Memorandum submitted by the Dairy Industry
Association Limited
THE IMPLEMENTATION OF CAP REFORM IN THE UK
DAIRY INDUSTRY
ASSOCIATION (DIAL)
1. This document is the response by the
Dairy Industry Association to the inquiry by the Environment,
Food and Rural Affairs Committee into the implementation of CAP
reform in the UK.
2. DIAL is the trade association representing
milk processors and distributors of milk in England and Wales.
DIAL members account for approximately 90% of the milk processed
in England and Wales.
3. The dairy processing industry is a heavily
invested food processing sector that is responsible for employing
30,000 people and sales of dairy products in the UK amount to
around £6 billion per annum.
(a) What principles and by what method
the United Kingdom should implement the proposals contained in
the regulations formally adopted at the Council meeting in September
2003?
DIAL's Position
4. DIAL's objective is to secure a viable
future for milk production in the UK. The industry requires profitable
dairy producers that have the confidence to invest in the future.
This in turn will give our members confidence to invest in milk
processing.
5. DIAL therefore wishes to ensure that
the maximum possible advantage is taken of the discretion open
to the UK to implement the CAP reform package to minimise any
potential disruption to the industry and to ensure a smooth transition
to the new commercial environment that will be created by the
reduction in price support.
6. DIAL therefore supports:
— early introduction of decoupling;
— calculation of producer payments
according to historic entitlements. For dairy producers this means
the calculation of payments according to quota;
— minimisation of any reductions in
direct payments through the use of the national envelope.
7. This position is shared by both the NFU
and the Federation of Milk Groups (the trade association representing
producer co-ops). As a result, a press release was issued jointly
by DIAL, the NFU and the FMG setting out this position (see annex
1[3]).
8. This demonstrates that there exists a
unanimity of view within the dairy industry on the principles
that should be used to implement CAP reform for the dairy sector.
CAP Reform and Dairy Producers
9. DIAL is concerned that producers should
receive the full benefit of direct payments to ensure that they
can restructure their businesses to survive in the lower price
environment that will be generated by CAP reform.
10. The stated objective of the reform of
the dairy sector CAP is to reduce EU internal market prices to
make them more competitive with world market levels. This objective
is to be achieved by reducing the market support provided by the
CAP. Of the major agricultural sectors dairy is unique in the
scale of the price adjustment that will be required by this CAP
reform package.
Cuts in Dairy Sector Intervention Support
Prices
| From | Butter
| SMP | Raw milk price equivalent
|
| /tonne | /tonne
| Pence per litre |
| 1.7.03 | 328.20 | 205.52
| 19.15 |
| 1.7.04 | 305.23 | 195.24
| 17.87 |
| 1.7.05 | 282.44 | 184.97
| 16.59 |
| 1.7.06 | 259.52 | 174.69
| 15.32 |
| 1.7.07 | 246.39 | 174.69
| 14.94 |
| Total cut | 81.81 | 30.83
| 4.21ppl |
| % Change | 25% | 15%
| 22% |
| | |
|
11. The impact of this change in price support will be
a long-term step change in the industry's price environment. This
will mean a reduction in the income to producers from the sale
of milk. In order to sustain their viability producers will have
to address their cost base. This will require significant restructuring
by producers. This requires a transition period to allow producers
time to adapt to the new price environment. Producers need all
the assistance available to them to achieve this objective.
12. The need for assistance has been recognised in the
reform of the CAP by the creation of compensatory direct payments
to dairy producers. It is essential that dairy producers obtain
the full benefit of these payments. It would be wholly inappropriate
if the funds set aside for dairy producers should be redirected
to meet other objectives. This may be acceptable for other sectors
that are not undergoing a significant price adjustment, but it
would not be equitable for the dairy sector.
Regional Averaging
13. DIAL is opposed to regional averaging.
14. The distribution of payments according to quota will
ensure that it is roughly equivalent to the scale of a producer's
dairy enterprise and that producers operating with proportionately
less land will not be discriminated against. It will also ensure
that the legitimate expectations of dairy producers are met.
15. Distribution of payments by quota will mean that
it will be broadly proportional to the costs of operation for
individual producers. This is because there will be a close alignment
between quota and milk production. As producers manage their costs
in line with production, then the compensation will also be broadly
proportional to their costs.
16. The same effect will not be achieved by regional
averaging. Milk production costs are not always proportional to
land area. Regional averaging would generate completely arbitrary
results and would discriminate against producers that do not utilise
a significant land area. In particular producers that focus their
business on the controlled management of feed inputs to their
livestock would suffer.
17. These producers are less orientated to growing their
own feed stuffs and more reliant on bought in feeds. This "intensive"
model of production gives the potential for greater control over
costs, tighter environmental management, higher yields and allows
for a flatter profile of production. The latter is of particular
significance for the supply of milk to the liquid milk market.
These farms also tend to be larger and therefore enjoy economies
of scale and are operated by more business minded producers who
are central to the industry's future. It is therefore of some
importance to the processing sector that the viability of these
producers is not undermined by discriminatory treatment.
18. Dairy producers have already been undertaking investment
decisions for their businesses based on the expectation of the
calculation of direct payments according to quota. Calculations
for the viability of these investments have been made on the expectation
that quota will be used to determine payments. The use of regional
averaging will therefore frustrate the legitimate aspirations
of many producers.
Decoupling
19. DIAL supports the introduction in 2005 of decoupling
for direct payments in the dairy sector.
20. Early introduction of decoupling will avoid any potential
for disruption that may be caused by delaying until 2007 as it
will allow a longer transition period for the industry to adapt
to decoupled payments. It will also facilitate the process of
restructuring amongst producers.
21. Many dairy producers seeking to leave the industry
may not be willing to do so until they have secured their entitlement
to direct payments. Delaying the introduction of decoupling to
2007 will mean that these producers will be under an incentive
to remain in the industry until payments are decoupled. This could
cause disruption to milk output when decoupling was finally introduced
in 2007. Early decoupling would minimise this effect.
22. Early decoupling would allow producers to secure
their future entitlement to direct payments in 2005. For those
producers seeking to leave the industry, the decision on when
to do so will be influenced by the value of the payment. As the
value will rise over a three year period, then the effect on the
rate of industry exit of decoupled payments will be gradual.
23. Decoupling would also allow quota to be released
earlier to producers who wish to remain and expand. The absence
of available quota could be a barrier to expansion for remaining
producers and early decoupling will ensure that this is not the
case.
National Reserve and Additional Payment
24. Producer payments should not be subject to deductions
under the national reserve or dilution through the use of the
additional payment to meet other objectives.
25. It should be assumed that producers will be best
qualified to judge how to spend their entitlements to improve
their position in the market place. If the test of economic sustainability
is the market place then we are doubtful that the objectives that
may be identified by government for expenditure under the national
envelope will be of permanent benefit to the industry.
26. On a similar basis, DIAL is opposed to any treatment
of the additional payment other than its immediate integration
into the dairy premium. If direct payments are to be decoupled
then any other treatment will be short lived and the difficulties
of its administration would not be justified.
(b) What impact implementation will have on the
agriculture sector, particularly when taking account of approaches
to CAP reform in other European Union Member States?
27. DIAL will focus its comments on the impact implementation
will have on the dairy sector.
28. The cuts in support prices under CAP reform will
percolate through to market prices. Whilst the full magnitude
of the effect cannot be accurately forecast due to the variety
of factors involved, it is inconceivable that prices will not
be subject to some degree of downward pressure.
29. The impact on dairy producers of CAP reform will
depend on how the UK chooses to exploit the options open to it
for the calculation of direct payments.
30. The implementation in other EU member states should
not directly affect the market for dairy products but it will
create differences in the commercial environment for dairy producers
between member states which may affect overall milk production
levels in each member state at certain price levels.
Impact on Dairy Product Markets
31. The EU dairy market is a managed market. For so long
as the EU produces a structural surplus of milk of the order of
10% over its domestic consumption then the overall market balance
will be determined by the market management instruments operated
by the European Commission.
32. Intervention purchasing is a key market management
instrument. Intervention purchasing provides a floor to the market
place for dairy products, a floor to which the market has fallen
on many occasions. CAP reform will reduce the value of the support
provided by intervention purchasing. It can therefore be presumed
that the market will be affected by this development.
33. It is also important to understand that the aid provided
by other support schemes in the dairy sector such as consumption
subsidies for butter and SMP will be adjusted in line with the
reductions in intervention support. This is the publicly stated
objective of the European Commission. The implementation of a
tendering system for export refunds will mean that this will also
be the case for export refunds. The reduction to these aids will
also act to reduce overall price levels.
34. The full extent of the impact of these measures on
prices will be determined by a variety of factors but the principle
factor will remain the management of the EU internal market by
the European Commission. Given the Commission's tight budgetary
constraints and their stated policy objective of making EU prices
more internationally competitive through CAP reform, then it must
be presumed that overall EU prices will fall.
35. However, the extent that to which this will have
an impact on the UK can be greatly influenced by the value of
sterling. If sterling depreciates against the Euro then this may
offset some of the reduction in EU prices. Conversely an appreciation
of sterling would exaggerate the effect.
36. Other factors that may increase or reduce prices
include:
Factors favouring weaker prices:
— further restrictions on EU subsidised exports
through any new WTO agreement.
Factors favouring firmer prices:
— continued growth in total EU consumption, particularly
for cheese;
— reduction in output through accelerated exit from
the industry.
37. Overall, whilst there remains some uncertainty over
the scale of the price reduction, there remains a strong consensus
of opinion on the direction of the change.
Impact of Direct Payments to Producers
38. As discussed above, the impact direct payments will
have on the dairy sector will very largely depend on the way in
which they are implemented. The choice between early or late decoupling
and between regional averaging verses historic entitlement will
have a major bearing on restructuring by producers.
39. The adoption of regional averaging could impair the
ability of producers to respond to the new commercial environment
created by the reform and this could threaten total UK milk production.
Impact of Approaches Taken in Other EU States
40. Changes to the dairy sector market support regime
should have the same effect across all EU states. The UK should
not in theory be discriminated against by these changes.
41. Differences in the implementation of direct payments
should not have a direct affect on the market for dairy products.
Prices for dairy products will be determined by the interaction
of supply and demand and this should not be affected by the advent
of direct payments.
42. Milk purchasers in EU member states will not seek
to obtain a competitive advantage by seeking a reduction in their
raw material costs to take account of any additional income producers
may receive by direct payments. The market mechanism for determining
raw milk prices means that prices for raw milk are determined
by overall market returns to the dairy industry and not by the
cost of production.
43. Differences in the implementation of direct payments
will affect the overall commercial environment for milk producers
in each member state and therefore this will have an impact on
whether milk production is more viable in some member states than
others. If the UK adopts regional averaging then UK dairy producers
may find themselves discriminated against compared to producers
in other member states who would be obtaining greater benefit
from direct payments. This could affect the level of milk production
that could be obtained at certain price levels.
(c) What progress has been made in implementing
the proposals made by the Policy Commission on the future of farming
and food, and how that work meshes with wider reform of the CAP?
44. The validity of the main recommendations of the Policy
Commission on the Future of Farming should be carefully assessed,
particularly in light of the current and future commercial environment
for the agriculture sector in general and the dairy industry in
particular. A number of the other recommendations of the Commission
were directed at the dairy industry. DIAL has played an active
and constructive role in implementing these recommendations.
Principle Recommendation of the Policy Commission
45. The principle recommendation of the Policy Commission
was that for as long as direct payments existed they should be
coupled to base environmental conditions and that CAP funds should
be shifted to rural development and environmental protection schemes.
46. DIAL believes that the appropriateness of this vision
needs to be carefully assessed against the commercial needs of
agriculture in general and dairy in particular. With many areas
of agriculture under financial pressure the economic impact of
the redirection of public support has to be carefully considered
and the role of government in assisting the resulting transition
has to be acknowledged.
47. It is apparent from our contacts with the European
industry that CAP reform will have far reaching implications on
processors. The EU industry is already taking steps to address
the challenges created through a range of measures.
48. Dairy producers will be even more directly affected.
It is essential to the future of the industry that the consequence
should not just be the loss of producers from the industry. DEFRA
has to adopt policies that provide a viable opportunity for those
producers that remain to invest in their businesses to ensure
the future of the industry. DEFRA has a responsibility to the
dairy industry to do its utmost to minimise the economic impact
of the policies that it has chosen to pursue and to protect the
prosperity of a major component of the rural economy.
Creation of a Single Farm Assurance Scheme
49. The Commission recommended that current assurance
schemes need to be rationalised behind the Red Tractor Scheme
and then promoted strongly to producers and consumers.
50. DIAL is a constituent member of the Board of the
NDFAS, which is the farm assurance scheme for the dairy sector.
DIAL has participated fully in seeking the integration of farm
assurance schemes under the red tractor scheme whilst seeking
to ensure that the interests of the dairy sector were full recognised.
Food Chain Centre
51. The Commission recommended that a Food Chain Centre
should be established facilitated by the IGD.
52. DEFRA has provided a grant for a study by the Food
Chain Centre into the dairy sector and DIAL members are participating
in this study.
Food Industry Sustainability Strategy
53. DIAL is participating in the discussions led by DEFRA
on the creation of a Food Industry Sustainability Strategy. DIAL
will be seeking to formulate a strategy specifically for the processing
sector.
Closer Co-operation
54. The Policy Commission also made a general call for
closer co-operation within each sector and for agriculture to
reconnect with its markets.
55. As an organisation DIAL is seeking a closer working
relationship with other trade bodies in the sector. DIAL has created
a number of forums to discuss industry issues with producer co-ops.
DIAL is also participating in a number of marketing initiatives
co-financed by the producer levy funded Milk Development Council.
Dairy Industry Association Limited
December 2003
3
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