Memorandum submitted by Dairy UK (SFS 39)

 

Executive Summary

 

1. Dairy UK welcomes the EFRA inquiry into food security. Inadequate attention has been given over the past few years to issues of production and food security.

 

2. The depth of dairy industry expertise and investment at the farming and processing levels, high levels of product safety and innovation, as well as consumer recognition of the nutritional importance of dairy products, means that in the medium to long term the dairy industry is robust. Both the strengths and the weaknesses of the dairy sector can be strongly influenced by Government policy.

 

3. The challenge for the UK dairy industry is for the sector to reach its productive potential.

 

4. Generally the industry is optimistic that, if it receives the appropriate backing from Government, it can exploit the rising global demand for dairy products and move towards realising its potential. However the Government must be willing to help the industry if the growth in supply from low cost producers around the world undermines the viability of the sector.

 

5. The sector would benefit if Government policy in a variety of areas was reconsidered including:

 

research and development

 

the provision of training

 

environmental and regulatory compliance costs

 

competition policy

 

implementation of FSA initiatives

 

protecting the industry from price volatility

 

6. Consumer trends should see more opportunities for product differentiation in the long term, although the recession is currently putting a greater focus on value.

 

7. Local supply is clearly an opportunity for adding value, but the structure of the industry means that the emphasis for the dairy sector has to be on national supply networks.

 

8. Defra should acknowledge its responsibility to sustain the productive potential of the UK dairy industry.

 

9. The Vision for the CAP produced jointly by the Treasury and Defra needs to be updated to take account of the food security agenda. The CAP needs to be retained as an agricultural policy. A purely rural policy is no substitute. The CAP also needs to continue to play a role in minimising market volatility.

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Introduction

 

10. Dairy UK is the trade association that represents the interests of dairy farmers, producer co-ops and dairy companies in the UK. Members of Dairy UK process around 90% of the milk produced in the UK. Further information on Dairy UK can be found at www.dairyuk.org.

 

11. Dairy UK welcomes the EFRA inquiry into food security. Inadequate attention has been given over the past few years to issues of production and food security.

 

12. The UK dairy industry is a major component of the UK food sector. Dairy farming accounts for 18% of the value of UK on-farm production and dairy processing accounts for 12% of the value of food processing in the UK.

 

13. This submission will answer the questions set out in the announcement for the inquiry from the perspective of the UK dairy industry.

 

How robust is the current UK food system? What are its main strengths and weaknesses?

 

14. The depth of dairy industry expertise and investment at the farming and processing levels, high levels of product safety and innovation, as well as consumer recognition of the nutritional importance of dairy products, means that, in the medium to long term, the dairy industry is robust.

 

15. In the short term the dairy sector is vulnerable to its high dependency on energy, limited holding of critical inputs, just in time stock control through the food distribution system and the complexity of the supply and distribution chain.

 

16. Dairy industry strengths include:

 

benign weather and excellent natural soil fertility;

 

high average scale and efficiency of dairy farms;

 

an efficient and dynamic processing sector;

 

high degree of industry professionalism;

 

high levels of product safety and innovation;

 

high levels of demand and consumer confidence in the safety of dairy products and their nutritional value; and

 

strong sense of Corporate Social Responsibility within the sector, in particular the commitment of the industry to improve its environmental performance through the Milk Road Map.

 

17. Dairy industry weaknesses include:

 

low margins from the intensely competitive environment created by a high degree of concentration amongst industry customers;

 

insufficient investment at the farming level due to lack of confidence over the industry's future;

 

difficulties in attracting and retaining skilled labour;

 

absence of effective private or public sector mechanisms to reduce the impact of price volatility;

 

exposure to the volatility of sterling;

 

historic Government indifference to issues of production and productivity;

 

excessive focus by Government R&D on environmental and sustainability issues at the expense of production; and

 

public hostility to technologies that may increase productivity such as GM.

 

18. Both the strengths and the weaknesses of the dairy sector can be strongly influenced by Government policy.

 

 

 

 

 

 

 

How well placed is the UK to make the most of its opportunities in responding to the challenge of increasing global food production by 50% by 2030, and doubling it by 2050, while ensuring that such production is sustainable?

 

19. The challenge for the UK dairy industry is for the sector to reach its productive potential, otherwise the UK will be exposed to greater dependency on imports and the UK industry cannot make a contribution to meeting global demand by increasing its exports.

 

20. Milk production in the UK has been falling for four years. Demand is stable, which means that imports are increasing.

 

21. The reform of the CAP means that the EU dairy industry will be more directly exposed to the world market, consequently the UK industry will be operating in a price environment created by the interaction between supply and demand for dairy products over many regions of the world.

 

22. Whilst it is widely expected that prices created from this exposure to the global market will be much more volatile, it is not clear exactly where in the future average prices will reside, and consequently whether the UK will be competitive.

23. The importance of EU production to meeting global demand for dairy products would support the assumption that prices should be at a level that will keep efficient EU dairy farmers in production. However, whilst this may be true of Europe in general, because the UK is not in the eurozone, then the future value of sterling has to be taken into account.

 

24. Because a large proportion of UK domestic demand is for fresh dairy products that can only be met by domestic production, then the need to secure domestic supplies should ensure that in the long run dairy farmers involved in the fresh product supply chain should receive sufficiently high prices to cover their costs of production. However, a significant proportion of UK farmers are directly exposed to the global market through the manufacture of commodity products, particularly those in Northern Ireland.

 

25. It is a matter of debate whether farmers directly exposed to the global market will be cost competitive in the future global pricing environment. The industry also has the difficulty that in a free market raw milk from low cost farmers cannot be prevented from entering the supply chain for fresh products, undermining the premium for security of supply farmers already in this segment of the market may be receiving.

 

26. This means that for the UK dairy industry to reach its productive potential it needs to pursue two strategies:

 

i. Domestic demand for dairy products of domestic origin has to be maximised sufficiently for these products to earn a premium to cover the costs of production.

 

ii. All farmers should be given every opportunity to maximise their competitiveness.

 

27. Generally the industry is optimistic that, if it receives the appropriate backing from Government, it can exploit the rising global demand for dairy products and move towards realising its potential. However the development of the industry has to be monitored closely and the Government must be willing to help the sector if the growth in supply from low cost producers around the world undermines the viability of the sector.

 

In particular, what are the challenges the UK faces in relation to the following aspects of the supply side of the food system?

 

Soil quality

 

Water availability

 

28. The dairy industry has no pressing issues with soil quality or water availability. Most dairy production is located in the western part of the UK which receives the highest level of rainfall.

 

The science base

 

29. The dairy industry does not receive sufficient margins to engage in original technological R&D. It is dependant on global food technology suppliers and Government R&D for improvements in the technology that underpins its productivity.

 

The provision of training

 

30. The industry has great difficulty in obtaining the necessary skilled labour and, to a degree, it has become dependent at both the processing and farm level on east European labour.

 

Trade barriers

 

31. Tariff barriers have been declining as a result of the surge in prices forcing countries to cut import tariffs in order to reduce the cost of food supplies to their domestic populations.

 

The way in which land is farmed and managed

 

32. EU environmental legislation governing water pollution will have a serious impact on the UK dairy industry. Some of this legislation is of questionable value. This includes the Nitrates Directive in particular, which an earlier EFRA committee investigation concluded was:

 

'old-fashioned because it imposes prescriptive rules to achieve its aim, unlike recent EU legislation, which tends to be more flexible'.

 

33. The value of the Directive is also questionable given the limited improvements that are expected in water quality from its implementation and the fact that nitrate levels are falling already.

 

34. The problem for the industry is that the implementation of the Directive will impose significant costs as a result of revisions to the England Nitrate Vulnerable Zone Action Programme. This will require major investment in slurry storage capacity by the industry. In addition the Programme places an effective limit on the stocking density that can be achieved by dairy farms. Defra is seeking a derogation that would mitigate the effect of this constraint, but even if successful, the derogation will expire.

 

35. No precise quantification has been made of the extent to which the Directive will ultimately constrain any future growth in UK milk production but it would be worthwhile for Defra to examine this issue.

 

What trends are likely to emerge on the demand side of the food system in the UK, in terms of consumer taste and habits, and what will be their main effect?

 

36. Over the future time period being considered by the inquiry it can be expected that the consumer trends seen in the past decade will resume and intensify, i.e., growing demand for:

 

convenience

 

functional foods

 

ethical attributes (organic, animal welfare, fair trade)

 

provenance

 

37. These trends will be underpinned by rising real incomes and a more informed and sophisticated food culture. These trends should provide opportunities for developing added value products.

 

38. By requiring more product differentiation the effect of these trends on supply chain would be to:

 

require a greater flow of information

 

generate much greater integration

 

result in greater dedication of individual farms to certain product types

 

result in greater complexity

 

39. In the short term the current recession has meant greater consumer focus on value. This is undermining the industry's investment in value added products. The organic sector in particular is encountering difficulties.

 

What use could be made of local food networks?

 

40. Considerable commercial opportunities are available to the industry to meet growing demand for products of local origin. However it has to be borne in mind that efficiency in the dairy industry, both at the farm level and at the processing level, is generated through scale. There is no direct correlation to local supply and environmental and commercial efficiency as transport costs are a relatively small part of total industry costs. Continued concentration of processing into a smaller number of larger plants would unquestionably improve the industry's overall efficiency and reduce its environmental footprint.

 

41. Climatic reasons also mean that dairy farming and processing is naturally located to the west and the north of the country away from the main centres of population. There is practically no dairy farming left in the south-east of the UK next to London.

 

42. Local supply is clearly an opportunity for adding value, but the structure of the industry means that the emphasis for the dairy sector has to be on national supply networks.

 

43. However, it would clearly benefit the industry if the Government supported initiatives that encouraged the consumption of UK dairy products, i.e. clearer country of origin labelling requirements.

 

What role should Defra play both in ensuring that the strengths of the UK food system are maintained and in addressing the weaknesses that have been identified?

 

44. Government policy interacts with the dairy industry at many levels. The food security agenda and responsible policy making means that the Government should seek to sustain the productive capability of the sector. There are a range of areas where Government policy would enhance the industry's strengths and minimise its weaknesses.

 

Environmental and Regulatory Costs

 

45. The dairy industry is committed to meeting its environmental obligations. The dairy industry is still unique amongst agricultural sectors in agreeing with Defra a Milk Road Map which sets out challenging environmental performance targets for the sector up to 2020.

 

46. The CAP provides funds for agri-environment schemes that reward farmers for environmental management. However, Defra does not provide funds for meeting new regulatory compliance costs, in particular no grant aid has been made available to help farmers to meet their obligations under the revised England NVZ Action Programme. This compares with the more supportive policies adopted by the devolved administrations.

 

47. Defra has to recognise that the market place does not provide an automatic mechanism by which regulatory costs are met. If the Government decides to regulate for higher standards then, if it wishes to sustain the productive potential of the sector, it should consider providing transitional assistance.

 

Labour

 

48. The industry is working on a number of initiatives to improve the supply of skilled labour. This includes working with Improve (the Food and Drink Sector Skills Council) and the relevant National Skills Academy in a number of areas, including establishing an innovative, bespoke industry training project for technicians working in the processing sector.

 

49. Labour recruitment would be enhanced if the industry's image in the eyes of prospective employees was improved. The Government can contribute to this process by showing its appreciation for the achievements of farming and the food sector. In pursuing its environmental agenda it should not portray farmers as perpetrators of environmental degradation, but as guardians of the countryside.

 

50. Government can also help by maintaining continued investment in the Learning and Skills Council and the Regional Development Agencies to assist in the provision of dairy training.

 

Research and Development

 

51. Dairy UK is very concerned that the current thrust of Government R&D is almost exclusively focused on environmental issues to the exclusion of protecting and improving industry productivity.

 

52. The biggest threat to industry productivity is animal diseases. Investment in new research in a range of disease threats would benefit the industry, particularly mastitis and Johne's disease.

 

53. The Government must be ready to evaluate the safety of new technologies, such as GM and cloning, and be willing to proactively defend these technologies if they are proved to be safe.

 

Other Departments

 

54. Other departments and agencies that significantly impact on the dairy industry include:

 

DECC

 

BERR

 

FSA

 

OFT/Competition Commission

 

OFT/Competition Commission

 

55. If the UK dairy industry is to sustain its competitiveness in the increasingly globalised market place that is shaping its commercial future then further industry consolidation is essential. The industry finds it alarming that even relatively minor mergers between small cheese makers are being referred to the Competition Commission by the Office of Fair Trading. This level of scrutiny for industry merger activity represents a serious hindrance to the development of the sector. The evolution of competition policy enforcement in the UK needs to take this in account.

 

Food Standards Agency

 

56. The FSA is pursuing a number of initiatives that will impact on the dairy industry. This includes a public information campaign on energy and saturated fat consumption. The FSA also wants the dairy industry to reformulate its mainstream products to reduce their fat content.

 

57. Because fat is a major determinant of taste then this could affect the acceptability of British dairy products compared to imported products. This would place UK products at a competitive disadvantage. This does not necessarily present a problem for liquid milk, where imports are minimal, but it is a serious issue for products like cheese and yogurt. FSA initiatives must be framed in such a way that they do not discriminate against the domestic industry.

 

58. The FSA should also communicate the positive nutritional benefits of dairy products. FSA policy is overly focused on negative food constituents, such as fat and salt, to the detriment of communicating the importance of a balanced diet.

 

Price Volatility

 

59. The dismantling of the CAP will expose the industry to greater price volatility. This is destructive of productive potential. Private sector mechanisms do not exist to minimise volatility. Futures markets only allow operators to manage their risk within a volatile environment. At present none exist for dairy. Price volatility is a market failure that needs to be addressed by Government.

 

60. The EU can still play a role in managing the EU dairy market to reduce price volatility by operating an effective intervention safety net system and by engaging in active market management through the use of export refunds when this is necessitated by market developments. As such Dairy UK welcomes the Commission recent announcement on market support measures.

 

61. The dairy industry would also unquestionably benefit from the UK joining the euro at a competitive exchange rate. This would remove the volatility created by fluctuations in the value of sterling.

 

62. The Government also needs to monitor closely whether the process of industry restructuring at both the farm and processing level is sufficient to maintain its competitiveness in a more globalised pricing environment. The Government should adopt a sufficiently flexible and pragmatic approach to policy such that it could reconsider its free market agenda if it proved necessary to sustain the economic viability of the dairy industry.

 

What leadership and assistance should Defra provide to the food industry?

 

63. Defra should acknowledge its responsibility to sustain the productive potential of the UK dairy industry. At present no Government department has this responsibility.

 

64. MAFF used to undertake the function of 'sponsoring' the dairy industry but Defra, as a matter of policy, has abandoned this activity. Until recently senior Defra officials were stating that the Government was indifferent to the scale of the UK dairy industry.

 

How well does Defra engage with other relevant departments across Government, and with European and international bodies, on food policy and the regulatory framework for the food supply chain? Is there coherent cross-Government food strategy?

 

65. If Defra is to lead food policy then it needs to achieve a close relationship with the Department of Health and with the Food Standards Agency. Whilst the Agency is theoretically independent of Government, the 'creep' in its remit into a wide range of subject areas means that it is essentially taking a political role that needs to be subject to ministerial oversight.

 

66. The Cabinet Office Strategy Unit report concluded that there was a requirement for a coherent vision for food policy. Defra is taking on this initiative.

 

67. The Vision for the CAP produced jointly by the Treasury and Defra provides a coherent Government policy on the commercial issues affecting the sector. This policy position, which would reduce the CAP to a rural development policy, needs to be updated to take account of the food security agenda.

 

68. The CAP needs to be retained as an agricultural policy. A purely rural policy, as advocated by the Vision document, is no substitute. The CAP also needs to continue to play a role in minimising market volatility. The Vision document argues that all market management functions should be discontinued.

 

What criteria should Defra use to monitor how well the UK is doing in responding to the challenge of doubling global food production by 2050 while ensuring that such production is sustainable?

 

69. Defra needs to monitor production and the extent to which agricultural sectors are meeting their productive potential. The indices put forward by Defra to monitor food security in its discussion document 'Ensuring the UK's Food Security in a Changing World' completely fail to address this issue.

 

January 2009