Examination of Witnesses (Questions 229-239)
8 MARCH 2004
MR JOHN
DUNCAN AND
MR DAVID
STRANG
Q229 Chairman: Good afternoon, everyone.
If we could make a start. This is the third evidence session that
we are having and some you know the score very well, but I do
not know whether either Mr Duncan or Mr Strang have been with
us in previous sessions. The aim is to get through four different
sessions of evidence as expeditiously as we possibly can, but
obviously to try and build on the evidence we have had so far.
Please accept that our questions are going to be somewhat brief
and brusque; it is not in any way meant to be insulting but it
is in order to get through everything as fast as we possibly can.
We have got a replacement witness so it would be useful, Mr Duncan,
if you could say who you are and what your organisation is and
then Mr Strang could introduce himself.
Mr Duncan: Chairman, thank you
for your introduction. My name is John Duncan and I am the Chairman
of the Federation of Milk Groups. You may know that the Federation
of Milk Groups is an umbrella organisation representing milk sellers,
mainly the four GB Co-ops, GB and Northern Ireland. I make apologies
for my colleague, Malcolm Smith, who is unable to attend, but
this is David Strang. Mr Strang: I am David
Strang. I am a solicitor and partner with a law firm called Barlow
Lyde & Gilbert. We are long-standing advisors to First Milk.
Q230 Chairman: If we can get straight
into this. Clearly you may have heard some previous sessions on
this but can I just ask the most obvious question: why do you
think farmers are always alleging that the price of milk paid
to them is that much lower than the retail price of milk? If that
is a given, why is that so? Mr Duncan: I think
that is a question that has been posed by dairy farmers for as
long as I have been involved in the industry, some 20 years, and,
indeed, before the deregulation of the Milk Marketing Boards.
The dairy farmers at that point in time believed that the milk
price doubled within two days of leaving the farms, and clearly
from that point in time wanted to see their business involved
in milk processing. You will be aware at that point in time in
the South that the Milk Marketing Board of England and Wales owned
a business which had become Dairy Crest and in Scotland the corresponding
board owned Scottish Pride. The problems all started with deregulation
when there was an insistence that the continuing Co-op organisations
divested themselves of the processing arms. That is where the
problem arose.
Q231 Chairman: So do you think matters would
be helped if there was a regulatory body to arbitrate on these
differentials in milk prices? I should have said in my initial
remarks that, of course, it is the rate of increase rather than
the actual milk price. Should there be a regulatory body in this
industry that actually looks at why there is such discontent among
farmers and why retailers just say "that is the market price"
and that is what we have to accept?
Mr Duncan: The
problem is that we have a market price but the market price can
differ depending on to whom the dairy farmer is selling his milk.
It can differ by three to four pence per litre, which in percentage
terms is very significant. Would a regulator assist? Clearly it
would depend on the terms of reference. It is quite difficult
to see how at this stage, given the evolution of the industry,
particularly the processing and retail sectors, one would find
a role or remit for a regulator.
Q232 Paddy Tipping: In
your evidence you talk about the possibility of a two-tier, dual-price
dairy farming sector with one level of producers directly supplying
dairies and the others maybe going a different route. What are
the consequences for people who, in a sense, are at the bottom,
the people who are not getting as much price?Mr Duncan:
The consequences are that in due course they would find themselves
being exposed purely to the returns from the commodity end of
the market. As we move into CAP reform, which is going to deliver
reduced intervention prices, reduced access to intervention, then
the greater pressure to exit the industry would be felt by those
producers.
Q233 Paddy Tipping: Are
they going to survive? What is your prognosis? Mr Duncan:
To whom are you addressing that, ourselves?
Q234 Paddy Tipping:
Those producers that you have just been talking about supplying
the commodity end because they face some pretty severe world competition,
do they not? Mr Duncan: I am suggesting that
is a potential, it is not a given at this point in time. Were
we to see this situation developing then, yes, I think we could
see a very significant exit from the industry.
Q235 Paddy Tipping:
One of the things you could do, to go back to your opening
comments, would be to vertically integrate again. Clearly you
have got strong views on this. What discussions have you had,
say, with Defra or the competition authorities around that prospect?
Is it a runner? Mr Duncan: That is a fundamental
objective of all of the major Co-ops in the UK, to do that. I
know you have heard evidence from Milk Link, who have achieved
a degree of success going down that route. For others in the Co-op
it is more challenging because of the consolidation that we have
seen in the processing sector. At this moment in time opportunities—I
do not overstate it or understate it—do not grow on trees,
they are exceedingly limited. Of course, with the consolidation
the value of businesses becomes that much greater. What approaches
have we made? We gave some supporting evidence to the Curry Commission
in its early days. I have not gone to the Competition Commission
but certainly individual farmers and other groups of farmers have
gone to them and posed these very questions. The issue of the
restriction by competition on the development of Co-ops is one
which does test us. I will pass that to Mr Strang. Mr
Strang: I think it has been an issue which has vexed the
dairy industry since the deregulation and prohibition of vertical
integration then and since the demise of Milk Marque. There is
no simple answer. There has been some limited discussion with
the Office of Fair Trading that a number of people have had, rather
than the Competition Commission I would say. I think their attitude
is that in theory they are not uncomfortable with the idea of
vertical integration but it very much depends on the individual
circumstances, so I suspect that in different parts of the country
the answers will be different because they have a different experience
of conditions of competition. Chairman: We will look
at milk prices and efficiency next.
Q236 Mr Wiggin: I wonder
if you could tell us a little bit about why New Zealand is able
to make a profit where the farmgate prices are less than half
of those in the EU. Can you also say a little bit about efficiency
and what steps are being taken by your members to improve efficiency
in milk production? Mr Duncan: It is an interesting
comparison. I think one comfort that UK dairy farmers have is
that New Zealand is 12,000 miles away. They have got a clear climatic
advantage. They have got a huge operational scale. If you look
at the average size of New Zealand dairy farming units they are
somewhere above 300 cows. If you compare that with Europe, I think
the lowest average herd size in Spain is 18. There are huge advantages
of scale. Similarly, their production is very much grass-based,
given that grass grows close to nine months of the year, and they
have huge investment in processing and, of course, the fundamental
advantage is that approximately 96% of New Zealand milk is collected
from farms, processed, marketed and sold by one Co-op.
Q237
Mr Wiggin: What about efficiency in the UK? Mr Duncan:
The UK, in European terms, and I think we have evidence to show
this, is clearly the most efficient. We have the largest herd
size.
Q238 Mr Wiggin: What is it? Mr Duncan:
Figures from 2001-02 suggest the figure is on the top side of
70. In Scotland it is over 100. Ireland is 30, yet Irish dairy
farmers appear to achieve higher milk prices. What is happening
about efficiency is the latest Colman-Harvey report[1]looking
into UK dairy farming costs over the course of the end of last
year showed that the average cost of production across 400 England
and Wales dairy farms was about 18 to 18.5 pence per litre. Three
years ago, when they last did that analysis, the cost of production
was 21 pence. I think there is no denying the fact that UK dairy
farmers have been driven down the efficiency route.
Q239 Mr
Jack: Just to follow on from an earlier point you were making
about where you saw prices going in the light of the reform of
the CAP and the figures you have just given, do you think that
UK dairy producers, farmers, can actually lower their costs to
the levels required to stay in business, even the most efficient
ones, in the light of about 21 to 17 to 18? Down to 14 is a big
change. How is that going to be achieved? Mr Duncan:
I think we should be careful and not assume that because in a
certain set of given circumstances the support mechanisms may
go down to 14 pence that that, in fact, would be the price that
UK dairy farmers would need to survive. Certainly as a representative
organisation we would be looking at avenues to ensure that prices
were not driven as low as that. What steps are we taking? To come
back to UK efficiencies, one of the elements that has come out
of the Colman-Harvey report is that over that period in time the
average herd size in the UK has increased significantly, so they
are assuming a direct correlation between efficiency, ie a lower
cost of production, with the herd size starting to increase, but
the backbone to the UK dairy farming sector would still appear
to be the family dairy unit, but a family dairy unit effectively
run—I say this with respect—on more business orientated
terms that in the future, family business units, averaging around
150 cows.
1 (Colman and Harvey) February 2004, The Future
of UK Dairy Farming, available at http://www.defra.gov.uk/foodrin/milk/colman-harveyreport.pdf Back
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