Examination of Witnesses (Questions 285-299)
8 MARCH 2004
MR BRIAN
PEACOCK, MR
KEVIN BELLAMY
AND MR
KEN BOYNS
Q285 Chairman: I think it would be useful
if you could introduce your team and we will get straight into
the evidence giving session.
Mr Peacock: Thank you, Chairman.
I am Brian Peacock, Chairman of the Milk Development Council.
On my immediate left is Kevin Bellamy, the Chief Executive of
the MDC, and Ken Boyns, the senior economist.
Chairman: Okay. It is likely we are going
to be interrupted by a vote, that is the bad news. The good news
is that we will come back and whatever time we lose we will make
up but we are obviously trying to get through to the Minister
so we do not keep him waiting for too long. Michael, would you
like to start off?
Q286 Mr Jack: I think during the inquiry
we got the impression that the only way that the price of milk
in recent times has moved is because farmers became vociferous,
demonstrated, barricaded supply chains and all the rest of it.
Can you just give us your take on that because somehow you do
draw the conclusion that it was farmers' action that caused the
price to change and, therefore, somehow the market place for milk
is not working as it should do?
Mr Bellamy: I think in simple
terms the reason for the direct action has been because the price
structure which has been received by farmers has been insufficient
to sustain their business. I think we have to look deeper than
that and look at structural matters which point towards difficulties.
We carried out a piece of research last year on the prices and
profitability across the chain and that highlighted four issues
which perhaps I will just briefly touch on. The first one is the
issue of supply chain power and I think we can all understand
that the balance of power across the supply chain over maybe the
past ten years has changed significantly partly because of the
decline in liquid milk sales, partly because of the decline in
doorstep sales, significantly because of the end of use pricing
at the end of the Milk Marketing Board. What we have shown in
our submission is that there is transmission across the chain
but because of that change in balance of power when it is in favour
of the supermarkets the transmission is very slow and has been
encouraged by direct action and the fact that, as we have heard,
supermarkets are sensitive to the actions of people like Farmers
for Action yet when it is in the other direction and in favour
of the supermarkets it tends to be very quick and that is a reflection
of the supply chain power. I think the second issue leads on from
that and it is a lack of vertical integration. I think we are
seeing now organisations, such as the larger Co-operatives, beginning
to move into a vertically integrated strategy but clearly we need
to be careful in doing so that we are not adding to the competition
in the market place and simply putting further downward pressure
on price. Now while those are important issues, I think we have
to be careful that we do not over-estimate the effect that they
might have because we estimate that those are fractions of a penny
which we are talking about rather than two or three pence. Clearly
we have to look deeper than just the current issues on price,
the two other issues which we would identify are over-dependence
on commodity markets, and we identify the fact that a litre of
milk going down the various supply chains in the UK returns significantly
less from the consumer than any of the other European states that
we looked at. The UK is twelfth out of 12 in terms of the value
derived from a litre of milk. Finally, the lack of market information
and the lack of understanding of both the consumer market place
and how the market operates is a significant factor, so I think
there are a variety of structural issues which we need to look
at but fundamentally the problem is getting a price that is sustainable
to the producer and if he cannot get that then he is likely to
take direct action.
Q287 Mr Jack: Let us just pick up on
three points which come out of what you have said. First of all,
do you sense that there is any genuine awareness by the major
purchasers, supermarkets, of the impact that their pricing policies
are having on farmers? You made the point that reaction can be
quick when it favours the supermarket, and clearly some of the
structural changes which have occurred with IMPE have favoured
supermarkets, therefore they have taken advantage, but in so doing
it has clearly had an impact on the structure of the dairy industry.
Supermarkets are quick to point out that they are strong on corporate
social responsibility, strong on partnership with farmers and
want a good future for British agriculture. Some of these phrases
do not ring too true, do they, when it comes to dairy?
Mr Bellamy: I think you could
level that up as an accusation but I think equally in the normal
terms of businesses supermarkets have been doing what businesses
do, they have an opportunity to maximise their profitability and
they are seeking to do so within the market place. I totally agree
with you that in their terms of social responsibility and their
other moral responsibilities then, yes, there are some failings.
Q288 Mr Jack: So it is okay for them
to use considerable power and leverage irrespective of the impact?
Mr Bellamy: That depends on your
definition of "okay".
Q289 Mr Jack: Okay. Well, let us move
on and talk about some of the competition issues. Do we have the
right attitude, in your judgment, in terms of our competition
policy as it affects dairy to allow the developments of vertical
integration which are now being demonstrated by people like Milk
Link to genuinely prosper and in the long term address some of
the questions of the past down the value chain to the primary
producer?
Mr Peacock: I think it is true
to say that the Government have tried hard to make sure there
is consistency in the application of the competition law and to
make sure it fits in with European legislation. However, I believe
there has been quite a lot of nervousness in the industry about
the application of the activities of the OFT and a reluctance
in some cases and a misunderstanding of some of the views of OFT.
It has been an issue which has stifled discussion within the industry.
The report we had done by KPMG highlighted some of these things
and the Committee, I think, has already had that particular document
but one aspect that KPMG did pick up was that there did seem to
be some differences in application of OFT activities or regulatory
activities between ourselves and Europe. For instance, in Denmark
the competition authorities there seem to be quite happy to look
at behavioural measures with regard to Arla but in this country
it is somewhat different in its application. There have been some
differences in approach and some misunderstandings across the
period.
Q290 Mr Jack: The question I actually
asked was where we are now can the emerging vertically integrated
organisations prosper or are they suddenly going to find themselves
the subject of further investigation?
Mr Peacock: It is difficult to
judge from our position, we are not in direct contact with the
competition authorities or OFT. To put a position on that is somewhat
difficult. However, I think there is a much clearer understanding
about the way that things may well be judged within the various
projects that people may want to put forward for discussion.
Mr Bellamy: What you can say,
Chairman, is that certainly the focus of our OFT on structure
rather than effect will deter people from getting involved in
the adventures which will move us forward and add cost to that
with the legal charges of having to investigate these things beforehand.
I think the emphasis will slow down the period of restructuring.
Q291 Mr Jack: Finally, you mentioned
that in certain of our supply chains in the UK the returns were
lower than the continental counterparts, why?
Mr Bellamy: That is a factor of
the product mix which comes out of the UK in that across Europe
there is far less milk going into the liquid supply chain, far
more milk going into cheese and higher value supply chains. It
is the basket of products which comes out of a UK litre milk.
Chairman: Can we now move on to look
at the impact of the CAP reforms and I will ask Bill Wiggin to
put some questions.
Q292 Mr Wiggin: If the farmgate milk
price drops to 15 pence a litre, how many farmers do you think
will pull out of the industry?
Mr Boyns: I think it is very difficult
to estimate exactly what is going to happen. The best estimate
we do have is the David Colman and David Harvey work. We suggest
that we will lose 35% of farmers, 8,500 out of 25,000. That is
the most reasonable estimate we have got so far but whether it
is accurate or not only time will tell.
Q293 Mr Wiggin: Do you think that will
create a shortage of raw milk in the UK?
Mr Boyns: It depends on what you
term a shortage. If you mean less than quota then Colman and Harvey's
work suggests that 15 pence is a crucial level. If we go slightly
below we will have less milk than quota; if we are slightly above
then it suggests we will fill the quota. Again, it is a knife
edge, no-one knows exactly what is going to happen.
Q294 Mr Wiggin: What do you think has
to happen for the quantity of milk to be so low that there is
a significant increase in price?
Mr Boyns: We have two markets.
We have 14 billion litres of milk quota in this country, of which
you can argue about the size of the markets, but approximately
10 billion litres is the domestic market, protected to a certain
extent by transport costs, liquid milk, other value products and
we have four billion litres in a commodity milk market which is
cheddar cheese, butter, powder. We have to lose a fair proportion
of that four billion litres to allow supply and demand to bring
the price up for the rest. How much of that it is very difficult
to estimate.
Q295 Paddy Tipping: It all depends on
the Single Farm Payment, does it not, and how that is implemented.
The decision to go down that route has not been welcomed with
acclaim by the sector, has it? What are the consequences?
Mr Boyns: Theoretically there
should be no effects on the sector on how the Single Farm Payment
is made because it is a decoupled payment. I think a large part
of the industry is concentrating on encouraging farmers to treat
it as decoupled to make commercial business decisions. In reality
Professors Colman and Harvey said a lot of farmers will treat
the payment as coupled. If that is the case then you have to look
not only at what large producers theoretically lose under the
hybrid system but also the extra efficiency they have got because
they are bigger in the first place than smaller farmers. Colman
and Harvey's figures suggest maybe three pence a litre, large
producers go under three pence a litre lower costs than a smaller
producer.
Paddy Tipping: Can you just take me through
that again. So the larger, more efficient producers who have got
more quota per hectare are going to be in a stronger position,
is that what you are saying?
Q296 Mr Jack: Can you just define large
for the sake of answering the question?
Mr Boyns: Large in terms of how
Professors Colman and Harvey define it is greater than 150 cows.
They have, according to their figures, around about three pence
a litre lower cost than herds of below 70 cows. Now not every
large herd will have very high quota to hectare ratios nor every
small herd will have very low quota to hectare ratios but the
work that Colman and Harvey have done suggests on average larger
herds have higher quota to hectare ratios and will lose out, therefore,
in Single Farm Payment over time.
Q297 Paddy Tipping: Just help me with
this, because previous witnesses have told us, Professor Colman
may understand this, you may understand this, Mr Boyns, but when
is the penny going to drop on the small producer? When will they
understand the significance of the new payment system? When will
they make decisions, I suppose that is what I am asking you?
Mr Boyns: It will take time because
farmers are traditionally relatively conservative. There will
be some farmers who understand it better than I do now. There
will be some farmers who will take some time to decide. There
will be consultants, bank managers in particular, talking to farmers
about it. It will take some time. It is difficult to estimate
exactly how long. Certainly we are talking months, maybe a year
or two years.
Q298 Chairman: Can I ask one thing on
the back of that. Is this going to be international in Western
Europe? Obviously we are looking at different systems of farm
payment but let us look ahead five years, where will we be in
this country with regard to the balance between smaller and larger
producers compared with France and Germany, for example?
Mr Boyns: To be honest with you,
I would have to put some thought into that question before I answer.
I am quite happy to put an answer in writing if you would like.
Q299 Chairman: That would be very interesting.
Without going into which is going to be the best, which is going
to be the worst for small farmers, it will be different, as it
is at the moment?
Mr Boyns: There are some very
big traditional farming differences. For instance, there is a
strong emphasis on part-time farming already in France and Germany.
Those part-time farmers may react differently to what we would
term a small farm in this country which is where it is a full-time
occupation. That is why personally I think I need some more information.
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