APPENDIX 8
Memorandum submitted by the National Farmers'
Union of Scotland (Q11)
Summary
- Milk producers are weak sellers into a highly
concentrated processing and retail market. Milk producers believe
that this dominance allows processors and retailers to exploit
producers' weakness in the market place.
- We therefore consider the co-operative marketing
and processing of milk by producers to be the best means of achieving
market balance.
- However, the bargaining positions of the successor
bodies to the Milk Marketing Boards have been weakened by the
premium price offered by dairy companies.
- Milk Marque's selling system has a direct bearing
on milk prices in Scotland. This system, and particularly the
90 per cent rule, has been neither efficient nor effective.
- Increased investment in efficient processing
of milk in the UK is essential to compete directly with imports,
develop exports, expand existing markets and find new niches.
- We consider increased and improved vertical integration
within co-operatives would maximise efficiency and allow producers
to more effectively and profitably market their milk by adding
value. This would also provide a greater opportunity to compete
with the highly integrated and rationalised dairy co- operatives
in most other developed countries.
- A generic promotion campaign would help stimulate
demand for milk and resist the steady decline in liquid milk consumption
in Britain. It is hoped that a producer poll to gauge support
for a statutory levy to fund a campaign will be undertaken later
this year. However, the success of a promotion campaign will depend
upon a commitment from the processors to provide matched funding.
Basis of comment
Our comment has been structured as a response to
each of the terms of reference given by the Agriculture Committee
to the enquiry.
Comment
1. EFFICIENCY AND
EFFECTIVENESS OF
MARKETING ARRANGEMENTS
FOR BUYING
AND SELLING
OF MILK
IN ENGLAND
AND WALES
This term of reference focuses principally on England
and Wales. However, it is appropriate that the Committee also
considers the position of Scottish milk producers because:
i) what happens in England and Wales, through Milk
Marque's selling rounds, sets the milk price in Scotland and as
a result, no distinction can be made between the marketing arrangements
for the buying and selling of milk in England and Wales and those
in Scotland;
ii) Scottish dairy producers supply several dairy
companies that operate both north and south of the border eg Robert
Wiseman & Sons and Express Dairies; and
iii) a small minority of Scottish producers supply
Milk Marque.
The efficiency and effectiveness of the system is
discussed in the context of the subsequent terms of reference,
as follows.
2. THE ACTIVITIES
OF MILK
MARQUE, DAIRY
PRODUCERS, PRODUCER
CO-OPS,
DAIRY COMPANIES
AND SUPERMARKETS
a) Milk Marque
It is widely recognised that the selling prices emerging
from Milk Marque's auction rounds have been the principal benchmark
which producers and processing companies throughout Britain use
in arriving at the price for raw milk.
The Union was particularly concerned about the depressing
effect that the 90 per cent rule had on milk prices. The rule
governed milk selling rounds until the end of 1998. The obligation
to allocate at least this amount in each selling round, left control
firmly in the hands of a few purchasers. We never believed this
rule provided for a fair price.
In addition, following deregulation Milk Marque was
prevented from adding value to its milk because of its monopoly
position. However, as market share has fallen, Milk Marque Developments
has entered processing and we believe that this should be allowed
to develop further.
b) Dairy Producers
Dairy producers have made substantial investments
in the efficient production of milk, in protecting the health
and welfare of their animals and the environment. Yet as milk
producers have seen the price for their milk fall by 25 per cent
over the last four years, retail prices for milk and milk products
have been firm and the profitability of processing companies has
increased.
In order to stimulate demand and halt the decline
in liquid milk consumption, dairy producers want to establish
a generic milk promotion campaign. It is hoped a producer poll
to gauge support for a statutory levy to fund a campaign will
be undertaken later this year. However, the success of a promotion
campaign will depend upon a commitment from the processors to
provide matched funding.
c) Producer Co-ops
Milk producers are weak sellers into a highly concentrated
processing and retail market. There are less than 12 major processing
companies and only four major retailers. The Union therefore strongly
supports the co-operative marketing and processing of milk by
producers as the best means of achieving market balance. It provides
the only means of counterbalancing the strength of processors
and retailers in the market and efficiently co-ordinating supply.
The principal milk producer co-operative in Scotland
is Scottish Milk, a successor of the disbanded Scottish Milk Marketing
Board. The other two producer co-operatives created after deregulation
of the other two Milk Marketing Boards (MMBs) in Scotland have
disposed of their liquid milk processing and wholesaling activities
to Robert Wiseman & Sons and Express Dairies.
It is estimated that Scottish Milk supplies equivalent
of two-thirds of all milk produced in Scotland (but only six per
cent of total UK production). Approximately 90 per cent of the
milk supplied from Scottish Milk is now sold by individual contracts.
These can be tailor-made to meet individual customer requirements
for an agreed volume of milk. The general level of prices is established
by reference to market forces, and an important element is the
pricing information widely available through the public selling
process operated by Milk Marque. The available milk not sold by
individual contracts is sold by monthly auctions, and a small
amount is reserved for a daily spot market. Approximately 50 per
cent of their milk sold goes on to be processed, with the remaining
50 per cent sold on to be liquid milk.
The co-operatives, principally Scottish Milk and
its equivalent south of the border, Milk Marque, have had some
success. However, with the increasing rationalisation in the processing
sector it is necessary that farmers be allowed to continue to
operate together in sufficiently large groups.
d) Dairy companies
Many of the major buyers of raw milk in the UK, including
those from outside the UK, have reduced their supply dependence
on the co-operatives that succeeded the MMBs. They have for a
time been prepared to offer higher prices to independent producers
and producer groups than those paid by the MMB successor bodies.
A result, over time, may have been to reduce overall prices, despite
the premium because the bargaining position of co-operatives has
been weakened.
e) Supermarkets
Supermarkets' share of sales of fresh milk to households
has risen strongly in recent years. At the same time there has
been a concentration of the processing industry into a smaller
number of larger dairies that are capable of meeting supermarkets'
stringent requirements and their preference for centralised sourcing
from two or three suppliers.
With more than half the milk produced in the UK entering
the liquid milk market, the price offered by the multiple retailer
is paramount. Supermarket buyers are only too well aware of trends
in wholesale milk prices and expect and demand corresponding reductions
in their suppliers' prices.
Multiple retailers wield significant power. They
have made no secret of their objective of gaining market share
of the liquid milk market at the expense of the local retailer
or doorstep delivery service, with only c.15 per cent of liquid
milk in Scotland now sold on the doorstep. Multiples have gained
a dominant position, and this allows them to exploit producers'
weakness in the market place.
3. THE EFFECTS
OF THE
CURRENT STRUCTURE
OF THE
DOMESTIC INDUSTRY
ON ITS
ABILITY TO
ADD VALUE
TO RAW
MILK
A strong Scottish dairy industry needs efficient
dairy producers supplying efficient and well-structured processors
if milk and milk products are to find customers in a competitive
climate.
The UK processing sector differs markedly in terms
of structure from most other developed countries, where a very
high percentage of milk is sold and processed through agricultural
co-operatives. The producer members of those organisations have
a commercial involvement in all stages of milk marketing, from
production to the processing of milk and dairy products.
In the UK, milk production and the processing and
manufacture of milk and dairy products are generally distinct—they
are separately owned and operated business sectors. The only significant
vertical integration has been the collection of raw milk and its
sale through producer-owned co-operatives. However, not all milk
is sold through that route, some is sold directly by producers
to processors and the producer-retailer phenomenon has survived
in a few areas.
The UK processing sector was restructured when the
MMBs were disbanded, but efficiency and new product innovation
lags behind its main competitors. More attention needs to be paid
to maximising efficiency throughout the milk chain, if the UK
industry is to compete with well-integrated continental businesses.
The industry has to focus on getting a better total return from
each litre of milk produced on farms. The industry needs to compete
directly with imports, develop exports, expand existing markets
and find new niches.
Milk producers need viable buyers for their milk.
It is essential that buyers are able to find another route to
consumers for milk that cannot secure a reasonable price in the
liquid market. More emphasis is now being given to milk producer
groups becoming actively involved in milk processing—in
an effort to stabilise falling milk prices. In the interest of
the future security of the UK dairy industry, the Union supports
moves by producer co-operatives—and particularly Scottish
Milk—to become more actively involved in milk processing
if that is their strategic decision.
11 June 1999
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