Select Committee on Agriculture Minutes of Evidence


Examination of witness (Questions 720 - 739)

TUESDAY 23 NOVEMBER 1999

RT HON STEPHEN BYERS

  720. On the question of competition, you said in your press release in September, "A strong competitive market can help to rejuvenate Britain's dairy industry, making it more responsive to its customers and more competitive internationally. All links in the supply chain, from farmers to processors, can benefit". The NFUS has argued that the split into three bodies of Milk Marque will work to the disadvantage of the industry. Why do you believe that that will make the industry more competitive?
  (Mr Byers) It should do and time will tell. That is why we have laid down certain requirements in terms of the way in which the three successor bodies can organise themselves. For example, between themselves they will not be able to have joint ventures; they will not be able to have common directors and they will not be able to have shareholdings in each other's organisation. That is to try to ensure that the split is real. Also they should now start to compete with each other. Time will tell as to whether or not they do that. The great prize will come when they address the competition concerns and as a result lift the bar on going into processing. I personally believe that that is the way forward for the industry. That is the lesson that we can learn from what has happened on the Continent.

  721. Without the processing aspect they would be in a weaker position than Milk Marque was, would they not? That would appear to be an increasingly weak position as far as the market is concerned.
  (Mr Byers) A weak position, in what way? Competition does not necessarily mean that you are in a weaker position.

  722. It was losing market share at a rapid rate, as we discussed earlier, over the period of time of the inquiry. It is now below 40 per cent. That is one organisation that started out on its own without processing. Will they not be in the hands of the dairy companies?
  (Mr Byers) They may begin to regain some of that market share.

  723. Have you formed a view about the impact of the split into three bodies on the price of milk to the farmers?
  (Mr Byers) Time will tell. The indications from the selling round in the early stages of beginning to identify the break-up are that prices are slightly lower. But, no, I have not and I think it should reduce the price because of the nature of the competition because the clear finding from the Monopolies and Mergers Commission report was that Milk Marque was essentially providing a floor in terms of price and there was then no competition that could lower that floor. That was one of the clear adverse findings from the MMC.

  724. Your judgment would be that the consequence of the competition is to reduce the price of milk to the farmer?
  (Mr Byers) That may well be the outcome.

  725. The evidence that we have received during the inquiry is that the producer farmer is in a state of financial crisis at the present time. How can it be helpful if the price goes down?
  (Mr Byers) It is in the nature of competition that if competitive markets are developed, the price may go lower. I cannot predict. That may be a consequence.

  726. This is certainly not a consequence welcomed by British milk producers. It is something that they would be concerned about if the price were to go lower still. In regard to Denmark you indicated that you suspect, as I am sure is right, that there is much more cross-border trading than there would be here. Looking into the future of the industry would you see it as competing domestically within Europe or in a much wider area?
  (Mr Byers) I think it depends on the product. As Mr Todd said, certainly as far as processed products are concerned, there is no reason why it should be restricted to the European Union. There are markets globally for some of our products. I am very keen, as the trade department sponsoring UK exports, to look carefully at how we can support in this case the cheese, yogurt, or whatever industry it may be. We are looking carefully at how we can promote them. There are some very good products in the UK. We would be very willing to assist the industry to do precisely that.

  727. With regard to raw milk, MD Foods, which has a dairy in my constituency, has been mentioned. I attended an event there when they launched a much longer-lived milk product than we are used to. That opens up the possibility, does it not, of much more cross-border trading in raw milk or in the milk product without the processing element to it?
  (Mr Byers) Yes.

  728. Would that not be a further threat or danger to our domestic dairy producers?
  (Mr Byers) It does not need to be. They should see it as an opportunity and not a threat. There is a market of 370 million in the European Union.

Mr Jack

  729. What advice did you receive during the course of your consideration of this inquiry as to whether we had enough milk processing capacity in this country?
  (Mr Byers) The report was on the supply of raw milk. So the processing aspect was not a matter that was primarily of concern in the report.

  730. With respect, Secretary of State, a moment or two ago you indicated your aspiration to see the successor bodies to Milk Marque go into processing. Therefore, again I ask whether you received any advice or background information to form a view as to whether that was a good or a bad thing?
  (Mr Byers) I think the record will show that the question that was put to me was not one specifically in relation to the Monopolies and Mergers Commission report. It was a more general question about the industry and the benefits which may come from processing. Your question was specifically in relation to the Monopolies and Mergers Commission report. Specifically in relation to the report it was a report into the supply of raw milk. That was what I considered.

Mrs Organ

  731. On the implementation of the structural reform, are you satisfied with the division of Milk Marque now being implemented? Do you have any concerns, for instance, that the three separate cooperatives are valid for one day only and after day one farmers, say, in the Cheshire dairy area can choose whether they go into the northern or central areas; or the Forest of Dean, or anywhere. As you have said, time will tell. Could we not end up with a situation where we have one dominant cooperative and two much smaller ones which operate in a far less favourable scenario because they have to deal with farmers from far afield? Could you comment on how you feel about that and what you see in the future?
  (Mr Byers) I had not realised until now that farmers in your own constituency would have such a wide choice.

  732. Theoretically that is so.
  (Mr Byers) I can see that. The point is one that is well made. There will be three groupings at a particular time and broadly in three equal areas in terms of the number of the amount of market share that will be covered. There is nothing to stop a farmer moving from one to the other. Indeed the Director General of Fair Trading will make sure that there is no attempt to have restrictions placed on individual farmers which would make it difficult for them to move from one of the successor bodies to another. Clearly it will be movable; it will change. The issue we are concerned about is to ensure that there is competition. Earlier on I made the point that because any one body has a dominant market position does not per se mean that that needs to be a dominant position that is abused. We shall continue to monitor that area. The Director General of Fair Trading has indicated that he will look carefully at the way in which the successor bodies operate to ensure that there is effective competition there.

  733. If, as time will tell, there were a situation where one of the cooperatives became not just dominant, but did abuse its dominance, would you want to look again at the split?
  (Mr Byers) We would want to look again at the whole area.

  734. Do you believe that the structural reform that is being put in place meets all the objections of the competition authorities against the behaviour of Milk Marque? Do you think we have satisfied all the criteria?
  (Mr Byers) I think the structure has the potential to do so. Now we need to consider the way in which it works in practice. As I mentioned in a reply to Mr Jack, we have put in place restrictions in terms of no common directors and no shareholdings in one company by another to ensure that the split is a real split. Of course, there is a lot that can happen in practice. There are telephones and people speak to each other, and so on. The Director General of Fair Trading will look carefully to make sure that not just the structures are in place, but that the way in which it works in practice is competitive. The Director General will monitor that in the first few months in the lead up to the first selling round.

  735. Was there anything that you felt uneasy about and where you felt you were not meeting the objections of the competition authorities in the structural reform?
  (Mr Byers) No. The reason why I warmly welcomed the decision that Milk Marque had taken—and its members—voluntarily to break itself up into these three successor bodies, is that I believe that it meets the concerns that were expressed by the Monopolies and Mergers Commission. If my recollection is correct, I believe that the report talks about the forceable break-up into between three and five successor bodies. I think this meets the terms of the report.

  736. You have asked people who have concerns about the split to contact the Director General of Fair Trading. When do you expect to receive his advice on the substance of those concerns? What action will you take?
  (Mr Byers) The indictions from the Director General are that he shall be able to advise me at the end of this financial year or at the beginning of the next, so round about the beginning of April. That is why I have said that if he is satisfied that the competition concerns have been addressed, round about Easter time—although Easter is later next year—I shall want to be able to say whether or not there is still a barrier to going into processing. I shall want to be able to indicate that, if at all possible, round about Easter time next year.

Mr Curry

  737. We all glibly talk about processing. What we really mean is producing products. Skimmed milk powder is a processed product. No one wants skimmed milk powder all over the place. The reason for the break-up is the question of processing. The main objection of the dairy companies to Milk Marque as it was constituted, was, firstly, its selling system and, secondly, its current obsession of getting into processing. When they gave evidence to us they made it fairly clear that they thought that the successor bodies would be barmy to try to get into processing and that there was plenty already. That was the gist of what they said. At the moment they appear to want to call off the war between the two sides which has characterised the industry for years. If we saw the cooperatives seriously going into processing I can imagine it livening up again. Are you likely to be scrutinising the activities of the cooperatives in any attempts to get into processing? You have said that you can see no bar to it, but it must be a question of scale as well.
  (Mr Byers) My view is that if it is a commercial decision taken by the cooperatives that will be a decision for them to take, and it would be inappropriate for me to advise one way or the other.

  738. Is it not more likely that we shall see increasing cooperation between dairy companies and their regional cooperative? After all, a lot of the dairy companies already have farmers signed up so that they have their own farmers who will not resile from that and we are going to see vertical integration created perhaps on a regional basis. Would that cause inconvenience?
  (Mr Byers) It does not need to, provided it operates in a competitive manner.

  739. Did you form the impression that the cooperatives could survive without processing, either by acquiring it or by being acquired, or acquiring existing businesses themselves?
  (Mr Byers) This is not in the context of the report, but I would have thought that the three successor bodies should be strong enough on their own but I know that they are, for their own reasons, very keen to get into processing. As I say, that will be a commercial decision for the successor bodies to take.


 
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