Food gap in the land of plenty: British farmers are good at producing, but the UK still has a pounds 6bn trade deficit in the foods sector. Diane Coyle says one reason is that the processing industry lacks both investment and organisation

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DESPITE our reputation for plain tastes, Britons have long celebrated foreign food. Some of this appetite is for the exotic, some for the basic, but for nearly a century and a half we have happily imported other people's food rather than growing more of our own.

In the days of empire, food-stuffs were an essential part of the trade system. A 1930s recipe for Empire Christmas Pudding, for instance, exhorts loyal subjects to buy the produce of the colonies, with Cape fruits, brandy and Indian tea to soak the fruit. Latterly, our food sources have become more eclectic as exemplified by the latest supermarket recipe cards calling for Mediterranean limes or Thai lemon grass.

Britain has been a net food importer since the repeal of the Corn Laws in 1846 ended restrictions on agricultural imports. From time to time this has caused acute national hardship, such as the food rationing during the Second World War when German U-boats disrupted the flow of imports. But the growing recognition that the permanent shortfall in food makes an unnecessarily large contribution to the country's balance of trade deficit is relatively recent.

Last year, Britain's food imports came to pounds 6bn more than its food exports - better than the previous year's pounds 6.7bn, but nearly half the pounds 13bn total trade deficit. The biggest shortfalls were in fruit, vegetables and meat.

Inevitably, a small country with a cold climate has to ship in some foods.

Star fruit and lychees, sweet potatoes and exotic spices cannot be grown here.

Food From Britain, the semi-government-funded food export organisation, calculates that pounds 7.5bn of the pounds 13.4bn in food imports in 1993 was unavoidable, either because of climate, limited British growing seasons, quotas limiting home production or 'authentic' demand for the exotic things in life.

This demand has grown over the decades. Some of the blame for the food trade gap dates back to the late cookery writer Elizabeth David creating the desire in post- war British kitchens for what were then exotica, such as lemons and olive oil. The first recipe in her 1951 classic French Country Cooking is a soup calling for langoustines, wine, lemons, garlic, paprika, rice and fresh eggs - at a time when rationing was still in force. Who can blame Britons for feeding their desire for foreign ingredients?

But this is less than half the story. According to John Malcolm, chief economist of the National Farmers Union, three-quarters of imported food consists of foodstuffs that could in principle be grown at home. There is no innate reason why we should raise pigs yet import pounds 500m-worth of Danish bacon a year, except that we have done so for a century.

In some cases, there are sound economic reasons for this apparent anomaly: some foods that Britain can grow are cheaper to produce elsewhere. Wheat, for instance, is cultivated here but economies of scale on the huge farms of the North American prairies make US wheat cheaper.

Agricultural subsidies complicate the trade picture, but since every significant food-producing country apart from New Zealand indulges in farm subsidies, the net effect is difficult to assess and probably small. The only clear winners in the game of competitive protectionism are countries that do not produce food.

In the end, trade protectionism plays little part in the explanation for Britain's persistent deficits. The real reason is a lack of organisation and investment in an industry that has been slow to take advantage of ample opportunities. Mr Malcolm said: 'Most of the problem comes after the farm.

Our farmers are good at producing pork, but our food processors are not as good as the Danes at producing bacon.'

Other economists agree. Simon Briscoe, UK economist at the City merchant bank SG Warburg, said: 'We ship a lot of food overseas to be processed and import it again. The value added goes to the processor overseas.'

Bacon is not the only example. Britain exports milk - and imports yoghurt and fromage frais from Germany. It exports grain and imports cakes and biscuits.

Mick Sloyan, chief economist at the Meat & Livestock Commission, the meat industry's trade body, says that it is only within the past few years that British bacon has achieved the same high standards - and wholesale prices - as Danish bacon. He said: 'Quality was the first battle. There was no point trying to build volume at a discount price.'

Yet quality by itself is not enough. British bacon manufacturers face more hurdles in shouldering their rashers on to the supermarket shelves. They do not spend nearly as much on advertising as the Danish or Dutch newcomers do.

According to Mr Sloyan, a bigger difficulty is getting producers to invest enough in plant and equipment to supply the big supermarket chains in the quantities they want. He said: 'You have to persuade the multiples that your product is as good quality as your competitors' and can be supplied in the volumes they want. It is difficult to get suppliers to invest millions of pounds in bigger-scale production without the guarantee of a ready market.'

The issue of having to supply on a big scale, to meet the demands of Britain's concentrated retailing business, is a persistent theme in discussions of the food industry. Mr Briscoe says: 'British farmers and many food producers are neither small enough to want to sell through co-operatives nor big enough to be able to take on the retailers.'

He argues that many imports are accounted for by the fact that some foreign governments, such as France, South Africa and Chile, have been more active in co-ordinating their food exporters. France turned a persistent food trade deficit equal to about 1 per cent of national output into a surplus of the same size over the course of 15 years, thanks to the organisation of farm co-operatives and government-run marketing drives.

Peter Pullen, the trade minister at the South African Embassy in London, said: 'Initially we had some problems selling to the big chains. They wanted uniformity and huge volumes. Our agricultural marketing boards did provide continuity of supply.'

The marketing boards are now being phased out, since the volume and quality of South African exports is established. They are being replaced by industry bodies. But that leaves a panoply of free services to exporters such as the 40 overseas trade offices and free market research. Mr Pullen said: 'We have had to excel in consistency, quality and packaging because sanctions made us so isolated.' Since sanctions were lifted, exports have soared.

The NFU's John Malcolm agrees that the scale of supplies required by supermarkets has been a problem in the past, but thinks it is diminishing.

He points out that about two-thirds of British apples are now sold through co-ops. There are about two dozen of these - still too many - but Kent co-ops East Kent Packers and Home Grown Fruits dominate. However, he agrees that the supermarkets' control of food supply 'does not always help'.

The supermarkets deny that size matters. They look for the best possible products at good value. David Sawday, a Tesco spokesman, said: 'The size of supplier is definitely not a problem to us.' This year, he says, Tesco has introduced 20 British farmhouse cheeses, including one from a Yorkshire farm that is sold to a single York store.

Like Safeway, Tesco has had a firm Buy British policy for two years. It boasts of big increases in sales of British produce last year, including a 900 per cent increase for British cherries, 500 per cent rise for conference pears and a 300 per cent rise in apple juice sales. The chain says all its fresh milk and eggs are now sourced in Britain. It is a sign of how far there is to go that selling British milk and eggs is regarded as progress.

The supermarkets have tried to encourage domestic processors to substitute for some imports. A good example is the yoghurt with separate fruit, a huge success when introduced from Germany in 1990. Since then, the chains have found British firms to supply the same product.

Unfortunately, the demise of the Milk Marketing Board from tomorrow is expected to mean a 10 per cent rise in raw material costs for these firms.

One supermarket executive said it was not yet clear whether they would continue to get a good enough deal for customers to justify buying British.

Patrick Davis, chief executive of Food From Britain, thinks import substitution in the home market is not the way to shrink the deficit anyway.

British firms already supply 85 per cent of the UK market. He said: 'The best we can do in the home market is stay as strong as we are. The far bigger opportunity is to go for exports.' British firms supply only 1 per cent of the EU market outside the UK.

FFB believes that with growth in the home market tailing off, Britain's food processors are beginning to be seriously interested in exports for the first time. About 170 firms displayed their wares at SIAL, one of the food trade's biggest international exhibitions, last week. At the last biennial exhibition, there were 140 British firms.

Mr Davis reckons the opportunities are there for British firms to pluck. He says: 'If you supply Sainsbury or M&S, European retailers figure you're in the premier league.'

A sceptic might query the appeal of classic British frozen foods to European consumers - Bernard Matthews turkey dinosaurs are the British mother's little helper but surely have cultural barriers to overcome on the Continent. But there is little doubt that some foods processed in Britain are of much higher quality, as any English toddler who has tasted French fish fingers will testify.

Mr Davis said: 'The biggest hurdle is attitude. British companies are still pleasantly surprised when they find that Europeans want to buy their products.' He thinks that within five to 10 years, Britain could close the food trade gap through exports of higher value-added processed foods.

However, a recent study published by the National Institute of Economic and Social Research throws a shadow of doubt over this rosy prospect. The researchers compared biscuit factories in Britain, France, Germany and the Netherlands. Britain is self-sufficient in biscuits, but has a rising share of imports of higher-priced, luxury types.

The comparison showed that the average value added per ton of biscuits was 40 per cent lower in Britain than in Germany, and 10-15 per cent lower than in France and the Netherlands. British products are low-quality.

The study concludes that an unskilled workforce confines Britain to the bulk production of uncomplicated types of biscuit - and leaves the home market open to import penetration from both luxury biscuits from Europe and, eventually, basic biscuits from lower-wage industrialising countries. The only protections are the cultural preference for digestive biscuits and advertising spending on domestic brands.

There are other examples of the potential threat from foreign food processors. Eighteen months ago, South Africa developed a frozen food industry in the eastern Cape. The UK has become its biggest market, with, for example, more than pounds 1m in sales of frozen cauliflower in both 1992 and 1993 from a standing start.

Mr Pullen, the South African trade minister in London, says there are plans to do the same with other products. For instance, a co-operative has recently been formed among small sugar cane farmers in Natal to refine and export sugar. There will also be an export drive for Cape fruit juices.

Just like other British industries, food processors will find it increasingly difficult to compete in basic goods against low-wage countries, and might not have made the investment in capital and skills needed to manufacture higher value-added products.

One thing that encourages the pessimists is that the Government is becoming more active in encouraging an export drive. Last year, it focused Food From Britain on exports. On Wednesday William Waldegrave, Minister of Agriculture, Fisheries and Food, will give his first big address to the food industry since taking office in July. He will be preaching the gospel of exports to the food producers. After that, it is up to the food industry to take bacon to the Danes.

(Photographs omitted)