Price controls on essential food items: consultation paper

Chapter 6: Protection for primary producers

While the overall policy is intended to improve the affordability of essential foods for consumers, it is important to understand whether the introduction of price controls could have unintended consequences for our primary producers as well as elsewhere in the supply chain.

Implementing price caps may have implications for businesses throughout the food supply chain, including farmers, fishers, food manufacturers, processors, wholesalers, distributors and others. These impacts could affect operating costs, investment decisions, product availability or business viability.

The Scottish Government recognises that food producers work tirelessly to grow, catch, cultivate and provide high quality, nutritious food for the people of Scotland and further afield. Scotland’s food, fishing and farming sectors have a critical role to play in Scotland’s food security and economy, producing food for consumption in Scotland, and increasing our economic resilience through exports of food and drink.

Unlike other areas of the UK, the Scottish Government continues to provide direct support to our farmers and crofters, recognising the work they do to support rural life, care for the environment and provide and connect us with our food. Our commitment to continue to invest in their resilience, as set out in our Rural Support Plan, provides the confidence they need to plan ahead and deliver their essential role.

This critical role of producing food and supporting rural economies is why the potential impact of any food price caps on our primary producers is an important consideration.

As noted previously, the selection of food items that would be subject to a price cap is central to the implementation of the policy. This is also a key consideration when assessing impacts on primary producers. The consequences for Scottish producers will depend on decisions made at various stages of the supply chain beyond the farm gate, meaning that the scale and nature of any effects are likely to vary considerably between products.

What is the proposal?

The government is committed to working closely with farmers, crofters, fishers and other primary producers to explore approaches that support a resilient and sustainable food sector while achieving the policy's objectives.

In addressing the question of protecting primary producers from impacts arising from taking forward price caps of essential foods it is proposed that the impact on primary producers is best dealt with by means of policy interventions, rather than creating specific legislative provisions in any future Bill.

The illustrative draft provisions include a proposed requirement for Scottish Ministers to consider the impacts on producers, food retailers and other businesses the Scottish Ministers consider may be impacted when setting a price cap.

There are a number of identified challenges which we are seeking to more fully understand through this consultation. There are also different ways we can look to address any impacts arising from price caps and to help inform that work, we have outlined potential mitigation measures below and welcome your views on them. In particular, further evidence from those operating across the supply chain will help us better understand the scale and nature of any impacts in practice.

Discussion points relating to protecting primary producers

Data availability and profit margins

Designing measures that mitigate impacts on primary producers requires careful consideration of the complexity of modern food supply chains. Primary producers typically operate within interconnected supply networks and often sell their products through processors, packers, manufacturers or other intermediaries before goods reach retailers and consumers.

Consequently, farm-gate prices are shaped by a range of interconnected factors, including domestic and international market conditions, input and production costs, contractual arrangements and wider supply chain dynamics. This of course makes it challenging to directly identify the extent to which any changes in prices received by producers are attributable to a price cap, rather than to broader market developments occurring across the food system.

While information on farm-gate prices and point of sale pricing is often readily available, it becomes decidedly more complex to track how individual ingredients, costs and profits within composite food products move through supply chains. Even for more “simple” products made up of a single ingredient, the number of intermediaries means no one actor in the food supply chain typically has visibility of costs and prices paid.

We would welcome insights from stakeholders on the practicalities of tracing profits and margin throughout the supply chain for a variety of goods. In particular, we seek input on the practicalities of obtaining the information necessary, from across the supply chain, to trace any cost displacement from price capped sales through to primary production.

As the policy development progresses, we will examine what powers may be available or may be necessary to achieve such an outcome. As an example, section 14 of the Agriculture (Retained EU Law and Data) (Scotland) Act 2020^[11] provides Ministers with powers to impose requirements on a person or persons in, or closely connected with, an agri-food supply chain to provide information about matters connected with any of the person's activities connected with the supply chain so far as the activities take place in Scotland.

Top-down and bottom-up approaches

We propose to examine “bottom-up” approaches as outlined above whereby costs are filtered through the supply chain from the retailer and potentially to the primary producer, but also a “top-down” approach where the impact of price caps on primary producers are estimated or measured generally and any protections put in place are based on this. A combination of approaches could also be considered.

Effect on domestic products

Scotland produces food that is recognised around the world for its quality, underpinned by high standards of environmental stewardship and animal health and welfare. The costs associated with labour, energy, feed, fertiliser and other inputs are significant factors in food production

At the same time, strong trading relationships are also vital as imports ensure a wide choice of food throughout the year and that we are not reliant on any one country of origin for our food security.

Concerns have been raised that the introduction of price controls on certain products could influence sourcing decisions within the supply chain. Depending on how any price cap is designed and implemented, there may be circumstances in which retailers or suppliers seek to source lower-cost alternatives to maintain margins or manage costs. This could affect demand for some domestically produced goods and potentially increase reliance on imported products.

This may have implications for Scottish producers and could raise wider questions around economic impacts, environmental outcomes, production standards and food security. To help us understand any potential impacts, we are exploring the effects of price capping on primary production in countries where similar policies were advanced. As part of this consultation, we are seeking evidence on the form and scale of anticipated impacts, and on how they may vary across different products and sectors. We recognise that views may need to be general at this stage given a number of design models remain available.

Perceptions of value of food

In considering the impacts of any price control measures, it is also important to understand how they may influence consumer perceptions of the value of food. While the overall policy objective is to improve the affordability of food for households facing cost of living pressures, any changes in retail pricing could affect how consumers perceive intrinsic value of those products.

It is important to recognise that the retail price paid by consumers does not always fully reflect the full range of costs and activities involved throughout the supply chain - the costs involved in producing, processing, distributing and preparing food are often viewed as ‘hidden costs’.

Equally we are aware that the perception of the value of food impacts how people react to the price of food in the out of home setting where additional overheads mean that meals made from essential food items (for example a gourmet sandwich made at a restaurant) are at a higher price point.

We are therefore interested in receiving evidence on whether price controls could influence perceptions of the value of food, consumer purchasing behaviour, or the viability of businesses operating in different parts of the food system.

Business relationships

The balance of power between food producers, manufacturers, retailers and other actors in the food and drink supply chain has been well documented and discussed in recent years, with some improvements driven by the establishment of the Groceries Supply Code of Practice (GSCOP) and later the Groceries Code Adjudicator (GCA). It is recognised that retailers operate within a highly competitive market however the power is unevenly distributed throughout the supply chain, with primary producers often having fewer options for negotiating prices and terms than larger downstream businesses.

In instances where primary producers have limited influence over pricing or contract terms, there may be concerns that commercial pressures could be felt disproportionately at the production stage. We are interested in understanding whether the introduction of price controls could influence these dynamics, including whether businesses in different parts of the supply chain would have differing abilities to absorb costs, adapt to change, or negotiate preferential commercial terms.

We are also interested in understanding whether certain sectors, products or types of producers may be more affected than others.

We recognise that there may be measures which could help mitigate adverse impacts where they arise. These could include changes to existing scheme designs, monitoring arrangements, or other forms of support.

Potential Mitigations

We are interested in views on whether, and if so what, additional safeguards could be incorporated into protection for primary producers, including:

• periodic impact assessments.
• monitoring of farmgate and wholesale prices.
• monitoring of cost and value margins through domestic supply chains.
• temporary exemptions during major supply disruptions.
• regular consultation with producers and manufacturers.
• mechanisms allowing Ministers to amend or suspend price controls where significant adverse impacts are identified.

Consultation questions

29. What impacts, if any, do you think a food price cap scheme could have on producers and other businesses within the food supply chain? Please provide any evidence or examples to support your answer.

30. What mitigation measures should be considered to minimise any potential adverse impacts on primary producers and other actors across the food supply chain?

31. To what extent do you think it is possible to trace profits and margins throughout the supply chain for a variety of goods? Please provide any evidence or examples to support your answer.

32. Please detail any other issues you want the Scottish Government to take into account for primary production when considering a price cap scheme and how risks could be mitigated.