Examination of Witnesses (Questions 260-279)
8 MARCH 2004
MR ALAN
HINTON, MR
JIM BEGG
AND MR
PETER DAWSON
Q260 Diana Organ: I think
that would be most useful. When you made that statement there
were a few wry smiles behind you. You could not see them, but
I could. There were some slightly cynical looks. My second question
is because maybe there is a feeling that that is not what happened
across the board, what do you think can be done to make the dairy
supply chain more transparent so that farmers and others at the
beginning of the chain can readily identify the relationship between
what the customer is paying for milk off the supermarket shelf
or at the doorstep and the farmgate price, so we all know who
gets what out of the deal? Mr Begg: We do understand
the demand for transparency but I think what we really need here
is dialogue and a bit more trust building up in the supply chain.
It is true that there are not published margins or profit statements
or anything like that, I do not think you would expect to get
these in a free market, but what you have been hearing about is
the new relationship between farmers and processors; where the
dairy companies engage the farmers in terms of explanation as
to why price movements are taking place; where market information
is shared; where farmers and producers have the opportunities
to explain their needs and their requirements. What we have got
here is a dialogue building up and much more information about
what is going on in the marketplace. I do not believe you are
going to get the publication of margins, it is just not something
that happens in a free market for commercial confidentiality reasons,
but you have got rising dialogue and much, much more information
generally being made available to milk producers about what is
going on in markets. The work of the Milk Development Council,
for example, has been superb in communicating market movements
to farmers, milk producers, and this all helps to build trust
and dialogue which will see us going forward positively in the
future.
Q261 Mr Jack: Can we just follow on from that.
You monitor what the price of milk is going into the system and
you also must monitor what people are selling product at. Is the
question of the retail margin a uniform number across the major
supermarkets or does it vary from your analysis? Mr
Begg: You will understand that we do not routinely monitor
that kind of thing. As I say, we are not engaged directly in buying
and selling milk. In terms of the retail situation, retailers
are operating in the same free market that everybody else is and
you cannot really criticise them for operating in what they see
as their direct interests.
Q262 Mr Jack: You are involved
in the Supply Chain Forum and people who supply retailers by and
large like to know what they are doing. I cannot believe that
you do not collectively keep some record of what retail margins
are, even on the lowest to the highest, a range. Mr
Begg: We are constrained to a certain degree by competition
rules and restrictions. In a fully deregulated market the relationship
between a supplier and the supermarket is a confidential matter.
It is a matter for these companies individually.
Q263 Mr Jack:
So as an association you are saying that you have not got
a clue what the retail margins are on either liquid milk or dairy
products, you have not got an ounce of an idea. Mr Begg:
We can observe and look at the reports which appear in publications
and all the rest of it, just as anybody else outside can see.
Q264 Mr Jack: You do nothing yourself to see what margins
retailers are on. The reason I am asking this is because it is
clear that some dairy farmers are getting more of the price increases
back to them, for example, the lucky few, the chosen few, who
supply directly to the processors and others are less fortunate
in terms of the food chain. Unless you can have some idea of the
relative shares that are taken by the different players then it
is difficult to establish whether, in fact, each is taking an
appropriate, adequate, fair, whatever word you choose, part of
the price of the dairy product. I am just trying to find out from
your point of view what you know about this. Mr Begg:
I think the main point really, and what people need to understand
about the milk market, is that it does operate fairly. By "fairly"
I mean it operates in a way where the price would be generated
in the way that you would expect from a normally functioning market.
It is very difficult to define what fair is but that is how we
would see it. From time to time there are various people who analyse
this trend; is it fair? KPMG, for example, analysed that and came
to the conclusion that the UK market was a fair market, that there
was reasonable price transmission, that no-one was making any
excess profits, that the processors' profits over a period of
time had not increased, for example. By any reasonable basis of
independent analysis they have come to the conclusion that the
market is fair. In the case of the individual farmer, the price
that the individual farmer receives in response to any movement
in the market will, of course, vary because it is a complicated
market, it operates to very basic principles, but obviously the
price that an individual farmer gets will depend on who he sells
his milk to, the particular markets that they are in, the degree
of speed of transmission of that market, so no two farmers are
ever going to be in the same situation unless they are supplying
a Co-op. That is how the market works. It is a complicated market
but it works fairly, and that is the crucial thing.
Q265 Mr
Jack: I hear what you say but it is quite clear that some
dairy producers who are the chosen ones, who can supply direct
to processors, are getting a better share of price increases than
others. Trading with Co-ops does not exactly seem like the best
bet. What is that going to do to the structure in the milk supply
industry? Mr Hinton: In theory, Chairman, it
is the choice of the farmer who he supplies to. A number of farmers
choose to supply Co-ops because of the advantages of being a part-owner
of the end product. In theory, as the Co-operatives move into
the food chain direct or directly involved in products, although
their prices at the beginning of the cycle may well be lower,
at the end it should come back to the same sort of price on average.
There are some advantages to being in Co-ops. There are more people
directly supplying dairy companies than supplying Co-ops. It is
the choice of the farmer to a greater or lesser extent. As I say,
as they diversify into the food chain direct their margins or
extra profits should come back a different way, ie the selling
of the products direct to the consumer.
Q266 Mr Jack: Just
to return to the previous line of enquiry, just to be absolutely
clear: you do not monitor at all retail margins on any dairy product? Mr
Hinton: We would not know that. We can pick up a price
structure from a retailing store and we can read what is published
of the farmers' prices, but it is not our remit at all to investigate,
and nor would we want to get involved with our members' direct
business activities with the retailers, be it a hospital, school
or a multiple. That is not our remit at all. We know the price
at one end because we read it in the press and we know the price
at the other end, but in-between it is not our role as an association
to work out margins. Q267 Mr Jack: So you are quite happy,
therefore, without knowledge of the relative shares being taken
in the end pricing of dairy products to say that the market operates
fairly? Mr Begg: We have no formal role in price
negotiation. We are prevented from having a formal role in price
negotiation, which is why I have tried to explain to you that
what we must do is have recourse to defer to independent analysis
of this situation. The independent analysis leads us to submit
to you that we are operating in essentially a fair market. We
are operating in a fair market in the UK. That does not mean that
the market will always cover everyone's expectations, or even
to some degree that it will cover everyone's costs, but what is
important is that there is price transmission and there is a reasonable
balance of power down the chain.
Q268 Mr Wiggin: As the
trade association for dairy productions, what action have you
taken since 2000 to try to address what our predecessor, the MAFF
Select Committee, described as "institutionalised antagonism
between the suppliers and the dairies"? Mr Begg:
It has been a difficult situation over the years. I think that
has got a lot to do with the history and the separation of the
farming and processing sides. History is very difficult to shake
off, even nowadays. We have been working very hard to try to build
up trust in the industry. We have a very close and extensive dialogue
on a range of policy issues with the farming organisations. We
involve them in working groups on operational issues, for example,
trying to find ways of taking costs out of the system. Their staff
come to our meetings at DIAL. The whole objective is to try to
build up trust in the industry. I think it is working because
we do find that other organisations in the supply chain, the farming
organisations, are very keen to do the same. We are keen to put
the history behind us and I do genuinely think it is working.
I think the dialogue between the dairy companies and the producers
at farm level, and indeed the increased situation that we have
here now of joint ventures between dairy companies and farming
organisations, all helps to develop relationships and understanding—understanding—about
why a price moves when the market moves, or why it does not. We
have been very much part of that process.
Q269 Mr Wiggin: You
go to all this trouble to describe how a price moves, how a market
grows, how you build up trust, and yet you have no clue what the
actual retail margin is. Mr Begg: We do not.
We do not routinely gather retail margins because that information
is confidential to the business between our members and their
customers. Q270 Mr Wiggin: Do you not think that is what
people want to know? Mr Hinton: In all fairness,
Chairman, our members know what their margins are. Bear in mind
we are an association of many different types and our job is not
to work out what their margins are, it is up to them to buy raw
milk at whatever price and to make their contracts or their agreements
with their end customers. That is what their role is and our role
is to advise on greater things than the margins they might make.
Q271 Chairman: We are going to look at CAP now. Obviously
one of the predictions in terms of the CAP is because of the surplus
that remains in tact in this industry that the price to be paid
to the producer could fall dramatically to as low as 14p. What
is your prediction and what would be the implications if that
was the case? Mr Dawson: As part of the Dairy
Supply Chain Forum we commissioned research work through Professor
Colman to look into this area as to what impact the price reductions
under CAP reform may have. He reviewed his previous work and came
to a forecast that, say, on an ongoing price of about 16 pence
a litre you might see a significant reduction in producer numbers
to around about 16,000 by the year 2010. There would be a significant
impact on producer numbers but the study also indicated that by
and large milk production would probably remain at or around quota.
It is quite conceivable that, depending on the magnitude of the
price cut under CAP reform, the current scale of the industry
would remain unchanged. Alternatively, if the prices as they transpired
after the CAP reform were less than that then, yes, there may
be a production impact. Q272 Mr Breed: I think the one
thing that everyone is agreed on is that CAP reform will put pressure
on producer prices. I suppose the only difference is the estimate
of what that impact, that downward pressure, is going to be. We
have learned from other people giving evidence, saying very similar
things to you, that we may well see the numbers of actual dairy
farmers decline but, in fact, production will probably be relatively
stable at quota. The obvious corollary, therefore, is that we
are going to see bigger farms, larger herd sizes, greater efficiency
and such like. Do you think we will actually get to a situation
with the way the Single Payment is going to be made available
that some people, maybe quite a lot of people, will actually say
"I am going to get out of milk" and we are going to
see quite an exodus and that exodus may take everybody by surprise
and we may get down to a situation where we may see only liquid
milk sales here and almost everything else is going to be imported?
Do you think it is going to be much more gradual, along the lines
of David Colman and David Harvey's report? They go into 2015-16.
As we cannot even see what is going to happen the year after next,
to be talking about 2015-16 I think is just total pie in the sky. Mr
Begg: As far as the Single Farm Payment is concerned,
we did not favour the decision by Defra to go down that route.
We were very strong in our view that we should go the other way.
One of the reasons why we wanted that was because it would give
farmers more opportunity to face what potentially could be. We
have not forecast the price at 15, it depends on so many things,
but certainly we were pretty clear that there was going to be
pressure and farmers in the short to medium term would need every
assistance with restructuring their businesses. We were very keen
on the idea of an historic route, as was virtually everybody else
in the industry. In terms of what is going to happen, this is
clearly what the industry has got to discuss in terms of finding
a strategy to go forward. It is still a little early to get a
definitive understanding. You have heard very many people tell
you that pretty much farmers understand what is happening here
and they understand the implications of this. I would not necessarily
concur with that. I think that they have been told lots of times
but they need to be kept on being told what the implications of
this are. We are certainly trying to do that and the farming organisations,
the MDC and NFU, are doing that as well. There is still a lot
to be decided and the final package, so to speak, is not really
there. The time has not been there for analysis. In terms of where
we will end up, in the sense of are we going to be down to the
liquid milk market, I do not think by any stretch of the imagination
that we are going to get down to that level where milk production
falls to the level where it only services liquid milk. On the
other hand, in terms of our future raw commodities, I think it
is very much the focus of the industry and the processing industry
to move out of commodity markets to the full extent that they
can. We have been criticised for many years for having an over-dependence
on commodity markets and we must move out of that area and into
added value and branded markets as quickly as we can. There is
strong evidence which is coming across now from the activities
of the dairy companies and the dairy processors, assisted by the
farming organisations and the MDC in particular, that we are now
doing that fairly successfully. We have seen the launch recently
of a lot of brands and a lot of new products. I have a list of
innovations and marketing initiatives which have taken place in
the last year that demonstrate this point. It is not a question
of being forced out of commodity markets, it is a specific policy
and strategic objective of the dairy processing sector. Q273
Mr Breed: In your written evidence to us you quote from the
Colman-Harvey report that "The unequivocal conclusion to
be drawn is that size is the key to the efficiency and herd size
increase is critical to further cost reductions". I think
we would all agree with that. Then you go on to say, interestingly,
that "Defra has a key role in assisting producers to achieve
this objective". Mr Begg: Yes. Q274
Mr Breed: In the light of the decision over the Single Farm
Payment you may feel—or may not—that Defra is basically
saying "that is it" and, therefore, the market will
determine the attrition. What I think you are suggesting is that
Defra ought to intervene in order to assist that process to happen
in a more planned way. If that is the case, how do you suggest
they could do that? Mr Begg: What we meant by
that was that they should go down the historic route for quota
for determining the Single Farm Payment. Q275 Mr Breed: Yet
now they have not. Mr Begg: They have not. We
have to get on with it. We remain in dialogue with Defra. As I
say, the package is not complete, there are a number of other
aspects which still have to be determined, and there are a number
of other policy initiatives which Defra are looking at at the
moment as we go forward, the whole business of cross-compliance
and what farmers will be required to do there. All we are saying
is that when they take these policy decisions, as a priority they
have to have in mind the continued economic viability of farming
in the country, that is a very, very important factor. One of
the negative things about the decision of Defra in England to
go down the area route and the other devolved regions going down
a different route was the signal to say that the other devolved
routes felt, "here is a government that has listened to its
industry, who has said `we value the importance of food production
in the countryside and we have come behind you and gone down the
route of the historic payment' ", whereas Defra missed that
opportunity. Here was the perfect opportunity to say, "We
support you as an industry in future, we support farmers in the
countryside" and I think it was missed. There was a psychological
message there. As they go through the policy that they will adopt
on cross-compliance and all the other decisions on sustainability
and environmental objectives, they have to have an eye to economic
sustainability as well as the other aspects. Q276 Mr Breed:
In a way what you are saying is— Mr Begg:
We are not asking for intervention. Q277 Mr Breed: On the
one hand you are saying it is inevitable we are going to get bigger
farms and bigger herds and everything else, and on the other hand
you are saying you want to try to protect the rural farming community
which, particularly in many parts of England, is based upon much
smaller units. How can you argue both ways? Mr Begg:
I do not think it is necessarily arguing both ways. What we are
trying to say is that the CAP reform has a major impact, it would
appear to be going to have a major impact, and that Defra, in
the implementation of their policy as far as they can, should
support the economic viability of farming in the countryside.
That is all we are saying really. If that does lead us down an
inconsistent route then we will resolve that. I do not think we
are at that point at the moment but if there are dilemmas then
we will answer those dilemmas. Mr Hinton: One
thing I wish to add to that is that it is essential that all the
farming communities understand how the CAP is going to change
their way of life. Although the bodies of the NFU and other bodies
will be doing their very best, I do not think we can leave Defra
out of the circle. They have decided to go this way and it is
critical that farmers understand how it is going to affect them
and the way it is going to affect them so that we do not have
a mass exit and if farmers choose over a period of time to leave
the industry, it is organised over a period of time. I am not
quite sure that it is going to be as far as over ten years. There
is a responsibility, as my colleague said. Defra asked for our
opinions and we all gave them unanimously but they chose not to
go that way so, therefore, there is a certain amount of responsibility
on them to ensure that the communications to farmers and, indeed,
the rest of the industry are very professionally looked at.
Q278 Mr Breed: It is just my personal opinion that so many
of the smaller farmers are so tight up against their bank facilities
that, quite frankly, many of the decisions have been taken out
of their hands and in that case we will see a massive exodus.
It may not be necessarily what the farmers want. Mr
Hinton: Nor the industry. Q279 Mr Breed: The economic
reality will hit them and a decision will be taken by others,
namely their bank managers. That is the fear that many of us have
now. Mr Begg: We agree with that. In terms of
our dialogue with Defra, with their support we are continuing
to get further analysis of this done. We are going to commission
another study which will try and throw more light on the full
implications for the countryside of what Defra have now decided
to do. There is going to be more of that coming forward in the
next few months.
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