5 Conclusions and recommendations
1. We accept Defra's evidence that, although
retail prices for liquid milk rose by 2 ppl between October 2002
and October 2003, the average farmgate price in fact rose by 1.46
ppl, as against the 0.6 ppl that might be expected. We therefore
conclude that the July and September 2003 retail price increases
were transmitted to farmers. (Paragraph 40)
2. However, we are concerned about the way in
which the price increases were achieved: despite the indicators
in the dairy market in 2003 suggesting that farmgate prices should
increase, the major supermarkets appear to have increased their
prices only when political pressure was applied by farmers. We
are also concerned about the way in which the price increases
were transmitted. The transmission was uneven: some farmers have
benefited more than others. The transmission was also delayed:
it took some time for increases in the retail price to reach farmers.
It remains to be seen how long this price increase will remain
sustainable. (Paragraph 41)
3. The events of 2003 suggest that market-based
information which particularly reflected known changes in the
cost of production and currency movements had little influence
on the pricing decisions of the major milk buyers. If the milk
market is to work efficiently, signals on factors affecting price
must be responded to without the need for application of external
political pressure. (Paragraph 43)
4. We recommend that the Milk Development Council
commission research into the reasons why farmers are pulling out
of the dairy industry. In particular, it should ascertain whether
farmers who sell their milk through the farmer-owned co-ops, rather
than directly to the dairy companies, are over-represented in
the group of farmers pulling out of the industry. We consider
such information vital in tracking the development of the dairy
industry. (Paragraph 46)
5. We urge the dairy companies to examine the
means by which they communicate with their producers and, where
they feel that there is a legitimate reason for delaying transmission
of price increases on to farmers, to ensure that this is communicated
effectively to farmers. Constructive dialogue between dairy companies
and producers is obviously to be preferred to direct action. (Paragraph
47)
6. Given that we know that dairy companies are
making no more than about 3 ppl profit, the evidence we have received
suggests that about 18 ppl of the retail price of a litre of liquid
milk is being taken up by the dairy companies' costs. The dairy
companies will of course need to use some or all of that 18 ppl
in collecting and transporting raw milk and then processing it
into liquid milk. We believe that the dairy companies should provide
dairy farmers with a detailed justification of why it is that
they appear to need to take such a significant chunk of the retail
price of liquid milk to cover their costs. (Paragraph 56)
7. When added to the complex structure of the
dairy sector, the lack of transparency in the dairy supply chain
means that farmers have been unable to identify conclusively what
proportion of the 2003 retail price increases has passed back
to them by way of increased farmgate prices. (Paragraph 58)
8. From the evidence we have heard in the course
of our present inquiry, we are extremely concerned by the poor
state of relations in the dairy industry. We have seen evidence
of suspicion and mistrust, preoccupied self-interest and a lack
of constructive dialogue. Some of the answers we received to our
questions were at best opaque, if not disingenuous, making this
a difficult enquiry to undertake and to conclude. We can only
agree with Dairy Crest's description of the dairy sector as characterised
by an "engrained adversarialism and blame culture".
Sadly, there has been no evidence of an improvement since the
Agriculture Committee inquiry. (Paragraph 59)
9. We commend the Government for the initiative
it has shown in setting up the Dairy Supply Chain Forum. (Paragraph
61)
10. We have serious doubts about the wisdom of
the Government's intention to withdraw from its role as facilitator
of the Dairy Supply Chain Forum. We are not confident that relations
within the dairy industry are sufficiently advanced as to be capable
of constructive dialogue and action without the facilitation of
the Government. We recommend that, rather than withdrawing from
the forum, the Government should instead continue to chair the
forum in order to demonstrate the importance that it places on
the dairy sector and the need for further change within the sector.
We recommend that the Government use the forum as a means to:
—take immediate action to establish what proportion
of the retail price of liquid milk and other dairy products is
retained by each of the participants in the relevant supply chain
in order to improve transparency in the dairy supply chain
—improve the information about the dairy
market that is available and communicate that information to dairy
farmers by way of regular, formal communication; such information
should explain how retail price increases are transmitted down
the dairy supply chain and provide case-specific data in respect
of recent retail price increases
—address, in an open and constructive
way, the engrained adversarialism and blame culture that continues
to characterise the dairy industry. (Paragraph 63)
11. We see no compelling evidence in favour of
setting up a regulatory body to oversee the dairy industry supply
at this stage. (Paragraph 64)
12. Experience to date suggests that the UK dairy
sector is yet to exploit fully the benefits that could arise from
greater horizontal and vertical integration. (Paragraph 71)
13. The disparity between the major supermarkets
and the primary producers results in an uneven distribution of
power along the dairy supply chain, with the balance of power
being weighted towards retailers. This uneven distribution of
power may account for the dairy market being slow to react to
upward pressure on retail prices, as it was in 2003, when prices
increased only following direct action by farmers. (Paragraph
75)
14. We have been struck by the divergent views
within the dairy industry about what factors do, in fact, determine
the price of milk. We recommend that the Dairy Supply Chain Forum
take the lead in seeking to build a consensus within the industry
about the factors that are determinative in this matter. (Paragraph
78)
15. We welcome the decisions of the supermarkets
to increase the retail prices of liquid milk and cheese last year
while specifying that the price increases must be passed along
to farmers. However, on the basis of the evidence we have received
in this inquiry and the findings of the Office of Fair Trading's
review of the code, we agree with the Office of Fair Trading and
the Competition Commission that there remains a fundamental imbalance
of negotiating strength between supermarkets and most of their
suppliers. The code appears to have been ineffective in redressing
this imbalance, at least in respect of the dairy supply chain.
Supermarkets should carefully examine the way in which they exploit
their buying strength and establish whether this is compatible
with their oft-stated aim of supporting British agriculture via
supply chain partnerships. (Paragraph 83)
16. We urge the supermarkets to place more weight
upon their social responsibility to ensure, at the least, a sustainable
farmgate price for British dairy farmers. If supermarkets are
genuinely concerned about the farmgate prices received by all
farmers, we suggest that they aim to establish a balanced spread
of suppliers by increasing the proportion of products such as
liquid milk that they buy from farmer-owned co-ops. (Paragraph
85)
17. We are particularly concerned about the impact
on dairy farmers of their financial support being reduced under
the CAP reforms while milk quotas remain in place until at least
2015. Necessary restructuring within the industry is likely to
be hampered by the inflexibility of quotas. We consider that eliminating
milk quotas would be economically worthwhile for the UK and for
the EU as a whole and we encourage the Government to continue
its pursuit of this policy aim. It is most disappointing that
some other EU member states have opposed the initiative to phase
out EU milk quotas. (Paragraph 93)
18. If dairy farmers were to join together, in
order to make the process of raw milk retailing both more unified
and more dynamic, it could well go some way towards redressing
the uneven distribution of power in the supply chain. We would
hope that CAP reforms will spur farmers to greater co-operation
and to further development of value-added products. (Paragraph
94)
19. We urge the Government to ensure that greater
emphasis is placed on communicating directly to the dairy industry,
especially to farmers, information about what forms of vertical
integration can be carried out under current competition law.
The Government must take steps to foster an environment that is
conducive to greater vertical integration. In its capacity as
chair of the Dairy Supply Chain Forum, the Government should work
towards achieving a balance in the dairy industry so that the
interests of UK domestic consumers are not protected to such an
extent that UK dairy producers are detrimentally affected. (Paragraph
102)
20. We encourage the Office of Fair Trading and
the Competition Commission to take all possible steps to ensure
that the dairy sector knows that the competition authorities are
not opposed to vertical integration in principle and are open
to approaches from within the dairy industry. The Office of Fair
Trading and the Competition Commission should be sending clear
signals on this point. (Paragraph 103)
21. We urge those dairy farmers who are not members
of farmer-owned co-operatives to consider carefully their decision
to remain outside the co-op framework. Although co-op membership
may be a less financially attractive option for farmers in the
short term, it is the most effective long-term option available
for farmers to gain greater control over when, to whom and at
what price they sell their milk. If farmgate prices are to increase,
farmers must act to redress the uneven distribution of power currently
in the dairy supply chain. (Paragraph 106)
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