Examination of Witnesses (Questions 65-79)
9 FEBRUARY 2004
MR JEREMY
POPE AND
MR BARRY
NICHOLLS
Q65 Chairman: Welcome, gentlemen. I know,
Mr Pope, certainly you were not here at the beginning. We are
trying to keep to half an hour per session. Obviously we are trying
as well not to go back over ground which covers your written submission
because of the shortage of time, but we hope that you will still
feel able to contribute as fully as possible. I think it would
be very useful if you briefly introduce yourself and your colleague
and say a few things about Milk Link, even though, I think, we
are fairly clear what you do and certainly all the other sessions
have seemed to defer to yourselves.
Mr Pope: Thank you, Chairman.
I am not sure whether I am grateful or rather daunted by that
introduction. My name is Jeremy Pope. I am Chairman of Milk Link.
I think I perhaps ought to declare one or two other interests.
I sit on Don Curry's implementation group, Sustainable Farming
Food, and I am also chairman of English Farming Food Partnerships,
which is designed to promote collaboration and co-operation, both
horizontally and vertically, within this country. Barry Nicholls
is our chief executive, and his antecedent history was in the
food industry rather than in the dairy industry. Chairman, just
by way of summary, as you know, Milk Link was established in the
year 2000 on the break-up of Milk Marque. We handle about 1.4
billion litres of milk. We have approximately 2,400 members. In
August 2001 we reorganised the structure of the co-operative along
continental lines, rather than what one might describe as the
Rochdale pioneer principles, and under that system we arranged
for there to be a differential voting system according to the
amount of milk consigned to the co-operative. We established members'
capital accounts and we withhold .5p per litre of the milk cheque
which is paid into that individual member's account; it bears
interest and is a fund which is available to them when they leave
or retire; and we also established a financial agreement with
all our members, under which there is a contingent liability if
we, the management, make us mess of it, under which they could
theoretically have 5 pence clawed back as security. With those
funds we have raised finance and we have purchased a number of
outlets initially, mainly in the longlife milk market, where we
now have a leading position, in business to business ingredients
and, more recently, we have bought two fresh liquid milk dairies
in the south-west, which is where the preponderance of our milk
is produced, where it is particularly high quality. I can leave
it there, if I may.
Q66 Mr Jack: If it is so good to co-operate,
how do you react to the data which has been put before the Committee
by the Federation of Milk Groups, who have stated to us that farmers
supplying direct to liquid dairies have, on average, gained more
than those farmers who supply co-ops? By way of illustration,
on the period September 2000 to July 2003 they provided us with
a table showing the price increase in pence per litre, and top
of the tree is Express Dairies (Arla, as they are now) and Wisemans
at 3p, and there is Milk Link, according to this table, at the
bottom, at 1.5p. Why, if co-operation is such a good deal, are
you at half the level of the increase of the others?
Mr Pope: I think you need to understand
the structure of the industry. The direct supply arrangements
operate usually on the basis that that supplier or that processor
buys in perhaps 75 or 80% of its milk requirements and buys the
balance either on contract or on spot. We have to collect all
milk that is produced by our members and we have to find a home
for it. If we have our own processing, then, in a sense, we will
be placed in exactly the same situation as some other milk processors,
and that is the whole ethos of what we are seeking to try and
establish so that the profitability from those activities goes
back to our members under a thirteenth payment. What we have already
done—and I think it is frequently misunderstood—is
that we buy on quality and we sell on volume. That, I am afraid,
is the way that the industry has been established, and a lot of
what we are trying to do is to break the fractions of milk so
that we do not effectively give away the quality for which we
have paid at a price which is volume-related only.
Q67 Mr Jack: So, if I have understood
you correctly, these were increases in farmgate prices that, with
your thirteenth payment, if one added that back in, the number
would not be one and a half, it would be a number greater than
that and would move you nearer to the dairy processors to whom
I referred?
Mr Pope: The answer is not yet,
because we still have a substantial amount of debt which we are
having to repay over a period of time in order to enable us to
develop the business in the way that is ultimately, we believe,
in the best interests of our members. What I would really like
to do is to let Barry add some comments to what I have already
said.
Mr Nicholls: A couple of points
I would like to make there. First of all, we do not publish the
price that we actually pay our members. The league tables would
make an assumption on butter-fat and protein thereby calculating
a price that we would, in theory, pay our members. It happens
to be that our quality is different to the national average, so
we are in fact paying our members a higher price as a first price
than perhaps the league tables would suggest we do. That is the
first point. The second point is that, generally speaking, I think
our price is very, very close to the price that certainly the
very close proximity major Plc processors to us are actually paying
their members. The third point is that our whole strategy is not
only about getting our members a fair first price for their monthly
milk check, but to be able to move into vertical integration,
to be able to earn the 2p that was being referred to that perhaps
Wiseman are saying the net margins are, for us to be able to pay
that back to our members as a thirteenth payment or a dividend
at the end of the year by way of their milk price.
Q68 Mr Jack: So your argument would be
that there are some long-term advantages, in terms of moving the
farmer up the value chain, to working with you in co-operation.
Even if today in absolute pence per litre there might be a small
disadvantage, in the long-term, if you are in it for the long-term,
it is better to co-operate with you?
Mr Nicholls: Correct.
Mr Pope: We believe it is essential.
Q69 Mr Jack: Is there any indication,
in terms of the ebbs and flows of where farmers are selling their
milk, to show that that message has got through to farmers—to
pick up a point that David Handley was making earlier about the
need for people throughout the industry to co-operate more—that
they are moving to you as a market outlet?
Mr Pope: What I would say there
is that we have not lost members. I think that as we unfold our
strategy and people see it working, then one would hope that there
would be a flow of people towards us; but the objective is to
process a substantial amount, maybe 80 to 90% of our milk, rather
than necessarily getting bigger for its own sake, so that we can
actually return those benefits to the members who wish to work
with us and through us.
Q70 Mr Jack: Why have you in your processing
so far restricted yourselves—and I ask this in ignorance—seemingly
to the commodity end of the dairy market?
Mr Nicholls: We have not actually.
Q71 Mr Jack: I am glad I said seemingly?
Mr Nicholls: The supply and demand
curve of milk—as you know, the supply peaks in the spring
and then falls away. The demand for milk is pretty flat. So the
first thing we needed to do in moving into processing was to be
able to balance the supply and demand, which we do through our
powder business, and we have also developed an ingredients business
on the side of that, which is pretty high added value ingredients:
yoghurts, soft-cheese, fromage frais—those types of products—which
we sell to companies like Heinz, Geest, Northern Foods, etcetera.
We have also acquired the major share of the longlife milk business
in this country, so we are supplying UHT longlife milk to the
trade. In addition, we have recently moved into fresh liquid milk.
We have a joint venture with Arla Foods, whereby we produce for
the joint venture at Staplemead (of which we own 50%) probably
about 50% of the country's fresh clotted-cream as well as added
value favoured milks and those types of products. We believe quite
strongly that the way to get our members a better milk price is
to move the milk in product form as close to the consumer as we
can get it and add value in that way.
Q72 Mr Jack: So let me just be clear.
You have taken the approach that the market place ultimately will
determine the price, but you are determined to get more of that
price for your members by the product range which you are developing?
Mr Nicholls: Yes; absolutely right.
Can I give you an example? Liquid milk is, to an extent, a commodity,
but we have recently launched a product—we licence work
with Nestle—
Q73 Mr Jack: Free advertising!
Mr Nicholls: Well, no, there is
an important point here actually. If Liquid milk in a supermarket
per litre is 50p per litre, if you can put it into an added value
form, you can brand it, add flavour, etcetera, to it, we charge
£1.20 a litre for it and consumers really like the product.
So it is in the format you put the product that is user-friendly
in terms of what the consumer wants to buy that will bring you
added value. So innovation is really important.
Q74 Mr Jack: Are you saying that innovation
together with co-operation moves you from the debate of arguing
about fair shares into something where, you would argue, dictating
more of your own policy is a better line of attack to the problem
of good returns or proper returns to the producer, rather than
arguing about fairness up and down the value chain?
Mr Pope: That is the policy that
we have adopted in our particular instance. We do not have a monopoly
of original thought in this area, but one other feature that I
would say has emerged from some of the research that we have been
doing within England Farming Food Partnerships says that at the
retail end of the market there is increasing consolidation. If
that is the situation, then, in order to react to that process,
the farmers need, in my judgment, to co-operate in order to facilitate
that process; and I think it is interesting that already the relationships
that our team have developed with major retailers is of a very
different sort and much less confrontational when they know that
what we are seeking to try and do is add to value for everybody
in the supply chain, them and us included.
Q75 Mr Jack: Can I ask one final question
at this stage? We have heard from our previous but one witnesses
that one is going out of milk, and we have heard other examples
of that. Given your achievements to date, have there been any
serious withdrawals from your supply side that, in spite of your
efforts to give what you would regard as a good return to your
members, that has not paid off as far as some are concerned?
Mr Pope: I think I am very worried
what will happen when the CAP reforms come in and single farm
payments replace direct subsidy. I think that there are really
quite a number of people who, at that point, will conclude, as
you yourself said earlier on, that there is not sufficient cash
to sustain their business and that they can take the single farm
payment without producing a single drop of milk. I think, ironically,
one of the problems of the market in this country is what ought
to be a parcel of shining gem in the Crown—and that is fresh,
liquid milk—because of its perishability has to be sold,
as you were saying about your lettuces earlier on, to where you
can get it. So unless you can convert it into a less perishable
product, you are very much at the whim of the commoditisation
of what should be a value added and a high value added product.
Q76 Chairman: Can I just make a quick
point on that and hand over to Bill to ask about the CAP. We have
all seen the operation of the Meat Livestock Commission, and one
could be critical about the degree to which it has effected change
in the provision of meat, but the one thing that always stands
out with regard to the MLC is it does a lot of number crunching,
it does a lot of work in terms of what the public's perception
is of red meat compared to white meat, and so on, and looks at
issues like elasticity of demand. I am not in any way being critical
of the Milk Development Council, but I cannot recall seeing the
same level of, if you like, intricate analysis of what the consumer
will really bear in terms of milk prices and would be prepared
to pay more if there were better value-added products. Is that
a criticism that you would feel—
Mr Pope: I would not like, necessarily,
directly to criticise the Milk Development Council, but I do think
it is quite interesting that, on the back of the formation of
the red meat forum, there is an equivalent now, a dairy forum,
emerging which all branches of the industry are involved with,
and it seems to me having a sensible debating forum that can look
at these issues is a more constructive way forward for the future
for us.
Chairman: Can we now look at the CAP?
Q77 Mr Wiggin: Can I just ask you: have
you made any assessment of the number of dairy farmers likely
to withdraw from dairy farming once we have direct—
Mr Pope: I think, unless and until
we know what the basis of the single farm payment is going to
be—is it going to be historic, is it going to be regional,
is it going to be hybridised—I find it very difficult to
know what exactly will occur. What I can say is that we would
be very worried if it became a regional only based payment, certainly
initially, given that many effective and efficient dairy farmers
have actually geared up their business in the anticipation of
what is going to happen, and I think that if they had a differential—I
cannot remember what the figure is. It is £300, or so, from
memory, a hectare, on a historic basis, for many of these people
down to about £130, if I have got the figures correct. There
is a substantial differential, which is probably less significant
in relation to arable farming, but in most of the livestock—and
obviously that includes the dairy sector—it could be very
significant.
Q78 Mr Wiggin: Will that create a shortage
of milk?
Mr Pope: I cannot answer that,
but I think that when we are a bit farther advanced. We need to
try and get some sort of handle on what will happen to our membership
generally. Anecdotally, a number of people who are at or near
retirement age have certainly indicated that they will probably
get out; and that is an issue that we have raised quite specifically
with government: because I think that there is a tendency to think
that farmers will hold on come hell or high water, and I do not
believe that that is necessarily going to be the case when the
basis of subsidy change is so dramatic.
Mr Nicholls: Could I add a point
here? There are two issues. One is the number of farmers farming.
The other is the volume of milk produced. We have had a number
of members who have retired or left Milk Link, but we have produced
more milk this year than in our whole history. I think there will
have to be a shake-out of the industry, but, if a lot of farmers
do leave, that does not necessarily mean to say there will be
less milk produced. We have 21,000 milk production factories in
this country, all going through to more or less supplying five
or six retailers. So I think one of the issues will be, and our
currency within Milk Link is, the volume of milk. So it really
depends on price as to whether there will be a major reduction
in terms of the volume of milk produced, even if a number of dairy
farmers leave or amalgamate or work together with other farmers
to make more efficient units.
Chairman: Could we look now at the structure
of the industry and your role as co-operatives, and, more particularly,
what may or may not help the vertical integration which seemingly
everyone is calling for. I will ask Colin to lead on this.
Q79 Mr Breed: Do you have any information
at all, can you give us any idea, what proportion of dairy farmers
actually sell their product to co-operatives as a whole? There
has been a lot of rationalisation in the last few years. You yourself
have been involved in that.
Mr Nicholls: About 45% of the
milk produced in this country is sold through co-operatives.
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