UK-wide consultation gives hope for the future of the pig sector

No other sector of agriculture has been harder hit by the shuddering hike in feed and other input costs that have rocked farming as a whole to its very foundations.

Adding to the woes of pig farmers is the fact that they have been facing-up to the double whammy of strengthening input costs and challenging market returns for their produce.

But recent days have brought hope that there is light at the end of the tunnel.

Specifically, the Department of Agriculture, Environment and Rural Affairs (DAERA) has welcomed the publication of responses to a Department of Environment Food and Rural Affairs (DEFRA) led consultation, looking at the establishment of contracts within the UK pig sector.

The background

Between July and October 2022, DEFRA, with input from the devolved administrations, conducted the aforementioned public consultation, exploring contractual practice in the UK pig sector.

The work undertaken aimed to understand whether contract reform could provide greater certainty to both pig producers and processors, by improving access to data and ensuring that clear terms and conditions are established in agreements.

The consultation first invited views on whether legislation in this area was needed, before a more detailed series of questions covering topics such as the use of pricing data and typical components of pig sale agreements.

A total of 374 responses to the consultation were received (364 responses to the online survey, and 10 email responses). Not all respondents answered every question.

From a primary producer perspective, 65% of producers enter into a sale agreement with a marketing group.

Some of these producers note that their marketing group then deals directly with the processor, acting as a middleman between producer and processor.

In addition, 23% of producers enter into a sale agreement directly with a processor.

Of these respondents, some indicated that their marketing group provides general support or advise on this agreement, even in instances where it is made directly with a processor.

Written agreements are the most common type of agreement used by respondents, accounting for 66% of all agreement types.

A further 4% of respondents stated that they had no formal sale agreement, neither verbal or written. In addition, 6% of respondents do not know what type of contract they hold.

When comparing independent and integrated producers, roughly the same proportion of both utilise written agreements.

Approximately 90% of respondents either agreed or strongly agreed that all sale agreements between producers and purchasers should be covered by a written agreement.

Three quarters of these respondents believe it will provide producers with more security, although a few respondents indicated that flexibility is needed for special, shorter-term agreements.

Some respondents also mentioned that written agreements provide better proof and are therefore the best way an agreement can be enforced.

However, some other responses suggested that written agreements are too restrictive for smaller sized companies.

In essence, the consultation looked at the nature of the relationships across the supply chain and whether future policy could improve it.

The DAERA perspective

DAERA has acknowledged the publication, which reflects the diverse contributions from across the UK and notes the UK government’s intention to bring forward regulations for written pig contracts between all producers and their buyers, using powers in the Agriculture Act 2020.

In addition, DAERA will continue to work closely with officials in DEFRA, Scotland and Wales to ensure the legislation works for the whole of the UK pig sector and takes account of the views of any incoming Northern Ireland ministers at Stormont.

The primary purposes of this consultation were to establish whether there are issues with fairness in the pig sector supply chain, assess whether interventions could improve this situation and explore the nature of any interventions needed.

The responses received have demonstrated that there are legitimate concerns about the nature of business relationships in the UK pig sector.

There is a clear demand for a legislative solution, and evidence of a popular sentiment that legally required written contracts would remove the uncertainty and ambiguity which has underlain recent issues.

There is a far weaker consensus regarding what mandatory written agreements should cover and whether these agreements should be standardised throughout the sector.

A substantial number of responses stressed the need for a light-touch, flexible approach to any future legislation to account for the wide variation in business arrangements found in the sector.

Producers also generally recognised that too much contractual rigidity could have unintended consequences on the market.

Some further insights from the responses received follow:

The consultation asked multiple questions on the transparency of data and whether additional data points, either from the first stage of the supply chain or elsewhere, would be beneficial.

Responses revealed a picture of inconsistency in terms of the availability of supply chain data, with some areas well covered and others severely lacking.

It was also regularly raised that a more complete picture of the supply chain – such as additional data points covering overall population numbers – would improve industry wide planning capabilities, which could help avoid supply and demand imbalances in the future.

Standard Pig Price

There were also complaints that the limited granularity of the data currently collected means market reporting services are not always applicable to every business.

For instance, responses from those in Northern Ireland note that their data is not included in the formation of the GB standard pig price (SPP) and show a desire for this to be addressed.

Throughout all questions, respondents regularly referred to recent issues in the UK pig sector and provided evidence of poor contractual practice, including where pre-agreed pig numbers were ignored and producers were penalised for circumstances outside of their control. Consultation responses strongly sought an end to these practices.

Response analysis revealed a strong statistical consensus that business consolidation in the processing sector has undermined the position of producers.

Producers have communicated clear concerns that consolidation has limited local outlets and limited the success of niche products. There was a general sentiment that power was in too few hands and independent producers were suffering as a result.

Responses also suggest that there is an inherent unfairness in the imbalance of contingency requirements between producers and processors.

Respondents indicated that all responsibility for dealing with unforeseen circumstances, and associated financial risk, is unfairly placed with producers.

The consultation included a question on the application of legislation across the UK. Among respondents there was a general consensus that any new legislation should be uniform across the whole of the UK, although a significant number of respondents were uncertain about this and there was wide acknowledgement that the market operates differently across nations.

Responses from Scottish organisations highlighted the unique processor market in Scotland and requested that this is considered within any legislation, while responses from Northern Ireland indicated increased costs compared with the rest of the UK.

There was a strong consensus that action must be taken on dispute resolution, although various methods to achieving a successful outcome were referenced.

Next steps

In light of these responses, DEFRA has indicated that it will work to share our findings relating to the alleged negative consequences of market consolidation with the Competition and Markets Authority (CMA).

The UK government will commence work developing regulations for pig contracts, using the regulation making power in section 29 of the Agriculture Act 2020.

These regulations will ensure written agreements are used between all producers and their buyers.

DEFRA will work closely with industry to explore what other provisions, if any, should be mandated as part of these agreements.

Moreover, DEFRA will continue to engage with stakeholders to ensure that legislation works for all parts of the UK and incorporate special provision for differing circumstances, if necessary.

Where there is no minister in place, as in Northern Ireland at present, DEFRA will continue to work closely with government officials.

Regulations will also be amended to collect and disseminate more supply chain data, particularly in relation to wholesale price transparency and national slaughter numbers.

DEFRA will use the powers in sections 23 to 28 of the Agriculture Act to create such provisions in England.

It will also work with the devolved administrations on this issue, as this is a devolved matter.

Pig farmers not out of the woods yet

Meanwhile, local pig producers continue to receive prices that are below their total cost of production.

According to Ulster Farmers’ Union (UFU) policy officer, David McClure, the organisation’s pork and bacon committee has been focused on several work streams over recent months.

A notable success story for the group has been the delivery of support to the sector in the form of the DAERA Exceptional Costs Pigs Scheme.

The UFU approached then DAERA Minister Edwin Poots, about this issue in Autumn 2022. Afterwards, a meeting was arranged where UFU presented facts around the current market situation to DAERA.

Committee members outlined the economic stress which the sector has endured since the onset of the war in Ukraine.

According to McClure, spiralling input costs have left huge dents in bank balances whilst the markets have struggled to react and cover the deficit.

DAERA has now agreed to provide £1.6m of support. These monies, delivered on a headage basis, have recently been paid out.

According to McClure the DAERA funding , whilst a useful contribution, will not fill the void which was accumulated in the first six months of 2022. The UFU acknowledge DAERA’s commitment to support the sector.

McClure points out market conditions for pig producers in Northern Ireland are somewhat improved from that of 12 months ago, with future signs of further improvement now showing.

Supplies of pork products remain tight across Europe and this has seen European prices increasing closer to UK levels in recent weeks.

Not only does this movement encourage further increase of UK prices, but detracts from the likelihood of imported products appearing on the shelves of UK retailers.

But production costs remain high, with cereal and protein sources still trading at strong prices, and energy prices remain a huge concern for many pig producers. That said, UFU members are now reporting more favourable trading conditions. With the price of cull sows at strong levels, perhaps some producers have seen the return to positive cash flow as an opportunity to exit the sector.

Pig committee members remain concerned about the threat of African Swine Fever (ASF) as a factor which could decimate any market gain.