Memorandum submitted by the Yeo Valley
Organic Company Ltd (F10)
OUR BUSINESS OUTLOOK FOR THE ORGANIC DAIRY
INDUSTRY
Organic food and farming offer great benefits
to the consumer, through the natural production of food without
recourse to chemicals, genetically-modified organisms and artificial
fertilisers. The environment also benefits where farms encourage
the re-establishment of natural wildlife habitats and reduce the
chemical pollution of watercourses.
We also believe that organic food production
provides the opportunity to redress the imbalances of modern trading
relationships that are currently damaging significant sections
of the rural economy.
The plight of conventional dairy farmers, whose
income from their milk has dropped by over 25 per cent in the
past three years, to a point where many are now no longer able
to continue, is a clear example of this. The pressure from the
supermarkets to offer milk (their biggest selling product line)
at ever cheaper prices has been passed on from the milk processor
to the farmer with a blunt ultimatum: supply the milk cheaper,
or don't supply it at all.
The Yeo Valley Organic Company Ltd is an independently
owned company, founded by a dairy-farming family in 1996, and
now is proud parent of the fourth-biggest and fastest-growing
yoghurt brand in the UK. We take a very different view to how
we treat our supplying farmers and growers, both now and in the
future.
We strive to be efficient and profitable in
our operations to provide consumers with the finest organic products
at affordable prices but are bound by our self-imposed legal Company
Constitution to act fairly and equitably with our suppliers and
customers, to help further the organic market. To this end we
have developed a ground-breaking relationship with our organic
dairy farmers who are all British members of the Organic Milk
Suppliers Co-operative (OMSCo).
We have signed a three-year rolling contract
with OMSCo for organic milk that guarantees a fixed price per
litre to the farmers and commits to ever-increasing volumes. The
price has been calculated with the farmers to ensure that it covers
the increased costs of organic farming, with some profit to re-invest
in their farms; it is not linked to the downward spiral of the
conventional milk price in any way.
The long-term nature of our farm supply contract
has been instrumental in encouraging more farmers to embark on
the two year, three month organic conversion process, secure in
the knowledge that there will a known market and price for their
milk at the end of it. Furthermore, we share up to 30 per cent
of our company's annual profits with our organic suppliers and
last May paid over £100,000 to the farmers of OMSCo as a
profit-related milk bonus.
Looking forward, we believe that our manufacturing
expertise and cost effectiveness allows us to deliver keenly priced,
great quality organic products to consumers. Our efforts to develop
the organic yogurt market over the past six years have been very
successful; organic yoghurt now accounts for around 6.3 per cent
of the total UK yogurt market. We have achieved the lion's share
of this growth through a long-term vision, investing heavily in
our dairy and our suppliers and taking a pragmatic view that short-term
profitability is not of primary importance. Our independent status
means that we escape the short-termist demands of the City institutions
and are free to develop a long-term supportive relationship with
our suppliers. The OMSC started with five farmers in 1994 and
now has over 200, either producing or in conversion to organic;
they share our confidence that we can offer a stable sustainable
trading environment for their industry.
Now that the organic market has been firmly
established, however, larger plc businesses are beginning to produce
organic variants of their conventional products. In the dairy
sector, retailers are currently encouraging their traditional
milk processors to secure organic milk supplies from wherever
they can. There is a real concern that, as a result, organic dairy
farmers will be split into small groups, to become vulnerable
to the market pressures that have so badly traumatised conventional
dairy farming.
Some concerted action is now required to prevent
the warning signals currently appearing from turning into widespread
concern amongst potential organic farmers. Some are already sensitive
to the possibility that the current financial sustainability of
organic dairy farming might be short-lived.
Consumers are increasingly demanding quality
organic products so the failure to develop a strong, well-managed
organic farming base in Britain will result in an even higher
level of imports. Import levels currently stand at some 70 per
cent of total UK demand for organic foodstuffs (according to the
Soil Association). They will increase even more in favour of countries
like Denmark and Sweden—whose organic dairy farmers have
operated under the strong leadership of, respectively, MD and
Arla for many years—unless UK processors and growers develop
healthy businesses.
MAFF, in our view, has a key part to play, working
with the Federation of Milk Groups to chart a UK organic milk
supply plan for the coming years. Failure to intervene at this
crucial stage could see British organic dairy farming snatch defeat
from the jaws of victory.
The following notes A and B highlight some areas
that we suggest should be thoroughly investigated by MAFF.
8 June 2000
A. UK ORGANIC
DAIRY INDUSTRY
STRUCTURE
Using MD Foods of Denmark and Arla of Sweden
as examples, both countries have farmer co-operatives processing
approximately 80 per cent of their total milk (not allowed by
the UK government). Both farmer groups have encouraged organic
farming significantly and both their relative governments help
far more than in the UK.
In spite of the relatively high level of control,
both countries have still had "hiccups" in under/over
supply of organic milk.
How can the UK dairy sector avoid a major under/over
supply of the market when it has:
— Many accreditation bodies.
— Very diverse farmer co-operatives
and direct selling organisations.
— Very concentrated and powerful multiple
grocers (change of policy by one of these will effect the whole
supply/demand market for a certain product).
The potential to waste money, encouraging conversion
without actually understanding the potential market, is huge—but
not as serious as missing the opportunity to maximise the potential
of organic farming.
— Should the Government intervene directly
in the market at this stage through a MAFF-organised committee?
— If there is to be no direct intervention,
what is the Government's role to support this sector?
B. EXTRACT FROM
THE YEO
VALLEY SUBMISSION
RE: AGENDA
2000—ORGANIC CEREALS
10 per cent of arable land is set-aside (this
costs approximately £100 per acre IACS payment).
— The aim of set-aside is to reduce
production of arable crops.
— Organic cereals reduce yields by
an average of, say, 50 per cent.
An alternative would be to pay £50 per
acre every year to organic cereal farmers, up to a maximum of
20 per cent of IACS land, with standard set-aside being reduced
by every one acre for two organic taken up.
— No extra costs incurred.
— The scheme would reduce the level
of imports of organic cereal.
— Conventional farmers may not have
to have any set-aside (becoming more profitable).
— Huge environmental benefits.
— A lack of organic cereals will slow
down the potential growth of dairy and livestock sectors.
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