Competition law and agriculture
76. The decision of the Secretary of State to accept
the findings against Milk Marque and to forbid the company from
expansion into processing sent out a message which alarmed those
producers who had listened to the advice of the Ministry of Agriculture
to build new co-operative and collaborative structures in order
to improve their position. The TFA believed it "farcical
for the Government on one hand to be encouraging the agricultural
industry to be more co-operative and to find ways of adding value
to their raw products when on the other it criticises the industry's
best co-operative, Milk Marque, for being successful in co-operation
and adding value".[293]
Leaving aside the question of how successful Milk Marque was,
it is clear that the TFA is correct in spotting this contradiction
and that the NFU is right to be concerned that "the Secretary
of State's decisions based on the MMC's Report have implications
for all agricultural co-operatives that wish to invest in processing
and move down their marketing chain".[294]
These implications could be that co-operatives with substantial
market share will not be allowed to grow and will not be allowed
to process their own produce.
77. Both would be unfortunate. When questioned, Mr
Brown repeated his support for farmer co-operation: "I believe
that, where it is appropriate, as it clearly is in the dairy industry,
working co-operatively together farmers can gain from all the
obvious economies of scale and the general benefits of co-operation,
probably particularly important in a product like milk which requires
intensive capital investment at the producer end, the distribution
end, in retailing as well and of course in processing".[295]
This recognition of the aptness of such structures to the dairy
industry makes the demise of Milk Marque all the more puzzling.
As the FUW noted, "Producers within the dairy sector are,
inevitably, drawing parallels with the red meat industry where
every encouragement is being given to the development of producer
co-operatives".[296]
The answer to this conundrum, according to Mr Brown, is that "we
also have to be mindful of the need for real competition in the
industry".[297]
His Cabinet colleague elaborated that "there is not a problem
per se with having someone who has a dominant share in
the market. The issue is whether they abuse that dominant market
position".[298]
78. We acknowledge that the MMC found Milk Marque
in breach of rules concerning abuse of market power but there
are still fundamental issues about competition policy as it has
been applied to the dairy industry. First, there is the European
dimension. As we have described, many of the EU member states
have dairy industries dominated by large producer/processor co-operatives.
This is also the case in the US, Australia and New Zealand,[299]
underlining the force of this development in the milk sector.
The European examples and the scale of the dominant players, however,
are particularly compelling as these are the companies which provide
competition to the UK industry both at home and abroad. Many questioned
this apparent unevenness of application of competition law across
the EU, with the National Assembly for Wales Secretary for Agriculture
and Rural Development, Ms Christine Gwyther AM, asking on behalf
of the Assembly "why it should be acceptable to competition
authorities for such arrangements to exist in some countries of
the European Union, and not others".[300]
79. Secondly, there is the question of whether competition
law can or should be applied indiscriminately to the agricultural
industry as to any other. One aspect of this is the feeling expressed
by witnesses that the MMC finding militates against the possibility
of establishing successful producer co-operatives. Another was
raised by the Welsh Agriculture Secretary's concern about the
definition of the public interest and the special position of
farmers in the market. Ms Gwyther argued that the MMC equation
of the public interest in the supply of milk with the price consumers
pay for milk might be too narrow: "it treats farms as mere
economic units of production and allows no account to be taken
of the impact that lower farmgate milk prices will have on the
social fabric of fragile rural communities, or on the environment".[301]
Furthermore, the perception of farmers of their "overwhelming
weakness in terms of market power, when faced by a highly concentrated
UK retail sector" created a situation in which "the
application of competition policy to the agriculture sector will
continue to be fraught with difficulty".[302]
80. We were grateful to Ms Gwyther for raising these
important questions with us and we hope that she and her successors
will follow this welcome precedent in submitting evidence to our
Committee on behalf of the devolved government of Wales. Sadly,
on this occasion we did not receive satisfactory answers to the
points she raised when we discussed them with UK Ministers. We
accept that there are differences in other EU markets which bear
upon the decisions of the competition authorities in assessing
acceptable arrangements. However, Mr Byers' observation that those
markets "are not self-contained, as our market is",[303]
while largely true of the supply of milk, ignores both the presence
of European producer/processor co-operatives in the UK, which
has done much to open up the home market, and the impact of trade
in processed products on the price of raw milk. The MMC's narrow
remit did not allow it to look at such issues. Similarly, on the
public interest question, Mr Byers explained that "when I
arrive at my conclusion on [MMC] recommendations I cannot take
into account any wider factors in relation to the agriculture
industry more generally".[304]
He is only able to decide on the matter that was referred to the
MMC. Once again, we accept this position as a statement of fact
but we note that in the current inquiry into the supply of groceries,
the DTI told us that "the conduct of the investigation is
a matter for the Competition Commission" and that the Commission
"is looking as far upstream as supplies of liquid milk to
supermarkets ... if the Competition Commission decides that there
is a need to look further upstream then it will do so".[305]
This implies that the Competition Commission has the discretion
to look at which factors it decides are relevant, even if the
Secretary of State does not.
81. Given the uncertainties caused by the MMC inquiry
into the supply of raw milk during all its various stages, there
is a clear need for the Government to establish a framework in
which to apply competition policy to the agricultural industry,
and to producer co-operatives in particular. We are not calling
for protection for farmers against the realities of the marketplace,
although we understand those who put forward arguments for such
protection and we recognise the requirement for a socio-environmental
policy aimed at farms in disadvantaged areas. Rather, we agree
with one of our producer witnesses who reasoned that "if
processors can attain efficiencies and economies of scale through
mergers/amalgamations, likewise the same 'commercial' opportunities
should be given to milk producers - especially if they decide
by their own choice to work together co-operatively and collaboratively".[306]
It is not enough for the Government to encourage the development
of producer co-operatives if they are not then allowed the freedom
to flourish. We recommend that the Government take account
of the wider role agriculture plays in maintaining the social
and environmental fabric of rural areas in its definition of the
public interest when considering reports from the Competition
Commission on agricultural co-operatives. We further recommend
that the Government clarify when domestic and European competition
policy should apply in relation to agricultural co-operatives
which operate within the mechanisms of the CAP. We also seek clarification
of Government policy towards non-UK integrated farmer co-operatives
venturing into UK markets founded on their dominant domestic positions.
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