Examination of Witnesses (Questions 240-254)
8 MARCH 2004
MR JOHN
DUNCAN AND
MR DAVID
STRANG
Q240 Mr Jack: What I am
intrigued to know is where you think the further efficiencies
are likely to come from? Mr Duncan: I am not
suggesting that there will be that many more efficiencies to be
driven out of the UK average dairy farm. I can assure you that
in speaking to many dairy farmers, every time they hear talk of
them becoming more efficient it means surviving at lower prices.
That is the context in which that seems to be accepted. If we
look at the structure of the UK herd compared to our main competitors,
UK competitors—Ireland, France, Germany, Holland—we
have a stronger farm structure that should ensure that we can
survive, that is if we can see this proverbial level playing field.
Q241 Mr Jack: Are we as productive as the major European competitors
because we seem to have an abundance of natural advantage, particularly
on the western side of the United Kingdom? In fact, within the
Community the three most efficient producers should be Northern
France, the West of the United Kingdom and Ireland, yet here we
are saying can we hang in there and we have got everything going
for us. That is the bit I find is a paradox. Mr Duncan:
I think what is interesting in looking back at the average prices
that have been paid to British dairy farmers compared to Irish
and the main European ones, which I mentioned, over the course
of the last six years is in five out of these six years British
dairy farmers have had lower prices. Lower prices than our Irish
competitors who have a much smaller herd size where for every
litre that is consumed domestically seven litres is exported,
so it goes on to either the world market or back into the UK and
yet they have been able to pay their producers a higher milk price
than we have been able to achieve in the UK. What does that tell
us? I think it focuses on the structure of the industry.
Q242
Diana Organ: You hinted in response to Michael Jack that the
larger units have cottoned on to how to become more efficient
but that there is a slight problem that the majority of, shall
we say, family dairy farms have not really got the message. We
are not talking about their survival here but the only way they
can become profitable and have a business that is worth hanging
on to is for them to have a bigger unit and larger herds. Do you
think that message has got through to people involved with small
farms, tenant farmers, small family farms? Mr Duncan:
You would assume so, but I think that a unit of that size does
not always focus on accounts at the end of the year and return
on capital. Many of those farms survive by continuing to tighten
their belts with members of the family working away from home.
It is a labour of love.
Q243 Diana Organ: So, in other
words, what you are saying is they are not so interested in what
farm income is, it is what the farmer's household income is that
keeps them in the structure? Mr Duncan: I would
not dispute that.
Q244 Mr Liddell-Grainger: Following on
from what Michael was saying, we are finding that retailers are
keeping a larger and larger slice of the action from the milk
producers, are they not? Are you finding that? Mr Duncan:
One of the other questions we looked at was the transparency within
the milk supply chain.
Q245 Mr Liddell-Grainger: I was
going to come on to that. Mr Duncan: I beg your
pardon.
Q246 Mr Liddell-Grainger: I want to know very much
straight down the line on retailers themselves the margins they
are keeping, supermarkets, and should we be looking at that? Mr
Duncan: Clearly multiple retailers, supermarkets, are
making a significant margin. We see from the evidence you have
taken that processors are making between two and three pence a
litre clear margin. If we refer back to the question that I was
asked earlier about the average cost of production, UK dairy farmers'
production was 18 to 18.5 pence a litre but the average milk price
over that period was less than that, so dairy farmers were operating
a negative return.
Q247 Mr Liddell-Grainger: But that is
one of the big problems, is it not? If you look at France, Germany,
etc., where their co-operatives do tend to be bigger, more aggressive,
set up with EU money, we have a problem, we have got one arm behind
our back at all times. The retailers control us, do they not?
I say "us", I mean dairy farmers. Mr Duncan:
I would agree, Chairman.
Q248 Mr Liddell-Grainger: What
would you do about it? Mr Duncan: From our perspective
it is particularly difficult. Since the deregulation of the Milk
Marketing Boards we have seen a huge evolution in the structure
of the industry. Although we are seeing an exit rate of dairy
farmers of 8% a year, there are still 25,000 dairy farmers in
the UK selling their milk to two or three Co-ops under direct
supply contracts, but the majority of that milk is processed by
five major processors and sold on through half a dozen major retailers.
You can see where the imbalance lies. I know I have not given
you any remedies that you might be looking for.
Q249 Mr Liddell-Grainger:
Let us just take yoghurt. We have a direct threat on yoghurt
from Europe and yet we are very confined. I have an organic yoghurt
producer in my constituency called Yeo Valley, who I am sure you
have heard of. They are finding it very difficult because they
have to buy organic milk which has got slight problems at the
moment anyway and, therefore, they are buying it over and above
what the market is probably dictating because, in fact, the retailers
are controlling it so tightly it is very difficult for them to
move. If we go on like this the members you represent and others
are not going to be there because they will find it harder and
harder to operate because you can go to Ireland, France or Germany,
wherever you want to go to buy milk. Do we not have to come up
with some way of resolving this
Mr Duncan: I think we really do
have to because we are seeing a huge downward pressure on dairy
farmers' returns. Certainly many members are becoming more and
more disillusioned. To go back over one or two of the points we
made earlier, dairy farmers saw themselves investing up to 10
years ago in Dairy Crest and Scottish Pride, but that has gone.
They saw Milk Marque being obliged to break itself up on the expectation
that the successor organisations would be able to vertically integrate
their business. Some have found opportunities to do that but with
the consolidation of the processing sector that is increasingly
becoming a challenge.
Q250 Diana Organ: When in July 2003
the major supermarkets raised the retail price of liquid milk
by two pence per litre, did they ever admit to any of you lot
that they were selling milk as a loss leader anyway? Mr
Duncan: It is very difficult to say with any real accuracy,
as we are not privy to that kind of information. We do not know
how much retailers sell milk for and we do not know how much it
is generally sold to the processors for. You could argue that
they may have been selling milk as a loss leader up until that
period of four or five years ago but that is certainly not the
case now. Information that was provided by one of our members
showed that the widening gap between the price that dairy farmers
receive and the price the consumer pays over the course of the
last six years has increased by something like 12 pence a litre.
Q251 Diana Organ: If you just look at the way that supermarket
layouts are, particularly in urban areas, they deliberately are
putting it out as a loss leader because they know that lots of
people go in to pick up milk and, if the milk is a reasonable
price and it is cheaper than buying it from a doorstep delivery,
that is where they will get it and while they are there they will
also pick up readymade meals and everything else that they are
flogging. They are always going to do this because bread and milk
are things that people in urban areas will drop into a supermarket
for but while they are there will probably spend another 20 quid
on other things. They are always going to do that but they never
admit that, do they? Mr Duncan: You may be right
but, from our understanding, multiple retailers are now taking
quite useful margins out of the price they sell milk at.
Q252
Chairman: In your written evidence you talk about wanting,
as others have, to move us on to the agenda of value added. Is
not the problem that you are trying to play cricket and the retailers
want to play rugby and this is not at all in any way a common
game? I was struck by what Mr Hawkins said last week quite honestly
in the evidence session, that he thought the value added notion
was a nice one but really supermarkets are not very interested
in that because they will sell whatever they can sell at the best
price and the milk producers, as long as there are enough of them,
are not their problem. What is your response to Mr Hawkins? Mr
Duncan: I would not say that value added is not a primary
selling organisation's problem. The fundamental objective of the
Co-ops, who are members of Federation of Milk Groups, is to vertically
integrate the business. First of all to get a captive market for
the milk and also, hopefully, to gain a share of the value added.
True value added is built on the back of brands and that takes
a huge investment to recognise that. Of course, a processor that
has value added or a brand buys milk for that, he does not buy
milk at a premium to put into, he has invested in the development
of the brand and, I would contend, is entitled to get a return
on it.
Q253 Chairman: If the supermarkets continue to take
the line that they are playing a different ballgame, what authority
do you and your members have in trying to pull them to something
where you can at least talk about the rules even if you cannot
play the same game? Mr Duncan: Selling Co-ops
have effectively little trading relationships with multiple retailers.
What we have seen over the course of the last two years is major
retailers are ultra-sensitive to the difficulties that dairy farmers
are facing, hence the reason that Farmers for Action, for example,
get access into retailers at very high levels. The question is
whether the industry can continue to negotiate milk price on a
picket line. I would like to think that all of us working together
can probably work on the Lord Whitty supply chain meeting where
we had the opportunity to meet with processors and retailers and
hopefully find a better way forward for the industry, but I have
to say I think we are going to need some help.
Q254 Chairman:
On that positive note, can I thank you for your evidence.
As I say to every evidence giver, what you have said cannot be
unsaid but there may be additional points that you wish to supplement.
Feel free to contact us if there is anything that you felt you
did not get across and you feel would help us make our report,
or more particularly anything you felt was mistaken in what you
said in this session. I thank you for your evidence. Mr
Duncan: Can I thank you for seeing us at short notice.
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