Examination of Witnesses (Questions 140-149)
1 MARCH 2004
MR DRUMMOND
HALL AMD
MR DAVID
LATTIMORE
Q140 Mr Breed: You have rather helpfully
put a point in your evidence to us, a section on the implications
of CAP, although you said you are not embarking on a detailed
analysis of this highly complex topic in relation to the pricing
issue, which of course is the fundamental thing that we are talking
about. Nevertheless, the last bit I just want to perhaps expand
on. The report goes on to explain that in this context "most
efficient is largely synonymous with larger herds. Again, these
factors are part of the reality that the UK dairy sector will
have to face up to collectively over the coming years". Do
you have an idea of what you believe the optimum sort of average-sized
herd is likely to be?
Mr Lattimore: No, I do not think
there is a standard model for that, because you have to look at
the individual circumstances of the farmer concerned. However,
there is some evidence in our personal experience that producers,
farmers, will get to a certain level and then find that they actually
do not get any further efficiency gains.
Q141 Mr Breed: The law of diminishing
returns?
Mr Lattimore: Not necessarily
diminishing, but static, so it is hardly worth them investing
more, but it does depend very much on where they are, how they
operate, and also to some extent the markets that they are supplying.
Q142 Mr Breed: Whilst not getting down
to the exact number of cows, could you give us a range that might
be the optimum level?
Mr Lattimore: That is an extremely
difficult question to answer. There are producers that can operate
at 500/600 cows and seem to benefit from the efficiencies at that
level, but there is some doubt as to whether, moving on to perhaps
1,000 cows, the benefits would show at that sort of level.
Q143 Mr Breed: That is fine. Just briefly,
again, if we are talking about the efficiencies of farmers having
to get together, some going out and selling their holdings, all
that sort of thing, what about the processors? I suspect you are
going to be under a bit of pressure as well. So what sort of plant
are you going to close down, and what sort of efficiencies are
you going to have to undertake in terms of a response to this?
Mr Hall: Can I make two replies
to that question. One is, in terms of efficiency, undoubtedly
we will have to become more efficient in our operations. Without
sounding complacent, we have already invested a huge amount of
money in our business to get ourselves in shape for that. In the
last four years we would have invested £200 million in capital
investment; we have constructed two very large super-dairies.
We are currently just finishing investing £50 million in
a very large cheese creamery at Davidstow in Cornwall; so we believe
that we are well ahead of the game in terms of that investment.
However, we will have to continue to take cost out. Probably the
next area is going to be areas like distribution, particularly
ex-farm milk haulage, where we are working with one or two of
the co-ops to take out milk collection from on-farm. Also—I
am sorry for sounding like a broken record—I come back to
the fundamentals: we have to add more value. If we simply become
more and more efficient in taking cost out, that will be necessary,
but it will not be sufficient, so we have got to have a better
mix of added-value product in the country.
Q144 Chairman: You heard the question
I asked Wisemans about the 14 pence proposal that has been made
by MDC. What is your view on that? Obviously farmers would say
that is completely unsustainable. Is that your view?
Mr Lattimore: I think if you look
at our experience historically, where we had major shocks—BSE,
foot and mouth, or whatever—that has done serious damage
to the whole of the industry. One of the things about the supply
chain forum, where everybody is coming together to try and find
some longer solutions, is that that body in my view and our view
can actually start to get some of these figures together and put
these scenarios out, so that price does not have to dip to let
us say to 14 pence, cause a lot of damage, and then bounce back,
so that we have some knowledge about how we might be able to influence
and manage some of these issues in the future, as an industry,
not as individuals. Historically it shows that with processors,
retailers and farmers separate, we do not do as good a job as
potentially we could do if we were together and, as we see with
colleagues on the continent, how better they sometimes do things
because they tend to work together, particularly farmers and processors.
Chairman: That takes us directly into
what Michael will no doubt ask you.
Q145 Mr Jack: This cosy, nice warm world
of partnership and transparency in discussion sounds all well
and good, but the impression I gained from reading the evidence
to date is that we would not actually be talking about higher
prices for milk, had it not been for that grumpy minority of farmers
who demonstrated and made a big fuss. Eventually it was more the
moral of the situation than the economics that seemed to decide
that supermarkets would pay more in the first instance for liquid
milk, and then there had to be a second round of sabre rattling
before they came to the party for cheese. So if you want to see—as
you say in paragraph 10 of your evidence—a move away from
the institutionalised antagonism, how do you achieve that, against
the most recent background, where what price increases have occurred
seem only to have resulted from a good old bout of antagonism?
Mr Hall: Perhaps I can deal with
that, then ask David to supplement it. The price increases that
have occurred have actually occurred on the back of market fundamentals.
The reason that the prices have been able to move up is that the
floor price moved up on the back of intervention, milk pricing
having moved up and setting the floor in the market, and a base
from which prices could rise. The cheese issue was entirely down
to the tightening of cheese stocks. If you were to go back three
years, as I say, we had a collapse in cheese prices. Cheese prices
in fact fell by something like £600 a ton, which, expressed
in milk equivalent, would be about six pence a litre, and we did
not take our prices down to farmers by anything like that, because
we wanted a sustainable future. The main driver for that was a
very, very high level of cheese stock, it took a very long time
for industry cheese stocks to work their way out of the system.
What you then saw going into September was increasing tightening
of that cheese stock, that first happened in the earlier part
of that year. It is fair to say Mr Handley popped in on the back
of that.
Q146 Mr Jack: You would suggest that
he and those who follow his line have been opportunists?
Mr Hall: If the market conditions
had been different those price increases would not have happened.
Q147 Mr Jack: In terms of the dialogue
which you advocate to get rid of this institutionalised antagonism
when there was a fall in the market because the currency changed,
started to alter who made the first phone call, was it you to
your customers saying the market is now shifting we need to discuss
price, because it is unusual for buyers in supermarkets to pick
up the phone and volunteer out of a spirit of generosity, recognising
the irresistible forces of the market place, to want to pay you
more?
Mr Hall: If you take the example
of cheese that is exactly the role of our cheese traders and our
cheese sales force, to read the market, judge whether it is moving
and go and have those first conversations with retail buyers to
get the price moving, and that is exactly what happened in this
case.
Mr Lattimore: Can I come back
to you on the fundamental point, if you were to talk to anybody
representing the farmers side of the industry they would agree—and
I would include David Handley in this—industrial action
of one sort or another is not a long-term solution, and they are
seeking long-term solutions as much as anybody. We have a vehicle
in the Supply Chain Forum to try and build trust and confidence
going forward, looking at history is not going to help us at all
because that clearly does not work. We believe the Supply Chain
Forum does present with an opportunity to try and build that trust
if we are going to make this work going forward.
Q148 Mr Jack: You would suggest that
the Supply Chain Forum is the antidote to the suggestion of those
who put forward an idea of a regulator body for the industry?
Mr Lattimore: As far as the regulator
is concerned there are two points Dairy Crest would make, first
of all regulators do not always operate in the way that you might
expect them and they may seek to take a view more in terms of
markets and consumers rather than in terms of farmers and invariably
it will involve everybody in more bureaucracy rather than in marketing
the products and perhaps making ourselves more efficient.
Mr Hall: From our perspective
we must remember a large element of our competition sits abroad,
with a large amount of cheese imported into the UK, and what we
could not have is one rule for us here in the United Kingdom and
a different set of rules in the rest of Europe.
Q149 Mr Jack: Can you just say a bit
about the Supply Chain Forum, who is on it? What does it do? When
does it meet? What powers does it have?
Mr Lattimore: I am sure Defra
would answer this more efficiently than we can. It represents
a broad church of the supply chain within the dairy industry from
retailers to producers' organisations to processes and to individual
groups. They have set up a number of individual sub groups on
marketing and innovation, industry development and the idea is
that these sub groups meet, come up with initiatives, ways forward,
examine opportunities and then report back to the main group.
I think in the longer term it is envisaged that the group rather
than being chaired by Lord Whitty or a representative of the Government
would actually become an industry body and that would mean the
industry working together.
Chairman: If you wish to contribute to
anything that you think needs further explanation feel free to
do so, however what has been said must remain said. Thank you
for your evidence.
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