Examination of Witnesses (Questions 40-59)
MR JOHN DUNCAN AND MR ROBERT AUDAS
TUESDAY 4 DECEMBER 2001
40. You have not got any figures?
(Mr Duncan) That is really beyond our area of remit at this moment in time. It is the area we do want to move into but again because of mainly competition law
41. But you surely have looked at what the supermarkets are paying, have you not?
(Mr Duncan) What they are paying?
(Mr Duncan) I do not know because that is a matter privately agreed betwixt themselves and the processor whom they are buying from.
43. Do you think farmers are getting a fair deal?
(Mr Duncan) If you look at you yourself, you would know what you need to pay in Sainsbury's for a litre of milk, and then refer that back to the 19p which our members are being paid, which is probably closer to £1 for two litres, 50p a litre, which is more than double. But they are able to determine what their margin is going to be. The poor old dairy farmer finds himself in many cases getting what is left.
(Mr Audas) I think also a relevant factor which we pointed out earlier is that the UK dairy farmer is achieving a lower percentage of the retail selling price of dairy products in this country than in other countries in Europe because of their different structures and the greater involvement in farmers in co-ops and in processing, whose main interest is to ensure a maximum return for their milk prices. It does show that the consumers are not being ripped off in other countries yet still, because of the fact the producers are more involved in the supply chain, they are there to ensure a higher proportion of the retail selling price is coming back to the dairy producers.
44. Who, at the end of the day, do you think controls the structure of prices?
(Mr Audas) It comes back really to the same point. There probably is not a single party you can label who controls the structure. It is a highly deregulated and a highly non-co-ordinated supply chain at the moment and therefore the amount being taken by supermarkets has varied quite a lot over the last 20 years, I know that for sure. Indeed, the international markets can have a major influence on the prices of all products. What we are seeking really is the stability required, or a degree of stability required, by producers in the future, or we are looking to have a supply chain which does allow the producer to have a greater and more stabilising influence on the price he gets for products, and we have explained how it has to be done.
(Mr Duncan) There are one or two interesting points looking back at the period since deregulation. This is the Welsh Committee and you would know there was a significant processing facility in Wales at Whitland. In the first month, I think, of deregulation the owners of that business closed it down, so that effectively took some 1 million litres a day capacity out of the UK processing sector. You can understand that could have a significant effect on the power within the market; what might have been a sellers market then quickly becomes a buyers market. I have no doubt the company which closed the facility had their own sound reasons for doing that, or so they would say, but over the years we have seen a number of processing plants closed. At this moment in time there is another one closed and another one being mothballed. I assume the PLC which did that did their own analysis of the market which led them to that conclusion because maybe at one point they felt there was not sufficient milk, or maybe their felt the price was strengthening and if they had to compete for milk it would push the price up.
45. Which was that company?
(Mr Duncan) In that case it was Dairy Crest.
46. Which, as you said, is one of the more profitable of the processors. We can all draw our conclusions from that.
(Mr Duncan) That company was owned by English and Welsh dairy farmers and we believe that still some 37 per cent of the shares are held by dairy farmers. If I could just say a word about the whole structure the industry might develop, in discussions we have had with some of our purchasers, one can conclude that shares in dairy processing companies is not seen as a particularly sound investment by city investors, but the direction of these companies is absolutely crucial to dairy farmers. We need to see a vibrant, dynamic, efficient dairy processing sector which we need to have an influence in. It is not inconceivable that before very long you could see that shareholding changed from being owned by city investors to dairy farmers, and that I think would be a relatively painless way for the industry to develop, providing we were not restricted by competition law.
47. Talking about processing, what profit is there on processed dairy products such as yoghurt, butter and cheese, compared to milk in the raw form?
(Mr Audas) That can vary enormously. A year ago it was quite a profitable business, at this point in time it is extremely difficult because of the international markets. If you look at the milk business, it is a whole sub-economy on its own. If one wants to develop a viable dairy industry in the future, one does have to have a mix of both fresh and added value products and commodity products because of the cyclical nature of milk production. The argument for the future is that you have to have a dairy economy which is a mixed economy of products, which is providing different levels of profitability in different years. That is why many of the companies involved in processing, once they reach a certain scale, have a spread of businesses across various sectors of that whole economy of milk.
(Mr Duncan) Could I give you an interesting comparison there because we have been manufacturing cheese now in Scotland for seven or eight years in fairly remote areas out in the West Coast in small creameries where cost of production is particularly high and, therefore, we have got to address the branded market to get a higher return. We are currently selling cheese out of those creameries for £3,500 per tonne, yet at our new purchase in Wales, because of the markets we have inherited, we are selling at close to £1,000 a tonne less than that. That is not because of quality, it is just because we have not yet focused on branding and focused on the marketplace.
48. Do you think that is the answer? Is one answer to go for higher quality, to go perhaps for niche markets and really add value where perhaps you move away from the competition of a New Zealand Cheddar or other international cheese?
(Mr Audas) We have also got to recognise that although there have been sound initiatives on brands in the UK, British brands are not in a very strong position overall in the UK dairy industry. For instance, the top two brands of butter are both imported brandsLurpack and Anchorand the top British brand is nine per cent of the marketplace, as an example. The top brand of yoghurt is Müller, which is produced in this country but has been brought in from abroad. That does suggest there is a lot to be done in terms of adding value and adding brands in the UK dairy market, and that is what we have to achieve in the future.
49. You mentioned previously that Dairy Crest and others have closed processing plants, or mothballed processing plants. Does this not create an opportunity for co-operatives in Wales to come together to buy those plants and develop their own brands? The second part of the question is with devolution, the Scottish Parliament and the National Assembly, does that not create greater branding opportunities, to brand Wales and to brand Scotland as particular Welsh and Scottish products?
(Mr Audas) I think there are considerable opportunities actually for regional products, for Scottish products, for Welsh products, and I think those will develop in the future. What we need to recognise is as support comes more directly off farmers, if you like, it needs to go down the chain in terms of marketing milk for a start in terms of our sort of businesses, but then marketing products in the future. I think if we are going to develop added value for our products in the future we have got to make sure we pick on the right investment opportunities both for plants and for brands. Your point on plants is a valid one but it is not always necessarily the best buy to buy something that someone else wants to close down. On certain occasions it can be, it depends what overall strategy you have got, and you have got to have a fully developed strategy for putting money into brand in order to add value in the sector.
50. Does that strategy for buying plants encompass Objective 1 funding?
(Mr Audas) Yes, it can do, absolutely.
51. Objective 1 funding will last for a seven year period and now there is a chance, using that money in a sectoral approach, for all the milk industry in Wales, or Objective 1 areas, to do the research, to buy the plants, to develop the brand. I would have thought now is a golden opportunity with the Welsh Assembly and Objective 1 funding.
(Mr Duncan) But they have to be prepared to sell it. In this situation they are not prepared to sell it, if you ask your colleagues at the WDA.
52. Does that not belie their motives then? You were hedging round it. Does that not belie their motives if they are not prepared to sell?
(Mr Audas) I agree with everything you have said but you have got to make sure that every business has got a viable business plan, that it can really make sure that all the investment it can get in terms of support from the WDA and so on has to develop into a viable future as well.
53. But if you cannot develop a viable business plan now with Objective 1 funding for Wales you are never going to be able to do that.
(Mr Audas) I appreciate the point, and it is valid, but all I am saying is one has to make sure that one's investment is at the front end in terms of developing the right quality of brands that are going to appeal to consumers right across the UK and potentially export, because that is what we are lacking. Those things do need investment and they do need developing over a period of years.
54. I think we have hit on a key point because we are very familiar with the discussions that have been ongoing for a number of years and there have been at certain junctures a number of local farmers and others associated with the industry who have expressed very real interest in developing higher value adding co-operative processing activity, moving away from the kind of volume that Whitland was in previously but developing higher value adding niche activity that we all want to see. One of the key obstacles is the fact that the company has not been minded to sell and from the earlier responses it seems one of the potential reasons for that would be that it sees it is not in its own interests to do so. I understand that the Welsh Development Agency does have certain compulsory purchasing powers under the Act. I wonder if you are aware of those and whether there have been discussions in relation to them?
(Mr Duncan) We have been aware of them and I think we are also aware that they have threatened to use them.
55. The Committee will find that very, very interesting. I agree with your earlier comments that where there is a real opportunity here to actually move forward with the Agri-Foods Strategy that possibly the Welsh Development Agency now should move ahead and use those compulsory purchasing powers.
(Mr Duncan) Yes.
56. You mentioned earlier some of the differentials between particularly farm gate prices across the European Union, and I think you mentioned Sweden in particular. I know that we have got some graphs here as well but for the purpose of the discussion this morning perhaps you could outline some of the differences between price per litre to the farmer in the United Kingdom compared with some of our European partners?
(Mr Audas) Yes, I can do that. For instance, just taking some of the latest information we have got, which is not necessarily in this pack I do not think, the range of prices throughout Europe is not an enormous range but it will tend to run, looking at average prices over the last year, from about 18 up to about 23 pence.
(Mr Audas) With traditionally those businesses which have developedThere are one or two exceptions, like Italy, where the price tends to be higher because it is more difficult to make fresh milk there. In the more Northern European countries the price does tend to follow the amount of influence that co-operative structures have on the marketplace, remembering that the principal aim of those co-operative structures is to maximise the price of milk back to their producers.
58. So the main determinant, in your view, of the differential is the structure differences on the supplier side, if you like, in terms of the greater prominence of producer co-operatives?
(Mr Audas) And particularly the amount of extra money that goes back to the farmers, if you like, from their profits in processing and all the brands they have built over a time. For instance, I was saying earlier the Lurpack butter brand is a very strong brand internationally which obviously brings back additional revenues to farmers in Denmark. It has been invested in for many decades and it is a very good product. That sort of thing is the kind of thing one needs to do to add value to the basic milk price.
59. So in a sense success breeds success?
(Mr Audas) Yes, indeed, and any investment in the future you can justify because all the profits of the past are in the present.