Examination of Witnesses (Questions 20-39)
9 FEBRUARY 2004
MR TIM
BRIGSTOCKE, MR
ANDREW CHADWICK,
MR ROBERT
CLARKE AND
MR JOHN
SUMNER
Q20 Chairman: You have the benefit of
my earlier remarks, so I hope you understand we will try to keep
to the same track record, but I think it would be very useful
if you would just introduce who is giving evidence, and also,
because we do not necessarily take as much evidence from yourselves
as we do from the NFU and others, say a couple of things about
the organisation.
Mr Brigstocke: I am Tim Brigstocke,
and I am Chairman of the Royal Association of British Dairy Farmers,
which for ease we will call RABDF. On my far left is John Sumner,
who is our Policy Advisor. On my immediate left is Andrew Chadwick,
who is a dairy farmer with 200 cows in Cheshire, and on my right
is Robert Clarke, who runs a family unit of 120 cows near Preston.
Both Andrew and John, as well as myself, are directors of RABDF,
and Robert is also a director of Dairy Farmers of Britain. Our
main activity as far as RABDF is concerned is running the Dairy
Event, which is the major technology transfer event held each
year at Stoneleigh, where we have about 14,000 attending a two-day
event, with about 400 trade stands. So we are very much involved
as an organisation in technology transfer as well as responding
to consultations. We have an annual conference, which is well
known and is perceived as the Oxford farming equivalent for the
dairy sector, and we have also recently done two things which
may be of interest: first, we have received funding under the
Agricultural Development Scheme from Defra to do director training
in the milk group sector, so that not just existing directors
but aspiring directors are properly trained in how to run farmer-controlled
businesses, and secondly, we have done quite a detailed evaluation
of the costs of milk production, which has received a number of
plaudits from the industry.
Chairman: Thank you for that. That is
very clear. We are going to stay in the same vein of looking at
the efficiency of the industry, perhaps with some international
comparisons in mind. I will ask Colin to take up the questions.
Q21 Mr Breed: In your evidence, you claim
that milk production in the UK compares very favourably with other
leading dairying countries, but how efficient really is our milk
production, particularly when you compare it to producers outside
the European Union?
Mr Sumner: Chairman, if you look
at any set of parameters, the structure of the UK dairy farming
business is strong. We have a higher than average herd size compared
to Europe. We have the same average as in America, not that that
says too much really. Whatever parameters you might like to take,
including genetic improvement and feeding technology, then I think
we compare pretty favourably with the rest of Europe.
Q22 Mr Breed: What about outside Europe?
Mr Sumner: If you look outside
Europe at the main dairying countries, we look at New Zealand
as a main competitor. If you wish to talk about Japan, I do not
think the comparison is too important.
Q23 Mr Breed: Perhaps America and New
Zealand.
Mr Sumner: If you look at America,
we have the same sort of herd size and the same sort of structure
as they have in America. New Zealand obviously has a larger herd
size, but they have quite a different set of circumstances in
terms of production and, I think in terms of technical efficiency,
we can probably hold our heads up and say we are as good as they
are.
Q24 Mr Breed: I know it is very difficult
to make strict comparisons because of the different ways that
they look at butter fat and everything else, and therefore there
will be some slight variations, but when you look at our prices
and what farm gate prices are here compared to New Zealand, there
is an enormous difference, yet their dairy farmers are clearly
making at least adequate profits. How might you explain that?
Mr Sumner: There is a big fundamental
difference between the countries you have just described. If you
look at New Zealand, most of their milk is produced from grass
production; they do not have to provide winter housing conditions
for their cows. They also have an industry that is geared up to
exporting most of their product. Eighty-five per cent of milk
produced in New Zealand is exported elsewhere, so there is quite
a different culture in terms of milk production to the one that
we have in the UK.
Mr Chadwick: I do not think we
are ever going to compete on price with the New Zealanders. Partly
because of climate, partly because dairying in New Zealand is
a very important industry, but they cannot supply the whole of
the world market, however hard they try. We cannot compete either
with parts of Australia. We are much more competitive with the
United States, but the United States is changing. To over-generalise,
it is moving from east to west dramatically. If you go to California,
there are several herds of 4,000 cows, all milked in a factory
system, with entirely Mexican labour, except for the owner, who
is normally a first, second, or third generation Dutchman. We
do not have the ability to have those very large units, and they
would not be socially acceptable here. It is going to be more
difficult to compete with the States.
Mr Brigstocke: To add to that,
Mr Chairman, I think the welfare standards that we have to operate
in the UK are quite different to what happens in New Zealand,
and particularly North America. It is interesting that Dick Sibley,
who has recently, last week, won the Princess Royal Award for
his outstanding contribution to the dairy farming sector as a
vet, has recently been to North America to look specifically at
cattle health plans, and was horrified at how bad the North American
situation was.
Q25 Mr Wiggin: Can you tell us how bad
it is in New Zealand? We hear this a lot, but there is never much
evidence.
Mr Brigstocke: Really, as Mr Chadwick
has just said, there are practices that are acceptable over there
that would not be acceptable over here, such as tail-docking,
for example. The very extensive conditions that operate over there,
that animals do not have to be housed, over here just would not
be acceptable.
Q26 Mr Breed: As you may be aware, the
Committee went there not so very long ago and we did look at that.
They use a very low-cost system, in almost every respect.
Mr Brigstocke: They do. It would
not be acceptable.
Q27 Mr Breed: They have hardly any labour,
low concentrate, and it is a totally different system. Nevertheless,
I think we are wrong sometimes to try and emphasize the animal
welfare aspect, which may be slightly different, but I think it
is the fact that they have a low-cost system and their yields
are much lower, but at the end of the day they produce more profit.
Can we look at the quota system in terms of the way in which it
might distort the market for milk in the EU, such that it may
in effect protect the more inefficient producers in other EU states,
which are perhaps kept in business, which may disadvantage UK
dairy farmers? Do you have any comment on that?
Mr Clarke: I think it is important
to remember that the UK market is one of the highest in percentage
terms of domestic fresh and liquid products, and that gives a
slightly different relationship between the producers and their
ultimate market, or should do. From the point of view of the quota
implications and the way this Government and previous governments
have implemented quota regulations, we have discrepancies across
the various European states as to how they have been implemented.
I think we have to concentrate really on protecting the UK market
for the British consumer. I am sure the British Government will
want to ensure that their electorate has a constant supply of
cost-effective, safe product. Issues like food security are going
to come more into play. There is a great danger if some of the
implications that previous contributors have indicated to you
could happen in terms of the total supply of milk in the UK declining
and actually threatening the UK's ability to even feed its own
people with the healthy, nutritious food that milk is.
Q28 Mr Breed: Are you entirely happy
with the current quota?
Mr Clarke: I think the way that
the quota system has been implemented gives a false restriction
in the marketplace. Supply and demand at the end of the day should
regulate the market. When you have one issue like quota, and the
perception that you should produce to the country's quota, it
stifles many of the innovative and forward-thinking developments
that can go on, particularly in products and in terms of product
development. We have to educate—and producers have to be
educated as well—to understand that "market" is
not necessarily "quota", and we should be producing
to the market and not to quota.
Q29 Mr Breed: I think you mean by that
you would be quite happy if quotas went?
Mr Clarke: On a personal level,
yes. As an organisation, yes.
Mr Chadwick: Personally, I think,
if the MTR comes in, and milk prices fall, as most economists
expect, to about 15 pence a litre, quota, although formally there,
will be irrelevant; we will not be producing to quota. That is
my guess.
Chairman: Obviously you heard us ask
a number of questions, understandably, on market structure, which
is key to this whole area. I am going to ask Bill to follow those
up.
Q30 Mr Wiggin: To what extent would the
problems of low farm gate milk price be addressed through vertical
integration and breaking what you call, I believe the price taken
mould?
Mr Clarke: The important thing
to remember is that the implementation of the trust that you have
heard previous speakers talk about and the level of cooperation
that we need to achieve is not going to come about by any political
solutions; it is going to come about through commercial solutions.
It is important that we do not have any blockages in the way of
that. We need to look carefully at how competition legislation
is implemented and how that is applied throughout the food chain,
because if we are going to see producers being able to change
their fortunes by investing in processing, in forming relationships
with both retailers and with established processors, to actually
take more part in the chain, there has to be a level of stability,
and the current pricing level does not really give them the ability
or the confidence to go forward.
Mr Sumner: Chairman, if I can
support that, if we look back over the history of the dairy business
since deregulation, since 1994 the industry has been severely
constrained by competition law. If we are looking forward as to
how the industry might develop, then we would ask the Government
to look again at the way it applies competition law to the dairy
industry, in that it does not present any unnecessary boulders
in the way of development of the structures that we need within
our business.
Q31 Mr Wiggin: Have you talked to the
Competition Commission about this? Do you think that they would
stand in the way of that sort of integration?
Mr Sumner: We have not talked
direct to the Competition Commission about this particular issue,
but we did give evidence as an organisation when Milk Marque had
its inquiry. We had a slight concern that the competition authorities
do not always carry over one message to another. Another competition
inquiry that we gave evidence to did not know the outcome of the
Milk Marque inquiry, which gave us a little bit of concern. But
no, we have not given evidence to them, but we would welcome the
opportunity to do so.
Mr Brigstocke: From some informal
discussions, we have been led to believe that they appreciate
that the dairy industry has changed quite appreciably since the
demise of Milk Marque, and therefore it might be a fair time to
re-look at the whole situation.
Q32 Mr Jack: Just refresh my memory.
I thought that one of the main reasons why we got the changes
that occurred second time round was that the Competition Commission,
in their report, made adverse comments on the way that Milk Marque
abused its market position, and it jumped, if you like, before
it was pushed, and we ended up with the three co-op solution.
Perhaps you could refresh my memory as to where there are words
from the competition authorities to say "Thou shalt not vertically
integrate."
Mr Brigstocke: Mr Sumner's point
was that when we were giving evidence on a different inquiry,
the people asking the questions had been involved in the Milk
Marque decision and wanted to know our opinion as an organisation
about what had actually happened once Milk Marque had disappeared.
That was the point he was trying to make.
Mr Chadwick: I think you are right.
Milk Marque was found to have abused the thing. By the time the
Competition Commission came to that finding, it had already lost
its power and influence anyway, but I think what came out of it
was two things: one, the Competition Commission makes a decision,
largely on legal grounds as far as I understand it, and it never
returns and looks at the effect of its decision; there does not
seem to be any mechanism, from our discussions with them, by which
five years on they can look at their decisions and see what has
happened commercially, however justified legally. The second point
is I think they have certainly put the wind up the directors of
the co-ops—and I am not one—and certainly, rightly
or wrongly, it stopped them co-operating together.
Q33 Mr Jack: I come back to the question
I actually asked, which was that I do not recall having read anything
that said "Thou shalt not vertically integrate" in terms
of looking for this value chain. We will be taking evidence later
on from Milk Link, who have to a degree climbed out of the bargain
basement producer and are stretching up to do some production,
but what I do not see is a lot of evidence from the producer side
of moving rapidly beyond the basic commodity-type market into
value added. Is it feasible to do that?
Mr Brigstocke: I am going to ask
Mr Clarke, as a director of Dairy Farmers of Britain, to answer
that.
Mr Clarke: Firstly, I am here
as a producer, not as a director of Dairy Farmers of Britain,
but with the benefit of some of that experience, you are right
that the implication of the report was not to stop vertical integration.
The point I was making earlier was that, in the interpretation
of the legislation, which sets percentages for market share, in
the interpretation of what constitutes the market when you are
measuring market share, that is where we need to have a clearer
understanding. If you take a very narrow understanding of what
market share is, that precludes a lot of the collaborative work
that many producers want to see happen. If there is a will to
have the widest possible understanding of what is market share,
then the market structure in the country would develop in terms
of getting producer organisations and selling organisations down,
from many teams of different organisations not only to single
figures but down to two or three, to be more effective in terms
of their equal status relationship with the rest of the chain.
Q34 Mr Jack: We got into this inquiry
because there was a perception that farmers were not getting a
fair deal out of the existing supply chain, and you can either
fix that by getting more of somebody else's share, or by being
much more price setters for products than price takers. That is
why I am exploring what can be done, and I have to say I have
not had a clear indication, structurally speaking, as to why,
from the producer point of view, we can go further up the chain.
It may well be that there are capital constraints, but we will
come back to that. Let us talk about the question of profit. Dairy
farmers are very open people. The cost of producing milk is a
never-ending topic of conversation, but the margin, for example,
that other people make, either on the producer side or on the
retailer side, seems to be a hidden secret. We did actually get
some evidence from Robert Wiseman, who claim that their take is
relatively moderate; they are talking about a net margin of 2.2
pence per litre; Arla Foods quoted us a figure of 1.2 pence per
litre. Are those fair returns for those people, or are they being
greedy at the expense of the primary producer?
Mr Clarke: I do not think it is
a case of being greedy. I think people need to have a fair share.
I am not here to represent the two companies you mention, but
that would not be excessive, and it would certainly be our view
that producers, being at the bottom of the chain, take basically
what is left. If processors are in such a position that they are
only able to take that sort of margin from the retailer, it obviously
indicates where the remainder of the margin already is.
Q35 Mr Jack: Let us explore in a little
more detail. When I go into a supermarket and pick up a carton
of milk, I am sometimes quite shocked at how low the price is.
I can buy four pints in my local newsagent for 89 pence. How much
profit is my newsagent making out of that, and how much eventually
comes back to you?
Mr Clarke: I do not know what
the newsagent is making out of it. What comes back to me, as a
producer, not quite on the Fylde where many of your constituents
are but close to it, is as follows. We currently operate on a
margin, before management time, of 0.1 of a penny. That is what
is left after my milk price. That has not paid for my management
time, and it has not paid for my partner's labour in the business.
In terms of what is coming back to the farm gate price, with me
currently receiving 18.89 pence, it is not sufficient for my business
to make confident investments for the future.
Q36 Mr Jack: A moment ago when I quoted
the figures for Arla and Robert Wiseman you did not balk at it;
you did not say "My God, that is outrageous!" You said
that was supposedly fair.
Mr Clarke: If I could have a margin
of a penny, or a penny and a half, on top of my own management
income, I would say that was a fair margin as well.
Q37 Mr Jack: That is another 0.9 pence
a litre, if I have followed your mathematics.
Mr Clarke: I said the figure we
are at at the moment was before I paid for myself. I require another
1.5 pence to pay for my management time, so we are looking at
3.5 pence.
Q38 Mr Jack: Where should that 1.5 pence
come from?
Mr Clarke: That margin, I believe,
can be gained by the processor and the producer working together
in some sort of relationship to come from the retail sector. There
are certain cases where some differentiation, some better marketing,
can grow the various sectors of the dairy industry, and everybody
in the chain can have a fairer share. But in certain very competitive
areas—and I am sure Robert Wiseman will give evidence of
the fact that he sees liquid milk as a commodity area, as he has
said it before in public—there should be more margin coming
out of the supermarkets.
Q39 Mr Jack: What dialogue do you as
an organisation have with retailers and processors? Do they have
open discussions with you about what they are making out of your
products? You have been very open with us in telling us the numbers
that make sense to your enterprise. What dialogue do you have
with processors and retailers?
Mr Sumner: Chairman, I am not
going to answer your question directly but I would like to make
a comment. You were talking about price takers. Dairy farmers
are price takers. You made the point very clearly, and Robert
Clarke has given his example as a dairy farmer. The price of milk
is set by those that put milk on the shelves, and that seems to
bear no relationship at all to the costs that might be incurred
in the chain. There are, of course, three layers in the chain
that you have described: the producers, the processors and the
retailers. The farmer at the end of the day has to take the price.
We do talk to retailers, but we do not have any power because
as an organisation we do not sell any milk; we just represent
the interests of dairy farmers. We do talk to processors and to
retailers, and we try to explain to them the mechanics of the
dairy business, but at the end of the day, the five big supermarkets
drive the price of milk, and they impose on the industry, if you
like—and they will obviously have very strong reasons for
doing so—the price at which they will sell milk. You have
described the price of 89 pence in your local newsagents. Dairy
farmers have no contribution to that price at all, and maybe that
is part of the reason why we are all here.
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