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Memorandum submitted by Philip Dunn (DFoB 06)
I am writing as an ex-DFoB supplier to voice my views surrounding the collapse of DFoB and to highlight the pressures that my business is still facing many weeks on from the receivership date.
I am a young (20 years old) tenant farmer in Yorkshire currently running a 75 cow herd producing circa 0.5m litres per annum. When DFoB were placed into administration on June 3rd, I had already tendered my resignation with the company but at that point had been unable to gain a definite 'yes' from alternative milk buyers. As soon as DFoB were placed into administration I was immediately cast to the bottom of the pile as the larger suppliers were gradually cherry picked by the major processors. I was consistently told that I did not fit the volume or location criteria demanded by purchasers, despite the fact that my farm is located next to a major main road and is passed by a tanker of a major rival milk processor.
Having been unable to source an alternative milk contract, I was forced to endure a month of supplying milk to the receivers at what shall now be 15.7ppl before I started supplying a small local dairy on a market related contract on July 1st. This dairy paid the equivalent of 15.5ppl to those members who transferred in June, and I have recently learnt that the price for July milk will be 16.4ppl. The table below provides a resume of the financial implications that the receivership has had on my business so far in terms of milk sales. For comparative purposes, the value of the milk is also shown if sold at a typical industry price at the time of 23ppl.
As well as losses of over £15K on milk sales in the last three months, my business has also lost approximately £20k as a result of the money held in my DFoB Member Investment Account (MIA). Given the desperately low milk prices involved, it is extremely infuriating to hear various industry commentators stating phrases such as 'most ex-DFoB members have now secured contracts at much higher prices than DFoB were paying, and should therefore make up the losses with time'. This is simply not true, especially in the Yorkshire and North East region. First Milk will now only be paying 18.65ppl for a standard industry litre, alongside Arla at 18.4ppl and Milk Link at 18.45ppl. Added to this list are a number of smaller, independent dairies in the region who are paying substantially less than 18ppl. The last DFoB milk cheque that most producers received was paying in the region of 19ppl, so it is certainly not fair to say that most members are now better off.
I increasingly believe that milk purchasers are now using this situation to their advantage. Whilst many of the milk purchasers are to be commended for recruiting ex-DFoB suppliers in the first place, I now believe that their treatment of us warrants further investigation. I completely accept that the secondary milk market in the UK is currently in a terrible state. However, I fail to believe that nearly all of DFoB's milk pool is now being traded on the spot market as most processors would make us believe, even with the volume of cheap milk and cheese coming in from Ireland. First Milk are stating that all of the ex-DFoB milk is going on the spot market or into Westbury, as are Arla, Meadow Foods, Milk Link and a number of smaller independents such as Paynes Dairies and Wensleydale Creamery. Somehow it just doesn't all add up.
What is most worrying is the reaction of most producers to the pathetically low prices that are currently being paid to ex-DFoB members. Most producers have simply accepted the abysmal prices on offer without so much of a whisper. The fact is that most producers are frightened to speak out and take action as most have no other option. Milk purchasers have recognised this, and I strongly believe that the milk purchasers will exploit this advantage for some time in the future. My concern is that if there is a more general weakening of the UK dairy sector, it will be the ex-DFoB suppliers that will be first in line for a price cut. This will enable the milk purchasers to sustain the current payments to larger, existing suppliers and avoid a PR disaster. How long can this two tier industry continue, with one cohort of producers receiving 23-24ppl and another cohort receiving sub-18ppl?
Prior to the collapse of DFoB, haulage of milk in the North Yorkshire region was deemed to be relatively efficient, as shared haulage agreements existed between DFoB and First Milk, and DFoB and Arla. I understand that a similar agreement cannot be reached between First Milk and Arla. In this area of North Yorkshire, we now have the ridiculous situation of several milk tankers passing each other to collect from neighbouring farms. In one isolated dale, there are only two milk producers left, and despite the fact that these milk producers are on neighbouring farms, there are now separate milk tankers picking up the milk from each farm. This is supposedly called efficiency.
I am now having to question how long I can continue to produce milk at sub-18ppl, especially given the huge losses that my business sustained at the time of receivership. Like all other dairy businesses, my thoughts are focused on Nitrate Vulnerable Zone (NVZ) compliance by 2012. With the milk prices I am receiving and the losses incurred through the DFoB receivership, I have no idea how I can make the figures stack up to comply with the legislation. My business has been knocked back by several years and I find it incredible that the ex-DFoB cohort can be expected to comply with the legislation in the same timescale as other producers on standard contracts. I was initially very pleased to hear the NFU calling for an NVZ compliance extension back in June, but the issue seems to have died away. This issue must not be allowed to go quiet, as this is one area where affected producers can really be assisted. The government does not have the power to manipulate the milk market, but it does have the power to apply for a derogation to this legislation. NVZs are already going to claim a significant number of victims, but the losses could be huge if action is not taken soon.
To rub salt into the wound I am now facing a four figure tax bill for the last financial year as a result of the money I had invested in my DFoB Member Investment Account. Due to DFoB's March 2009 debt for equity swap (which members could never individually vote on) the capital retention payments held in my MIA are now classed as a capital loss rather than an income loss. If this debt for equity swap had not taken place, the funds would be classed as an income loss and I would thus have gained effective relief from taxation in the previous year. I am now facing a large taxation demand at the same time as I shall make a huge loss due to the problems at DFoB.
It should also be brought to your attention that members have been taxed in previous years for interest payments on the funds held in the MIA. These interest payments were always rolled over into the MIA however i.e. no cash payment was ever made. Paying tax on money that I have never had and never will have is inconceivable. The member council capitalised the debt in March 09 to facilitate extra bank lending, but since there was obviously no guarantee of further bank lending when this was done, the council surely acted negligently and irresponsibly. As stated before, individual members were never allowed to vote on this proposal and would never have allowed it. The council members who made this decision must therefore be held to account, as they did not represent the views of members. Refunding these tax demands will affect no one else apart from HM Revenue and Customs. Once again, this is a key area where Government can assist affected producers without interfering with the milk market.
The problems at DFoB could not have come at a worse time for my business, as I am currently in the process of expanding my herd, with the construction of new housing facilities, cow tracks, fencing etc. Sadly, I am one of a number of younger producers in this area that have been caught up in this debacle. We are all committed to milk production in the long term and are making significant investments to do so, but sadly we may be forced out of the industry due to some serious short-termism on behalf of milk purchasers.
Whilst we accept that nothing can be done about the present fragilities of the UK milk market, there are key areas where the current pain could be eased, with NVZ compliance being the main example. So far assistance from Defra has not been forthcoming. We sincerely hope that the Government can recognise that the UK dairy industry is currently on a knife-edge and that urgent action is needed to prevent the critical mass from being lost from the industry.
Philip Dunn
August 2009 |