82. Prior to the demise of the Milk Marketing Board,
producers and processors both showed signs of complacency. With
good profits to be made in marketplaces which were seldom genuinely
competitive, innovation in production was concentrated on improving
efficiency and little was spent on seeking to add value to products.
Processors achieved comfortable returns from standard lines and
farmers had no commitment to the marketing their own milk. Since
1994, however, the sector has been destabilised by a combination
of partial, hesitant deregulation, increasing pressure from retailers,
the rising pound, marginally increased foreign competition and
the impact of BSE. Regrettably, much of the last six years has
been spent arguing over the ground rules of a less regulated sector
and the MMC inquiry only enhanced this antagonism, thereby reducing
the incentive to create the integrated structure needed to add
value to milk.
83. There is no obvious way out of this dilemma.
It was notable that witnesses to our inquiry did not offer any
plans or solutions to help reshape the industry in order to meet
its future challenges by ensuring a plentiful supply of high quality
milk to be turned into market-oriented products, with the exception
of the Milk Strategy Initiative which received short shrift from
the processing sector. However, there is now some cause for optimism,
arising from Milk Marque's decision to undergo voluntary restructuring.
Despite some concerns about the narrowness of the MMC inquiry,
we recognise that the major obstacle to harmony in the milk industry
in the shape of Milk Marque's selling system has now been removed.
It can be expected that a multiplicity of arrangements will now
emerge, which will provide the necessary flexibility to meet the
needs of all participants. Whether these arrangements will be
seen to add transparency to milk price determination may be questioned,
but we confidently expect that past problems with milk selling
systems will disappear. Already there are signs of better relationships
between processors and producers and a new chance to add value
to milk through co-ordinated activities. This is the only way
the industry can succeed and it is essential that the Government
makes good its promises to support enterprise and encourage producer
co-operatives in order that the dairy industry can realise its
potential.
84. The restructuring of the dairy sector may well
have a significant negative impact on the economy of a number
of farming areas, which we call upon the Government to find means
of alleviating through effective use of the rural development
regulation, including environmental initiatives. However, beyond
the farmgate, the industry must be allowed to develop its own
relationships, without interference from the state, unless of
course market positions are abused by any participant in the dairy
sector. On the wider question of the application of competition
policy to agricultural co-operatives, we believe that this is
an area which requires much more consideration than it has received
up to now. It is vital that the apparent contradiction between
the treatment of Milk Marque and the emphasis placed by MAFF in
particular on producer co-operatives is resolved if UK agriculture
is to have the confidence to develop and invest in new ideas and
structures appropriate to the new challenges which it faces in
the UK, Europe and further afield. The presumption must be
that there will be no further investigations by the competition
authorities into the dairy sector for many years. The time has
come for the industry to escape from the structures that have
stultified innovation and development for decades. As we have
made clear, this is not just a challenge to politicians and regulators,
but also to the industry itself to refrain from seeking intervention.
The Minister of Agriculture, Fisheries and Food told us that "There
is a good and secure future for the dairy industry in the United
Kingdom".[307]
We invite him and the industry to meet the challenge of bringing
this about.
85. Our other main conclusions
and recommendations are as follows:
Milk
quotas
1. We reiterate our support for a rapid end
to milk quotas which are a constraint on the development of an
efficient, market-focussed industry and we urge the Government
to press other EU partners to agree an end to the quota scheme
before 2003 (paragraph 21).
Monitoring
market power in the structures
2. We expect the DGFT to monitor the market
structures that now develop in order to check that the decisions
taken under pressure from the competition authorities have had
the desired consequences and do not lead to excessive concentration
of power in any one sector of the dairy industry (paragraph 29).
Producers
and processors
3. We agree with the Minister that under
the new arrangements the industry has an opportunity to evolve
good and enduring working relationships throughout the entire
chain, although we recognise that there remains a natural conflict
of interest between producer and processor which must be overcome
if the industry is to reach the standards of efficiency and effectiveness
necessary to compete in the marketplace either at home or elsewhere
(paragraph 35).
Farmers
and processing
4. In the current climate, processing is
often presented as instant salvation for hard-pressed farmers.
We are sympathetic to their desire to earn a higher percentage
of the retail price of their product but rash investments in processing
capacity for its own sake, for example, producing intervention
products, will not necessarily bring the rewards farmers seek
and in the case of the new successor bodies could seriously weaken
their financial stability. Investment in products for the retail
market by the producer co-operatives, alone or in concert with
other companies, is a different matter altogether and we believe
that there could be many opportunities which will open up for
the new co-operatives in this way (paragraph 38).
5. Whilst we give every encouragement to
the development of small, specialist producers of dairy products,
we recognise the difficulties involved in the establishment of
such businesses. Undeniably, a renaissance of small dairy enterprises
could help individual farmers and contribute to the development
of regional tourism and we recommend that resources from the rural
development fund be applied to support their initial set up. However,
for most farmers there is much greater potential for adding value
through innovation and investment by the existing dairy companies
and, increasingly, the producer co-operatives (paragraph 54).
Competition
restraints on the new co-operatives
6. There seems to us no reason why any regulatory
limits should now be placed on the activities of the successor
co-operatives beyond those of complete independence from one another.
The co-operatives are not yet free of the competition authorities
since the restraints on their expansion into processing will not
be lifted until Mr Byers has received the advice of the DGFT which
should be "round about Easter time" this year. However,
a speedy decision in favour of processing, on advice from the
DGFT, would be in everyone's interest. We recommend an early decision
by the Government that will allow the successor co-operatives
to consider processing milk. We note that the past references
to the competition authorities have resulted from complaints originating
within the industry. To that extent, freedom from competition
restraints lies in the hands of the industry itself and can be
realised only if the habit of appealing to outside bodies for
redress of internal grievances is broken (paragraph 40).
Conclusions
on the new structures
7. In general, we believe that the new structure
for the marketing of milk in England and Wales will give the industry
seen as a whole an opportunity to adapt to the market, to increase
its competitiveness and to achieve better returns for participants
prepared to meet the challenges (paragraph 41).
The
future for dairy farmers
8. There is without doubt a crisis in dairy
farming and, sadly, there are likely to be more casualties before
any real recovery is felt (paragraph 43).
Government
assistance for dairy farmers
9. We recommend that the Government commission
research into the implications for the rural economy and the environment
of further structural change in the dairy sector (paragraph 44).
10. We further recommend that the Government
identify areas where small farms are at risk as priority areas
for help under rural development measures (paragraph 44).
11. Other appropriate vehicles for supporting
small farms could include assistance with collection charges,
which are proportionately higher for small producers, and Government
funding of dairy inspection charges in England and Wales as is
already the case in Scotland and elsewhere in the EU (paragraph
45).
12. It is worth noting that the review of
the Over Thirty Month Scheme will have a material effect on farm
incomes. The removal of the Calf Processing Aid Scheme has particularly
affected dairy farmers, and marketing assistance to find customers
for dairy bull calves would be welcome (paragraph 45).
Adding
value: innovation
13. The UK processing industry must address
the consumer demand for new products if it is to compete with
the far more innovative foreign-owned companies (paragraph 50).
School
milk
14. We recommend that the Government review
the school milk subsidy and examine whether a revised scheme,
allied with industry initiatives such as generic marketing, might
boost demand for milk (paragraph 51).
Organic
milk
15. We recommend that the Government review
the amount of organic aid given to dairy farmers and ensure that
the sector as a whole supports the development of organic milk
(paragraph 52).
Generic
marketing
16. We would welcome discussions between
the industry, retailers and all sections of the catering industry
about their participation in the generic promotion of milk and
their contribution to the financing of the campaign (paragraph
57).
17. We believe that generic marketing of
milk and subsequently of other dairy products has great potential
to increase or at least maintain sales in the UK but that it can
only work with a well-funded, imaginative campaign to which all
parties are committed. We would welcome a clear undertaking from
the DIF to support the campaign and we call for early implementation
of the necessary legislation for a producers' levy by the Government
(paragraph 58).
Branding
18. On balance, while we support the development
by the industry of a label linked to quality assurance and British
identity, we believe that at the moment greater potential for
adding value lies in promoting regional and branded products.
For small producers, who are particularly in need of support to
remain viable, we recommend that the Government encourage a marketing
strategy based on the marketing of "small farm milk"
as a brand (paragraph 60).
19. MAFF should ensure that the labelling
requirements do not conflict with any form of innovative branding
concepts (paragraph 60).
Farm
assurance schemes
20. The proliferation of farm assurance schemes
to differing standards could act as a barrier to competition as
direct suppliers become bound to one dairy company. This is an
issue which the OFT will need to keep under review (paragraph
62).
Secondment
of Government officials
21. We welcome the secondment of a MAFF official
to the Specialist Cheemakers Association and recommend that the
initiative be extended to other speciality sectors (paragraph
65).
Specialist
cheesemaking
22. We deplore the unimaginative and damaging
prejudice that the very existence of small food producers such
as cheesemakers is inherently a threat to public health and look
to Ministers in MAFF and the Department of Health, and to the
new Food Standards Agency, to combat such attitudes with vigour
and urge the Agency to follow the example of MAFF and appoint
an official to act as liaison with the industry (paragraph 65).
23. We recommend that the Government, including
MAFF and the Department of Health, prepare a cross-departmental
audit of all regulations bearing on the specialist cheesemaking
sector to ensure that they are equitable and necessary. We further
recommend that the implementation of the new regulations on dairy
hygiene be delayed until there is convincing proof of the relevant
scientific basis and the consumer benefits of the new microbiological
standards (paragraph 65).
Producer
co-operation
24. We look forward to receiving the views
of the Competition Commission on producer co-operation in its
forthcoming report on supermarkets (paragraph 66).
25. We hope that the regional development
agencies will keep a close interest in the development within
the dairy industry of supply chain partnerships at regional levels
(paragraph 69).
Government
support for adding value
26. We agree entirely with the approach of
ensuring Government support for small businesses is more widely
available to the agricultural sector. If farmers are to be treated
as small businesses, they should be eligible for all the general
support schemes open to other industries, including those for
research and development (paragraph 68).
27. We recommend that the Government examine
the feasibility of establishing DTI and other relevant departmental
information points at MAFF regional centres, so that MAFF staff
who deal with farmers on a day to day basis are aware of and can
promote the range of non-MAFF schemes open to farmers (paragraph
68).
28. We recommend that MAFF, following consultations
with the DTI and the Cabinet Committee on Rural Affairs, set out
its strategy for assisting the dairy industry to achieve the objectives
of cohesion, innovation and customer awareness espoused by the
Minister (paragraph 69).
Regulation
29. In the dairy industry, as in all others,
it is vital that the UK Government takes responsibility both for
monitoring the situation abroad and for assessing new regulatory
demands against the competitive situation of the industry so as
to maintain a level playing field between it and its European
competitors (paragraph 69).
30. We recommend that the Government review
the regulatory burden across all aspects of the dairy sector with
the aim of reducing it (paragraph 69).
Industry
strategy
31. Any strategy to promote milk and dairy
products should involve the entire chain from farmer to supermarket
(paragraph 73).
32. We recommend that the Government consider
with the industry the best vehicle for the organisation and co-ordination
of a strategy to promote and develop British milk and milk products
and enhance the competitiveness of the sector, with a presumption
in favour of the National Dairy Council (paragraph 73).
Competition
policy and agriculture
33. We recommend that, especially when dealing
with an industry in obvious difficulties, the Government observe
a guideline of two months in publishing and responding to a Competition
Commission report (paragraph 75).
34. 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 (paragraph 81).
35. 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 (paragraph 81).
36. We also seek clarification of Government
policy towards non-UK integrated farmer co-operatives venturing
into UK markets founded on their dominant domestic positions (paragraph
81).
