End of business adjournment debate on Groceries Code Adjudicator - Mar 5

Mr Alistair Carmichael (Orkney and Shetland) (LD)

Having seen the House run through business at such a blistering pace, we can now all settle back and enjoy the next four hours and six minutes as we consider the matter of the Groceries Code Adjudicator. I assure the House that it is some years since I made my living by speaking for six-minute units in the legal profession, so we may manage to knock off the odd six minutes here or there. I remind the House of my entry in the Register of Members’ Financial Interests.

Yesterday we were here in rather greater numbers for a wider debate on agriculture. I spoke then about the importance of food manufacture and processing to the local economy in the northern isles. Today we paint on a somewhat broader canvas with issues of wider concern, but what is important for the agricultural industries throughout the United Kingdom will always be important for us in the northern isles.

In recent years, farmers in my constituency and elsewhere have found themselves caught in a pincer. They have seen their input costs—particularly the costs of fuel and fertiliser—rise sharply, while the price that they are able to get for their produce at the farm gate has continued to be depressed by the operation of the market in which they are often required to operate. Farmers have, to put it bluntly, found themselves squeezed in the middle.

I think it worth reminding ourselves of how we came to this point. The genesis of the Groceries Code Adjudicator was an inquiry by what was then the Competition Commission—now, I guess, the Competition and Markets Authority. That inquiry took many years of pressure to be held, and its report led to the creation of the groceries supply code of practice, which was, in turn, followed by the Groceries Code Adjudicator Act 2013. It was a long, slow and painful process to get even to that stage. I remember the conversations that I had with colleagues in 2013, as a Minister in the coalition Government, about how the adjudicator would operate and whether it would be sufficient. I think we all knew that, at some point or other, we would need to revisit the matter, but we were certainly pragmatic about it, and took the view that what we were getting in 2013 was better than nothing.

Jim Shannon (Strangford) (DUP)

I commend the right hon. Gentleman for securing this debate on a massive issue that affects us all. Hailing as I do from a farming constituency, I have a deep and intricate interest in the defence of farmers’ prices and income. My real fear is that the harder farmers struggle to eke out their pay, the less likely future generations will be to pursue farming, being isolated and working night and day for less than minimum wage. Does he agree that we need to defend the pay scales, through an enhanced adjudicator power, to secure the viability of the job as an occupation for the future?

Mr Carmichael

I do. I felt that a debate focused on the Groceries Code Adjudicator was timely and essential because the relationship between the producer and the retailer is critical. Unless we get that relationship right, there will be no future; many generations, one after the other, have made the decision to go into agriculture, but it will simply not be worth it. As many of our environmental objectives rely on agriculture, the reduction of agriculture and the change we are seeing in the countryside will ultimately be counterproductive to achieving those environmental gains.

I understand Governments’ reluctance and caution about interfering in the operation of a market—we all know that the law of unintended consequences is never far away—but 10 years since the adjudicator’s creation, it is surely obvious that the way in which it is working, measured by its outputs, is simply not good enough, and that reform is required. On the basis of the debate we had in the Chamber yesterday, the good news for the Government is that there is already a fairly broad consensus in the House, both from people representing rural seats and those representing urban seats, about what that reform should achieve.

The Competition Commission’s report identified what was essentially a dysfunctional market. On the one hand, we have a handful of behemoth purchasers: 95% of the food consumed in this country comes from 12 retail companies. On the other hand, we have thousands of small businesses—farmers, processers and others. We have all heard the stories over the years about the influence of the supermarkets  Of course, big food manufacturers such as Kraft Heinz can compete—they can engage with supermarkets on something like an equal footing—but for the farmers and processers in my constituency and those of other Members, it is a very different story.

The hard commercial fact is that farmers require access to supermarkets to grow their business, but once they have access to those supermarkets  the risk is that they become dependent on it. At that point, it is the supermarkets that can dictate the terms and conditions on which trade is done. Of course, that is a matter of contract, but as any lawyer could tell us, when it comes to taking action to enforce or arbitrate on the basis of a contract, that contract is only as good as the resources behind it. It seems that even 10 years after the creation of the adjudicator, it is still necessary for farmers and processers to say that supermarkets should be required to buy what they say they are going to buy, pay the price that they say they are going to pay, and pay it on time. The fact that we still hear that message is the simplest basis on which I can illustrate the need for reform.

At the moment, our farmers find themselves in a perfect storm. Leaving the European Union brought with it the repatriation of agricultural policy, as well as a number of trade deals with other countries in other parts of the world. The changes to agricultural support risk reducing the amount of food produced on the land; at the same time, we see land given over to other, non-food-producing purposes, such as the creation of renewable energy resources or the process of growing trees—rewilding. Those trade agreements open up our markets to imported food. If that food is not produced according to the same welfare and environmental standards that we expect our farmers to meet, it will inevitably lead to an imbalance in price, which makes it more difficult for our farmers to compete on price. At a time when we see huge pressure on family budgets as a consequence of a massive spike in the cost of living, consumers will increasingly buy on the basis of price. It seems to me that we are putting ourselves in a place where our own farmers are least able to compete on the basis that consumers are most likely to buy on.

If the Government are sincere in wanting to keep productive farming and a proper, functioning market, the relationship between the farmer and the retailer is absolutely critical—it is more important than ever. I was struck when listening to the debate yesterday how many of the participants spoke about subsidies for farmers. The hard truth of the matter is that these subsidies have never properly been subsidies for farmers; they have been subsidies for consumers, because they have allowed farmers to sell their produce at a price that simply would not be economic in any free market. The people who have benefited from these farm subsidies have ultimately been the consumers and the large corporates—the supermarkets—that have been supplying them.

The world is very different today from the one in which the adjudicator was created 10 years ago. There are changes that I would like to see, around which consensus was apparent yesterday. The first difficulty in the way in which the adjudicator’s functions and office were created is that the remit given to them misses out on the early parts of the supply chain. It does not cover producers who supply processers, or smaller retailers. As with the Groceries Code Adjudicator, the code of practice surely requires to be extended to include processers, hospitality and manufacturers.

As well as the remit given to the adjudicator, the resourcing of that office also requires to improve. It is difficult to see how we can possibly hope for an adjudicator to exercise meaningful control over the big supermarkets—who, incidentally, fund its operation through a levy—if the cost of a single investigation is greater than its annual budget. Remember also that when it comes to the dialogue between the regulator and the supermarkets  the supermarkets will not be under-resourced and they have every interest and every means to ensure that they put forward the most favourable case they can possibly create. Just as there is an inequality of arms between supermarkets and farmers, so there is an inequality of arms between the supermarkets and the regulator.

Also, the code applies only to direct suppliers, which are now the 14 largest retailers. There is no protection, as things are currently structured, for those who would be indirect suppliers, so any supermarkets or other large retailer that wishes to avoid enforcement or coming under the attention of the Groceries Code Adjudicator can do that quite simply by purchasing the goods through intermediaries.

The Agriculture Act 2020 allowed the Department for Environment, Food and Rural Affairs to create statutory codes of conduct. I am aware that a consultation being carried out by the Government on contractual relationships in the fresh produce industry finished on 22 February. I expect that that is still being considered by Ministers, but I hope it will be possible to hear some indication from the Minister today of when we might see the outcome of that consultation. As we consider the reform of the adjudicator’s office, we must ask one simple question: is there an overall strategy at play? It seems to me that different avenues of influence are possible and that, as part of the review, the compatibility of the codes of conduct under the 2020 Act and the office of the adjudicator requires to be examined.
Bluntly, I do not care how we tackle this. The vehicle for change is irrelevant, as far as I am concerned. It is the outcome, the change that we are able to achieve, that matters to me. The concern that is most frequently expressed to me is a pretty fundamental one—namely, that the code does not cover pricing. Few things illustrate that better than the way in which the dairy industry has been affected by supermarket activities in recent years, but when we speak to producers in just about every sector, we get the same story every time.

The strands of Government policy that we have at the moment—the removal of support for production through the new agricultural policy for England, which, as I said yesterday, has a knock-on effect for agriculture in other parts of the United Kingdom, and the improvement of food security—will only both be achieved if British farmers receive a fair price for the food that they produce. If we do not achieve that, then removing the direct support for food production from our subsidy system will leave us with no option but to import ever more of our food. The carbon consequences of the production of that food—reference was made yesterday to its being produced in Central and South America in ground that would previously have been rainforest or whatever else—and its transportation would run counterproductive to other stated Government policies.

It is in the round that we see the importance of regulating properly this relationship, and it is now a matter of urgency. Recent research demonstrated that 49% of farmers in the United Kingdom fear they could be out of business next year, 61% identify supply chain unfairness as something that has an adverse effect on their mental health, and 23% of dairy farmers doubt that they will continue into 2025. Action needs to be taken. There is a willingness in this House to take meaningful action to deal properly with this relationship, which in itself will have a significant effect on the future economic and social viability of our rural communities producing good-quality food for people in all our communities to consume. Who would not want that?

3.41pm
The Parliamentary Under-Secretary of State for Business and Trade (Kevin Hollinrake)

It is a pleasure to serve with you in the Chair, Mr Deputy Speaker. This debate is very important to me personally. My father was a hill farmer, and I represent a rural constituency with many farmers who are experiencing many of the pressures that the right hon. Member for Orkney and Shetland (Mr Carmichael) referred to; indeed, he described them as a perfect storm. I congratulate him on securing the debate and on all the work he does in this area, of which I am only too aware. He mentioned the pressures that farmers and those in the farming community face making a living, and the competition for land from different land uses, with which we should be careful in ensuring that we have food security as well as energy security and the other things that we need to retain in this country.

The right hon. Gentleman is of course familiar with the Groceries Code Adjudicator, but it might be worthwhile setting out exactly what it is there to do, how it can help get a fair deal for farmers, and what else we are doing to ensure that that is the case. The role of the GCA is to enforce the groceries supply code of practice. It does so by providing advice and guidance to both suppliers and large retailers on matters relating to the code, arbitrating in disputes between large retailers and their direct suppliers, investigating issues to ascertain whether there has been non-compliance with the code, and imposing sanctions and other remedies for breaches of the code.

The code applies to the 14 largest grocery retailers in the UK, which have an annual turnover in groceries of £1 billion or more. As the right hon. Gentleman rightly pointed out, the code was put in place following a detailed market investigation by the Competition Commission between 2006 and 2008, which found that direct suppliers of groceries to large supermarkets faced unfair risks that adversely affected competition and, ultimately, consumers. The code regulates designated retailers’ interaction with their direct suppliers, including some but not the majority of farmers.

While the code prevents the unilateral variation of supply agreements, such as on wastage and forecasting errors, and requires retailers to pay invoices on time, it does not cover prices agreed between a retailer and a supplier, which, as the right hon. Gentleman says, are a matter of commercial negotiation. However, the code does help ensure that negotiations are conducted fairly and transparently, and the GCA has an interest in ensuring that negotiations on cost price pressures do not lead to non-compliance with the code.

Of particular note are the GCA’s seven golden rules, which all the regulated retailers have signed up to and which safeguard the requirements of the code in discussions about price and cost pressures. There is strong evidence to show that the GCA has been highly effective since it was established in ensuring compliance with the code and changing the behaviour of retailers to ensure fairness for suppliers.

Stakeholders have expressed a positive view of the GCA and their input has helped inform the statutory review of the performance of the GCA that the Government conduct every three years. Indeed, I met many of those suppliers and they spoke very clearly about the benefits of the GCA that they see. Those suppliers represent many of the primary producers referred to by the right hon. Gentleman.

The third such review concluded in July 2023 and I hope the right hon. Gentleman’s constituents felt able to submit their views. The review considered publicly available evidence and the responses submitted by 71 stakeholders, including from 27 individual suppliers and their representative bodies, and 30 other trade associations, organisations and individuals. Most of the suppliers who responded to the review said they believed the impact of the GCA on the groceries market had been positive as retailer behaviour had improved. They also said the adjudicator had addressed the previous imbalance of power and made the grocery market fairer to operate in. For instance, in 2014, just after the GCA was set up, four out of five direct suppliers responding to the GCA’s first annual survey said they had experienced an issue with the code. That is now down to one in three, and the issues that concern suppliers are down in practically all cases. Suppliers, including small and medium-sized enterprises, feel better protected against any poor behaviours from retailers following the best practice put in place by the GCA. In 2022, more than two thirds of direct suppliers felt that retailers covered by the code conducted relationships fairly.

Overall, there is a consistently high level of awareness among suppliers of the GCA and the code. I have met the current adjudicator, Mark White, several times and have been extremely impressed by his pragmatic approach to ensuring the compliance of the designated supermarkets  which has helped to stop problems escalating and reduced the need for time-consuming and expensive formal dispute resolution.

I am aware that some Members have asked whether the GCA has the necessary powers and resources. I know that Mark White believes his current powers provide the necessary tools to enforce the code and change retailer behaviour. He is also responsible for determining the level of resources that he needs and setting the levy of regulated retailers to fund his work. While Ministers are responsible for approving the proposed levy, the Government have always accepted the adjudicator’s levy business case and will of course give careful consideration to future requests.

Mr Carmichael

I am pondering the words the Minister has used. I think he is right that the adjudicator does have the powers to investigate and enforce the code of practice, but there are still big areas that are not covered, and that comes to the concern that farmers, producers and processors have.

Kevin Hollinrake

I am not ignoring the right hon. Gentleman’s concerns at all. I recognise them and, as I said earlier in my speech, the vast majority of the market in terms of primary producers is not covered by the code. I will come on to that shortly. The right hon. Gentleman will be aware that there would be challenges in the GCA being the custodian or overseer of thousands upon thousands of business contracts, with the complexity and bureaucracy that would flow from that, which neither of us would wish to see. That would, of course, result in an impact on prices as well. I will address that later.

We recognise that, despite the GCA’s effectiveness and successful interventionist approach, we have not yet stamped out all unfair practices. The impact of the recent cost price pressures in the food sector has demonstrated how external factors can affect relationships and behaviours. As such, we recognise the continued need for the GCA’s role in ensuring fair treatment of suppliers to supermarkets through enforcement of the code. We are aware that some poor practices are affecting producers across several agricultural sectors not covered by the code and that primary producers, such as farmers, have felt unfairly treated. The Government also want farmers to get a fair price for their products—that was the opening and closing argument of the right hon. Gentleman—and we are committed to tackling contractual unfairness that can exist in the agrifood supply chain.

Powers in the Agriculture Act 2020 enable the introduction of statutory codes and contractual practice to protect farmers. Those codes would apply to any businesses purchasing agricultural products directly from farmers, including processors, consolidators and other intermediaries, providing greater certainty for farmers by ensuring that clear terms and conditions are set out in contracts. That will seek to improve the negotiating position of farmers to achieve fairer prices and greater transparency and accountability in supply chains. Ministers in the Department for Environment, Food and Rural Affairs are exercising the powers under the 2020 Act in a sector-specific approach, acknowledging that the problems experienced by each sector differ widely and avoiding broad regulation that places burdens on sectors that may not require intervention.
The first sector-specific regulations for the dairy sector were laid in draft in February 2024 and regulations for the pig sector are expected to be introduced later this year. Work is also progressing on regulations for the egg sector, and DEFRA carried out a fresh produce review, which the right hon. Gentleman referred to, in December 2023, and the response to that will be published shortly. I cannot give a more definitive timescale than that, I regret—if it was all in my gift, perhaps I could, but it is not. He is probably pretty familiar with the term “shortly”. Crucially, the recruitment is under way for an agricultural supply chain adjudicator, who will be responsible for enforcing the new regulations.

As I touched on earlier, it may be that the GCA’s effectiveness is the reason why some think we should extend its role to ensure the better protection of primary producers in the grocery supply chain, such as farmers. Requiring the GCA to regulate the many thousands of transactions throughout diverse supply chains would risk diluting the adjudicator’s tight focus on the 14 largest supermarkets and could undermine its record as a highly effective regulator. In terms of what it does, if something is not broken, don’t try and fix it. However, we do understand that parts of the system are broken, and that is why we are bringing in the sector-specific supply chain remedies.

It is important to safeguard the GCA’s ability to remain vigilant on the compliance of the 14 designated retailers. The Government therefore have no plans to extend the adjudicator’s remit, but instead seek to learn from and emulate the GCA’s approach and effectiveness, so that it can be replicated for the sector-specific codes.

Question put and agreed to.