Memorandum submitted by Dairy UK (CAP
27)
DAIRY UK
1. Dairy UK is the trade association representing
the interests of dairy farmers, producer co-ops, dairy processors
and bottled milk buyers in the UK. Milk processed by Dairy UK
members account for over 90% of the milk produced in the UK.
THE DAIRY
INDUSTRY
2. The dairy industry is a highly invested,
technologically sophisticated, dynamic food industry. Around 21,000
dairy farmers produce 14 billion litres of milk which accounts
for 16% of the value of UK agricultural output. Dairy processors
employ 34,000 people and the turnover of the sector at £6bn
constitutes 10% of the UK food and beverages sector.
3. Dairy farmers play a major role in maintaining
the current rural landscape. The dairy industry's products form
a major part of the diet of UK consumers and they provide clear
and substantial nutritional benefits.
4. Dairy UK would welcome the opportunity
to give oral evidence to the Committee.
Dairy UK's key points
5. The six key points that Dairy UK wishes
to draw to the attention of the Committee are:
(i) The industry is subject to price deflation
as a result of market pressures and the effects of CAP reform.
This may be further compounded by the effects of any WTO agreement
on agriculture.
(ii) In order to sustain itself the dairy
industry needs to be able to undertake further rationalisation
and consolidation. This process must not be unnecessarily impaired
by the competition authorities.
(iii) The industry must not be discriminated
against compared with its EU counterparts as a result of the implementation
of CAP reform in the UK. In particular dairy farmers should not
be subject to higher rates of modulation and funds raised must
be matched by the Treasury.
(iv) In order to ensure that producers in
any region of the UK are not disadvantaged the Government and
the devolved administrations need to reach an understanding on
the limits of acceptable divergence in their implementation of
CAP reform.
(v) If further reform of the dairy sector
CAP entails cuts in support prices then compensation should be
provided to producers at the same level as the current round of
reform.
(vi) The industry needs time to adapt to
the current round of CAP reform and further changes should not
be undertaken until its impact has been fully evaluated.
BASIS OF
DAIRY UK'S
POSITION
6. Dairy UK interprets the Treasury's vision
document to mean the wholesale abolition of pillar 1 of the CAP,
coupled with the virtual abolition of all international trade
barriers, with expenditure on agri-environment schemes remaining
as the only government support peculiar to the sector.
7. We appreciate that liberalisation of
agricultural policy is the basic policy objective of the Government
and that liberalisation of world trade in agriculture through
the WTO will be a powerful impetus towards further reform of the
CAP. We understand that freer trade in agricultural products must
be part of a much broader liberalisation of foods and services.
8. We recognise that in the long term greater
trade liberalisation will generate economic benefits to society
and provide a powerful tool for growth in the world economy.
9. The impact of trade liberalisation on
the UK industry will not be uniform. There are strong regional
differences in product output and the markets served by the regions
of the UK. In particular, Northern Ireland is heavily dependent
on the production of milk powders for export. This means that
trade liberalisation, and in particular the future of export subsidies,
will have a major impact on the province.
10. The key issue for Dairy UK is whether
the intensity and timescale over which any reform programme is
implemented will give the industry sufficient opportunity to adapt
to maintain its competitive position.
11. The UK dairy industry has several inherent
natural advantages that should give it a strong basis to achieve
international competitiveness, eg; appropriate climate, strong
local markets and high levels of expertise. However, it also has
some inherent disadvantages such as comparatively high labour
and energy costs, high land prices and a lower level of industry
concentration compared with its potential international competitors.
They have been able to undertake a greater degree of consolidation
and are significantly more dominant in their home markets as well
as having greater international reach.
12. There are also variations in the competitiveness
between the regions of the UK and this is demonstrated by the
movement of quota over the past 10 years.
|
| Quota: Billion litres
|
|
| 1996
| 2005 | % change
|
| England | 9.90
| 9.44 | -4.6 |
| Wales | 1.44
| 1.56 | +8.3 |
| Scotland | 1.16
| 1.27 | +9.4 |
| Northern Ireland | 1.39
| 1.77 | +27.3 |
|
13. The dairy sector is already being reformed as part
of the 2003 CAP reform package. This will continue the price deflation
the sector has been subject to since the devaluation of sterling
since 1994.
14. Under the reform agreement price support is being
cut by the equivalent of 22% over four years. This is only being
partially compensated by the introduction of direct payments equivalent
to 60% of the price cut. This has been diluted by Defra's choice
in England of the area payment model, which will reduce the value
of payments to English dairy farmers compared to those operating
in the other countries of the UK where payments have largely been
distributed on the basis of historic entitlements. The value of
direct payments will be diluted further by compulsory and voluntary
modulation, financial discipline and funding of the national reserve
which could theoretically bring the total amount of deductions
to a maximum of 37%.
15. Price deflation arising from reductions in price
support and market pressures will necessitate a continued drive
for efficiency and competitiveness at both farm and processor
level. In the environment created by the current round of CAP
reform it is questionable whether the industry will retain its
existing scale. According to a report by Professor Colman, the
industry could reduce in scale by over a billion litres under
the pricing scenarios that can be expected under CAP reform.
16. This background of CAP reform, trade liberalisation
and market pressures means that the industry must be given time
and stability to allow it to adapt. The industry cannot be placed
in a condition of permanent flux.
17. Therefore, before committing ourselves to supporting
yet a further round of CAP reform, the full effect of the current
round needs to manifest itself, and then the industry needs to
evaluate its impact and the industry's potential to cope with
further adjustment. As the future of the quota regime is integral
to the question of reform, then Dairy UK's policy on quotas will
be determined as part of this review.
GOVERNMENT SUPPORT
FOR AGRICULTURE
IN GENERAL
18. We query whether the Government's aspiration of disengagement
of economic support for agriculture is viable given the peculiarities
of agriculture in a free market framework.
19. Farm production is extremely fragmented and the majority
of agricultural output is of undifferentiated products. This means
that farmers are subject to commodity pricing dynamics which places
them in the position of price takers that are unable to pass on
cost increases. Instead, farmers have to maintain their competitiveness
through improvements in cost efficiency.
20. This means that there can be no presumption that
UK agriculture will deliver up the high standards of animal welfare
and environmental performance desired by the Government, especially
if it is exposed to competition from countries with lower standards.
21. This tension in the Government's policy between environmental
aspirations and liberalisation is bridged by agri-environment
schemes, but the funding of these could be threatened if the Treasury
does not agree to match funding of voluntary modulation.
22. Given agriculture's key role in managing the environment
and contributing to the health of the nation, it must be questioned
whether the Government's aspiration of total disengagement from
the economic sustainability of the sector is desirable.
23. The main propositions advanced by the report, and
the questions raised by the Committee in its press release, are
set out below along with a summary of Dairy UK's position and
an elaboration of this position in detail.
GOVERNMENT VISION:
THE IMPACTS
OF FURTHER
CAP REFORM AND
TRADE LIBERALISATION
ON FOOD
SECURITY MAY
NOT BE
SIGNIFICANT. CAP REFORM
WILL STRENGTHEN
FOOD SECURITY
BY IMPROVING
THE DISTRIBUTION
OF FOOD
Question: Does the Government remain committed to UK food production?
Dairy UK Position: The vision demonstrates the Government is not
committed to UK food production and its implementation could undermine
UK food security.
24. In a completely deregulated international trading
environment there is no guarantee that UK dairy production will
remain at its current level.
25. Work undertaken by the International Farm Comparison
Network on behalf of the Dairy Supply Chain Forum indicates that,
on the basis of existing levels of efficiency, UK dairy farmers
could be competitive in a single unified global market. However,
this work relies on an extremely narrow evidence base and does
not take account of the potential of Eastern Europe, Ukraine or
South America. The UK dairy industry cannot compete with the lower
input costs of these nations. As a result world prices could be
at a level that would drive down UK production.
26. The Government has repeatedly stated that they are
not committed to maintaining the UK dairy industry at its current
scale. They have even implied that a more competitive industry
would be derived from a reduction in the current scale of production.
27. The issue of food security cannot be ignored. Relying
on international trade presumes that trade will never be disrupted
and that both producing nations and consuming nations will ensure
that this is the case. The same logic should underpin the gas
sector. Recent experience has shown that this is not the case.
GOVERNMENT VISION:
REFORM OF
THE CAP COULD
BE ACHIEVED
THAT WOULD
ENSURE A
FREE, FAIR
AND LEVEL
PLAYING FIELD
THROUGHOUT THE
EU
Question: What are the potential for distortions and inequality
of treatment of farmers across the EU?
Dairy UK position: English dairy farmers are already suffering
from the distortions permitted by current CAP Reform. It is essential
that the future development of the CAP ensures that further competitive
distortions are not introduced
28. Distortions are most likely to occur if the CAP is
re-nationalised. This could be the case if even more resources
are shifted to pillar 2, along with even greater discretion to
member states on how these funds could be spent.
29. CAP reform has already introduced a number of routes
by which distortions can be created.
(i) Determination of Direct Payments: Member states were
given discretion to decide how to distribute direct payments.
Within the UK itself three models have been chosen (historic,
static hybrid and dynamic hybrid). The upshot is that not only
between UK and other EU dairy producers are there differences
in the level of payment, but also within the UK.
(ii) Voluntary Modulation: Under CAP reform member states
were given the option to modulate direct payments above the compulsory
amounts fixed by the EU. The UK has been one of the few states
to use this option. The new budget deal now permits member states
to modulate funds by up to 20% whilst making match funding optional.
Consequently the reformed CAP already allows differences in the
level of deductions from direct payments and the amounts that
can be recycled back into pillar 2.
(iii) Rural Development Regulation: The RDR gives a wide
range of options for member states to choose from. The UK has
opted for agri-environment schemes that compensate producers for
the cost of attaining certain environmental standards. Other options
in the RDR allow members to spend money on improving competitiveness
and efficiency, which would improve the competitiveness of countries
using these options compared to the UK.
30. The vision document recognises the potential for
further distortions in shifting more funds to the second pillar
when it argues that "non-production distorting measures defined
and applied at member state, regional and local levels' must be
consistent with EU competition policy".
GOVERNMENT VISION:
INTENSIFICATION OF
PRODUCTION IN
THE EU HAS
BEEN ENCOURAGED
BY HIGH
LEVELS OF
MARKET PRICES
SUPPORT IN
THE CAP
Question: What are the possible environmental consequences
of the proposals?
Dairy UK position: There is no reason why the environmental consequences
of further reform should inherently be positive
31. The evidence put forward in the vision document for
the proposition that there is a link between intensification and
high levels of subsidy is thin.
32. There is every reason to believe that placing UK
agriculture under greater international competition could easily
result in further intensification of production or of land abandonment.
If UK agriculture is to compete with Brazil or America, then it
will be under pressure to copy their production models.
33. Exposing UK agriculture to international competition
and lower prices will not enhance the ability of producers to
provide environmental benefits. The compensation provided by agri-environmental
schemes to provide environmental benefits is also under threat.
34. There are a whole variety of models by which dairy
farmers can seek to improve their efficiency, some of which are
more intensive than others. The need to reduce unit labour costs
by tighter control over herd management and feed regimes would
favour intensification.
35. However, intensification in the dairy sector would
not necessarily be environmentally negative as intensive production
models create the opportunity for environmental impacts to be
more tightly managed.
GOVERNMENT VISION:
CAP IMPOSES SUBSTANTIAL
COSTS ON
CONSUMERS AND
TAXPAYERS
Question: What is the extent to which the proposed changes
to the CAP would result in lower food prices and through reduced
public spending on the CAP a lower level of taxation?
Dairy UK Position: There can be no presumption that reform will
result in consumers being beneficiaries of lower farm gate prices
36. The dairy supply chain has been subject to price
deflation for over ten years due to the devaluation of sterling.
Over that time producer prices have fallen and processors margins
have remained static, whilst retail prices have not fallen. This
is demonstrated by the graph below from the MDC.
37. This shows that consumers have not benefited from
lower farm gate prices. This must be due to structural reasons.
Unless these change then further reform will not work in the favour
of consumers.
38. Whether taxes fall depends on the future relationship
between the EU and the UK.
GOVERNMENT VISION:
A REFORMED AGRICULTURE
WOULD BE
INTERNATIONALLY COMPETITIVE
WITHOUT RELIANCE
ON SUBSIDIES
OR PROTECTION
Question: How such a revised CAP would enable the EU's farmers
to be more competitive?
Dairy UK Position: The implementation of CAP reform in the UK
could undermine the competitive position of UK farmers, and it
has not provided any mechanism which would support improvements
in competitiveness by UK dairy farmers
39. Further reform will require the EU's farmers to be
more competitive in order to compete on a liberalised world market.
40. As noted above, the mechanism for distributing decoupled
payments in England will discriminate against English dairy farmers,
which will undermine their competitive position. If the UK decides
on levels of modulation that are greater than those prevailing
in other parts of the EU, then this will further undermine the
competitive position of UK producers.
41. The CAP does provide a mechanism to assist producers
to become more efficient through the competitiveness measures
that are available under the Rural Development Regulation. However,
so far the UK has not exploited these provisions.
42. It is contended that the decoupling of payments will
allow farmers to focus on meeting market needs and that this will
allow EU farmers to be more competitive. This argument is of no
relevance to dairy farmers as they never received production linked
direct payments prior to the 2003 CAP Reform package.
GOVERNMENT VISION:
THE RURAL
ECONOMY COULD
BENEFIT FROM
SHIFTS AWAY
FROM GENERAL
AGRICULTURAL SUPPORT
TOWARDS MORE
TARGETED RURAL
DEVELOPMENT
Question: How would the UK's rural economy fare under the changes
proposed in the report?
Dairy UK Position: As the report's proposals could result in a
decline in UK agriculture, then the impact on the rural economy
could be negative
43. Agriculture still plays a major role in the rural economy,
especially in the devolved regions where its contribution to GDP
is much greater. Aside from employment opportunities, its biggest
impact is its role in managing the UK's rural landscape. This
is effectively a free input for the rural leisure sector. Drastic
reform could have a significant impact on employment opportunities
and landscape management.
GOVERNMENT VISION:
DEVELOPING COUNTRIES
WOULD BENEFIT
SIGNIFICANTLY FROM
CAP REFORM AND
TRADE LIBERALISATION
Question: What is the impact of CAP reform on developing countries
and conclusions about the erosion of trade preferences and the
potential benefits of a liberalised agricultural market in the
EU and other OECD countries?
Dairy UK Position: It is unlikely that developing countries will
be beneficiaries of trade liberalisation in the dairy sector
44. Dairying requires a significant degree of capital
investment. Given the restricted resources available to developing
countries it is unlikely that dairying is an area of repressed
competitive advantage that they will seek to exploit.
45. Liberalisation of trade will benefit developed countries
like New Zealand or advanced developing countries like Brazil.
These countries have already been the main beneficiaries of the
trade liberalisation under the Uruguay Round and they are well
placed to exploit any further opportunities.
46. Trade liberalisation is widely expected to bring
higher prices for product traded on the world market. If this
is the case this will clearly benefit dairy producing countries
that can compete in this market. However, higher prices on the
world market will disadvantage net food importing countries and
consumers in developing countries.
47. Trade liberalisation in the dairy sector will not
undermine any existing preferential trade agreements with developing
countries, as there are no such EU agreements in the dairy sector.
48. There are a number of reports that produce various
estimates as to the aggregate benefits of agricultural trade liberalisation.
They all generally conclude that overall balance of benefits will
be positive, but the difference in the aggregate amount can be
enormous.
GOVERNMENT VISION:
SECURING FURTHER
TRADE REFORM
WILL GENERATE
SUBSTANTIAL BENEFITS
FOR THE
GLOBAL ECONOMY
Questions: What would be the likely effect of proposals on
the wider global economy?
Dairy UK Position: The overall impact would be positive but there
will be winners and losers
49. Overall Dairy UK accepts the assumption that trade
liberalisation, if undertaken over a suitable timescale, does
increase the sum of global economic activity. In this respect
the proposals are potentially beneficial.
50. However, within any aggregate net benefit there will
be winners and losers. The main losers will be producers in developed
countries, who can expect cuts in income, and consumers in developing
countries who will experience higher prices.
GOVERNMENT VISION:
REFORM COULD
PERMIT VERY
SUBSTANTIAL SAVINGS
IN THE
CAP BUDGET
Question: How the reforms proposed in the report could be achieved
in practice, and how these changes relate to the ongoing debate
surrounding the future financing of the CAP?
Dairy UK Position: The budget deal may accelerate the re-nationalisation
of the CAP and put pressure on the budget
51. The budget agreement will place pillar 1 expenditure
under considerable pressure. In order to protect expenditure on
agriculture, member states may press for greater discretion to
either match fund EU monies or to undertake expenditure in their
own right. This would open the way to the re-nationalisation of
the CAP which would be an unwelcome development.
52. Further reform in the dairy sector would also require
compensation to be paid to producers for cuts in support prices
which would put further pressure on the EU budget.
GOVERNMENT VISION:
CHANGES SHOULD
BE ACHIEVED
OVER A
10 TO 15 YEAR
TIMETABLE
Question: What barriers might be put in the way of implementing
such reforms by other EU member states?
Dairy UK Position: Progress in attaining the UK's objectives will
be slow
53. The UK is isolated in the EU on its position taken
on CAP reform. It has few allies of significance. The UK's vision
will be opposed by the majority of EU members.
February 2006
| 
