Memorandum submitted by the Royal Association
of British Dairy Farmers (L10)
EXECUTIVE SUMMARY
The inquiry is welcomed as it takes place against
an extremely difficult economic background for dairy farming which
in addition now faces substantial change and challenge as a result
of the forthcoming CAP reform. Since de-regulation, the market
for milk has not functioned according to the usual "laws"
and the structure of the dairy industry has resulted in dairy
farmers being reduced to price-takers.
The Committee's attention is drawn to the lack
of transparency shown by retailers in milk pricing compared to
dairy farmers where the cost of producing a litre of milk is widely
published. Traditional methods of calculating milk production
costs underestimate the true costs often by 20%. The dairy food
chain is urged to better understand the true costs of production
as demonstrated by the new RABDF Guidelines for Dairy Costing
Schemes.
Issues:
1. The Royal Association of British Dairy
Farmers (RABDF) is the only UK independent body representing the
interests of specialised dairy farmers and dairy farming generally.
Membership is dominated by dairy farmers but includes representatives
of the service and supply industries. The Association welcomes
the Committee's inquiry which takes place against a background
of dairy farming experiencing serious financial difficulties.
2. Since de-regulation in 1994, dairy farmers
have had to manage their businesses in a climate of considerable
change with much re-structuring taking place within all segments
of the dairy industry. In addition, the forthcoming radical changes
CAP reform will undoubtedly bring add to the uncertainty and make
business planning very difficult.
3. Over and above all of these challenges
has been the issue of milk pricing. Those responsible for the
production of milk have had little influence on the price they
have received. They have been and remain price-takers. For the
vast majority of dairy farmers the last three or even more years
have witnessed a milk price below the true costs of production.
The word "true" is emphasised in this context and this
response will return to the point later.
4. It is puzzling why, in a country with
a relatively affluent population, with milk production areas reasonably
close to urban ones, where the efficiency of milk production compares
very favourably with leading dairying countries, the UK milk price
sits at the base of the EU milk price league table.
5. The Committee will appreciate the differences
between the UK dairy industry structure and that of most other
developed dairying countries, including those within the EU. Considerably
more vertical integration has taken place elsewhere than here
resulting in overseas producers being closer to the end market
and thus having greater influence on milk price received.
6. For historical reasons the UK has three
layers within the dairy market structure: producers, processors
and retailers. Each requires a share of the milk price, the share
being driven by the degree of influence. The size and power of
the small number of large retailers is well recognised. They set
the retail price, the price-makers, negotiate milk purchase in
the main with a handful of processors who in turn deliver a milk
price to the UK's over 20,000 individual producers. It is a wholly
unsatisfactory arrangement.
7. The UK lives with a further anomaly.
The costs of producing milk are widely available to all within
the industry, processors do not declare their costs but they can
be estimated, but retailers demonstrate no level of transparency
whatsoever. The point has directly or indirectly been made by
many studies into the milk industry.
8. It is appropriate to comment that the
producing side of the industry has since de-regulation recognised
the need for a "trade representative body" to mirror
for example the processor's association, DIAL (Dairy Industry
Association Ltd). The Federation of Milk Groups (FMG) has been
formed but it has found the pathway to represent all milk selling
groups a difficult one.
9. The Committee will no doubt receive many
responses from well-qualified organisations on the economics and
dynamics of the milk market and the effect milk price has had
and has on the structure of the industry. The RABDF will leave
those issues to others but will focus hereon on a specific issue
that has not been fully understood by all involved in the industry,
that is, the true costs of milk production.
10. The recent KPMG report, commissioned
by the Milk Development Council, on prices and profitability in
the British dairy chain, specifically identified problems with
the current independent studies of milk production costs. Indeed
this Association has for some time expressed serious concern over
statements frequently made in the press and elsewhere that producers
can still make a profit and have enough to invest at a milk price
of about 16 pence per litre. As a result, "The RABDF Independent
Guidelines for Dairy Costing Schemes" were published last
autumn. The Guidelines were developed in conjunction with and
endorsed by the consulting and dairy farm data recording segments
of the industry.
11. The dairy farming industry has since
the days of the "February Price Review" declared its
milk production costs to Government and the industry in general.
In doing so it developed a set of criteria, a data set, relevant
to the time. The practice continues through the Government commissioned
Economics of Milk Production Studies together with reports from
a wide range of consultancies, accountants, auditors and other
recording bodies. Most have continued to use the same approach.
12. Much of the terminology used is peculiar
to this industry and would not be recognised by an average British
business outside agriculture. Furthermore, most reports on milk
production costs do not adequately take into account paid or unpaid
management. It is not uncommon for the costs of producing a litre
of milk to be published or stated which exclude the costs of the
farmer's own labour and management inputs. In doing so the true
costs of milk production are underestimated by as much as 20%
thereby seriously misrepresenting the financial viability of the
dairy farming industry.
13. The new guidelines for dairy costing
schemes have standardised the data set and included appropriate
remuneration for the farmer's own inputs, before stating the cost
of production.
14. It is accepted that milk price should
be a feature of supply and demand. However as previously described,
in our opinion the structure of the industry does not allow the
market to function appropriately. There can be little doubt that
those who set the milk price are well aware of the published information
on milk production costs which must have a bearing on the price
paid. We urge that all in the dairy food chain develop a better
understanding of the true costs of milk production.
15. The average milk price received by dairy
farmers in recent years cannot result in a sustainable dairy farming
and therefore wider dairy industry. It is essential that as far
as possible everyone involved in the dairy food chain should better
understand how much it really costs to produce a litre of milk.
This alone would make a contribution to the relationship between
market and farm-gate price.
January 2004
| 
