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The Costs and Benefits of Farm Assurance to Livestock Producers in England

by 5m Editor
13 February 2004, at 12:00am

UK - This report is the Executive Summary from the MLC's latest document on Farm Assurance in England.

The Costs and Benefits of Farm Assurance to Livestock Producers in England - UK - This report is the Executive Summary from the MLC's latest document on Farm Assurance in England.

Introduction

Farm Assurance has been a significant element of British livestock production since the early 1990's. The key drivers for the development of farm assurance schemes in the UK red meat industry include: changes in consumer purchasing and consumption behaviour; changes in the structure of the industry, increased public focus on food safety (pre and post-BSE), and changing food safety legislation. However, in recent years farmers have begun to question the value of farm assurance schemes, on two grounds: a) their implementation is perceived to result in added costs on-farm that are not reflected in the prices they receive for farm assured livestock, and b) livestock producers overseas, who service UK meat manufacturers and retailers, are not subject to the same assurance standards and thus may obtain a competitive advantage. The objective of this study is to establish the benefits of farm assurance schemes to livestock producers in England and compare them with their associated costs.

Methodology

A four-stage approach was adopted for this study. A review of previous studies in the public domain and analysis of existing evidence was followed by qualitative research in the form of semi-structured interviews with representatives of the key stakeholders in the red meat industry (assurance providers, fanners, marketing groups, auction markets, importers, manufacturers, supermarket, butchers, food service) and focus groups with red meat consumers, in order to establish the key issues, past, present and future. Stage three involved two surveys: one of livestock producers, to explore their attitudes towards farm assurance, the associated cost and perceived benefits; and one of red meat consumers, to explore their awareness of, attitudes towards and willingness to pay for farm assured pork, lamb and beef. Finally, a number of farm case studies were undertaken to verify the findings from the farmer survey and shed further light on some of the more complex issues raised.

Key Findings

There are varied views on the role of farm assurance. This is a significant problem as divergent expectations amongst different stakeholders in the food chain, with respect to the costs and benefits of farm assurance is a source of tension between farmers, who unequivocally bear the costs, and downstream stakeholders (manufacturers and retailers) who, it may be argued, receive greater (or least more explicit) benefits from the adoption of farm assurance upstream.

The potential costs associated with farm assurance are twofold:

  • Membership and inspection costs - known, published and inversely related to the number of certification bodies (competition in the provision of farm assurance)
  • Compliance costs - inversely related to the competence and attention to detail of the producer, typically less significant in monetary terms than widely perceived and likely to diminish over time

Membership and inspection costs range from £75 to £85 for beef and lamb and from £150 to £185 for pigs. Actual costs vary according to farm size and the number of enterprises covered (ie there are discounts for multiple enterprise and whole farm inspections). In addition, pig producers face quarterly veterinary inspection, the cost of which can range from £50 to £500 per visit, depending on the size of enterprise.

The cost of compliance is difficult to estimate as the vast majority of the assurance standards require no more of farmers than is already required of them by law. The fact that the overwhelming majority of respondents to the farmer survey recorded zero or minimal compliance costs at the time of initial membership suggests that a) most of them were already complying with the law, and b) actual compliance costs (whether they be wholly attributed to farm assurance or not) are significantly lower than the perceived costs, most of which are associated with record keeping and red tape. There were extreme cases reported of compliance costs in excess of £5,000 by both cattle and pig producers, primarily in association with improvements to buildings and almost two fifths of FABBL members surveyed reported costs associated with veterinary inspections at the time of initial application, despite the fact that this is not a FABBL requirement.

This limited evidence could fuel the argument that farm assurance is prohibitively costly for producers, yet the likelihood is that some of these costs would have been incurred whether the producers concerned were applying for membership of farm assurance or not, so to attribute them exclusively to membership of a farm assurance scheme is an exaggeration of the actual costs of compliance. Nevertheless, the fact remains that significant numbers of farmers associate compliance with food law on the farm with farm assurance standards and attribute those cost exclusively farm assurance, maintaining it is costly and time-consuming. The fact that some farmers feel the need to consult a vet when applying for membership of an assurance scheme suggests that scope exists for improving the application process, to reduce the perceived barriers to membership at the outset.

The assurance industry needs to address this perceived barrier to adoption, particularly amongst smaller producers, either through a simplification of the process (to reduce the perceived complexity and actual time associated with administration) or a more effective communication of what farmers are actually required to do. To some extent this problem arises from the failure of those concerned to effectively communicate what is required of livestock producers by law. Application to join a farm assurance scheme draws this explicitly to the attention of producers, the result of which is the perception that the administration time and compliance costs are solely associated with farm assurance, when in fact the majority of the tasks that are required by Ihe assurance bodies are required by law.

The potential benefits of farm assurance to farmers are threefold:

  • A source of price premia - requires attributes that are valued by consumers and effective communication of credence attributes that require an act of faith on the part of The consumer.
  • Security of market access/barrier to import penetration - requires supermarkets to implement farm assured purchasing strategies with rigour and consistency.
  • Source of improved management - attention to detail required by farm assurance schemes can reveal improvement areas on farm.

There is strong evidence to support the claim that market prices are driven by market forces and in a "normal trading environment, the message from downstream processors and retailers is loud and clear - farm assurance is a market qualifier (an entry requirement) but by itself cannot and does not justify a premium although in effect there is a premium as non-assured livestock are invariably traded at a discount. The exceptions to this are for some high street butchers and local food service operators who have very different needs and for whom provenance or farm assurance are of less importance. Thus, it may often be the case that small quantities of non-assured livestock are sold through this channel at a premium. This premium is partly offset by the ability of high street butchers to use a larger proportion of the carcase (e.g. less trim and a greater variety of cuts) and partly offset by higher retail prices. However, their market share has been declining for the past twenty years and is unlikely to represent more than a small, albeit important, niche market for the foreseeable future.

In terms of market access, all the processors to whom we spoke, who supply retailers with fresh meat from the UK said they only source farm assured livestock. However, whilst supermarkets seek farm assured British meat wherever possible some major retailers turn a blind-eye when cheaper imported meat becomes available. Retailers expressed a commitment to buying British where possible and in preference to imported meat, but they acknowledged a desire/need to remain flexible and use imported meat when appropriate. Thus, farm-assured is important for British producers wishing to access the supermarket trade but is not working as well as it might with respect to imports. In order for British farm assured meat to stand any chance of displacing imported meat, without competing on price (which the UK meat industry is ill-equipped to do), consumers need to a) be aware of it, and b) understand what it means, in order to state a preference and express a willingness to pay a premium for it Assurance scheme providers have found it difficult to educate farmers about the importance of farm assurance and the FSA report (2002) concluded that consumers remain unaware of and confused about farm assurance and what it stands for. If the majority are blissfully ignorant of the existence of farm assurance, let alone what it stands for, then why would they seek it out in preference to imported meat? Moreover, in the absence of consumer preference, what incentive is there for supermarkets to support British farm assured meat, particularly when to do so would require them to replace low cost/high margin imported meat with higher cost/lower margin British meat? The answer lies in persuading consumers of the benefits of farm assurance and extracting a market premium, which processors and retailers have consistently argued is difficult to justify.

The consumer research provided strong evidence to support the view that if made aware of what is currently on offer in certain supermarkets and what farm assurance and the little red tractor stand for, many consumers would be likely to switch to a known British, farm assured product and some would be willing to pay a premium.

The third potential benefit from farm assurance is the improvement of business management through the systematic monitoring of activities. This is a by-product of farm assurance that has received little attention in the past but is attracting growing interest amongst as proponents of farm assurance The survey results revealed a small proportion of fanners (10% and 9% of FABBL and ABP members respectively) who believed they had managed to reduce costs, improve quality or generally improve the management of their cattle/sheep/pig enterprise as a direct result of farm assurance. Interestingly, downstream sectors of the supply chain were much more positive on this point with several auctioneers, farm inspectors and processors expressing the view that farm assured stock is generally of better quality and/or that the management of livestock enterprises often improves as a result of farm assurance.

Conclusions

It is evident that farm assurance is here to stay and that the standards will likely rise in the years ahead, driven by legislation and the continued desire within the English assurance community to stay ahead of the competition. However, incurring costs, however small, to stay ahead of the competition is of little value if the customer is unwilling to pay. Supermarkets have repeatedly argued that consumers assume farm assurance as a given and are preoccupied with price as a key purchase cue but will also pay more for quality attributes.

We now have an opportunity to be more positive and inject some much-needed momentum into the evolution of assurance, as part of an integrated food chain in which the interests of all stakeholders are best served through more effective marketing, communication and merchandising of British farm assured meat. Should the red meat industry succeed in persuading a significant proportion of UK consumers of the merits of farm assured meat, and extracting a price premium as a result, then producers hiding behind the mirage of compliance costs will focus more clearly on the benefits and the debate over farm assurance will become a thing of the past. Added to this, there are good opportunities for greater linkage of assurance schemes with some of the brand development work which is taking place in the English beef and lamb sector - this already exists for the Quality Standard Mark for British pigs which has succeeded in achieving a premium over other sourced pig meat over the past 12 months.

We would strongly recommend that these findings are used to support supermarket trials in which British farm-assured meat is given prominence on the meat counter with point of sale support for a premium priced product that will incentivise all stakeholders in the meat chain to source domestic product in preference to imported meat

To read the full report please click here

Source: Meat and Livestock Commission - 12th February 2004

5m Editor