Examination of Witnesses (Questions 150-159)
1 MARCH 2004
MR NEIL
DAVIDSON AND
MR PETER
WALKER
Q150 Chairman: Gentlemen, you know the
process you are entering into now, you have seen the previous
two evidence sessions. If you can introduce yourselves then we
will get into the session.
Mr Davidson: I am Neil Davidson,
Chief Executive of Arla Foods UK plc.
Mr Walker: I am Peter Walker,
Milk Buying Director for Arla Foods UK plc.
Q151 Chairman: Let me start with the
question I have asked the other two processors, which is the allegation
or the fact that has been presented to us by the producers, the
farmers that when there is this increase in the retail price it
does not backwash in terms of a better position for the farmers,
why is that so?
Mr Davidson: We can only say that
we have passed back everything we have received from the retailer,
equally you can see a rise in milk price over the last two and
a half years as a result of that. Our milk price is three pence
a litre higher than it was one and a half years ago to our farmers.
Q152 Chairman: You tracked this, it would
be interesting to let us know how you communicate with your farmers.
Mr Davidson: We have a unique
organisation within our relationship with farmers, we have two
unique relationships, one with our direct suppliers who since
deregulation have been members of what is now the Express Milk
Partnership and soon to become the Arla Milk Partnership, that
is a body where we sit round the table virtually every month with
our farmers and discuss industry issues. They negotiate every
aspect of the contract, including the price on behalf of their
members and you cannot have a direct supply contract with us unless
you are a member of the partnership. It is akin to a closed-shop
arrangement, if you like, and it has worked very effectively over
the last 10 years. We also have a unique relationship with one
of the co-ops, Milk Link, with whom we have a strategic alliance.
In terms of communication and working with farmers we have established
the mechanisms and the structures in place to enable that to take
place.
Q153 Chairman: Can you say more about
the strategic alliance, why did you form that and what advantage
did you get?
Mr Davidson: We had a set of assets
which Milk Link particularly wanted and we agreed to sell them
those assets, but there is far more to that partnership. We made
them preferred suppliers to our business, particularly in the
south alongside our Express Milk Partnership members and we set
up a joint venture where we are starting to develop value-added
products for the UK retail market on a joint basis.
Q154 Paddy Tipping: Talk to us a bit
about liquid milk and the profit you are making per litre, you
have heard the other people, are you comparatively in that position?
Mr Davidson: Not dissimilar. If
you take our accounts for last year and divide by the number of
litres that we bought then one and a half to two pence a litre
is what we made on milk.
Q155 Paddy Tipping: Why is there a variation
between the different companies we have seen? Dairy Crest told
us that they made their profit out of added-value. You are at
the lower end of the figures we have been given, why would that
be?
Mr Davidson: We would have to
say whether we are comparing apples with pears and I cannot answer
that question. Different companies have different product mixes.
We are predominantly in the liquid milk market but not totally,
Dairy Crest have a wider spread in this country. There will be
variations based on product mix.
Q156 Paddy Tipping: You mentioned there
have been price rises in liquid milk I got the impression you
passed that all back to your producers?
Mr Davidson: That is correct.
Q157 Paddy Tipping: It has not made any
difference to your profit margins?
Mr Davidson: Margins have gone
down. In absolute cash terms, no, it has made no difference at
all.
Q158 Paddy Tipping: How are the retailers
doing, the big supermarkets? What do you think they are making
per litre?
Mr Davidson: I think the figures
which were talked about earlier are accurate, they have come out
with the same report and I think they are accurate. Milk takes
up chilled space in the supermarket which is expensive space for
the retailer. I think the figures are there and net margins are
also as described.
Q159 Paddy Tipping: You would not subscribe
to the view of some producers in effect that producers are being
ripped off by the supermarkets?
Mr Davidson: No, I would not at
all. There are separate markets, there is the market for raw milk,
there is the market to sell liquid milk to retailers and then
there is the market for retailers to sell to their consumers.
The dynamics of each leg in the chain are different. In the raw
milk end there is clearly the CAP, CAP has the biggest single
influence on milk pricing in this country, which I think we included
in our submission. To put some meat on those bones then the floor
price determined in euro has not changed since February 1995 but
the translation in sterling has been anywhere between 14 pence
and 22 pence a litre, that is purely currency based. Our farmers
are uniquely exposed to that currency risk, nowhere else in Europe,
except perhaps Sweden, is any other group of farmers exposed to
that risk. The CAP just simply does not work in this country protecting
farmers' income, which is what it is supposed to do.
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