Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


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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