuczciwej konkurencji (Dz.U. 2003, Nr 154, poz. 1503 ze zm.).Ustawa z dnia 12 czerwca 2003 r. o terminach zap•aty w transakcjach handlowych (Dz.U. 2003, Nr 139, poz. 1323).Mi•dzyresortowy Zespó• do spraw Zwi•kszenia Przejrzysto•ci Rynku Artyku•ów Rolno-Spo•ywczych i PoprawyFunkcjonowania •a•cucha •ywno•ciowego.52


3.2.5 GermanySupply chain relationsThe German meat market is characterised by a low degree of vertical integration, as manylivestock traders and wholesalers tie the value chain together. This is particularly the casefor the pork sector. The low integration in the value chain is followed by businessrelationships characterised by repeated market transaction which means that the prices arenegotiated typically on short-term contracts (e.g. weekly basis) or fixed by the spotmarket. Longer term contracts are relatively rare. The main competitive factor is price,but with some tendency that other competitive factors such as quality/food safetybecomes more important for the meat market.There is strong competition at every stage of the supply chain. Neither food retailers norprocessing companies or farmer associations dispose of sufficient market power to takeon the role of a comprehensive chain coordinator or to set industry standards.Nevertheless, the retailers without doubt have the upper hand in terms of bargainingpower. Due to the retailers’ important market share, they do play a crucial role indetermining prices along the chains. Through increased engagement in private labels, andbackward integration of some chains such as EDEKA and REWE, which run their ownslaughterhouses, they considerably influence the meat market. In terms of the relationbetween processors and retailers, the fierce competition and the increasingly sophisticateddemand and price senility of German consumers are the main driving forces for thedevelopment of relationships between processors and retailers. This development has ingeneral 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 beencharacterised by “arm’s length” transactions. In a highly competitive surrounding, thesupply 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 causeconflicts 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 transparencyregarding rating and accounting of farmers’ products by their buyers (traders andslaughterhouses). Traders and slaughterhouses, on the other hand, see a central problemin 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 chainmay also be that there is hardly any incentive to establish transparency. On spot marketsfarmers and livestock dealers but also processors and meat wholesalers sometimes evenbenefit from the obscure marketing channels since competitive advantages are alsoachieved by means of opportunistic behaviour. For fear of disintermediation livestockdealers 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 investigationby the Bundeskartellamt suspected for price fixing. This investigation follows an initialinvestigation, begun in mid July 2009, which unearthed “substantial evidence” of pricefixing between the years 2003 and 2008. However, according to sources inside andoutside 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. Onemajor problem has been coordination in relation to the industry’s response to diseasessuch as Salmonella and BSE. There has been no company or institution in the meat chainwhich efficiently coordinates chain information, harmonises the different IT systems ortakes on professional public relations in charge of the whole sector. In cases of foodcrises, up- and downstream information slowly flows across the chain which hinders bothseamless traceability and the harmonisation of production processes between the variousstages of the supply chain (Bahlmann & Spiller 2008).Retail power. Due to the fierce competition and increasing concentration at the retaillevel, more market power is shifted to the retail sector potentially leading to marketimbalance in the chains. This situation is amplified as retailers are increasingly backwardintegrating into the processing sector and introducing private labels. Private labels arewidespread in the German retailing sector. These products, introduced as alternatives tonational brands, represent a crucial element in food retailers’ marketing and pricingstrategies (Stiegert & Kim 2009).The prevalence of private labels in the retail stores combined with a strong focus on foodsafety, means the retailers has become more demanding and preferring “control” to“trust”, regarding processors (Fiscer et al. 2007).InnovationOver the period 2000 to 2007, investment has followed consumer prices for meat. Form ahigh investment level in 2002 , the investments go down in 2001 along with the decline inconsumer and stabilise at an investment level at EUR 600 million per year. As the pricestend to increase in the end of the period, the investment also increases from 2005 andonwards.Split by types of investment, the entire meat industry invests about 80 percent of the totalinvestment in machinery and equipment which indicates that the investment is done inorder to obtain an increase in productivity, see Table E.6. German processors have also agood reputation for building and innovation in the meat processing industry, largely dueto their expertise in engineering (goliath.ecnext.com, 2007). However, the investmentfigures do also signal that improvement and modernisation of the production facility to alarge extent can take place within the existing facilities as investment in construction andbuildings are declining.Legal environmentThe German Food Law consists of about 230 different ordinances, including the FoodLabelling Ordinance, Packaging Ordinance, Dietetic Foods Ordinance, various hygienic54


and veterinary requirements, as well as numerous other special product or product grouprules 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. Inaddition to the LMBG, in 2005 Germany developed a central Food and Feed Law Book(Lebensmittel-, Bedarfsgegenstaende- und Futtermittelgesetzbuch - LFGB), providingbasic definitions, procedural rules and goals of the German food law. Both acts definegeneral food safety and health protection rules, address labelling requirements, regulateinspection, detention and seizure rules of suspect food. These rules apply to domesticallyproduced as well as to imported food products.The German Food Law is a federal law whose enforcement is the responsibility of theLänder. This implies that on occasion, a minor infraction to the food law may be toleratedin one state but not in another. However, major violations are persecuted in all federalstates.The responsible agency for monitoring compliance with German food law regulations isThe Federal Office of Consumer Protection and Food Safety (BVL). It is under thesupervision of the Federal Ministry of Food, Agriculture and Consumer Protection. TheBVL was established as an independent higher federal authority and is also responsiblefor risk management. BVL, inter alia, exercises authority over sub-stances and productsthat harbour potential risks and that are directly or indirectly related to food safety (suchas plant protection products and veterinary drugs). It is involved in formulating generaladministrative rules to implement laws in the fields of consumer health protection andfood safety, as well as in the preparation and monitoring of surveillance schemes andplans by the Laender. In addition, BVL acts as coordinator in the run-up to inspectionscarried out by the European Food and Veterinary Office (FVO). It is responsible forimplementing the European rapid alert system in the fields of consumer health protectionand food safety in Germany. The national reference laboratory for the detection ofresidues and the Community reference laboratory for the detection of residues are alsopart of BVL.Alongside EU competition law, national rules also ensure that competition is sustainableand fair. These rules are contained in the Restraint of Competition Act (GWB) and theUnfair Competition Act (UWG).The Cartel Act (GWB) does not prohibit market dominance as such. However, there is adanger that a firm dominating a market will impose its business targets largely as its seesfit. Anti-trust controls over dominant market positions and, in Germany as well, overfirms with a strong market presence (i.e. a strong position in relation to their customers orsuppliers) are designed to stop firms not sufficiently kept in check by competition fromabusing their position of dominance to the detriment of competitors orcustomers/suppliers and against the general interest. The following are prohibited:Unfair hindrance of competitors, i.e. a firm with a dominant market position denies, forexample, a competing firm access to its networks and infrastructures, or attempts to oust acompetitor from the market through an aggressive pricing strategy. This category also55


includes forced tie-ups (e.g. a product is sold only under an obligation to purchase spareparts from the same firm) and exclusivity provisions (a retailer is obliged to obtainspecific products solely from the market-dominant producer).Exploitative conduct, i.e. a firm demands inappropriate prices or conditions from itscustomers or suppliers.Non-discrimination, i.e. competing firms may not be disadvantaged or treated differentlywithout material reason.The Unfair Competition Act (UWG) determines which unfair commercial practicesagainst competitors, consumers or other market participants are improper.The Federal Cartel Office (Bundeskartellamt) – together with the relevant cartelauthorities in the federal states – is responsible for the protection of competition. Branchspecificdecisions on cartels are taken by the Federal Cartel Office's legal departments.The Centre for Protection against Unfair Competition and the Federation of GermanConsumer Organisations are the two biggest national institutions in terms ofimplementing Germany's unfair competition legislation. In addition, the law entitlescompetitors, fellow associations and Chambers of Commerce and Industry to pursueaction on breaches of fair competition. The Federal Office of Consumer Protection andFood Safety (BVL) is responsible for cross-border legal violations.Code of conductRegulations are mostly a matter between the EU and the German Länder, because theFederal State is not involved with the implementation of European law.The tendency has gone towards liberalisation. According to our sources, both farmers andindustry are happy with deregulation.It should be noted also that voluntary agreements are not very common on the Germanymarket as repeated market transactions dominate the market.3.3 A typology for the five countriesFrom 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 3.1Cross-cutting issues in the five Member State countries studiedSpainUnitedThePolandGermanyKingdomNetherlandsCompetitionOne generalCompetitionGeneralTwo Acts applyCompetitionlawregulation onjudged byregulation ofto competitionjudged bycompetition,Office of Faircompetition.issues,office. Two actsand a secondTrading. Twoincluding unfairon generalaimed atprimary acts—competition andcompetition asretailing.thecustomerwell as one onCompetition Actprotection.cartels.56


SpainUnitedThePolandGermanyKingdomNetherlands1998 andprovisions inthe EnterpriseAct 2002.PricingSomeLack ofLack ofLack ofLack oftransparencytransparencytransparency.transparency;transparency.transparency,with priceSales priceno currentFormer priceand littleobservatoryformation andinitiatives.commissionwillingness tomonitored bypricing structureterminated,sharegovernmentparticularlyincludinginformation.problematic forparticipation offarmers.meat producersReluctance ofand processors.retailers to talk"prices".Structure ofDual nature atDual nature atHorizontalLittleLittlethe chainhorizontal levelvertical levelintegration inaggregationaggregationIntegrated atLargelyslaughteringwith severalwith severalthe productionfractured, butand less so inmiddlemenmiddlemenstagewith somefurtherHowever,Processingintegrationprocessingpoultry industrylargelyanchored bymore integratedfragmentedthe retailersserving twotypes ofmarketingchannels:traditional(small retailers)and modern(largersupermarketsandhypermarkets)(Structural)Little merger orConsolidationConsolidationSomeHugechanges to theacquisitionat thedue to excessconsolidation inconsolidation /chainprocessor levelcapacity andprogress egconcentration into counter retailinternationaldriven by FDIslaughteringpowercompetitionRetail(discount) withincreasingbargainingpowerInnovation andLow, drivenMedium, drivenHigh, driven toAdjustment toProductivityits driverslargely beforelargely bya large extentinternationalwith focus on2007 to reducedesire forby desire tomarketproduction57


SpainUnitedThePolandGermanyKingdomNetherlandscostsefficiency gainsdifferentiateconditionstechnologyProductFocus onQuality/foodinnovationmoderationsafetydriven to an(technology,increasingly inextent byfacilities andfocusgovernmentmanagerialpolicy andaspects)consumer(safety andconvenience)ContractualGenerallyShort termGenerallyGenerallyGenerallyarrangementsinformal, butbetweeninformal, withinformalinformal, withformal in someretailers andretailers betterretailers betterspecific casesprocessorsable to changeable to changeContracts withInformalconditionsconditionsretailers,betweenIntegrateddepending onfarmers andproductionsthe retailerprocessorssystems orcontractingrelationship inthe poultrysector betweenfarmers andindustry, butpork productionis dominated byrepeatedmarkettransactionViews on codeAgainstRetailers areAgainstAgainst theGenerallyof conductgovernmentagainst the ideagovernmentideaagainst theinterventionin general;interventionidea, butprocessors andcooperation inproducers areterms of qualityhesitant in theirand hygieneviews, but(primarily duepessimisticto the outbreakabout impactof diseases)What is interesting to pull from the typology is the high similarities in the structure ofmeat industries across the five case countries as well as the problems that each chainfaces. In all five countries, contractual agreements are generally informal and retailers aregenerally able to take advantage of these contractual informalities because they hold thepower in the value chain relationship.58


From a legal perspective, regulations in regards to food safety and traceability can varyquite substantially from country to country, though no evidence suggests that it playsmuch of a role in price asymmetries. Competition issues, however, play a large role withvarying 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 somepublication of pricing, and notably only Spain has managed to succeed in maintaining thistransparency.What is probably most interesting to pull from this typology is the structural changes inthe chain and their drivers. In countries such as the United Kingdom and the Netherlands,other levels of the chain have been consolidating—whether through co-operatives orother means—to rebalance power along the value chain. Yet, in other countries, thesestructural changes have not been taking place. This issue will be addressed further in thepolicy recommendations, in chapter 5.59


4 Further Analysis: Modelling and MeasuringAsymmetric Price Transmission4.1 IntroductionIn the previous chapter, we addressed the similarities and differences between the fivecase studies chosen for analysis. In these case studies, disparities in bargaining powerwere identified—primarily at the retail level. The purpose of this chapter is to assesseswhether these power disparities lead to price asymmetries in the supply chains of theseMember States. Moreover, we will also try to investigate at what stage of the supplychain price asymmetry occurs in order to identify what stage may have market power.4.2 Price transmissionPrice transmission is about the relationship between prices at the respective stages of thesupply chain. Do changes in farm prices lead to changes in consumer prices and viceversa? More specifically, are price changes at one level of the supply chain fullytransmitted 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 andthe long run. If price changes are not fully transmitted in the long run, firms inone stage of the supply chain are likely to make excess profits. In that case, thegap between farm, wholesale and retail prices deserves special attention;2. It always takes some time before prices are transmitted from one level of thesupply 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 anddecreases in other stages of the supply chain. The reaction of e.g. retailers to anincrease in wholesale prices may differ from their response to a decrease inwholesale prices. The asymmetry may apply to the adjustment size, but also tothe adjustment speed. Figure 2.1A gives an example of a difference in theadjustment size. A positive price shock at the wholesale level is fully transmittedinto consumer prices, while a price decrease is not. Figure 2.1B gives an exampleof a difference in the adjustment speed. The consumer price P c reacts morequickly to increases in the wholesale level P w than to price decreases. Priceasymmetry is primarily a short-run problem. However, again, the short run maytake a long time.61


Figure 4.1Asymmetry in adjustment size (A) and speed (B)PcP cP wP wtimetimeThe economic literature has presented extensive research on asymmetric pricetransmission in production and marketing chains. Overview articles on this literature arethose 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 38studies, 25 of which refer to agricultural products. In these studies, 197 estimations havebeen performed. These estimations are based on different methods, among other thingsbecause estimation methods have been improved through time. Table 1 summarises theestimation 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 chainsanalysed. 42Table 4.1Results of price asymmetry studiesTest methodAllmethodsFirstdifferencesSummationfirstErrorcorrectionThresholdmethodsOthermethodsdifferencesNumber of tests 197 93 47 31 10 18Symmetry 102 30 36 17 2 17Asymmetry 95 63 11 14 8 1Asymmetry (%) 48 68 23 45 80 6Source: Meyer and Von Cramon-Taubadel, 2004.There are several studies analysing price transmission for European meat supply chainsincluding Vavra and Goodwin (2005).There are several theoretical explanations for imperfections in price transmission, amongother things market power and adjustment costs. Market power may explain why pricesare not fully transmitted. Oligopolistic and oligopsonistic interdependence may give riseto lags in price adjustment. The risk of invoking a price war may make firms reluctant tolower prices. This may cause an asymmetry in the price reaction to positive versusnegative price shocks. Due to several adjustment costs (labelling, advertising andgoodwill) remarking prices may be expensive. Adjustment costs thus give rise to response42Peltzman’s 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 alsocause price asymmetries. Adjustment costs thus give rise to price levelling. Themarketing literature forwards several other arguments for this phenomenon. Apart frommarket power and adjustment costs, non-linearities in demand and supply may give riseto apparent imperfections in price transmission.4.3 Econometric methodologyThe estimation methods reviewed by Meyer and Von Cramon Taubadel (2004) and Freyand Manara (2007) estimate price asymmetry indirectly. Price asymmetry is assumed ifcertain coefficient restrictions may be rejected. If the restrictions are not rejected, then thequestion remains whether there really is no asymmetric price transmission. Indeed, itmight as well be that the restrictions are not rejected because the underlying model doesnot provide a good fit of the empirical data resulting in a low power of the coefficienttest. And vice versa, if the restrictions are to be rejected in favour of asymmetric pricetransmission, one may be suspicious whether the model has probably become too flexiblein fitting the data as a result of which it is describing noise instead of economic laws. Inthat case the asymmetry found might well be a consequence of a few outliers rather thancapturing the representative pattern for the price transmission behaviour of the verticalchain participants.In this part of the study we elaborate a method for detecting asymmetric pricetransmission in agricultural marketing channels that makes use of secondary time-seriesobservations, but now in conjunction with a semiparametric estimation method. Thismethod - due to Newey and West (1987) - allows for a partially parametric regressionmodel whose specification hardly affects the coefficient restrictions to be tested in orderto test for the absence of asymmetric price transmission. Because the method does notrequire processes of model specification, which can be very time-consuming, it is wellsuitable for performing a large number of analyses as is required in this part of the projectwhere we wish to assess the asymmetry of price transmission in the pork and poultrychains in the case study countries.We consider the prices of two consecutive stages in the marketing chain and computetheir changes between the current and the previous time period. Let us denote the pricereceived by the upstream stage and paid by the downstream stage as the “input price” andthe price obtained by the downstream stage as the “output price”. Now four differentsituations may arise: 1. both prices rise; 2. both prices fall; 3. the input price increaseswhile the output price decreases; and 4. the input price decreases and the output priceincreases. Consequently, in situation 1 both price changes are positive; in situation 2 theyare negative; in situation 3 the change in the input price is positive while the output pricechange is negative; and, in situation 4, the change in the input price is negative and theoutput price change is positive. For each of the two prices we can perform a summationof its changes over a number of time periods. If the outcomes of the two summations areequal, then price transmission is concluded to be symmetric. In case the outcomessignificantly differ, asymmetric price transmission is diagnosed. Then, a greater sum forthe output price compared with the sum for the input price enlarges the price spread while63


a smaller sum diminishes the price spread. The former situation could indicate marketpower of the downstream stage vis-à-vis the upstream stage, while a diminishing spreadmay 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 twoprice changes comes down on the following system of “dummy” regressions:∆p o,t = β o,1 I∆p o >= ∧∆p0 Τ / ∑ =I∆po, s >= 0 ∧∆pi,s >=(1)∀ t = 1,...,T, t 0 i,t >=Ts1 0+ β o,2 I∆p o < ∧∆p0 Τ / ∑ =I∆p< ∧∆p=Ts 1 o,s 0 i,s 0+ β o,4 I∆p o >= ∧∆p0 Τ / ∑ =I∆po, s >= 0 ∧∆pi,s < + u o,t, t 0 i,t = ∧∆p0 Τ / ∑ =I∆po, s >= 0 ∧∆pi,s >=(2)∀ t = 1,...,T, t 0 i,t >=Ts1 0+ β i,2 I∆p o < ∧∆p0 Τ / ∑ =I∆p< ∧∆p=Ts 1 o,s 0 i,s 0+ β i,4 I∆p o >= ∧∆p0 Τ / ∑ =I∆po, s >= 0 ∧∆pi,s < + u i,t, t 0 i,t = ∧∆p0 Τ / ∑ =I∆po, s >= 0 ∧∆pi,s >= (3)∀ t = 1,...,T, t 0 i,t >=Ts1 0+ α 2 I∆p o < ∧∆p0 Τ / ∑ =I∆p< ∧∆p=Ts 1 o,s 0 i,s 0+ α 4 I∆p o >= ∧∆p0 Τ / ∑ =I∆po, s >= 0 ∧∆pi,s < + u t, t 0 i,t


and being tested by single-equation estimation of the α coefficients in equation (3). Inaddition, according to the narrow definition of asymmetric price transmission a negativechange in the input price is only partially adopted by a negative change in the output pricewhile a positive change in the input price is followed by a positive change in the outputprice such that the positive change in the input price does not exceed the positive changein the output price by more than the absolute value of the negative change in the inputprice is larger than the absolute value of the negative change in the output price. In termsof the α coefficients in equation (3) this definition implies the following hypotheses:H 01 : α 2 = 0 against H 11 : α 2 > 0 andH 02 : α 1 + α 2 = 0 against H 12 : α 1 + α 2 > 0which we can test for by one-sided t tests for the regression coefficients α 1 and α 2 inequation (3). Note that if α 1 + α 2 = 0 with α 1 < 0 and α 2 > 0, the output price is smoothingthe fluctuations in the input price without generating any profit for the output stage at allunder 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 pricechanges. Such a model leaves the dynamics of the price changes unmodelled. Eventhough the estimator (OLSE) is consistent, its variances will be biased. This implies thatthe F-test which measures whether the model results are significant will have large type Ior type II errors. Fortunately, by using the Newey-West (1987) HAC robust estimator,only small second-order moment estimation biases result, cf. Jordà (2005). Several wellknowneconometric software packages, like EViews6, the one we used for ourcomputations, offer the option of computing the Newey-West HAC covariance estimates(e.g. EViews6, 2007: 36).4.4 DataFor this study, we made use of publicly available price data for the pork and poultrysupply chains in Germany, the Netherlands, Poland and the UK. Due to inadequacies inthe data, an analysis of Spain was excluded because at the product level, only retail-levelwas available (from GfK). The Ministry of the Environment and Rural and MarineAffairs (MARM) did have additional data at all levels (from the Observatory mentionedin the case studies), but only for a few perishable products at the farm, wholesale andretail levels. This data did not prove adequate for our analysis.Our researchers had also gathered some pricing data from the MARM, and some data wasmade 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. Despiterepeated attempts to obtain data from various private sources and stakeholders65


themselves, the necessary data for processed products were simply not released to ourresearch 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 timesseries 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 hasstopped recording (wholesale) price data after 2005. Moreover, there is a change indefinition between 2004 and 2005 for pork. For the UK, we have weekly price dataexcept for consumer prices for poultry.Table 4.2Data sourcesGermany Netherlands Poland UKFarm prices ZMP LEI …Wholesale pricesZMP(Slaughter prices)Eurostat(Export prices)…(Slaughter prices)Consumer prices ZMP GfK Eurostat Office NationalStatisticsTime periodMonthly data:For porkJan 2000-Dec 2004For poultry:Jan 2004-Dec 2007Monthly: *Jan 2001-Aug2009Monthly:Jan 2006-Aug2009For poultrymonthly data:Jan 2002-Feb 2010For porkWeekly dataJul 2007-Feb 2010For 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 andconsumer prices. We do not have data for packaged meat. This implies that the price gapbetween the farm and wholesale levels refers primarily to the slaughter phase (but also towholesale trade in meat the Netherlands). The gap between wholesale and consumerprices 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 4.3Meat products studiedPorkPoultryGermany Netherlands Poland UKCutletsGeneralGeneralLoin chopsPork for fryingBaconLoin steaksSchnitzelsPorkchopsBoneless legsSchnitzelFilletSausagesMinced porkDiced porkChicken schnitzelGeneralChicken breastRoastersRoaster (fresh and Chicken breastfrozen)LegsTurkey schnitzel66


4.5 ResultsWe consider time series of farm, wholesale and retail prices in the pork and poultrychains in four EU Member States: Germany, The Netherlands, Poland and the UnitedKingdom. Having these three prices available, we can evaluate the farm-wholesale pricespread, which is simply the wholesale price minus the farm price, and the wholesale-retailprice spread, given by subtracting the wholesale price from the retail price. One shouldtake into account that the farm-wholesale price spread captures primarily the slaughteringphase. The wholesale-retail price spread captures two activities: meat packing and retailtrade. 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 ofequation (3) are given in Annex 2. In this section, we interpret the results.GermanyIn the German pork supply chain, the farm-wholesale price spread is decreasing.Wholesale prices decrease even when farm prices increase. This result could suggest aweak position for the wholesalers in the supply chain, but on the other hand, if we look atthe wholesale-retail price spread, we see that this price spread is also decreasing while aweak position of the wholesalers in the supply chain would rather comply with anincreasing wholesale-retail price spread. A strong position for the wholesale has not beenfound either, because for two of the three pork products (schnitzel and loins) the decreasein the wholesale-retail price spread is not significant. Consequently, the results mayprobably reveal a general situation of decreasing margins in the pork sector rather thanpower imbalances in the chain.In the German turkey supply chain, both the farm-wholesale price spread and thewholesale-retail price spread increase. The farm-wholesale price spread increases becausewholesale prices increase more when farm prices increase. The wholesale-retail pricespread rises, because retail prices also rise at times that the wholesale price decreases.Moreover, we also observe asymmetric price behaviour conform its narrow definition: ifboth 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 downturnin the wholesale price. Consumer prices are not related to slaughterhouse prices. Eithermeat packers or retailers are able to set prices independently from price developmentsupstream in the supply chain.For poultry, the estimates show that for whole chickens (fresh and frozen) the wholesalersmanage to increase the farm-wholesale prices spread in particular because the wholesaleprice increases more when the farm price increases. The wholesale-retail price spreaddecreases because the wholesale price also increases more when the retail price increases.This result suggests that slaughterhouses for poultry have a strong bargaining position. Incase of chicken schnitzels, however, no significant price-spread changes occur.67


NetherlandsIn the Dutch pork chain, the only price spread which increases significantly is thewholesale-retail price spread for bacon (or rather “spek”). The increase is particularlygenerated 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 decreasesin wholesale prices are only partially followed by retail price reductions. The increase inthe 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 meatpackers rather than food retail.In the Dutch poultry chain, we see a significant decrease of the farm-wholesale pricespread for boneless cuts by 16.1 eurocents/kg/year, which is somewhat compensated by asignificant increase with 5.2 eurocents/kg/year of the farm-wholesale price spread forlegs. In both cases wholesale prices increase more when farm prices increase, but alsodecrease more when farm prices decrease. And in case of boneless cuts wholesale pricesare also decreasing if farm prices are rising. These results point to a competitive situationin the wholesale sector in getting farmers under contract. Vis-à-vis the retailers there areno significant changes in the (wholesale-retail) price spread.PolandIn Poland, the wholesale-retail price spread is increasing for both pork and poultry. Retailprices increase more than wholesale prices do at the same time, whereas they decreaseless when wholesale prices decrease. Moreover, in the poultry chain situations in whichthe retail price rises while the wholesale price falls also significantly contribute to theincrease 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 pricespread as wholesale prices increase more than farm prices do.UKThe results for the pork chain in the UK are mixed for the farm-wholesale part of thechain, but quite uniform for the wholesale-retail channel. While the farm-wholesale pricespread is increasing for loins, it is not significantly changing for legs and significantlydecreasing for bellies. The relative profitability of animal parts has changed in the UK. Inthe wholesale-retail part of the chain, however, for all products considered the retailwholesaleprice spread is increasing in particular because the retail price is increasingmuch more than the wholesale price at times both prices are increasing. Moreover, thewholesale-retail price spread is also significantly widened by the occurrence of situationsin which the retail price is increasing whereas the wholesale price is decreasing. Such acombination of results suggest that changes in consumer prices are not related to pricedevelopments elsewhere in the supply chain.While retailers may behave independently in the UK pork chain, no significant changesare observed in the UK wholesale-retail poultry price spread. This is also true for the twomain wholesale products in the farm-wholesale part of the channel (roasters and fillets).Consequently, no possible imbalances are detected in the UK poultry chain.68


SummaryTo summarise the results and to allow for cross-country comparison, Tables 4a and 4bprovide the impact of the price transmission patterns estimated on the price spread in themeat supply chain for the respective countries. For example, the annual decrease in thefarm-wholesale price spread due to price asymmetry is 0-1.42 percent of the retail price inthe German pork supply chain. A zero indicates absence of asymmetric pricetransmission. The table also interprets the results found (column 4). Table 4a reveals thatin three of the four countries changes in retail prices are not related to price developmentselsewhere in the supply chain. With respect to the poultry chain, see Table 4b, this appliesfor two of the four countries. In Poland retailers (or meat packers) are benefiting fromincreasing wholesale-retail price spreads in both chains, increases that amount to 1.91 percent of the retail price in the pork chain and 4.12 per cent of the retail price in the poultrychain. In the UK this percentage even reaches a level of 11.4 per cent in case of bonelesscuts of pork legs. Consequently, our results support the hypothesis that retailers, butpossibly also meat packers have a strong bargaining position vis-à-vis consumers andsuppliers. In Germany, prices are under pressure throughout the supply chain for bothpork and chicken (but not for turkey). 43Table 4.4Pork chain summaryImpact of Price Asymmetry on Price Spread(Impact on Average Annual Change in PriceSpread as % of Average Consumer Price 1 )Farm-wholesaleprice spreadWholesale-retailprice spreadGermany From -1.42 to 0 From -2.21 to 0Netherlands 0 Bacon: 2.08Poland 01.91UK From -1.94 to 2.77From 2.69 to 11.4CharacterisationProducts with decreasing marginsthroughout supply chainPrice asymmetry in favour of retailerand/or meatpacker for baconPrice asymmetry in favour of retailerand/or meatpackerPrice asymmetry in favour of retailerand/or meatpacker. Shifts in pricespread for different parts of pig atwholesale levelConsumer Price Germany concerns the price of a schnitzel; Bacon for the Netherlands; Pork general in case ofPoland; and Sausages for the UK.43In the individual case study for Spain, a brief analysis of price asymmetry based on publicly available data at the PriceObservatory 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). Itshould be noted that these results are not on specific products nor do they rely on modelling, and as such, were notincluded in this discussion. For more information, please see the discussion of price asymmetry in Annex A.69


Table 4.5Poultry chain summary (chicken, unless otherwise stated)Average Annual Change in Price Spread as %of Average Consumer Price 1)Farm-wholesale Wholesale-retailprice spreadprice spreadCharacterisationGermanyTurkey: 2.42Chicken: From -1.42 to0Turkey: 3.49Chicken: from -2.13 to0Price asymmetry in favour ofslaughterhouses as well as retailersand/or meat packers for turkeyDecreasing margins throughout supplychain for chickenNetherlands From -2.60 to 0.84 0 No price asymmetry at retail stage;Shifts in price spread for different partsof chicken at wholesale levelPoland From 0 to 1.23 4.12 Price asymmetry in favour ofslaughterhouses as well as retailersand/or meatpackersUK From 0 to 1.28 0 Price asymmetry in favour ofslaughterhouses** Consumer Prices Germany concerns the price of a turkey schnitzel or a chicken schnitzel; Chicken breast forthe Netherlands and Poland; and roaster for the UK.4.6 ConclusionThis chapter identifies possible price asymmetry in the fresh pork and poultry supplychains 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 chickensupply chain, but they increase in the turkey supply chain. In Germany, price asymmetrybenefits 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 inPoland and the UK and - to some extent - the Netherlands. For chicken, this is only thecase for Poland. Slaughterhouses are able to increase profit margins on broilers in Polandand the UK through asymmetric price transmission. In both countries, retailers and/ormeatpackers have bargaining power in the pork supply chain, while slaughterhouses havenot. In the chicken supply chain, however, slaughterhouses have bargaining power inPoland and the UK.Given the data restrictions, it is not possible to identify whether meat packers or retailersare able to apply price asymmetry and to increase gross margins. Germany may beidentified as a price market. As noted by European Commission (2009), asymmetric pricetransmission is more prevalent in central Europe – in this case Poland – rather than theEU15. Retailers’ probably have more bargaining power in the pork supply chain ratherthan the vertically integrated poultry supply chains. Poultry slaughterhouses performrelatively well.70


Any statistical method necessarily involves generalising reality, and if this tool is going tobe used for evaluation purposes or to create transparency, if one is to draw properconclusions, it is important to understand the advantages and disadvantages of thismethod.4.6.1 Advantages of the methodFirst, the method requires little data: price series, which are publicly available for somelevels of the food supply chain, notably the farm and the consumer level. It is moredifficult to obtain price series for other levels as we found out. The analysis does notdepend on information about costs, market structure, et cetera.Second, there is substantial body of econometric literature. Even though econometricresults are not robust in all respects (see below), the methodology is well advanced. Ifthere really is price asymmetry, you observe it using all possible approaches.Third, the econometric models do not depend on behavioural assumptions with respect topricing, oligopolistic and oligopsonistic interaction, and demand and supply conditions ingeneral. There is little a priori structure in the analysis. This is also a drawback, becauseeconomic theory may also be used to find structure in the price data. Economic theoryalso enables one to find possible causes of price asymmetry and to test for them (seebelow). The econometric approaches used for testing price asymmetry are a good start forfinding out whether there is problem: does pricing divert from pricing under perfectcompetition?4.6.2 Drawbacks of the approachFirst, different econometric methods may lead to different results: rejection of the nullhypothesis of symmetry.Second, asymmetry tests behave differently in the presence of data anomalies. Structuralbreaks in the underlying price series are common. All methods lead to a significant overrejectionof the null hypothesis of symmetry in the presence of structural breaks. For thisreason, 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 amonth.Fourth, there may be a divergence between the stability of prices at the micro level anddynamics at the macro level and vice versa, differences in the variability of prices at thenational 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 asymmetrytest are more useful in describing how markets look than how they work.71


72Sixth, related to the previous point, the literature and methodology focus on econometriccharacteristics (statistically significant) rather than economical meaning (see, forexample, OECD 2005). The econometric approach should look for a way to distinguishbetween asymmetry caused by (short run) transaction costs and use of market power.


5 Policy recommendationsPrevious studies presented in Chapter 2 as well as the case studies presented in Chapter 3have pointed to potential power asymmetries, particularly leaning towards retailers. In thevast majority of cases, the modelling exercise presented in Chapter 4 has served toconfirm price asymmetries in places where power imbalances also said to exist, thuspartly corroborating the relationship between a lack of bargaining power and priceasymmetry. These problems, our case studies have shown, are exacerbated by theinformal nature of contracting, which makes these asymmetries all the more evident andimmediate.Some policymakers have focused their attention on the results of these powerasymmetries. For example, recommendations and policies have already been developedto prevent stronger partners from taking advantage of weaker ones over payment terms incontracts. Evidence in Spain has already shown, however, that strong partner can becreative and find other ways to extract rents from the value chain.Rather than focus on the result of these power imbalances, the policy recommendations inthis report will focus on the cause—namely, excessive power within one particular part ofthe chain (again, as indicated by the model and case studies).Clearly, imbalances along the value chain can be confronted in one of two ways. Eitherlarge partners need to be broken up, or smaller partners need to be given assistance togain 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 isthree-fold. First and foremost, proving excessive power and consolidation has provendifficult on a practical level. Second, it remains unlikely that Member States will want tobreak up their most powerful organisations, especially since it may have consequences fortheir competitiveness across the European Union and also internationally. Third, thisstudy 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 acompetitive advantage in their bargaining.The primary vehicle for changing patterns of behaviour and rebalancing bargaining powerin the value chain will be a voluntary code of conduct. Adopting a voluntary code ofconduct lies very much inline with the direction of EU policy-making, as envisioned forinstance in the Open Method of Co-ordination (OMC).The underlying assumption of the OMC is bottom-up policy making, relying on the actorsthemselves to present solutions to problems. Of course, the mere existence of a written,73


voluntary code of conduct, in and of itself, will not address power imbalances in the valuechain. Its success essentially depends on powerful partners honestly agreeing not to usetheir market power to extract “excess” profits from the value chain. And here, theEuropean Commission can play an important role in convincing actors that their bestinterest lies in addressing these imbalances, and issues that will be addressed in thischapter.5.1 Previous efforts of the CommissionBefore proceeding with the recommendations based on this research, it is worthemphasising the current efforts of the European Commission, as illustrated by theCommunication entitled “A better functioning food supply chain in Europe”. It is worthnoting that the communication was developed under the Spanish presidency, and thatSpain remains a leader in terms of trying to carry out the recommendations. The typologyfrom Chapter 3, for example, points to the fact that Spain is the only country whichmakes much of an attempt at achieving transparency of pricing within the value chain ofmeat products (though not specifically meat processing products, as has been pointedout).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 withother links of the supply chain (through widening the scope of activities of interbranchassociations, restructuring the role of cooperatives or training farmers instrategic planning);2. Increasing transparency through, for instance, Food Price Monitoring;3. Combating unfair trading policies mainly related to payment periods anddiscounts and promotions;4. Encouraging self-regulation initiatives: standard contracts or codes of goodcommercial 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 keyto achieving the underlying goals of some of the other recommendations, mostimportantly to combat unfair trade policies and also to achieve transparency. 44 As shall beshown in this chapter, we favour restructuring the value chain, but only in those caseswhere restructuring is not already occurring, as demonstrated in the typology.In parallel, the High Level Group on the Competitiveness of the Agro-FoodIndustry (HLG) issued a report with 30 recommendations in March 200944It should be noted, however, that we are argue for transparency towards the Commission, and not necessarily towards allstakeholders and the public. We feel that full transparency may be too difficult to achieve, and in some sense, isunnecessary to achieve accountability in terms of solving price asymmetries. This issue will be addressed further later inthis chapter.74


aiming to enhance the competitiveness of this sector. The recommendations aimedto achieve a more balanced distribution of power in the food chain topreserve and improve consumer choice, product quality and innovation. Moreoverthey sought to enhance the competitiveness of the food and retailing sectors as well asthe agricultural sector.In particular, recommendation 15 focused on the contractual relationships in thefood supply chain and aimed to “ensure the proper and optimal functioning of theentire food chain by addressing the relationships among the food chain players”This recommendation is in line with the Commission Communication “a betterFunctioning 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” whichaim is to address the business-to-business contractual relationships along the foodchain 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 pursuea voluntary code of conduct, where it is made clear to actors that the primary focusbe on reducing price asymmetry. A voluntary code of conduct, by its nature, is not onein which a central authority will impose conditions. While the European Commissionmay use evidence from various reports to suggest the focus of a code of conduct, the mainmessage 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 EuropeanCommission needs to make clear the reasons for the new code of conduct. In anydiscussions, we feel that the European Commission should come with a fairly strongmessage, saying that perceived inequities between levels of the value chain and priceasymmetries are the problem that the Commission wants addressed. If industry cannotsolve the problem, then the European Commission will be forced into a more proactive,and regulatory approach. As mentioned earlier, actors are concerned about furthergovernment intervention, and this is an important tool that the European Commissioncould exploit.(2) More importantly, however, we would recommend regular monitoring andpublishing of progress on indicators that both the European Commission andstakeholders agree upon to measure asymmetries in the value chain. This would givethe code of conduct greater scope for success, as the monitoring function allows theCommission to extend its shadow, so to speak, and make clear that it expects someresults from the code. Figures should be given as a single number index and shouldindicate graphically whether they are trending up, down, or holding steady. Regular,quarterly updates of this figure should be relatively easy to accomplish. Information couldbe provided in a format that offers a forum by which stakeholders can directly offer theircomments or critiques of the figures, e.g. a Wiki.75


Below is an example of a simple graphic that could be included on the site. Its simplicitywill be a powerful feature and one which will be more difficult to contend.Figure 5.1Sample graphic to show index on price asymmetries5.2.1 The reasoning behind a voluntary code of conductImplementing a voluntary code of conduct to govern industry implies a change in thefunction of government. Rather than focussing on guiding industry, the governmentworks 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 wherethey are appropriate, they can be extremely effective. Members of a particular industry ornetwork are better aware of the dynamics of the industry and can know better the effectsof 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 beendefined by industry themselves. This legitimacy leads to less shirking, and as such, meansthat compliance will tend to be higher.The effectiveness of the voluntary agreement, however, depends on the mutual interestsof 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 ifindustry does not change their business, then governments will. Governments governthrough a “shadow of hierarchy”.Codes of conduct for the chemical industry in response to the disaster in Bhopal, India in1984 are a classic example of this form of governing. While an extreme example, this is aclassic response of industrial action following a legitimate threat of governmentintervention. In this case, members of the chemical industry came together to develop aneffective code of conduct, which all members agreed to follow. This code of conduct metthe concerns of governments, and has generally been considered to be an effectivedeterrent to further problems in the industry.5.2.2 Challenges for a European-wide code of conductTwo fundamental issues stand in the way of an effective code of conduct at the Europeanlevel.76


First, if governing in the shadow of hierarchy is going to be sustainable, the governmentneeds to have the legitimate ability to revoke the status of any one network. In otherwords, a fall-back regulatory option needs to exist (Knill & Lenschow, 2004, p. 223). Thethreat of intervention keeps companies from acting against the public good. Thesenetworks must feel that unless they act in good faith, the government will intervene. Touse the words of Adrienne Héritier, companies are allowed to participate in voluntaryaccords 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 needto feel restrained enough to allow the governance structure to work independently of thegovernment; on the other side, network structures need to believe that the governmenttruly represents a threat to their independence, and they must follow unwritten rulesregarding their activities.The problem for a European-wide code of conduct is that it remains unclear whether theEuropean Commission represents the immediate and present “threat” that it would needto be. While the EU clearly has a profound influence on food policy and by extensionvalue chain structures, this influence is one-level removed, as Member States interpret thecode of conduct according to their own presuppositions. 45A second problem for this “shadow-of-hierarchy” is the bureaucracy casting the shadowneeds to remain strong and competent enough to step in when the public interest is notbeing followed. Governments can end up ceding competencies to other organisations, andthe state loses.This, of course, is a long-term problem to be monitored, but not something withimmediate implications for implementing a code of conduct.Finally, voluntary codes of conduct tend to work more effectively in situations whereactors are equal in size, and as is clear from the research for this study, this simply is notalways the case. For a voluntary code of conduct to be effective, either weaker levels ofthe value chain need to be consolidated or stronger levels broken apart. To ensure theeffectiveness of voluntary agreements for the meat (processing) industry, competitionpolicy 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 priceasymmetries. The model can be the basis to produce one of the indices that wererecommended above.45True, the voluntary code of conduct could offer suggested interpretations. Nonetheless, no guarantee exists that MemberStates will follow these guidelines. In fact, we would argue that the adoption of a voluntary code of conduct lays very muchinline with the idea of the Open Method of Co-ordination (OMC). The underlying assumption of the OMC is that MemberStates should be the primary source of interpretation, and as such, the Member State should remain the primary interpreterof a code of conduct.77


As mentioned in the previous section, monitoring and publishing (for industry) results ondysfunctions in the value chain is critical to show the European Commission’s continuinginterest 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 tocomplaint than qualitative ones.The model developed for this study could be such a tool given its focus on both pricingand concentration levels, the former of which is the primary result of concern and thelatter of which is the primary causal factor.5.2.4 Improved data gathering(4) We would recommend that the European Commission instruct Eurostat to focuson collecting representative data (not from the whole industry, as this would be toocostly) that would address the following variables: (1) pricing and (2) concentrationlevels. For the first year, it seems fairly clear that any published figures wouldconcentrate on aggregate figures, which will probably give a distorted picture of how thevalue chain is functioning. It seems likely that some players of industry would need toprovide additional data to get the desired level of disaggregation. These figures should beclearly presented to the stakeholders, including the existing limitations on data. It shouldalso be made clear to stakeholders that evaluations of the success or failure of a voluntaryagreement will be based on these figures, and if industry is unable to provide additionalfigures, then unnecessary government intervention becomes more likely.While some researchers have identified information asymmetries between various levelsof the value chain as being an important issue, the case studies have shown varying levelsof transparency without much effect on the issues along the value chain. This does notmean, however, that transparency is not an issue. What remains important is that industryremains highly aware of issues along the value chain, and has the data to back it up. Thismakes the “threat” of government intervention more credible.One of the fundamental issues facing this study has been the lack of pricing data that isappropriately broken up into constituent parts. Data is primarily aggregated along anindustry or country, which makes conducting a proper value chain analysis ratherimprecise. In the United Kingdom and the Netherlands, for example, value chains wereidentified as having a “dual nature”, meaning that the chains were highly integrated forsome products and producers, while others were not integrated at all. This leads tomisleading data results showing a middle ground, which may not give an accurate enoughpicture for analysis.5.2.5 Enforcement mechanisms(5) We would recommend that some form of arbitration be set up in the form of anombudsperson. This office should remain reactive, responding to complaintsreceived from organisations within the chain.78


The role of the ombudsperson should remain clear—to enforce the code of conduct whencomplaints are received by the office. When this office is being formed, the EuropeanCommission and various stakeholders should focus their attention on the level ofpenalties that should be levied on organisations found to contravene those rules. TheCommission should be clear that the penalties must be high enough to work as adeterrent.While SMEs and even some larger organisations feel pressure to not register complaintsfor fear of losing market share, we still believe the option should remain reactive. Giventhat this office would be policing a voluntary agreement, it would appear excessive togive this office the power to actively seek out offences.The ombudsperson should be appointed by the government, but agreed to by a group ofstakeholders.5.3 Fallback recommendations: regulatory optionsThe assumption of a voluntary code of conduct is that the actors will progress towardslevelling asymmetries themselves. However, if actors are unwilling to genuinely changetheir patterns of behaviour, then either the European Commission or the Member Statesneed to step in with regulatory action. Of course, the voluntary code of conduct canremain in place, but regulations can and should be formulated to ensure the results thatthe actors themselves have set forward.Changed role of ombudsperson(1) We would recommend that a European ombudsperson be created solely underthe jurisdiction of the European Union, and that he or she be given proactive powersto investigate potential abuses of power within the Member States.The role of the ombudsperson would vary depending on whether a voluntary code ofconduct had been agreed upon. In cases where this voluntary code of conduct exists, theombudsperson’s role simply becomes stronger and more proactive in enforcing goodbehaviour on the part of actors. In cases where a code of conduct may not have even beenagreed to, the European Commission’s role will be to create a code of conduct,potentially drawing on the findings of this report and others.Contents of this code could include:• Mandatory transparency in pricing;• Mandatory contracting and payment terms of a set period (i.e. 30 days);• Banning unfair trade practices, such as excessive late payments, unilateral or ad-hocchanges 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 governmentshere is that powerful players will continually find new and innovative ways to pressureweaker actors in the value chain.79


Information sharing(2) Food labelling changes should be considered to make it easier to infer the reasonsfor price changes along the value chain.Current food labelling enables consumers to make informed choices and protects themagainst hazards, as with GMO- and allergy-labelling. 46 This labelling, however, cannot beused to analyse prices and price transfers in the supply chain. Revealing the specificpercentage content of products would better enable policy-makers and researchers to inferhow price increases for particular components of a product should influence the overallproduct price. This “labelling” could be provided in confidence to an independentauthority, to belay any competition concerns.(3) Companies should be obliged to provide pricing data and cost structureinformation.Current reporting requirements, laid down in directives, serve the interests of financialstakeholders and do not provide transparency on pricing for individual products. Withoutthis information, the Commission is left with inadequate, aggregated data.With respect to costing information, data should focus on long-term, integral costs as wellas short-term, differential costs. Again, this information should be collected under thestrictest confidence, possibly by an independent institution. Regulation 1/2003 (Article17-21) provides the Commission with the option of asking national governments andcompetition authorities to provide information in the interests of fair competition (Berryand Hargreaves, 2007, p. 251-269). An argument can be found in Article 102 TFEU. Itprohibits lowering prices under marginal product costs when the intention is to exclude oreliminate competition (Berry and Hargreaves, 2007, p. 287).If regulation 1/2003 is deemed to be inadequate for the present purpose, pricing datacould be made available by means of pin-pointed new regulation.Competition policy(4) We would recommend that the European Commission examine options forchanging food and competition law to protect suppliers by addressing dependencyrelations, which can force companies out of the market. As indicated in the legalanalysis in Chapter 2, the burden of compliance to food law is to a large extent vested oncompanies 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 ofcountervailing power by producers, and reveal the circumstances under which this may beenacted.(5) The European Commission should define economic dependency and integratethis concept in competition law.Currently, economic dependency is considered in some competition cases, but it remainsan ill-defined concept. It is advised to set rules for assessing dependency and integrate theconcept within competition law.46See in this context regulation 1829/2003 of the European Parliament and of the Council of 22nd September 2003 ongenetically modified food and feed (OJ L 268, 18/10/2003)80


(6) The European Commission should also address the dual role of retailers as bothcustomers and direct competitors of their suppliers.Retailers get information as customers from their suppliers and may abuse thisinformation as private label producers. In the Kesko/Tuko merger case, the EuropeanCommission also evaluated the impact of the retailer’s information with respect toindustrial brands on the competition with private labels. The information retailers obtainon the marketing strategies of all suppliers may be used to market private labels in such away that their competitiveness is enhanced. Private label development is a key element inthe power wielded by retailers vis-à-vis branded daily consumer-goods producers. Itenables retailers, who are inevitably privy to commercially sensitive details regarding thebranded good producers’ product launches and promotional strategies, to act ascompetitors as well as key customers of the producers. This privileged position increasesthe leverage enjoyed by retailers over branded-good producers.The use of commercial information from upstream suppliers to optimise the marketingstrategy 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 EuropeanCommission has not done this yet.In this respect, private labels are a challenge to the dichotomy between horizontal andvertical competition in European competition law. Private labels comprise both elements.Competition law and practice should take into account that the world is more complexthan the dichotomy assumes.Retail buyer power is here to stay, as retailers carry a large range of products, control theshelf (access to the consumer), and act both as supplier and customer. Only as far ascompetition policy addresses these issues, there may be a substantial change in bargainingrelations.Producer indications(7) Consider introducing a system of compulsory producer indications on privatelabelsIn this way innovative companies will be visible to the consumer as their brands arerevealed. It will help to improve the bargaining position of producers in the middle part ofthe chain, that often find themselves squeezed from the side of their suppliers as well asby their buyers. Producer indications on private labels enhance the visibility of producersin the eyes of consumers. If consumers attach value to specific food processors, this couldenhance the bargaining position of processors vis-à-vis retailers as well as competitionamong processors. However, if producers supply both industrial brands and privatelabels, as many of them do, the introduction of producer indications could also influenceconsumer perceptions of industrial brands. It may influence competitive relation betweenindustrial brands and private labels. It could also enhance transparency towards theconsumer to assess the difference between the industrial brand and the private label ifboth are supplied by the same processor (or vice versa) (Poppe et al. 2007).81


5.4 Additional recommendation: strengthening weak actorsAs mentioned on numerous occasions, power imbalances between actors are one of thecauses of dysfunctions in the value chain. In the introduction to this chapter, we pointedout that one solution to power imbalances is to increase the strength of weak actors (inthis case, normally farmers, but also in other parts of the chain in some Member States).In some cases, market forces are progressing to rectify those imbalances—such as in theUK case. However, in Member States where farming is considered part of the culturalheritage, such as Spain (as noted in the typology), small enterprises have been hesitant tocombine to meet the challenges posed by larger actors in the value chain.(1) In this case, we would recommend that the European Commission encourageand promote the further creation of associations or co-operatives in those MemberStates where structural changes are not taking place. However, these organisationsshould work as more than simply vessels for price negotiation, but should alsoprovide a form of “capacity building” for smaller actors. This capacity building couldinclude developing centralised systems for traceability of meat products.This recommendation remains very much inline with what has been envisioned theimprovement of the structure and consolidation of the agro-food sector, favouring thevertical integration of primary producers and SME processors with other links of thesupply chain (through widening the scope of activities of inter-branch associations,restructuring the role of cooperatives or training farmers in strategic planning).82


A SpainA.1 Description of the IndustryThe 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 behindFrance, 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 totalindustry sales, 17.3 percent of total consumption of raw materials, 14,7 percent of theemployment, 12.5 percent of labour costs, 12.9 percent of total investment and 13.1percent 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 labourthan other industrial sectors, as labour costs represent 13.5 percent of total sales, while forthe food industry this percentage is 12.7 percent. However, the consumption of rawmaterials represents almost two thirds of total sales while for the Food Industry is 56percent. As can be observed in Table A.1, the productivity level is lower as well as theGross Operating Margin. Finally, in relation to employment, the rate of unemploymentwas lower than for the food industry (6.6 percent and 7.2 percent, respectively) (Encuestade Población Activa 2008) (INE, 2009).Table A.1 Main indicators of the Spanish Meat Industry (2007)Meat IndustryFood IndustryTotal Industry% onFood industryEmployment (number) 87,936 377,897 2,580,375 23.27Product sales (EUR million) 16,374 82,094 512,603 19.95Consumption of Raw Materials (EUR million) 10,552 45,953 266,037 22.96Gross Value Added (EUR million) 3,787 20,137 154,287 18.81Labour Costs (EUR million) 2,241 10,402 83,206 21.54Investments (Million EUR) 693.0 3,629 28,121 19.10Product sales / Employment (EUR 1,000) 186.2 217.2 198.7Labour Costs / Product sales (%) 13.5 12.7 16.2Consumption of Raw Materials / Product sales (%) 64.4 56.0 51.9Productivity (Value Added / Employment) (EUR 1,000) 43.1 53.3 59.8Operating Surplus (Value Added - Labour Costs) (EUR million) 1,576.2 9,735.2 71,080.6 16.2Gross Operating Margin (Operating Surplus / Product sales) (%) 9.6 11.9 13.983


The Meat sector in Spain is very complex in nature and includes both fresh and processedproducts. It is composed by different species, each of them following different supplychains. While in the case of beef, pork and poultry intensive production systems with ahigh degree of vertical integration dominates, in the lamb sector, production systems, ingeneral, are more extensive in nature, although some changes have taking place towardsmore intensive production systems in the last decade. In this study, we will focus ourattention to the pork and poultry subsectors. Although we will analyze deeper the supplychain in Section 1.2, we can anticipate that the main characteristic of both sectors is aclear differentiation between the production of young animals and fattening farms. Thefeed companies have played a capital role in the vertical integration and, in general, theyown 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 (oneof the major investment issues in the last 5 years to accommodate the increasing marketshare of self-services (supermarkets and hypermarkets), the meat industry also includes avery active processing activity. The processed meat sector uses mainly pork meat as theraw material although with a marginal but increasing contribution of beef, poultry andturkey.Pork meat production increased by 1.3 percent in 2008 with respect to 2007 while in theprevious year the increase was 10 percent. This decreasing growth rate was the result ofthe existing high feed prices in Spain by the end of 2007 and the beginning of 2008, as ithappened worldwide. Meat prices also increase by 11 percent during 2008 (the highestincrease over the last ten years), although this trend has changed in 2009 as aconsequence of the economic crisis and its impact on private consumption. The porksector has partially overcome this situation by increasing exports. In 2008, exportsincreased 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. Whiledomestic consumption in 2008 increased by 1.8 percent, (following Nielsen, or 4.4percent, following MARM (Ministry of Environment and Rural and Marine Affairs)),exports increased by 14.5 percent. Some mergers and acquisitions have taken place toconsolidate the exporting position. New investments have decreased substantially andhave been oriented to the production of sliced products to face the increasing demand forsupermarkets and hypermarkets.The poultry sector has suffered a hard period in 2008. High production levels and adecreasing demand led to a significant cut of prices, while feed costs (representing 70percent of total production costs) increased due the aforementioned cereals priceincreases. The situation in 2009 is observed as more optimistic as production has slightlyreduced but feed and energy costs have reduced significantly, which has generated anexpected profitability increase. However, those optimistic expectations have been reducedin the last month due to the increased pressure by retails chains to cut down prices due thedecreasing demand as a result of the economic crisis that has whipped the world economyduring the last one and a half years.84


A.1.1Food Price VolatilityFigure A.1 shows the evolution of weekly pork farm and retail prices in the period 2004-2009. Prices are from the Observatory of Prices elaborated by the Spanish Ministry ofEnvironment and Rural and Marine Affairs (MARM) 47 . While farm prices seem to bequite stable along the considered period (no significant differences are found whencomparing average values between years, although during the five years analysed analternation of higher and lower prices is observed), retail prices exhibit a slight upwardtrend up to 2008 and a downward slope during 2009. The seasonal component is notevident 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, theevolution of the marketing margin (in absolute values) is closely related to the evolutionof farm prices. Increasing (decreasing) farm prices are associated to decreasing(increasing) marketing margins. The overall trend is, on the other hand, very close to thatexhibit 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)7,006,005,004,003,002,001,000,00WeeksFarm Retail Marketing MarginSource: MARM (Observatorio de precios).Figure A.2 shows the evolution of the marketing margin as a percentage of the retailprice. While in absolute terms the marketing margin exhibits an upward trend, percentagechanges 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 thefarm price.47Conversion factors have not been used to transform farm prices into equivalent retail prices. The marketing margin, then,includes processing and losses throughout the supply chain.85


Figure A.2 Evolution of Relative marketing margin for pork in Spain (%) (2004-2009)82807876747270686664WeeksSource: MARM (Observatorio de precios).Figure A.3 and Figure A.4 are related to the poultry sector. As in the pork sector, theretail 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. Between2004 and 2007, its evolution is very close to that of the retail price. In 2006, the retailprice decreased slightly in order to incentive the demand after the appearance of the avianinfluenza in the mass media. The marketing margin during this period remained quitestable 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 changeddramatically, generating structural problems at farm level. As mentioned above, 2008 ischaracterised by excess supply, pushing prices down. Decreasing farm prices togetherwith the increase of production costs (due to the increase of the cereal prices) generated astruggling situation at the farm level. Although in 2009 the production level decrease aswell as the feed cost, the demand also decreases due to the economic crisis. Retail chainshave pressured farmers to decrease prices in order to stimulate consumption. As aconsequence, the marketing margin has diminished substantially during the last twoyears, both in absolute (Figure A.3) and relative terms (Figure A.4).86


Figure A.3 Evolution of farm price, retail price and marketing margin for chicken in Spain (EUR/Kg) (2004-2007)3,503,002,502,001,501,000,500,00WeeksFarm Retail Marketing MarginSource: MARM (Observatorio de precios).Figure A.4 Evolution of Relative marketing margin for chicken in Spain (%) (2004-2009)140120100806040200WeeksSource: MARM (Observatorio de precios).A.1.2Consumption levelsThis section is structured as follows. First, we will describe the relative importance of theconsumption of fresh and processed meat. Next, we will analyse the evolution, during the87


last five years, of the different types of meat and meat products. Finally, we will analysesome issues related to shopping and consumption behaviour as well as some attitudestowards meat prices and safety.Figure A.5 shows the relative importance of the consumption of processed meat productsin relation to fresh meat. As can be observed fresh meat products still represent asignificant share of total meat consumption (76 percent). Processed meat productsrepresent 22 percent while the remaining 2 percent corresponds to frozen meat. TableA.2, additionally, shows the evolution of the consumption of different types of meat andprocessed products from 2004 to 2008, while in Figure A.6 changes in the meatconsumption patterns over the analysed period are considered. Data suggest a number ofissues:• The relative position of the different products shown in Table A.2 has remainedrelatively stable along the 5 years of study;• Among the fresh meat, poultry and pork are the most consumed products representingtogether around 60 percent of total fresh meat consumption;• Total meat consumption has increased slightly along the analysed period (around 2percent). However, while fresh meat consumption has remained stable, theconsumption of processed meat has increased;• Among fresh products, only pork consumption has increased significantly while thatof beef, lamb and other meat has decreased (the consumption of chicken hasincreased by 1 percent).Figure A.5 Distribution of meat consumption in Spain (%)22%2%76%Fresh Meat Frozen Meat Processed meatSource: MARM (Consumo Alimentario).Table A.2Evolution of meat consumption in Spain (tonnes)2004 2005 2006 2007 2008Total meat 2,228.52 2,233.29 2,215.09 2,252.24 2,275.03Certified meat 278.92 283.84 272.92 283.91 268.59988


2004 2005 2006 2007 2008Fresh Meat 1,724.88 1,731.49 1,706.83 1,724.85 1,725.51Beef 328.62 332.74 314.43 323.11 321.97Chicken 579.55 570.05 564.32 569.98 583.88Lamb 117.96 116.40 118.15 119.90 106.37Pork 471.92 469.71 507.30 506.77 519.96Other Fresh meat 226.81 242.58 202.61 205.08 193.32Frozen Meat 29.44 29.88 40.58 38.15 39.00Processed meat 474.19 471.91 467.67 489.23 510.51Cured ham 102.43 102.38 101.42 106.25 106.14Cured Pork Loin 12.37 12.88 12.57 12.12 12.25Chorizos 52.76 51.64 49.30 50.35 49.45Other cured products 90.36 90.67 87.63 90.96 99.48Cooked sausages 35.49 35.04 38.84 42.09 46.10Cooked ham 63.34 60.70 60.11 63.45 64.06Other cooked products 117.40 118.48 117.78 123.99 133.00Source: MARM (Consumo Alimentario).In 2006, the consumption slightly decreased as a consequence of the appearance in massmedia of the avian influenza, having recovered since then (mainly in 2008). Pork meatwas the most benefited from this food scare. Lamb consumption has remained quitestable from 2004 to 2007. However, the economic crisis at the end of 2008 generated asignificant 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 2008Other cooked productsCooked hamCooked sausagesOther cured productsChorizosCured Pork LoinCured hamProcessed meatFrozen MeatOther Fresh meatPorkLambChickenBeefFresh MeatCertified meatTotal meat-20,00 -10,00 0,00 10,00 20,00 30,00 40,00Source: 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: curedand cooked, representing 52 percent and 48 percent of total consumption of processedproducts, respectively. However, from 2004 and 2008, cooked products are the mainresponsible 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 oneshowing 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 consumptionbehaviour. Figure A.7 show the relative importance of the convenience attribute whenbuying pork meat (both fresh and processed). While in fresh pork meat, the relativeimportance of pre-packaged product is around 17 percent, in the case of processedproducts this importance arrives at 30 percent. As we will mention below, maininvestments in the meat sector in the last 5 years have been addressed towards slicedproducts.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 daysafter shopping, in the case of fresh products, around 60 percent is frozen totally orpartially at home. In many cases, after shopping the quantity bought is divided inpackages according to household size or life styles and is frozen.Figure A.7 Types of pork meat consumed in Spain (%)9080706050403020100FreshProcessedPre-packagedDirectly from the butcher to be cutSource: MARM (Monográfico carne y embutidos, 2009).90


Figure A.8Consumption behaviour of pork meat in Spain80706050403020100Inmediately In the next 2/3daysFrozen athomePartiallyconsumed andthe rest frozenCooked andthen frozenFreshProcessedSource: MARM (Monográfico 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 inSpain are addressed to buy packaged cut products (legs, breasts, etc) for a total of 60percent of total consumption (Table A.3). Chicken fillets, on the other hand, represent 12percent of total chicken consumption.Beef and lamb are perceived as the more expensive meat products (Table A.4). Amongprocessed products cured ham has the same image. Finally, as mentioned above, chickenis perceived as the most healthy meat product. In the case of processed products thegeneral attitude is positive in relation to their safety. Around 46 percent of consumersperceive processed meat products as safe while 38 percent are indifferent. Only 15percent declare that processed meat products are unsafe.Table A.3 Distribution of chicken meat consumption in Spain (2008)1,000 tonnes EUR million EUR/KgWhole Chicken 205 589 2.87Chicken Fillets 46 297 6.5Chicken Pieces 333 1,520 4.56Total 584 2,407Source: MARM (Consumo Alimentario).Table A.4Consumer attitudes towards meat price and safety (scale from 0 – expensive - to 10 – cheap-)PriceSafetyBeef 3.4 6.7Lamb 3.4 6.391


PriceSafetyPork 4.7 5.6Chicken 4.7 7.0Cured ham 3.4 Safe 46.0%Other cured meat products 4.2 Indifferent 38.5%Cooked meat products 4.5 Unsafe 15.5%Source: MARM (Monográfico carne y embutidos, 2009).A.2 The Pork and Poultry Supply Chain in SpainIn this section, we will describe the pork and poultry supply chains in Spain. We willintroduce this topic by analysing the meat balance for the last year the information isavailable. Then, this section is structured in two subsections, each of them devoted to thedescription 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 thevalue 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 beobserved, 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 alsoconcentrates 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 importsplaying a marginal role. France is by far the main partner from both an exporting andimporting points of view. Spain is also the second larger producer within the EU.However, its share only arrives at 13 percent.A.2.1The Pork Supply ChainThe pork supply chain in Spain is structured in three main phases and includes varioussteps in which a variable number of agents participate. Figure A.10 describes the threephases and the different agents that can play a role in each of them. Vertical integration isa big issue between feed companies and farms (70 percent of total production) andbetween the sow production farms and the piglet and fatten farms. However, it is verylimited at the other phases of the supply chain.At the production level, three main farming systems coexist. Sow production farmershandle 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 onaverage. Close cycle farms handle the whole process.92


Figure A.9Balance sheet of pork and chicken in Spain (1,000 tonnes)Meat ImportsConsumptionPork: 86.5 (UE 86.8%) Pork: 2580.9Poultry: 125.0 (UE 76%) Poultry: 1360.6Live Animal Imports Slaughtering and Precessing Meat exportsPork: 24.2 (UE 100%) Pork: 3233.8 Pork: 694.5 (UE 85.1%)Poultry: 3.2 (UE 100%) Poultry: 1309.7 Poultry: 72.7 (UE 65.5%)Live Animal ProductionExport of Live AnimalsPork: 3191.0 Pork: 67.0 (UE 98.6%)Poultry: 1308.3 Poultry: 4.7 (UE 93.6%)Source: MARM (Anuario de Estadística Agraria, 2006).In the slaughtering and processing phase, different agents can participate. At the slaughterhouses animals are scarified and carcasses are prepared and classified. Slaughters can beindependent or integrated. In the first case, animals are bought directly to farmers.Carcasses are sold to wholesalers, cutting factories or processing factories to elaboratecured or cooked meat products. Slaughter houses belonging to vertically integratedcompanies usually include cutting and/or sliced rooms to be ready for distribution tosupermarket and hypermarket chains. In some cases, slaughter houses can also sacrificeanimals 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. Thedifferentiation between carcasses going to the fresh and processed markets is alsoconsidered. In 2008, approximately 60 percent of the slaughtered meat went to the freshmarketing channel. This percentage has been reduced slightly since the beginning of the21 st Century. Cataluña is the leading region, as far as pork production is concerned,accounting for about 35 percent of the Spanish production (Figure A.12), followed byCastilla-León (13 percent). It is interesting to note that, while in Cataluña the relativeimportance of the processed meat marketing channel is very close to the national value, inCastilla-León this channel concentrates almost 80 percent of the pork production, whichis 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 perishableproducts located in the main urban agglomerations, being MERCAMADRID (Madrid)and MERCABARNA (Barcelona), the most relevant.93


Figure A.10Overview of the Pork Supply Chain in SpainSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de la Carne de Cerdo deCapa Blanca).Figure A.11Evolution of pork meat production (million tonnes of carcass weight)432102001 2002 2003 2004 2005 2006 2007 2008Fresh Meat ChannelProcessed Meat ChannelSource: MARM (Anuario de Estadística Agraria).The transport of both live animals and meat also play an important role. In the first case,animal welfare regulation is increasingly relevant, although main concerns here arisemainly when we refer to exports (long distance transport).At the retail level, traditional outlets and supermarkets and hypermarkets coexist. Theirmarket share is balanced, accounting each system for about 45 percent of the marketshare.94


Figure A.12 Geographical distribution of pork meat production in Spain (2008) (%)Source: MARM (Anuario de Estadística Agraria).Taking into account the different agents participating in the supply chain, two differentmarketing channels can be identified in Spain (Figure A.13): 1) Traditional MarketingChannel; and 2) Modern Marketing Channel. The Traditional Marketing Channel ischaracterised by:• Vertical integration between sowing and fattening farms either because both activitiesare done under closed cycle farms or because feed companies integrate both types offarms. 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 (feedcompanies, piglet producers, fattening farms, slaughter houses or wholesalers). In theprocessing phase, transport and storage are hold by the agent in charge of theindustrial activities;• Relative importance of the wholesaler, who buy entire or pieced carcasses to be soldto traditional butchers who, additionally, can also be supplied directly by the meatindustry;• 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 deeperhorizontal concentration, larger farms and an increasing vertical coordination along thesupply chain including production protocols. This has generated a more modernmarketing 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 newcustomers needs buying at supermarket and hypermarket chains. However, slicedproduct coexist with butchers located in the same supermarkets and hypermarkets;• The increasing importance of distribution platforms associated to retail chains;• Disappearance of wholesalers.95


Figure A.13Types of marketing channels in the pork sector in SpainTraditional Marketing ChannelModern Marketing Channel AModern Marketing Channel BSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de la Carne de Cerdo deCapa Blanca).A.2.2The Chicken Supply ChainThe Spanish poultry sector is characterised by an intensive production system, morefundamental than in the pork sector. As in the previous case, Figure A.14 provides anoverall picture about the different agents participating along the three main phases of thesupply chain. While in the pork sector vertical integration only took place in the firstphase, here vertical contracts extend along the three phases. Around 90 percent of totalchicken production is performed under any type of vertical contract.96


Figure A.14Overview of the Poultry Supply Chain in SpainSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de Avicultura de Carne).At the production stage, layer farms and hatcheries belong to the integrated companies.They are in charge of incorporating new layer hens, by replacement or buying themoutside, feed them, removing residuals and corpses, transporting eggs to the hatcheries,quality control and traceability and transporting chicks to the fattening farms. At thisstage, the farmer works for the integrated company. Farmers take care of chicks foraround 50 days when they get enough weight to be sent for slaughtering. All farmsmaintenance costs (including labour) are supported by the farmer, which account forabout EUR 0.20-0.35 per broiler. Farmers receive a payment from the integratedcompany, which has two components: one fixed and the other variable depending onproductivity. Main factors determining productivity use to be farm size, technologicallevel, labour skills and feed quality. Other factors can be: densities, fattening days orweights 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 verticalintegration is also very high. At the slaughter house, animals are sacrificed, carcasses arecleaned (gutted), cooled and classified. Also, quality controls and traceability activitiesare undertaken. Integrated companies are responsible for transporting carcasses to cuttingfactories, distribution platforms or traditional butchers. In Spain, there exist around 150slaughter houses. More of them are rather small generating around 5,000 tonnes ofcarcass weight annually. On the other hand, the slaughter houses owned by the 10 moreimportant companies in Spain generated 65 percent of meat production. Productioncapacity 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. Productionlevels have remained relatively stable around 1.1 million tonnes, with some oscillationbetween years. The minimum production level was reached in 2006, due to the effect of97


avian influenza. Again as in the pork case, Cataluña is the main producing region (22percent of the Spanish production) followed by Andalucía (16 percent), Galicia (14percent) and Castilla León (8 percent) (Figure A.16).Figure A.15Evolution of chicken production (million tonnes of carcass weight)1,221,201,181,161,141,121,101,081,061,041,021,002001 2002 2003 2004 2005 2006 2007 2008Source: MARM (Anuario de Estadística Agraria).Figure A.16 Geographical distribution of chicken production in Spain (2008) (%)Other20%Galicia14%Andalucía20%Cataluña22%C. Valenciana16%Castilla y León8%Source: MARM (Anuario de Estadística Agraria).Traditionally, a significant share of chicken production was marketed as whole carcasses.However, the relative importance of pieced carcasses and fillets has increased. FigureA.17 shows the evolution of the production of the two types of meat. As can be observed,while in 2001, 36 percent of the production was marketed as pieced carcasses and fillets,this percentage reached 45 percent in 2008.98


Figure A.17Evolution of chicken production destination (million tonnes of carcass weight)1200100080060040020002001 2002 2003 2004 2005 2006 2007 2008Whole carcassPieced carcass and filletsSource: Revista ALIMARKET (Mayo, 2009).Summing up, as in the pork sector, two main marketing channels can be identified (withdifferent 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 retailcompanies that are addressed (Figure A.18).Figure A.18Types of marketing channels in the poultry sector in SpainTraditional Marketing ChannelModern Marketing ChannelSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de Avicultura de Carne).The traditional marketing channel is very short and only two agents participate. Thepoultry companies integrate the production and slaughtering processes. Whole carcassesare sold to traditional butchers who cut the carcasses at the shop. The modern marketing99


chain is addressed to the supermarkets and hypermarkets. Under this channel carcassesare pieced at the transformation process. Cutting rooms within the slaughter houses ofnew cutting factories have been developed to satisfy supermarkets and hypermarketsrequirements for convenience products. In these retail outlets, however, there iscoexistence between packaged meat, sold in refrigerated shelves, and butchers who cutthe meat according to customer requirements.A.3 Market structureA.3.1The number of firmsThe meat industry is the most important food sector in Spain. In 2004, there was 4534firms, 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 of2.23 percent over the situation in 2004.Figure A.19Number of firms in the Spanish meat industry4560454045204500448044604440442044004380436043402004 2005 2006 2007 2008 2009Source: INE (Directorio Central de Empresas).A.3.2Number of firms related to size of firmTable A.5 shows the evolution of the number of firms related to the size. Three mainconclusions can be obtained:• The Spanish meat sector is a dual industry. There is a significant number of smallfirms (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, whichhas generated an increase of the firm size. In fact, comparing 2004 and 2099, it iseasy to observe than the number of smaller firms has decreased, while the opposite100


has taken place for the larger ones. It is interesting to note the significant increase intwo size segments: those employing between 50 and 99 employees and thoseemploying between 100 and 199 people;• The number of firms without employees has remained quite steadily with a positiveincrease of about 6 percent.Table A.5Evolution of the number of firms related to the size of the firm2004 2005 2006 2007 2008 2009 % change 2004-2009No employees 877 860 853 836 884 936 6.731-2 1,000 988 947 928 882 853 -14.702-5 732 735 722 710 696 693 -5.336-9 588 549 561 542 553 522 -11.2210-19 580 576 580 579 599 607 4.6620-49 546 539 563 562 560 564 3.3050-99 115 138 137 149 150 146 26.96100-199 53 50 59 59 62 63 18.87200-499 33 33 37 39 39 36 9.09500-999 6 6 6 6 7 9 50.001,000-4,999 4 5 4 4 5 4 0.00Source: INE (Directorio Central de Empresas).A.3.3Concentration within the industryThe 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 anyofficial data. We have calculated a proxy with two main databases: ALIMARKET andMARM. Second, we have differentiated three markets: fresh pork, processed pork andpoultry.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 marketconsumption has been obtained from MARM (Consumo Alimentario) by adding theconsumption of fresh pork at home and away-from-home. As can be observed in the freshpork market the concentration level is relatively low. The top ten only represent 44percent of the market share. Individually, market shares are also quite low. The mostimportant firm hardly arrives at a market share of 6 percent.Table A.6 The top ten firms in the fresh pork industry in Spain (2008)1,000 tonnes Market share Accumulated Market shareGRUPO BATALLE 161.0 5.83 5.83GRUPO VALL COMPANYS 150.5 5.45 11.28GRUPO SAMPER 142.8 5.17 16.46INDUSTRIAS CARNICAS VILARO 138.0 5.00 21.46GRUPO TERFRISA 118.0 4.27 25.73INDUSTRIAS CARNICAS LORIENTE PIQUERAS 115.4 4.18 29.91101


1,000 tonnes Market share Accumulated Market shareEL POZO ALIMENTACION 108.0 3.91 33.83CAMPOFRIO 105.0 3.80 37.63GRUPO FAMADESA 89.0 3.22 40.85CARNICAS SOLA 85.0 3.08 43.93Source: Revista ALIMARKET (Abril, 2009) and MARM (Consumo Alimentario).The picture is totally different in the processed meat sector (Table A.7). In this case, themost important firm (CAMPOFRIO) gets a 27.65 percent of the market share, and the topten arrives at the 82 percent. In any case, these figures have to be interpreted with cautionas in some cases firms’ output (i.e. CAMPOFRIO) includes Portugal.Table A.7 The top ten firms in the processed pork industry in Spain (2008)1,000 tonnes Market share Accumulated Market shareCAMPOFRIO 175.0 27.65 27.65EL POZO ALIMENTACION 87.0 13.74 41.39CASA TARRADELLAS 73.3 11.58 52.97GRUPO ALIMENTARIO ARGAL 40,1 6.33 59.30NOEL ALIMENTARIA 30.0 4.74 64.04INDUSTRIAS CARNICAS LORIENTE PIQUERAS 29.5 4.66 68.70EMBUTIDOS MONELLS 24.5 3.87 72.58CORPORACION ALIMENTARIA GUISSONA 22.0 3.48 76.05CASADEMONT 20.5 3.24 79.29GRUPO CAÑIGUERAL 17.0 2.69 81.97Source: Revista ALIMARKET (Abril, 2009) and MARM (Consumo Alimentario).In the poultry sector GRUPO SADA concentrates 26.2 percent of the market (FigureA.20). The other top ten do not reach 10 percent individually, but jointly considered theyconcentrate around 88 percent of the market. This situation has been quite stable in thelast 5 years.102


Figure A.20 The top ten firms in the poultry industry in Spain (2008) (%)302520151050GRUPO SADAVALL COMPANYSCORENUVESAPADESAGUISSONAAVICOLA MELIDAFLORIDAAVICOLA MORALEJAJ.L. REDONDOOTHERSource: Revista ALIMARKET (Mayo, 2009).A.4 Market featuresIn this section, we will describe some issues related to the performance of the MeatSupply Chain. When possible, data will refer to the pork or poultry sectors; otherwise, themeat 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 investmentsduring the last five years information is available. Second, we will analyse the evolutionof profits of the meat industry as a whole. The third section is the most important andrelevant for the purposes of this study, as it will aim at providing a description of themain costs and profits that are generated along the supply chain. The study willdifferentiate among the alternative marketing channels that were described for pork andpoultry in Section 1.2. We will end with an analysis of the competitive position of theSpanish meat and poultry sectors in external markets.A.4.1Levels of innovationAs mentioned in Section 1.1, the meat industry in Spain is the most important foodindustry. Total investments accounted for EUR 700 million, in 2007, representing around19 percent of total investments in the food industry. Figure A.21 shows that investmentshave 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 othermeats apart from pork and poultry. As can be observed, it took two years to the meatindustry to recover from BSE (in Spain the outbreak took place in November 2000). Afterreaching a maximum in 2003, average investments were around EUR 650 millionannually, with a small drop in 2006 due to the impact of the avian influence. As we willshow in the next section investments are closely related to profits in the meat sector.103


Figure A.21Evolution of Meat Industry investments in Spain (EUR million)8007507006506005505004504002001 2002 2003 2004 2005 2006 2007Source: INE (Encuesta Industrial de Empresas).From a qualitative point of view, the major part of investments in the meat industry hasbeen addressed to satisfy the requirements of the big retail chains. In fact, when analysingmain facts of the pork and poultry sectors, periodically reviewed in professionalmagazines such us ALIMARKET, we can conclude that main investments were due toacquisitions or for building new cutting and slicing rooms. The same trend has beenobserved for the processed meat industry. In Embutidos Monells (ranked 7 th in Table A.7)the percentage of sliced products on total turnover was 39 percent; 44 percent inCasademont (ranked 9 th ); or 65 percent, in Grupo Cañigueral (ranked 10 th ). Percentagesare higher in smaller firms as their businesses are more concentrated in this market, whilelarger firms also participate in the fresh meat market.A.4.2ProfitabilityFigure A.22 shows the evolution of profits in the meat sector. As mentioned above, ittook two years to start recovering from the BSE. From 2004 and 2007, the meat industryhas benefited from a reduction of farm prices but no information is still available to assessquantitatively the impact of increasing prices in 2008 and the economic crisis of 2009-09.These issues will be addressed qualitatively in Section 2.104


Figure A.22Evolution of Meat Industry profits in Spain (EUR million)60050040030020010002001 2002 2003 2004 2005 2006 2007Source: INE (Encuesta Industrial de Empresas).A.4.3Added valueOne of the main issues in this report is to describe the cost structure of the pork andpoultry supply chains in order to understand main changes that have taken place duringthe last 2-3 years, namely the impact of the increasing commodity prices during the endof 2007 up to mid 2008, and that of the economic crisis in 2008 and 2009. Moreover, theanalysis of the cost structure will help us to understand to what extent improving thebargaining power of the meat industry will benefit producers and consumers.Once we have understood how marketing margins are determined, the next step in ouranalysis will be to understand their dynamics. In other words, how marketing marginschange when supply and demand conditions along the food chain also change. This leadsus to the concept of price transmission along the food chain and the potential appearanceof asymmetries, an issue which has generated a lot of literature in the past 15 years (bothfrom a methodological and empirical points of view).Let us start when the analysis of the costs structure along the supply chain for eachmarketing channel and product we described in Section 2.+ Cost structure- PorkIn 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 werecalled modern, as the final destination were the larger retailers’ stores. In the followingfigures, we will show the different costs along the supply chain referred to 2008. We willcompare accumulated costs in each of the three stages of the supply chain with the pricesperceived at the end of each stage. All prices and costs are offered in intervals.105


Figure A.23 shows the cost structure along the traditional marketing channel. Productioncosts account for 1.5 to 1.6 EUR/Kg, representing around 30 percent of total costs. Thefarm price ate this stage is between 1.42 and 1.44, indicating that in 2008 market priceshave not compensating production costs at farm level.Figure A.23Cost structure along the traditional pork marketing channelCONCEPT COST TOTAL COSTFeed 1.021- 1.289Other costs 0.481 – 0.322PROFIT - LOSS[(-0,6%)- (-12%)](-0.083)-(-0.171)1.502-1.611 €/kgCONCEPT COST TOTAL COSTTransport to slaughter 0.023-0.025Slaughtering cost 0.059-0.061Other slaughter costs 0.040-0.055By-products (=Income) -(0.035- 0.037)Cutting costs 0.175-0.190Cutting losses 0.355- 0.360Other cutting costs 0.181- 0.200Transport to wholesaler 0.035- 0.042Net Profit (2%- 1%) 0.048- 0.014Other costs 0.04- 0.07Transport top butcher 0.14- 0.16Net profit (1%) 0.02- 0.02Slaughtering 0.087-0.104 €/kgCutting 0.746- 0.792 €/kgWholesaler 0.180- 0.230 €/kgCONCEPT COST TOTAL COSTLabour costs 0.920- 1.200Retail losses (2%) 0.045- 0.052Other costs 0.822- 1.066Net profit (5%) 0.213- 0.2821.787-2.318 €/kgSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de la Carne de Cerdo deCapa 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 consideredpositively as they constitute a revenue source). Net profit (margin) at the slaughter isestimated to be between 1 and 2 percent of total costs. Total accumulated costs at thisstage lies between 2.33 and 2.51 EUR/kg, while the price perceived at this stage rangebetween 2.3 and 2.35 EUR/Kg. If we add the wholesaler costs (including its margin or netprofit), 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 47percent of total costs. Main costs are labour and other fixed costs. Retail margin is set at 5106


percent. Total accumulated costs are 4.302-5.055 EUR/kg while consumers pay between4.82 and 5.56 EUR/kg.Figure A.24 shows the cost structure corresponding to what we called modern marketingchannel A (Figure A.24). It is oriented to the same type of products than in the traditionalchannel (i.e. pieced carcasses), but addressed to the larger retail companies instead of totraditional butchers. As can be observed, production and slaughtering costs remain thesame. The wholesaler has disappeared and its role is substituted by distribution platformsbelonging to retail companies. Thus, retail costs account under this scheme for 52 percentof total costs.Figure A.24Cost structure along the modern pork marketing channel ACONCEPT COST TOTAL COSTFeed 1.021- 1,289Other costs 0.81 – 0.322Profit - Losses [(-0,6%)- (-12%)] (-0.083)-(-0.171)1.502-1.611 €/kgCONCEPT COST TOTAL COSTTransport to slaughter 0.023-0.025Slaughtering cost 0.059-0.061Other slaughter costs 0.040-0.055Subproducts (=Income) -(0.035- 0.037)Cutting costs 0.175-0.190Cutting losses 0.355- 0.360Other cutting costs 0.181- 0.200Transport to platform 0.035- 0.042Net profit (2%- 1%) 0.048- 0.014Slaughtering 0.087-0.104 €/kgCutting 0.746- 0.792 €/kgCONCEPT COST TOTAL COSTPlatform costs 0.160- 0.178Transport to retail shops 0.095- 0.140Retail shop costs 1.780- 2.270Retails shop losses 0.045- 0.104Net profit (3%) 0.120- 0.158Platform costs 0.255- 0.318 €/kgRetail shop costs 1.825- 2.374 €/kgSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de la Carne de Cerdo deCapa Blanca) and own elaboration.Platform costs are higher that wholesaler costs in the previous scheme (0.255-0.318EUR/kg). Retailer costs (more precisely shop costs) are very similar under the twomarketing 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 theconsumer at supermarkets and hypermarkets lies between 4.82 and 5.56 EUR/Kg.107


The main difference between modern marketing channels A and B lies in the degree ofmeat transformation. While channel A is oriented towards the production of piecedcarcasses to be sliced at the retail shops, channel B is oriented to the presentation ofpackaged 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.25Cost structure along the modern pork marketing channel BCONCEPT COST TOTAL COSTFeed 1.021- 1.289Other costs 0.481 – 0.322Profits - Losses[(-0,6%)- (-12%)](-0.083)-(-0.171)1.502-1.611 €/kgCONCEPT COST TOTAL COSTTransport to slaughter 0.023-0.025Slaughter costs 0.059-0.061Other slaughter costs 0.040-0.055Subproducts (=Income) -(0.035- 0.037)Cutting costs 0.175-0.190Cutting losses 0.355- 0.360Sliced costs 1.190- 1.300Sliced losses 0.071- 0.072Other sliced costs 0.181- 0.200Transport to platform 0.040-0.060Net profit (1%) 0.032- 0.024Slaughtering 0.087-0.104 €/kgCutting 0.530- 0.550 €/kgSlicing 1,482- 1,632 €/kgCONCEPT COST TOTAL COSTPlatform costs 0.081- 0.090Transport to retail shop 0.120- 0.130Retail shop costs 0.665- 0.810Retail shop losses 0.335- 0.371Net profit (5%- 3%) 0.249- 0.149Platform 0.201- 0.220 €/kgRetail shop 1.00- 1.181 €/kgSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de la Carne de Cerdo deCapa Blanca) and own elaboration.In channel B, the slaughtering and processing phases includes the slicing costs, whichalso account for meat losses during the processing (those costs and losses wereincorporated at the retail stage in channel A). Total costs at this stage account for 43percent of total costs (between 3.601 and 3.887 EUR/Kg) while prices perceived by themeat firms range between 3.55 and 3.897 EUR/kg).108


Finally, retail costs are much lower than in the previous case as labour costs are reducedsubstantially. 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 rangebetween 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 themain losers were farmers. The meat industry has been able to compensate costs and theretailers have benefited for a profit of about 0.5 EUR/kg.PoultryA similar analysis has been carried out for the two marketing channels described inearlier. The main distinction between the two channels is the final customer. While in thetraditional marketing channel the meat industry sell products to traditional butchers, in themodern one, the larger retail chains are the final destination. In both cases, we alreadymentioned that the level of vertical integration is very high, reaching 90 percent at theproduction and slaughtering stages.Figure A.26 shows the costs structure along the traditional marketing channel. Productioncosts account for 48 percent of total costs and include the payment for chicks, feed costsand the price paid to integrated farmers. Total costs at this stage range from 1.37 to 1.40EUR/Kg. There is not market price at this stage as the whole process is owned by themeat industry.Figure A.26Cost structure along the traditional poultry marketing channelCONCEPT COST TOTAL COSTChick Price 0.246- 0.266Feed costs 0.892- 0.938Price to Integrated Farmers 0.185- 0.140Other costs 0.046- 0.0561.37-1.40 €/kgCONCEPT COST TOTAL COSTTransport to slaughter 0.04- 0.06Slaughtering 0.15- 0.17Other costs 0.16- 0.18Transport to traditional retail shop 0.34- 0.38Profit (+1%) 0.03-0.020.69-0.79 €/kgCONCEPT COST TOTAL COSTLabour Costs 0.46-0.61Losses at the retail shop(2%)0.05-0.06Other expenditures 0.02- 0.03Net profit (3%- 5%) 0.08- 0.140.53-0.70 €/kgSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de Avicultura de Carne) andown elaboration.Slaughtering costs lie between 0.69 and 0.79 EUR/Kg, with main costs componentsdescribed 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 by109


the meat industry are between 2.08 and 2.21 EUR/Kg (or between 3.53 and 3.73EUR/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, areestimated to lie between 2.59 and 2.89 EUR/kg while prices paid by the consumers areslightly higher (2.89-3.26 EUR/kg). So, there is still a small margin to reduce prices at theconsumer 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 percentof total costs. Slaughtering costs are slightly lower as the transport costs to distributionplatforms are lower than those associated to traditional butchers (0.19-25 EUR/kg and0.34-0.38 EUR/kg, respectively). Thus, total accumulated costs at this stage ranges from1.91 to 2.06 EUR/kg, while prices perceived by the poultry industry go from 1.94 to 2.02EUR/kg.Retail costs in the modern channel are also lower than in the previous case (0.39-0.57EUR/kg) and includes both platform costs and retail shop costs. Total costs associated tothis channel range from 2.30 to 2.63 EUR/kg. Consumer prices at the retail level liesbetween 2.57 and 2.99 EUR/kg. We have to note that under both schemes we have notconsidered the pieced and sliced products that are increasingly present in the retailer’sshelves.Figure A.27Cost structure along the modern poultry marketing channelCONCEPT COST TOTAL COSTChick Price 0.246- 0.266Feed costs 0.892- 0.938Price to Integrated farmers 0.185- 0.140Other costs 0.046- 0.0561.37-1.40 €/kgCONCEPT COST TOTAL COSTTransport to slaughter 0.04- 0.06Slaughtering and processing 0.15- 0.17Other costs 0.16- 0.18Transport to the distribution platform 0.19- 0.25Profit - Losses (+2%- (-2%)) 0.03- (-0.04)0,54-0.66 €/kgCONCEPT COST TOTAL COSTDistribution Platform costs 0.05-0.06Transport costs to the retail outlet 0.10- 0.12Labour 0.072- 0.140Losses at the retail outlet (5% - 7%) 0.120- 0.196Other expenditures 0.048- 0.056Net profit (3%- 7%) 0.07- 0.21Platform 0.15- 0.18 €/kgRetail outlet 0.24- 0.39 €/kgSource: MARM (Estudio de la Cadena de Valor y Formación de Precios del Sector de Avicultura de Carne) andown elaboration.110


+ Price transmission along the supply chainThe issues of marketing margins and price transmission along the food marketing chainhave traditionally been the subject of considerable research interest among agriculturaleconomists, as they are considered to be relevant to structure, conduct and performanceanalyses. Recently, however, researchers have paid increasing attention to these analyses,mainly as a response to social and political concerns about the extent and speed withwhich price shocks are transmitted between different levels of the marketing chain. In thelast two decades, markets and business practices have changed at a considerable speed.These changes may have modified the competitive positions of different economic agentsparticipating in the market and altered price transmission processes, which in turn mayhave had potentially relevant welfare and policy implications.Although the analyses of the evolution of margins over time and price transmission arerelated topics, and have been considered indistinctly in the literature, they are notidentical 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 thesources of imperfections in price transmission, in most papers there exists a gap betweenthe theoretical model and the empirical application, as some of the marketing margindeterminants are unobservable. Partly for this reason, much of the empirical literaturedealing with price transmission is concerned with the application of time-series modellingtechniques to price data alone. The main focus of this approach has been to characterisevertical price relationships by the extent, speed and nature of the adjustments through thesupply chain to market shocks that are generated at different levels of the marketingprocess.Market efficiency often suggests an equilibrium relationship between prices at differentlevels of the marketing chain. Some authors have hypothesised that a variety of economicand institutional factors may result in the long-run relationship between prices beingasymmetric. This may occur, for example, if middlemen in the marketing chain pass inputprice increases to customers more quickly and completely than input price reductions.Particular importance has been given to assess this issue. Different methodologicalalternatives have been proposed in the literature to analyse price transmissionasymmetries along the food chain. Although the author of this report is aware of suchmethodological approaches, it is out of the scope of this study to present such analysis. Asan alternative, we will make a simpler exercise taking the data series presented in belowinto account. The approach consists of the following steps:• For each price (farm and retail) and the marketing margin, weekly changes arecalculated;• We have split the sample period in two subperiods depending on the behaviour of thefarm price. The first subperiod corresponds to weeks where the price change withrespect to the previous one has been negative. The second subperiod includes positivevariations of the farm price;• For both subperiods, weekly changes of the retail price and the marketing margin arealso 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 poultrysectors, respectively. As can be observed, in both cases, retail prices are sticker than farm111


prices. In the pork sector (Figure A.28), when farm prices decrease (first subperiod), retailprices remain constant, making the marketing margin to increase. The opposite takesplace in the second subperiod. The second interesting result is that in both subperiodschanges are of similar magnitude (slightly higher in the first subperiod, that is, when thefarm price diminishes). This would indicate that the price transmission seems to be fairlysymmetric in the Spanish pork sector. In any case, we have carried out the same analysisby comparing farm price changes in week t with retail price changes in week t+1 and t+2.Results are very similar.Figure A.28Average changes of the retail price and the marketing margin as a response to negative and positive changes atthe farm price in the Spanish pork sector (EUR/Kg) (2004-2009)Negative changes at farm level0,040,030,020,010-0,01-0,02-0,03-0,04Average Change in Farm Price Average Change in Retail Price Average Change in Marketing Margin112


Positive changes at farm level0,040,030,020,010-0,01-0,02-0,03-0,04Average Change in Farm Price Average Change in Retail Price Average Change in Marketing MarginIn the case of the poultry sector (Figure A.29), the same patterns have been found withtwo differences. First, the magnitude of the changes is higher in this case even though theprice per Kg for poultry is lower than for pork. Average farm price changes are around0.04 EUR/Kg when in the pork sector were 0.03 EUR/Kg. The second change is that inthis case the resulting average change, in absolute values, in the marketing margin ishigher when farm prices decrease than when they increase. This asymmetry is able toexplain the increasing marketing margin that has taken place over the last two years in thepoultry sector.113


Figure A.29Average changes of the retail price and the marketing margin as a response to positive and negative changes atthe farm price in the Spanish poultry sector (EUR/Kg) (2004-2009)Negative changes at farm level0,050,040,030,020,010-0,01-0,02-0,03-0,04-0,05Average Change in Farm Price Average Change in Retail Price Average Change in Marketing MarginPositive changes at farm level0,050,040,030,020,010-0,01-0,02-0,03-0,04Average Change in Farm Price Average Change in Retail Price Average Change in Marketing Margin114


A.4.4International competitivenessAt the beginning of Section 2 we provided an outline of main characteristics of the porkand poultry international trade. In this section we will provide an overall picture about theevolution of exports and imports as well as the geographical distribution of Spanishexports. To be consistent with the rest of this study, we will differentiate between porkand poultry.Spain has been traditionally a net exporter of pork exporting between 15 and 20 percentof the slaughtered meat. However, 2008 has broken all previous expectations with anexporting record. Total meat exports (Table A.8) reached 0.9 million tonnes, when in2004 they were 0.6 million (50 percent increase). Although fresh, frozen and processedproduct have increased their presence in EU and international markets, the mostspectacular increase has taken place in the frozen meat, which currently represent around36 percent of total exports. The main reason for this spectacular increase is the demandfrom Russia and Hong Kong (Figure A.29). In the latter case, the increasing demand inthe Chinese market and the Olympic games could explain this phenomenon.Table A.8Evolution of Spanish pork imports and exports (thousands tonnes)EXPORTS 2004 2005 2006 2007 2008Fresh Meat 369,4 408,3 393 411 492,9Frozen Meat 159,3 189,7 205,6 243,8 335,1Processed Meat 64,6 70 75,3 81,1 92,8Total 593,3 668 673,9 735,9 920,8IMPORTS 2004 2005 2006 2007 2008Fresh Meat 26,3 26,3 38,4 48 39,6Frozen Meat 68,5 60,43 72,6 75,8 58,7Processed Meat 25,2 26,9 29,4 29,9 29,6Total 120 113,63 140,4 153,7 127,9Source: Dirección General de Aduanas Database COMTRADE.Exports of fresh meat have increased also significantly in 2008 (more than 20 percentwith respect 2007), ranking Spain in the fourth position worldwide after China, USA andGermany. France, Portugal, Germany and Italy are our main customers. Interestingly,there has been an increase in the demand coming from EU eastern countries, in whichincrease cereals prices has generated a sharp decrease of meat production. Spain has betfor international markets. In 2008, an Exporters’ List has been created. The main aim is tounify the requisites that our main customers are imposing in terms of food safety in orderto make exports smoother.In spite of the important increase in pork exports, our potential is much higher, as for thesame period EU exports increase by 33.5 percent, with also a significant increase inexports to Hong Kong, Russia, Ukraine and South Corea. Exports’ increase has aliviatedthe problems that the pork sector has in the domestic market which is mature and highlycompetitive.115


Exports of processed products only represent 10 percent of total exports but in 2008 grewup 14.5 percent with respect to 2007 mainly due to the exports of cured ham whichincreased by 33 percent, while exports of cooked products decreased by 10 percent(Dirección General de Aduanas database). As the domestic market is almost saturated,exports have become crucial for future success. The recent agreement between the privatesector and the public administration on the “Plan de Mejora de las Exportaciones deProductos Cárnicos” (Plan for improvement of meat exports) aiming at stimulatingexports 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 (%)3028,52522201514,311,9109,754,23,932,50France Portugal Italy Germany Hong Kong Russia UnitedKingdomDenmarkOtherSource: Dirección General de Aduanas Database COMTRADE.116


Figure A.31 Main geographical destination of Spanish exports of processed pork (%)302524,72016,917,41511,5 11,31053,4 3,4 3,2 3,12,6 2,50France Portugal Germany Russia Italy Greece UnitedKingdomCzechRepublicBelgium TheNetherlandsOtherSource: Dirección General de Aduanas Database DATACOMEX.In fact, as observed in Figure A.30, with the exception of Russia, the most importantcustomers are EU countries (77.1 percent of total exports). Campofrio is also the leadingexporting 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 totalproduction, respectively. Figure A.31 shows the evolution of Spanish imports andexports. 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 Africanand Asian countries are relevant (Figure A.32).117


Figure A.32Evolution of Spanish chicken imports and exports (1,000 tonnes)10090807060504030201002004 2005 2006 2007 2008ExportsImportsSource: Dirección General de Aduanas Database DATACOMEX.Figure A.33 Main geographical destination of Spanish chicken exports (%)OtherRussiaGabonVietnamChinaThe NetherlandsUnited KingdomFranceBeninPortugal0 5 10 15 20 25 30Source: Dirección General de Aduanas Database DATACOMEX.In fact, although Portugal is Spain’s main customer, concentrating 26.5 percent ofSpanish exports, Benin occupies the second position (19.2 percent). China, Vietnam andGabon jointly concentrate 11.4 percent of total exports.A.5 Value chain and industry issuesThe context in which vertical relationships along the Spanish Meat Supply Chain takesplace has changed dramatically in the last 4 to 5 years. While commodity price increasesduring the end of 2007 and the first half of 2008 can be considered as part as the market118


conjuncture evolution (with important consequences due to the magnitude of pricechanges), the financial and economic crisis from 2008 up to date has generated deeperchanges 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 inSpain has been deeper than in any other EU countries with which trade relationships areundertaken due to the specific characteristics of the Spanish economy (most intervieweesconsider that increasing exports in the last two years has compensated the decreasingdemand 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 tounderstand what has happened in the last years. In the pork sector, Spain is a net exporterand has excess capacity and supply. Second, the production stage is highly integrated butintegration is lower between animal production and processing. The processing market isheavily fragmented, with two large and 10 medium size firms, able to operate at nationallevel with larger retailers in a wide range of processed products, and a few thousands ofsmall 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 thatexcept for the two larger processed firms the rest uses to belong to families with largetradition in the sector. In the case of the poultry sector, only the largest firm is able tosupply 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 verticallyintegrating all stages of the Meat Chain. While some firms are specialised in producingfresh meat (whole carcasses, pieced meat, pre-packaged fresh meat) with agreements withboth livestock producers, as main suppliers, and processed meat industries, as maincustomers, others focus on the processed meat sector with backwards integration to earlystages of the food chain. In the poultry sector, the business relationships are lessercomplex as the degree on integration along the food supply chain is higher, as mentionedin Section 1.At the end of the food chain, the retailing sector has suffered also some changes in thelast years. It is difficult to give an exact figure (different information sources (marketresearch companies) provide different figures) but, currently, we can say that the marketis equally divided between traditional and modern retailers (the importance of the last oneto increase in processed products). Focussing on the larger retailer companies, andcontrary to other European countries, the degree of horizontal concentration is lower. Thelast report from ALIMARKET (March 2010) estimates that 6 groups concentrates 50percent of the total selling surface. In spite of this fragmentation, the horizontalconcentration is higher than in the processing sector, which generates disequilibrium inthe bargaining power along the food chain in favour of the distribution chains.However, the distribution sector is also suffering deep transformations during the lastyears. First, it continues the gradual decrease on the number of retailing outlets (mainly119


due to the progressive disappearance of traditional outlets). Second, in 2009, the sellingsurface only increased by 1.1 percent while the average growth between 2006 and 2008was 2.5 percent. Moreover, the number of outlets opened in 2009 was 30 percent lowerthan in 2008 (only 4 new hypermarkets were opened, the lowest figure since 2000). Themain business strategy of the retail sector has been oriented to a better rationalisation oftheir marketing structures pivoting around prices and private labels (i.e. restructuring thecurrently existing outlets instead of expanding the number of outlets). These features willhelp us to understand changes that have taken place in the vertical relationships along theSpanish Meat Chain.A.5.1Bargaining power issuesMost of the studies, reports and comments from interviewees highlight the issue of theexercise of market power by retailers due to two main factors: the higher degree ofhorizontal concentration at the retail level and information asymmetry, as they have directcontact with the consumer (trends, shopping behaviour, new products’ impact, privatelabels). Retailers seem to exercise market power through two main instruments: pricenegotiations 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 authorsof this report in relation to meat products in Spain, have analysed price transmissionalong the food chain as it is considered a good indicator of market efficiency in verticallyrelated markets. Market efficiency often suggests an equilibrium relationship betweenprices at different levels of the marketing chain. Some authors have hypothesised that avariety of economic and institutional factors may result in the long-run relationshipbetween prices being asymmetric. Although asymmetries have been linked to noncompetitivebehaviour, this is not necessarily true. In presence of market power, pricechanges could be greater or less than the competitive benchmark case depending on theinteraction between such market power and returns to scale.Moreover, one has to be very careful about results from these studies taking into accountthe nature of data (in most of them, prices analysed are referred to broad food groups) andthe consideration of dynamics (in most cases dynamics are analysed based in purestatistical methods while biological factors are hardly taken into account). In any case,some of the studies carried out recently with more sophisticated methodologicalapproaches allowing for non linear adjustments and asymmetries, highlight two mainissues, which have been corroborated by the interviewees in this study.First, price relationships differ at different stages of the food chain. For instance, in thecase of pork and poultry the relationship between feed prices and live animal prices hasbeen 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 thoseanimals fattened with more expensive feed are sold in the market. This is consistent withthe degree of vertical integration existing at the earlier production stages in whichcompanies provide feed and technical assistance to farmers and pay afterwards a marginper fattened animal. For non integrated farmers, usually transactions made by pork meat120


processors rely on prices at a reference market (Mercolleida), which everybody hasagreed that reflects quite accurately the existing market supply and demand conditions. Inpoultry, it does not seem to be a reference market as vertical integration also includesprocessing.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, althoughmost interviewees coincide stating that during 2007-08 only two-thirds of cost increasescould be passed to the retail price. However, when production cost decreases, marketingmargins at the retail level increases as retail prices remain quite stable. Marketing margingains 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 hastaken place at the retail level, which has faced to a global decreasing demand due thefinancial and economic crisis. Most market research reports agree that sales have slightlyincreased in volume in 2009 with respect to 2008, but have decreased in value. We willturn back to this later in this report.Taking this into account, the impact of the feed price increases in 2007 and 2008 onproducers and processors varied somewhat in the pork and poultry sectors as thestructural characteristics and the previous market conditions were different in bothmarkets. 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 asignificant decrease in poultry consumption and production. As the demand in 2007 hadbeen higher than the supply, retail prices were already relatively high, allowing producersto compensate for costs increases. For integrated farmers the impact was relatively low asthe risk was assumed by the integrated companies. The impact at the processing leveldepended, to a certain extent, on the business strategy. In Spain, there is one firm thatintegrates all the stages of the supply chain, including retailing (this is an exceptional casethat has been the focus of case studies in a number of business schools). This group iscomposed by two main firms: one cooperative (dealing with animal production farms)and a commercial firm which include feed, slaughtering, cutting and processing factoriesand retailing (mostly in a franchised regime). In this case, cost increases were assumed bythe commercial firm although the impact was lower than in other firms as they controlledthe whole chain. In the rest, as mentioned, the impact differed according to the businessstrategy of each firm, the relative importance of the modern distribution channel withintheir total turnover and the firm size. But all interviewees agree that the retail companiesexercise their bargaining power in those years by delaying price negotiations. As the 2007prices had been already negotiated, it was not possible to pass cost increases to sellingprices. This was not very problematic up to the end of the year when fattened animals fedwith more expensive feed were started to be sold at the market. Negotiations for 2008contracts were signed by April, so 2007 negotiated prices were kept constant up to thismonth. However, when cereal prices started to go down price revisions were requiredimmediately by retailers.121


At least two of the interviewees mentioned deep changes that had been taken place intheir relationships with the larger retailing companies (taking into account also that thebusiness strategies of the retail companies differ among them), although a consensus existthat as the larger the retail company is, the harder are the vertical relationships with thepoultry industry. As mentioned above, prices have become the key competitive issueamong food retailers. While ten years ago, variable prices were negotiated following areference price, yields and margins (up to 10 price intervals were defined), five years agobilateral fix prices were agreed annually with each distributor. This strategy was viewedas fair in a context of increasing demand and costs stability. However, the second largerretail company in Spain (MERCADONA) started to change its policy towards costreduction by eliminating many references, eliminating suppliers and reinforcing its ownlabel together with an aggressive campaign on new openings. Nowadays, some retailersuse to take retail prices at MERCADONA as the reference price from which negotiationswith the industry start. Some big concerns have been mentioned by the industry about thepotential consequences of this “price war” among the larger retail companies. Allinterviewees have mentioned diversification (marketing channels and firms) as the mainstrategy to tackle with this issue.In the pork sector the impact was higher, which have generating significant cuts in thenumber of animals. One of the meat associations has estimated the impact on about20EUR per animal. However, due to the excess capacity and the excess supply thatcharacterises the pork sector, the pass through of increasing costs to farm and retail priceswere very limited due to the existing low prices in 2008. Fortunately, the significantexports increase (as mentioned in section 1) alleviated domestic market tensions. In anycase, the impact was different at different levels of the marketing chain and for differentmarketing channels.Stakeholders working in the fresh sector declare that from their own point of viewmarkets behave as competitive where prices are more or less determined by supply anddemand conditions. They buy live animals taking into account reference prices inMercolleida. On the other hand, their customers are somewhat diversified. Customers canbe: processed firms, for which fresh meat is the raw material; importers in other EU andnon EU countries; domestic wholesalers distributing to small butchers; or retailers forwhich 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 negotiatedfollowing reference prices. In the case of pieced meat for industrial uses, the Lonja deBarcelona market is used as the reference price at the domestic market while foreignwholesale 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 relativelytransparent.In the case of the processed meat, the issue of price transmission is less relevant as thenumber of references is relatively high. In this case, the exercise of bargaining power byretailers is through contract negotiations. The type of agreement are rather complex aseach distributor has its own business strategy. However, as mentioned above, a commontrend is towards a reduction in the number of suppliers. In any case, while some retailcompanies prefer to work with one or two firms for a group of meat products (to reducelogistic costs), other prefer to have at least 4 to 5 suppliers to guarantee provisioning.122


Usually, agreements apply for a list of references (“plantilla”). Some retailers has aunique person in charge for a whole family of products (fresh and processed meat) whileother have different people for each type of product. A usual strategy is to change theresponsible 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 andthe retailers with prices to be negotiated each year. However, two interviewees point outthat in recent years the exercise of the bargain power by retailers has generated anincreasing uncertainty about medium term contracts. One strategy, specially mentionedby some of the interviewees from the industry is the growing trend among retailers tomake a kind of auctions among suppliers every year, as this would increase significantlythe risk when making long term decisions. This practice has started to work for specificproducts and periods, and mainly applied for private labels, but there is a big concernabout its potential generalisation. Processed meat industry managers managed these risksthrough diversification (alternative marketing channels, exports, deeper and lengthierproduct mix, alternative retailers, own brands) (mainly the bigger firms) or, in somecases, 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 issueof how manufacturers and retailers adjust prices over time. This is an important issuefrom both a macroeconomic and industrial organisation perspective. Pricing behaviour offirms is also important from an industrial organisation perspective in understanding thedynamics of competition in highly concentrated markets. Again the role of discounting isan important phenomenon, although the literature has not yet found a satisfactoryapproach to reconcile the theoretical models with the empirical evidences. However, inthis literature the empirical analyses have been mostly carried out considering monthlydata related to product groups. In this case, the availability of high frequency data at thebarcode 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 retailchains which can therefore be employed to provide a detailed analysis of the nature ofprice competition between retail chains.Interviewees have declared that the use of price discounts to finance promotions, newopenings, re-structuring of existing outlets and so on, is a common practice. In the poultrysector, 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 andtype of product.A final common concern about the exercise of the bargain power among retailers refers toprivate labels. All the interviewees in our study sell products under private labelsalthough the relative importance within the total turnover varies a lot. Private labels areview as a necessary condition to keep customers’ need satisfied and to guarantee thepresence of brand labelled products in retailers’ shelves. In any case, none of theinterviewees was explicit enough on what are the exactly contract conditions related tothis issue.123


There is a common agreement among processors that innovation decisions are a keyfactor for future business success, and that these decisions are highly dependent on theirrelationships with the retailers. Under the current situation of increasing uncertainty aboutthe length of the contracts, processors are concerned about its impact on futureinvestment decisions. Moreover, there is also a concern that the higher importance of theprivate level, the lower incentive to innovate. The increased price competition amongretailers is observed as short term benefit for consumers but the long run impact onconsumers’ welfare is difficult to assess.In any case, there is also a consensus along the meat chain that there is a huge range ofpotential innovations (processes, product mix, new products, management, etc). Thefinancial crisis has stimulated innovation in managing products within the firm trying toincrease the efficiency of information flows in order to save costs. In relation toinnovation in meat products all processed firms devote a significant share of theirresources to new products based on new trends observed in domestic and internationalmarkets. However, except in a limited number of cases, there is not a significantcollaboration between retailers and the industry about new potential products. In thiscontext there are asymmetric information flows along the mat supply chain. Some of theinterviewees 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 privatelabel counterpart.A.5.2Code of conductCurrently, vertical relationships along the food value chain are regulated by two mainhorizontal 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 mainconcerns of food industries, in general, and meat industries, in particular: the terms ofpayment. The new law has established 30 days for perishable products and 60 days fornon-perishable products. Although the new law is very new, there is a wide consensusamong the people interviewed that there will not be problems with its application and thatthis is a good step in improving contractual relationships between processing andretailing. However, two interviewees were concerned about the potential increase of thediscounts by retailers to compensate part of the potential financial losses derived from thenew regulation.The main Law regulating vertical and horizontal relationships along the food valueChainis 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 orrecommendations made by industry associations to fix a common price;• Abuse of Dominant Position: price discrimination, to sell below buying price (butoriented to affect the competitive position of a competitor), to create artificial barriersto entry to eliminate competitors, etc.;124


• Unfair Competition: provided that this conduct affect the public interest (which is notalways easy to demonstrate).The Competition Commission is in charge of solving any potential conflict. It usuallytakes a maximum of 18 months to take a decision.The second one relates to horizontal concentration (mergers and acquisitions). Wheninvolved firms surpass a threshold value related to market share or turnover in a specificmarket, the Competition Commission has to be informed and takes the decision in 1month. 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 lowindicating that business practices by retailers are not illegal, mainly because the exerciseof the market power by retailers affects the bilateral relationships between industries andretailers but does not affect the public interest (in short, it seems that consumers havebenefited from lower prices to stimulate consumption during the economic crisis). Therehave been only five mergers of acquisitions. The three more important were theacquisition of DOUX Ibérica by VALLS COMPANYS (feed and poultry sector), theacquisition of GRUPO FUERTES of the logistic Meat Platforms belonged toCARREFOUR, and the third one the acquisition of SMITHFIELD by CAMPOFRIO.In relation to conducts, the only noticeably case was the punishment to PROPOLLO, theassociation of poultry industries, in 2008 after sending an internal communication tomembers to fix rising prices.Apart from this horizontal regulation, there exists a specific regulation applied to the foodsector for which the Ministry of Environmental, Rural and Marine Affairs (MARM) isresponsible. However, in Spain food industries depend on two different Ministries. Firsttransformation food industries depend on the MARM. Second and further transformationfood industries depend on the Ministry of Industry, Energy and Commerce (the retailingsector also is regulated by this Ministry). In any case, there exist continuous contactsbetween the two ministries to regulate the whole sector.What it is interesting to note is that in spite of the increasing concern about the bargainpower issues along the food chain, no specific regulation exist up to date. However, theMARM is actively working in three main axes:• The Observatory of Prices. Aiming at increasing the transparency along the foodchain, the MARM is publishing, on a weekly basis, prices at different stages of thefood chain. Only perishable products are considered. In most products three levels areconsidered: farm, wholesale and retail. In the case of meat, only fresh meat isincluded at two levels (farm and retail). Up to now, main efforts have been addressedto publish in a unique web site prices that were recorded by the MARM and theMinistry of Industry. Recently, the Observatory has been reinforced with theinclusion 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 mentionedabove, however, there is some information published daily in the Lonja de Barcelonafor specific carcass cuts to be sold to the processing industry, which could beincorporated. The second limitation is that published prices have been spatially125


aggregated and over retailers, making impossible to differentiate the behaviour oftraditional butchers and larger retailer firms;• Self-regulation. The MARM is working in the elaboration of a Code of Conduct. In2009 a working group was formed to elaborate the first draft, which is underdiscussion now among main representatives of the different stages along the foodchain. No information is still available but it seems that it will be voluntary aiming atimproving information flows up and down the food chain and promote cooperationbetween producers, processing industries and retailers. In any case, none of thepeople interviewed knew anything about the code. All of them were against anyregulation about marketing margins. They were in favour of voluntary agreements,codes of conduct or the establishment of a common general framework under whichbilateral contracts can be signed. As one informed clearly indicated: “less regulationand more transparency”. Finally, some of the interviewees also raise the concernabout 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 someprevious laws that have become obsolete (i.e. The Law of Contracts (2000) and theLaw of Inter-professional associations (1994)).As mentioned, the meat industry is against any kind of strict regulation. Competition rulesare harder than before but they have been adapting to the new framework. They are awareabout the competitive situation and that this situation arises for the different bargainingPower along the food chain due to the higher horizontal concentration rate at the retaillevel. They do not think that relationships between processors and retailers can beregulated by law except when some practices are against the existing Law of CompetitionDefence. Processors know that the potential solutions are in their hands: bettercooperation with retailers, higher degree of horizontal integration and further andcontinuous innovation are key factors. However, they strongly believe that these goals aredifficult to achieve taking into account the current structure and the idiosyncrasy of themeat processing sector.A.5.3Development and trendsAs a summary, in this section, we will review main factors that can have an impact onfuture developments on the Meat Value Chain in Spain and also main concerns thatinterviewees have expressed about them.Structure of the sector and bargain powerAs mentioned above, the horizontal concentration level at the retail level (even though itis lower than in other countries analysed in this study) is higher than in the pork andpoultry sectors. In the latter case, both are dual sectors, although this situation is clearer inthe poultry sector as this Value Chain is simpler. On one hand, there are only few firmsthat can operate at national level or, at least, at a wider regional level (covering betweenone third and half of the Spanish market). These types of firms are the only ones that arelarge enough to negotiate with the modern retail sector. On the other, there are around onehundred firms that operate at regional level (only in some cases and in some specificconjunctures, these firms can supply to the modern distribution) and, finally, there arearound 2000 smaller firms operating at local markets, which mainly operate directly or126


through a wholesaler with traditional retailers. However, as mentioned above, the marketshare of the last two groups, jointly considered, is almost equal or slightly higher than thatof the larger ones. With such structure, the larger retailers have a clear advantage whenbargaining with the meat and poultry industry, position that is reinforced by the directaccess retailers have to information about consumers’ behaviour.Although most of the interviewees agree that the processing sector has to walk towards aprogressive horizontal concentration, they also feel very sceptical about progressingtowards such direction. With the exception of the larger two firms, in the processed meatsector, and one firm, in the poultry sector, which have a “multinational strategic businessapproach”, most of the firms belong to traditional families that started in this sector manyyears ago. Interviewees’ perception indicates that those firms will want to maintain theirown identity and that mergers and acquisition among the larger firms are no longerpossible 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 beovertaken by the larger ones (in some cases there exists already contractual arrangementsbetween smaller and larger processing firms by which the smaller ones supply products tothe larger to satisfy volume needs from the modern distribution).Impact of changes in market conditionsIn Spain, the poultry sector is much sensitive to changes in supply and demand conditionsthan the pork sector due to three main factors: 1) the poultry market is clearly a domesticmarket with exports and imports playing a marginal role (some of the intervieweescharacterise this market as even regional); 2) due to the above condition, the poultrysector is mainly a “fresh market” sector where the frozen technology has not beendeveloped; 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 easilyaccommodated if it lasts less than four days (live animals are usually sold between 2.3and 2.7 Kg and this difference (400 grams) can be achieve in four days). If the impact islarger, the whole production process has to be accommodated and it will take 4 to 5months to compensate losses due to the food scare (obviously the effect will be higherdepending 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 potentialimpact 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 liveanimals own suppliers (or with long-term contracts); 2) if the firm operates in the fresh orprocessed market (or both); 3) on the relative importance of large retailers on its totalturnover; 4) the firm’s exporting propensity; and 5) the relative importance of theproduction 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 pricecompetition among retailers goes on into the future. Particular concerns arise in relationto the potential generalisation in the future of annual auctions.127


RegulationAfter 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 theCouncil of the European Union some further steps have been developed to increasetransparency 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 withother links of the supply chain (through widening the scope of activities of interbranchassociations, restructuring the role of cooperatives or training farmers instrategic planning);2. increasing transparency through, for instance, Food Price Monitoring. Althoughthis can be a good idea, its implementation is not exempt of difficulties. Takinginto account the Spanish experience, several issues arise: homogenisation on thedefinition of primary producers’ prices among countries (what prices have to bechosen: at farm level, at the entrance of the wholesaler, etc); higher spatiallydisaggregation of farm level prices; higher disaggregation at wholesale level (perspecific pieces to be sold at the processing firms); higher disaggregation at theretail level (the challenge here is to monitoring retail prices from scan data). Inany case, a trade off has to be made in order to balance existing informationsources and the potential costs of making the needed information available;3. Combating unfair trading policies mainly related to payment periods anddiscounts and promotions;4. Encouraging self-regulation initiatives: standard contracts or codes of goodcommercial practices, which have to be voluntary from the interviewees’perspective. Agents in the meat chain are strongly against strict regulation and arealso quite sceptical about the usefulness of these agreements and codes if there isnot any authority able to manage dysfunctions that may arise in theirimplementation. Most of the interviewees rely more on markets own regulationalthough they are willing to participate in negotiations to reach to agreements inrelation to standard contracts and codes;5. Making compatible CAP and Competition Policy. It seems that, taking intoaccount literature review and interviewees’ opinions, there is a lot of concernabout the CAP beyond 2013. As substantial reductions of subsidies are expected,there have been many efforts to generate new mechanisms to offset its potentialreduction (i.e. new income insurances). Any measure affecting primary producerscan have an effect on competition along the meat chain and the CompetitionCommission is going to pay special attention to these issues to assure that newCAP regulations are not going to generate anti-competitive agreements prohibitedby law. In my personal opinion, this is going to be one of the future mainchallenges from a regulation point of view.External tradeThis is an issue related to the previous one. Although most of interviewees are in favourof market own regulation, they have shown some concern about external traderegulations. As it is well known imports are regulated at EU level, while exports arenegotiated on a bilateral basis. Importing countries are grouped in three main categories128


which depend on how technical audits are undertaken and by who (Spanish or importedcountries auditors). While there are some concerns about China and Russia, it seems thateverybody is satisfied with the situation as the rules are of general application for anyother EU member (some differences have been observed, however, when exporting to thetwo above mentioned countries as technical audits are undertaken by those countriesauditors and conditions may change slightly from country to country). Moreover, allinterviewees agree that the Spanish Government initiative of creating the Exporter’s listcan be a positive one in the near future but it is soon to assess its impact as it has passedonly one year since its implementation.Main concerns arise in relation to imports. All interviewees claim for a stricter regulationabout 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 tore-exporting imported products from one EU country to another. This generate a decreaseof domestic prices in importing countries which stimulate exports to Spain affectingdownwards Spanish pricesFood safety and animal welfare issuesIn relation to food safety and animal welfare issues, in general terms, there are three mainconcerns. The first one is their impact on primary producer’s costs and the loss ofcompetitiveness in relation to imports coming from third countries. The second concern isabout the application of rules that can affect differently to different EU countries. In thecase of Spain, the two main concerns are measures related to the long distance transportof live animals and those related to temperature conditions (as this country is warmer thatthe other and energy costs could be higher). The final concern is the potential subjectivityof some measures. The meat industry associations are particularly concerned about theoutcome of the EU funded project “Welfare Quality”. A formal communication has beenaddressed to highlight the potential subjectivity of some measures.Innovation strategiesAs mentioned above, innovation is considered a key factor for business success.Innovation strategies differ depending on the type of company, being more productorientedin those companies working at the latest stages in the food chain and with asignificant share of their turnover addressed to modern retailers or the food service. Inthose cases, it is expected to work deeper in the product mix by both adding newattributes to existing products (product width) (health and convenience as the keyelements) or by extending the product lines (i.e. pre-cooked products).However, in relation to innovation strategies, two main issues arise when talking with theprocessors: The first one is the importance assigned to investments to improve efficiencyof products management within the firm as a key factor to reduce costs. The second issueis related to the uncertainty about the future impact of private labels on innovation. Asmentioned before, some interviewees expressed their concerns about the negative impactthat the increasing market share of private labels at retailing on firm’s productinvestment.129


B The United KingdomB.1 IntroductionThe UK food sector contributed GBP 80.5 billion to the UK economy in 2007. As thelargest manufacturing sector in the country, it employs nearly 3.6 million people in foodand farming. Approximately 196,000 food chain enterprises ranging from large retailersto small cafés existed in 2007. In addition, GBP 13.2 billion worth of food was exportedin 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. Forexample, nearly one quarter of all employment in the food industry is provided by themeat sector. The industry also generates approximately 17.5 percent of the total productsales in food sector. Both ratios are substantially higher than the dairy industry in thesame sector (5 percent and 8 percent respectively).Table B.1, further highlights the size and importance of the food industry UK meatindustry as well as the meat subsector.Table B.1 Main indicators of the UK Food and Meat industry, 2007IndicatorsFoodIndustryMeatIndustryDairyIndustryMeat % FoodIndustryEmployment (number) 441,641 99,128 26,334 22.4Product sales (EUR million) 111,481 19,512 9,065 17.5Value Added at Factor Cost (EUR million) 33,139 4,598 1,919 13.9Labour Costs (EUR million) 16,302 3,092 937 19.0Gross Investments 48 (EUR million) 8,502 1,077 1,000 12.7Gross Operating Surplus (EUR million) 16,837 1,505 982 8.9Product sales / Employment (EUR 1,000) 252 196 344Labour Costs / Product sales (%) 14.6 15.8 10Productivity (Value Added / Employment)(EUR 1,000)75.0 46.4 73Gross Operating Surplus / Turnover (%) 14.1 7.5 10Source: Eurostat.48Gross investments include gross investments in tangible goods, land, existing buildings and structures, construction andalteration of buildings, machinery and equipment.131


The large size of the industry, as evidenced in the figures above, does not lead to leadingclass figures in terms of productivity and profitability. Again, comparing dairy to themeat industry, productivity and profitability figures are both lower for the meat industry.B.1.1Significant events from the last decadeDuring the last ten years, the meat industry has suffered the outbreak of various animaldiseases 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 productinnovation have all increased the pressure on price. The meat industry has been hit onboth supply and demand.For all of the turbulence, the most pressing factor mentioned repeatedly in previousstudies has been the impact of rising feed prices on the industry. Feed prices started toincrease in October 2006, when unfavourable weather conditions affected cereal andwheat feed in the producing countries, particularly Brazil and Australia. This caused aprice hike of 19 percent compared to the previous year. Feed prices continued to rise forthe next years, with feed wheat prices more than doubling from GBP 83 in 2006 to GBP166 in 2008. For producers, feed costs constitute the largest portion of animal productioncosts (approximately 55 percent for pork), and these increases affected behaviour of thewhole industry.Implications for the pork industryAgainst this background, the pork industry has faced serious challenges in the past tenyears. First, production costs increased dramatically. Figure B.1 below shows the pace offeed price increase and its impact on production costs, where feed have the largest shareof production costs, rising from 45 percent in 2006 to 59 percent in 2007. This sharedwarfs all other costs including financing, which presumably impacts investment as well.Figure B.1 Price of Producing Pig in 2006 versus 2007Source: BPEX 2007 the Impact of Feed Prices on the British Pig Industry.132


Feed prices increases were not the only reasons behind the increase in production costs;high animal welfare standards and their associated costs contributed to the increasedproduction costs as well. It was estimated that most English pig producers are producingpigs at a loss (estimated at GBP 25/pig in 2007 and GBP 7/pig in 2009), the result of suchcrisis was that many farmers went bankrupt.Second, production decreased almost by 40 percent between 1998 and 2007. This declinewas not only attributed to the decline in the UK national herd, but was viewed by expertsas a symptom of long tem erosion of the competitiveness of the industry The localproduction could not meet the high level of demand for pork meat and resulted inincreasing imports from other EU countries like Denmark and the Netherlands. 49Implications for the poultry industryThe poultry industry is one of the most regulated industries in the UK and is equallysubject to public hygiene and animal welfare regulations. As opposed to the porkindustry, poultry production has grown by approximately 25 percent over the last twodecades with 167.7 million birds in production at any one time in 2007. This growth ratewas a result of an increase of over 50 percent in the number of birds kept for poultry meatproduction. In 2009, around 23kg of chicken was consumed per head per year,representing one third of total meat consumption 50 .In the course of this study, we have not come across literature that explained the reasonsbehind the pork and poultry industries diversion over the last decade, though one couldsurmise that health concerns could be an important factor. Poultry is considered a healthymeat option and has recently constituted an important part of the western diet. Localiseddiseases that have affected British animals—such as foot and mouth disease—have alsofocussed on the pig and cattle industries.The two industriesDespite 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 experiencesimilar price pressures. Special interest in animal welfare is creating pressure onproducers and processors from retailers so as to meet consumers’ standards. 51 Englishconsumers seem to be keen to trace the origin of the meat they consume and want toknow the level of welfare the animal or bird has gone through during its lifetime, withoutcompromising costs.495051House 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, describingpractices of industrial farming. Celebrity chefs such as Jamie Oliver have also had high profile campaigns to revealnegative aspects of the industry, though in this case, Oliver highlights lower standards from outside the country.133


B.1.2Consumption levelsMeat consumption in the UK is relatively high with an average of 82 kg of meatconsumed per person in 2007. Consumption levels, however, have fluctuatedconsiderably over the years. For instance, in 2004, the level of consumption reached85 kg per person, yet was as low as 68kg and 69kg in 2003 and 2005 respectively. Thesehuge fluctuations, interestingly, have been caused almost solely by variation in pork andcattle consumption. Poultry figures were constant over these years.Looking at longer-term trends, independently, pork and poultry consumption havediverged, with poultry consumption as a percentage of overall meat consumption on therise and falling for pork. Figure B.2 demonstrates this divergence.Figure B.2 Meat Consumption Trends 1999-2007Meat Consumption Trends UKof total meat consumption45%40%35%30%25%20%15%10%5%0%Meat : PigsMeat : PoultryMeat: OtherEurostat Data: ECORYS Calculation.While overall meat consumption trends may be relatively steady, the recent economiccrisis has severely impacted where consumers are eating their meat i.e eating out or athome, with significant declines in dining. An industry study of November 2009 titledPork: A meat for all occasions in November 2009 suggests that “while the recession hasimpacted significantly the catering market and consumers have adapted their eating-outhabits according to their circumstances, so too have they adjusted their spending prioritieswhen shopping for home consumption.” In this respect, pork is found to be the only oneof the red meats to show an increase in consumption at home over the past year measuredby the number of occasions where pork is used (See Figure B.3 for the number ofoccasions where different types of meat are consumed). While sales of meat and poultryhave remained relatively stable during this period (2007-2009), consumers have changedtheir behaviour and how they buy in the category.134


Figure B.3In-home consumption: Total beef, lamb and pork (cuts)Source: BPEX, 2009.B.1.3Meat price volatilityFigure 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 hikefrom 59 pence per kg to more than 64 pence per kg. After 1997, prices go down until theyreach 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 stabilizingafterwards.Figure B.4Poultry- Average Weekly Market Price (GBPence)6964595449441996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: DEFRA.Pork meat prices from the 1996 to 2009 have fluctuated considerably according to thegraph presented below, suffering much more dramatic shifts than for poultry. Followingthe outbreak of BSE (Mad Cow disease) in 1996, the UK pig prices soared reaching GBP150/kg. During 1997, pig price crash was offset due to strengthening EU prices followingClassical Swine Flu (CSF) outbreak in the Netherlands. In 1999, the UK introduced135


unilateral welfare legislations- which increased costs of production by 10 percent, causingthe UK pig meat to be less competitive in the UK market. In addition, herd contractionand 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. In2000, the CSF outbreak in East Anglia (largest UK pig region), caused the the loss of theUK exports markets. Between 2001 and 2004, the UK pig herd continued to decline dueto low demand, because retailers switched to lower cost EU imports. From these lows in1999 and 2000, a gradual recovery have been in the period 2005-2006, where producersmade profits for the first time since 1997 due to low feed prices 52 . The further increase inprices in 2009 is attributed to the further tightening of supply and the shift inconsumption away from beef and lamb to pork. In addition, the UK pound appreciationversus the Euro contributed to the price increase.Figure B.5Pigs- Average Weekly Market PricePigs - Average Weekly Market Pricepence/kg dw1501301109070501996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: Defra. 53The comparison between the two graphs reveals that in general terms, the two industriesfollowed a similar trend, but with pork influenced by much higher levels of volatility.B.2 Market StructureB.2.1Number of firmsIn this section, we present the number of meat manufacturing firms in the UK in generalregardless of their positioning within the value chain. The purpose of the section is toprovide an overview of the size of the industry and its evolution overtime. The supplychain market structure will be further detailed in the supply chain explanation sectionbelow.5253UK 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 PigExecutive, launched a new deadweight pig price reporting survey – the Deadweight Average Pig Price (DAPP). The DAPPreplaced the Adjusted Euro Spec Average (AESA), the price formally reported. In March 2004 the AESA ceased to becalculated and the DAPP became the official pig price indicator.136


As observed from the graph presented below, the number has gradually declinedbetween1998-2007. In 1998, 1,294 firms were involved in the meat manufacturingindustry. This figure declined to under 1,000 in 2007. Although the literature does notprovide adequate analysis of the reasons behind the decreasing numbers of firms, itprovides enough evidence about the current restructuring of the sector which includesmergers, acquisitions, but also closure of small firms that could not keep up with the newdevelopments in the business.The available data does not provide a segregation of the meat manufacturing firmsaccording to the type of meat produced apart from poultry, which represented 12 percentof total number of manufacturing firms in 2007.30%58%12%Production and preserving of meatProduction of meat and poultrymeat productsProduction and preserving of poultrymeatSource: Eurostat.B.2.2Size StructureThe table below shows the number of firms in the meat industry related to the size of thefirm in terms of its employees.Table B.2Number of Firms related to size of firm2002 2003 2004 2005 2006 2007% change2002-20071-9 638 586 569 567 560 583 -8.610-19 140 136 126 138 129 100 -28.5720-49 140 179 179 176 188 173 23.5750-249 243 160 165 173 162 151 -37.86250 and above 92 103 100 93 84 90 -2.17Source: Eurostat.The changes in the number of firms as exhibited above further confirms our initialobservation in section 7.2.1 where the decreasing numbers of firms could largely beattributed to mergers, acquisitions and further consolidation of the sector. We have not137


come across literature explaining the rising numbers of firms size (20-49), but it could beattributed to “new entrants” in the markets.B.3 Market FeaturesB.3.1Levels of innovationTotal 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 showsthat the levels of investment in absolute terms have decreased considerably after 2000. Itis noteworthy to mention, however, that the greatest share of investments have been inmachinery and equipment which represented 71 percent of total investment in theindustry in 2007. Although, we have not encountered literature that extensively addressedinnovation and its relationship with the current levels of investment, interviews withvarious stakeholders in the industry confirm that investment in new machinery, haveimportant implications on the improvement of the industry’s efficiency and productivity.An example of that was given by one interviewee who mentioned that the introduction ofrobots at poultry slaughtering line is an important step towards efficiency for the industry.Figure B.6 Total Investment (EUR Million) (1998-2007)1600140012001000800total investment EUR million6004002000199619971998199920002001200220032004200520062007Source: Eurostat.B.3.2ProfitabilityProfitability is defined as gross operating rates of the industry (gross operatingsurplus/turnover). In general terms, the meat industry’s profitability declined considerablyover the period 1996 to 2007 reaching from 11 percent in 1996 to 7.5 percent in 2007 asper the graph below.138


Figure B.7 Gross operating rates (1996-2007)Gross operating surplus/turnover (gross operating rate) (%)1210864Gross operatingsurplus/turnover (grossoperating rate) (%)201996A001997A001998A001999A002000A002001A002002A002003A002004A002005A002006A002007A00Source: Eurostat.On a more detailed level, i.e. looking at the farm level income, the profitability of thesector for both pork and poultry fluctuated considerably.Figure B.8 below depicts farm level income from 1006 to 2009 (taking into accountshareholders capital investment). In comparison to poultry farm, pig farms suffered lowincome levels due to the outbreak of swine flu, which led to the banning of pork importsfrom the UK in many countries, Between 1998 and 2008, the value of British porkexports has fallen by 67 percent (Agriculture UK, 2008). This has largely been replacedby imports from the Netherlands and Denmark, which has kept the price of pork low. In2001, there was an increase in the number of countries that banned pork imports fromBritain. However, a recent increase in pig meat prices due to tighter supplies and aweaker Sterling Pound has been could be reflected in a rise in the profitability of pigfarms in 2008/09.The price of poultry has risen by 24 percent in 2009. Agricultural analysis states that theaverage income of specialist poultry farms has remained the same over the past year. Thedip in poultry farm income in 2009 could be explained by the fact that there was a massre-classification of broiler fowl between 2007 and 2008. The higher prices in poultryfarms 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 theUK. However, poultry profitability has generally been higher than pork. This may beexplained by the substitution effect between poultry and beef/pork (such as during theBSE outbreak of 2001).139


Figure B.8Net Income pig and poultry farmsSource: Defra.B.3.3Added value & ProductivityIn absolute terms, the value added at factor cost of the meat industry has slightlyincreased from EUR 4,200,000 in 1998 to EUR 4,598,000 in 2007 with an average of16^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 toreach from EUR 30,000 in 1996 to EUR 47,000 in 2007 with an average of 4.2 percentover the same period. Observing the investment trends in relation to the sectorproductivity we observe that there is a close relation between the two variables whereincreases in investment is accompanied by an increased productivity and vice versa.Figure B.9Gross Value Added per Employee and Total Investment in EUR million50454035302520151050199619971998199920002001200220032004200520062007800070006000500040003000200010000Gross value addedper employeetotal investment EURmillion140


B.4 Pork Supply ChainPoor efficiency and lack of transparency along the UK pork value chain are major issuesaddressed by the UK government in the last few years. In general terms, the UK porksupply chain has been described as “fragmented” and characterised by adversarialrelations between producers, suppliers and retailers.The pork meat value chain is composed of the following nodes and can be visualised asper figure:• Farming;• Primary Processing (Abattoirs);• Secondary Processing;• Distribution.Figure B.10 Structure of the Pork Value Chain 54Farmers# of holdings 11,730 ( in2007)Primary Processors(Abattoir)# 285 (in 2007)Secondary ProcessorsCaterer Retailer ButcherIn this section, we will describe in details the structure of the pork value chain. We willdescribe the production levels of each node of the value chain, its relationships with theupstream and downstream industry, its market structure and finally how costs aredistributed among the different stakeholders along the value chain.54According to EUROSTAT the number of manufacturing firms in the UK was 997 in 2007. However, the number may not begiving 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 secondaryprocessing and it could also be referring to either nodes of the value chain.141


B.4.1FarmingDescriptionFarming is the first node of the pork meat supply chain where livestock is bred andfattened. 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 theanimal to an appropriate weight and condition for slaughtering) and integrated farms,where farmers perform both activities in their farms. Farmers buy animal feeds fromagricultural feed providers, and they sell their produce to abattoirs, individual butchersand 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 slaughteranimals, its history goes back to the nineteenth century, where animals are transported byfarmers and are bid for by representatives of buyers. Several types of buyers join auctionrings for animal purchases, these could be; representatives of abattoirs, butchers andindependent agents/resellers. Auctions sell livestock on commission basis usuallybetween 3 to 4 percent of sales price.The importance of auctioning in the UK is declining considerably, as in 2006, only 1percent of pigs were sold through auctions. According to online resources, the number ofauction rings in the UK decreased due to improved means of communication as a result ofICT development and the use of internet for information acquisition and consulting.Producers marketing groups still play an important role in the value chain, they wouldundertake the task of communicating and negotiating directly with processors on behalfof farmers since in general terms, farmers have little influence on the downstream valuechain and therefore have little bargaining power against their bigger buyers. Joiningmarketing cooperatives is one of the practices that have been resorted to by farmers inorder to increase their bargaining power against their biggest buyers, and where theywould sell “collectively” and directly to processors and butchers. In a similar manner,joining a marketing cooperative helps farmers to overcome one or two middlemen alongthe value chain and capture returns resulting from this shortcut. Marketing groups alsooffer “credit insurance” which serves as a leverage for small producers if they want toinvest. According to online resources, marketing cooperatives in the UK pig market arevery important as their largest 8 groups account for 8 percent of sales to butchers andprocessors 55 . Some argue however, that the future of marketing groups is not likely to besustainable, especially with further vertical integration, which will restrict the role ofmarketing groups to small farmers.Farming ProductionThe pig farming production declined sharply from 1999 to 2009 where the pig breedingherd dropped by 40 percent. As mentioned in a previous section of this study, the declineof the UK pig herd is largely attributed to various diseases that considerably affected the55http://www.redmeatindustryforum.org.uk/supplychain/LivestockMarketing.htm.142


industry and by feed price pressure as well as “long term erosion of the competitivenessin the industry” (See section 7.1.1). In addition to these two factors some sources refer toa lack of confidence in the industry 56 .Figure B.11 UK breeding herds (1998-2008)Breeding herd 000 heads800700600500400300000 heads20010001998 2000 2002 2004 2006 2008Source: BPEX.Farming StructureThree types of farms co exist simultaneously, feeding farms, finishing farms and the moreintegrated farms. There is no integration between the farming sector and the agriculturalfeed sector. Recent discussions by the government with various stakeholders along thevalue chain raised the question of the integration between these two sectors for thepurpose of creating more efficient and cost effective sector.According to the most recent data (2007), there were 11,730 57 holdings in the UKproducing pork meat compared to 14,040 holdings in 1997.The evolving structure of the meat market in the UK increased direct communicationbetween farmers and buyers. According to literature, the meat industry in the UK hasbecome more concentrated, where the number of small abattoirs decreased due to overcapacity and/or the imposition of tight regulations with which small abattoirs could notcomply. Accompanied by an increase in number and “power” of large meat processingcompanies, a trend of bypassing the physical auction and the diversion of sales toelectronic auctioning developed. Information technology, is contributing to shortening thevalue chain, and facilitating direct contact between farmers and meat processingcompanies 58 .565758Nicolas 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 oflivestock.http://homepages.ed.ac.uk/grahami/research/LIVESTOK.HTM,143


B.4.2Slaughterers / Abattoirs (Primary Processors)DescriptionThe second large node of the pork meat value chain is the “primary processing” whichtakes 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 productsresulting from this operation end up being consumer goods and are sold directly toretailers, which in this case involves also packaging, boxing and packing of theproduct;• In a third stage, minced meat is produced and further cutting of primal takes place forthe preparation of special products. Some of these products end up being directconsumer products sold to retailers.Abattoirs supply their produce to other agents including independent butchers and otherfurther processing plants where further alteration to their produce takes place. Abattoirscould 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 toconsumers. They also supply farmers who sell directly to consumers.Slaughtering outputAs per the graph shown below, pork slaughtering trend declined sharply from 1997 to2008. There are several factors that could have contributed to the decreasing numbers ofslaughtered animals, the most prominent of which is the outbreak of foot and mouthdisease in 2001 that resulted in a loss of around 436,000 pigs slaughtered which did notenter the food chain and thus were excluded from the figures.Figure B.12Clean pigs slaughtered in the UK during 1997-2008 (1,000 heads)Slaughtered Animals000 heads1800016000140001200010000800060004000200001997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008TotalSource: Slaughterhouse survey, Defra, DARD.144


Slaughtering Sector StructureThe number of slaughterhouses in the UK has been on the decline since 1985; from 1,000abattoirs servicing 21,000 retail butchers reaching 285 abattoirs servicing only 6,800retail butchers in 2006 and reaching 162 abattoirs in 2008. In general terms, the abattoirsector is highly concentrated, where only 7 companies have the lion’s share in marketthroughput at approximately 54 percent. The table below shows the breakdown andoutput share of the abattoir sector as per the latest data available 2008. Small and mediumsize abattoirs are multi-species, which means, they could be involved in pig as well as inother meat production.Table B.3 Breakdown and output shares- Abattoir Sector 2008Size Group- # head Abattoir # Total Throughput head Average Throughput head Throughput Share %1-1,000 34 12,843 378 0.21,001-5,000 55 141,814 2,578 1.85,001-10,000 20 149,809 7,490 1.910,001-20,000 19 282,228 14,854 3.520,001-30,000 9 230,819 25,647 2.930,001-100,000 9 578,115 64,235 7.2100,001-500,000 9 2,328,935 258,771 28.8500,000+ 7 4,350,527 621,504 53.9Total 162 8,075,090 49,846 100Source: BPEX.Since the nineties, the abattoir sector in the UK is massively restructuring. The drop inlivestock 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 crisiswas the closure of small and medium size abattoirs. This was accompanied by mergersand 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 theindustry where in 2006, the largest 10 companies had a 75 percent share of pig . On theother hand, the roles of high street supermarket increased dramatically, where their sharesin retail sales increased from 29 percent in 1985 to 80 percent in 2007 of the UK retailsales of meat.The abattoir sector is undergoing a rationalisation process and currently shows verticaland horizontal integration, especially with the downstream industry (processing andfurther processing); some of the larger abattoirs own and operate several abattoirs, whilesome own and operate “further processing” plants. The following table shows typicalexamples of large slaughtering companies and owners of processing plants. The UK hastwo of the largest European Slaughtering companies; the “Danish Crown” and “GrampianFood” which was recently purchased by the Dutch company “Vion”.145


Table B.4Top 10 Meat Abattoirs in EU – 2007 DataRank Group Country Share of EuropeanMarket (%)1 Danish Crown Denmark, UK 8.82 Vion Netherlands, Germany 7.43 Tönnies Fleisch Germany 3.74 Westfleisch Germany 2.65 HK Scan Finland, Sweden, Baltic 1.66 Socopa France 1.37 Cooperl France 1.38 Grampian Foods UK 1.29 Vall Companys Spain 1.210 Smithfield Foods Poland, Romania 1.0Source: Pig International- E-News Letter July 2007.B.4.3Processors (Secondary / specialised Processing)DescriptionOne of the important buyers of animal parts and smaller meat cuts are “processors”, whowould perform further processing of the meat cuts before they are finally sold to retailersand food caterers (hospitals, schools, prisons, etc.). Processors rely heavily on importedmeat 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 (retailpacking);• Uncooked meat products such as sausages and burgers as well as “convenienceproducts” 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 ofbuyer. The chart shows the importance of the processing sector representing 38 percent ofpig meat consumption at retailers’, followed by bacon at 25 percent.146


Figure B.13Pork Usage Share- by product and buyer (as percentage of total consumption)UK porc usage Share- 2008Food service baconFood service fresh pork andprocessedRetail processed porkRetail baconRetail fresh pork0% 5% 10% 15% 20% 25% 30% 35% 40%Source: BPEX.B.4.4DistributionDescriptionVarious 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 ofsupermarkets (particularly the top 4 retailers in the UK market) which are the maindistribution channel for pork meat with an average of 70 percent of market .The diagrambelow depicts the shares of groceries in expenditure per product type in the UK in early2010. As per the diagram, the sector is highly concentrated, where for all the products,top 4 multiple retailers dominate the market.Figure B.14Total UK Meat expenditure- segregated by product and sellersSource: BPEX 59 .59AHDB Monthly Report.147


The pork value chain in general terms is structured in a fragmented manner andcharacterised by a lack of long term commitment between producers and retailers. At thelevel of retail, there are very few examples of integrated value chains especially withlarge retailers, who according to literature have rationalised their meat supply chains andtheir buyer power has ‘forced’ many of the large abattoir companies which supply themto do so through dedicated plants.B.4.5Price StructureIn this section, we will project price development along the value chain based on the datacollected so far. On the producers’ side, it is obvious from the table presented below thatthe cost of production has increased dramatically from 1999 to 2009, but was notnecessarily accompanied by an increase in sales prices, in several instances farmers wereoperating at huge losses without being compensated. This picture is clearer inFigure B.5which shows fluctuation of profit margins for farmers reaching close to -23 percent in1999. According to the graph, farmers were operating at a loss for a substantial period oftime. The relative better performance in 2009 has been attributed to the appreciation ofthe English pound versus the Euro.Table B.5Pork Production costs versus Deadweight Average Pig PriceDAPPProduction costsYear Pound/ kg Pound/kg1999 79,27 113,662000 95,16 113,582001 98,03 107,512002 93,64 105,502003 103,57 103,402004 103,84 110,202005 103,88 104,402006 104,75 108,602007 108,00 121,702008 126,31 136,842009 145,68 136,84Source: BPEX.148


Figure B.15Farm production cost and net marginsProduction Costs and net MarginsPounds/Kg120100806040200-20-40Production cost/headnet marginSource: BPEX.The further examination of the relation between the Pork Basket prices 60 versus whatfarmers actually received from retailers reveals that, farmers received a relatively stableamount (averaging 23 percent) of the total pork price. And which has not changed muchdespite 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 betterduring 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 notaccompanied by an increase in sales price in the same year. But a slight increase in salesprices can be felt from one year to another, which in the context of this study confirms thelag 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- 2009farmers were operating at a loss, which in the context of this study would mean that thechanges 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 DAPPand Pork Basket Price Increasing cost of production is that this relationship was quitestable 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 costswere born mainly by producers with limited contribution from buyers.The third observation is that although sales prices increased to a certain extent, increasesdid not occur at the same year where production costs increased, which refers to apossible time lag between the occurrence of price increase at the production level and itstransmission to the next node of the chain. It must be noted however that it is somehowexpected that sales prices do not show an increase at the same year of production due toprior agreements on sales price before the time of sales. Therefore the testing of the pricetransmission model will shed more light on this aspect.60Basket Price is intended for tracking the prices of consumer goods and service, which in this case is Pork.149


Figure B.16Average Pork Basket Price versus DAPP (English Pound)800700600500Average pork Basket Price400300200DAPP1000Source: BPEX.B.5 Poultry Supply ChainIn 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 tothe pork value chain in the UK 61 . Interviewees interviewed in the course of this studyhave referred to a certain level of consolidation and integration between the two levels;farming and processing.B.5.1FarmingThe poultry supply chain in the UK commonly starts at layer farms, where parentchickens are reared to lay eggs. The eggs are then supplied to hatcheries in so called“flocks” of eggs. These are subsequently incubated electronically and, afterapproximately 21 days, the chicks hatch. The hatched chicks are sorted and sexedelectronically and transported to the rearing farms. Here, the day old chicks are reared for39-44 days, depending on desired slaughter weight (Pearson, 1996). Notably, slaughterweight in the UK is slightly below the slaughter weight of competing nations such asBrazil, which is considered a disadvantage in the industry (Poultry World, 2008).At slaughter weight, the chickens are slaughtered and cut at the slaughterhouses. The UKpoultry industry is dominated by very large scale units in which broiler production wasdistributed over 3,100 units in 2005. (RBR, 2008a).61House of Commons (2009) - The English Pig Industry. P. 30. Environment, Food and Rural Affairs Committee report,produced in 2009.150


Figure B.17 UK poultry numbers between 1988 and 2007Source: DEFRA.B.5.2ProcessingDespite the fact that the number of poultry processing companies in the UK has beenrelatively stable, literature indicates that the processing sector is characterised byincreasing consolidation (Poultry World, 2005). Having been cut for fresh meat or furtherprocessed for cooked, pre-made meat the products are transferred to wholesales andretailers and commonly reach the consumer within 3 days.B.5.3DistributionRetail sales of poultry meat in the UK are worth around GBP3.7 billion annually. TableB.6 shows the distribution of poultry meat sales over poultry types and product type.Table B.6 Retail sales in the UK for 2006Value (GBP 1000)Volume (tonnes)Chicken Duck Turkey Chicken Duck TurkeyPrimary 1,263,729 31,189 154,365 397,012 8,353 50,380Rawconvenience232,439 2,148 115,626 48,208 337 23,434Furtherprocessed488,504 n.a. 79,649 113,012 n.a. 18,411Ready meals 651,409 n.a. 8,609 148,124 n.a. 1,717Cooked 315,983 Na.a 6,647 67,739 n.a. 712Total 2,952,080 33,337 364,896 774,090 8,690 94,654Source: British Poultry Council.151


B.5.4Cost StructureRetailers obtain a proportionally high share of profit margins (50 percent) in comparisonto processors, obtaining only a quarter of total margins. 62 Increases in electrical and watercosts, and comparatively high wages have considerably decreased margins for processors,effectively doubling the price of production over the last 10 years.Figure B.18Input costs versus Growers Margins in the UK poultry meat IndustrySource: 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 droppingfrom 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 afew large retailers dominating the consumer market and new market entrants attackingthe low-cost segment, which is favoured by the current economic situation. This hasresulted in an elevated need for new product development among processors in order tostay 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 ofretailers;• A disproportionate margin expectation in the chain leaves significantly less margin toshare between the integrator and the grower.62Savillis Agribusiness & Savillis Research. "A Sustainable Future for British Chicken." NFU Poultry Board and UK BroilerGrowers, 2009.152


Figure B.19Estimated average poultry pricesSource: Defra & Savillis Research.Figure B.20 Estimated share of average total retail price in 2008Source: Defra & Savillis Research.• The broiler chicken market has seen value growth of five per cent in 2008 comparedwith 2007, but sales by volume have fallen two per cent indicating rising prices at theretail level.B.6 Value Chain and Industry IssuesIn the recent years, the UK market has been characterised by an increasing power ofretailers. The latest investigation conducted by the Competition Commission in 2006regarding the supply of groceries by retailers in the UK found two important findings; thefirst is that several retailers have a strong position in some local markets, which153


constitutes barriers to entry to smaller grocery shops, and the second finding concerns thetransfer of excessive risk and unexpected costs by grocery retailers to their suppliersthrough various supply chain practices. The findings confirm that if these practices arenot checked, they might have adversarial effects on investment and innovation in thesupply 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, theirpower might very well be offset by the market power possessed by suppliers of brandedgoods 63 .Whereas the second finding is more relevant to this study, the first finding is equallyimportant because it highlights the fact that retail power is not to be underestimated in theUK market.In response to the increasing power of retailers, the Competition authority has suggested afew remedies to offset it, the most relevant of which to this study is the tightening of theSupply Code of Practice (SCOP) together with an Ombudsman to ensure effectiveenforcement of the new provisions for suppliers and retailers.Bargaining power along the supply chain of the meat industry has been heavily addressedby authorities and stakeholders along the value chain in the UK. In the below section wehave extracted from literature and reports the most relevant subjects to this study and wehave backed them up by evidence provided from interviewees interviewed in the courseof this study.B.6.1Exercise of Buyer PowerThe literature review provided at the beginning of this study highlighted issues of pricetransmission 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 pricetransmission along the value chain have been a hot topic of discussion by the public andmedia.The Department for Environment Food and Rural Affairs (DEFRA) has estimated that in2007 the rise of animal feed cost resulted into a rise of 20 percent in pig meat productioncosts for farmers, but only with a rise of 3 percent for processors and 4 percent forretailers. This meant that the spread between the retail and the producer price hasnarrowed, but that primary producers are currently carrying more of the burden ofincreased production costs 64 . First hand information emphasised issues of pricetransmission asymmetry along the pork value chain especially on the side of producerswho have been voicing the increasing cost of pig farming with no consequent sales pricerise and the need for appropriate action from the processors and retailers sides. In thatcontext, DEFRA mentioned that: “most of the evidence it received suggested Englishpig farmers are not receiving a fair share of the retail price” 65 .636465Competition 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/.154


The pig meat supply chain is considered to be fragmented and “adversarial” betweenproducers, processors, retailers and manufacturers. Farmers’ representatives interviewedduring the course of this study have confirmed that retailers’ competition in the UKmarket is ruthless. The exercise of retailer’s buyer power, for them, was exemplified inthe price pressure they faced during the food crisis and the aftermath of the animal feedprices increase. While they were faced with increasing production costs in response topolicy requirements such as the Integrated Prevention & Pollution Control directive(IPPC), Nitrate directive and Waste Directive, their selling prices did not increase inreturn, therefore they were faced with incredible losses. In 2008, while the National PigAssociation estimated that producers could break even at USD1.34 per pound carcassweight and advocated for sales price increase, their efforts managed to increase pig pricesto only USD 1.20 66 . It is obvious as well that the situation has not much improved, evenin the past year, when producers were able to earn more money, it was due to the UKpound appreciation versus the Euro, which is not a sustainable way of making money.There is hardly any direct communication between farmers and retailers, because theydeal mainly with processors. Therefore, farmers need to squeeze their prices based on thearguments given to them by processors, which in most cases, is the increasing pricepressure by retailers. Farmers are not sure where the pressure is, in reality, stemmingfrom: 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 inquiryconducted and reported to the House of Common on the Pig Industry 67 : “BPEX claimedthat consumers had seen prices increase by 90p but producers' prices had onlyincreased by 27 pence. It was not apparent where the difference in increase hadgone”.It is noteworthy to mention that the exercise of buyer power by retailers and/or processorswas not the only factor behind price pressure over farmers. Other factors contributed toprice pressure as well, various resources refer to the fact that, while pig meat productionprices increased in response to compliance with regulations, English farmers did notsucceed in promoting their products among consumers. They did not sufficiently informconsumers or increase their awareness about the high standard welfare that English pigsare bred in. Therefore, for consumers, there was no “apparent” reason why they would bepaying more than they did before the application of regulations.It appears from various internet resources that processors are less vocal in expressingtheir 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.: “Retailersand processors must look again at their supply chain relationships to ensure thatthey deliver a fair price to the producer while responding to consumer demand” 68 .Contracting relations between farmers and processors are not necessarily formalised andmay sometimes not be governed by contracts, but they are rather informal and are built on666768http://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/.155


trust and long term business relations. Similar findings were referred to by the House ofCommon report in 2009, which also confirmed that the absence of effective contractualrelations between farmers, processors (and retailers) are key issues that hinderedindustry’s willingness to invest.Uncertainty about the longer term relations between processors and retailers due to thelack of long term relations between the two parties was an issue of particular attentionboth in literature and in interviews. In practice, one interviewee indicated that[Supermarket X] meat suppliers have to enter every three months into a competitive bidbefore [Supermarket X] can buy their product. The 2009 House of Common Report onthe pig meat industry referred to the fact that: “Retailers often relied on short termbuying initiatives which were not conducive to the long term stability” (The Englishpig Industry: p. 30). The same source indicated that the same issues were highlighted bylarge retailers themselves who highlighted the fact that the lack of long-term committedrelationships is a key problem for the industry, but which is also an issue that to a certainextent can not be regulated. Although the practice itself is not illegal, it still might affectthe stability of the chain.Innovation and investment decisions by processors are very much dependent on theirrelationship with retailers, the stronger the relation, the more willingness to invest forinnovation. Given the current short term relations and uncertainties surrounding it,investment decisions become very difficult for processors. The industry has witnessedstrong 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, hadthese contractual relations been for longer terms, innovation levels could have beenhigher than observed.In addition, innovation is much dependent on the extent of which retailers are willing tosupport suppliers in their “new adventure”. Some of the interviewees of this study haveemphasised that it is always difficult for the supplier to make new investments onforehand, simply because their new product may not necessarily be well received byconsumers and therefore, retailers will be reluctant to buy the product and consequentlycontribute in investment costs. Therefore, the retailers being the link between consumersand processors need to give the first signals to suppliers before any decision on furtherinvestment is taken.Processors representatives confirmed abusive practices by retailers in the UK meatmarket. However, when asked about specific practices, interviewees were less “detailed”in their description and did not refer to specific practices, but some described thesepractices as “evil” and “barely legal”, such as for example, listing fees, which are feespaid by suppliers to retailers in advance before they are guaranteed a place on thesupermarket’s list of suppliers. Similarly, reports refer to examples of practicesparticularly related to transfer of excessive risk and unexpected costs by retailers to theirsuppliers. Although there are cases where these risks were allocated on forehand, theextent of risk transferred to the supplier was found to be “excessive”, which is a strongindication of the tilting of power balance towards retailers. The impact of such practiceson innovation levels has not been obvious and there were no evidence to confirm or denyit, but the general consensus is that leaving these practices unchecked may result into156


detrimental effects on the industry. Bearing the costs of marketing (TV ads, promotion,etc.) is another retailer’s practice highlighted by several sources (interviewees, but lessliterature). In their quest to achieving economies of scale, retailers offer promotions onmeat products at the expense of suppliers against longer contracts, bigger purchasevolumes and loyalty bonuses. The practice impacts profitability of the industry forprocessors.Through the interviewees conducted, processors perceive themselves as the mostvulnerable in the value chain. On one hand, they have no guarantee of business continuityfrom the farmers’ side- even though it is on a “gentlemen’s agreement”, but with no legalcommitment between them, and on the other hand, they commit with retailers to providethem with continuous supply (even though on short term basis). Processors position alongthe value chain was regarded as very risky.The level of integration of the pig meat industry is one of the important issues associatedwith the obvious imbalances of power along the nodes of the value chain. According tothe English Pig Industry Report, there are few examples of “integrated” supply chainswhere all the parties along the chain work together for the benefit of all. “Few examplesexist of integrated supply chains (either partial or completely) where all the partieswork together and add value for the benefit of all in the supply chain, therebydriving sales of English pig meat where profitability is respected and delivered forall 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 tosurvive in the business than others, who, if not integrated in a value chain, would hardlyeven “come near” a retailers shop. Therefore, farmers are keen on being “inserted in thesupply chain” of big retailers hoping they would also bear with them the increasing costsof production and investment innovation for processors.While for the pork industry, imbalance of power was consistently prominent, the picturewas less cynical in the case for poultry meat. The main reason given behind that was thehigher level of integration of poultry if compared to pork supply chain and therefore thereare lower numbers of nodes for price transmission. Recent information confirms that“many British chains have been building closer links with farmers and primaryproducers. In particular, Morrisons, which holds fourth place in the market sharestakes behind Tesco, Asda and Sainsbury, is teaming up with the NFU [NationalFarm Union] and several agricultural colleges and is planning to open two researchfarms, where it will create centres of excellence for applied farming research. It isalso helping to improve communications across the supply chain by launchingfarmer groups, including several in the poultry sector” 70 .In the poultry sector, processors usually own farms; therefore the tension observedbetween processors and farmers in the pig sector case is almost non existent in the poultrysector. Farmers interviewed in the course of the production of the “English Pig Industryreport” stated: it would help if processors and supermarkets got to know farmers andthe issues facing the industry—in the same way that processors appeared to6970House of Commons, ibid, p. 30.http://www.thepoultrysite.com/articles/1568/poultry-industry-in-the-forefront-of-supermarket-price-war.157


understand the costs of the poultry industry 71 , which implies the higher level ofintegration of the poultry sector versus the pork sector.In practice, it must be noted that the poultry industry in the UK has not been sufficientlystudied 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 byseveral processors to the Competition commission in the course of the Commission’s“Supply of Groceries in the UK market Investigations” report 72 in order to betterunderstand the relations between processors and retailers. The examination of some of thesubmissions showed that for example, the UK biggest poultry processor “Two Sistersfood group” have actually praised the “partnership” relations that it had with various bigretailers in the UK market, with references to the impact of such relation on innovationand investment levels of the company. Two Sisters also confirmed the contribution ofretailers in investment for product development at a reasonable consumer price.Contribution of retailers in investment for product development has also been confirmedby the “poultry processing” representatives interviewed in the study. Interviewees of thisstudy referred to the fact that, processors do not invest “independently” from retailers.Because retailers are the link between consumers and processors, processors work hand inhand with retailers in order to produce products that would meet consumer satisfactionand would be at a reasonable price as well.The above example is not meant to be for generalizing purposes because no othersubmissions by meat processors were found. But in general terms, complaints submittedagainst retailers’ behaviour came from smaller producers (although not necessarily in themeat industry).It must be noted however that despite of the above, the poultry meat suppliers have notescaped the increasing power of retailers. In a recent media report, the excess of retailersbargaining power is also extending to the poultry industry and will very much likely leadto unreasonable sales prices that would affect the competitiveness of the sector: “Such isthe 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 resultedin some controversial items, including a GBP1.99 chicken offer.” 73ConclusionTo conclude this section, for the pig industry, three important features characterise thechain: 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 contractualarrangements between the two parties are self centred and do not consider mutual benefitsof the two parties. The second is the lack of long term contractual arrangements betweenproducers, processors and retailers. In general terms, the value chain as a whole wasdescribed as “adversarial”. The third feature is represented in practices utilised byretailers emphasising their stronger position versus their suppliers. These took various717273House 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.158


forms, among which is the transfer of excessive risk and unexpected costs by retailers totheir suppliers as well as processors bearing promotion costs.The poultry sector, although less pessimistic than the pig sector, it has already beenfacing an increase in production costs, and will likely experience similar squeeze asprocessors in the pig sector.B.6.2Code of conductIn order to address the issues of buyer power exercised by supermarkets and suppliersover other stakeholders in the upstream food supply chain, the UK CompetitionCommission has, in 2004, published a draft code of conduct, which was officiallylaunched in early 2010. The code was consulted on and the Competition Commissionpublished the final version of the Order setting out the GSCOP in August 2009. TheCompetition Commission sought the large supermarkets’ voluntary agreement to theestablishment and funding of an Ombudsman to enforce the code. The code will beadministered by the Office of Fair Trade and will give suppliers opportunities to appeal toan independent arbitrator in the cases of disputes arising from exercise of buyer powerand any associated abusive practices, such as retrospective adjustments to terms andconditions of supply or entering into arrangements with suppliers that result in suppliersbeing held liable for losses due to shrinkage. Consultations are currently being held aboutthe establishment of an ombudsman office to enforce the code.UK media have, to a certain extent, hinted at various stakeholders’ perceptions about thenew code and whether or not it is considered to be an effective means to solve theproblems along the value chain. Perceptions varied considerably across the value chain;retailers’ representative hinted at the “strong” relation between suppliers and retailers andquestioned whether an expensive ombudsman office is necessary to tilt power balancestowards processors. Retailers spokesman said: “We think it will help demonstrate thestrength of the relationship between food retailers and their suppliers. It should helpovercome some of the myths. If it produces the results we expect, it will demonstratethat a costly ombudsman – that would skew the negotiating balance in favour ofsuppliers – is unnecessary” 74 .Processors and farmers representative interviewed for this study did not have a positiveview about the introduction of the new code of conduct. The majority of intervieweesagreed that the number of largest retailers in the UK is rather small; only 4 big retailersdominate the market. Every producer wants to have a good commercial relation with theirbuyer for business continuity and will very much likely be reluctant to report abuses tothe ombudsman office fearing retaliation by retailers. And unless the ombudsman officetakes a “proactive” approach to find out about abuses of power, the instrument (the codeand the ombudsman office) would not be as effective as they should be. Similarly, if thecode is “toothless”, there is little hope that it can change any thing.74http://www.just-food.com/article.aspx?id=109700.159


In the same line, media reported that processors were pessimistic about possible changesthat the new code of conduct may bring about to this skewed relation: “Nothing is goingto change. It is the nature of life. Big suppliers bully small retailers and big retailersbully small suppliers. It is a fact of life” 75 .When stakeholders were asked about the potential role of regulations to manage therelationships between producers, suppliers and retailers, interviewees agreed that thisrelationship can not be governed by the law, except in the cases where parties wouldexercise anti-competitive behaviours that are by law illegal and for which the NationalCompetition Authority has found no evidence so far. Other than that, the relation ismainly governed by market factors where supply and demand are the main factors drivingthe balance of power; wherever suppliers outnumber buyers, the balance of power tiltstowards buyers and vice versa.Overall, there was no consensus among interviewees and interviewees about what couldbe possible policy solutions that would effectively address power imbalances issues. Butsome interviewees agreed that the solutions should come from the industry itself. Two ofthe interviewees referred to the need for dialogue between farmers, processors andsuppliers. Consumers are demanding and they have many options in the market, so ifretailers are not able to provide consumers with their needs and “preferences”, consumerswould search and find another high street supermarket. Retailers, therefore competefiercely in the market to retain their consumers, and in doing that, they also need theirsuppliers in order to guarantee the business continuity. Therefore, dialogue andtransparency are needed so that parties can understand each other. One interviewee fromthe retail sector informed the researchers that he established a “partnership” schemegathering farmers, suppliers and retailers, where meetings and dialogues were held onfrequent basis for better communication and transparency among the differentstakeholders.B.6.3Developments and trendsThe interviewees of this study interviewed so far agreed that the current structure of themeat industry in the UK is the main reason behind the increased bargaining power ofretailers versus producers and producers versus producers. Publicly available data on thenumber of units at each level (farmers and processors) is scarce, but interviewees gave arough estimation of these numbers as follows: for the pork market, there are 1500 farms,10 companies responsible for producing ½ of the slaughtered pig meat; 10 largeprocessing companies, and 4 large retailers. The current structure translates into higherlevel supply if compared to demand, i.e. one retailer has 10 options of processors tochoose from, while processors have to compete for a small number of retailers. The sameis 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 trendoccurring in the industry, although not yet captured by literature. In order to balance thebargaining power of retailers, a process of consolidation and merging is happening at theprocessors level. According to interviewees, if the numbers of processors decrease,75http://www.just-food.com/article.aspx?id=109700.160


etailers will have fewer choices and which might at the end restore the balance of powerin the market between retailers and processors.Various stakeholders and interviewees interviewed in this study have confirmed that theissues around the value chain imbalances are very important issues that affect the pricesand profitability of the industry in general. But, it would be too simplistic to look at priceimbalances only from a supply chain perspective because there are several other factorsthat interact together to finally form the current picture of the industry. These arecombined 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 theindustry: The first issue is the ambiguity about pig meat labelling, which was at centre ofpublic debate until end of 2009. Much of the meat available in supermarkets including thebig retailers, although had a British label, did not necessarily originate in the UK. InFebruary 2010, the UK has introduced a new country of origin labelling (COOL) code ofpractice for pork, which is a voluntary code that aims to give clear information aboutcountries of origin on packs for pork, bacon and ham 77 . The introduction of the new codeis not only about providing information, but it has a lot to do with benefiting the localindustry particularly production. Recent research found that there is a strong connectionbetween country of origin and consumers willingness to pay. According to Davies,MacPherson and Froud, 2010, “COOL was used by consumers as a means ofproviding economic benefits for local producers and local economies. The NatCen(2010) survey found that amongst the 52 percent of consumers who looked forCOOL, they were mainly doing so out of a preference to buy British/support Britishfarmers (34 percent)” 78 .The second is the efficient use of the pig carcass. In the UK, the most used parts of thepig are the legs and loins, which, at the current level of pig production in the UK, doesnot meet the current demand and leads to imports of these parts from other countries. Theremaining parts of the UK are exported to other countries at cheaper prices. The challengenow 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 StrategicManagement across the meat supply chains as an important factor for the industry toremain competitive. The comment does not imply the poor management of the chain, andcan no way be generalised, but the success of few players in the meat market versus thefailure/exit of others is largely attributed to their ability to adapt and absorb shocks in asustainable manner. For example, Grampian Food, which was one of the largest foodproducers in the UK did not manage to make the business as profitable, since theyproduced a surplus which on one hand distorted the market and on the other hand causedhuge losses to the company. The company was recently acquired by the Dutch Company767778These 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 ScienceResearch Unit Food Standards Agency. January 2010.161


Vion, which due to their viable management strategy; could make it a profitablebusiness”.In addition to the above mentioned factors, two external factors affect the competitivenessof 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 theimplementation of new environmental regulations, the IPPC directive in particular whichstipulates the adoption of environmental standards that would for many farmers andproducers incur huge costs. Although the regulators interviewed have highlighted the factthat the introduction of the IPPC directive was not a surprise to the industry, because itwas introduced 10 years ago for implementation to all industries with meat being one ofthe latest.Stakeholders interviewed in this research exercise had a two general observations, thefirst is that the UK is a “starter” in terms of the application of EU policies. An example ofthat is the early introduction of bans on stalls and tethers ahead of most EU countries. Thesecond is that, while the UK national policies stem originally from EU policies, they arealways transposed in a stricter manner than in other EU countries. Regulators do notagree with this view and believe that regulators in other EU countries are doing more orless the same as the UK regulators.Competition from cheaper imports from other EU countries. The English pig industry haslower and less efficient, production than its EU counterparts and as a result, part of theretail hospitality and public sector choose to buy the cheaper products from overseesproducers.The meat Market in the UK has undergone a number of developments (Eurostat Data, oninnovators companies). The literature review conducted at the outset of this study pointedout to the fact that innovation within the food sector has been relatively low compared toother industries due to the nature of the industry, due to the limited sources of foodsupplies.On a different level of innovation, it seems that there are observable advancement in theindustry at several levels, both at the process and the product level. These have beenobserved at the three levels of stakeholders along the value chain (farmers, processors andretailers).Farming innovationIt seems that, while the stressful environmental regulations, including the IPPC(Integrated Prevention & Pollution Control) Directive, Waste Directive and the NitrateDirective have burdened farmers in both pigs and poultry sector, the regulations havecreated positive innovative responses. Farmers representatives and industry expertsinterviewed confirmed that, although the dominant reaction to environmental regulationsis negative due to the financial and administrative burden, the regulations themselves ledto observable positive signs. At the livestock production level, fertilizers use on pasture,animal feed production, animal waste an its treatment. Responses we exemplified in theupgrade of farms to comply with regulations, especially the introduction of incinerators162


and waste disposal systems, which reduces odours and are subsequently friendlier toenvironment.One of the most important innovations referred to by interviewees in the poultry sector isthe introduction of new poultry feeds which reduced water usage and increased poultryweight in an efficient manner, where for example one kilo of poultry meet is produced by1.6 Kg of feed. The evolution in breeding techniques had a strong effect on the industrywhere “selective” breeding improves genetics of the produced meat.Technology has supported the industry quite strongly in the past few years (especiallypoultry), where it helped the prevention of various diseases and the reduction of“salmonella” infection in flocks at different levels.Slaughtering and ProcessingFor the poultry sector, innovation is represented in the introduction of robots along theslaughtering line, which resulted into more efficiency and cleanliness.For processors, innovation occurred at the level of process as well as product. In responseto the heterogeneity of market demand and ethnic diversity in the UK, meat products arediversified 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 productionemerging in the UK market as well.The reuse of animal unused parts for animal feed is one of the new developments in theindustry as well. Recent investment in new equipment is facilitating the processing of byproductsinto organic matter, which can then be used as fertilisers and the use of tallowextracted in this process to produce bio-fuel.Information technologies helped to improve communication between suppliers andretailers, 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 willimprove communication with end consumer about the product, which was an issue highlydebated in the past couple of years. In the case of pork industry, traceability of products isexpected to increase sales of local products versus imported products and lighten theimpact of competition of cheaper meat.163


C The NetherlandsC.1 IntroductionThe Dutch food industry is one of the most important industrial sectors in theNetherlands. 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 costsand of 28 percent in gross operating surplus. The Netherlands are one of the largerexporters of agricultural commodities and food and beverages. The Netherlands are alarge 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 percentof 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 ingeneral. Productivity in the Dutch food industry is high relative to total manufacturing inthe Netherlands or for instance the Spanish food industry. In the meat industryproductivity is below other parts of the food industry. The share of intermediary inputs inturnover is very high: 82 percent. This is much higher than elsewhere in the food industryor manufacturing or e.g. Spain.Table C.1Main indicators of the Dutch meat supply chainMeat industry Food industry Total industryEmployment 18,200 122,500 847,100Product sales 9,908 60,176 294,758Consumption of raw materials 8,177 45,819 222,991Gross value added 1,731 14,357 71,767Labour costs 897 5,825 40,959Operating surplus 834 8,397 30,401Product sales / Employment (EUR 1,000) 544 491 348Labour costs / Product sales 9.1% 9.7% 13.9%Consumption of raw materials / Product sales 82.5% 76.1% 75.7%Productivity (Value added / Employment; EUR 1,000) 95 117 85Gross operating margin 8.4% 14.0% 10.3%The meat supply chain is specialised per meat category: poultry, veal and to a lesserextent pork and beef. Slightly less than a half of all economic activities refers toslaughtering; the rest to meat processing. Most meat produced in the Netherlands is freshrather than processed meat. Meat processing refers primarily to slicing fresh meat for165


Dutch and foreign retailers. Poultry and veal production are vertically integrated. This isnot the case for pork and beef production. Vertical relations have been intensified in porkproduction after the outbreak of animal diseases in the 1990s and the early 2000s, butthey do not involve long term contracts. There is little specialised beef production in theNetherlands. Most beef refers to cows from the dairy industry. There is little lambproduction in the Netherlands. In this study we focus on the pork and poultry supplychain.C.2 Food price volatilityThe following figures show pork and poultry prices for the Netherlands. Farm prices arereported by LEI, wholesale prices refer to export price data as reported by Eurostat andconsumer data are obtained from GfK. For pork, prices at all levels exhibit seasonalpatterns. Consumer prices for pork are higher in the summer and in December, amongother things due to differences in consumption patterns. Fluctuations in farm andwholesale prices are clearly related. This is less evident, but possibly also the case forconsumer prices. The gap between wholesale prices – primarily carcasses – and consumerprices is substantial. However, wholesale prices for sausages are not that much higherthan wholesale prices for pork carcasses.Figure C.1Pork prices in the NL8,007,006,005,00Europ per kilo4,003,002,001,000,001-1-20001-5-20001-9-20001-1-20011-5-20011-9-20011-1-20021-5-20021-9-20021-1-20031-5-20031-9-20031-1-20041-5-20041-9-20041-1-20051-5-20051-9-20051-1-20061-5-20061-9-20061-1-20071-5-20071-9-20071-1-20081-5-20081-9-20081-1-20091-5-20091-9-2009Farm Consumption WholesaleFigure 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 areobtained from GfK. Farm prices refer to contract prices concluded between farmers andthe slaughterhouses. Farm prices are stable, while export prices and consumer pricesfluctuate due to supply and demand fluctuations on international wholesale markets anddue to promotional activities of supermarket chains. At the macro level, prices are more166


or less stable at all three levels of the supply chain. Farm prices and wholesale prices arerelatively high in 2009. Figure C.2 shows that a lower level, there is more dynamics inconsumer prices. Consumer prices for chicken breast have fallen from 2001 till 2009,while consumer prices for other chicken products have risen. Chicken breast is becominga commodity, while prepared whole chickens, chicken schnitzels and cordon bleus (otherparts) are increasingly marketed as high value products.Figure C.2Poultry prices in the NL7,006,005,00Euro per kilo4,003,002,001,000,001-1-20001-5-20001-9-20001-1-20011-5-20011-9-20011-1-20021-5-20021-9-20021-1-20031-5-20031-9-20031-1-20041-5-20041-9-20041-1-20051-5-20051-9-20051-1-20061-5-20061-9-20061-1-20071-5-20071-9-20071-1-20081-5-20081-9-20081-1-20091-5-20091-9-2009Farm Consumption WholesaleFigure C.3Poultry consumer prices in the Netherlands876Total54320101-01040117-01200133-01360149-01520213-02160229-02320245-02489-12-200325-28/0341-44/035-8-200421-24/0437-40/041-4-200517-20/0533-36/0549-52/0513-16/0629-32/0645-48/069-12-200725-28/0741-44/075-8-200821-24/0837-40/081-4-200917-20/0933-36/09LegsBreastOther partsWhole chicken167


C.3 ConsumptionMeat consumption in the Netherlands refers primarily to beef, pork and poultry. Percapita meat consumption in the Netherlands falls. Consumers eat less meat, in particularpork. Consumption of poultry and other meat still rises. The rise in poultry consumptionis among other things due to the fact that consumer prices for poultry rise less than thosefor beef and pork. Beef consumption remains constant due to the relatively high incomeelasticity. The demand for other meat rises due to immigration and changes inconsumption patterns.Table C.2Consumption per capita (kg)2000 2001 2002 2003 2004 2005 2006 2007 2008Total 86.2 85.6 86.3 85.5 86.0 85.6 84.9 85.1 84.7Beef and veal 19.2 18.9 19.2 19.1 19.5 19.1 19.0 19.3 19.2Pork 43.3 42.4 42.5 42.4 42.3 41.9 41.5 41.0 40.6Poultry 21.6 22.1 22.5 21.5 21.9 22.2 21.9 22.5 22.5Other meat 2.1 2.2 2.1 2.5 2.3 2.4 2.5 2.3 2.4In terms of expenses, fresh and frozen meat including poultry refers to two thirds ofconsumer expenses and one third to meat products. Minced meat is popular in theNetherlands. Ham and sausages are the most popular types of processed meat. Expenseson fresh pork and poultry declined from 2000 till 2007 by 4 percent. The decline is due toa decline in the expenses on fresh beef and veal (10 percent) and pork (9 percent) whenminced beef and pork is taken out. Expenses on poultry and processed meat increased by12 percent and 4 percent respectively.Table C.3Consumer expenses per household (EUR)2000 2003 2004 2005 2006 2007Fresh meat 317 330 348 315 298 305Fresh beef and veal 69 70 75 70 61 62Fresh pork 94 89 99 84 85 86Minced meat (pork and beef) 88 96 98 85 85 88Other meat 39 42 39 46 40 41Frozen meat 27 33 37 30 27 28Poultry 76 96 88 92 85 85Processed meat 202 218 221 197 196 209Smoke-dried meat (rookvlees) 10 9 9 9 9 9Ham 52 59 57 46 47 49Bacon (ontbijtspek) 12 11 11 12 10 10Sausages and like meat products 106 115 120 110 108 119Other meat products 21 23 25 20 23 22168


Figure C.4 Percent changes in household consumption in the Netherlands (%)Fresh pork and beef (Total)Fresh beef and vealFresh porkMinced pork and beefOther pork and beefFrozen pork and beefPoultryProcessed meat (Total)Smoke-dried meat (rookvlees)HamBacon (ontbijtspek)Sausages and like meat productsOther 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 expenseson meat, while supermarkets have a 71 percent share and other distribution channels a 7percent share (HBD 2009). Supermarkets have a relatively high market share in freshmeat rather than meat products. Aggregate turnover of butchers declined by 12.5 percentfrom 2003 till 2008. In this respect, they are outperformed by other SMEs andsupermarkets. Turnover of Dutch food SME retailers declined by 5 percent in the sameperiod, while turnover in supermarkets increased by 17.5 percent.C.4 The meat supply chainThe Netherlands is a net exporter of both life animals and meat. This holds notably forpork, poultry and veal. The self sufficiency ratio for pork, poultry and veal is about 200percent. For beef, the Netherlands are self sufficient. However, because Dutch beefproduction primarily refers to milk cows, there is substantial import of premium beef inthe Netherlands. Dutch meat production and processing are relatively big. TheNetherlands 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 toneighbouring EU countries, notably Germany and the UK. Veal is also exported to Franceand Italy.79The Dutch population has a 3.3% share in the population of the EU27.169


Figure C.5 The Dutch meat supply chain (2008)The self sufficiency ratio for beef has fallen since the 1990s. Production of beef and vealhas fallen while consumption still grows with the Dutch population. The self sufficiencyratio also fell for pork since 1990s, but has risen again from 2005 onwards. The selfsufficiency for poultry declined in the 2000s in the aftermath of avian influenza, butrecovered after 2005.At the farm level, poultry production doubled since 1990, while production of veal andpork remained more or less constant and production of beef fell by 50 percent. At thelevel 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 carcasseshas fallen by 28 percent. The Netherlands export more live animals. This development isrelated to the existence of excess capacity in European slaughtering. Dutch producersexport more pigs to Germany, because German slaughterhouses pay higher prices. Excesscapacity has induced Dutch slaughterhouses to rationalise production. According toBackus et al. (2007), the scale of slaughterhouses has grown. However, the number offirms remained more or less constant in the Netherlands. The number of veal carcasseshas risen by 35 percent. The Netherlands import more calves in order to slaughter andexport them.Figure C.6Pork supply chain170


Figure C.7Poultry supply chainFigure C.8Self sufficiency ratios for meat3,002,502,001,501,000,500,001990 1995 2000 2005 2008Beef and veal Pork PoultryPork production is concentrated in the South and the East of the Netherlands. Of all farmsfattening pigs, 43.4 percent is located in the province of Noord-Brabant and 13.1 percentin the province of Limburg (South) and 19.1 percent and 13.9 percent in the provinces ofGelderland and Overijssel respectively (East). Poultry production is more dispersed. 29percent 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 thepoultry livestock.Farmers are increasingly specialised. The largest 300 farmers have a share of 20 percentin pig fattening. Halve of all breeding pigs and one third of all fattening pigs are held onspecialised farms.171


Figure C.9Regional dispersion of livestock productionPork productionOther; 10,4%Overijssel; 13,9%Gelderland; 19,1%Noord-Brabant;43,4%Limburg; 13,1%Poultry productionNoord-Brabant;29,2%Other; 7,6%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)2,502,001,501,00BeefVealPorkPoultry0,500,001990 1995 2000 2005 2008172


Figure C.11 Production development slaughterhouses (1990 = 1)2,502,001,501,00BeefVealPorkPoultry0,500,001990 1995 2000 2005 2008C.5 Market structure, business dynamics and economic impactThe number of firms is still large throughout the entire meat supply chain. The number offarms and SME retailers falls. (This also holds for beef and veal production if all farmerswould be taken into account.) The number of slaughterhouses diminishes slightly. Thenumber of wholesalers and meat processors increases. Most firms are SMEs. The numberof supermarket remains constant. The number of firms with more than 100 employees isrelatively small.173


Table C.4Number of firms2006 2007 2008 2009Beef production * 1,911 1,945 1,975 -Veal production * 1,936 2,002 1,943 -Pork production 4,365 4,225 4,260 4,130Poultry production 1,410 1,420 1,440 1,350Slaughterhouses 280 275 270 270Slaughterhouses (poultry) 55 50 50 50Meat processing 180 170 170 185Wholesale trade animals 1,210 1,200 1,195 1,240Wholesale trade meat 985 895 850 1,035Supermarkets ** 45 50 45 45SME retail 2,570 2,505 2,380 2,330Source: 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 10 to 20 20 to 50 50 to 100 More than 100Slaughterhouses 210 30 20 10 10Slaughterhouses (poultry) 20 5 10 10 10Meat processing 110 30 20 10 10Wholesale trade animals 1215 20 10 0 0Wholesale trade meat 845 85 75 20 10Supermarkets 1,855 390 540 105 45Source: Statistics Netherlands.The number of firms may be still large, concentration is important in meat processing andfood retail. In pork slaughtering the six largest processors have a market share of about 95percent. VION has a share of 57 percent and dominates the industry. In veal slaughteringand processing, VanDrie as well as Plukon and Storteboom have large shares of poultryslaughtering.C.6 Pricing and value addedC.6.1The pork supply chainSupermarket chains obtain 24 percent of the consumer euro spent on meat and meatproducts, the processing industry obtains 44 percent, farmers 13 percent and the feedindustry 19 percent. SME retail outlets have a larger share of the consumer euro: 50percent. A large part of the processors’ share of the consumer euro is spend onintermediary inputs other than livestock. 43 percent of processor turnover is spend on174


intermediary costs other than livestock. Intermediary costs are also high in the feedindustry and pig production. Farming is capital intensive. Depreciation and interest are asubstantial part of farmer costs. Paid labour costs are low in farming because most labouris being done by farmer. Revenues are high in supermarket chains followed by the feedindustry. Farmer income is low when one takes into account that is both a reward forlabour and capital. Revenues seem high in SME retail outlets (butchers) but they includea reward for the labour of the owner and his relatives as well.Figure C.12Pork consumer euro spent in supermarkets chains and SME retail outletsSupermarket chainsRetailFeed industryPig productionPig fatteningProcessingSMEsFeed industryPig productionPig fatteningRetailProcessingTable C.6 Shares in turnover in the meat supply chain (2008)Feed industry Pig production Pig fattening Processing SME Super-marketsRaw materials (fodder) 51.3 53.0 46.3 - - -Raw materials (meat) - - 26.4 41.7 50 75.8Other intermediary costs 34.3 22.9 10.2 42.7 13 7.2Depreciations / Interest 2.0 17.5 11.8 1.8 6 2.2Labour costs 9.1 5.3 0.9 12.2 18 10.7Net revenues 3.3 - - 1.6 12 4.1Farm income - 1.2 4.4 - - -Source: LEI, CBS, HBD, Rabobank.Backus et al provide an overview of return on investment in Dutch pork supply chain(Table C.7). The returns on investment have been calculated on the basis of Amadeus. Inline with the results in Table C.6, Table C.7 shows that supermarket chains obtain the175


highest returns on investment followed by the feed industry. If the labour input of farmersis 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 thesix 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,) areapproximately equal to the returns of the six largest companies.In meat processing, returns on equity equalled 9 percent and returns on total assets 4percent. The profit margin equalled 1 percent of turnover. The largest companies had areturn on total assets of 1 percent and where outperformed by the 24 smaller meatprocessors in the panel which obtained a return of 9 percent.Table C.7 Financial performance in the Dutch pork supply chain (2005)LinkNumber ofobservationsReturn ontotal assetsReturn onequitySolvability(%)Profitmargin (%)(%)(%)Feed industry 27 7.7 13.2 48.9 2.8Farming 77 0.1 -4.3 53.0 -15.0Processing 31 4.3 9.1 32.6 1.2Supermarkets 18 7.1 22.0 19.3 1.2Source: Backus et al. (2007).C.6.2PoultryConsumer prices of poultry are comparable to those of pork. The share of the processingindustry is bigger. Profits in the poultry processing are higher than those in porkprocessing. Raw materials – in particular poultry - are much cheaper in poultryprocessing than they are in pork processing.176


Figure C.13Poultry consumer EUR spent in supermarkets chains and SME retail outletsSupermarket chainsRetailFeed industryPig fatteningProcessingSMEsFeed industryPig fatteningRetailProcessingTable C.8 Shares in turnover in the poultry meat supply chain (2008)Feed industry Pig fattening Processing SME RetailRaw materials (fodder) 51.3 61.6 - - -Raw materials (meat) - 17.1 34.3 50 75.8Other intermediary costs 34.3 1.8 42.4 13 7.2Depreciations / Interest 2.0 17.4 1.8 6 2.2Labour costs 9.1 2.4 8.9 18 10.7Net revenues 3.3 - 12.6 12 4.1Farm income - 0.0 - - -C.7 Price transmissionC.7.1PorkWe 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 anindirect relation between farm and consumer prices. Farm and wholesale prices arelinked; and wholesale and retail prices are linked;• Pricing at all three levels of the supply chain is pretty independent of pricing at theother levels. Prices are limitedly transmitted. If there is price shock at one level,177


prices in the links directly upstream or downstream rise a little as well. Basically onlythe link where the price shock occurs profits from the shock.C.7.2PoultryWe draw the following conclusions from the price transmission analyses.• Price transmission occurs relatively quickly, in 1-3 months. Wholesale prices adjustquickly to changes in supply and demand conditions. This holds to a lesser extentalso for retail prices. Farm contract prices adjust slowly to changes in supply anddemand conditions. Processors react to increases in farm prices, but not to decreasesin farm prices;• There is no direct relation between farm price and consumer prices. This is amongother things due to the fact that farm prices are contract prices. There is an indirectrelation 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 thefarm price changes with one cent, the wholesale gross margin changes by more than10 cents. When the wholesale price changes by 1 cent, the wholesale gross marginchanges by 1 cent because the farm price is not influenced. These results are probablydue to the use of long term contracts between farmers and processors. Wholesaleprices reflect supply and demand conditions, while farm prices are contracted.However, when the retail price changes by 1 cent, the wholesale gross margindeclines 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. Theyprofit a little when there is a shock at the consumer level. Farmers profit from a priceshock at the farm level, but do not become better off when demand increases at thewholesale or retail level.C.8 International tradeThe Netherlands are a large (net) exporter of meat. Dutch exports of fresh and frozenmeat 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 meatequals 10 percent of exports of fresh and frozen meat. The Netherlands export rawmaterials rather than processed products. Exports increased by one third from 2000 till2008. Exports of beef and veal and offal increase by 50 percent. Exports of poultryincreased by nearly 30 percent and exports of pork by a little more than 10 percent.Table C.9Evolution of Dutch meat exports (EUR million)2000 2002 2004 2006 2008% Change2000-2008Fresh and frozen meat 4,309 3,963 4,252 4,828 5,758 33.6%Beef and veal 1,277 1,192 1,398 1,697 1,903 49.0%178


2000 2002 2004 2006 2008% Change2000-2008Swine 1,322 1,029 1,173 1,257 1,476 11.7%Poultry 1,067 1,126 914 1,114 1,373 28.7%Bovine and swine offal 621 577 729 691 929 49.5%Processed meat 361 407 390 412 580 60.5%Dutch imports of fresh and frozen meat is much smaller than Dutch exports. Importsequalled 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 isnearly a quarter of fresh and frozen meat imports. Imports more than doubled between2000 and 2008. Beef and veal imports and poultry imports increased by 135 percent and120 percent respectively. Pork imports even increased by almost 245 percent. Net exportsof fresh and frozen meat remained constant at EUR 3.3 billion. Net exports of porkdecreased by 12.5 percent. Net exports of offal increased by 32.5 percent. Net exports ofbeef and veal, and poultry remained more or less constant. Net exports of processed meatdecreased from a surplus of EUR 65 million in 2000 to a deficit of nearly EUR 60 millionin 2008.Table C.10Evolution of Dutch meat imports (EUR million)2000 2002 2004 2006 2008% Change2000-2008Fresh and frozen meat 1,039 1,256 1,520 1,892 2,439 135%Beef and veal 459 540 646 866 1,079 135%Swine 127 183 320 361 436 243%Poultry 233 310 358 396 515 121%Bovine and swine offal 166 156 126 178 326 97%Processed meat 296 379 432 475 636 115%The Netherlands export meat primarily to other EU15 countries. Veal is exported toFrance and Italy, beef to Germany. Pork is exported to Germany and Italy, poultry toGermany and the UK. Processed meat is exported to Belgium, Germany and the UK.179


Figure C.14 Meat export per partner country (2008)40,0%35,0%30,0%25,0%20,0%Beef and vealPorkPoultryProcessed meat15,0%10,0%5,0%0,0%Belgium France Germany Italy Spain UK Rest of theEURest of theworldThe Netherlands import most meat from Belgium and Germany. Beef and processed meatare imported from non-EU15 countries.180


Figure C.15 Meat import per partner country (2008)60,0%50,0%40,0%30,0%BeefPorkPoultryProcessed meat20,0%10,0%0,0%Belgium France Germany UK Rest of EU Rest of the WorldC.9 Dutch Food LawThe Dutch Food and Goods Law is a framework law to which new guidelines anddecisions may be added. The Law contains prescriptions for food ingredients, foodprocessing and distribution. The Product Boards – one of the government bodies in theNetherlands - define additional product specific norms. Food Law is controlled by theDutch Goods Authority (VWA). Following EU legislation, the General food Law, foodcompanies have to develop and implement their own food safety and traceabilitymechanisms such as HACCP. HACCP compel firms to assess risks, to identify criticalcontrol points and to control these points. Food companies are also obliged to introducetraceability mechanisms.C.9.1Dutch competition lawDutch Competition Law is enforced by the Netherlands Competition Authority (NMa).The Act came into effect on January 1st, 1998. The Competition Act has seen severalamendments since then. The Competition Act was amended as a result of EuropeanRegulation 1/2003. Another amendment was made on July 1st, 2005, when the NMabecame an Autonomous Administrative Authority (ZBO). The NMa received additionalpowers in 2007 as a result of the evaluation of the Competition Act. Section 6 of theCompetition Act prohibits agreements between undertakings distorting competition.Section 24 prohibits abuse of a dominant position. Section 34 requires notification ofmergers.181


The NMa considered about 30 merger cases in food processing and food retail in the2000s. In 25 of the 30 concentration cases notified to the NMa, no permission wasnecessary according to the NMa. In the other 4 cases permission was granted. 1 case isstill pending. Most concentration cases in the supermarket channel refer to a limitednumber 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. Qualitycontrol mechanisms in the food supply chain have been scrutinised.The NMa designated the food and agro-processing industry as a priority industry in its2008-2009 Agenda. The supply is highly concentrated in the Netherlands. This holds formost supply chain levels: the farm supply industries, marketing boards, food processingand food retail. That is why the NMa has been quite active in this industry recently. In2009, a NMa study looked into price formation in the Dutch food supply chain. The studyconcludes that retail prices reflect supply chain costs and that price changes in therespective 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 contractconditions 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 ofproduct specifications, logistics and planning.• Differences in contract duration are product specific: bread versus fresh produce.C.9.2Code of conductSo far, there is no or little law regulating supplier – retailer relations other than theCompetition Act. In December 2009, the Dutch Minister of Economic Affairs proposedto introduce a Conduct Code following the British example in this respect and to neglectFrench and German legislation for the moment (Tweede Kamer, vergaderjaar 2009–2010,32 123 XIII, nr. 46). There is also no prohibition to sell below purchasing prices. On thebasis of an evaluation in 2005, the Dutch government decided not to pursue theprohibition.182


D PolandD.1 IntroductionIn Poland, the food manufacturing sector is the largest manufacturing sector whichemployees 17 percent of all employees in the manufacturing sector and has a turnoverequal to 18 percent of the total turnover in manufacturing.The food industry is based on large agricultural production. Poland is among the EUcountrieswith the largest agricultural population. The number agricultural holdings arealso very high indicating that some structural changes in favour of a more industrialand/or service oriented economy might take in the years.Within the food manufacturing industry, the meat sector represents a significant industrialsector employing 30 percent of all employees and having a turnover equal to 24 percentof the total turnover, as shown in Table D.1. The meat sector is also significantly largersector than another food sectors as dairy sector.Table D.1 Main indicators for the Polish meat industry, 2007IndicatorsFoodMeatDairyMeat %IndustryIndustryindustryFoodindustryNumber of employees 424,229 125,755 42,095 29.6%Turnover or gross premiums written (EUR million) 43,640 10,597 5,856 24.3%Value added at factor cost (EUR million) 8,527 1,202 966 14.1%Personnel costs (EUR million) 3,708 890 439 24.0%Gross investment (EUR million) 1,978 387 274 19.6%Gross Operation surplus (EUR million) 4,800 307 527 6.4%Turnover/employment (EUR 1,000) 103 84 139Personnel costs/turnover (%) 8.5 8.4 7.5Productivity (value add/turnover) (%) 19.5 11.3 16.5Gross operating surplus/turnover (gross operatingrate) (%)11.0 2.9 9.0Source: Eurostat.Table D.1 highlights also some other economic indicators illustrating the role andimportant of the meat sector in Poland. Even though the meat sector is a very large sector183


it is remarkable that the economic performance of the entire meat sector is laggingsignificantly behind the entire food sector as well as the dairy sector when is comes tovalue added, productivity and profitability.Poland has for two decades been through a transition process form a planned economy toa market economy.In 2004, Poland joined EU which has had some impact on the competitive situation in thefollowing years. The enlargement of EU has been prepared for some years and the Polishindustry has been adjusted to an increasing European competition. However, 2004 was aremarkable year, which changed in the competitive situation leading to an increasinginternationalisation (e.g. removal of tariffs and non-tariff barriers) which has lead tomarket and structural changes. Development programmes have been implemented inorder to encourage a modernisation process of food industry. This process has resulted ina reduction of the technological gab between the Polish and the EU-industry, adaption ofmodern methods of management and marketing as well as inward investment hasincluded the Polish industry into international business networks. In the end the Polishfood industry has experienced a significant increase in export having significant impacton growth. This improvement of the export orientation remain mainly to a competitiveadvantage in terms of cost and pricesHowever, the general positive impact on the Polish industry after the accession to theEuropean Union has been challenged due to the international financial and economiccrises which have had an impact on both supply and demand situation.D.2 Consumption levelThe 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 82kg. In Poland, we observe that the meat consumption has been increasing since 2000picking up in 2007 followed by a decrease indicating an impact of the general economycrises from 2008 onwards.Figure D.1Total consumption of meat per capita, kg.80787674727068666462602000 2002 2005 2006 2007 2008Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.184


Looking into the composition of the meat consumption, we find that pork meat has thelargest market share but the consumption trend is relatively stable, cf. exhibit 3. Theobserved increase in meat consumption has taken place within poultry both in absoluteterm 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.2Consumption per capita, kg504540353025201510502000 2002 2005 2006 2007 2008PorkPoultryBeefSource: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.D.2.1Meat price volatilityThe market prices is based on an average price per year which might hide some for pricefluctuation over the period but under all circumstance Figures D.3 and D.4 give an overallpicture of the trends in market prices.The market (retail) prices for pig meat has in period 1999 to 2008 been somehowfluctuating 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 theprices up till Poland join EU in 2004. In the following period the prices are relativelystable, but from 2007 to 2008 prices have increased again.185


Figure D.3Average retail prices for selected pig product 2000-2008, zl30,0025,0020,0015,0010,00Pork centre cut loin roast 1kgPork shoulder, boneless 1kgPork, cooked ham, 1 kgSausage "My•liwska" 1kg5,000,001999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: Central Statistical Office of Poland, Regional data bank.The market (retail) price for gutted poultry has been fluctuating considerable in the samemanner as pig meat as illustrated above. However, the overall impression is that theprices has been relative stable without been affected by Poland joining EU and by asignificantly increase in consumption (demand) as shown above. The increasingconsumption has, as seen below, been followed by an increasing production.Figure D.4Average retail prices for gutted chickens (1kg), 2000-2008, zl6,005,004,003,002,001,000,001999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: Central Statistical Office of Poland, Regional data bank.186


D.3 The market structureD.3.1Number of enterprisesFigure 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 arepart of or member of larger company groups.In 2003/2004, there is about 18,000 meat producing enterprises in Poland which seems toquite high compare to other western countries, e.g. UK. After 2004, the number ofenterprises starts to decline and reach 15,500 in 2007 indicating a process of structuralchange continuing after Poland has join EU.Figure D.5 Number of enterprises, 2007185001800017500170001650016000155001500014500140002003 2004 2005 2006 2007Source: Eurostat.D.3.2Size structureFigures on size classes is only available for 2001, and here we observe that a 72 percentof the enterprise has less than 9 employees occupying 12 percent of the employees withthe meat industry. Enterprises with more than 250 employees counts for 2 percent of theenterprises employing 42 percent of the employees.187


Figure D.6 Number of enterprises by size classes, 20011 and 910 and 1920 and 4950 and 99100 and 249250 and overSource: Eurostat.Figure D.7 Number of employees by size classes of enterprises, 20011 and 910 and 1920 and 4950 and 99100 and 249250 and overSource: Eurostat.After joining EU, we have good reason to believe that a concentration has taken place andthe average size of the enterprises has increased as the number of enterprises has beendeclining while we in the same period observe an increase in the number of employees by15,000 persons.D.4 Market featureD.4.1Level of innovation and investmentsAs an indication for innovation we have here used figures for investment as it indicatessome kind of improvement of the production facilities but we cannot for sure assume thatnew products or production processes has been development or organisationaldevelopment has taken place.In the period of 2000 to 2007, we find that the investment has been increasing until 2004from EUR 184 million to EUR 344 million as an indication of the industry – and foreigninvestors – have been dedicate to modernise the meat industry. After the Europeanaccession in 2004, we find that the investment in the meat industry stabilise at a level for188


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 equipmentand 37 percent within construction and alteration of buildings. These investments have, asindicated above, contributed to reduce the technological gab between the Polish and theEU-industry and to the adaption of modern methods of production.Figure D.8Gross investment in tangible goods in the meat sector5004504003503002502001501005002000 2001 2002 2003 2004 2005 2006 2007Source: Eurostat.D.4.2ProfitabilityProfitability 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 arelatively low level or even negative. However, after 2004 the profitability stabilises at aquite low level of 3 percent indicating than the industry has not been affected by somedramatic industrial or economy changes.Figure D.9 Gross operating surplus/turnover (gross operating rate) (%)302520151050-52000 2001 2002 2003 2004 2005 2006 2007Source: Eurostat.189


D.4.3Added value – productivityFigure 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 in2004, which could express that technological improvement/adjustment compared to theEU-industry is taken place, but have not be capitalised until Poland joined EU in 2004given better access to larger markets.Figure D.10 Gross operating surplus/turnover (gross operating rate) (%)12,010,08,06,04,02,00,02002 2003 2004 2005 2006 2007Source: Eurostat.D.5 The meat supply chain – the overall industrial structureIn this section we will look into the overall industrial structure of producing anddelivering meat products to the market in order to reveal characteristics than might havean impact of the competitive power in the value chain.In this section we will describe the structure in the value chain for meat production anddistribution 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 ishorizontal integration of these two value chains. The subsequent section will focusexplicitly 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 productionand meat production and processing is low, although growing.190


D.5.1FarmingLooking into the farming structure, we observe that the Polish agriculture is characterisedby an average size of agricultural holdings at 10.15 ha of agricultural land. More than halfof the holdings produce only or mainly for their own use, thus reducing their expenses onthe 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 decliningand then number of larger holdings is increasing. The no-commercial market seems torepresent about 10 percentage of the production but is in a process of being squeeze outof the market. In 2008 11 percent of the holdings have more 15 ha and these larger farmshave a predominant share of agricultural land at 47 percent.Even though we observe tendencies to restructuring rearing of pigs is still dispersed onhuge number of holdings. The total number of holding rearing pigs have been decliningfrom about 700,000 holdings in 2005 to 664,000 in 2007 of which about 85 percent have20 animal or more.Up till Poland’s accession to EU, the number of holdings with boilers increased reachinga peak in 2005 of about 665,000 holdings of which about 10,000 holdings have more than100 boilers. In 2007 the number holdings have been reduced to 633,000 of which 6,400have more than 100 boilers. Holdings with more than 100,000 boilers represent about 25percentage of the production and this share has been declining.D.5.2Middleman procurement of livestockMost transactions occur on the spot market or as loose contractual arrangements wheremiddlemen 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 weobserve the formation of producer marketing groups delivering to the slaughterhouses.These producer groups can represent bargaining power (longer term contract and abilityto achieve higher prices) against the meat industry but the all impression is that thesegroups are only progressing slowly (the exact number of these producer groups isunknown).Among the large meat production industries, we observe some downwards integration asthe companies typically have their own middlemen procuring livestock as well as some ofthe larger companies have close relationship with farmers (agreements) or some haveeven 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 agrowing concentration is taken place in pig production.191


D.5.3Meat industryFor the meat manufacturing industry as a whole we find an increased employment, butthe increase takes first of all place within the poultry sector, as an outcome of increasingdemand and production.Figure D.11 Employment in meat processing industry, 2002 – 2007, Index 2002 =10014013513012512011511010510095Production, processing,preserving of meat, meatproductsProduction and preserving ofmeatProduction and preserving ofpoultrymeatProduction of meat andpoultrymeat products902002 2003 2004 2005 2006 2007Source: Eurostat.The number of enterprises has been falling and most significantly for the sector producingand preserving meat, as per Figure D.12.Figure D.12 Number of enterprises in meat processing industry, 2002 – 2007, Index 2002 =1001101051009590858075Production, processing,preserving of meat, meatproductsProduction and preserving ofmeatProduction and preserving ofpoultrymeatProduction of meat andpoultrymeat products702002 2003 2004 2005 2006 2007Source: Eurostat.From 2002 to 2007 the average size of a meat producing enterprise increases from 27employees to almost 40 employees. Within the production and preserving of poultry meatenterprises have in average 71 employees in 2007 which is much higher than the meatprocessing industry as a whole.192


As to vertical integration, large meat processors do have integrated abattoirs indeed intheir capital groups, though some of them slaughter more animals than they process (ineffect selling half-products on to other processors), others have less slaughtering thanprocessing capacity and buy half-products in the market. Leading processors often havetheir own breeding facilities, though they usually account for much less than theirprocessing needs. Some processors are also integrated into retail (through meat shopchains).The concentration within the meat processing industry is driving by structural change inthe sector as well as by FDI. The foreign investors have not only focused atmodernisation and restructuring the industry but has also lead to formation of industrialgroups and hereby to a concentration. Some of the meat-industry firm which has attractedforeign investment or larger industrial concentrations are:• The Animex Capital Group (holding 13 companies in Poland) working in four basicareas:o production and processing of meat ( red and venison);o production and processing of poultry;o agriculture and factories of fodders;o foreign trade and national sale.• Soko•ów S.A. is the biggest meat-firm noted on Valuable Papers Stock S.A. inWarsaw. 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 fortextile 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 andturkey products in Poland having a large market share in national market. The Groupis specializing in farming and industrial fattening of turkeys and production and saleof turkey meat and turkey products.193


D.5.4Distribution – wholesale and retailWholesale markets are an important link in the distribution system and almost 40 percentof the total sales of fresh fruit and vegetables in Poland take place on the wholesalemarkets. Other products offered on those markets include flowers, eggs and dairyproducts, meat, fish, preserves and flower accessories. The currently functioningwholesale markets were created under departmental and government programmes forcreating and development of wholesale markets with a substantial support from publicfunds.However, within meat production we observe that traditional wholesalers with meat aresqueezed out and replaced by “functional” wholesaler working on behalf for meat plantsor the larger retailers.In the retail sector we observe also a tendency to a higher concentration as the numbers ofplayers are declining, as per Figure D.13.Figure D.13 Retail industry, 2002 – 2007, Index 2002 =100Source: Eurostat.Large supermarkets and hypermarkets retail networks (often foreign own; e.g. German orFrance retail groups) continue to increase their market share especially in the large urbanareas. In the value chain the large retailers seems to have a strong bargaining power in avery competitive market.However, the number of other retailers (e.g. groceries, specialised meat shops andcatering outlets) is still very high but declining. Distribution of meat to these shops takesplace through wholesalers but to an increasing extent also through direct sales from theslaughterhouse and the processing industry.Some of the meat processers have their own brands (e.g. Soko•ów) in order to obtain astronger market position but generally the cost for establishing own brands are too highfor most of the processing industry.194


D.6 Pork supply chainIn this section we will focus at trade and consumption and the price structure.D.6.1Pig meat and consumer product of pigsIn 2008, Poland has a huge domestic production, but Poland is also integrated ininternational supply chain. In 2008 Poland is a net-importer of pig meat as the productionis lower than the consumption (see below).Figure D.14The supply chain of pork and pork meat in Poland, 2008 and in 1,000 tonnesImport Production andExportconsumptionLive bovine animals424,000 headsProduction forslaughter(live weight)(cooled weight)423Production fromslaughter(cooled weight)Live bovine animalsConsumption(cooled weight)(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 moreintegrated in the international market. In general, the entire production and consumptionis rather stable in the period while import and export especially after 2004 increase fromrepresenting about 5 percent of the production/consumption to more than 25 percent.After Poland’s accession to EU, export to CIS-countries to very low price (subsided)where replaced by an increasing export to (and import from) EU-countries as the valuechain (e.g. larger foreign industrial groups) has been an integrated part of the EU-valuechain buying raw material from other countries and supplying the EU-market. Further,Poland has been a net-export until 2007, but in 2008 the import exceeds the export.195


Table D.2Production, imports, exports and consumption of pork, in thousand tonnes2003 2004 2005 2006 2007 2008Production from slaughter 1,895 1,847 1,889 2,000 2,030 1,837Import 59 60 203 178 267 499Export 132 81 294 314 338 432Consumption 1,822 1,826 1,798 1,864 1,959 1,904Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.D.6.2Prices structure for pig productsThrough the value chain we will expect that the processing of the meat will increase thevalue of the product and hereby the market prices of the product. Table D.3 clearlyillustrates this value creating process.A first examination of the prices of pig meat in the period 2003 – 2008 reveals increasingprices at all stage in the values chain from 2003 to 2004 and again from 2007 to 2008 andrather stable prices between 2004 and 2007, but the growth rate differs betweenprocurement prices, producers prices and retail process.The procurement prices – the payment to the farmers – have in some year even beenfailing and a more significant increase in the procurement prices are only seen from 2007to 2008. We have here some indication of an increasing price gab which to some extenthas been reduces from 2007 to 2008.Table D.3 Price volatility for pig meat through the value chain, per kg in zl, 2003-2008Average procurement prices2003 20042005per kgin zl2006 2007 2008Pigs for slaughter (in live weight) 3.68 3.57 3.82 3.56 3.46 4.01Average prices received by farmers onmarketplacesPigs for slaughter 3.6 3.65 3.91 3.61 3.59 4.06Retail prices of some consumer goodsPork meat. bone-in (centre loin) 13.46 13.48 13.54 13.1 13.43 14.49Pork ham. boiled 18.89 19.85 19.94 19.64 19.84 20.64Sausage "Mysliwaka" 21.46 23.19 24.32 24.34 24.68 26.06Pork frankfurters per kg 7.2 7.76 8.53 8.34 8.72 9.53Note: 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 theCentral Statistical Office.196


The changes in the producers and retail prices are to some extent difficult to compare asthe product might not be completely comparable. However the price volatility follows thesame pattern, but a closer examination might reveal that the producer prices increaseslightly more than retail prices.Comparing the procurement prices of pigs for slaughter and the retail prices, we find infor most of the products that the procurement prices have been relatively high in 2004 and2008 compared to the retail prices while the retail prices have been relatively increasingin 2005-2007.Table D.4Relations between retail prices of some consumer products of pigs and procurement prices of pigs for slaughter2003 2004 2005 2006 2007 2008Procurement price of 1 kg of pigs for slaughter = 1.00Pork meat bone-in (centre lion) - kg 3.67 3.78 3.54 3.68 3.88 3.61Pork ham boiled - kg 5.13 5.56 5.22 5.52 5.73 5.15"Baleron" (cervical pork boiled) - kg 4.63 4.98 4.46 4.58 4.77 4.24Sausage "Mysliwska" - kg 5.83 6.5 6.37 6.84 7.13 6.5Sausage "Torunska" kg 3.23 3.48 3.14 3.31 3.44 3.14Raw bacon -kg 2.36 2.92 2.82 2.88 3.02 2.76Pork fat -kg 0.8 1.03 1.13 1.01 0.97 0.98Note: 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 pricesand a closer examination of the development in prices in the period 2005-2009 revealsthat the procurement prices for pigs for slaughter were rising two times slower than theselling prices (producer prices) and retail prices for boiled pork ham and “toru•ska”sausage while retail prices have only increase slightly more than the selling.197


Figure D.15Procurement price for pigs and selling and retail prices for pork ham boiled [in z•/kg]14,00y = 0,0427x + 19,10524,00procurement price for pigs12,0010,008,006,004,00y = 0,0407x + 15,049y = 0,015x + 3,443622,0020,0018,0016,0014,00selling price and retail price for pork ham boiled2,00I 2005 III V VII IX XII 2006 III V VII IX XI I 2007 III V VII IX XII 2008 III V VII IX XI I 2009 III V VII IX XII 201012,00procurement price for pigs selling price retail price trendSource: Central Statistical Office (GUS) and Agricultural Market Agency.Figure D.16Procurement price for pigs (in z•/kg) and selling and retail prices for "Toru•ska" sausageProcurement prices for pigs7,006,506,005,505,004,504,003,50y = 0,0323x + 9,0518y = 0,0381x + 11,264y = 0,015x + 3,443615,6014,4013,2012,0010,809,608,407,20Selling prices and retail prices for "Toru•ska" sausage3,00I 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 20106,00procurement price for pigs selling price retail price Lineær (retail price)Source: Central Statistical Office (GUS) and Agricultural Market Agency.An international comparison of the procurement prices in Poland with Germany showsthat the procurement prices has been lower in Poland, but in 2008 and 2009 the pricelevel converge or even merged to the same prices level. Special attention should be pay to2007 and 2008 while the procurement price goes from index 94 to 109 without the sameincrease in producer prices and retail prices. The Agricultural Market Agency(Informative Bulletin 10/2008) argues that the increase in procurement prices is causedby sharp drop in livestock caused by oversupply and increase in feed prices lowering thelevel of a profitable production.198


Figure D.17Farmers’ price for pig meat delivered to slaughter houses, prices per weekIn any case, it is very interesting to notice that the procurement prices in 2006 in Polandhave be lover compared to Germany and Denmark, but in 2009 the procurement priceshas been higher in Poland, shown below.Figure D.18 Procurement prices in Poland, Germany and Denmark in 2006199


Figure D.19 Procurement prices in Poland, Germany and Denmark in 2009In general, we observe that rather radical changes in the Polish market for both pig meatproducts and poultry where the Polish industry has taken advantage of their competitiveedge, mainly in terms of pricing.D.7 Poultry supply chainD.7.1Consumption and production levelsFor poultry, we observe that the consumption in 2008 is much lower than the productionwhich makes Poland a net-exporter of poultry, Figure D.20.Figure D.20The supply chain of poultry in Poland, 2008 and in 1,000 tonnesImport Production andExportconsumptionLive poultryProduction forslaughter(live weight)(cooled weight)314Production fromslaughter(cooled weight)Live poultry48203 headsSource: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.Consumption(cooled weight)(cooled weight)42In the period 2003 to 2008, the poultry industry in Poland experiences some radicalchanges in the market situation. On the one hand, the consumption increases by 65200


percent. On the other hand the production doubles and after 2004 the export increasesheavily and is eight time higher in 2008 than in 2003.Table D.5Production, imports, exports and consumption of poultry meat, in thousand tonnes2003 2004 2005 2006 2007 2008Production from slaughter 621 829 1,086 1,136 1,194 1,252Import 16 29 82 79 69 42Export 42 55 212 250 280 314Consumption 595 803 956 965 983 980Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland.D.7.2Prices structure for poultry productsThrough the value chain we find that the processing of meat increase the value of theproduct and as expected the retail prices are higher than the procurement prices but wealso 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, 2003-2008Average procurement prices2003 20042005per kgin zl2006 2007 2008Poultry for slaughter (in live weight) 3.27 2.93 3.14 2.76 3.52 3.46Average prices received by farmers onmarketplaceslive hen - 1,5-2,0 kg per unit 9.07 9.16 11.56 12.34 12.89 15.35Retail prices of some consumer goodsDisembowelled chicken 5.76 4.93 5.63 4.9 6.31 6.21Source: Statistical Yearbook of Agriculture 2009, Central Statistical Office of Poland and GUS-data from theCentral Statistical Office.In 2004, the price formation seems somewhat strange in 2004 probably due to change inthe regulatory regime, In the following years the procurement, producers and retail pricesare fluctuating following the same patent of increase and decrease in prices.However, a closer examination reveals that the rise of the procurement prices for poultryfor slaughter was two times smaller than the rise of selling prices and retail prices fordisemboweled chickens.201


Figure D.21Procurement prices for poultry and selling and retail prices for disembowelled chickens, in z•/kg6,008,70procurement price for poultry5,505,004,504,003,503,00y = 0,0296x + 5,0781y = 0,0226x + 4,4554y = 0,0127x + 2,91167,606,505,404,303,202,10selling price and retail price for disembowelled chickens2,50I 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 20101,00procurement price for poultry kurcz• patroszone cena zbytu kurcz• patroszone cena detaliczna trendSource: Central Statistical Office (GUS) and Agricultural Market Agency.D.8 The cost structureSome very general figures about the cost structure in the meat production and processingindustry are presented in exhibit 25 (see also the annex). In all sector the main cost ispurchases of goods and services mainly animals for slaughtering and meat for processingwhich counts for about 90 percent of turnover.The overall impression is that the meat manufacturing industry with pigs and poultryproducts only comes out with a small surplus (see also exhibit 10) which might indicate astrong competition and/or a pressure for further structural change.Table D.7 Actual cost within the meat production, millions Euro, 2007Production andpreserving ofmeatProduction andpreserving ofpoultry meatProduction ofmeat and poultrymeat productsTurnover or gross premiums written 5,258 2,448 2,891Gross operating surplus 125 112 75Production value 4,685 2,065 2,411Total purchases of goods and services 4,834 2,212 2,612Purchases of energy products (in value) : : :Personnel costs 439 165 286Wages and Salaries 357 132 233Social security costs 83 32 53Source: Eurostat.202


D.9 Value chain and industry issuesD.9.1Developments and trendsProduction of pig and poultry meat trend is taken place in fragmented value chainscharacterised by low-scale production of pigs and poultry for slaughtering as well as weobserve huge number of production and processing enterprises. In order to make thevalue chain functioning, middlemen are playing an important role especially in the lowerend 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 tendencytowards:• larger holdings even though this transformation probably will take years;• increasing concentration within production and processing of meat among otherinitiated by the establishment of large (foreign own) industrial groupings but no oneof the groupings have so far a dominating position in the market;• increasing concentration in retail as larger retail (foreign own supermarket andhypermarket) chains are entering the market gaining strong market positions.These new large and strong player in the value have also been followed by some verticalintegration. At farm level, the farmers try to strengthening their market position byestablishing producer marketing groups delivering to the slaughterhouses. The prevalenceand impact of these groups are probably to be seen.The large industrial groups with production and processing are often developingproduction lines which include slaughtering and processing of meat products. In somecase we even observe further downwards and upwards integration as these industrialgroups have their own farms for feeding pigs and/or poultry, purchasing units contractingthe farmers as well as some also have their own distribution facilities.The middlemen, the wholesaler, the small producers and retailers are facing increasingcompetition 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 pressureEven though some consider the Polish meat to be very advanced (excellent assortment ofproducts), the market is met by increasing demand for improved quality and standards.An increasing quality pressure would contribute to more formalised business relationshipe.g. more use of written and long lasting probably agreement/contacts in favour of thelarger enterprises.Existence of middlemenThe middlemen do play an important role and do not exclude transmission of informationfrom costumers (e.g. about quality) or the use of formal contractual relationships.However, trading through middlemen will typically be based on less formal type ofbusiness relationships as repeated market transaction. Further, the middlemen trend to203


lower the prices e.g. to the farmers as they may capture a part of the margin e.g. forimplementing better quality.TrustTrading relationships in the value chain may to a large extent be based on trust. Personalrelationship is also an important factor supporting the building of repeating businesstransactions e.g. through middlemen.However, the value chain seems also to be influence by distrust among the partners asmany have unwillingness to share information with trading partner or entre closerbusiness relationships.The situation is somewhat different when it comes to large retailers and manufactories asthe business relations becomes much more sophisticated and complicated. More often thepartners 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 - inthe value chain which have increased institutionalisation of the trading relationship in thevalue chain.D.9.2Bargaining power issuesEven though we see structural changes taken place, the market is still dominated by shortterm repeated agreement and the spot market. The fragmented structure is still alimitation for developing more tight relationship between the farmer, the industry anddistribution.The farmers seems to be in the weakest bargaining position as they typically only are ableto deliver small quantity of meat (animal for slaughtering) as well as the price formationat the spot market follows the price level in the neighbouring countries. An attempt toincrease prices exclusively in Poland will probably be met by an increasing import (ifthere is sufficient supply of pigs and poultry for slaughtering). The large production andprocessing industry do following the prices in these countries and will within a shortnotice 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 andespecially the large chain have a strong bargaining power. Especially when it comes toraw meat, the retailers can choose between many suppliers and the prices formation willto a large extent depend on the supply (the price at the spot market). Some of the largergroupings have established their oven distribution network in order to have more tightrelationship 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 (qualityproducts) as a market strategy to obtain higher prices. The industry stresses that it is verycostly to establish a brand and the existing low profit margins is a hindrance for such204


investments. As a responds to brands, the retailers could introduce private labels but theimpression is that privet labels are not widespread.All in all, short term repeated agreement and the spot market is still dominating themarket. Some argue that the market – the price formation - is even very transparent butretailers having the strong bargaining position. Trading agreements are often on a weeklybasis and with short term condition for payment. In rare cases and with larger consumers,the agreements can last up 4 to 8 weeks.D.9.3Code of conductThe 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 aswell as the institutional and regulatory set up. A key issue is to develop the value chain tomeet the competitive challenge followed by the transition to a market economy and theaccession to EU. The main consideration seems to pursue the economic opportunities inthe market rather to discuss whether regulation or a voluntary code of conduct as a bettersolution to problems in the value chain.Polish Food LawToday, the Polish regulatory regime is generally based on provisions from the EU(Common Agricultural Policy) and Poland’s entry into EU has involved adjustment inanimal production and processing, aimed at ensuring food quality. These requirementshave led to investment/FDI in improved or new production facilities followed byrestructuring, tendencies to concentration in the food sector.When it comes to price formation, the Common Agricultural Policy do not interferedirectly with the market (no intervention procurement but subsides for storage andexport) which might the impact of more fluctuating price. The Office of Competition andConsumer Protection 80 exerts control over the observance of market competition rulesand is in charge of consumer rights protection in Poland. Two basic legal acts concerningcompetition rules and consumer protection are “The Act of 16 February 2007 oncompetition and consumer protection” (Journal of Laws of 2007, No. 50, item 331, asamended) 81 and “The Act of 16 April 1993 on combating unfair competition” (Journal ofLaws of 2003, No. 154, item 1503 as amended) 82 . Another general act that regulatesmarket functioning in Poland is “The Act of 12 June 2003 on payment terms incommercial 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 beenencountered any significant problems when is goes for prices formation and merges.Some larger industrial groups have been established in the pork and poultry processingindustry but the value chain is still to be characterised as fragmented and not industrial80818283(Urz•d Ochrony Konkurencji i Konsumentów - http://www.uokik.gov.pl/.Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentów (Dz.U. 2007, Nr 50, poz. 331 ze zm.).Ustawa z dnia 16 kwietnia 1993 r. o zwalczaniu nieuczciwej konkurencji (Dz.U. 2003, Nr 154, poz. 1503 ze zm.).Ustawa z dnia 12 czerwca 2003 r. o terminach zap•aty w transakcjach handlowych (Dz.U. 2003, Nr 139, poz. 1323).205


concentration seems to have any dominating position on in the value chain to affect theprices formation.However, political initiatives have been taken in order to monitor the prices in the foodmarket.A price commission was an initiative by the former Polish government. The initiativeinvolved the formation of working groups with the participation of meat producers andprocessors, whose main goal was to overview the meat market by gathering andpublicizing information on average weekly meat prices in the value chain in order toprovide the market with more transparent and updated price information. The pricecommission’s work has been terminated probably due to political reason.A new initiative was launched in February 2010 by establishing an “Intersectoral Groupon Strengthening of the Agri-Food Products Market Transparency and Food SupplyChain Functioning Improvement” 84 under the Ministry of Agriculture and RuralDevelopment. The Group has among others to overview and estimation of commercialpractices within food supply chain, working out an idea of how to constantly monitorprices and margins, looking for the possibilities of reaching consent among participants ofthe food supply chain and preparing a code of good commercial practice in relation totrade in food.Voluntary agreementsThe impression is that there is no real tradition for voluntary agreement in Poland and wehave 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 Polishgovernment but the initiative had involved a working group with the participation of meatproducers and processors.84Mi•dzyresortowy Zespó• do spraw Zwi•kszenia Przejrzysto•ci Rynku Artyku•ów Rolno-Spo•ywczych i PoprawyFunkcjonowania •a•cucha •ywno•ciowego.206


E GermanyE.1 IntroductionWithin the manufacturing industry, the food sector is a dominating sector whichaccounted for 11 percent of the employees in Germany in 2007. The food sectorrepresents about 800,000 persons employed in total and when including farming andtrading, the food sector increases its important in the economy.Table E.1 highlights the size and the economic importance of the food sector in Germanyas well as of the entire meat sector. The meat sector represents a significant importance inthe economy accounting for about one quarter of the employment and turnover in thefood sector. The large size (employment share) of the meat sector does not lead to relativehigh scores on the economic performance indicators such as value added, profitability andproductivity.Table E.1 Main indicators of the German meat and food industry, 2007Meat Food* Meat % FoodTurnover (EUR million) 36,433.1 163,232.0 22.3Production value (EUR million) 34,276.5 150,752.7 22.7Value added at factor cost (EUR million) 6,724.5 34,077.7 19.7Gross operating surplus (EUR million) 2,650.6 12,356.4 21.5Labour costs (EUR million) 4,073.9 21,721.3 18.8Gross investments** (EUR million) 1,305.3 9,455.3 13.8Number of persons employed 194,349 826,011 23.5Gross value added per employee (EUR 1,000) 37.5 43.3Share of personnel costs in production (%) 11.9 14.4Gross operating surplus/turnover (%) 7.3 7.6*: Including beverages.**: In tangible goods, existing buildings and structures, machinery and equipment.Source: Eurostat.When looking specifically at the subsector meat processing (excluding slaughtering), thesector has experienced increasing turnovers and fairly stable employment numbers since2005, see Table E.2.207


Table E.2 Main indicators of the meat processing industry, 2005-20092005 2006 2007 2008 2009Persons employed 62,621 62,829 59,607 58,977 60,189Turnover (EUR million) 14,106 15,680 15,453 16,146 16,179Source: 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 producerof pig meat in the EU and the third largest producer in the world.Figure E.1Production of meat in commercial slaughterhousesSource: Statistiches Bundesamt Deutschland.Traditionally, the Germany has been a net-importer of pork meat, but the production hasincreased without an increase in the national demand. In 2006, the production pass theconsumption at the home marked and Germany becomes an exporting country. In the lastcouple of years, the average monthly difference between the value of exports and thevalue 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 in2000 to 4.4 million in 2008 (ZDS 2009). The the imports of pigletts have also increaedfollowed by an increased in the domestic production. In 2000, the stock of pigs forslaughter in Germany was 10.1 million compared to 11.2 million in 2008 (ZDS 2009).Figure E.2Foreign trade in pig meatSource: Statistiches Bundesamt Deutschland.208


E.1.1Meat price volatilityFor 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 inrelation to poultry. For 2000 to 2009, the overall picture is that the prices for pig meatproducts have been rather stable, see Figure E.3. However, in 2001 the prices riseremarkable from a relatively low level and peaked in the same year followed by a gradualdecline. In the middle of the decade the prices have been very stable but in the end of2007 the prices gradual begins to rise and since the end of 2008 the prices have stabilisedat a slightly higher level.Figure E.3 Consumer prices for selected pig products, index 2000-2009Source: Statistiches Bundesamt Deutschland.The consumer prices for poultry products have been fluctuating considerable from 2000to 2009, see figure 4. The prices peak in 2001 followed by a decline, a minor peak in2004 followed by stable prices in 2005 and 2006. In the end of 2007, the prices starts toincrease dramatically and reaches a significantly higher level in 2008 follow by astabilisation at a lower level in 2009 – though at remarkable higher level than seen formost of previous years.Figure E.4 Consumer prices for selected poultry products, index 2000-2009Source: Statistiches Bundesamt Deutschland.209


E.1.2Consumption levelsThe meat consumption in Germany is about 88 kg per capita which is quite highcompared to other European countries (e.g. UK 82 kg per capita), see Table E.3. We alsoobserve that the composition of the meat consumption has developed steadily, where theshare of pig meat consumption is about 62 percent with a tendency to decliningconsumption while poultry is steady about 17-18 percent of the entire meat consumption.Table E.3 Consumption of meat (kg/head), 2005-20082005 2006 2007 2008Kg/head % Kg/head % Kg/head % Kg/head %Poultry meat 17.5 20.1 16.7 19.2 17.8 19.8 18.8 21.2Pig meat 54.1 62.0 54.5 62.9 55.4 61.8 53.3 60.3Other kinds of meat 15.6 17.9 15.4 17.9 16.5 18.4 16.3 18.5Meat in total 87.2 100.0 86.6 100.0 89.7 100.0 88.4 100.0Source: BVDF.When looking specifically at the consumption of processed meat (all kinds of meat), ithas also developed very steadily at around 30 kg per capita, see table 4.Table E.4Consumption of processed meat (kg/head)2005 2006 2007 2008Meat consumption in total 87.2 86.6 89.7 88.4Of which processed meat 30.3 30 31 30.6processed meat in % of all meat consumption 34.7 34.6 34.6 34.6Source: BVDF.The fact that per capita consumption has remained fairly stable, while production hasincreased, makes the export business of particular importance for the futurecompetitiveness of the meat industry (Bahlmann & Spiller 2008).E.2 Market structureIn this section, the market structure of the meat industry in general (production,preserving and processing of meat) will be highlighted based on data from namelyEurostat. Later on in relation to the description of the supply chain, the structure of thedifferent subsectors will be addressed more thoroughly.210


E.2.1Number of firmsThe development in the total number of enterprises in the meat sector is presented in inFigure E.5.Figure E.5Number of enterprise in the entire meat industrySource: Eurostat.The number of enterprises falls from 2000 to 2002 and in the following years the numberof enterprise has been stabilised, but some structural changes is hidden behind thesefigure. First, the largest subsector within the meat industry is production of meat andpoultry meat products representing 91 percent of the enterprises, but the main reductionof enterprises is to be found here while the number of enterprises is reduced by 40percent. Secondly, we observe an increase in the number of enterprises within productionand preserving of meat (slaughtering) representing an increase from 425 to 841enterprises.E.2.2Number of firms related to sizeIn the entire meat industry, small enterprises dominate the sector in term of number ofenterprises, see Figure E.6, but a high concentration in term of turnover and employmentis found as enterprise with more than 250 person employed counts for 47 percent of totalturnover and one third of the total employment.211


Figure E.6 Number of enterprise by size classes in the entire meat industry, 20071086963231Between 1 and 9Between 10 and 19Between 20 and 249250 or more6751Source: Eurostat.In the period 2002 to 2007, we find that the decrease in number of enterprise takes placein the group of micro enterprise (1-9 employees) where the number of enterprisesdeclines by more than 2000. The other size classes the number of enterprise is morestable with some minor peaks in the period; see table.Table E.5Enterprises by size in the entire meat industry, in percent2002 2003 2004 2005 2006 20071-9 employed 8,879 8,183 6,840 6,171 6,502 6,75110-19 employed 3,048 4,733 4,840 5,299 4,099 3,23120-49 employed 609 591 616 596 1,247 1,08650-249 employed 436 422 446 459250< employed 85 87 83 90 90 96Total 13,057 14,016 12,825 12,615 11,758 11,164Source: Eurostat.E.3 Market featuresE.3.1Levels of innovationThe level of innovation is here represented by the investment in tangible good in theentire meat industry, se Figure E.7. Over the period 2000 to 2007 the investment seems tofollow the same fluctuation as the meat prices (consumer prices). Form a high investmentlevel in 2002, the investments go down in 2001 along with the decline in consumer (seeabove) and stabilise at an investment level at EUR 600 million per year. As the pricestend to increase in the end of the period, the investment also increases from 2005 andonwards.212


Figure E.7Gross investment in tangible goodsSource: Eurostat.Split by types of investment, the entire meat industry invests about 80 percent of the totalinvestment in machinery and equipment which indicates that the investment is done inorder to obtain an increase in productivity, see Table E.6. German processors have also agood reputation for building and innovation in the meat processing industry, largely dueto their expertise in engineering (goliath.ecnext.com, 2007). However, the investmentfigures do also signal that improvement and modernisation of the production facility to alarge extent can take place within the existing facilities as investment in construction andbuildings are declining.Table E.6 Type of investment in the meat industry, 2000-20062000 2001 2002 2003 2004 2005 2006Land (%) 0.7 0.6 0.6 0.4 1.2 0.6 1.6Existing buildings and structures (%) 1.2 0.5 2.1 1.7 1.1 0.7 1.3Construction and alteration of buildings (%) 23.7 19.1 16.0 15.9 19.6 15.5 16.8Machinery and equipment (%) 74.5 79.7 81.3 82.0 78.1 83.3 80.4Source: Eurostat.E.3.2ProfitabilityIn the period 2000 to 2007, the profitability – the gross operating rate – in the entire meatindustry is fluctuating in an interval from 5 to above 7 percent, see Figure E.8. Thesefluctuations are to a very large extent following the prices volatility, but the relativedifferences between peaks and bottoms seems to by larger.213


Figure E.8 Gross operating rate in the meat industry, 2000-2007Source: Eurostat.E.3.3Added valueFigure E.9 presents the trend in value add per employees. The overall trend is that valueadded has been gradually increasing over the entire period with some minor decline en in2001-2003 and more dramatic drop back in 2005 following by increasing value added in2006 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, 2000-2007Source: Eurostat.E.3.4ProductivityThe following Figure E.10 presents the production value. We observe that the productionvalue is about EUR 25,000 million in the beginning of the period, but peaks in 2004 atmore than EUR 40,000 million and declining to about EUR 35,000 million in thefollowing years.214


Figure E.10 Production value in the meat industry, 2000-2007Source: Eurostat.E.4 The structure of the supply chainIn the following section an analysis of the supply chains will be provided. Firstly, ageneral picture of the meat supply chain will be presented and afterwards are moredetailed analysis of each level of the supply chain will be provided focused on pork andpoultry.As will be seen, in almost all parts of both the pork and poultry supply chainsconcentration is taking place. Concentration in the chains is driven by intensifiedcompetition at all levels, but especially at the retail level (Reynolds et al. 2009). Smallunits tend to survive longer in the pork chain than in the poultry chain and concentrationis more pervasive downstream than upstream. The structure of the pork chain is morecomplex than the poultry chain, due to a lower degree of vertical integration (Bahlmann& Spiller 2008). In the pork chain, the most typical relationship between businesspartners is repeated market transactions (RMT), while relations tend to be more formaldownstream than upstream (FOODCOMM 2006).In the poultry chain both independent and integrated models are practiced, but the mainplayers are working as integrations. In contrast to the pig value chain, relations in thepoultry chain between business partners are in general more formalised and based onlong-term contracts.Another major trend is that export since 2006 has been a main driver for expanding theproduction (economics of scale). Within the industry we have not only seen an increasingconsolidation in term of establishing very large enterprises build on modern productiontechnology but also an increasing international market orientation. In order to utilise theproduction capacity access to pigs for slaughtering becomes more critical and thecompetition becomes more intense at the home market, but the export business is ofparticular importance for the (future) competitiveness of the industry. The consequence is215


that the German meat production both at the supply side of pig (animals) for slaughteringand sale of process and produced meat is becoming more integrated in global chains.E.4.1An overview of the supply chainBased on data from Eurostat, FOODCOMM and Statistiches Bundesamt Deutschland, weget an overview of the supply chain in terms of number of enterprises in figure 11. Somenumbers are estimates from 2004 (marked with ˜).Noticeable is the fairly large numbers of intermediaries, i.e. livestock traders (2,299) andmeat wholesalers (1,285), active in the chain. It can also be noted, that pig meatprocessing is very dominating at the processing level as a whole. The estimated numberof pig meat processers (estimation by FOODCOMM), leaves less than 15 enterprises leftfor processors specializing in poultry or other kinds of meat. This primarily reflects theextremely high degree of concentration at this stage in the poultry supply chain. The sametendency is not as profound at the slaughterhouse level though. We also see a low numberof retailers specialised in meat sales (3,618). This number has been decreasing throughoutthe years, as will be shown later.Figure E.11 Number of enterprises in the value chain for pig and poultry products, 2007Source: 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 themeat chain (ZMP 2006).In the first part of the supply chain from slaughtering to processing, we see again theimportance of intermediaries with in pig meat as 18 percent of the pig meat for furtherprocessing is provided by meat wholesalers. Of all unprocessed pig meat entering theGerman market from both domestic and foreign sources, 54 percent is processed by theprocessing industry while 44 percent of the meat is sold as fresh or process meat by theslaughter houses. Within poultry production the wholesalers with fresh are not a part ofthe supply chain as well as only 30 percent of the fresh meat is processed.216


Figure E.12 Flows of pig meat from slaughtering to processing, 2004Figure E.13 Flows of poultry meat from slaughtering to processing, 2004Source: ZMP Warenstromanalyse Fleisch 2006.In Figure E.14, we see the flows of processed meat from processing to consumers. 79percent of processed meat entering the German market is processed by the domesticprocessing industry. The processed meat leaving the industry goes out to several differentdistributers primarily the retailers (61 percent). 19 percent is going through meatwholesalers (this eventually spreads out to chain participants further downstream.217


Figure E.14 Flows of all kind of meat from processing to consumers, 2004Source: ZMP Warenstromanalyse Fleisch 2006.After this introduction to the meat supply chain, we turn to the different levels of thesupply chain, i.e. farmers, livestock traders, slaughterhouses, processors, meatwholesalers and retailers, and we focus our attention specifically on pork and poultrymeat.E.4.2FarmingThere is one common trend in the farm structure, which goes for both pig and poultryholdings. 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 farmingin relation to poultry is often integrated up- and downstream in the supply chain. Poultryfarmers often deliver directly to the large integrated poultry companies such as PHW-Gruppe.The pig farmers are less integrated with the slaughterhouses and pig processing industrywhich is illustrated by pig farmers choosing between several different marketingchannels.218


E.4.3Pig farmersIn Germany, pig farms have traditionally been small, often family owned and managedpart-time. Three main production systems characterise pig farms in Germany: specialisedbreeding units, specialised finishing units and integrated units where both breeding andfattening takes place (FOODCOMM 2006).The main trend in the German pig production is that the farmers increasingly areconcentration there production on fattening pigs. The production of pig for slaughtering isincreasing, while the production piglets have been declining. In order to compensate forthe declining supply of piglets but increasing prices for piglets, Germany has asignificantly increasing import of piglets from among other from Denmark (2000: about 1million piglets; 2009: 9 million piglets) and the Netherlands as the German market is veryattractive.Looking specifically at fattening, during the last years, there has been an increasedconcentration resulting in fewer and larger fat pig farms. The production of fat pigsincreased significantly during the last decade from a stock totalling 10.1 million in 2001to 11 million in 2007, see table 7. At the same time, the number of holdings has decreasedfrom 85,808 in 2001 to 62,195 in 2007. Accordingly, there is a tendency towards largerfarms. In the period from 1996 to 2003, the number of farms with 199 fat pigs or moreincreased with 10.5 percentages in the old Federal States and 12.1 percentages in the newones and each farm unit had 9 percent more pigs in 2008 than in 2007 (FOODCOMM) 85 .Table E.7Holdings with fat pigs2001 2003 2005 2007Holdings 85,808 77,671 66,500 62,195Fat pigs 10,096,559 10,481,910 10,663,500 10,958,187Source: Statistiches Bundesamt Deutschland.Pig producers can choose between different marketing channels. A small minority offarmers have established direct marketing relationships with consumers based on on-farmslaughtering, cutting and in some cases even processing. Another group of farmers relyon private or cooperative livestock traders when selling their fat pigs (two-tier system). Alarge share of these transactions is done with farmer cooperatives engaged in trading. Athird group of farmers deliver directly to slaughterhouses (single-tier system). The pigfarmers’ relationships with the slaughterhouses can by and large be described as informalrepeated market transactions. A major reason for this is that the farmers generally have ahigh preference for commercial independence. At the same time tradition and trust play acentral role for them. As a consequence, the farmers primarily engage in informal, at firstsight short-term oriented, business transactions, which are, however, rather stable, andoften carried out with well-known partners (FOODCOMM 2006). While spot-market or85The German pig production is compared to the Denmark characterised by relative smaller farms, where the typical Germanpig producer have space for 176 pigs for fattening while a typically Danish farmer have space for 750 pigs. However, thereis a large diversity in size of the farm among the German farmers and the average sizes of the farms are increasing.219


informal long-term relationship with slaughterhouses tends to dominate, Westfleisch,Germany’s third largest slaughter company, strongly promotes marketing contracts withfarmers. Some slaughterhouses are owned by farmers such as EGO Osnabrück owned byapproximately 700 farmers. EGO slaughters 448,000 pigs on a yearly basis.E.4.4Poultry farmersThe production of broilers is highly concentrated in Germany. In 2007, 99 percent of allbroilers were kept by 960 (or 11 percent) of the holdings (Eurostat). The concentrationhas been increasing during the last decade. While the stock has gone up, the number ofholdings has been stable or decreasing – except when looking at the largest holdings. Thenumber of holdings with 100,000 or more broilers has increased from 80 in 2000 to 120in 2007, see table 8. In other words, the level of concentration is high and rising.Table E.8Holdings with broilers2003 2005 2007Holdings Broilers* Holdings Broilers* Holdings Broilers*1 and 99broilers10,000 60 8,340 50 7,640 60100 and 999broilers450 110 450 90 290 701,000 and2,99960 110 60 110 60 100broilers3,000 and4,99920 70 20 60 20 80broilers5,000 and9,99940 280 30 220 40 260broilers10,000 and49,999690 19,290 590 16,720 610 17,450broilers50,000 and99,999230 14,440 240 15,940 230 15,720broilers100,000 ormore broilers90 22,030 90 23,580 120 27,580Total 11,580 56,390 9,820 56,760 9,000 61,310Source: Eurostat.*: 1,000 heads.The leading farmers sometimes develop integrated production systems including ownmills for feed stuff production, animal production, abattoirs, sizing and packaging as wellas shipping and some farmers negotiate directly with retailers. It is very common thatfarms are either subsidiaries of large integrated companies or contracted by them. For220


instance, approximately 800 farmers produce broilers for PHW-Gruppe, the largestpoultry company in Germany (www.phw-gruppe.de). Approximately 20 percent of PHWfarmsare owned and 80 percent is contracted. 86 Contracts are usually quite strict, forinstance the type of feed stuff is prescribed by the companies.E.4.5Livestock tradersSpecific to the German pig market is the intermediate between the farmer andslaughterhouse level, i.e. livestock traders. The number of livestock traders in Germany isdecreasing, while turnover is increasing. In 2000, 2,520 enterprises operated in the sectorand the turnover was EUR 7.8 million. In comparison, 2,299 enterprises operated in thesector in 2007 generating EUR 10 million in turnover (Eurostat). In other words, aconcentration is taking place at this level too, even though the average size of enterprisesstill remains very small.Table E.9Livestock tradersNumber ofEnterprisesTurnover(MillionEUR)Personsemployed2000 2001 2002 2003 2004 2005 2006 20072,520 2,253 2,148 2,377 2,430 2,391 2,348 2,2997,816 7,823 7,296 7,990 8,977 9,848 11,105 10,0549,519 8,292 8,163 9,959 10,964 11,115 11,182 11,460Source: Eurostat.Concentration can be explained by concentration happening downstream. According toSchulze (2009), mergers and acquisitions are the most competitive strategy in this sectorand the concentration at the slaughterhouse level leads to increased competition amonglivestock dealers.Livestock traders play an important role in relation to pigs due to relatively large numbersof farms and the need to “bundle” large quantities of pigs. Framework agreements arenegotiated generally once every year, with penalties for delivering too few animals perweek. Sometimes bonuses are granted as well if the trader is able to flexibly deliver morethan the stipulated quantity in weeks with special needs. Livestock traders play a lessimportant role in relation to poultry, due to the high degree of vertical integrationprevailing.86http://www.ishii-co-ltd.jp/High.pdf.221


E.4.6SlaughterhousesThe 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 ofenterprises has actually gone up in recent years. Nevertheless, the largest companies areincreasing their share of the total production. In terms of poultry, the slaughterhouse levelis extremely concentrated. Only around 40 enterprises are active and the largest threecompanies generate 82 percent of turnover. In both cases, the large companies areintegrated forward into processing.Pig slaughterhousesTraditionally, the pig slaughtering sector in Germany has been quite fragmented. A largepart of the industry has been regional enterprises with relatively small shares of themarket. The industry still comprises many small and middle sized enterprises andenterprises that call themselves “Fleischhandwerk”. When looking at the number ofenterprises, it has actually gone up in the period from 2005 to 2008 (notice, that thenumber of slaughterhouses includes all kinds of meat but poultry), see Table E.10.Table E.10Slaughterhouses excluding poultry2005 2006 2007 2008Number of Enterprises 155 160 164 175Persons employed 16,238 16,550 17,249 17,980Turnover (Tsd. Euro) 9,486,523 10,148,733 10,657,514 12,539,892Source: 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 inGermany, compared to 33 percent in 2006 (Hamann 2009). In the recent years we haveseen an increase in production and at the same time a consolidation in the sector. Theslaughtering processes have been concentrated to a number of production facilities in asmaller number of very large companies operating all over the country but still verticaldisintegrated. However, some of the larger companies have developed to be verticalintegrated, e.g. as some companies are owned by the farmers.There are relatively few large enterprises in the industry, whereas B & C TönniesFleisch,Westfleisch, and the newcomer, Vion Food Group, are the largest (“the big three”). Thelargest slaughter companies have increased their production in the last couple of years. B& C TönniesFleisch has increased production with 1 million pigs each year. Westfleisch,for the first time, slaughtered more than 6 million pigs in 2008. Vion has not increased itspig production in as significant numbers as the other large slaughterhouses. The reasonfor 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 theirproduction into processing (FOODCOMM 2006). Slaughterhouses in Germany havetraditionally conducted the processes from killing (stunning, sticking and bleeding) tocutting (splitting carcass and cutting into smaller pieces), but, especially for large-scaleslaughterhouses, there is a trend towards forward integration, and thus extensions into222


processing. This holds for the ten largest meat processors in Germany which generatearound half of the total revenue of this sector.Poultry slaughterhousesIn terms of poultry slaughterhouses, the number of enterprises and persons employed areremarkably stable, see table 9. Turnover is rising, while the structure in terms ofenterprises and employment has been unchanged.Table E.11Poultry slaughtering2005 2006 2007 2008Number of Enterprises 41 42 42 40Persons employed 8595 8711 8414 9041Turnover (Tsd. Euro) 2,473,204 2,494,994 3,148,280 3,888,673Source: Destatis.The largest poultry slaughter companies are PHW-Gruppe, Sprehe and Stolle. Of the totalturnover in 2008, approximately 50 percent was generated by PHW-Gruppe, 17 percentby Sprehe and 15 percent by Stolle (Agrarmärkte 2009). In other words, approximately82 percent of total turnover was generated by the three largest companies. Thesecompanies are large integrated companies covering the supply chain from farming toprocessing.E.4.7ProcessorsOn the processing stage, there is also a tendency towards concentration, with the numberof enterprises falling from 406 in 2005 to 383 in 2009, while turnover increased. Thenumber of persons employed has been falling, indicating higher productivity.Table E.12Meat processors2005 2006 2007 2008 2009Enterprises 406 415 389 381 383Persons employed 62,621 62,829 59,607 58,977 60,189Turnover (Tsd. Euro) 14,105,843 15,680,129 15,453,051 16,146,066 16,178,594Source: Statistiches Bundesamt Deutschland.Looking at the size structure, the processing stage is numerically dominated byenterprises with less than 50 persons employed, but in terms of both persons employedand turnover, the processing stage is dominated by enterprises with 100-249 personsemployed, see Table E.13.Table E.13Meat processors by size classesEnterprises Persons employed Turnover (Mio. Euro)Less than 50 persons 588 17,289 2,006223


employedEnterprises Persons employed Turnover (Mio. Euro)50-99 persons employed 180 12,133 1,893100-249 persons employed 143 21,487 5,606250-499 persons employed 40 13,888 4,992500 or more persons employed 17 12,246 3,630Total 968 77,043 18,127Source: Statistiches Bundesamt Deutschland.Pig processors54 percent of the unprocessed pig meat entering the German market is processed by thedomestic processing industry. 67 percent is provided directly by slaughterhouses, 18percent by wholesalers and 15 percent through imports.Poultry processorsOnly 30 percent of the unprocessed poultry meat is used for further processing. 50percent of the meat for further processing is supplied by slaughterhouses, 7 percent bywholesalers and 43 percent through imports.E.4.8Meat wholesalersAs can be seen in Table E.14, the number of enterprises involved in meat wholesale (allkind 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.14Wholesale of meat and meat products2000 2001 2002 2003 2004 2005 2006 2007Enterprises 1,655 1,535 1,504 1,422 1,291 1,214 1,307 1,285Turnover 12,517 13,130 11,324 14,227 14,987 14,727 16,062 15,617Personsemployed27,328 25,546 24,781 25,775 24,653 21,798 22,648 22,514Source: Statistiches Bundesamt Deutschland.E.4.9RetailersOver the last four decades, the German food-retailing sector has been subject tocontinuous structural change. Most important have been the combination of increasingconcentration, with rising store size, and the growing role of discounters implementing anaggressive “every-day-low-price” (EDLP) strategy (Stiegert & Kim 2009) which ischanging 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 consolidationand merger activity in the sector. Hence, the concentration ratio of the leading ten firms224


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 75percent in 2010 (Schulze 2009).Within the last decade there has been a trend to market the meat product under privatelabels and the traditional way of buying meat from butchers or service sales department inthe 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 pressurewithin the sector, given that the discounters control significant shares in red meat andpoultry sales, see Table E.15 for consumer poultry purchasing behavior.Table E.15Poultry, consumer purchasing behaviour2008 2009Aldi and Lidl 29 % 31 %Discount (excluding Aldi and Lidl) 15 % 17 %Retail with food (Lebensmiddtteleinzelhandel( LEH)) 20 % 19 %SB-warehouses 23 % 21 %Butchers 3 % 2 %Others 10 % 10 %Total 100 % 100 %Source: MEG.Retailers specialised in meat and meat products (e.g. butchers or specialised departmentsin larger shops) are increasingly squeezed out, as indicated in Table E.16.Table E.16Retailers specialised in meat and meat products2000 2001 2002 2003 2004 2005 2006 2007Enterprises 5,047 4,793 4,377 3,450 3,236 2,922 3,573 3,618Turnover 2,401 2,409 2,139 2,089 1,937 1,927 2,068 2,069Personsemployed41,723 39,688 36,480 31,393 29,219 27,988 31,998 33,109Source: Eurostat.These trends of moving the retailing of meat toward larger retail chains and especiallydiscount shops and private labels will set lower prices (and cost) and the ability to deliverlarger quantity on the top of the agenda. Smaller (regional) slaughterhouse and butchersand smaller retailer is challenged by these changes in the market.In these years, food retailers align their firms’ strategies to make them moredistinguishable for consumers. This “diversification” affects their relationships with theirsuppliers. Today, business relationships between distributors and processors embracemany relationship types and include ad hoc online transactions, annual negotiations,integration as well as short term and long-term contracts (FOODCOMM 2006). Someretailers are integrating into the meat processing industry, including REWE and EDEKA.225


An increasing focus at quality and especially on food safety and traceability (also apreference for German produced meat in the Germany market) seems also to put apressure on the private labels (Aldi and Lidl has recently reduced the number of privatelabels) and new openings in the market for new innovative product which can beforeseen.E.4.10Prices and cost along the chainWithin the last decade, the price index illustrate how the price have developed the valuechain 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 in2001 compared to wholesale and retail prices, but in the following year the retailprices 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 pigproducts increase. In 2006 the wholesale and retail prices seems to be effected by therelatively increasing prices. I 2007 the wholesale and retail prices follow theincreasing producer prices, but remain at a relative high price level when the producerprices go down in 2009 (expect for frozen poultry meat).During the last decade we observe rather fluctuating producer prices while the especiallythe retail prices have been rather stable except for 208 an 2009, where the retail andwhole sale prices do not follow the falling producer prices.Table E.17 Price index for meat products in the value chain, Index 2005 = 1002000 2001 2002 2003 2004 2005 2006 2007 2008 2009Producer price- Pork, fresh or chilled 85.3 103.2 94.0 91.8 98.9 100.0 105.8 100.4 110.7 102.2- Pork, parts, salted, dried, 92.9 106.4 100.6 95.4 97.1 100.0 103.1 100.7 104.8 102.5smoked Norwegian- Poultry meat, fresh or100.0 100.0 101.2 104.9 103.0chilled- Poultry meat, frozen 90.3 99.4 96.0 94.8 96.4 100.0 98.1 113.6 127.8 127.6Wholesale of meat and 89.2 101.4 95.6 93.9 96.8 100.0 101.6 100.7 107.4 107.2meat productsRetail sale of meat andmeat products94.1 101.1 101.1 99.9 99.8 100.0 100.8 102.8 106.7 108.9Source: Federal Statistical Office of Germany.Pig meat pricesA closer look at the pig meat prices in value chain over the period 2006- 2009 shows avery parallel prices development between farmers and wholesale prices but to the sameextent for the consumer prices, see figure 16. Over the period 2006-2009, the consumerprices seems to have increased be the end of 2006 and remained at this level.226


Figure E.15 Pig meat prices in the value chain, euro/kg, 2006-2009Source: AMI-Marktbilanz: Vieb und Fleisch 2010.The differences between the farmers, wholesales and consumer prices indicate that thecosts, value add/profit per kilo meat are relative lower by the farmers and in theproduction. Between wholesale and consumers prices we observe the largest “jump” inthe pries per kilo and since the consumer prices are fluctuating different manner that theprevious level in the value chain, we may assume that the consumer prices are influencedby another cost structure and competition pattern.Poultry meat pricesIn the period 2004-2009, the prices formation and the prices development for poultrymeat is somewhat different to the development for pig meat. From 2004 and onwards theprices have l been rather stable at all level in the value chain but in 2007 the pricesincrease rather dramatic and stabilise in 2008 and 2009 at a higher level. However, theprices from the farmer have a falling tendency and the consumer prices are veryfluctuating in this period.Figure E.16 Chicken meat prices in the value chain, euro/kg, kg 2004-2009Source: AMI-Marktbilanz: Vieb und Fleisch 2010.227


Figure E.16 indicates that the main part of the costs of the final product is placed by theprocessor which indicate that the main part of the cost and value add are placed at thislevel in the value chain.Table E.18Cost structure within meat production, Percent of gross outputProduction andpreserving of meatProduction andpreserving of poultryProduction of meat andpoultry meat productsmeatMaterial consumption 81.9 59.3 57.2Energy cost 1.1 2.5 2.0Use of commodity goods 1.2 16.4 6.7Costs for contract work 2.3 0.6 0.8Gross wages andsalaries3.9 6.0 10.3Social cost 0.8 1.3 2.2Other inputs 0.6 1.2 1.7Tax expense 0.3 0.3 0.6Rents and leases 0.6 1.4 2.0Temporary workers 4.9 9.0 9.7Depreciation 0.7 1.4 2.0Borrowing costs 0.4 0.7 0.5Source: Federal Statistical Office of Germany.Cost StructureThe cost within meat production and processing (primarily pig meat) indicate that themain 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 relativelycloseness and parallel development the farmers process and the wholesale prices.For poultry meat, the cost structure in production and processing is quite different as thecost to poultry for slaughtering (material) is much lover and the cost for commoditygoods and labour cost represent a larger share of the costs. These figures underline theabove assumption that a main part of value added is generate in the production andprocessing 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 theactual cost in production and processing of meat. These figures seem to be I line with theabove assumption of the cost structure in the value chain.Table E.19Actual cost within meat production, 2007, millions of EuroTurnover or grosspremiums writtenProduction andpreserving of meatProduction andpreserving of poultrymeatProduction of meat andpoultry meat products11,187.1 3,497.2 2,1748.8228


Production andpreserving of meatProduction andpreserving of poultryProduction of meat andpoultry meat productsmeatGross operating surplus 410.8 161.1 2,078.8Production value 11,088.1 2,935.4 20,252.9Total purchases ofgoods and services10,215.0 3,088.9 16,342.7Purchases of energyproducts (in value)121.5 86.8 447.3Personnel costs 567.7 256.3 3,249.9Wages and Salaries 466.2 212.2 2,664.8Social security costs 101.5 44.1 585.1Source: Eurostat.E.5 Value chain and industry issuesThe German meat market is, as highlighted above, especially with the pig meat valuechain characterised by low degree of vertical integration and many livestock traders andwholesalers to tie the value chain together. The low integration in the value chain isfollow by business relationships characterised by repeated market transaction whichmeans that the prices are negotiated typically on short term contract (e.g. weekly basis) orfix by the spot market. Longer term contracts seem to relative rare. The main competitivefactor is the prices but with some tendency that other competitive factors such as qualitymight have an increase impact on the market.E.5.1Bargaining power issuesThere is strong competition on every stage of the supply chain. Neither food retailers norprocessing companies or farmer associations dispose of sufficient market power to takeon the role of a comprehensive chain coordinator or to set industry standards.Nevertheless, the retailers without doubt have the upper hand in terms of bargainingpower. Due to the retailers’ important market share, they do play a crucial role indetermining prices along the chains. Through increased engagement in private labels, andbackward integration of some chains such as EDEKA and REWE, which are running ownslaughterhouses, they considerably influence the meat market. In terms of the relationbetween processors and retailers, the fierce competition and the increasingly sophisticateddemand and price senility of German consumers are the main driving forces for thedevelopment of relationships between processors and retailers. This development has ingeneral led to a higher dependency of processors towards distributors (Reynolds et al.2009).ImbalancesThree factors creating imbalances are highlighted: Firstly, lack of transparency, secondly,lack of coordination and thirdly, retail power.229


Lack of TransparencyThe pork industry in Germany has traditionally been characterised by “arm’s length”transactions. In a highly competitive surrounding, the supply chain shows a certain levelof distrust, which leads to distinctive inefficiencies. Partly doubtful grading processes anda lack of price transparency in the market cause conflicts and lead farmers to question thecredibility of their buyers (Schulze et al. 2006). A major provision for conflict in relationto the pork chain is missing transparency regarding rating and accounting of farmers’products by their buyers (traders and slaughterhouses). Traders and slaughterhouses, onthe other hand, see a central problem in their relationship to farmers in hiddeninformation regarding the quality of supply (Reynolds et al. 2009).One reason for the generally reserved willingness to share information across the chainmay also be that there is hardly any incentive to establish transparency. On spot marketsfarmers and livestock dealers but also processors and meat wholesalers sometimes evenbenefit from the obscure marketing channels since competitive advantages are alsoachieved by means of opportunistic behaviour. For fear of disintermediation livestockdealers 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 investigationby the Bundeskartellamt suspected for price fixing. This investigation follows an initialinvestigation, begun in mid July 2009, which unearthed “substantial evidence” of pricefixing between the years 2003 and 2008. However, according to sources inside andoutside the industry, it is not expected that the investigation will unveil any wrongdoing.Lack of coordinationThe low level of trust also affects coordination in the chain. One major problem has beencoordination in relation to the industry’s response to diseases such as Salmonella andBSE. There has been no focal company in the meat chain which efficiently coordinateschain information, harmonises the different IT systems or takes on professional publicrelations in charge of the whole sector. In cases of food crises, up- and downstreaminformation slowly flows across the chain which hinders both seamless traceability andthe harmonisation of production processes between the various stages of the supply chain(Bahlmann & Spiller 2008).Retail powerDue to the fierce competition and increasing concentration at the retail level, more marketpower 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 theprocessing sector and introducing private labels. Private labels are widespread in theGerman 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 foodsafety, means the retailers has become more demanding and preferring “control” to“trust”, regarding processors (Fiscer et al. 2007).230


E.6 Code of ConductRegulations are mostly a matter between the EU and the German Länder, because theFederal State is not involved with the implementation of European law.The tendency has gone towards liberalisation. According to our sources, both farmers andindustry are happy with deregulation.E.6.1German Food LawThe German Food Law consists of about 230 different ordinances, including the FoodLabelling Ordinance, Packaging Ordinance, Dietetic Foods Ordinance, various hygienicand veterinary requirements, as well as numerous other special product or product grouprules 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. Inaddition to the LMBG, in 2005 Germany developed a central Food and Feed Law Book(Lebensmittel-, Bedarfsgegenstaende- und Futtermittelgesetzbuch - LFGB), providingbasic definitions, procedural rules and goals of the German food law. Both acts definegeneral food safety and health protection rules, address labelling requirements, regulateinspection, detention and seizure rules of suspect food. These rules apply to domesticallyproduced as well as to imported food products.The German Food Law is a federal law whose enforcement is the responsibility of theLänder. This implies that on occasion, a minor infraction to the food law may be toleratedin one state but not in another. However, major violations are persecuted in all federalstates.The responsible agency for monitoring compliance with German food law regulations isThe Federal Office of Consumer Protection and Food Safety (BVL). It is under thesupervision of the Federal Ministry of Food, Agriculture and Consumer Protection. TheBVL was established as an independent higher federal authority and is also responsiblefor risk management. BVL, inter alia, exercises authority over sub-stances and productsthat harbour potential risks and that are directly or indirectly related to food safety (suchas plant protection products and veterinary drugs). It is involved in formulating generaladministrative rules to implement laws in the fields of consumer health protection andfood safety, as well as in the preparation and monitoring of surveillance schemes andplans by the Laender. In addition, BVL acts as coordinator in the run-up to inspectionscarried out by the European Food and Veterinary Office (FVO). It is responsible forimplementing the Euro-pean rapid alert system in the fields of consumer health protectionand food safety in Germany. The national reference laboratory for the detection ofresidues and the Community reference laboratory for the detection of residues are alsopart of BVL.231


E.6.2Competition LawAlongside EU competition law, national rules also ensure that competition is sustainableand fair. These rules are contained in the Restraint of Competition Act (GWB) and theUnfair Competition Act (UWG).The Cartel Act (GWB) does not prohibit market dominance as such. However, there is adanger that a firm dominating a market will impose its business targets largely as its seesfit. Anti-trust controls over dominant market positions and, in Germany as well, overfirms with a strong market presence (i.e. a strong position in relation to their customers orsuppliers) are designed to stop firms not sufficiently kept in check by competition fromabusing their position of dominance to the detriment of competitors orcustomers/suppliers and against the general interest. The following are prohibited:Unfair hindrance of competitors, i.e. a firm with a dominant market position denies, forexample, a competing firm access to its networks and infrastructures, or attempts to oust acompetitor from the market through an aggressive pricing strategy. This category alsoincludes forced tie-ups (e.g. a product is sold only under an obligation to purchase spareparts from the same firm) and exclusivity provisions (a retailer is obliged to obtainspecific products solely from the market-dominant producer).Exploitative conduct, i.e. a firm demands inappropriate prices or conditions from itscustomers or suppliers.Non-discrimination, i.e. competing firms may not be disadvantaged or treated differentlywithout material reason.The Unfair Competition Act (UWG) determines which unfair commercial practicesagainst competitors, consumers or other market participants are improper.The Federal Cartel Office (Bundeskartellamt) – together with the relevant cartelauthorities in the federal states – is responsible for the protection of competition. Branchspecificdecisions on cartels are taken by the Federal Cartel Office's legal departments.The Centre for Protection against Unfair Competition and the Federation of GermanConsumer Organisations are the two biggest national institutions in terms ofimplementing Germany's unfair competition legislation. In addition, the law entitlescompetitors, fellow associations and Chambers of Commerce and Industry to pursueaction on breaches of fair competition. The Federal Office of Consumer Protection andFood Safety (BVL) is responsible for cross-border legal violations.E.6.3Voluntary agreementsVoluntary agreements seems not to very common on the Germany market as by repeatedmarket transaction is dominating the market.232


E.7 Developments and trendsE.7.1Focus on exportsWhile domestic consumption is fairly stable and stakeholders expect it to decrease in thefuture, exports markets has become more important to the German processing industry.E.7.2Focus on food qualityNew initiatives indicates a stronger willingness to cooperate and coordinate across thechain. QS Qualität und Sicherheit GmbH was established in 2001 by a cross-section ofsix 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 qualityassurance system for food supply chains. During the last 9 years since its foundation, QShas seen a remarkable development and become the most important certification approachin German agrobusiness. All in all, approximately 101,249 system partners of the meatindustry are affiliated to QS (Bahlmann & Spiller 2008) and QS almost represent thewhole supply chain, including 100 percent of the feed industry, 90 percent of thelivestock traders in pig meat and 95 percent of the livestock traders in poultry, 85 percentof the slaughterhouses, 50 percent of the processors and 90 percent of the food retailers.QS’ high market penetration is also a matter of downstream acceptance. Germany’s topfood retailers, have a strong demand for QS goods.233


F Guidelines for interviews and interviewee listThe following is the document that was provided to researchers to guide the open-endedinterview they would be conducting.F.1 Interview guidelinesWe would anticipate that the interview should take approximately one hour (depending,of course, on how talkative the interviewee is). These interviews are semi-structured, andas such, the following are guidelines that you should use in your discussion with theinterviewee.General (5-10 minutes)You should use the first part of the interview to build a rapport with theinterviewee. Describe the purpose of the study, and get some general facts on theirbusiness:1. Ask about the how the business has been proceeding for the past five years. Afteryou have received some information, raise the issue of prices increases in 2007and subsequent decreases. Ask about what the impact that was on profits, andalso 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 forthis study. You want to show some knowledge of the subject:1. Summarise one potential business practice and characteristic influencing thebargaining position of suppliers vis-à-vis customers (retail concentration, listingfees) that you have identified in your desk research, and get the interviewee’sopinion as to its validity. This business practice should NOT be attributed to thetype of individual that you are interviewing. From this initial discussion, probefor 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 theyidentify other parts of the chain with which they have no direct connection:2. Once the business practices have been summarised, discuss how this mightinfluence the interviewee’s ability to compete. For example, if a firm forces the235


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 valoriseinnovations.3. In the discussion above, you should also ask how these influence theinterviewee’s ability to innovate. You should ask for specific examples of whatthe interviewee could do differently (and better) if the value chain lookeddifferent (i.e. the bargaining positions were different);4. If there are business practices that you can identify that could be attributed to theinterviewee, and you feel you have built up the proper rapport, ask about theirown 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 anEU-wide code of conduct. Essentially, you should briefly be looking to see howregulation or voluntary agreements can best improve the functioning of the valuechain: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 thatvoluntary agreements, for example, are strong enough to solve problems that theyface in the value chain? Try to discover which regulations—whether national orEU—are adding the greatest burden (without resulting benefit) to theinterviewee;2. Related to the above discussion, also engage the interviewee in national vs. EUregulations. 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 thestate of the industry. In our proposal:1. Ask the interviewee about changes that they have seen in the industry over thelast five or ten years, potentially drawing on some of your desk research. Youmay 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 yearsto remain competitive.F.2 What to do with requests for questionsWe would prefer NOT to send a questionnaire in advance, given that we want theinterviews to be relatively open; however, if the interviewees request in advance a list ofquestions, you can offer the following:1. Can you describe how price changes since 2005 (particularly the rise incommodity prices in 2007) have influenced your profitability?236


2. Can you summarise business practices that influence your bargaining power withyour contactors?3. How does your bargaining position influence your ability to grow and add valueto 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 youbelieve that voluntary agreements are strong enough to solve problems that theyface 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, andenvironmental concerns?8. What changes do you anticipate for the future to remain competitive?F.3 Industry-association-specific questionsUse the standard questionnaire as a guideline for the interview. In addition to thediscussion 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 couldprioritise 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 thelocation within the chain:2. Once the interviewee has prioritised these innovations, get 2-3 concrete examplesof the first two;3. Also in reference to the top-two priorities for innovation, probe the factors thatmight influence a company’s ability to achieve these innovations. You may referback to issues in the value chain, regulation, or other issues not yet raised.F.4 Table of intervieweesUnited KingdomCompany/InstitutionAssociation of Independent Meat SuppliersNPA, National Pig Association part of NFUBritish Meat Manufacturer’s AssociationBpexEnvironment AgencyBritish Poultry CouncilContact personNorman BagleyBarney KayStephen RossidesAndrew KnowlesTricia HentonPeter Bradnock237


DEFRARattlerow FarmsChief Poultry Advisor NFUAnglia Quality Meat AssociationMike RoperRobin BriceRobert NewbryRichard DoelSpainCompany/InstitutionGrupo BatalleJorge Sa (Grupo Samper)Patel Sa (Grupo Vall Companys)Casa TarradellasCasademontCorporacion Agroalimentaria GuissonaGrupo SadaCampofrioMinistry Of Environment, Rural And Marine AffairsAsocarnePropolloComision Nacional De La CompetenciaFECICContact personJosep BatalléJorge Samper RivasEnrique Gil Burgos / Albert MoreraJosep Tarradellas ArcaronsAdriana CasademontTeresa Alsina CornellanaPedro Padilla Pulido (Vicep)Pedro José BallvéCarlos EscribanoFernando PascualÁngel MartínAlfredo González-Panizo TamargoJosep ColladoThe NetherlandsCompany/InstitutionVan Rooi Meat, HelmondVion Food Group, BoxtelVleeshandel Hilckmann Nijmegen B.V.,Abattoir Westfort, GorinchemEgbert Kruiswijk VleesproductenContact personMr. M. van Rooi, directorMr. S. Korver, director public affairsMrs. D. Hilckmann, directorMr. J. de Wit, directorMr. E. Kruiswijk, directorInterchickenStorteboomPlukonHeijsgroepPolandNameMinistry of Agriculture and Rural Development,PolandAgricultural Market AgencyOffice of Competition and Consumer ProtectionContactJoanna Trybus, Ph.D.Radoslaw LewandowskiExpert on Meat MarketsNikodem Szadkowski238


SokolowDeputy DirectorMarket Analysis DepartmentOffice of Competition and Consumer ProtectionSecretariatMain invester: Danish CrownNoveInterview with Projectchef Søren TinggaardCEO Max Sørensen Alexandra (secretary)GermanyNameMinistry of Food, Agriculture and ConsumerProtectionBundesverband der DeutschenFleischwarenindustrieTönnies FleischWiesenhofContactDr. Hermann Josef SchlöderMinisterialratThomas VogelsangManagerDr. TimmermannOliver Kaufmann239


G Data sources for modellingGermany - PorkFarm price:Wholesale prices:Retail prices:Germany - TurkeyFarm price:Wholesale price:Retail price:Prices paid by slaughterhouses to farmers. Auszahlungspreise derVersandschlachtereien und Fleischwarenfabriken für Schweineund Schlachtsauen (M1): Gesamtdeutschland, Monatsmittel(EUR/kg Schlachtgewicht, frei Schlachtstätte, gewogene Mittel),Durchschnitt aller Klassen (E-P);Data source: ZMP-Marktbilanz Vieh und Fleisch 2006, Seite 84,Tabelle 55, 2000:01 – 2005:12.Wholesale prices for pork on Hamburg wholesale market forselected products. Groβhandelsabgabepreise für Schweinefleischam Hamburger Fleisch-groβmarkt (obere Notierungsstufe,EUR/kg);Selected products: Schultern, rund geschnitten; Kotelettstränge(ohne Nacken), Schinken, rund geschnitten;Data source: ZMP-Marktbilanz Vieh und Fleisch 2002, Seite 118,Tabelle 70, 1999:01 – 2001:12, ZMP-Marktbilanz Vieh undFleisch 2005, Seite 118, Tabelle 70, 2002:01 – 2004:12, ZMP-Marktbilanz Vieh und Fleisch 2006, Vieh und Fleisch 2006, Seite86, Tabelle 58, 2003:01 – 2005:12.Average consumer prices for selected products (including VAT;EUR/kg). Durchschnittliche Verbraucherpreise fürSchweinefleisch (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 fürSchweinefleisch (EUR/kg, einschl. MwSt.), 2000:01 – 2004:12.Prices paid to turkey farmers. Auszahlungspreise an diePutenmäster – Bundesdurchschnitt -, Hähne schwerer Rassen,Leitgewicht 18,5 kg, Euro/kg, 2003:01 – 2008:12;Data source: MEG-Marktbilanz Eier und Geflügel 2009, page159, Tabelle 121.Prices received by slaughterhouses. Schlachtereiabgabepreise fürdeutsches Putenfleisch, Euro/kg, Frische Putenschnitzel (bulk),2003:01 – 2008:12;Data source: MEG-Marktbilanz Eier und Geflügel 2009, page161, Tabelle 122b.Consumer prices for fresh turkey schnitzels. Verbraucherpreisefür Putenschnitzel frisch, natur in Deutschland, Euro/kg, 2003:01– 2008:12;Data source: MEG-Marktbilanz Eier und Geflügel 2009, page162, Tabelle 123.241


Germany – PoultryFarm price:Wholesale prices:Retail prices:Prices paid to broiler producers. Auszahlungspreise an dieHähnchen-mäster, Bundesdurchschnitt, Euro/kg LG, 1900 g,2004:01 – 2007:12;Data source: ZMP-Marktbilanz Eier und Geflügel 2008, page148, Tabelle 102.Prices received by slaughterhouses. Schlachtereiabgabepreise fürdeutsche Hähnchen, Durchschnitt aller Gewichte, Euro/kg freiEmpfänger, 2002:01 – 2007:12;Data source: ZMP-Marktbilanz Eier und Geflügel 2008, Tabelle104.Consumer prices. Verbraucherpreise in Deutschland, Euro/kg,2002:01 – 2007:12;Selected products: gefrorene Hähnchen, frische Hähnchen andHähnchenschnitzel frisch, natur in Deutschland, Euro/kg;Data source: ZMP-Marktbilanz Eier und Geflügel 2008, Tabelle107- 109.The Netherlands - PorkFarm price: Price of hogs per kilo live weight. Data source: LEI.Wholesale price: Eurostat export data: Dutch exports in euro divided by Dutchexports in 1,000 tonnes for selected product categories.Consumer prices: Price per kilo for selected products: pork, bacon, pork chops andschnitzels. Data source: GfK Budget panel.The Netherlands – PoultryFarm price: Price of chickens per kilo live weight. Data source: LEI.Wholesale price: Eurostat export data: Dutch exports in euro divided by Dutchexports in 1,000 tonnes for selected product categories.Consumer prices: Price per kilo for selected products: chicken, chicken legs andchicken breast. Data source: GfK Budget panel.Poland - PorkFarm priceFarm gate PLN/kg live weight.Wholesale price: Wholesale PLN/t (pork lion with bone) / 1000.Retail price: Price indices Eurostat. Consumer price PLN/kg (pork lion withbone) in 2008:03 = 16.25. The index is corrected by factor16.25/99.4.Poland - PoultryFarm price:Wholesale price:Retail price:Slaughterhouse PLN/kg live weight.Wholesale PLN/kg deadweight-whole chicken and chickenbreast.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 - PorkFarm price:Wholesale price:Retail price:UK - PoultryFarm price:242


Wholesale prices:Retail price:Average retail price of selected items (pence) per kg. Selecteditems: chicken: roasting, oven ready, fresh or chilled. Datasource: ONS.243


H Further information on the modelChanges of the price spread can be analysed by equation (3). According to equation (3)the farm-slaughterhouse (slaughterhouse-retail) price spread increases if:4∑ j = 1a > 0jwhich can arise if:1. the wholesale (retail) price increases more than the farm (wholesale) priceincreases so that α 1 > 0;2. the wholesale (retail) price decreases less than the farm (wholesale) pricedecreases, i.e., α 2 > 0;3. the wholesale (retail) price increases while the farm (wholesale) price decreases,giving α 4 > 0.At constant cost levels the first situation is not so worrying as it implies that thewholesalers (retailers) are profiting more from the economic growth than the farmers(wholesalers) do. The second situation deserves more attention as it may indicate marketpower of the wholesalers (retailers) vis-à-vis the farmers (wholesalers) in a climate ofeconomic stagnation or phase of market saturation. The third situation, however, is ratheralarming as it could be the result of wholesalers (retailers) who are taking advantage ofthe relatively weak market position of the individual farmers (wholesalers).Farm-wholesale (wholesale-retail) price spread decreases are revealed by:4∑ j = 1a < 0jwhich can happen if:1. the wholesale (retail) price increases less than the farm (wholesale) price inwhich case α 1 < 0;2. the wholesale (retail) price decreases more than the farm (wholesale) price doesso that α 2 < 0;3. the wholesale (retail) price decreases whereas the farm (wholesale) priceincreases, giving α 3 < 0.The situations 4-6 could be the result of increasing competition among the companies inthe output stage in which case there are no concerns from an anti-trust point of view. Incontrast, situations 4-6 may also arise because of increasing concentration levels at thefarm (co-ops) or wholesale stages (horizontal concentration by mergers or acquisitions) or245


oth (e.g. forward integration by farmers into processing/wholesaling activities).Therefore, discovery of a price spread decrease always deserves further inquiry into timeseries observations of industry concentration ratios.Combination of results may also give an indication of the power balance in the chain.Farmers (wholesalers) could find themselves in a rather weak position vis-à-vis thewholesalers (retailers) if it appears that α 1 > 0 and α 2 > 0 (and hence, α 1 + α 2 > 0) and α 3+ α 4 > 0. In contrast, if we find that α 1 < 0 and α 2 < 0 (and hence, α 1 + α 2 < 0) as well asα 3 + α 4 < 0, then farmers (wholesalers) might be too powerful vis-à-vis the wholesalers(retailers).The estimates and tests of the coefficients of equation (3) are displayed in Tables 1-7. Ineach column of results we first look at the estimate of ∑ =aj 1 j . If its p value is smallerthan 0.05 (5 percent significance level), then the estimate is concluded to be significantlydifferent from zero. The other results in the table’s column reveal which coefficients4drive the ∑ =aj 1 j estimate. In all cases we analyse annual changes. We shall first discussthe results per country and then perform cross-country comparisons afterwards.Table 1 displays the estimates for the pork sector in Germany. According the significantly4negative estimates of ∑ =aj 1 j (in case of shoulder the estimate is not significant), thefarm-wholesale price spread is decreasing. The significant negative estimates for α 2 andα 3 appear to be responsible for this result, implying that wholesale prices decrease lessthan farm prices decrease and it also occurs that farm prices increase while, at the sametime, wholesale prices decrease. This result could suggest a weak position for thewholesalers in the supply chain, but on the other hand, if we look at the wholesale-retailprice spread, we see that this price spread is also decreasing while a weak position of thewholesalers in the supply chain would rather comply with an increasing wholesale-retailprice spread. A strong position for the wholesale has not been found either, because fortwo of the three pork products (schnitzel and loin) the decrease in the wholesale-retailprice spread is not significant. Consequently, the results may probably reveal a generalsituation of decreasing margins in the pork sector rather than power imbalances in thechain.The first two columns with estimates in Table 2 concern the turkey chain in Germany.The farm-wholesale price spread increases (∑ =aj 1 j is significantly greater than zero) inparticular because the wholesale prices increase more when the farm prices increase (α 1 issignificantly greater than zero). In addition, the wholesale-retail price spread is increasingas well. In this case the increase comes from increasing retail prices at times that thewholesale price decreases (α 4 is significant). Moreover, we also observe asymmetric pricebehaviour conform its narrow definition: if both wholesale and retail prices rise, then bothprice changes do not significantly differ (α 1 is not significant), while if both pricedecrease, then the retail price does only partially follow the downturn in the wholesaleprice (α 2 is significantly greater than zero). Consequently, these results give rise to thesuggestion that retailers set prices independently from price developments elsewhere inthe supply chain.44246


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 toincrease the farm-wholesale prices spread in particular because the wholesale priceincreases more when the farm price increases, while the wholesale-retail price spreaddecreases because the wholesale price also increases more when the retail price increases.This result suggests that slaughterhouses set prices without taking price developmentselsewhere in the supply chain into account. In case of chicken schnitzels, however, nosignificant price-spread changes occur.Table 3 collects the estimation results for the pork chain in the Netherlands. There weobserve that the only significantly changing price spread is the increasing wholesale-retailprice spread for bacon. The increase is particularly generated by increasing retail prices attimes that wholesale prices decrease. In addition, we see some slight, but significantincrease caused by asymmetric price transmission since α 1 is not significant while α 2 issignificantly greater than zero indicating that increases in wholesale prices are fullytransmitted in higher retail prices while decreases in wholesale prices are only partiallyfollowed by retail price reductions.The estimates for the poultry chain in the Netherlands are displayed in Table 4. Lookingat these results we see a significant decrease of the farm-wholesale price spread forboneless cuts by 16.1 eurocents/kg/year, which is somewhat compensated by a significantincrease with 5.2 eurocents/kg/year of the farm-wholesale price spread for legs. In bothcases wholesale prices increase more when farm prices increase, but also decrease morewhen farm prices decrease. And in case of boneless cuts wholesale prices are alsodecreasing if farm prices are rising. These results point to a competitive situation in thewholesale sector in getting farmers under contract. Vis-à-vis the retailers there are nosignificant changes in the (wholesale-retail) price spread.Table 5 presents the estimation results for the pork and poultry chains in Poland. For bothchains the results suggests that retail prices develop independent from changes elsewherein the supply chain. The wholesale-retail price spread is increasing because retail pricesincrease more than wholesale prices do at the same time, whereas they decrease less whenwholesale prices decrease. Moreover, in the poultry chain situations in which the retailprice rises while the wholesale price falls also significantly contribute to the increase ofthe wholesale-retail price spread. Nevertheless, in the poultry chain, at least, in case ofwhole chickens, the wholesalers also face an increasing farm-wholesale price spread aswholesale prices increase more than farm prices do.The results for the pork chain in the UK, see Table 6, are mixed for the farm-wholesalepart of the chain, but quite uniform for the wholesale-retail channel. While the farmwholesaleprice spread is increasing for loins, it is not significantly changing for legs andsignificantly decreasing for bellies. In case of loins wholesale prices increase more thanfarm prices increase while in case of bellies wholesale prices increase less than farmprices increase. In the wholesale-retail part of the chain, however, for all productsconsidered the retail-wholesale price spread is increasing in particular because the retailprice is increasing much more than the wholesale price at times both prices areincreasing. Moreover, the wholesale-retail price spread is also significantly widened by247


the occurrence of situations in which the retail price is increasing whereas the wholesaleprice is decreasing. Such a combination of results suggest that changes in consumerprices are not related to price developments elsewhere in the supply chain.While retailers may behave independently in the UK pork chain, no significant changesare observed in the UK wholesale-retail poultry price spread. This is also true for the twomain 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.1Parameter estimates and tests regarding Equation (3) for several price relationships in the pork chain inGermany (H = 12)Price Relationships (Sample: 02:01-04:12 = 36 obs, EUR/kg)Farm-WholesaleWholesale-RetailLeg Shoulder Loin Schnitzel Pork for FryingLoinCoefficientsα 1 −0.016 0.057 −0.003 −0.011 −0.092 −0.021Std. error 0.010 0.023 0.017 0.005 0.014 0.018t-value −1.653 2.449 −0.143 −2.348 −6.534 −1.194p-value 0.108 0.020 0.887 0.025 0.000 0.241α 2 −0.069 −0.081 −0.087 −0.061 −0.086 −0.025Std. error 0.028 0.027 0.037 0.049 0.053 0.046t-value −2.493 −2.974 −2.414 −1.244 −1.613 −0.546p-value 0.018 0.005 0.022 0.223 0.117 0.589α 3 −0.030 −0.023 −0.023 −0.022 −0.066Std. error 0.007 0.003 0.007 0.005 0.013t-value −3.987 −6.750 −3.085 −4.691 −4.878p-value 0.000 0.000 0.004 0.000 0.000α 4 0.011 0.038 0.055 0.046 0.073Std. error 0.001 0.005 0.024 0.002 0.029t-value 8.212 7.610 2.258 194.7 2.531p-value 0.000 0.000 0.031 0.000 0.0174∑ =aj 1 j−0.103 −0.024 −0.075 −0.039 −0.160 −0.040Std. error 0.032 0.034 0.042 0.063 0.056 0.067p-value 0.003 0.481 0.084 0.538 0.008 0.555α 1 + α 2 −0.085 −0.091 −0.072 −0.178 −0.047Std. error 0.031 see Σα 0.041 0.049 0.055 0.049p-value 0.0090.033 0.154 0.003 0.346α 3 + α 4 −0.018 0.016 0.032 0.018 0.007Std. error 0.007 0.006 0.024 0.005 0.030248


Price Relationships (Sample: 02:01-04:12 = 36 obs, EUR/kg)p-value 0.016 0.016 0.187 0.001 0.817Table H.2Parameter 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)TurkeyRoastersFarm-Wholesale-Farm-(Whole Turkey(Breast TurkeyWholesaleRetailWholesaleBreast)- Schnitzel)Frozen Fresh Chicken Roaster RoasterSchnitzelSample No. of Obs06:01-08:12 06:01-08:12 05:01-07:12 05:01-07:12 05:01-07:1236 36 36 36 36Coefficientsα 1 0.258 0.078 0.147 0.097 0.092Std. error 0.050 0.074 0.022 0.022 0.032t-value 5.135 1.052 6.829 4.406 2.896p-value 0.000 0.300 0.000 0.000 0.006α 2 −0.034 0.028 −0.009 −0.006 −0.050Std. error 0.007 0.002 0.001 0.004 0.013t-value −4.798 16.26 −6.197 −1.509 −3.889p-value 0.000 0.000 0.000 0.138 0.000α 3 −0.066 −0.014Std. error 0.025 0.001t-value −2.687 −14.59p-value 0.011 0.000α 4 0.123 0.037 0.017 0.004Std. error 0.017 0.007 0.004 0.002t-value 0.000 0.000 0.000 0.093p-value4∑ =aj 1 j0.158 0.228 0.175 0.107 0.032Std. error 0.056 0.078 0.023 0.023 0.034p-value 0.008 0.006 0.000 0.000 0.343α 1 + α 2 0.224 0.138 0.138 0.091 0.042Std. error 0.051 0.021 0.021 0.022 0.033p-value 0.000 0.000 0.000 0.000 0.214α 3 + α 4 see α 3 see α 4 see α 4 see α 4 −0.010Std. error 0.002p-value 0.000249


Table H.2ContinuedPrice Relationships (EUR/kg)RoastersWholesale-RetailFrozen Fresh ChickenRoasterSample 05:01-07:12 05:01-07:12 05:01-07:12No. of Obs. 36 36 36CoefficientsRoasterSchnitzelα 1 −0.107 −0.054 −0.015Std. error 0.034 0.020 0.011t-value -3.111 −2.777 −1.356p-value 0.004 0.009 0.185α 2 0.002 0.010 −0.019Std. error 0.001 0.001 0.017t-value 1.522 7.313 −1.096p-value 0.138 0.000 0.281α 3 −0.024 −0.021 −0.050Std. error 0.008 0.008 0.013t-value −3.038 −2.465 −3.698p-value 0.005 0.019 0.001α 4 0.009 0.103Std. error 0.001 0.013t-value 6.328 7.762p-value 0.000 0.0004∑ =aj 1 j−0.129 −0.057 0.019Std. error 0.037 0.021 0.030p-value 0.001 0.013 0.525α 1 + α 2 −0.105 −0.044 −0.034Std. error 0.034 0.019 0.020p-value 0.004 0.029 0.108α 3 + α 4 see α 3 −0.012 0.053Std. error 0.008 0.017p-value 0.155 0.003250


Table H.3Parameter estimates and tests regarding Equation (3) for several price relationships in the pork chain in TheNetherlands (H = 12)Price Relationships (EUR/kg)Farm-WholesaleWholesale-RetailGeneral Pork chops Bacon SchnitzelSample01:01-09:08 02:01-09:08 07:01-09:08 07:01-09:08 07:01-09:08 No. of ObsCoefficientsα 1 0.010 0.006 0.028 0.013 0.010Std. error 0.012 0.008 0.019 0.023 0.027t-value 0.820 0.671 1.458 0.559 0.375p-value 0.414 0.504 0.156 0.580 0.711α 2 −0.011 0.006 −0.050 0.012 0.003Std. error 0.013 0.012 0.015 0.005 0.014t-value −0.833 0.546 −3.379 2.403 0.245p-value 0.407 0.587 0.002 0.023 0.808α 3 −0.009 −0.025 −0.031 −0.067Std. error 0.002 0.006 0.010 0.016t-value −5.643 −4.092 −3.049 −4.100p-value 0.000 0.000 0.005 0.005α 4 0.018 0.050 0.021 0.101 0.065Std. error 0.002 0.012 0.005 0.019 0.017t-value 8.165 4.161 4.156 5.203 3.787p-value 0.000 0.001 0.000 0.000 0.0014∑ =aj 1 j0.009 0.038 −0.031 0.126 0.011Std. error 0.019 0.022 0.025 0.031 0.041p-value 0.640 0.088 0.215 0.000 0.788α 1 + α 2 −0.000 0.012 −0.022 0.025 0.013Std. error 0.018 0.015 0.023 0.024 0.030p-value 0.979 0.406 0.355 0.303 0.656α 3 + α 4 0.009 0.025 −0.009 −0.002Std. error 0.003 0.013 0.011 see α 40.026p-value 0.003 0.058 0.4150.932251


Table H.4Parameter estimates and tests regarding Equation (3) for several price relationships in the poultry (roasters)chain in The Netherlands (H = 12)Price Relationships (EUR/kg)WholesaleFarm-Wholesale-RetailBoneless Legs GeneralCutsBreastChicken LegsSample 05:01-09:07 05:01-09:10 05:01-09:07 05:01-09:07 05:01-09:11No. of Obs 55 58 55 55 59Coefficientsα 1 0.057 0.054 −0.052 −0.027 −0.026Std. error 0.012 0.020 0.019 0.011 0.028t-value 4.757 2.714 −2.702 −2.323 −0.903p-value 0.000 0.009 0.009 0.024 0.370α 2 −0.108 −0.029 −0.003 0.064 0.004Std. error 0.025 0.010 0.007 0.030 0.008t-value −4.374 −2.965 −0.362 2.170 0.468p-value 0.000 0.005 0.719 0.035 0.642α 3 −0.126 −0.006 −0.027 −0.068 −0.046Std. error 0.020 0.001 0.008 0.011 0.010t-value −6.302 −4.486 −3.372 −6.032 −4.810p-value 0.000 0.000 0.001 0.000 0.000α 4 0.017 0.033 0.074 0.066 0.059Std. error 0.002 0.006 0.013 0.012 0.017t-value 9.744 5.877 5.877 5.420 3.425p-value 0.000 0.000 0.000 0.000 0.0014∑ =aj 1 j−0.161 0.052 −0.008 0.035 −0.009Std. error 0.040 0.022 0.026 0.038 0.035p-value 0.000 0.024 0.758 0.356 0.808α 1 + α 2 −0.051 0.025 −0.055 0.038 −0.022Std. error 0.028 0.022 0.021 0.030 0.030p-value 0.075 0.252 0.011 0.213 0.459α 3 + α 4 −0.109 0.027 0.047 −0.003 0.013Std. error 0.020 0.006 0.014 0.018 0.020p-value 0.000 0.000 0.001 0.888 0.500252


Table H.5Parameter estimates and tests regarding Equation (3) for several price relationships in the pork and poultry(roasters) chain in Poland (H = 12)Price Relationships (PLN/kg)Pork General Poultry Farm-WholesaleWholesale-RetailFarm-WholesaleWholesale-RetailWhole chickenbreastChicken ChickenBreastSample 07:01-09:07 07:01-09:07 07:01-09:08 07:01-09:08 07:01-09:08No. of Obs 31 31 32 32 32Coefficientsα 1 0.057 0.158 0.287 0.507 0.478Std. error 0.112 0.088 0.061 0.131 0.061t-value 0.511 1.794 4.716 3.866 7.850p-value 0.613 0.083 0.000 0.001 0.000α 2 −0.000 −0.037 −0.329 0.162Std. error 0.007 0.009 0.037 0.021t-value −0.047 −4.253 −9.004 7.721p-value 0.963 0.000 0.000 0.000α 3 −0.125 −0.060 −0.080 −0.080Std. error 0.036 0.013 0.013 0.000t-value −3.476 −4.646 −6.808 −∞p-value 0.002 0.000 0.000 0.000α 4 0.096 0.166 0.017 0.057Std. error 0.014 0.055 0.000 0.015t-value 6.676 3.018 3.715p-value 0.050 0.005 0.0014∑ =aj 1 j0.028 0.324 0.206 0.098 0.689Std. error 0.124 0.125 0.065 0.134 0.072p-value 0.822 0.014 0.004 0.473 0.000α 1 + α 2 0.057 0.249 0.178 0.640Std. error 0.113 see α 10.063 0.133 0.066p-value 0.6180.001 0.191 0.000α 3 + α 4 −0.029 −0.043 0.049Std. error 0.039 see α 40.013 see α 30.015p-value 0.4650.0020.003253


Table H.6Parameter estimates and tests regarding Equation (3) for several price relationships in the pork chain in theUnited Kingdom (H = 52)Price Relationships (pence/kg)Farm-WholesaleWholesale-RetailLoins Legs Bellies Loin Chops Loin SteaksSample 08:30-09:51 08:30-09:51 08:30-09:51 08:30-09:51 08:30-09:51No. of Obs 74 74 74 74 74Coefficientsα 1 14.78 4.759 −6.643 14.76 51.05Std. error 2.873 2.647 2.626 3.541 7.888t-value 5.143 1.798 −2.530 4.167 6.472p-value 0.000 0.076 0.014 0.000 0.000α 2 −1.524 −3.642 −2.645 −5.081 −4.892Std. error 0.002 0.198 0.268 0.495 0.982t-value −786.8 −18.41 −9.875 −10.26 −4.982p-value 0.000 0.000 0.000 0.000 0.000α 3 −1.524 −3.642 −2.645 −5.081 −4.892Std. error 0.002 0.198 0.268 0.495 0.982t-value −786.8 −18.41 −9.875 −10.26 −4.982p-value 0.000 0.000 0.000 0.000 0.000α 4 3.203 4.378Std. error 0.005 0.029t-value 657.6 149.6p-value 0.000 0.0004∑ =aj 1 j13.25 1.118 −9.288 12.88 12.88Std. error 2.873 2.634 2.650 3.566 7.823p-value 0.000 0.673 0.001 0.001 0.001α 1 + α 2Std. errorp-valuesee α1 see α1 see α 1 see α 1 see α 1α 3 + α 4 −1.878 −0.514Std. error see α 3 see α 3 see α 30.495 0.982p-value0.000 0.603254


Table H.6ContinuedPrice Relationships (pence/kg)Farm-WholesaleWholesale-RetailLegs-LegsLegs-FilletBelliesBellies-Bellies- DicedBonelessSausagesMinced PorkPorkSample 08:30-09:51 08:30-09:51 08:30-09:51 08:30-09:51 08:30-09:51No. of Obs 74 74 74 74 74Coefficientsα 1 47.08 23.19 28.96 38.77 46.86Std. error 5.479 3.197 3.729 5.847 7.593t-value 8.593 7.253 7.765 6.631 6.172p-value 0.000 0.000 0.000 0.000 0.000α 2 −0.122Std. error 0.000t-valuep-valueα 3 −1.716 −2.068 −7.135Std. error 0.561 0.707 1.091t-value −3.061 −2.923 −6.540p-value 0.003 0.005 0.000α 4 9.203 10.43 3.649 9.811 5.851Std. error 0.851 0.851 0.575 1.529 1.779t-value 1.779 5.354 6.351 6.418 3.289p-value 0.000 0.000 0.000 0.000 0.0024∑ =aj 1 j54.57 31.55 25.35 48.58 52.72Std. error 5.647 3.847 3.925 6.251 8.572p-value 0.000 0.000 0.000 0.000 0.000α 1 + α 2 28.84Std. error see α 1 see α 13.729see α 1 see α 1p-value0.000α 3 + α 4 7.486 8.365 −3.486Std. error 1.019 8.365 1.180see α 4 see α 4p-value 0.000 0.000 0.004255


Table H.7Parameter estimates and tests regarding Equation (3) for several price relationships in the poultry (chicken)chain in the United KingdomPrice Relationships (pence/kg)Farm-Farm-Wholesale-Wholesale (H =WholesaleRetail(H=12)52)Roasters>SkinlessBroilers1550-Roasters2050-Roasters 2050-2050g2450gBreast Fillet2450g2450gSample 03:01-09:48 03:01-09:48 03:01-09:48 03:01-09:11 03:01-09:11No. of Obs 357 357 357 83 83Coefficientsα 1 4.566 4.573 20.01 3.096 2.976Std. error 0.966 1.120 3.202 1.976 2.396t-value 4.726 4.083 6.250 1.567 1.242p-value 0.000 0.000 0.000 0.121 0.218α 2 −3.064 −3.139 −9.876 2.241 2.964Std. error 0.472 0.524 1.578 1.205 0.745t-value −6.498 −5.985 −6.257 1.860 3.981p-value 0.000 0.000 0.000 0.067 0.000α 3 −3.127 −4.215 −8.261 −8.133 −8.072Std. error 0.425 0.494 1.838 1.078 1.098t-value −7.359 −8.531 −4.495 −7.544 −7.351p-value 0.000 0.000 0.000 0.000 0.000α 4 4.752 5.168 4.328 6.675 6.976Std. error 0.532 0.708 0.840 1.672 1.481t-value 8.931 7.301 5.155 3.991 4.709p-value 0.000 0.000 0.000 0.000 0.0004∑ =aj 1 j3.127 2.288 6.203 3.880 4.843Std. error 1.276 1.489 3.935 3.626 3.705p-value 0.015 0.110 0.116 0.288 0.195α 1 + α 2 1.502 1.434 10.14 5.337 5.940Std. error 1.076 1.237 3.570 2.238 2.507p-value 0.164 0.247 0.005 0.020 0.020α 3 + α 4 1.625 0.953 −3.933 −1.458 −1.096Std. error 0.679 0.862 2.015 2.019 1.875p-value 0.017 0.270 0.052 0.472 0.561256


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