Examination of Witnesses (Questions 80-87)
9 FEBRUARY 2004
MR JEREMY
POPE AND
MR BARRY
NICHOLLS
Q80 Mr Breed: So it is getting up to
nearly half?
Mr Nicholls: Yes.
Mr Pope: I think one has to qualify
that. Traditionally a lot of the smaller producers have been in
the co-ops.
Q81 Mr Breed: When you are talking about
shake-out, that is a sort of euphemism for losing the smaller
farmer, is it?
Mr Pope: Well, not necessarily.
What I feel very strongly about is that in creating an organisation
such as Milk Link, notwithstanding the fact that there are differential
voting rights according to how much milk is consigned to the co-op,
those smaller farmers who wish to stay in production actually
enjoy the benefits of working with larger producers at the same
time because the dividend, if you will, is expressed exclusively
through the returns that they get on their milk, expressed as
either a first price at 17p plus per litre a thirteenth payment.
Q82 Mr Breed: You are obviously great
enthusiasts for the co-operative way. In your opinion, supposing
everybody, all dairy farmers, decided to sell through the co-operatives
as such, what effect would that have on the whole balance of power
within the total industry?
Mr Pope: Can I answer that? I
think it is quite salutary to look at the position in continental
Europe and, indeed, elsewhere in the world. At the present time
co-ops through their turnover account for about 50% of agricultural
production. In Sweden that figure would rise to 250% of the agricultural
production. So the opportunity for adding value there, I believe,
is huge by vertically integrating in that way. For instance, in
Denmark and Sweden, Arla are controlling, I think, over 90% of
the market; Danish Crown, in the pig market, about 95% of all
the meat and 100% of slaughtering; and there are analogues all
the way round the world where, for dairy produce particularly,
the co-operative model—and the co-operative model, incidentally,
which is organised on the basis of profit and not, as I was saying,
on the ideas of equality as per the Rochdale pioneers, the industrial
model—works very, very effectively.
Q83 Mr Breed: They have been going at
that a lot longer than perhaps after the MMB and such. Why do
you think that vertical integration is not just getting going
as quickly as I suspect you would want and everything else? What
are the barriers to that?
Mr Nicholls: Well, a couple of
points. Firstly, Fonterra is a vertically integrated farming business—probably
the largest dairy organisation in the world. The reason that vertical
integration works within the dairy industry is because milk is
a unique commodity unlike any other commodity in the food industry.
You cannot stop its supply on a daily basis, and you have got
to process it within 24 hours. There are very few products like
that. Therefore, you need to be able to couple your milk production
very closely to your processing operation. Of course, vertical
integration is nothing new in this country, because Dairy Crest
was the processing wing of the Milk Marketing Board. I sold, along
with others, 19 creameries from Unigate to the Milk Marketing
Board, which formed Dairy Crest. Dairy Crest was originally, as
I say, the processing arm of a co-operative.
Q84 Mr Breed: We know the history of
the Milk Marketing Board and where we are now. You must have had
some discussions with the Competition Commission in terms of how
they are beginning to view this whole thing. You talk about Fonterra,
90 odd %, and Arla and everything else. Do you think the Competition
Commission would currently stand in the way of further clear vertical
integration?
Mr Pope: I think it would be very
difficult for me to comment on that, but what we have regularly
pointed out to government is that the provisions of Article 33
of the Treaty of Rome has four aspects to it, that is to say that
the producer should receive a fair price for his produce, that
the interests of the supply chain, be it that of processor or
retailer, should operate effectively and equitably, and, lastly,
the consumer should expect to pay a reasonable price for that
produce. What appears to happen in competition policy in this
country is that there is a mesmeric preoccupation with the consumer,
and the other three arms of the supply chain, shall we say, are
imperfectly represented.
Q85 Chairman: Can I come in. I know Michael
wants to come back in. When we went to New Zealand and talked
to Fonterra, I think the one thing that interested us—I
will not say surprised us but really did interest us—is
the degree to which they were ruthless with their members, and
said, "Either you pay, as farmers, into this, and we will
build the capital base of this organisation, or we will all go
down the Swanny together." So it was a question of, "You
either back us or sack us; and if you sack us, you sack yourselves."
Are you being ruthless enough with your suppliers?
Mr Pope: I think we have been
very clear. I remember when we had the extraordinary meeting to
introduce our new constitution, somebody said to me, "This
is your last chance", and I said, "No, as a matter of
fact, it is your last chance, because if we do not get this right,
you will continue to be simply a broking agency and the ability
to add value will be zero or very, very limited." So we are
not in a situation as happens in quite the same way as New Zealand,
but I subscribe absolutely to the fact that, by being open and
honest with our members, we are much more likely to carry them
with us than being platitudinous about it; and I say all the time,
"If you do not like what we are doing, you sack us."
Q86 Mr Jack: Can I just ask for a commentary
from you about some of the forces that have shaped the price of
milk? We are inquiring into this because the dairy industry in
recent times, particularly from farming stand-points, had a difficult
period to go through, but in some evidence that the Committee
received from Robert Wiseman they said, "Since the deregulation
of the milk industry in the autumn of 1994, prices have been determined
on the open market." So their thesis, in that one sentence,
would suggest it is market forces which have determined the price.
Yet, if I look at the commentary in terms of evidence, we have
had a variety of perceptions on that, some of which say "retailers
being greedy", some say "processors being greedy",
some say "farmers not fully in control of what they are doing",
some others say "co-operation with strength leads to a better
price than we are getting". What is your perception of the
forces that shape the price of milk?
Mr Pope: I think that my perception
of that—and Barry might like to add to this in a moment—is
the fact that there has been surplus capacity. If I could read
you one issue out of a broker's note on Express Arla in September
of last year: "The industry is in dire need of this deal.
Margins have been headed one way only and the retailers have seized
upon the processors desperate battle for volume in this over-supplied
market, often playing them off against each other to secure better
deals for themselves. At the end of the day the retailers still
have considerable power in the UK and they too are consolidating
further." I do not subscribe to the view that we should go
in for retail bashing. The fact of the matter is that the retailers
had that opportunity and they used it; and that is what business
is about and the free market is about. So I think one can complain
about that, but I do think that getting the supply chain equation
or the supply demand equation into better equilibrium is likely
to have a significant effect, positively, one would hope, across
the whole piece.
Mr Nicholls: One of the difficulties
that the three co-ops had when Milk Marque was disbanded, and
even the problem that Milk Marque had, was that the negotiation
for the milk price in selling milk contracts for the year ahead
tended to happen at the end of March, beginning of April when
there was massive over-supply versus demand. So given that somewhere
between 60 and 80% of his direct costs are the raw material milk,
clearly it is in a processor's interest to have the lowest raw
material cost in order to be able to maximise the profit. What
has tended to happen has been that the profit within the supply
chain tended to be balanced back on the farmer; and the way to
turn that around is to do what we are doing, and that is to become
vertically integrated so as to be able to sell our products on
a balanced portfolio of products to the retailer in order to get
our prices up. But clearly milk brokers are at a disadvantage
negotiating a price in the market place when supply dramatically
outstrips demand.
Q87 Mr Jack: Can I ask, finally, we read
in our evidence that there is a need for more innovation in the
UK dairy industry. What are the main areas where you have spotted
that we could be more innovative? What are we missing out on?
What are British consumers not getting that others are getting
that seems to have the holy grail that, if we can only get there,
there will be lots of money, lots of value added and lots of happy,
smiling faces?
Mr Pope: I do not think you would
expect us to lay bare to you all our proposals for product development,
but we have talked about licensing products from elsewhere—the
Nesquik quick product—we have talked about trying to get
some category management into the longlife milk market which has
been seriously misunderstood; we have a series of other issues
that we are looking at, specifically not to try and take on the
world but to look for the issues that really enable us to develop
a leading position: because all the evidence that I have seen
in relation to this is that, unless you are at or very near the
top of a sector or a category, then you are following the whole
time. I suppose that the classic case would be yoghurt, where
the UK industry has really largely lost out to Muller, and
the second biggest supplier to the retail trade, Yeo Valley, down
in Somerset, who have been fantastically innovative in the way
that they have developed their production range; and I admire
that sort of lateral thought process that we think that we have
got to develop. Where we are at the moment is having to move,
not against the interests of our members, but from being a member
centric organisation into something which is much more market
orientated and market driven; and there, it seems to me, the ultimate
benefits flow through to our members. If we are constantly thinking
about membership issues, which are very important and need to
be communicated and so on, I think we would fail.
Mr Nicholls: It is also about
adding other things to milk: fruit to yoghurt, juice to milk,
or even soya to milk. If you look at the spreads market, one of
the highest added value markets, it is the one area in the dairy
industry in which milk has met margerine, so to speak, butter
has met margerine.
Chairman: Thank you gentleman. You have
been especially good, precise and to the point. As I have said
to previous witnesses, what you have said cannot be unsaid, but
if you wish to supplement what you have said, particularly after
we have heard from other witnesses in other parts of the industry,
it will be very useful. Can I also thank my sub-committee for
keeping to time. We are only a minute over, which is a miracle
in the history of Efra.
Mr Jack: Brilliant chairing, Chairman!
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