The Scottish Government

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Executive Summary

• DTZ was commissioned by the Scottish Government's Rural and Environment Research and Analysis Directorate ( RERAD) to conduct research into the levels of processing of primary produce in Scotland.
• The study was commissioned in February 2008 and completed in June 2008. It followed on from a 2007 study of Scottish processing.
• The aims of the research were:
  • To understand the opportunities to add value to food and drink processing in Scotland
  • Assessment of trends in the processing sector
  • To provide an evidence base to inform future policy
• Throughout this study the term "primary sector" includes the agriculture, fishing and fish farming sectors, with "primary produce" being the outputs from these sectors.
• The study methodology had three main components:
• Input-Output analysis and modelling of primary produce sales and purchases
• Benchmarking of the Scottish situation with ten other countries.
• A survey of 250 companies in the Scottish food and drink processing sector.

The study considered who are the buyers of Scottish Primary Produce.

• Total sales of primary produce grew by 10% to £3.3 Billion from 2003 to 2004.
• Around 93% of sales of primary produce are accounted for by four purchasing groups: Scottish food processing companies (24% - down 2% on 2003); Scottish households (23% - down 1%) ¹; the Scottish primary produce sector (18% - down 2%); and non-Scottish purchasers (30% - up 4%) including the rest of the UK and overseas.
• Non-Scottish purchasers have increased their purchasers at the expense of Scottish purchasers including processors.
• Although the percentage share of Scottish purchasers has gone down, absolute values have gone up slightly.
• Figure 1 below shows purchases of primary produce by these four groups from all origins.
• The area outside the circle is non-Scottish purchases. This will include purchases of produce not available from Scotland ².
• The Scottish hotels and restaurant sector has increased its share of purchase from within Scotland highlighting the importance of provenance.
• For Scottish purchasers, around a third of the primary produce they purchase is from non-Scottish sources.

Figure 1 - Purchases of primary produce by main Scottish purchasing groups

Source: Scottish Input-Output Tables, 2004.

The study considered the destinations of Scottish-processed food and drink

• Scottish food and drink processors sell 21% of their output within Scotland, 42% to the rest of the UK, and 37% outside the UK.
• Sales within Scotland are highest in the dairy sector (59%), followed by soft drinks (55%) and beer brewing (44%).
• Foreign exports (non- UK) are highest in the spirits and wines sub-sector (89%) and lowest in the soft drinks sector (2%).
• The bulk of outputs of the Scottish food and drink processing sector are sold to consumers via retailers, highlighting the fact that there is little further processing of this material.
• The value of sales to other processors is generally small with the obvious exceptions of products which are ingredients including oils and fats, and processed grains e.g. flour.

The findings on sales of primary produce were benchmarked against other EU countries, which when added to last year's countries provides a benchmark of ten countries

• A summary of the analysis is presented below which highlights the key differences between countries and Scotland's interdependence with the rest of the UK:

Table 1 - Destinations of primary produce for benchmark countries

• 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 reflect 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 final stage of the research was a survey of 250 food and drink processors.

• Of the companies surveyed 64% (55% last year) were small; 23% (27% last year) medium; and 13% (18% last year) large.
• Survey results were weighted by company size to reflect the Scottish situation overall. Only weighted results are reported in the Executive Summary, while both weighted and unweighted results are shown in the main report.
• 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.
• 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.

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