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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 335-iii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE
Monday 8 March 2004 MR JOHN DUNCAN and MR DAVID STRANG MR ALLEN HINTON, MR JIM BEGG and MR PETER DAWSON MR BRIAN PEACOCK, MR KEVIN BELLAMY and MR KEN BOYNS LORD WHITTY and MR ANDREW SLADE Evidence heard in Public Questions 229 - 394 USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environment, Food and Rural Affairs Committee, Milk Pricing Sub-Committee on Monday 8 March 2004 Members present Mr David Drew, in the Chair Mr Colin Breed Mr Michael Jack Mr Ian Liddell-Grainger Diana Organ Paddy Tipping Mr Bill Wiggin ________________ Memorandum submitted by Federation of Milk Groups Examination of Witnesses Witnesses: Mr John Duncan, Chairman, and Mr David Strang, Advisor, Federation of Milk Groups, examined. Q229 Chairman: Good afternoon, everyone. If we could make a start. This is the third evidence session that we are having and some you know the score very well, but I do not know whether either Mr Duncan or Mr Strang have been with us in previous sessions. The aim is to get through four different sessions of evidence as expeditiously as we possibly can, but obviously to try and build on the evidence we have had so far. Please accept that our questions are going to be somewhat brief and brusque; it is not in any way meant to be insulting but it is in order to get through everything as fast as we possibly can. We have got a replacement witness so it would be useful, Mr Duncan, if you could say who you are and what your organisation is and then Mr Strang could introduce himself. Mr Duncan: Chairman, thank you for your introduction. My name is John Duncan and I am the Chairman of the Federation of Milk Groups. You may know that the Federation of Milk Groups is an umbrella organisation representing milk sellers, mainly the four GB Co-ops, GB and Northern Ireland. I make apologies for my colleague, Malcolm Smith, who is unable to attend, but this is David Strang. Mr Strang: I am David Strang. I am a solicitor and partner with a law firm called Barlow-Lyde-Gilbert. We are a long-standing advisor to First Milk. Q230 Chairman: If we can get straight into this. Clearly you may have heard some previous sessions on this but can I just ask the most obvious question: why do you think farmers are always alleging that the price of milk paid to them is that much lower than the retail price of milk? If that is a given, why is that so? Mr Duncan: I think that is a question that has been posed of dairy farmers for as long as I have been involved in the industry, some 20 years, and, indeed, before the deregulation of the Milk Marketing Boards. The dairy farmers at that point in time believed that the milk price doubled within two days of leaving the farms, and clearly from that point in time wanted to see their business involved in the milk processing. You will be aware at that point in time in the South that the Milk Marketing Board of England and Wales owned a business which had become Dairy Crest and in Scotland they owned Scottish Pride. The problems all started with deregulation when there was an insistence that the continuing Co-op organisations divested themselves of the processing arms. That is where the problem arose. Q231 Chairman: So do you think matters would be helped if there was a regulatory body to arbitrate on these differentials in milk prices? I should have said in my initial remarks that, of course, it is the rate of increase rather than the actual milk price. Should there be a regulatory body in this industry that actually looks at why there is such discontent among farmers and why retailers just say "that is the market price" and that is what we have to accept? Mr Duncan: The problem is that we have a market price but the market price can differ depending on to whom the dairy farmer is selling his milk. It can differ by three to four pence per litre, which in percentage terms is very significant. Would a regulator assist? Clearly it would depend on the terms of reference. It is quite difficult to see how at this stage, given the evolution of the industry, particularly the processing and retail sectors, one would find a role or remit for a regulator. Q232 Paddy Tipping: In your evidence you talk about the possibility of a two-tier, dual-price dairy farming sector with one level of producers directly supplying dairies and the others maybe going a different route. What are the consequences for people who, in a sense, are at the bottom, the people who are not getting as much price? Mr Duncan: The consequences are that in due course they would find themselves being exposed purely to the returns from the Co-op commodity end of the market. As we move into CAP reform, which is going to deliver reduced intervention prices, reduced access to intervention, then the greater pressure to exit the industry would be felt by those producers. Q233 Paddy Tipping: Are they going to survive? What is your prognosis? Mr Duncan: To whom are you addressing that, ourselves? Q234 Paddy Tipping: Those producers that you have just been talking about supplying the commodity end because they face some pretty severe world competition, do they not? Mr Duncan: I am suggesting that is a potential, it is not a given at this point in time. Were we to see this situation developing then, yes, I think we could see a very significant exit from the industry. Q235 Paddy Tipping: One of the things you could do, to go back to your opening comments, would be to vertically integrate again. Clearly you have got strong views on this. What discussions have you had, say, with Defra or the competition authorities around that prospect? Is it a runner? Mr Duncan: That is a fundamental objective of all of the major Co-ops in the UK, to do that. I know you have heard evidence from Milk Link, who have achieved a degree of success going down that route. For others in the Co-op it is more challenging because of the consolidation that we have seen in the processing sector. At this moment in time opportunities - I do not overstate it or understate it - do not grow on trees, they are exceedingly limited. Of course, with the consolidation the value of businesses becomes that much greater. What approaches have we made? We gave some supporting evidence to the Curry Commission in its early days. I have not gone to the Competition Commission but certainly individual farmers and other groups of farmers have gone to them and posed these very questions. The issue of the restriction by competition on the development of Co-ops is one which does test us. I will pass that to Mr Strang. Mr Strang: I think it has been an issue which has vexed the dairy industry since the deregulation and prohibition of vertical integration then and since the demise of Milk Marque. There is no simple answer, I think. There has been some limited discussion with the Office of Fair Trading that a number of people have had, rather than the Competition Commission I would say. I think their attitude is that in theory they are not uncomfortable with the idea of vertical integration but it very much depends on the individual circumstances, so I suspect that in different parts of the country the answers will be different because they have a different experience of conditions of competition in different parts of the country. Chairman: We will look at milk prices and efficiency next. Q236 Mr Wiggin: I wonder if you could tell us a little bit about why New Zealand is able to make a profit where the farmgate prices are less than half of those in the EU. Can you also say a little bit about efficiency and what steps are being taken by your members to improve efficiency in milk production? Mr Duncan: It is an interesting comparison. I think one comfort that UK dairy farmers have is that New Zealand is 12,000 miles away. They have got a clear climatic advantage. They have got a huge operational scale. If you look at the average size of New Zealand dairy farming units they are somewhere above 300 cows. If you compare that with Europe, I think the lowest herd size in Spain is 17. There are huge advantages of scale. Similarly, their production is very much grass-based, given that grass grows close to nine months of the year, and they have huge investment in processing and, of course, the fundamental advantage they have is 96 per cent of New Zealand milk is collected from farms, processed, marketed and sold by one Co-op. Q237 Mr Wiggin: What about efficiency in the UK? Mr Duncan: The UK, in European terms, and I think we have evidence to show this, is clearly the most efficient. We have the largest herd size. Q238 Mr Wiggin: What is it? Mr Duncan: Top side of 70. In Scotland it is over 100. Ireland is 30, yet Irish dairy farmers appear to achieve higher milk prices. What is happening about efficiency is the latest Colman-Harvey report looking into UK dairy farming costs over the course of the end of last year showed that the average cost of production across 400 England and Wales dairy farms was about 18 to 18.5 pence per litre. Three years ago, when they last did that analysis, the cost of production was 21 pence. I think there is no denying the fact that UK dairy farmers have been driven down the efficiency route. Q239 Mr Jack: Just to follow on from an earlier point you were making about where you saw prices going in the light of the reform of the CAP and the figures you have just given, do you think that UK dairy producers, farmers, can actually lower their costs to the levels required to stay in business, even the most efficient ones, in the light of about 21 to 17 to 18? Down to 14 is a big change. How is that going to be achieved? Mr Duncan: I think we should be careful and not assume that because in a certain set of given circumstances the support mechanisms may go down to 14 pence that that, in fact, would be the price that UK dairy farmers would need to survive. Certainly as a representative organisation we would be looking at avenues to ensure that prices were not driven as low as that. What steps are we taking? To come back to UK efficiencies, one of the elements that has come out of the Colman-Harvey report is that over that period in time the average herd size in the UK has increased significantly, so they are assuming a direct correlation between efficiency, ie a lower cost of production, with the herd size starting to increase, but the backbone to the UK dairy farming sector would still appear to be the family dairy unit, but a family dairy unit effectively run - I say this with respect - on more business orientated terms. Family business units average around 150 cows. 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 eight per cent 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 ten 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: 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. Memorandum submitted by Dairy Industry Association Examination of Witnesses Witnesses: Mr Allen Hinton, President, Mr Jim Begg, Director-General, and Mr Peter Dawson, Policy Director, Dairy Industry Association (DIAL), examined. Q255 Chairman: Can I welcome you to the second session. Some of you are well known to some of us this side, so we will not need too many long introductions. If you would introduce yourself and the other two people, that would be helpful, and then we will get straight into the session. Mr Begg: Chairman, my name is Jim Begg. I am the Director-General of DIAL and I am also a member of the Dairy Supply Chain Forum. This is Allen Hinton, who is the Managing Director of ACC Co-operative Group, and on his left is Peter Dawson, who is DIAL's Policy Director. Chairman: You well know the way in which we approach this because you have managed to sit through all the sessions so far and will probably sit through the remainder of this. Q256 Diana Organ: You are adamant in your evidence to us that "UK dairies are not making excess profits at the expense of producers". I wonder if you could let me know a little bit about what proportion of the recent increases in retail prices of liquid milk and cheese has actually been passed back to the farmers. What proportion has been kept by you? What have you gained? The supermarkets put the price up, I suspect from pressure from the consumer that the poor old producer was really being ground down by it. I want to know what has really happened. Who got what out of the deal and did they do well out of it? Mr Hinton: The evidence already given to the Committee by our members, the major dairy companies, has indicated quite clearly that all of the monies from the initiatives have gone back to farmers. Q257 Diana Organ: You mean you have had none of it? Mr Hinton: No, it has all gone back to farmers. Q258 Diana Organ: You are saying hand on heart it has all gone back to the farmers and you have had none of it? Mr Hinton: Our members have already submitted to the Committee that all of the monies through the initiatives have gone back to farmers. Of course there is an occurrence where there could be a timing elapse between the move and when it went back to farmers, mainly due to the different types of contracts or who was selling milk and where it was sold to. Our members have indicated to the Committee that all of these monies have gone back to farmers. Mr Begg: You will appreciate that Dial is a central organisation and we do not get involved with the purchase or sale of milk. We cannot say hand on heart that every one of our members did that, we do not have the accounts. Q259 Diana Organ: But you do know what is happening along the chain. Mr Begg: Yes. What we can say is that in the evidence submitted to the Committee on that occasion, all of that was passed back. If you need further information and specifics from individual members, where these details apply to individual members, I am sure they will be happy to make that information available to you. 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 criticism 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 to the supermarket 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 quick 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 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. Q280 Mr Jack: Just to go back to the point you were talking about in relation to innovation. The perceived wisdom is that continental dairy producers are better at value added products than producers in the United Kingdom. Is that correct? If it is correct, what are we not doing that we should be? Mr Hinton: There is a very good point that should be made that we are ending up virtually with four major brands in this country and the majority of them are not British based. Having said that, from these big brands will grow opportunities. Once you have created these big mass brands there will be opportunities for smaller players, indeed farmers possibly, to come in on a localised basis with regional products and brands and start up. I think we are going to get to a point where there are going to be only four or five large brands that will probably come from the continent but that in itself will create opportunity, an opportunity we need to grasp and encourage in the industry, be it small processors, as DIAL represents members as well, or farmers who may well see this as an opportunity to move out of the mass, if I can use that, 650 cows or whatever, and into an area or product which could be sold locally very successfully. Q281 Mr Jack: Just give me some examples because on a national scale the question I asked in terms of dairy products was what are our continental competitors doing that we are not and you have just put the proposal forward that there may be opportunities for a farmer, or a group of farmers locally, to do something distinctive. Just flesh that out a bit more. Clearly if there is more value to be added in the types of products to which the question refers then the ownership of the added value part of it is very important. If it is a big branded manufacturer then there is not the same responsibility, if they are adding the value, to pass it back necessarily to the farmer, but if the farmer is doing it then has got control of the value chain up until the point of sale. Just help us to understand a little bit more how these two scenarios work? Mr Hinton: One of our colleagues who, unfortunately, got called away today is an ideal representative for that, a representative from Müller, which is now a British organisation which spent a huge amount of money in building a very successful brand. As he was very keen to point out, that is a British organisation. It may have roots elsewhere but the success depends totally on having the product and if you want to have that sort of brand the monies need to be spent. I am thinking now of dairy deserts rather than cheeses and things like that and if you pick out the major ones it is a very high capital spend on branding initiatives and building a brand. I think that is our problem in this country, we started very late in building brands due, unfortunately, to the Milk Marketing Scheme which stifled the growth of brands because there was a ---- Q282 Mr Jack: Just to be specific; am I right in saying that the problem is not so much the catalogue but the ownership of the value added chain? In other words, you are saying that it is continental companies like Müller who effectively are repatriating money back to their centre and it is not necessarily available for UK-owned and UK-based companies. I am still trying to get to the bottom of this because all of the evidence we have had says that continental dairy producers are much better at innovative, novel products, making more money because they are adding more value and the poor old Brits are late to the game not having any access to this value chain. Mr Begg: You put it in very stark terms. As Mr Hinton has said, we have a little bit of history there in terms of our approach to the Milk Marketing Scheme which we have spent some considerable time trying to move on from. The crucial thing now is that we get as much of our product and as much milk as possible utilised in the added value sector. Who gets the benefit of that is what I think you are asking. Q283 Mr Jack: No. Let us be very specific. I am sorry to labour the point. I go back to the evidence we have received. The evidence is that continental companies are doing better in this field, so in other words they are extracting more value out of the milk they are processing. Brits are not in the game, therefore we do not seem to have access to that better value chain that our continental counterparts do. Müller is a German company and they have put a fantastic amount of money into their Shropshire plant but, if you like, that is going back to the centre, to Müller HQ, and not somewhere in Brit dairyland. Mr Begg: Müller in the UK is a British dairy company using British milk and employing British people to produce British products but there are many other examples in the industry where our members are doing the same. There is new, you might call it Johnny-come-lately stuff, a new focus, a real interest and a real desire to develop added value products, branded products, in our marketplace as the way to the future. It is not a new thing in the sense that it has happened today, it has been happening for a couple of years now and we are moving forward positively in that sense. Ultimately, and indeed currently, that will deliver better returns for milk producers and that must be the right way. Q284 Chairman: Just to finish with that, give us a notion of what sort of products we are talking about? I can understand about Müller and their yoghurts, I can understand about Dairy Crest and FRijj, but what is out there that nobody else has thought of? This is really putting you on the spot but what is the sort of thing where Mr Farmer can think "We are in with something here; this is worth hanging in there"? There must be something we can do with milk. Mr Hinton: Certainly if there was a product out there that was ground breaking I would not tell anybody else, I would be doing it myself. One of the things Jim touched on was we have a very basic product called milk, which we do fantastic things about and we, as an organisation, start with the cow and go right through to cheddar cheese and everything in between. One of the things we have not been able to do is to brand things very well. If you take cheddar cheese, there is about 300,000 tonnes a year and only about 50,000 tonnes of that is branded, the rest is sold as "me too". That is a great step forward if we can move away from the commodity even on the cheese because as a commodity, and the Committee mentioned it earlier on, we are inviting imports into the country to fulfil a commodity product. Brands on old products are important and the initiatives on new products are very important. I look at the two or three brands coming out in cheese this year already and it is very important to move away from the commodity side. New developments are not easy even on liquid milk. One of our members has just launched a different type of milk to take a different edge and spin on these things. There is an awful lot of initiative out there but as a nation we are quite conservative when it comes to dairy products. I have seen some terrific products which have failed because the British consumer does not quite understand them at this minute in time but they will keep coming back until we have a mature market and that is exciting. There is a lot of work going on in relation to branding and new products. People feel that is the real way of putting value back into the industry. Chairman: Gentlemen, thank you very much for giving evidence. Certainly as Mr Begg has heard me say before, what is said cannot be unsaid but if there is additional material that you wish to give us to supplement your evidence then feel free to do that. Thank you.
Memorandum submitted by the Milk Development Council Examination of Witnesses Witnesses: Mr Brian Peacock, Chairman, Mr Kevin Bellamy, Chief Executive, and Mr Ken Boyns, Market Analyst, Milk Development Council, examined. 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 per cent 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. Q300 Chairman: If you would like to think about that, I think that would be quite interesting. Mr Boyns: Yes. Mr Peacock: We would be happy to come back with a considered view on that if that is helpful. Chairman: Diana, quotas? Q301 Diana Organ: KPMG did a report for you about what would happen vis a vis milk quotas and the cost of restructuring the industry. Mr Peacock: Yes. Q302 Diana Organ: We have a situation, as you know, where the forthcoming support is going to be less for dairy farmers but the quotas effectively are going to stay more or less as they are and remain in place until 2015. What effect is going that going to have, do you think, on dairy farmers, the two pressures coming together until 2015? Mr Boyns: I think the quota price is a factor of supply and demand from farmers, so farmer demand will set it. If a lot of farmers want to expand initially in an attempt to reduce their costs of production then potentially it could be a large amount of quota. If people pay a large amount for quotas there are two difficulties. Firstly, capital leaves the industry from existing dairy farmers, ongoing dairy farmers to exiting dairy farmers and, secondly, it increases the capital investment in the dairy farm and makes it harder to get a decent return on capital. Chairman: Michael, supply and demand? Q303 Mr Jack: I want to ask one question about quotas. Do you think the European Union has missed a trick in not scrapping them? Mr Bellamy: In terms of restructuring the cost of quota to the industry it means that capital is removed from the industry and therefore potentially delays the process of restructuring. Q304 Mr Jack: What do you sense the attitude of UK dairy farmers is to that? Some have quite enjoyed the comfort zone of quotas. It is bankable, you have got this, you just keep turning out the milk. Okay, there are problems with price but at least there is certainty. If you scrap quotas you move into an uncertain world for some farmers. Mr Bellamy: Exactly. I would not suggest I was representing the views of dairy farmers in saying that capital --- Q305 Mr Jack: Coming back to the thesis as put forward by the two Professors, I was surprised that 150 was deemed to be large. If you talk to me about large I would be talking about 250/300 plus, in New Zealand we are talking 1,200, I know it is a different regime. Given the climatic advantages we have in the United Kingdom, should we not have campaigned harder to get rid of quotas so we could really take in our advantages and push them to the limit? Mr Boyns: It is KPMG's recommendation in their independent report that they should be removed, price support should be removed. Q306 Diana Organ: What is your view then? That is KPMG stating that, they are not in the business, they are just the consultants looking at it. What is your view about that? Mr Boyns: The MDC does not lobby, we try to act. Q307 Diana Organ: You must have a view about this? Mr Peacock: I think in any answer it would be a personal view. Q308 Diana Organ: Let us hear that. Mr Peacock: I have to say, whenever the MDC Council discusses this issue we are completely split down the middle. Mr Breed: Like the NFU. Chairman: That is very helpful, Brian. Q309 Mr Jack: As intervention prices get lower the purpose of having quotas seems to be less relevant by the day. Milk consumption is declining, what are you doing about it? Why is it happening? Mr Bellamy: Part of that decline, Chairman, is if you are talking about liquid milk - which I presume you are - there has been a long term decline in liquid milk. Recently that has been due to the change from doorstep delivery to supermarket purchase which is accompanied normally by a decline in volume purchased by the household. What are doing about it? Mr Jack: Can I just stop you there. Is it simply the lug home factor which deters people? Diana Organ: They lug home the lager. Mr Jack: Yes. Here we have a sage observation to my right. Equally wine bottles are quite heavy. We have got consumption of heavy bottles of wine going up and milk going down, the two are not quite substitutable, either lager or wine. Why is it dropping? Mr Breed: Water. Q310 Mr Jack: Yes, water. Any more bids! Mr Peacock: We have this disgusting term of share a throat in the marketing jargon and liquid milk over the years has sustained a huge attack from a lot of drinks: soft drinks, things like Sunny Delight, a whole raft of things. I should not mention water but certainly there has been a huge attack on the drinks area and that has had a significant effect over the years on the way milk has been consumed. I think Kevin wants to pick something up here. Mr Bellamy: One of the things we have done as an industry is understand the consumer better. If you look at the demographics in the market place then doorstep delivery is now becoming more confined to the older age range who have been used to purchasing milk in that way. As we move into a new generation then there is far more competition, as Brian said, in the retail sector and, therefore, our share of throat as a liquid product is going down. What we need to do is to understand consumer trends and understand what consumers are looking for and react and build products and new markets based on consumer needs. Q311 Diana Organ: In my constituency I have got a large bottling plant for GlaxoSmithKline who are making Ribena and Lucosade and all these other health drinks. What they do is they are putting in to every leisure centre, every swimming pool and a large number of colleges and schools a refrigerated machine which sells this drink through the compartments either in Tetrapaks or bottles. We were talking about this, how much have you looked into schools, colleges, leisure centres? They put it in free by the way, the machines? You stick in a machine and it is refrigerated flavoured or natural flavoured milk sold in a carton, in a Tetrapak. Mr Bellamy: We have carried out research this year on vending as a process. Vending of milk because of its more limited shelf life does pose some problems but we are looking into how we can solve those. Let me point you towards an initiative which we are carrying out across senior schools across the UK together with First Milk, one of the Co-operatives, we are putting in - hopefully by the end of this year - 1,000 school milk bars which will make milk and flavoured milks available to school children. We have successfully reversed the trend and decline in subsidised school milk going into primary and nursery schools in this country. Since the year 2000 we have been increasing the amount of milk going down those channels. We are looking at different channels and we are seeking to understand how we can bring new products and innovation into the sector. I think you have to look back over the last ten years where we have seen an increasing concern about market share of commodity liquid milk and commodity products and clearly dairy companies and Co-ops have focused on reducing cost of processing rather than on innovation. What we have to do is reverse that trend. We have to understand the consumer better. We have to get that information out there and we have to encourage innovation, and that is what we are seeking to do. Paddy Tipping: You have given us one example, milk bars, what are the other examples of innovation and market access? Q312 Chairman: Why has it taken so long? Why is this industry so slow off the mark? Mr Bellamy: I think you have got to look at the market share argument. Clearly what dairy companies have needed to do, as they have seen their one retail outlet in terms of doorstep delivery be transferred to the major multiples, they have needed to concentrate on winning market share from those major multiples and that has squeezed out the innovation process. What we now need to do is encourage a reversal of that trend so that we can build brands and encourage innovation. That is what we are seeking to do. You asked me for another example. I think the flavoured milk area is a marvellous example of what we ought to be doing in this country. If you go to any other country in the world and you will see a range of flavoured milks in their own category on supermarket shelves. If you go into a supermarket in this country you will see flavoured milk on the top shelf of the milk fixture. What we are seeking to do is research into flavoured milks, into flavoured milk additives, and recently we have seen new products launched really on the back of some research which we carried out last year. Our strategy is to understand the consumer, to carry out the research, to look at innovation and then to publish that as widely as possible so that companies and organisations across the industry will take that up and carry it forward. Mr Peacock: Similar things have happened in the cheese area and in things like dairy deserts and the use of cream. There is plenty to go at and that is the sort of thing we are attacking in a similar manner to the flavoured milk and the liquid milk. Q313 Mr Wiggin: Can I just ask a question on the fat content because one of the problems I think milk consumption has is that it has a percentage of fat within it. That is something that people do not tend to want. How are you looking at that and dealing with that because actually the fat free stuff is not really very milky, shall we say? Mr Bellamy: I think there is a lot of confusion about the effect of fat within the market place. Our belief is that fat is a deterrent to people purchasing milk and milk products and that the consumer does not understand the fat content of milk. Paddy Tipping: Can you just remind us what it is so it is on the record? Q314 Mr Wiggin: It depends on the milk. Mr Bellamy: The fat content of milk will be somewhere around 3.6 to four per cent depending on the cow and all sorts of things. Q315 Diana Organ: For the record, can you tell us - there is semi-skimmed and skimmed milk - what is the fat content of those? Mr Bellamy: Semi-skimmed will be at two per cent and skimmed milk will be less than one per cent. Clearly we need to get that out as a message to the consumer but again that offers opportunities and we are about to see Wiseman's - one of the major dairy companies - launching a product based around one per cent. Mr Peacock: The industry does a survey on a regular basis asking the consumer what is actually the fat content of milk and about 30 per cent of the people who reply to the survey say that whole milk or full fat milk, whichever term you use, has indeed got 30 per cent fat. Q316 Mr Wiggin: The difficulty is not just the fat content but when you balance that as to why milk is good for you, that equation perhaps also needs a bit of pushing. Mr Bellamy: Yes, I totally agree. Through our work with the Dairy Council where we are communicating those messages in co-operation with DIAL to the consumer world our problem, as always, is that the consumer is even more interested in the nature of the product rather than health aspects and health aspects do not sell the product. Q317 Chairman: Can I just say one thing and then Diana can come in. But, given that health association with milk, again have you not missed a trick in terms of some of the ways in which other products have had their comeuppance because of the various food scares there have been? Milk, within reason, has never featured in that and milk has got the benefit of being seen to be a healthy product and yet the consumer either forgets or is disinterested in that. Mr Bellamy: Chairman, we carry out a usage and attitude survey every year on milk, as Brian said, and despite people's belief about fat content, the metric on people's attitude towards milk as a healthy product which is good for them remains in the upper 90 percentile. Despite the fat issue people believe that milk is a natural healthy product and continue to do so. Q318 Diana Organ: I have just two points, really. One is why do you not market it at 96 per cent fat free rather than four per cent with fat? Also there is a real campaign I think that can be done because young teenage girls are very sceptical at doing things which are good for them and actually it is crucial that girls between nine and 13 do drink a fair bit of milk because otherwise later in life they will get osteoporosis. Mr Bellamy: Very quick answers. First of all we are marketing milk as 98 per cent fat free but I have to point out that is against Food Standards Agency guidelines because they believe it is confusing the market place. Secondly, we will be in an application to the EU for structural funds to help communicate the messages to teenage girls. Chairman: We have to rush off so as not to keep the Minister waiting. Any additional evidence please send to us. Thank you for your evidence this session. I am sorry we are even more pressed this time because we have to go and vote. The Committee suspended from 5.34pm to 5.46pm for a division in the House Memorandum submitted by the Department for Environment, Food and Rural Affairs Examination of Witnesses Witnesses: Lord Whitty, a Member of the House of Lords, Minister for Food, Farming and Sustainable Energy, and Mr Andrew Slade, Head of Livestock Products Division, Department for Environment, Food and Rural Affairs, examined. 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 we have any 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, 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. Q340 Paddy Tipping: What about the notion of putting more transparency into the supply chain? How could we do that? You are not very keen on a regulatory body but there needs to be trust and a shared vision of the way forward, and transparency is an important element of that. Lord Whitty: Yes, I think as with other parts of the food chain we can all do with a bit more transparency both on the question of how prices are set and what deals are done and on the stability of arrangements. Some work has been done on that by the MDC, on pricing in particular. The Food Chain Centre now is also looking at those relationships, it has just started on their look at the relationships within the dairy sector. I accept that some help in looking at issues of transparency would be desirable, that is a different issue from regulation. Q341 Paddy Tipping: I accept that. How would we do that then? How would we persuade people to work in a more transparent and co-operative way? You have got your Forum, which you told us earlier on, in a sense, was not your bag, it should be the industry taking this forward. Lord Whitty: The Forum has played its role in flushing out some of the information both in commissioning studies and in the work of the various sub-groups looking at the relationships which exist. As I say, there has been ongoing work on the same area by the MDC and what I think is very successful work on the food chain conducted by the Food Chain Centre in relation to red meat is now being looked at in terms of the value analysis and relationships within that sector. That is part financed by the Government and also part financed by the industry and one of the several post Curry institutions, as I call them, is hopefully helping to facilitate the industry to put its own house in better shape. Q342 Mr Jack: Can I just explore what you mean by this word transparency. One of the things that dairy farmers would like to have sight of is who gets what in the value chain? Do you mean that by transparency? Lord Whitty: Partly, yes. Q343 Mr Jack: So you would like to see a proper understanding and disclosure by all the parties up the chain of what their respective shares were, to answer the question which has permeated through, particularly from the farming standpoint, the perception that they are not getting their fair share of the value chain? Lord Whitty: I am not suggesting that we could easily establish what every litre of milk had taken from it. This is actually a relatively simply food chain compared with red meat. There are only relatively few people who are taking any part of it at all. The milk goes straight from the farm to the processor and straight from the processor to the supermarket. Q344 Mr Jack: What do you mean, therefore, by the word transparency? If it is a simple food chain there ought to be simple answers to simple questions. We are struggling. We just heard evidence earlier that those who represent the industry somehow magically never monitor what retail margins are, it is not their territory, it is not their business to know if retailers are making too much or too little, this is not where they operate. Your image of transparency gives me some hope that perhaps the relative shares might be exposed, or would they? Lord Whitty: The across the board ones would be, yes. There would be some, if you like, benchmarking of what happens in particular parts of the chain. Q345 Mr Jack: If I go to the Food Chain Centre and say "what are you doing to make this more transparent", what are they going to be doing? Lord Whitty: They are analysing the value of the product at the different stages in the chain both from the liquid milk side and on the product side. They are at a relatively early stage of their activities. Q346 Mr Jack: They are going to analyse the value at different stages in the chain. What is the purpose of this analysis? Lord Whitty: The purpose is that the industry could operate on a more rational basis. As Andrew has just reminded me, the KPMG report also covers broad stabs at this area in the regional development detail. Q347 Mr Jack: You are a key stakeholder, to quote modern parlance, in the food chain sector. The Government have put money into it and you say you hope as a result of their work the industry will operate in a more rational way. Perhaps you could explain to us where you see the rationality. What do you mean by that? Lord Whitty: There are a number of different aspects to this really. We have an industry which has operated on a very variable price at the farm gate, has largely because of the quota system produced roughly the same amount of milk whatever the state of the market - somebody once said to me, "If the price of milk goes up they produce more, if the price of milk goes down they produce more" - and the self-interest of all elements must be a greater degree of stability in that chain. Certainly it is in the interests of the producers, I am pretty certain it is in the interests of the processors. It is an industry which in a sense has some over-capacity - somebody referred to the quotas as being a constraint on production, actually they tend to be a motivation for production and there is certainly over-capacity in the sense of getting a profitable return on it. There is some significant instability in the market, both short-term instability, which the Forum has done a little bit about in relation to seasonality, and also longer term instability because there is no long-term, or very few, long-term, firm contracts at price and quantity in the liquid milk side; there are more stable relationships in some of the product side. But again if you had more clarity on the flows both of the milk and of the price at which milk was being exchanged I think the market could react more sensibly to develop longer-term stability. Q348 Mr Jack: Do you think as a result of these discussions, bearing in mind that both the processing side and the supermarkets are always going to be the big players relative to the smaller scale supply side, that there will be a real development of a mutual understanding about the need to try to sustain a dairy industry? The Committee has learnt about the continual haemorrhaging of numbers and inevitably there are implications for the well-being of the rural economy if you have this continual reduction in the number of dairy farms. Obviously some may amalgamate with others but there is bound to be an impact and sustaining a dairy industry would certainly from the industry stand-point be a key objective. Do you think there would be more mutual understanding and recognition of the effect which large players have on small players in this market place as a result of the measures you have described? Lord Whitty: I am not sure if it is entirely as a result of the measures I have described, but clearly part of establishing trust and mutual acknowledgement and understanding of what the position really is does depend on having figures and information which are largely agreed, and it is probably a sine qua non rather than what delivers a more stable outcome. It is unlikely that the outcome would be an industry which had the same number of operators in it as it currently does. I do not think we are talking about reversing or even freezing the exit from the industry of a number of producers, but what has happened until recently has been that the total number of cattle has not gone down very much, the production has more or less stayed constant, and it has been largely amalgamations of herds and amalgamation also of the processing as well. The net result is that neither is in a particularly economic position. Chairman: The missing element so far is the role of the supermarkets and whether they themselves should be much more subject to a firm form of accountability. I will ask Paddy to ask some questions on that. Q349 Paddy Tipping: They are the big powerful player, there is a code of practice but how do you rate the current practice? Is it working? Is it effective? Lord Whitty: No. The OFT study itself shows that, although ou can read it both ways. The code of practice, whilst it might be said it is by and large being followed, has not actually given any security to the suppliers of all sorts including the dairy sector, and the likelihood is that people have not complained about the supermarket practices because they are afraid of being delisted or other sanctions brought against them. I therefore think the code in its post-OFT inquiry into the big four is not viable and the OFT's further work on auditing will throw up some examples as to why it is not operating as it should. The question then is what you do about it. Do you have a different sort of code which would probably be subject to the same problems? Even if you widened it to include the other large supermarkets and possibly even the large processors, the problem would still remain as to whether an individual small supplier would be prepared to take advantage of that code if he feared there could be significant sanctions. So I think the supermarkets are probably the part of the food chain which is most susceptible to public opinion and most sensitive to public opinion and therefore need to recognise their obligations to the supply chain in a more corporate responsibility sense maybe backed up by a code, but nevertheless the code is not going to deliver the totality of what is needed in terms of trust and stability of the chain. Q350 Paddy Tipping: You meet the supermarkets fairly regularly, what are you saying to them? What are you putting to them? Lord Whitty: I say all sorts of things to them. Q351 Paddy Tipping: Well? Lord Whitty: Of course they will say, "The bulk of the value added in this chain is not us. We operate on fairly tight margins, we operate in a highly competitive sector, a big part of the difference between what we charge on the shelves and the 18p, whatever it is, the 19p-and-a-bit now, that the farmers are getting is not down to us." Q352 Paddy Tipping: But this is a strange world, is it not? We have an OFT code which many of the producers are saying is ineffective and are frightened of putting into operation; you, the Minister, have just agreed it does not work; you have suggested the OFT knows it does not work, so what next? What is the logical next step? Lord Whitty: The next step the OFT are engaged in is doing an independent audit themselves which would require people to put their head above the parapet. I think that will show up maybe not a wide range but some serious problems. I am not particularly talking about this sector but am talking about their relationships with suppliers in general. Personally, I think there is scope for a voluntary code which the supermarkets, rather than being differentially subjected to in terms of the top four, could be persuaded to sign up to. That would change the atmosphere, it would still require people to identify themselves if they had problems about the non-operation of the code. Taken together with other aspects of greater transparency within the chain, this could with reasonable goodwill - and part of the Forum's activity is to establish that reasonable goodwill in the dairy sector - lead to more stable relationships, more longer term relationships and more confidence therefore in the long-term future for those who remain in the industry. Q353 Paddy Tipping: But there are some in the industry who say, "This code of practice ought to be given the force of law and therefore if the supermarkets do not stick to it - and there is an issue about enforceability there which I accept - they should be liable to some kind of offence." What do you make of that suggestion? Lord Whitty: Of course the current code on the top four does have the force of law and a proven transgression would be subject to further Competition Authority intervention. The problem is, we have never got to the stage of proven transgression. Q354 Chairman: Why is that? Given that everybody complains about everybody in this industry, why have we never had a situation where ---- Lord Whitty: They complain about everybody else to me and you and in the pubs and clubs of the agricultural community, but will they say, "You diddled me on that contract" when they want to sign another contract next week? The answer to that is not very often. That is not just a criticism of the industry, it is understandable that if you want to remain in business you do not risk delisting. I think the supermarkets are not prepared to be quite as harsh in that regard as people fear, but the fear is a very real one. Q355 Chairman: People go from being a member of a co-op to being a direct supplier to going off on their own, producers do take all manner of risks, yet you are telling us that the big bad threat of the supermarket prevents them from really actually saying what they think, so their only recourse is to picket. That is a pretty sad indictment of this industry. Lord Whitty: I do not think their only recourse is to picket in fact. The relationships with the processors and the retailers are best discussed around a table rather than in the carpark of a regional distribution centre from my point of view. There are times when shock tactics have an effect but actually that is rather short-term and in the long-term they have to sit down and discuss. At the end of the day the supermarkets are still going to be there never mind how many pickets David Handley and his friends manage to mount. Q356 Chairman: They certainly moved a lot quicker last time when they had the pickets on; the 2p went on. There is an argument about whether it went --- Lord Whitty: The more respectable elements in the farming industry will say it was because of a lot of very solid work which the former president of the NFU was doing. I am not saying that the picketing has no effect, clearly if you are picketing you immediately start thinking a little more sharply about what you are doing, but it is not a long-term solution. A long-term solution does require sitting down at a table with them and that is why whatever the short-term tactics of Farmers for Action and others have been, in the long-term you do have to discuss this, and that is one of the things the Forum is attempting to facilitate. Q357 Paddy Tipping: What are you saying, as one of the more respectable members of the agricultural sector? Lord Whitty: I am not respectable at all, I am a politician. Q358 Paddy Tipping: I was going to remind you of your history as a trade union leader. What would your advice be to the farmers who feel they are being ripped off? What should they be doing? Lord Whitty: As trade unions you can have the odd demonstration and strike and whatever but at the end of the day you do have to negotiate, and you usually have to negotiate with somebody who is more powerful than you. You need to get yourselves together rather more effectively in terms of how you negotiate, which in a sense is one of the Curry messages, that the industry does not get itself together sufficiently and even the big co-ops within the sector do not always agree with each other and there is a lack of cohesion between the producers and the processors when they are dealing with the supermarkets and the catering companies. Chairman: Whatever the situation at the moment, there are those who will predict it will get that much worse as prices fall after the Single Farm Payment. I will ask Bill Wiggin if he can tease out from you what you think is going to happen. Q359 Mr Wiggin: Let's start with the decision to adopt a flat rate payment. Do you not think this may penalise the most efficient dairy farmers, that is those who hold the most quota per hectare? Lord Whitty: There will be some redistribution, both away from dairy and within dairy, but that is the nature of the total reform. It does have a slightly differential impact on dairy, partly for the reasons we were discussing earlier, namely that the earlier stages of reform for dairy are later than those for other sectors. So there would inevitably be a distributional effect if you moved from what is a production-related subsidy to an area-related subsidy. Within dairy you could argue that the distribution was in favour of small and medium producers. Some aspects of social and environmental policy would be, yes, you do need to support them, but that is not the objective of the policy, the objective of the policy is to provide over a pretty long lead-in period a situation where there is no differential in terms of support to farming except one which reflects the public good which farming delivers to the rural community and to the landscape, and that farmers' decisions are therefore based on what the market is. That applies to dairy as much as it does to anybody else. If you are a farmer with so many hectares, you would then have to decide in the light of the fact all payments are now decoupled, or will be at the end of the process, what is your best future market. Yes, as compared with under the old system to the end of the new system, dairy will in aggregate lose out and some of the more intensive, larger dairies would lose out within that. Q360 Mr Wiggin: So you agree it actually penalises the most efficient? Lord Whitty: "Penalise" is not the word I would use. The most efficient will be the most competitive and the most able to face up to the new challenges. If you are looking at a static position and see a farmer with so many cows per hectare, with so much production per hectare now, with so much subsidy particularly as the direct payments come through, if he remains absolutely static at the end of that will he do less well than somebody slightly smaller or somebody in a different sector? Of course, the whole point of the reform is to get everybody more market orientated, so they are engaged in a process of restructuring the industry which will end up with a more competitive sector, so there is no point taking somebody in 2003 and then somebody in 2013 in a totally static position - if they have any nous, and many of these farmers have quite a lot of nous in terms of the more progressive elements in dairy farming, they will put themselves in a position to benefit from the market orientation. Q361 Mr Wiggin: So we all want market orientation, we all want to bring different parts of the dairy sector together to talk to one another, yet the way the Government sends out that message, and it is different in Wales and it is different in Scotland, is to say, "If you are the most competitive, you have to face the toughest time". It is an interesting way of delivering your ambitions, is it not? Lord Whitty: What we are delivering is a continued and definite level of support for farming and an ability for farmers themselves to adapt to the market. If you were talking to entrepreneurs in any other sector, they would say, "That is exactly what we want." Q362 Mr Wiggin: I am not sure they would. Lord Whitty: Well, I think they would actually. I think most entrepreneurs in most parts of the industry would say, "What we want is certainty about what Government is going to do and freedom to meet the market for our products on our own decisions." Q363 Mr Wiggin: I am sure they would agree with that part, I am not sure they would agree with the ---- well let's talk about the difference with Scotland and Wales. Certainly in my constituency on the Welsh borders there are real difficulties with competitiveness now. To what extent do you think English dairy farmers are going to be disadvantaged in comparison with their neighbours across the border because of the way the Assembly has chosen a different type from you in terms of the Single Farm Payment scheme? Lord Whitty: All parts of the United Kingdom will be decoupled. Q364 Mr Wiggin: I know that. Lord Whitty: So that means there is no additional subsidy for any additional pint of milk or additional number of sheep. So in one sense they are all equal. In marketing decisions or whether they will increase or decrease production, that is the relevant thing. I appreciate that psychologically if you are getting a closer amount to your historic payment one side of the border as against another, you may feel better off, but actually the decision facing you is based on the fact you are now in a decoupled world, and there should therefore not be any market advantage to being on different sides of the border. Obviously, I would have preferred if all parts of the United Kingdom had taken roughly speaking the same decision, but that is one of the consequences of devolution and people take decisions accordingly. There are parts of the likely Welsh position which will be less welcome to the Welsh side of the border; they may well be using national envelopes, for example, which we have decided not to. Q365 Mr Wiggin: There is a real problem though with severely disadvantaged areas which in my constituency are classed as such because of their altitude, they are not moorlands, they are just one side of what is the other side a Welsh mountain, and yet those farmers are going to receive a third of the flat rate payment which their neighbours on the other side and probably their neighbours further down the hill get. You have created with this scheme some extremely peculiar situations for farmers going forward. Do you think it needs to be looked at again? Lord Whitty: When we proposed, suggested or hinted pretty broadly was that we were likely to favour a system which moved towards an area payment rather than an historic payment. There were a lot of grumblings from some parts of the industry and a lot of support from other parts of the industry taken across the board, but one thing they were united on was that if we do that we would have to do two things. One was to ensure it is phased in over a reasonable amount of time and the other is that you avoid the most substantial redistribution. The first was met by having what was probably the longest transitional period we could conceive of which was eight years, the second was by dividing England between two areas so effectively there was not a huge movement of the money, if you like, up the hill. In order to comply with Brussels rules you have to have an area which has some legal certainty about it, you cannot simply define it by current structures of ownership or terrain, and the SDA border is one recognised in European and British law, English law, and which was the most obvious way of stopping the most drastic of the redistributive effects. It still means the money within the SDA area will be the same in total as it ever has been. The distribution within the SDA area, as for distribution in the non-SDA area, will of course change but the total amount of money in the SDA area will be the same. This does have some anomalous effects. I know the beef sector in particular is very concerned about the differentiation of those who happen to be classified as SDA farms in part or in whole and those pretty much adjacent. We have received representations from particularly the beef farmers and other local groups of farmers who are involved in that and clearly before we finalise these regulations we will have to take those representations into account, but wherever you draw the line there will inevitably be some anomalies. The bigger issue was if we had gone for a single area for England the redistribution which you and the dairy sector are complaining about would have been significantly greater. Q366 Mr Wiggin: Let me start by saying I am grateful for the fact you are still considering. Can I also say there is another worry which is, if you are in of these severely disadvantaged areas you will have to increase your production to maintain your income, and therefore you may not have moved the money up the hill but you may have moved the cows up the hill. Lord Whitty: That is one of the issues we need to assess as to how important that might in practice be, because that could have in some circumstances at least some environmental downside as well as rather distorting the pattern of production. Mr Slade: In certain parts too few cattle is a problem environmentally, just as much as in other areas within the SDA too many is a problem. Q367 Chairman: The grazing implications. Mr Slade: Yes. Q368 Paddy Tipping: The real issue in upland areas has been over-grazing and I am pleased to hear the Minister say, "We think there may be some environmental consequences of this and we are mindful of this and need to look at it." Part of this could be looked at as a result of the hierarchy of agri-environmental payments. Lord Whitty: That is one way of dealing with it, certainly both the entry level scheme and higher level schemes could perhaps provide some help to farmers in those situations. Q369 Chairman: Just before I bring in Mr Jack, you have obviously been lobbied by the beef industry, unless I am misunderstanding this you are going to be heavily lobbied by the dairy industry on the way in which the English Single Farm Payments are going to be made. This was the part of the industry, certainly in the South West, which was adamant it had to be historic, it could not be area based. Okay, we have a historic compromise, I could say, in that it is moving from one to the other, but that industry is going to be very unhappy. Lord Whitty: I have already received, and would anticipate further, representations from the dairy sector in the South West. I would not be too disparaging if I say I rather expected that whatever proposition we have put out. Just to be clear on the nature of the redistribution, we are talking about a period where at worst the large dairy farms would have over eight years of reduction of up to 17 per cent in their support, whereas the smaller and medium sized farms would actually have an increase, the smaller ones a significant increase. When we talk about the South West in particular, bearing in mind they do tend to be on the vociferous side, there are actually more small to medium sized farms there than in many other parts of the country who might actually have a better case to complain about the redistributive effect. Q370 Mr Jack: Could you explain to me, because I really do not understand, how it is that the SDA areas have such a low level of support? Up to now, when if you like we had domestic control over payment for disadvantaged areas, we did it the other way round, we looked at the special characteristics and we made some additional payments to compensate for the problems of farming in the least able areas to sustain agriculture. But looking at the Farming Today interview, which I am sure you must have heard on 2 March, we have the complete reverse. Could you just explain to me how does SDA end up with effectively the lowest level of support when there are still tremendous structural problems in those parts of the country? Lord Whitty: The current payment, the historic payment, in the SDA area is entirely based on the production SDA areas, and the number of sheep per hectare in some of those upland areas can probably be counted on the fingers of a single hand. If you are basing it on the historic payments then it is sparsity which is the answer as compared to lowland areas. Of course that calculation does not take into account the HFA which is unaffected by all these calculations. Q371 Mr Jack: Just for the record could you refresh our memory about HFAs? Lord Whitty: The Hill Farm Allowance, which is made on an area basis in most of the SDA areas, is unaffected by any of these calculations. So that, if you like, national pillar two finance part of the equation, remains the same. It is a diminishing absolute figure but it is not altered by these changes. Q372 Mr Jack: Looking at the Farming Today interview it may be a partial position in terms of the total amount of support which could be made available, and I would very much like a note to try and make certain I have a proper view of what is going on. The discussions centred on Mr Robert Gosling who had 320 dairy cows - which going back to some evidence earlier is actually a large herd, so here we have somebody who is twice the level which we are told is large and therefore efficient - produced 21/2 million litres of milk every year, 7,000 litres a day, which all sounds very good news, but then you turn over in the transcript and this particular farmer is going to be some £24,000 a year worse off than a comparator in a non-SDA area. I was not certain what the basis of those numbers was but it does not seem to be quite the picture of trying to assist farming. The difference is that the Single Farm Payment is about £20 per acre, £60 per acre less than the £80 attracted in the non-SDA land. That just seemed to be the wrong way round and I do not understand how those numbers had come out, and why the SDA seemed to get the worst deal. Lord Whitty: The total amount of money within the SDA does not alter as a result of this. Mr Wiggin: What do you mean by that? Q373 Mr Jack: If it does not alter, if it is a different label on giving some of it back to the farmer, just explain it in money terms. Here we have, according to the numbers we have been given falling out of this Farming Today interview, a £60 deficit per acre if you are in a severely disadvantaged area. Is that order of magnitude difference right or wrong? Lord Whitty: I do not know about that individual farm clearly, but as with the rest of England if you move away from a production subsidy to a land subsidy over an eight year period then the more intensive the producers operating on a smaller acreage will lose out compared with the less intensive producers. In a sense, put crudely in probably that case, the subsidy will have moved away from cattle towards sheep in that area if that is the kind of farming which operates in the uplands. Q374 Mr Jack: Let us focus on this particular farmer. I am still not clear, and I will put my hands up and say it may well be my lack of understanding, and it probably is, but that is why I am just probing this. Here we have a farmer in a severely disadvantaged area, in this case in Derbyshire, looking after over 300 cows, so it is the kind of unit we might want to encourage because it is large and we hope it will be efficient. The net result is a severe reversal in terms of the support, the decoupled payment which the farmer is going to get. Bearing in mind the importance which I guess this farmer has to the rural environment in which he operates, one might be inclined to say, "We would want to find ways of sustaining this farmer given the implications to his piece of rural Derbyshire if he were not to carry on what he is doing at the moment." With 320-odd cows it ought to be quite a viable business. I do not understand how these numbers have fallen out and why you then go on to say that the total amount of money in the SDA remains the same. I do not understand how that works. Please explain it to me. Lord Whitty: I thought I was explaining it to you. The amount of money in the SDA area at the moment and who gets that money, is determined by how many cows you have got, how many sheep you have got. The amount of money in future will be the same amount of money but distributed at the end of this period by how much land you have got, provided you are in cross-compliance. That therefore is bound to mean somebody who has relatively small amounts of land and relatively large numbers of beasts will have less of a share of that, but the total amount in the SDA area as a whole will remain the same. Mr Wiggin: But are the SDA flat rate payments the same? Sorry. Q375 Mr Jack: One of the things which Herr Fischler said he did not want to see under the proposals put forward by Member States was substantial redistributions of monies, he was concerned about that. Clearly you have won the argument in global terms about what you want to do in the United Kingdom, but in the SDA - and I follow the logic of the argument you have put forward in relation beasts to land - are we not going to see some structural changes occurring? In the case of this particular dairy farmer it may well be - if the numbers are correct according to the radio interview, he says here and I quote, "The difference between myself at A and the farm down the road which is non-SDA and the same acreage will be something like £24,000 a year, so that is quite a major impact on our business." I would agree with him, to try and take £2,000 a month out of the costs of his business - and he is already in a difficult area anyway but he has 325 cows and seems to be doing all right - to find £2,000 per month savings is by any stretch of the imagination an awful lot of money to take out of his business. If you do not want to see a structural change in terms of farming in areas like that, how are you going to address that kind of issue? Lord Whitty: I have never said I do not want to see any structural change, I think the structural change should be determined by what farming in each of these areas could produce for the market. If that particular enterprise is in the long-run not sustainable at the level of support we continue to give, then clearly there will be some structural change there as elsewhere. As I said earlier, one of the ways in which you avoid huge redistribution is by saying the upland areas, broadly speaking, will be treated separately from the lowland areas, because otherwise there would be, given the vast acres of moorland you might otherwise have to enter into the equation, a very significant shift, much greater than the 10 or so per cent out of dairy we are talking about here, away from the lowland probably more intensive producers to the uplands. So that would be a very serious ---- Q376 Mr Jack: Let me ask you another question. What modelling have you done to assess the impact? You have said to us that perhaps you would not shed a tear if this particular farmer moved away from dairy to ---- Lord Whitty: I did not comment on this particular farmer, I said there will be some structural change. Q377 Mr Jack: You have talked about structural change. You have said, "We will produce what the market will require", but if I have understood you correctly livestock producers in general in the SDA are all going to face the same problem and, bluntly, in the SDA areas there is not a lot else you can do but graze things either to produce meat for the table or, in this case, milk for the bottle. So if your range of alternatives is not that great, one will see potentially farmers saying, "Enough is enough", and then you will have the difficult problem of what is going to happen to the rural environs, the landscape, et cetera, et cetera. So what modelling has Defra done to try to work out what the likely economic impacts and commercial decision-making there is going to be by farmers in this area? Lord Whitty: If you are saying what will be the sectoral impact area by area ---- Q378 Mr Jack: No, I asked a specific question, what modelling have you done to try and work out the impact on these areas of the policy mix which you have now decided on? Lord Whitty: Modelling of what? Modelling of which sector gets the money or of where the total support is going? Chairman: I think we are looking at the differences within the SDA area but also between the SDA areas and the non-SDA areas. Non-SDA areas seem to be doing better. Q379 Mr Jack: Here is the Colman and Harvey Report which talks about the future of UK dairy farming, it is a piece of economic modelling, have you got a similar document tucked away in Defra which says, "The future of farming in the SDAs"? Lord Whitty: No, is the short answer to that. Q380 Mr Jack: So you do not know what the impact is going to be of the policy you have adopted on SDAs? Lord Whitty: We know what the overall effects will be but we do not know, and we have not got the modelling, what the effect will be in individual sectors. Indeed when I was referring earlier to the earlier modelling, the redistribution would have actually greatly benefited, disproportionately benefited, the SDA area. We have now moved away from that to put the SDA area ---- Q381 Mr Jack: Mr Wiggin expressed joy at the fact there was still a chance for you to consider these matters and decide what you were going to do. How are you going to decide what you are going to do when you do not know what the effect is you want to respond to? Lord Whitty: There are two different effects. One is the effect of not having a differentiation, the other is, is there an alternative differentiation which would be less distorting. If there is an alternative differentiation, is that acceptable in terms of the rules which were agreed last June? Q382 Mr Jack: It sounds to me as if you have been giving a little thought to these less distorting and alternative methods, perhaps you would like to share your thinking with the Committee on this? Lord Whitty: I would not at the moment. The issue is, if you are going to use any differentiation it has to be one which is established legally to the satisfaction of the Commission. The most obvious such differentiation is the SDA, there is not a very obvious alternative. That is a dilemma we have. Wherever you draw the boundary, there will be anomalies either side of the boundary. I regret this particular farmer would appear to be particularly suffering from that because he has an immediate comparable operation down the hill, but there will undoubtedly be - and we are talking about a period of eights years' adaptation - changes in structure of ownership to adapt to the new situation. But there will be some downsides. Some of those downsides, as I said to Mr Tipping earlier, could be addressed by the introduction of environmental schemes which would benefit people who were still grazing cattle or sheep. Q383 Mr Jack: You are actively looking at all of these options? Lord Whitty: Yes. Q384 Mr Jack: When do you think you might be able to come to some conclusions? Lord Whitty: There are a lot of aspects of this policy on which we need further consideration: the nature of cross-compliance, for example, on which we will be consulting. There are others on which we have to wait for the final definition by the EU rules which we are not now expecting for another couple of months. That takes us to at least May and probably June before we can finally indicate the total structure of this package. Q385 Mr Jack: It sounds like what I call the "ministerial summer" when you might just be able to say something further about this. Lord Whitty: Roughly that order of timescale. Q386 Mr Jack: Finally in terms of the differentials, because the same radio interview compared and contrasted the Scotland, Wales, England situation, which Mr Wiggin addressed earlier, are you worried at all about quota migration from England to Scotland? Again some of the differentials, farm versus farm of similar size, are quite substantial, and Scottish farmers might be busy plundering our quota. Are you not worried about that? Lord Whitty: They can buy the quota if there is quota on the market, but I go back to my earlier point, that in a decoupled system the Scottish farmer will be getting the money on the basis of his land. There is no particular point, unless he can make a profit out of it, acquiring additional quota. If there is profit to be made out of it, then the English farmer will be faced with exactly that same situation and no doubt will not wish to sell him the quota, or at least sell it at a rather inflated price. So I do not think there will be a general migration of quota, but there is a situation where that obviously could happen, and because of the psychology of the different methods of payment it is possible there will be some slight tendency in that direction, but I do not think it is a very rational economic one. Q387 Chairman: What we have been trying to tease out is in a sense this industry is being driven towards greater efficiency and it is going to be driven towards greater efficiency up the food chain whether we like it or not, and there may be some things we will have to say in our report about that, but at the same time that producer, potentially from what we are hearing, is possibly going to be moving in a slightly different direction away from greater efficiency if the numbers are to be believed. I think the one thing which surprised me was the notion that there is a neutral effect in terms of the SDAs when in effect we do not really know that yet because the numbers have not yet been calculated. You may want to come back to us in terms of additional evidence to help us tease out what implication that is going to have, but I will say no more. Lord Whitty: I did not say there would be a neutral effect in the SDA, what I said was the amount of money which is currently within the SDA would remain within the SDA, it would clearly be redistributed in a somewhat different way. Chairman: It is not going from the SDA into other areas, so I would take that to be a neutral effect. Within the SDAs there will be some redistribution but that obviously needs to be talked through quite carefully. Q388 Mr Wiggin: In your answer to Mr Jack you talked about agriculture based on the support it can receive, what I am unhappy about is that in my first question I think I pointed out how you would drive farmers essentially to farm more intensively in severely disadvantaged areas, and there is a danger of course they will simply give up and then we lose the environmental benefit, because if the SDAs are at such a disadvantage then their land value will also fall, so you will hit them twice, not only with a lower flat rate payment but also with a drop in their land value. I am very worried about that. You also mentioned moorland, and my particular area and the area we were talking about in Derbyshire are clearly not moorland, so the legal definition of SDA which you were talking about clearly does not apply in a uniform way, and perhaps that is also worth having a look at. Lord Whitty: The SDA includes all moorland. Q389 Mr Wiggin: It is moorland and highland, is it not? Lord Whitty: Yes, it includes lots of other areas which are not moorland. Mr Wiggin: That is the danger, that people tend to think of it as moorland and it is clearly not. Thank you. Q390 Chairman: We have now finished our questions. There were two bits of evidence which we wished to have back in terms of supplementary written evidence. There were Mr Jack's two points, firstly in terms of helping us to understand how the Forum operates and the terms of reference, even though there are no formal terms of reference it would be useful to know what the operating system is. Then the second issue is where are we with regard to some of the negotiations on the actual figures. We could do with some dates but also some understanding of what is likely to be happening over the next few months. Is that something you could provide us with? Lord Whitty: I am not sure what you mean by "negotiations". Chairman: People are coming to you asking you to look again at some of the aspects of this. "Negotiation" is maybe too strong a word, "discussion" perhaps, as to how that will take effect. Q391 Mr Jack: If you could include what I call the mechanical working-out of the numbers to illustrate the points you were making, so I can personally properly understand, compare and contrast between SDA and non-SDA areas? Perhaps you could put a little model in for us which would certainly help me. Lord Whitty: I think we can do modelling to that extent. Mr Jack: Thank you. Q392 Chairman: Thank you for your evidence. I am sure you will read it. I do not need to say that you cannot undo what you have so far done but there may be additional points. Lord Whitty: Indeed. Thank you very much. Q393 Chairman: If I can ask everyone to leave because we are now going to try and make some sense of what form our report is going to take. Lord Whitty: Good luck! Q394 Chairman: All I would say is we need every bit of good luck to make sense of it. If people would not mind having their discussions outside because we will have to struggle on a bit longer. Lord Whitty: Thank you. |