Supplementary Memorandum submitted by
the Federation of Milk Groups (L14a)
ADDITIONAL POINTS OF RESPONSE / COMMENT TO
THE COMMITTEE
The attached paper has been generated in response
to the arguments and positions forwarded by the various groups
and organisations to the committee via the first oral evidence
session, and addresses a number of key structural points and arguments
that we (FMG) feel need to be considered.
We would ask the committee to take into account
these points, and to view them as additional arguments to those
already outlined in our original submission.
POINTS OF
RESPONSE/COMMENT
1. UK retailers currently retain a significant
and disproportionate margin on dairy products. Clearly, in order
to drive such margins, the supply chain in its current structure,
is geared to drive benefits away from the farm gate.
While competition and profit maximisation are
the fundamental building blocks of modern commerce, the major
concern for FMG and its members, is that under the current supply
chain structure, the operating environment prevents the market
from working in a balanced, free-flowing commercial manner—leading
to a situation that prevents the bulk of milk producers from securing
returns and also one that increasingly fails to the cover average
costs of production at the farm gate.
It is the view of FMG, that a far greater and
genuine sense of co-operation and structural transparency must
be adopted within the supply chain, to deliver a fairer and more
equitable distribution of margins and profits.
2. There is evidence that dairy imports
continue to severely undermine the value of UK dairy produce.
A central factor in this negative process is the inconsistency
in the enforcement of farm assurance regulations.
The UK dairy industry is, in our view, quite
rightly subject to strict farm assurance regulations and quality
guarantees. Retailers and the dairy industry, including ourselves,
work extremely hard to ensure that the strict checks and balances
with regards farm assurance are upheld and adhered to. Assurance
comes at a price, and that price is obviously added and calculated
into the unit costs of dairy production.
It is our view, that with regards farm assurance
and quality guarantees that the UK dairy industry is systematically
and continually undermined, as retailers have failed to ensure
and enforce equally strict farm assurance schemes on imported
dairy products.
We also would urge that assurance/legislation
be adopted that would ensure all imports are of an equal standard,
as determined by the British Farm Standard (Red Tractor) and that
all UK farm produce be required to carry the Red Tractor logo.
This has additional benefits of protecting both consumer and farmer.
3. Recent "retail pricing initiatives"
have not delivered what they promised, with critics from within
some sections of the "producer" community claiming that
they have simply served to pass further control with regards milk
pricing into the hands of retailers.
While pricing initiatives have offered some
temporary relief to dairy farmers, this has not been evenly spread
across all sections of UK dairying. In the UK, milk processors
by choice pay higher prices to direct suppliers to the detriment
of the bulk of milk producers (co-operative members). It is reasonable
to suggest, that this pattern may lead to a market that operates
exclusively for the benefit of a selected few, with the majority
of milk producers being excluded access from the value added market
(liquid milk)
Suggestions have been made that this is leading
to an unmanageable, two-tier, dual-price farming sector.
The reality of the situation is that while those
producers that deal with liquid processors directly, because of
the location of their farms, can enjoy higher returns and the
associated benefits, whereas those farmers that are unlikely to
secure a direct supply contract with one of the main liquid processors,
are in effect restricted from maximising the profitability and
development of their business.
It is the view of the FMG, that in order to
level this situation, structural change with regards ownership
of key points within the supply chain must be allowed to evolve
and take place during this critical period in UK dairying.
This calls into questions current UK rules with
regard competition law, and more specifically, competition rules
concerned with vertical integration.
It is the view of FMG that it is only right
and fair, that UK competition law applies consistently throughout
the supply chain, specifically from the bottom up (producers)
as it currently does from the top down (retailers).
4. Finally, and looking in more detail at
the above point: it is the view of FMG that current, strict, UK
Competition law has made it extremely difficult for milk co-operatives
to vertically integrate.
The high cost of pursuing potential vertical
integration opportunities are persistently overshadowed with the
fear that where opportunity exists to secure and build a more
viable future for members/dairy farmers, that the potential opportunity
will ultimately be blocked and rejected under current competition
rules.
It is imperative at this crucial time for the
UK dairy industry that farmer co-operatives be legitimately free
to pursue reasonable and justifiable vertical integration opportunities
in line with other co-ops and multi-national dairy businesses
(eg Arla, Fronterra) operating in the major dairy markets, including
Europe, Scandinavia, North America and the Southern Hemisphere.
3 March 2004
| 
