Piggies in the middle

Food chains such as Sainsbury's stand accused of exploiting their suppliers. Peter Koenig assesses the facts
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TOUGH, CAUSTIC, ready for battle, Dino Adriano, chief executive of J Sainsbury, spent Wednesday morning trying to avoid two traps set for him by journalists gathered to report on the supermarket group's latest results.

The first trap was laid by reporters looking for a recession story. What effect, they wanted to know, was the economic downturn having on the company's performance? Sainsbury's sales had significantly slowed in the five weeks since the half year ending 19 September. When the news was reported Sainsbury's shares slipped 6.2 per cent, or 34.5p, on Wednesday, to 525p.

Still, Mr Adriano avoided the worst of the recession-story trap. He refused to be knocked off-message: "Halfway through our three-year recovery programme, begun in May 1997, we are on track," he said. And few in the investment community doubted him.

After losing its way several years ago, Sainsbury's - under non-Sainsbury family management for the first time in its 130-year history - really does appear to be back on track to secure its position as a great retailer. Its long-term aim is to steal back the number one supermarket slot from Tesco.

If Mr Adriano side-stepped the recession story trap, however, he was not so nimble in avoiding the one set by reporters looking for a "supermarkets exploit farmers" story. With an Office of Fair Trading investigation into supermarket pricing due for completion by the year end, and with a parliamentary select committee on agriculture due to begin hearings on the plight of pig farmers this month, he had no easy answer to reporters probing for links between Sainsbury's half-year figures and the dire straits of many farmers.

Mr Adriano stone-walled these questions. Reporting that the company's operating profit increased 5.1 per cent to pounds 431m on sales up 5.8 per cent to pounds 6.4bn for the six months to 19 September, he declined to break down these figures.

Where had the profits increase come from? "Fresh food," said Mr Adriano.

How much of the pounds 35m profits increase could be traced to the fall in prices paid to farmers for their livestock?

"None," Mr Adriano said.

In that case, why had Sainsbury's not profited from cheaper supplies of beef, sheep and pigs? Mr Adriano offered an answer few could follow.

Over lunch and drinks after the press conference, Sainsbury's spin doctors evinced a degree of cynicism about the "supermarkets exploit farmers" story now lighting up the British media. Stories about upland smallholders shooting their sheep in desperation, the spin doctors suggested, was a cynical championing of consumers as well as farmers, designed to sell newspapers.

Meanwhile, the spin doctors muttered darkly, the Government was happy to let the issue of supermarkets exploiting farmers rumble on inside the OFT and parliamentary select committees. The activity offered the impression that the Government was doing something - and so got it off the hook in rural areas where the metropolitan cast of New Labour has already cost the Government much of its popularity.

The cynicism of the Sainsbury's spin doctors is matched only by the cynicism of economists who have long followed the politics of food, and who judge the Government and media interest in the "supermarkets exploit farmers" issue as likely to make little difference to farmers.

"I am deeply suspicious the OFT will accomplish anything with its review of supermarket pricing," says Sean Rickard, a former chief economist for the National Farmers Union and now teaching at Cranfield Management School. "Farmers do have problems. There is a serious over-supply of pigs, for example. But the market will sort this out. It's tough, but people will go to the wall."

Still, as the mad cow disease story illustrates, stonewalling on food issues can have unpredictable economic consequences. The noise from farmers amplified by the media and government bodies cannot be entirely distorted. Farmers are speaking out more openly than ever before about their secretive terms of trade with supermarkets.

"Don't let's knock the supermarkets," says Robert Bowden, a large pig farmer based in Andover. "They're the best-organised retailers in the world. But they're dealing with probably the least-organised primary production process."

Over the past three years, Mr Bowden says, the average retail price of pork has declined marginally - from pounds 2.97 a kilo to pounds 2.84 a kilo. But the price of pigs has plummeted - from pounds 1.22 a kilo to 62p a kilo.

"Somebody must be getting more," Mr Bowden says. Trying to find out who, however, would tax the best detectives in the world, let alone the Office of Fair Trading.

Consider the chain loosely linking Mr Bowden and his pigs to Sainsbury's through middlemen slaughterhouses like Unigate. The situation basically looks like this: Mr Bowden operates as a contract pig farmer. He has local farmers supply him with land, barns and labour. He takes responsibility for breeding the piglets, supplying food and vet services, and marketing the livestock. From September 1995 to 1996, life was good. Mad cow disease meant consumers were buying pork instead of beef. Classic swine fever on the Continent cut the supply of pig meat imported into the UK.

Since 1997, however, conditions have collapsed. Pig farmers are now losing pounds 1m a week. The Asian and Russian financial crises have prompted Danish and Dutch pig farmers to export more to the UK. The strong pound has made this even more attractive.

Meanwhile, the slaughterhouse business has been consolidating. Currently, eight abattoirs process 90 per cent of the 307,000 pigs slaughtered per week. The largest, Unigate, handles 35 per cent.

The consequence of pig farmers' vulnerability to exploitation by slaughterhouses as well as supermarkets hit home in July. Traditionally, pig prices were adjusted weekly by the Meat and Livestock Commission. But these prices did not take into account steeply discounted pigs being sold into the UK by Danish and Dutch farmers. So the slaughterhouses ripped up the old formula and began using a new one based on Europe-wide pig prices.

Referring to this situation in conversation after the Wednesday press conference, Sainsbury's finance director, Rosemary Thorne, suggested the "supermarkets exploit farmers" story should be amended to the "slaughterhouses exploit farmers" story. "We're not profiting from the decline in pig prices," she said, "so the middlemen must be."

But Unigate adamantly denies that it has profited from the halving of pig prices in the past three years, either.

"We've cut our prices [for pigs] more slowly than our competitors," a Unigate spokeswoman says. "This cost us pounds 5.5m in the three months from April through June."

The solution to this who-dunit, Mr Rickard suggests, lies in the apportioning of costs by both supermarkets and slaughterhouses. Over the past three years, the margin on farm gate pig prices and retail pork prices has widened by 28 per cent.

"I can't believe increased costs have absorbed all this widening differential," he says.

Indeed, the situation is even more complicated. Pig farmer Mr Bowden has little quarrel with the profit margins on fresh pork commanded by slaughterhouses and supermarkets. His gripe, he says, is over what happens to the 60 to 65 per cent of his pigs that don't end up in supermarkets as chops or loins.

Mr Bowden argues that animal welfare legislation makes the cost of his business uncompetitive against continental European pig farmers. This means, for example, that Sainsbury's gets its bacon for the top of its frozen pizzas from slaughterhouses dealing in continental, not British, pigs.

"It's here - bacon, sausages, patties - we're getting killed," Mr Bowden says.

He has no ready solution for the fact that British pig meat and continental European pig meat are basically two different foods - with British pig meat being more expensive.

"The supermarkets and the Government should take responsibility for the fact that the public wants strict animal welfare legislation to apply to British farmers," is the best he has to offer.

Sainsbury's, meanwhile, has adopted an orthodox strategy for dealing with the issue: lie low; let a trade group - the British Retail Consortium - represent it along with other supermarkets to the OFT and the parliamentary select committee; and hope that the media and public lose interest in the issue as its complexity reveals itself.

"You can't really blame the supermarkets," says Mr Rickard. "They're in a fiercely competitive business, too."

But these are not orthodox times. A continued slump in world commodity prices will prolong and exacerbate the farm crisis.

"If that happens", says Mr Rickard, "then the supermarkets and middlemen could get caught up in this."