Memorandum submitted by Dairy
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.
challenge for the
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.
should acknowledge its responsibility to sustain the productive potential of
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.
13. This submission will answer the questions
set out in the announcement for the inquiry from the perspective of the
robust is the current
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
20. Milk production in the
21. The reform of the CAP means that the EU
dairy industry will be more directly exposed to the world market, consequently
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
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
24. Because a large proportion of
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
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.
particular, what are the challenges the
· 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
· 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
'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
trends are likely to emerge on the demand side of the food system in the
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:
· functional foods
· ethical attributes (organic, animal welfare, fair trade)
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
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.
role should Defra play both in ensuring that the strengths of the
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.
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
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
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.
54. Other departments and agencies that significantly impact on the dairy industry include:
· OFT/Competition Commission
55. If the
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
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.
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
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
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
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.
criteria should Defra use to monitor how well the
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