The National Living Wage (NLW) came into force just the other week and the repercussions for the UK fresh produce sector could be devastating. Many experts believe it could hasten the departure of many from the industry as the sums fail to add up. Produce Business UK speaks to those in the industry about what’s at stake
Arguably more than any other industry extant UK horticulture is constantly subject to unforeseen arrows of uncertainty. And by and large those involved in the fresh produce sector take whatever is thrown at them with admirable fortitude.
The recent introduction of the National Living Wage (NLW) and its unanticipated consequences have seriously shaken the industry, with many speaking of untold problems that will arise as a result of its implementation.
The NLW came into force on April 1, 2016 (no, it wasn’t an April Fool’s) and it means workers aged 25 and over are entitled to a minimum pay of £7.20 an hour – 50p higher than the previous National Minimum Wage. It will continue to rise over the forthcoming years and it’s expected to reach well over £9 an hour by 2020.
What NLW means for the produce industry
Surely more money in consumers’ pockets means more money to spend on food? If only it were that simple. Jack Ward, chief executive of the British Growers Association, concedes that on top of uncertainty about the forthcoming European Referendum, the NLW is more unfortunate news for the sector.
“Well,” Ward laments wearily, “this comes hot on the heels of this report from (Professor) Tim Lang about the decline in horticulture – the decline of horticultural production. This (the NLW) is going to pile more pressure on that problem. It’s going to make it harder and harder to continue to justify investing in fresh produce operations.”
One of the fundamental problems when it comes to the fresh produce industry, Ward acknowledges, is that typically labour costs account for between 30-65% of all costs. This is highly unusual and the problem is exacerbated when it becomes clear that consumers are unlikely to accept an increase in the price of their carrots, apples and the like.
“Typically the fresh produce industry is operating on a 1-2% margin,” he explains. “Where is that money (to cover the shortfall) going to come from? It’ll come from investment in other areas of the business or people will say, you know what, I think we’ll scale back and do something else. Let’s grow cereals instead.”
Some might respond by arguing that people in every sector deserve a fair day’s pay for a fair day’s work (or in the case of this sector, a hard day’s work). And no one in the fresh produce industry is stating otherwise.
“Not at all,” he says. “It’s a hard and demanding job after all – as long as they can recover their costs. But they can’t. When it goes up to £10 an hour it’s going to be a real problem.”
Ward concurs: “Nobody disagrees with the principle. People should be paid better and there should be less reliance on the state. It’s a great political ambition. But at some point somebody has got to generate sufficient income to be able to pay it. And the only way we’re going to be able to do that is to charge the beneficiaries of those higher wages more for their products.”
The Fresh Produce Consortium (FPC) has also backed this stance, with its chief executive Nigel Jenney stating: “The industry strives to reward its workers fairly and competitively. However the living wage and many more new employee requirements will force companies to review their current labour practices. It’s essential they maintain their commercial viability in a highly demanding and cost sensitive sector. Whilst the sector cannot be complacent it’s essential that both customers and consumers value the exceptional choice and true value of the products the industry has carefully grown and nurtured for their enjoyment.”
Investment and innovation at risk?
But if prices aren’t going to go up, as Ward suggests, where will this extra money come from?
“The savings will come from other parts of the business,” he replies. “Investment will slow down. Innovation will slow down. And they will look to cut costs wherever they can. Both are naturally detrimental to the long-term value of a business, the industry and fundamentally the country’s need for a strategic fresh produce industry.”
Since George Osborne announced the NLW in his post-election budget last July, the National Farmers’ Union (NFU) has attempted to engage Members of Parliament in a dialogue so they understood the profound implications it would have. In particular, as its deputy president Minette Batters said: “Labour-intensive crops such as hand-picked fruit, vegetables, flowers and plants. We are not against the national living wage, but we are concerned that the speed of its implementation and lack of consultation will have a devastating impact on our industry.”
In February the NFU issued a report – by farm business consultants Andersons – that assessed the financial implications of the NLW. Within the report it asked the government eight things.
1. For there to be no requirement for Employers National Insurance contributions for seasonal workers.
2. For there to be no pensions auto-enrolment requirement for seasonal workers, so they are not captured by this administratively burdensome process that delivers minimal value in pensions accrued.
3. Government to further support investment in productive technology, automisation and mechanisation, and to support science funding for research and development on the same. This support needs to be made more accessible to smaller businesses.
4. For Accommodation Offset to apply to NLW, and the level of the offset to be increased, taking into account increases in rental prices in the wider accommodation market.
5. For Government’s ambition for NLW to reach 60% of median earnings by 2020 to be pushed back into the next session of Parliament to allow industry time to adapt to the unanticipated substantial increases in labour costs.
6. To give the Low Pay Commission more powers to set minimum and living wage rates independently of government.
7. For the timing of the NLW and National Minimum wage increases to be aligned in a cost neutral way, rather than having separate rises in April and October.
8. To re-introduce a seasonal agricultural workers scheme accessible to agriculture student workers from anywhere in the world.
One of the many irksome factors about the implementation has been the wholesale lack of consultation, and while Ward and Hargreaves applaud the work done by the NFU, neither are surprised at the lack of a response or action from the government.
“At the moment the Chancellor is in the middle of correcting all his other mistakes,” suggests Ward. “So for anyone asking him to have a look at this at the moment the answer is probably no. But further down the line there is always an opportunity for some kind of mitigation. It will be an ongoing fight and campaign.”
Ward fears it will accelerate the loss of people within the industry. “If you’ve got a wage bill of several million pounds, then 7% on top of that is a massive amount of money,” he says.
Hargreaves also believes it will have an effect on the cost of what is being grown.
“If fuel goes up, transport [price] goes up – there’s a link,” he affirms.” And so it will be with crop production and labour. You can’t pay more for your labour and absorb it. It’s not possible.”
Hargreaves believes people will look to more efficient ways of doing things. “But unless the way that crops are grown changes dramatically I don’t think you can get more efficient than how it is at present,” he admits.
“With cucumbers you could grow more high wire crops. You might be able to squeeze a few more out that way, but the labour costs go up. And, of course, changing to a new system takes time to get your head around and to make as efficient as before – there are always teething problems.”
Teething problems would appear to be the least of horticulture’s worries when it comes to the National Living Wage. This tale is bound to run and run