Memorandum submitted by Robert Wiseman
Dairies (L23)
SUMMARY
Robert Wiseman Dairies' primary concern is to
support the economic stability of its own business, and by implication,
the sustainability of its raw milk supply. We recognise the need
for profitability throughout the industry, to allow for reinvestment
and growth. The advent of CAP reform measures will undoubtedly
put downward pressure on raw milk prices, which will lead to a
significant restructuring of the dairy farming sector. We have
always paid raw milk prices which command significant premiums
over the average and will continue to do so in order to help our
suppliers achieve profitability in the post CAP reform environment.
1. ROBERT WISEMAN
DAIRIES
This document is the response by Robert Wiseman
Dairies to the inquiry by the Environment, Food and Rural Affairs
Committee into the market price and farm gate price of milk.
Robert Wiseman Dairies is a milk processing
company based in East Kilbride, Glasgow, Scotland. We process
just over 1 billion litres of milk per annum for the liquid market
of the United Kingdom. Over 80% of our product is sold to the
major multiples, with only 4% on the doorstep and the balance
into the independent "middle ground" sector. We have
processing sites in Aberdeen, Glasgow, East Kilbride, Manchester
and Droitwich.
We buy the majority of our raw milk from three
direct supply groups and the balance from two farmer co-operatives.
Because of our business profile and our efficiency,
we have consistently paid milk prices within the top quartile
of any league table. We have worked closely with major supermarkets
and farming unions in recent times to facilitate where possible
increases in milk prices to dairy farmers.
2. TERMS OF
REFERENCE
The terms of reference for the inquiry are:
"The Committee will examine the market price
and farm-gate price of milk, and will investigate why recent rises
in the former have not led to increases in the latter".
As members of the Dairy Industry Association
Ltd (DIAL), we support the submission made by them in respect
of this inquiry and in the interest of brevity, in this submission
purely refer to additional points or clarify points of particular
interest to our specific marketplace. Until prompted, we were
happy that the DIAL submission was a fair reflection of the industry
position and thus felt no need to comment further.
3. UTILISATION
OF MILK
AND PRODUCER
RETURN
With a business dedicated to processing milk
for liquid consumption, predominately to the major multiples,
we have been able to reflect recent transparent milk price increases
from the multiple sectors back to our direct suppliers and the
co-operatives. The only element of complexity has related to the
degree to which all our customer prices have increased, and the
pooling effect this has had on our raw milk price. For information,
we detail below the mix of our business expressed in a similar
manner to the table on page 4 of the DIAL submission.
% OF PRODUCER
INCOME ACCOUNTED
FOR BY:
| Liquid | Doorstep
| 5 |
| Top six multiples | 60
|
| Other multiples | 22
|
| Independents | 13
|
| |
|
As a result of this mix, we were able to pass back a 2.8ppI
increase to all our suppliers from retailer initiatives announced
between October 2002 and July 2003.
4. PRICE DETERMINATION
AND THE
ROLE OF
COMMODITY PRODUCTS
Since the de-regulation of the milk industry in the autumn
of 1994, prices have been determined on the open market, with
the exception of the intervention of retailer initiatives most
recently in October 2002 and July 2003. The strength or weakness
of that market was determined by the commodity product sector.
Any market changes observed in that sector are reflected in the
liquid sector, milk prices rising or falling accordingly. The
difference in the price of milk for commodity products and milk
for the liquid markets will vary both between companies and between
products. But in general short shelf life products have paid a
premium for raw milk over longer life products due to the necessity
for fresh milk, and the service or profile required. The variability
of this differential is a function of competition to prevent the
undermining of the marketplace as referred to in the DIAL submission—page
5: paragraph 38.
5. FAIRNESS OF
THE RAW
MILK MARKET
Determining the value of a product by the strength of the
market into which it is sold, and the value of any additional
service required, is an acceptable method of trading throughout
the dairy industry. The raw Milk market should be no different.
Recent problems have occurred as a result of sectors of the market
moving away from this principle in the interest of boosting returns
to farmers. Whilst a worthwhile gesture and one that could be
sustained within the retail price levels, it has caused confusion
and mistrust in the way in which such increases have been passed
back to farmers. Such a principle could only be sustained with
regulatory intervention or unparalleled Industry agreement, which
could create OFT concerns.
6. WISEMAN FINANCIAL
RETURNS
Annexed is a graph setting out Wiseman's operating profit
per litre over the last six and a half years. Net margins have
stayed within a range of 2.34-3.13 pence per litre. We believe
this demonstrates clearly that certainly Wiseman has not profiteered
at expense of milk price to farmer.
February 2004
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