Examination of Witnesses (Questions 319-339)
8 MARCH 2004
LORD WHITTY
AND MR
ANDREW SLADE
Q319 Chairman: Minister, welcome. We
are sorry to keep you waiting. It is the exigencies of this place,
as you know. If you could perhaps just introduce Andrew that would
be helpful.
Lord Whitty: Yes. I have with
me Andrew Slade who is the Head of our Livestock Products Division.
Q320 Chairman: You know what we have
been doing, you know what you are going to get asked about. This
is the final session of a number of sessions. Can I ask you a
fairly straight forward question, which I know I have broached
with you informally before. How much importance do you give to
the Dairy Supply Chain Forum and, given that the only people that
everyone seems to want to talk to is you, what is the future of
this particular Forum?
Lord Whitty: I think one of the
things which became pretty clear to me after I got this job was
that the dairy sector was one of the sectors which was suffering
from what the Curry Commission identified as problems throughout
the food chain, the relationships and trust within the food chain.
Partly because of the economics of the sectors, which is the focus
of your inquiry, and partly because of the inheritance, the relationships
within the dairy sector were presumably worse than within some
of the other sectors, or at least significantly more acute. It
was therefore necessary to bring together the various elements
within the sector to see whether we could talk through some of
the problems. The Government's role essentially is a facilitating
one there. Obviously we give it some support. It is really to
ensure that all parts of the dairy chain talk to each other constructively
and look for creative solutions to their problems. I have always
said to the industry at some point it should be industry led rather
than expecting the Government to run it but we have not yet reached
that point so we will continue to chair it and to help out, but
I think at some point industry has to take responsibility for
their own future structure.
Q321 Chairman: What has it achieved so
far besides the fact that you can actually sit around a table,
which seems to be a way forward?
Lord Whitty: It was also quite
an achievement. I think we have set in place a number of different
bits of work which probably are not really reflected on the full
Forum agenda but are by the various sub-groups of the Forum which
would not have been established without it. The main one being
on the CAP reform which has more or less completed its work but
the most important one is probably the development of the industry
forum which is actually more or less driven by the industry and
would not have been set up, probably, had we not established the
Forum itself. There is another sub-group which relates to innovation
within the industry which as you will know the KPMG study found
was one of the problems with this sector.
Q322 Mr Jack: I am just intrigued, this
was more or less put forward by the industry. Going back to the
Chairman's comments in terms of what has it achieved, just refresh
my memory, what is its objective?
Lord Whitty: I am not sure of
the precise terms of reference but the objective is to address
the issues coming out of the Curry Commission and the problems
with the dairy sector and see how the dairy chain could operate
more effectively.
Q323 Mr Jack: How are you addressing
this agenda deficit then? How are you constructing the agenda
for the Forum? Is this talks about talks?
Lord Whitty: To some extent, yes,
because talking proper turkey must be between the various elements
of the industry itself, not by the Government. We have usefully
commissioned a number of studies and usefully discussed others.
Q324 Mr Jack: What studies have you commissioned?
Lord Whitty: The study by Professor
Colman was quite useful in guiding the industry to both the current
economics and the effects of CAP reform. The KPMG study, although
not commissioned by us, was usefully discussed as well.
Q325 Mr Jack: Let us just say that this
is an area which has been trawled over an awful lot and one of
the things which has quite clearly come out of the studies that
you have mentioned is the challenge as to how the UK industry
can live possibly with the reform of the CAP with milk prices
as low as 14 pence a litre. Are you or will you be setting a work
programme to address that type of issue?
Lord Whitty: The discussion on
the CAP both at the Forum and at the sub-group was addressing
exactly those kinds of issues and the ongoing work by the development
sub-group was also discussing what organisational, structural,
contractual changes would be needed to ensure that the industry
does meet these challenges and the challenges of changing markets
as well. It is not isolated to that particular issue although
that is one issue which clearly needs to be addressed if that
were definitely to be the case. The question of the milk price
is obviously the centre of your focus but the real issue is can
we have a viable industry and, if so, what does it look like.
Q326 Mr Jack: I do not want to unnecessarily
go and spend a long time forensically picking through what this
embryo body does but I wonder if through you, Chairman, we might
ask the Minister to provide us with a note to lay out in a little
more detail what precisely the Forum's agenda is, how it is operating,
frequency of meetings, membership, so that we can get some idea
of whether it is just a very cosy way of chatting over a pint
of milk about the problems of the industry or whether it is going
to contribute anything in terms of benchmarking and taking forward
the industry at a time of considerable pressure. On that, let
us just talk about milk quotas. They have survived in the round
of CAP negotiations but, just for the record, did the United Kingdom
start out in the negotiations to want to get rid of milk quotas?
Lord Whitty: Beyond the end of
the current regime, yes.
Q327 Mr Jack: You did. When did you envisage
that the end should come?
Lord Whitty: As soon as possible
after 2008.
Q328 Mr Jack: Which countries were your
allies and which implacably opposed?
Lord Whitty: Very few, I think.
Q329 Mr Jack: Just for the record, who
was for and who was against?
Lord Whitty: The Swedes and the
Danes were in favour, the Italians were episodically in favour.
Q330 Mr Jack: There really was not much
opportunity for you to win under those circumstances?
Lord Whitty: Not a QMV at the
moment, no.
Q331 Mr Jack: That is disappointing in
a way. When you went to say that you should get rid of them, did
you feel that you had the wholehearted support of the UK industry
behind you?
Lord Whitty: No. I think there
are different views within the UK industry and I think quotas
have become a way of life since they have been instituted and
have defined more or less the level of production and the level
of ambition of the industry. Personally I think this is unhealthy
and has inhibited the industry's ability to adapt to market changes
and think beyond quotas. There were some parts of the industry
which were in favour of the quotas at least being phased out but
there were quite a lot which said "No, that is our life line
to have a quota and we have tradeable assets here and what will
you do if you get rid of them?"
Q332 Mr Jack: One of the arguments was
that when intervention was, if you like, the commercial alternative
to selling it to the market place, you had a quota arrangement
which helped to control the amount of expenditure in terms of
intervention but as the price of intervention goods drops then
the need to control the market, in other words the market place,
should determine what dairy products are produced. Why is it that
the Commission are not persuaded of the argument that the need
for intervention and therefore a quota regime, those days are
gone? Why do they hang on to the old structure?
Lord Whitty: I do not know that
it would be necessarily fair to say that the Commission starting
from first principles would hold on to the old structure, I think
it is just that the sequence of events in the dairy sector as
compared with most of the livestock sectors, say, is a number
of years behind. We are therefore going through a reform which
the beef sector and the sheep sector went through at earlier stages.
I think the Commission probably recognise the inability of some
Member States certainly to think too much out of the box when
they are reforming these regimes, but you have to go through the
same stages. Some of that, of course, is now slightly overtaken
by the post MTR reforms but clearly a continuation of quota was
part of the cushioning of the reduction of the intervention price.
Q333 Mr Jack: Let me just ask this. What
analysis have you done in terms of sustaining or, if you like,
underpinning the line you have taken, to the extent that my vision
in a quota free world is that the United Kingdom dairy industry,
which says it is amongst if not the most efficient in Western
Europe, would be that given the opportunity to produce what the
market required and the quantities we required we should start
showing some serious commercial advantage? Is that argument sustained
by an analysis that Defra has done? Would it be the antidote to
the types of price structure which are said to be the prospect
for the industry in the immediate future in the light of the changes
to the CAP?
Lord Whitty: A number of studies,
including one by Professor Colman[15],
indicate that UK competitiveness would lead to a benefit for the
UK whereas for several other milk producing countries it would
not. I think that reflects both the comparative advantage that
we have in dairy production and the relative efficiency of large
parts of the industry. Our expectation would be benefit to the
sector from the removal of quotas. That would not mean, of course,
that the sector looked like it does now, we still envisage some
serious restructuring of the sector, but in total terms the UK
would benefit.
Chairman: If we could now look at one
of the other inhibitors which is the lack of vertical integration
because of competition law. I will ask Diana to lead off on this.
Q334 Diana Organ: Can we start with the
first one: does UK competition law limit vertical integration
in the dairy sector?
Lord Whitty: I think the industry
feels that it does. There is a whole history here of the abolition
of the Milk Marketing Board and the dismantling of Milk Marque
in the wake of the competition authorities' decision and the feeling
that the competition authorities are very harsh on their definition
of competition or anti-competitive practices. It is not my view
that the OFT are unduly negative towards vertical integration,
indeed we have a number of recent examples, including now the
various acquisitions of Milk Link, the latest one being into Glanbia
Food and, of course, the Co-op's joint acquisition of Westbury,
which have all been cleared with the OFT which indicates they
are not opposed to vertical integration.
Q335 Chairman: That is very small beer,
is it not?
Lord Whitty: That is not very
small beer really.
Q336 Chairman: This is at the margins.
Lord Whitty: Westbury is pretty
much the biggest facility that we have got in terms of processing
so it is not small beer. The issue is whether there is, as the
industry sometimes allege, a built in OFT objection to vertical
integration. I think it is fairly clear that there is not otherwise
such examples would not have got through. After the Curry Commission
we did encourage the industry to talk more if there were any potential
integrations, horizontal or vertical, to make sure they did not
transgress the OFT general approach on that. I think a more open
relationship with the OFT has transpired as a result of that.
The OFT's ultimate position is whatever the market share or the
nature of the structural change, it is a question of whether that
is likely to lead to anti-competitive practices rather than domination
of the market or closing off of market outlets.
Q337 Diana Organ: If you are arguing
then that it is really a perception that the producers have got
which is the block to greater vertical integration, what is Defra
doing to get rid of this myth and to promote more vertical integration
and to tell farmers "No, it is not like you think it is,
it is as it is"?
Lord Whitty: As I say, we have
told them, and I have to say that my initial impression is that
they were right and that there was a problem with the OFT. We
talked, therefore, to the OFT ourselves and we talked to the DTI
and we have talked to the industry in the light of that saying
that they should talk to the OFT if any proposition for vertical
or horizontal integration might meet up with some OFT inquiry,
or if it did have an inquiry might reach the negative, they should
talk to them at a very early stage. Many of them have in fact
done that. I would hope that any future proposals for integration
and collaboration down the chain were discussed with the OFT at
an early stage. I think the message about the desirability of
greater integration could not have been clearer following the
Curry Commission and the Government's acceptance of the Curry
Commission's overall approach here.
Q338 Diana Organ: Okay. What about the
difference between UK competition law and EU competition law and
the way that EU competition law might be implemented differently
from UK competition law? In what ways is it possible that could
be a brake on the development of vertical integration?
Lord Whitty: I do not think the
basic law is any different between Member States. The competition
authorities are required to look at the market. The issue in the
UK, of course, is that it is pretty much, as far as liquid milk
is concerned anyway, a closed market, more or less, whereas with
certain continental European countries there is a trans-border
trade, and quite substantial trans-border trade. Therefore, looking
at the dominance in one country is not the whole of the issue.
Now one can have some doubts or criticisms of the judgments which
individual competition authorities have made across Europe but
they are applying the same rules.
Q339 Paddy Tipping: During the course
of the inquiry a number of bodies have talked to us about the
notion of a regulatory body which is going to oversee the dairy
supply chain, surely this has been canvassed with you. What do
you think people are asking for to begin with? What is the conceptual
model as you understand it?
Lord Whitty: They are basically
looking for somebody to sort out what has been a poor experience,
particularly for the producers of the price of milk and looking
at the Government intervening in effect to set prices. That seems
to me not consistent with the general Government's approach to
the industry, all elements of the industry getting closer to the
markets and being able to sort out these problems themselves.
Of course a different issue which relates more to the area of
the code of practice and so on will be maybe a breakdown in relationships.
I do not think it is feasible in today's world for the Government
to promote a regulator of this sector in the sense that they wanted,
the producers in particular wanted, which is really to determine
pretty much the market price. Whatever the desirability of that,
those days have gone.
15 Colman (Ed.), Phasing out of Milk Quotas in the
EU, April 2002 available at http://statistics.defra.gov.uk/esg/reports/milkquota/default.asp Back
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