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Memorandum submitted by Gordon Brown (DFoB 23)
1 SUMMARY
I offer a farmer and council member's view of the collapse which I attribute to poor strategic planning by the business.
2 I was a member of DFB for its existence (2002-2009) and prior to that a member of Zenith. I was a council member of Zenith (2001-2002) and of DFB (2002-2008). The losses that my family have incurred are c£120k in terms of capital investment and bad debt. This figure would be higher if I included the disparity in milk price that existed between DFB and other local milk buyers for much of DFB's life.
3 I offer a farmer's eye view of DFB in the hope that others will not have to endure such catastrophic circumstances and the very real and material affect that this has on peoples' lives.
4
I joined Milk Marque at vesting day because whilst I was aware of its
potential inadequacies I recognised the inherent weakness that I faced in
marketing my milk in a situation where the
5 This strategy I was informed was vertical integration to capture some of the value chain and this made sense to me, but I had my doubts as to whether we had the scale to achieve anything worthwhile. Consequently I viewed the merger with The Milk Group to create DFB as a good thing.
6
Initially DFB seemed to be just a larger version of Zenith, but with
token processing (
7 At the time I was never overly concerned about this. Each came with an apparently strong business background and gave convincing-to me at any rate- presentations to the council.
8 The strategy of DFB as announced to us (the Council), was to become a major processor of liquid milk with "scale and power in the marketplace" to use an oft repeated Rob Knight mantra. This made sense to me when compared with the alternatives. Doing nothing would have meant remaining a milk broker and in effect performing an under paid balancing function for the processing sector. This I thought would lead to a rump co-operative of smaller and geographically unappealing farm business receiving a perpetually lower milk price as those who could get a better price elsewhere would leave, myself included. Becoming a commodity processor of milk into cheese, butter or powder looked like a more conservative option, but one that would have left us directly exposed to world market prices which at the time (2003/2004) were low and scheduled to fall with the introduction of decoupling. The first time I met Rob Knight I pointed out that for us to succeed, in what was a mature market, others would have to fail. He acknowledged this but exuded an air of confidence that I should have done more to scrutinise.
9 My views above I think it is safe to say were commonly held by my fellow council members and it was against this background that the ACC purchase was brought to us. As a council we had the right to veto this deal but didn't. We did not conduct any meaningful scrutiny of the deal nor could we, in my view, be reasonably expected to do so as a council of 80, or whatever we were at the time. I placed my trust in those we had elected to the board to do the due diligence on the deal. In addition to the more manageable size of the board I felt we had done all we reasonably could to ensure that its composition meant that it was up to the task. In addition I was given comfort by the fact that the banking syndicate had also carried out a further process of due diligence.
10
Many questions were asked of the board and the executive regarding this
deal. On the Sunday before the purchase
the council in small regional groups were guided through it. At the meeting that I attended at
11 I did not expect the ACC purchase to bring about a dramatic increase in the fortunes of the business in the short run. I knew that it would take time to build relationships with key stakeholders and to rationalise the production facilities. I felt that a reasonable length of time to do this would be about three years and that this process would be greatly enhanced by doing a deal of some sort with one of the majors (DC/RWD/AUK). When asked about a big strategic deal the response of the board was that we would like to do it but if we can't then we can just run the business we have.
12 Three years into the purchase it became apparent that we were locked into a war of attrition in liquids and we were at best treading water. It seemed that we were falling between two stools, the majors attacked us at the top end and various nifty local operators seemed to do it from the bottom. In addition the strategy we had was predicated on the basis that our liquid factories could always outdo the commodity end. This proved to be horribly wrong when the global spike in commodity prices that occurred in 2007/08 meant that any old Tom, Dick or Harry could set up a milk brokerage and pay a better price that DFB.
13 Consequently vast numbers of resignations came in and despite the protestations of the Chairman that "your business is in good heart" the members did not believe him and it was never glad confident morning again.
14 In my view though DFB set off from a tough position and suffered from bad luck at times these are not adequate explanations for our failure. We failed because we tried to do too much with too little and made bad strategic choices. Principally with the ACC purchase but it should also be remembered that the board told the council that the Bridgend purchase would be paid for by synergies within two years.
15 I hope the above has been of some use. I signed a supply contract with First Milk in June only for them to cut the price with indecent haste to a point where I am now losing money and am contemplating my future.
Gordon Brown September 2009 |