The Scottish Government

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5. Conclusions and Recommendations

5.1 Conclusions

• This report is the second annual survey of the Scottish food and drink processing sector.
• The key aim of this report was to gain an improved, evidence based, understanding of the levels of processing of primary produce in Scotland. Secondly, it aims to provide an assessment of the key trends, and to inform the Scottish Government policy response to meet the needs of the sector.
• The broad picture is of total primary produce sales of £3.3 billion, up 10% on the previous year, of which 24% are sold to the Scottish processing sector (down 2%), 22% sold directly to Scottish households (down 2%) and 16% to other primary producers (down 2%). A further 30% of sales go to non-domestic purchasers (up 4%) suggesting that UK supermarkets and processors have bought an increasing share of Scottish primary produce.
• It should be noted that where the percentage levels have fallen, there is still a slight increase in the absolute value of produce sold. However, Scottish processing facilities are losing out to non-Scottish purchasers.
• The other finding of note is that the hotel and catering sector has increased the level of inputs purchased from Scotland as opposed to other sources, suggesting that provenance is becoming increasingly important.
• When we put these figures into context with a range of benchmark countries, it is clear that Scotland has a lower proportion of total domestic sales than any of the benchmark countries except Wales. This low level of domestic sales is due to its small population and dependence on sales to the rest of the UK.
• Scotland has a significantly lower rate of primary produce processed domestically at 24%. On average, 43% of primary produce is processed domestically while Norway (57%), Denmark (59%) and Ireland (60%) are all higher.
• These findings reflects the concentration of indigenous processing in Denmark and Ireland contrasted with the interdependence of Scotland, England and Wales. In addition, the ability of UK companies to switch Scottish produce to different sites within the UK is a factor. The findings also reflect the fact that the bulk of the UK population is in the south east of England and the natural flow of primary and processed produce throughout the UK is southwards.
• Scotland is also above average (at 23%) in sales to domestic households, with only the UK (25%) and Poland having a higher level of 28%. This figure includes sales through retailers and highlights that much Scottish primary produce requires little in the way of processing. This may, in part, be due to differences in culture and tradition between Scotland (and the UK) and the benchmark countries and does not necessarily imply differences between the strengths of primary producers.
• There is more potential to sell to the Scottish hotel and restaurant sector, particularly given the example of Italy at 4% of £41 Bn.
• The survey results highlight that the focus of large players tends to be on volume products, but that there is an increasing focus on niche markets (see Figure 4.2).
• Of niche markets, the most important is the 'High quality/premium' sector at two thirds followed by organic at 10% and 'healthy' at 7% ( Figure 4.3).
• Over half of processors have developed their own brands with 20% also involved in own-label and a quarter suggesting both are important. Brand building is clearly important to Scottish processors.
• Almost half of processors' sales are to Scotland with 41% to the rest of the UK, the balance being exports (15%). The relatively low level of exports may reflect unfavourable exchange rates to the eurozone and the fact that the UK provides a ready market on the doorstep.
• Over half of processors have no further processing of their produce with meat and fish processors most likely to have their output used for further processing.
• Just over a quarter of processors buy all raw materials from Scotland while a further quarter buy between 0-25% from Scotland. Three quarters of Scottish produce bought by processors is unprocessed. Product origin is important for three quarters of processors, with two thirds of these processors saying that their customers prefer to buy Scottish produce.
• Encouraging processors to buy more Scottish product requires improved availability. However, it has got harder to source Scottish produce during the year with 57% recording availability as the main problem followed by price (25%). 85% of processors believe the situation is worsening or staying the same. Of these, the meat sector is worst affected. This point is a concern for the future.
• Demand for quality is the main factor driving markets followed by price. Since last year price has increased in importance.
• Only 1% of processors are 100% certified organic. About a third produce 1-25% of their total output as organic with 39% considering increasing organic output. Two thirds of processors produce no certified organic outputs.
• In sourcing organic inputs, two thirds of processors do not find it difficult to source organic produce, suggesting that factors other than availability are the main barriers to increasing organic production.
• Businesses identified a range of different challenges in the marketplace with competition being the most cited last year. However, this year there is a marked change with costs and financial issues followed by shortage of raw materials being the main challenges. This finding reflects the downturn in the economy combined with strong price inflation of commodity food products and energy.
• Rising prices for many agricultural commodities are clearly affecting processors but for many arable farmers higher prices are leading to improved profitability and a renewed interest in a range of food crops. For livestock producers, the situation is difficult as feed costs have risen substantially. The outcome of this situation will depend on the ability of increased supply to meet market demand and stabilise at a sustainable level. If oversupply results, prices will fall benefiting processors but raising questions over the sustainability of primary production.

5.2 Recommendations for further development

• This year's report has allowed trends to emerge through comparison with last year's, both for input-output and for the survey. For example, changes in availability of Scottish produce, implications of rising costs etc. It will be useful for the Scottish Government to continue to repeat the survey going forward to 'take the temperature of the sector' and assess impact of policy interventions.
• A review of the competitive landscape. With expanding food production from Eastern Europe and South America, how will this affect Scotland's primary production? Will price competition increase and make Scottish production unviable?

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