Select Committee on Environment, Food and Rural Affairs Ninth Report

2 Context of the inquiry

Deregulation of the dairy market

The UK dairy market prior to 1994

5. Until 1994, there were four Milk Marketing Boards (MMBs) which held a statutory monopoly on the collection and sale of milk in Great Britain. The MMBs were established to resist the downward pressure on producer incomes resulting from the increasing power of dairy companies. They became responsible for all the milk produced by dairy farmers, selling it on their behalf and pooling the returns in order to provide equal returns according to the volume of milk consigned by each farmer.

6. Although the MMBs were typically described as co-operatives, farmers were generally required to sell their milk to them; the MMBs were, in turn, required to buy milk from the producers and find a market for it. This meant that Boards acted not only as sole purchasers but also as monopoly suppliers of milk to the processors in their respective areas. The price of milk was negotiated and agreed by the MMB (on behalf of dairy farmers) and the Dairy Trade Federation (on behalf of the dairy companies).

7. The MMB system was generally regarded as having operated satisfactorily. But the customers of the marketing boards became concerned about pricing policy and its relationship to competition law. Moreover, market developments, including the growth of consumer demand for a widening range of milk products and the intensification of competition from imports, also put pressure on the system. Following a public consultation exercise, the MMBs were abolished in October 1994 and the dairy market was deregulated.

The UK dairy market after 1994

8. Following deregulation, a farmer-owned voluntary co-operative, Milk Marque, was established as the successor to the England and Wales Milk Marketing Boards. The majority of dairy farmers who had previously sold milk through the MMBs switched their allegiance to Milk Marque.

9. In 1999, the Monopolies and Mergers Commission (now the Competition Commission) concluded that Milk Marque had used its monopoly position to increase milk prices over and above what they would have been in a freely competitive market. The Commission recommended that Milk Marque should be broken up, although the Government did not accept that point of view. It also appears that some dairy farmers were dissatisfied with the farmgate price offered by Milk Marque and were withdrawing in ever-increasing numbers. In the event, Milk Marque voluntarily chose to split itself into three roughly equal-sized farmer-owned co-operatives: Milk Link, Axis (now merged with Scottish Milk to form First Milk) and Zenith (now merged with The Milk Group to form Dairy Farmers of Britain).

The UK dairy industry today

10. The UK is the seventh largest milk producer in the world, behind the United States of America, the Russian Federation, India, Germany, France and Brazil, and the third largest in Europe, behind Germany and France.[5] The UK's position in the world market is due to the importance of milk to the domestic consumer, and the fact that the UK's geography and climate makes many parts of the country well-suited to dairy farming.

EU dairy regime

11. The Milk Development Council (MDC) provides a helpful summary of the EU dairy regime:

The EU uses several tools to support the dairy market. These include an intervention buying system to buy in the basic milk product commodities of butter and skimmed milk powder. This provides a guaranteed floor to the market for all dairy products across the EU. Intervention prices keep prices for EU dairy products above world price levels. Intervention prices are set in euros, and hence the UK is susceptible to exchange rate movements as they alter the basic support price for the UK market.

Due to intervention prices keeping dairy product prices higher than world prices, the EU has to use export refunds to help processors and traders sell surplus products on to the world market without making a loss. In addition, the EU uses import tariffs to prevent other countries selling too much of their products into the high supported prices of the EU market.[6]

12. The fluctuation of the UK pound against the euro affects the farmgate price paid to UK dairy farmers because, as the pound strengthens against the euro, pound-denominated intervention prices for butter and skimmed milk powder fall, pulling down the Intervention Milk Price Equivalent (IMPE), which acts as a marker price in setting milk contract prices. As the pound continues to rise, the sterling value of the IMPE, which is set in euros, falls.

13. Milk production in the UK (as in the rest of the EU) is limited by milk quotas; the current annual quota for the UK is 14.2 billion litres. Data showing permanent quota held in the UK, broken down by county, is attached as an Annex.

Government's role in the dairy industry

14. Since deregulation, the Government's role in the dairy industry has been limited. The permanent secretary of Defra, Sir Brian Bender, recently described Defra's role as follows:

Tackling the issues of supply chain efficiency and adding value is very much for the sector to do itself … However, there is a place for Government to help facilitate supply chain co-operation and Government can also play a role in facilitating industry development …

Government has no particular view on how much milk the UK should produce or on how many producers or companies there should be. Similarly, we have no view on the most desirable structure of the sector. Government does of course have views on the importance of thriving rural communities and on how land is managed; and it wants a sustainable farming and food sector. But it does not have views on the shape of the industry.[7]

15. Despite the limitations of the role described by Sir Brian, Defra does retain some key responsibilities in respect of the industry, including UK policy on dairy aspects of the CAP and milk quotas. Defra also has responsibility for sponsorship of the dairy industry in the UK, which brings with it a considerable budget for research and development, and takes the lead in sponsoring the MDC. Defra has made a grant of nearly £0.5 million to the Food Chain Centre to enable it to examine how dairy supply chain efficiency can be improved.[8]

Industry players


16. In 2002, there were approximately 29,700 dairy herds in the UK, with an average herd size of 75 cows.[9] There is an overall trend towards fewer, larger dairy farms: in 1997, for example, there were approximately 37,300 herds, with an average of 66 cows per herd. In England, there is now less than half the number of dairy holdings that there were twenty years ago: in 1983, dairy was the predominant activity in 30,361 holdings compared with only 14,342 holdings in 2002.[10] As average herd sizes have increased, so has performance efficiency: milk yield per cow has steadily increased, from an average of 5,512 litres per cow in the 1996/97 year to 6,467 litres per cow in the 2002/03 year, about a 17% increase in yield.[11]

17. Despite this trend, there are still a significant number of small dairy farmers in the UK: in 2002, about 40% of UK herds had fewer than 50 cows, as illustrated by the following graph.[12] The MDC told us that the 50% of farmers with the smallest herds account for only 25% of milk production.[13]

Purchasers and processors

18. According to Defra, there are 130 milk purchasers and over 100 processors in the UK.[14] The five largest purchasers from producers are the farmer-owned co-ops First Milk, Dairy Farmers of Great Britain, Milk Link and United Dairy Farmers and a dairy company, Dairy Crest. The four largest processors in the UK are all dairy companies: Dairy Crest, Glanbia, Arla Foods and Robert Wiseman Dairies.[15]

19. Many of the purchasers are milk groups, a term which covers both farmer-owned co-operatives and also those groups of farmers who sell their milk to the dairy companies as a bloc; milk groups account for approximately 40% of the raw milk produced in the UK. Although the farmer-owned co-operatives do have some processing capacity, most of the milk they purchase is sold on to the privately-owned dairy companies.

20. The dairy companies purchase raw milk both directly from farmers and via the co-ops. The Dairy Industry Association (DIAL) believes that about 90% of the UK's raw milk is processed by the privately-owned dairy companies and only about 10% by the producer-owned co-operatives.[16]


21. Liquid milk and commodity products are sold through retailers of all sizes. However, milk and commodity products are now sold primarily through the major supermarkets: around 65% of household consumption of liquid milk is purchased in this way and around 80% of household consumption of other dairy products.[17] Other sales are through middle ground outlets like convenience stores, hospitals and catering outlets or via the doorstep.[18]


22. Consumers' demand for liquid milk has continued to decline steadily. From the 1950s through to the 1970s, average consumption per person per week was around 2.7 litres; by 2000 that figure had fallen to about 1.8 litres.[19] According to the British Retail Consortium (BRC), demand for dairy products is either static or declining, with the exception of yogurt. Increased demand for yogurt is of little benefit to the UK dairy industry, because the market is dominated by German and French brands, and relatively little liquid milk is used in the production process.[20]

The UK milk market

23. The raw milk produced by UK dairy farmers is processed into a number of different products. In 2002, for example:

A significant proportion of commodity products such as cheese, cream, butter and milk powders is exported. Liquid milk is sold almost exclusively in the domestic market, although movement of liquid milk between the UK, the Republic of Ireland and France is of increasing importance.[22]

Farmgate prices

24. UK farmgate prices reached a high soon after deregulation in 1994; since 1996, they have, on the whole, declined. Evidence we have received indicates that it costs the UK dairy farmer anywhere between 19 and 23 pence to produce a litre of milk.[23] Since 2000, average farmgate milk prices have varied between 16 pence per litre (ppl) and 20 ppl.[24] Average farmgate prices are therefore not high enough to cover farmers' costs. Milk Link told us that, in the past seven years, most dairy farmers' income has exceeded the national minimum wage only twice and the effective rate of pay has averaged £2.90 an hour.[25] The following table illustrates the low incomes experienced by dairy farmers in recent years:[26]

25. Farmgate prices are influenced by several factors. Prices of liquid milk and other milk products are affected by the value of the EU intervention price, which is itself affected by the sterling to euro exchange rate. Liquid milk is sold almost entirely on the domestic market, whereas other dairy products are sold on the world market and are therefore affected by factors such as currency movements and fluctuations in worldwide supply and demand.

26. UK farmgate prices are not only inadequate to recompense farmers for the cost of milk production, they are also consistently below the EU average. The National Farmers' Union for England and Wales (NFU) has cited the following figures by way of comparison:[27]

EU average farmgate milk prices by country: € per 100 kg

Jan 01
July 01
Jan 02
July 02
Jan 03
July 03

27. Several studies have examined farmgate prices in the UK. In the course of our inquiry, frequent reference was made to a report published by the MDC in March 2003, and commissioned from KPMG, Price and profitability in the British dairy chain (the KPMG report).[28] We refer to the KPMG report in our commentary below.

5   See  Back

6   Information from the Milk Development Council; available at Back

7   Speech given by Sir Brian Bender, Defra permanent secretary, to DIAL, 27 November 2003; available at  Back

8   HC Deb, 8 December 2003, cols 227W-228W Back

9   Data from the Milk Development Council; available at  Back

10   HC Deb, 19 January 2004, col 1015W Back

11   Data from the Milk Development Council; available at Back

12   Data from the Milk Development Council; available at  Back

13   Ev 95 [MDC] Back

14  Back

15   Arla Foods merged with Express Dairies in October 2003; the new company is known as Arla Foods. Back

16   Ev 86 [DIAL] Back

17   Ev 109 [Defra] Back

18   Ev 22 [Milk Link] Back

19   Environment, Food and Rural Affairs Committee, Ninth Report of Session 2001-02, The Future of UK Agriculture in a Changing World, HC 550-I, p 78 Back

20   Ev 60 [BRC] Back

21   HC Deb, 19 January 2004, col 1018W; the remaining 3% was accounted for by dairy wastage and stock changes and other on-farm uses. Back

22   In 1999, the UK exported: 61,000 tonnes of cheese, mostly to other EU Member States and North America; 95,000 tonnes of cream (out of UK production of 272,000 tonnes), mostly to Belgium and France; 43,000 tonnes of butter, almost all to other EU Member States; and 132,000 tonnes of milk powders (out of UK production of 204,000 tonnes), of which 50,000 tonnes went to other EU Member States, with much of the rest going to Africa and the Americas. See Back

23   Ev 23 [Milk Link]: independent reports from analysts KPMG and ADAS/HSBC have concluded that it costs the UK dairy farmer between 19 and 21 pence to produce a litre of milk; recent guidelines produced by the RABDF concluded that the breakeven point was just over 20 ppl, and as much as 23 ppl if full account was taken of the cost of unpaid family labour. Back

24   Ev 23 [Milk Link]; qq 237-238 [FMG] Back

25   Ev 22 [Milk Link] Back

26   Data from the Milk Development Council; available at  Back

27   "How are we to become dairy farmers?", presentation given by Sir Ben Gill, president of the NFU, to the 13th Cheshire Farming Conference, 13 November 2003. Back

28   Other relevant reports are: a study commissioned by the MDC, DIAL and Defra, with project advice from the NFU, on behalf of the Dairy Supply Chain Forum, and published in February 2004, The Future of UK Dairy Farming, by Professors Colman and Harvey; a report commissioned by Defra and edited by Professor Colman, Phasing out milk quotas in the EU, April 2002; available at  Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2004
Prepared 8 June 2004