UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 971-ivHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE
DAIRY FARMERS OF
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This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Environment, Food and Rural Affairs Committee
on
Members present
Mr Michael Jack, in the Chair
Patrick Hall
Lynne Jones
Miss Anne McIntosh
Dan Rogerson
David Taylor
Paddy Tipping
Mr Roger Williams
________________
Memorandum submitted by Tesco
Examination of Witness
Witness: Ms Emma Reynolds, Government Affairs Manager, Tesco, gave evidence.
Q338 Chairman: Welcome to our further evidence session on the Committee's inquiry into Dairy Farmers of Britain. We have three sessions this afternoon. In a moment we will be hearing from Emma Reynolds, the government affairs manager for Tesco. We welcome you back, if I remember rightly, from a spot of maternity leave. Is that right?
Ms Reynolds: That is right, yes.
Q339 Chairman: Everything is going well?
Ms Reynolds: Very well, thank you.
Q340 Chairman: We are delighted that you are back in the driving seat again. At 3.15 we hope this will be followed by Michael Oakes, a former director of DFB and a member of the board. Then there will be a break until 5.30 when the Committee will hear from the Minister and John Bourne, the deputy director for livestock and livestock products at DEFRA. That is the running order this afternoon. Having now welcomed Emma Reynolds back to the fold, in your evidence Tesco said you were disappointed to see DFB go into administration after what you describe as a positive two year relationship with them. What disappointed you about the fact that they had gone out of business?
Ms Reynolds: We set up the Local Choice brand with them back in 2007 and had strong hopes for that brand to be a success. Dairy Farmers of Britain were the obvious partners to deliver it, given their national coverage and the fact that we wanted to particularly target small, often family run dairy businesses. They were able to provide that. When they went into administration, we were no longer able to supply Local Choice and had to withdraw those products so that was disappointing for us.
Q341 Chairman: You make a very careful assessment as a business about any supplier that you choose to do business with. You look at them very carefully because obviously security of the commercial relationship and reputational matters, quality, all the myriad of things you have to worry about, are central to your supplier relationship. Given the two year harmonious relationship you had with DFB, what was your assessment of them as a business? What was the view that you formed of them?
Ms Reynolds: We had a good relationship with them, as we pointed out in the evidence. I think some of the issues that others have identified around outdated facilities were something we could recognise. We were working together with them on the delivery of our Local Choice brand. It is worth saying that Local Choice was a very small part of their business and also ours. Whilst we had ambitions to grow it, that is where it remained.
Q342 Chairman: You did represent four per cent of DFB's business. It might be small but it is not an insubstantial amount of what they did. Did you have confidence in DFB? You must have had sufficient confidence to have entered into commercial relationships with them. You mentioned that they had poor quality facilities and yet you still went ahead and did business with them.
Ms Reynolds: That is right. When we went into the relationship, they had a new management structure that gave a lot of confidence to us. We had a very collaborative relationship with them. When there might have been challenges around facilities, we were working quite closely with them. As well as promoting Local Choice brands, we had a team in place from Tesco around how we could increase the sales and that relationship worked well.
Q343 Chairman: You felt that they had the ingredients to be quite successful. Otherwise you would not have done business with them.
Ms Reynolds: Back in 2007 we were not anticipating what happened in June this year. I think that is fair to say.
Q344 Chairman: When one of your suppliers does go into receivership, what kind of analysis does Tesco carry out of the supplier? Do you just shrug your shoulders and say, "That is them gone" or do you look back and say, "Let us have another think about what the ingredients were"? How do you react when somebody goes into receivership?
Ms Reynolds: Thankfully, it is not something that we have to deal with on a regular basis. I am sure we have a set protocol. In this case, we looked to support the farmers that were supplying Dairy Farmers of Britain through Local Choice. Half of those were able to come through Arla for part of our Tesco sustainable dairy group, which is where we provide our direct contracts and we guarantee the price, as well as a more collaborative working relationship with the members who supply our standard milk. That was our immediate response.
Q345 Chairman: Your buyers are experienced in the world of the dairy industry. They have to be. It is a tough, sometimes complicated world. You need to understand a bit of the history. You need to understand the relationships within the dairy world. I would have thought that you would have formed a view as to what were the ingredients that brought DFB down. In other words, when you looked back with the benefit of hindsight and with the benefit of knowledge in the dairy industry - yours is considerable - what view did you form as to the reason why they failed?
Ms Reynolds: I can speak from our experience in working with them. I think the efficiency of the operation related to the assets, the processing facilities, was a big factor. If we look back to why we formed that relationship originally, it was a real proposition for us to try to deliver local milk at a national level. It was something that had not been done before and they were the people we thought we would be able to do it with because of their national coverage and the profile of their membership. We wanted to try and put everything into it. It was a big investment decision for us and we had good hopes for it. As I said back at the beginning, it was disappointing that it did not work out and we obviously learned from that experience.
Q346 Chairman: That very much replicates what you said a moment ago. The question I asked was: when you pooled your knowledge and your observations as to why it went wrong, apart from the fact that there were some difficulties with facilities, did you as a business come to any conclusions? In fairness to you, looking at the fact that you worked positively with them as a supplier to try and develop a business, one could not say its demise was because Tesco pulled the plug. Far from it. You were hoping to see better things from them. You also said, "I think we have a protocol of some kind to analyse these things." What I am interested in is what did your knowledgeable dairy people think caused the demise of this business? I cannot believe they came into the office on Monday morning and said, "Oh, DFB have gone. Right. What is next?" They must have a chat and said, "We saw this coming" or, "We saw that ingredient." What did they say?
Ms Reynolds: Obviously there had been speculation within the industry building up to the receivership. The closure of the sites and the five to three strategy was obviously a big change for us because that meant the withdrawal of eight of our Local Choice regions. They were surprised by the speed at which it happened. I do not think they planned for it to go into receivership at the time it did. Whilst we had been speaking to other processors to see whether we could try and establish Local Choice in a different way in those regions where dairy farmers were no longer able to provide, I think that we did not expect that to happen when it happened.
Q347 Chairman: I am deliberately asking you the questions in the way I have because I did not want to put a leading thought in your mind. The receivers' report does emphasise the importance which the board of DFB attached to the development of Local Choice. As we have been advised, DFB had to spend some ₤3.2 million on the Bridgend Dairy in 2008. That obviously followed on some very large capital expenditure when they bought the Associated Cooperative Creameries and they made efforts to improve their efficiency and rationalise their business. They had had quite a lot of capital outlay, including this on the Bridgend Dairy. Did you as a business, as far as Bridgend was concerned - and indeed any of their other processing plants - effectively say to DFB, "You are going to have to spend this money if you are going to secure the development of Local Choice"? In so doing, did you ask them any questions as to whether they could sustain the level of capital expenditure which was merited by your requests as a customer?
Ms Reynolds: We did not make requirements of them like that. We did not say, "You must invest in Bridgend in this way." I think they would have recognised that to be a sustainable business they needed to invest in their facilities and that was not just about supplying Local Choice. That was about their longer term business prospects and their strategy. We took quite a pragmatic view with how we worked with them on technical requirements. There were some challenges that we did not have with our standard milk producers, with Wiseman and Arla, around kerb life for example. We recognised that they were not able to meet those same levels and we were working with them to try and improve that. There was no point in telling them that they must invest in these facilities for us to continue working with them.
Q348 Chairman: What I am driving at is that, obviously when you have a dialogue with a supplier, you have a conversation and you identify things you would like to see happen. There will be some replies from the supplier, in this case DFB, to tell you whether they think they are capable of delivering. Did you receive sufficient reassurances, notwithstanding their then financial position in 2008, which still gave you confidence that they could manage expenditure at that level?
Ms Reynolds: I do not think it was ever brought to our attention at any earlier stage that the investment they were making was going to jeopardise their long term sustainability. Their investment was two way. They were making investments in Local Choice, as were we, for promotions. There was a big advertising campaign about the specific product. Both of us were trying to work together to make it a success. I had seen some good sales grades that had not quite reached the ambitions that we had hoped for, but we were confident that it could deliver it if we had more time.
Q349 Mr
Williams: Local Choice seems a strange way to market
milk. I am not quite sure what is the
difference between
Ms Reynolds: Not guarantees as such. We had discussed a target with them, an aspiration we would like to achieve, which we were not at by the time it went into receivership. They are the numbers we shared with them. We had a plan together to work out how we could deliver that.
Q350 Mr Williams: You say that you did not delist?
Ms Reynolds: No.
Q351 Mr
Williams: If Dairy Farmers of Britain had not closed
their two sites in
Ms Reynolds: Absolutely.
Q352 Mr Williams: Why have you not been able to find alternative suppliers? I cannot remember how many of those lines you are not supplying at the moment.
Ms Reynolds: We lost eight then and
obviously we lost the rest when they went under in the summer. We continue to supply Devon and
Q353 Mr Williams: I would have thought it is technically quite difficult and quite specialist. Is it because it is too expensive and too difficult that you cannot get alternative suppliers?
Ms Reynolds: I think that has been the challenge. When we originally wanted it, it was about small family businesses, which is why Dairy Farmers of Britain was so good for us in that respect. As you say, yes, it is about the short milk runs and the segregation and the very local offer, which was what we were trying to deliver.
Q354 Mr Williams: Because it is so difficult and so expensive, do you think it was prudent for Dairy Farmers of Britain to want to aspire to get into that market and that niche?
Ms Reynolds: I think it fitted quite well
with their member profile and with the location of their bottling plants, as
they were. It was something that they
could deliver and the challenge was making sure we get the customer awareness
as it becomes a popular product. In some
areas - Devon and
Q355 Mr
Williams: You are still operating in the
Ms Reynolds: Yes.
Q356 Mr Williams: Who is doing that?
Ms Reynolds:
Q357 Dan
Rogerson: You referred to Devon and
Ms Reynolds: It is still strong, yes. We find that with local products generally. It is a big area for growth for us. Interestingly, even throughout the recession - not just milk but generally - local sales grew by 30 per cent last year. I think in areas where they are particularly impassioned about their local food producers we see that being strongest and that is in the south west as a specific example of that.
Q358 Dan Rogerson: And the relationship with Milk Link?
Ms Reynolds: It is good. It is obviously a smaller scale because it is only just in those regions but we are confident.
Q359 Dan Rogerson: Are there any major differences that you would highlight in how that works and how the former relationship worked?
Ms Reynolds: On an operational level, I think no. The main difference is the scale of our relationship with them. We have a good working relationship with them.
Q360 Paddy Tipping: You mentioned Tesco dairy farmers earlier on. Is that an individual relationship with a dairy farmer?
Ms Reynolds: Yes. It was set up at the same time as Local Choice back in 2007, the Tesco Sustainable Dairy Group, through our two processors, Arla and Wiseman, but having a direct relationship with those suppliers. There were about 750 and when you bring in the seasonal suppliers it is about 1,000 suppliers. That is about having guaranteed price over a six month basis so it reflects the costs of production and is independently set through Promar.
Q361 Chairman: For the record, can you tell us what Promar is?
Ms Reynolds: It is the consultancy that does
the analysis around family labour, feed costs and comes up with an independent
assessment of what the cost of production is.
That is what we base it on. We
then have the certainty over that six month period which helps investment
decisions as well. It is also about
having a collaborative relationship with them.
That is about sharing customer information so we have regular
conferences, regional meetings, workshops, but also about standards around
animal welfare. We do milk recording and
mobility scoring through that group. I
think we are probably the only people to do mobility scoring, identifying
lameness in herds and therefore being able to improve animal welfare as well as
productivity. There is a big investment
in research through the Dairy Centre of Excellence which we have set up at
Q362 Paddy Tipping: That shortens the supply chain. It puts the producer and the retailer directly in contact.
Ms Reynolds: Yes. The processor is still there in the middle through Arla and Wiseman. We have full capability. We know which farms are supplying and they know where it is coming to as well. They know they are supplying Tesco.
Q363 Paddy Tipping: Does the farmer have to sell all of his or her milk to you?
Ms Reynolds: That is how it is working now, yes.
Q364 Paddy Tipping: I guess that is only a small proportion of your total milk sales?
Ms Reynolds: That group is for all our standard milk.
Q365 Paddy Tipping: I mean as a proportion of your total sales.
Ms Reynolds: The proportion of milk representative of our overall sales? I would have to do the numbers, I am afraid.
Q366 Paddy Tipping: It would be pretty small though, would it not?
Ms Reynolds: We sell, I think it is, around 22 million litres a week of standard milk. That is not an insignificant volume but I do not know how that relates to overall sales. I could find out for you if that is interesting.
Q367 Paddy Tipping: Are you going to pursue that model elsewhere in your supply chain?
Ms Reynolds: We are looking at it in beef so we have a Tesco sustainable beef group as well which follows it. Obviously you cannot apply exactly the same things because they are all very different but we are looking at those models to see whether they can be built on, particularly with the idea of producer groups and getting closer to the producers so they can understand things like customer trends and get closer to the market.
Q368 Chairman: Can I broaden the scope of questions slightly away from DFB? Cooperatives obviously are important within the dairy sector as they are in other parts of agriculture. You as a business have to deal with cooperatives wherever they turn up. Does Tesco have a view about the cooperative model in terms of its ability to both act as a good supplier but also to sustain itself - that is, the co-op - in terms of its investment requirements in an agricultural industry which is fiendishly competitive?
Ms Reynolds: We would look at it on a case by case basis rather than saying, "We think this of co-ops" and, "We think this of PLCs", looking at the individual strength and offer of that organisation, rather than having a corporate view per se on cooperatives.
Q369 Chairman: Coming back to the point where I started the questioning, whenever you decide you are going to do business with somebody, you have to make certain they have the necessary wherewithal to meet all the exacting requirements that a company like Tesco understandably puts on them, particularly in the capital intensive world of dairying. You have just talked about Arla and Wiseman, both of which have extraordinary track records of heavy investment in modern facilities because they want to be efficient. They want to be able to meet the standards of customers like you, but you have to be confident that companies like them can sustain the investment levels that you require. I come back to the question I asked: do you carry out the same kind of stringent analysis on cooperatives as you would do for private sector partners or PLCs and, if you do that, have you come to any conclusions about the relative strengths and weaknesses of the cooperative model compared with a conventional, non-cooperative company?
Ms Reynolds: I think we would look at each individual organisation on its merits with the same criteria in mind - its ability to offer the security of supply that you mentioned, the good customer offer, our ability to build a long and constructive relationship with them. The exception to that is when we are talking about local products. What we have developed there is a different sort of model where we have established regional teams that can work slightly differently with local producers, recognising that the prospect of supplying Tesco, if you are a very small, family business, can sometimes be daunting. Therefore we help them much more with technical requirements and so forth. In terms of the co-op versus the plc, we do not look at them differently. We just look at what they can offer and how we can work with them.
Q370 Chairman: Have you any examples of what you call good cooperative suppliers to tell us about and what particularly impresses you about them?
Ms Reynolds: Obviously we do work with Milk Link, as I mentioned, in terms of the Local Choice and that has been a positive relationship. If you want me to look into other examples I would be happy to do so.
Q371 Chairman: The reason I am asking the question is that part of the outcome of an inquiry like this is what kind of generic lessons do we learn about the cooperative model. There were many farmers, judging by the evidence that we have had, who felt passionately about the fact that it was their business. They trusted it. They put a lot of money into it. They invested a lot of time because they thought ultimately it would give them a degree of control over their product, which was milk, which they would not have had under other arrangements. On the other hand, things went wrong in the case of this co-op and we are anxious to know if there are some wider lessons from what went wrong that would apply elsewhere, which is why I was interested to say to you that, if you had found a cooperative activity, perhaps another part of agriculture, which impressed you, why did it impress you? What were the characteristics of the way the business was formulated that made you say, "They have got their act together. They know what they are doing. They have got their capital structure right", wherever it happened to be? If you cannot answer that now, I would really be interested to know what you think has impressed you in terms of a well organised, well run co-op. What made you think they were good?
Ms Reynolds: Let me take that away and talk about it with my commercial colleagues in some of the other sectors to see whether they have some examples that they think particularly stand up as being great.
Q372 Chairman: Perhaps whilst you are doing that as well you might give thought to the question of the financial structure. Do you deal with Arla?
Ms Reynolds: Yes.
Q373 Chairman:
Arla
is an interesting case of a massive six billion turnover business, but it is a
producer owned co-op, a very different market place characteristic to
everything else. What lessons do we
learn from why Arla is successful and why DFB has not been? Likewise, the relative size of some of the
co-ops in the
Ms Reynolds: Okay.
Q374 Miss McIntosh: I apologise for being out of the room for part of your evidence session. What price per litre were you initially offering?
Ms Reynolds: Right back in the beginning?
Q375 Miss McIntosh: Yes.
Ms Reynolds: In April 2007 it started off through the tracker at 22 pence per litre but there will be a 0.5 pence per litre supplement. Currently we are 27.37 for our standard Tesco sustainable dairy group but again there will be the supplement for those Local Choice suppliers that we still have. It is on a six monthly basis that we do it. You can see quite a change over that time period reflecting pressures on feed and inputs.
Q376 Miss McIntosh: That seems quite high and generous compared to some, I would imagine.
Ms Reynolds: This has been a successful model in ensuring that the cost of production is covered and it has been a market leading price that we have been offering.
Q377 Miss
McIntosh: I notice that you do not seem to have many
suppliers from the north of
Ms Reynolds: The list that is in the
evidence is the ones we had to withdraw in February 2009 after the closure of
Q378 Lynne Jones: Can I just ask what Tesco's policy is on securing supplies of other dairy products apart from milk, particularly butter, cheese and yoghurt, that kind of thing? Do you label those products that are British in any particular way?
Ms Reynolds: We have been supporters of the red tractor on dairy products for some time now.
Q379 Lynne Jones: Is your own brand butter for example British?
Ms Reynolds: Yes, and it would say that too. We support British dairy as much as we can.
Q380 Lynne Jones: What about cheese? Obviously it is a particular cheese that is going to be produced in other countries, I appreciate it is a speciality cheese, but say a cheese like cheddar. Do you source that ----?
Ms Reynolds: The vast majority is from the
Q381 Lynne
Jones: I understand you get a lot from
Ms Reynolds: There is some Irish supply,
yes. The majority is from the
Q382 Lynne Jones: You are trying to promote British dairy products?
Ms Reynolds: Yes. We are making sure that customers know that this is a British dairy product. They are given the information.
Chairman: We will have a short session at the end where everybody who has a little observation about their local Tesco store can mention it. I will be joining in.
Q383 David Taylor: When this Committee last had an inquiry into the dairy industry, quite some time ago now, I think the Honourable Member for Stroud probably chaired it. We were unable satisfactorily to identify the elements of cost in relation to the farmer, the processor and the retailer. All were quoting things at the point which suited them and they never added up to anything like the figure that we, the consumer, were purchasing. You said a moment or two ago to Anne McIntosh that your price was 27.37.
Ms Reynolds: 27.37 at the moment, yes. That is per litre for our standard milk. There is still a premium on top of that.
Q384 Miss McIntosh: Farmgate?
Ms Reynolds: Yes.
Q385 David Taylor: I know there is a range of types and offers but what typically would be the price at which that would appear in the chiller cabinet?
Ms Reynolds: A pint of standard milk at the moment is 45p.
Q386 David Taylor: We are talking about 85 pence per litre or something like that. It seems a substantial mark-up there.
Ms Reynolds: The feedback we have from the Promar cost tracker is that we are paying a very fair price for the milk of Farmgate. It is done independently to take into account the various costs that are faced on a farm. There are obviously further costs down the chain, including in terms of the bottling, the transportation and the promotion.
Q387 David Taylor: Does Tesco wholly own the processors?
Ms Reynolds: No.
David Taylor: It still seems substantial.
Miss McIntosh: May I just record it seems a very good price for many farmers.
Chairman: You have a tick in the box
from one side of the Committee. In the
light of the comments from Lynne Jones, we really would like to see a bit more
English bacon in the
David Taylor: We would have more regional produce. In the regions in which you are milk is fine but there is an awful lot of stuff, particularly cheeses and other types of product. It is not just Tesco who is guilty of this.
Q388 Chairman: We are assiduously ----
Ms Reynolds: I can send the Committee later a note on the sourcing if that would be interesting.
Chairman: We are always happy to be educated.
David Taylor: Replicate what Le Clerq do or
Gerard or those other large supermarkets in
Chairman: Having stimulated our interest, you have to make certain it is in the store so we can go and try it.
Mr Williams: As this discussion has broadened a bit I am a little bit nervous because I did not think I would have to declare an interest as I am nothing to do with milk, but I am a supplier of Tesco on a very small basis, but it will not affect my questioning.
Chairman: Miss McIntosh wants to declare an interest.
Miss McIntosh: Tesco hosts occasional surgeries for me.
Chairman: You can see that we do take a very keen interest in what you are up to. You are a very important business. Thank you for your written evidence and thank you for your contribution this afternoon.
Witness: Mr Michael Oakes, Former Director of DFB and Member of DFB Board, gave evidence.
Chairman: Can I formally welcome Mr Michael Oakes, who was a former director of DFB and a member of DFB's board?
Q389 David Taylor: Welcome to the Committee and thank you for your time. You are a tenant dairy farmer in Worcestershire. How big are you?
Mr Oakes: We milk about 150/160 cows, about 1.1, 1.2 or 1.3 million litres.
Q390 David Taylor: You have been involved commercially at quite a number of levels. You are a board member of the RDA and NFU council member for Worcestershire. You were with DFB from cradle to grave, were you not, 2002 to 2009?
Mr Oakes: I was a supplier of the Milk Group which was one of the two businesses which managed to create Dairy Farmers of Britain.
Q391 David Taylor: You have a fair amount of commercial nous then?
Mr Oakes: I think I have learned a lot in the last few years with DFB. If you are trying to get to the skills on the board, I was one of quite a few. We used RABI Bank to help us set up. I was not on the original board at that time but the interim board took advice from RABI Bank not only on the financial structure but also the make-up of the board and we used a guy from the Netherlands Institute of Cooperative Excellence, NICE, called Kirk van Dyke, who gave the previous council advice on making sure they had a balanced board. They tried to interview everybody.
Q392 David Taylor: We are very interested to hear your perspective on the reasons for DFB's collapse. Did it hurt you as an NFU council member for Worcestershire to know that the NFU themselves had said that they believed that the underlying causes of DFB's problems included a flawed business plan, poor management and bad decision making which gradually eroded the profitability and viability of the company? That is your national body in which you have had a significant regional part. Do you share that analysis?
Mr Oakes: No, I do not. I can agree with some of the things that they said. Personally, I think they said what their farming members wanted to hear.
Q393 David Taylor: You are a farming member.
Mr Oakes: I am a farming member. Myself and the vice-chairman went and sat with Peter Kendall and Gwyn Jones and we showed them the journey we had been on from day one of setting the strategy in place right through to the demise of DFB, including some of the issues we had over the last six or eight months. We gave them carte blanche to get to the bottom of this. This was literally days after we had collapsed. We felt it was important they knew the position the board had been in and what the board had been trying to do. They represented a lot of members. I do not think the NFU has used any of that information.
Q394 David Taylor: The receiver certainly was pretty unambiguous and said that the main reason for the collapse was a long line of bad decisions, aborted projects and a lack of any clear strategy within DFB which rests with the board and the executive team. I presume you do not necessarily agree with that?
Mr Oakes: There was a clear strategy. The Milk Group emerged. At that point there was a new board created. If you think back, at that point it did not matter who you supplied, whether it was a PLC or a co-op. Nobody was getting a sustainable milk price. Subsidies were about to be wound down and we were coming into the brave new world. The milk price predictions were 13p, 14p, 15p. I do not have a crystal ball but that is the sort of figure which was being predicted. Farmers as primary producers were pretty weak. The FFA were out there protesting outside a lot of the major retailers. There was a lot of activity going on and farmers were being paid, on the whole, below the cost of production.
Q395 David Taylor: The NFU at national level is pinning the responsibility for the collapse. It is always easy afterwards when the carcass is there on the financial pathologist's slab to say what led to its demise, but they said what they said and I quoted it to you. So did the receiver. You disagreed, it seemed to me, quite strongly with your own NFU and slightly with the receiver. In that case, what is your take on it? What do you attribute the eventually rapid collapse of Dairy Farmers of Britain to?
Mr Oakes: The board will have taken some decisions which turned out with hindsight not to have been perhaps the best route to go down but at the time they were taken for the right reasons and we could and did stand up in front of our own council and also the membership and justify most things that we agreed to do. The strategy was to add value to members' milk. We started with basically nothing and the members had to contribute in order to allow us to do that, including myself. We decided to go down the liquid route rather than the commodity route. We looked at whether we should build a new dairy and add a nice, shiny, new dairy such as Arla and Wiseman but we would have had no Christopher Meyer base. An opportunity arose not long after the merger. ACC decided to sell their diaries. The big attraction for us with the ACC dairies was the customer base. You had a customer. We had seen Westbury fail. We had seen Imelka fail, both of which were very efficient new factories, state of the art, but without a customer base. We viewed having a customer such as the co-op, which we believed would have some kind of cooperative link with us - unfortunately it did not quite turn out like that - would give us the ability to develop a long term, mutually beneficial relationship with another co-op. That contract to supply the co-op was one of the big attractions. We knew that they were not the best factories in the world. You only had to go round them to see. We did not get round them before we bought them because it was vendor due diligence and there were some issues on that which I am sure you will ask me about. It was that customer base. It was getting us into the market place. It was adding value to the members' milk.
Q396 David Taylor: Were you a member of Imelka?
Mr Oakes: No.
Q397 David Taylor: Did the whole of your 1.2 million litres go to Dairy Farmers of Britain?
Mr Oakes: Yes.
Q398 David Taylor: Where do they go now?
Mr Oakes: Milk Link.
Q399 Chairman: Can I just ask you about this ACC thing? I am struggling to find anybody I have talked to in the industry who does not think you paid anything but absolute top dollar for this investment. You had due diligence done. Why were you convinced that that was the right price to pay? You paid, what, about 70 million for it?
Mr Oakes: Yes. We had a board made up of farmers and other non-execs who were not farmers. We had advice from RABI Bank, advice on the price, plus Smith & Williamson. The one thing we did not know was whether anybody else was bidding. It was an open tender process where you had to make some kind of assumption on what your competitors were bidding. We believed at one point there were five competitors. That got down to what we believed were two other serious competitors, both PLCs, and the advice that we were given was that the price we bid at the end of the day was what it would take to look to acquire those factories. We also believed that it was not actually the highest bid. Only the co-op knows that. Perhaps they will tell you. They will not tell us, I am sure, but if some of the PLCs had bought it there would have been far more redundancies on day one. We put into our bid some kind of value. We wanted to run those factories and we believed that that was worth something to the Cooperative Society. Rightly or wrongly, that was the view that we took. We took a lot of advice. There were warranties and guarantees that what we said we bought was what it was. Unfortunately, some of it was not and I am sure we will get on to that but when we bid for that it was not a figure we plucked out of the air.
Q400 Chairman: Did you anticipate getting a £4 million tax bill as a result of this purchase?
Mr Oakes: No, we did not.
Q401 Chairman: Does that say something about the quality of the due diligence?
Mr Oakes: That was something which happened because the co-op had moved things around within different parts of the Cooperative Society. They had moved property around from different parts in order for them to be able to sell the business.
Q402 Chairman: Is that not what due diligence is about: exploring every nook and cranny to make certain you know what you are buying?
Mr Oakes: At the end of the day, we did not pay the £4 million tax bill. We had to pay some money for people's time in order to put a case as to why we should not pay it. It was the co-op's responsibility, not ours. We did spend time working with the co-op to argue with HMRC about who was liable for that. Under due diligence everybody that bid for it had to take it that what was said was true. There were guarantees and warranties. Later on we did go back to the Cooperative Society to say, "Actually, X factory was not quite what you said it was. X contract was not quite what you said it was. There were not as many of X, Y and Z as you said." There were potentially at one point talks going on around a claim somewhere in the region of £12 million to £18 million for things that we believed were not what they said on the tin.
Q403 Chairman: Were those ultimately settled to your advantage?
Mr Oakes: Unfortunately not. We did get a price increase at one point from the Cooperative Society. It was at a time when the market was moving up so we believed we were due for a price rise. I think there was a sweetener there at one point to try and put us back in our box. Ultimately, what it came down to was: did we really want to take our biggest customer - because they were our biggest customer at the time - to court over what was a substantial amount of money but, in the bigger picture, was it worth pursuing them for that and losing our biggest customer? At the end of the day, when we renewed the contract the second time - and it does hint at it in the receivers' report - all those issues were put to bed. If was a bit of, "If you forget those, you can have this." That is my cynical view. That was the reality of the due diligence indications.
Q404 Chairman: In hard reality, what you bought perhaps came as a little bit of a disappointment compared with the optimistic tone of the due diligence and the optimism of the board in buying the asset, because you were going to acquire a customer base. The hard reality was there was quite a lot of hidden cost in there which you did not see.
Mr Oakes: There were some parts of the business which were definitely not what we believed they were. There were some contracts that came with the business which were not what we thought they were.
Q405 Chairman: When you started DFB, why did you think you could be successful, bearing in mind the intense competition in the dairy sector? You are up against massive competition like Arla, the very aggressive business proposition of Wiseman. You come along as the smallest of the remaining co-ops. Why did you think you were going to be successful against that kind of background?
Mr Oakes: At the time, as I said earlier, most producers were getting paid less than the cost of production no matter who they supplied. There was a groundswell coming out of the Curry Report and farmers needed to add value and reconnect with the consumer. We believed in shortening the supply chain and taking some of the processes. We all know processing is not as simple as perhaps some people think it is and there are quite a lot of costs there.
Q406 Chairman: That is an aspiration. The question I was asking was far more focused on the business end of it. To achieve that aspiration - we have just had a discussion about a major investment that you made - you were without the necessary processing and customer base in the first instance. That is a fairly fundamental thing that you had to do. Against the fact that you are in this highly competitive, capital hungry world of dairy processing, ruthless as we have exposed in terms of our questioning about price, what made you think from a hard nosed business point of view that you were going to be successful?
Mr Oakes: We brought in the best people we could find to help us do it. The board set the strategy but we went out there and found the best executive team that we perceived we could find and alongside us as farmers on the board we also brought in retail experience on the board and processing experience on the board. We tried to bring in the best people we could in order to give us the best chance. It was never risk free. There was always a risk.
Q407 Chairman: The best led you into demise a relatively short time later.
Mr Oakes: Ultimately DFB ended up where it did. That is for all to see. The industry changed a lot on the way. The dedicated supply chains which you have heard about from Tesco - Asda still have them; Arla still have them - all the major retailers except the co-op now have a dedicated supply chain. That is on the back of the activity that the major co-ops have invested in processing in a slightly different way. We went down the liquid route. They tended to go down the commodity or more of the cheese route. I perhaps personally underestimated the fierce competition in that liquid market place. The ACC business came with doorstep business as well. Whilst it is declining, it was potentially quite profitable. Doorstep demand is declining year on year but it is still a reasonably profitable business. You were not taking on the other major processors head to head. It was not really until we started to deal with Tesco and started to really stand on some of our competitors' toes that they started to fight back. I am not saying they did anything wrong because they certainly did not. Business is business and they were not going to take it lying down.
Q408 David Taylor: You did spend about £100 million on ACC Lincoln and Bridgend dairies expecting that the investment would be repaid by member retentions and trading efficiency but in the four years that followed not only did that 100 million not get paid; it was not even half paid. Are those agencies, who gave you the best possible advice to which you refer still around in agriculture, giving that best possible advice?
Mr Oakes: Some are. Some are not. Some have disappeared. Some of the people that we used as advisers are no longer around. Some are.
Q409 David Taylor: We will move on to the governance of DFB. I do not know whether you were necessarily present when Lord Grantchester, who is here today, told us quite clearly that he did not feel that the governance structure of DFB was to blame for the problems experienced by the business. The structure that you have, representative of democracy, is that you have farmer members, of which you are one; elected members from their district under the members' council, of which you are one; and the members' council then electing people to serve on the board of directors, of which you are one. You are well placed to have had a close opportunity over a seven year period to pass comment on the governance structure. I know this may be a retrospective analysis but do you agree there were weaknesses and, if so, what were the most significant ones?
Mr Oakes: The board set the strategy and the executive went off and did the work. As a whole, that is no different than any PLC. The difference is, for me as a farmer on the board, because the business is owned by the suppliers in effect, we did get involved as farmers on the board with the members facing issues. It was the board with the executive that interacted with the council. There was a slightly different role than there would be in a PLC because your suppliers are your owners in effect and you are on the board representing them, or they perceive you are there to represent them. I do not think that is a weakness. That is quite a strength because you are there with the executive. In here I am a dairy farmer and I want my farm to succeed as well as my neighbour's farm. If you look at who was left at the end of DFB, it was the farmers who were still there, trying to put it right. There is some strength in that. We invested a lot of money in training the council. They worked with the Plunkett and the FFP to help them understand any advice on accounting and other governance structures. We also had a scholarship programme where we were training young, keen council members who were working with Plunkett and the FFP again to look at the best co-ops and PLCs throughout Europe mostly so that there would be young, keen people to come and kick me off the board. We wanted young, keen people. Initially, we had to pick the board from the council we had. Two of us, of which I was one - David Wilkinson was the other - did not have any non-exec experience when we first got on to the board. We have since both gained quite a lot in various places but that potentially on day one was a slight weakness. We made that up by making sure we were surrounded by other people with plenty of experience.
Q410 David Taylor: What weaknesses do you think, on reflection, the governance structure had?
Mr Oakes: I think it was very difficult in the last six or eight months. You wanted to tell the membership as much as you can about where the business was. It is their business. You feel they have a right to know but there is confidential information and there is commercial information there. Getting that balance right is quite difficult. Members felt they should have known we had the problems we had but if you are a PLC you would issue a statement, then get on and put it right. You would have members on the phone every night almost asking you what the issues were. That is not a weakness. It could be a strength but it is a difficulty.
Q411 David Taylor: You felt compromised by the position that you were in really?
Mr Oakes: It was not an easy position to be in.
Q412 David Taylor: Did you get much personal stick from the members' council or members of it?
Mr Oakes: The whole board was very accessible. The council could access the board very easily.
Q413 David Taylor: How much of your time typically, prior to the final collapse period, was involved with board activities?
Mr Oakes: Probably a week a month when the business was in a steady state. In the last eight or nine months it was considerably more.
Q414 David Taylor: You said quite clearly that the board made out the strategy and you expected the executive to go and deliver it. What was the trajectory, if you like, of the relationship between the board and the executive team? At some point it must have been a tense relationship perhaps.
Mr Oakes: It was a challenging relationship. We got rid of one chief executive relatively soon after we had taken over ACC. We did change other senior executives. The board changed as well because we were challenging ourselves. They were having to report to us and we expected them to deliver. If they did not, they would have to account for why not.
Q415 David Taylor: Were you one of the few who were on the board throughout its life?
Mr Oakes: No. The four of us who were there at the end were there at the beginning.
Q416 David Taylor: Four out of?
Mr Oakes: There were six farmer directors at one point and four non-execs who were not farmers.
Q417 Chairman: You were talking about communication. If my memory serves me correctly, I think one of the reasons why the co-op got nervous about you as a supplier was a comment in the press. They were reading about some of the difficulties that you were gradually encountering. I understand that the dairy industry is the victim of quite a lot of personal news letters, the blogosphere and all the rest of it. Did you ever monitor what people were saying about your business?
Mr Oakes: We were using Pinsent Mason to advise the board over the last eight or nine months, just to make sure that we were always in the right place as a board, making sure we were looking after all the stakeholders in effect. An interesting comment was from one of their senior partners. He had been involved in lots of businesses in a similar position to ours and had never seen a business with so much noise around it and so much activity.
Q418 Chairman: I am not an expert on these things but I gather that there are a number of privately posted internet news letters which, if you like, put information out. If it is not factually based, sometimes people add their own version of it. With that growing noise and the fact that ultimately it contributed to the demise of your business with the co-op, did that not tell you something about the degree of communication that you were having within your business and that it seemed to be being substituted by other people who might have been making it up as they went along?
Mr Oakes: It was very difficult. You either got on and tried to put the business right for the membership or you could have spent seven days a week trying to address what the commentators were saying. There were fora; there were websites. There was a whole host of things which would have been a full time job for somebody to address. You would probably have never won the battle.
Q419 Chairman: You did not feel the need to deal with that with more direct communication with the membership?
Mr Oakes: We did but as PWC were imposed on us by the bank and as the board were put in handcuffs in effect, to a certain degree, the bank were very nervous about what we said to the membership. If we had said anything which would have caused them to lose money, they made it quite clear what the consequences personally for us would be. You are trying to manage a customer base. You are trying to manage suppliers who are also your owners and the membership. At the same time the credit insurers pick up the news and one of them decides he is getting nervous and moves. That hits the press. It just builds and builds but ultimately you are still in a position where you are trying to find a way through it.
Q420 Mr Williams: You are obviously well respected by your fellow farmers. You are on the NFU council and you are also on the North West Development Agency. You come from a background of running a farm which is small compared with the business that you were then asked to become a director of. Did you have any induction? How were you prepared for that role?
Mr Oakes: We did spend quite a bit of time with the non-execs on the board. The non-exec roles were bread and butter for some of these people and running very big businesses was where they had come from. We learned from them. I went on a risk management course to get me up to speed on that.
Q421 Mr Williams: You were doing courses like that. Did you feel there was ever any opportunity for you to implement those things that you had had experience of? Did they give you any better understanding?
Mr Oakes: I think ultimately they did and we learned a lot from the people on the way. There are things out there such as partnerships and one of their roles is to educate farmer directors. We did attend their conferences. We were not just sat there in a box thinking that is it. I am on the board of the FB. I do not need to go out there and broaden my knowledge.
Q422 Mr Williams: You said that at some stage in the co-operative's development you had advice from a Dutch practice. What were they saying?
Mr Oakes: That was right at the
beginning and I was not on the board then.
That was the interim board.
Having spoken to one of those guys quite a lot recently, one of the
things they did was they anglicised what RABI Bank said was the ideal
cooperative model. The Dutch model would
have taken much more capital for much longer from the farmers. It would have taken general reserves as well
as a capital contribution. We could then
model to get the
Q423 Mr Williams: What you are saying really is if you had the best continental cooperative model you might still be doing business.
Mr Oakes: On one aspect you might be right. On the other aspect I do not think we would have ever got going because the ask on day one with farmers would have been so great.
Q424 Mr Williams: You said at one time there were six farmer directors and four other non-executives. Was that the right balance? You were bringing great enthusiasm to the business, knowledge and expertise of production and a growing understanding of how a business runs, but would it not have been better to have more external, non-executive directors and fewer farmer directors?
Mr Oakes: At one point we did alter the board slightly. We dropped one of the farmer directors. The board would have been more comfortable with fewer farmers and more non-execs from outside of agriculture, but the council was always adamant that the majority had to be from the membership.
Q425 Mr Williams: How did that work as a group? Did the farmers get their way? Did the non-execs get their way?
Mr Oakes: No. On many occasions it would be split. Sometimes it would be farmers and other than non-execs. The board was never the farmers and the non-farmers. It was a board and we had our differences, whether you were a farmer or a non-farmer.
Q426 Mr Williams: Can I ask you what the farmer directors were paid? You are a week a month away from your day job, your business.
Mr Oakes: It was in the annual accounts. Every member could see it. It was the one place they always looked at, what the farmer directors were being paid. I think over the six years I averaged about £25,000 a year personally.
Q427 Chairman: As farmer members of the board, did you have any access to independent advice on issues should you need it outwith the executive directors' information?
Mr Oakes: If at any time we felt we needed that advice, we could go and get it and the company would pay for it. There were some occasions, especially in the last nine or ten months, where we felt we were more comfortable getting some advice and we did that.
Q428 Miss
McIntosh: You spoke of the Dutch model and obviously
Arla is a Danish company. Do you have
any comparisons with how the Danish co-operatives work in
Mr Oakes: The big difference with Arla
is it is literally a monopoly in
Q429 Miss McIntosh: Do you think that puts you and your peers at a disadvantage?
Mr Oakes: Arla operates in the
Q430 Miss McIntosh: Can I phrase it slightly differently? I would presume that the Danes have a different organisation for each producer, for milk, for bacon, pork products etc. Do you think that is fair competition?
Mr Oakes: Arla and some of the other
European co-ops have spent 100 years plus getting to the size and position they
are in. Eight months ago we had a visit
from the Danish Co-operative Society.
Danish Crown came to see it. We
got Arla directors and a whole lot of other Scandinavian cooperatives. They met with some of the board from
DFB. We had some issues but we had not
fallen over at that point. They were
amazed at how quickly this business had grown because it had taken them 100
years. They had made a lot of mistakes
in that 100 years to get to where they got to, but we tried to do it in next to
no time. They were very complimentary about the journey we had been on and the
amount of time it had taken to get there because they did not underestimate the
challenges that we had faced because they had been there. Their father and their grandfather had gone
through that over two generations. They
are sitting on a lot more reserves so the cooperative model in the
Q431 Paddy Tipping: Could I ask you what your own capital contribution commitment was to Dairy Farmers of Britain?
Mr Oakes: It was in the region of about £55,000 and then there was the milk cheque on top of that.
Q432 Paddy Tipping: Would everybody pay the same?
Mr Oakes: On a per litre basis, everybody paid 3p to 4p a litre.
Q433 Paddy Tipping: Would you say that asking for a bigger injection of capital was too big an ask?
Mr Oakes: Because we are not
cooperatively minded in the
Q434 Paddy Tipping: One of the criticisms of the cooperative movement is that injection of capital is difficult. Is this a good example of an undercapitalised company?
Mr Oakes: Without a doubt I would agree
with that. The other issue that you have
is that my capital contribution to Dairy Farmers of Britain was taxed. If I had put that into on farm processing, on
the farm, I would have invested it and I would not have been taxed on that
investment. I paid taxes. I put the money into DFB. With some of the other European co-ops the
tax regime is more friendly for farmers to invest in their own collaborative
business than perhaps it is in the
Q435 Paddy
Tipping: Do you think we ought to look at the
cooperative model and change the rules a bit here in the
Mr Oakes: There is a case for that, yes. I am supplying the co-op now and I still believe that farmers ultimately should work together. I have just learned a very hard lesson along with every other DFB producer. It does not always work, but I am still supplying the co-op and I would still like to see co-ops succeed.
Q436 Paddy Tipping: Out of that hard lesson what ought we to do to make the cooperative structure work better for you in the future?
Mr Oakes: I think look at the issue of equity in the business. One of the issues we had was we were asset based lending in effect, which turned out to be the only route by which we could borrow because of our corporate structure in reality. There was a reluctance to fund us. They were not falling over themselves, even when the business was flying and growing. We were a co-op and actually we do not deal with co-ops. There were issues there which made life quite difficult.
Q437 Paddy Tipping: Did you or any of your colleagues have loans into the company as well?
Mr Oakes: All the farmer directors will have lost money, as has every single member.
Q438 Paddy Tipping: Would it be too pushy of me to ask you how much you have lost in total?
Mr Oakes: In total it would be getting on for £75,000 to £80,000.
Q439 Dan Rogerson: It struck me that you still believe in collaboration. Do you know how many of your members have taken the same decision and gone to one of the other co-ops or how many have turned their backs on it?
Mr Oakes: Quite understandably, a lot have said, "That is it. I have had enough. That was my company. I believed in it. We really wanted it to work but I am not going to get my fingers burnt again" and you can totally understand that. Unfortunately many did not have a choice. They were grateful that somebody came the next day to collect the milk. That was the reality of it.
Q440 Chairman: Thank you very much indeed for your insight into the business and for fully answering our questions.
Mr Oakes: There were a couple of things you said about lessons learned. One of them would be to change the leadership quicker.
Q441 Paddy Tipping: Are you talking about the government?
Mr Oakes: Perhaps that as well but that is not my responsibility. Within DFB there was a point when we perhaps needed a different skill set than some of the people we had leading the business and we should have perhaps changed that. I believe we should have changed that sooner. Once we had PWC imposed on us by the bank, which was from October onwards, it became very difficult to then be able to make those changes in the way you wanted to. Staying out of trouble would have been the sensible thing to do.
Q442 Lynne Jones: Is that entirely with hindsight or were these issues that were being discussed?
Mr Oakes: They were issues that were being discussed and the board regularly looked at whether the equity team and the board itself and the leadership of the board was right. It was debated. Were the people, including ourselves, still adding value? With hindsight, we perhaps should have changed them sooner but it was debated on quite a regular basis.
Q443 Lynne Jones: What do you think were the factors that made it difficult for you to take those decisions?
Mr Oakes: The consensus always was it was not the right time. Looking back there is never a right time. Just do it.
Q444 Lynne Jones: People did not want to grasp the nettle?
Mr Oakes: There was always something round the corner. We spent a lot of time looking for a strategic solution with Dairy Farmers of Britain and we went down a lot of avenues on that. There was always something just round the corner which stopped us making some of the changes we perhaps should have made.
Q445 Lynne Jones: Hoping for something to turn up?
Mr Oakes: No. There was a bit more than hope. There was always something that you could nearly touch but not quite.
Q446 Mr Williams: From some of the comments you have made, I almost believe that PWC played a very positive part in this. Their actual role was curious, I thought, because at one time they were advising you. They had responsibility to the bank as well. They then advised the bank to lend you another £13 million or something like that and then, within a week or a fortnight or so, they were the receivers of the business.
Mr Oakes: As I said earlier, they were imposed on us by the bank. We paid their fees. They reported to the bank and if we were lucky as a board we got to see what they said, in reality. It was not a comfortable relationship from where we were. The workload they created for the executive, in my view, took the executives' eye off running the business because PWC were running them around ragged. They wanted a report on this, this and this. The executive could not run the business because we had PWC coming in, looking at the five to three strategy, looking at selling. Initially, they were the bank's advisers in the business. Then they were selling the process and then they were the receiver. It was almost a seamless process.
Q447 Chairman: There has been a lot of contention about the fact that farmers lost their April milk cheque and the question was should you have drawn stumps earlier, when you could see that the end was nigh; whereas the alternative, dealing with a spring flush in an orderly manner, was an objective worth having, therefore soldiering on. Why did you not pull the plug earlier?
Mr Oakes: As I said earlier, we had Pinsent Mason literally advising the board on insolvency matters. They were there at the side of me, John Grantchester and the rest of the board, making sure that we were solvent and that, at any point, we were not trading as an insolvent business. We were very conscious of that, not just for the members but other stakeholders, including the employees. We were at all times trying to make sure that there was still a way out of this or we believed there was a way out of it and we were not trading in an insolvent way. The bank also were quite cute in making sure we were always funded to the point they wanted us to be funded to. The only time initially we needed an over advance was to pay the milk cheque. They would give us an over advance because you have a massive spike when you pay £17 million or £20 million out. You have another advance for maybe five million because you do not have enough capital in the business to pay the milk cheque and then the money comes in so it goes back down. They would make sure that you were funded to the point they wanted you funded to. You were a funded business with funds.
Q448 Chairman: The hard reality is, at the end of the process, farmers missed out on a month's worth.
Mr Oakes: You also had the bank watching the board, making sure that I was not looking after the farmers.
Q449 Chairman: I am asking the question on behalf of the many farmers who have written to us, who do not understand from their perception why it was that the business did not cease trading earlier - their perception, rightly or wrongly. They are sitting there in the middle of the dairy thinking they will send the milk off and they are going to get paid for it. The reality dawns. Receivership. No milk cheque. They are saying, "If you knew it was that bad, why did you not stop then? Maybe we could have found some other outlet for the milk." From their point of view, they feel cheated.
Mr Oakes: When there was no way out, that was the day we called the receiver in.
Q450 Chairman: For the record, because people are going to read what you say, you are saying to me that you as a board continued to trade the business "as normal" because you firmly believed that you could find a way through the difficulties and therefore pay farmers for the milk that they had supplied.
Mr Oakes: Until we lost the co-op contract and that became public knowledge, if the five to three, as you heard last week, had turned the liquid business round, we could still supply Tesco. We could still supply the co-op. The liquid part of the business was the bit that was dragging us down in reality. We had addressed that. The farmers had taken the hit of the £10 million costs in their 2p price reduction and the business was starting what we had challenged the executives to make it do. When we lost the co-op contract, then we thought where do we go now. The co-op were made fully aware of the potential consequences if we did not get that contract. When we lost that contract, it became very clear that we needed a managed exit that did least damage to all stakeholders. It was only at that point. We were still looking for a managed exit. Whether that was parking various parts of the business and various members with other PLCs, with other co-ops and creating the least damage, that was what our focus went onto at that point. It was only when the bank would not fund us to get through that process that we had to call in the receiver.
Chairman: Thank you very much indeed for the candour of your remarks. It has been very useful. Can I remind colleagues that in a moment we are going to adjourn the Committee but we recommence with the Minister at 5.30. Thank you very much.
Memorandum submitted by Defra
Examination of Witnesses
Witnesses: Jim Fitzpatrick MP, Minister for Food, Farming and the Environment, and Mr John Bourne, Deputy Director for Livestock and Livestock Production, Department for the Environment, Food and Rural Affairs, gave evidence.
Q451 Chairman: Can I welcome everyone back to this resumed session of the Committee's inquiry into Dairy Farmers of Britain and welcome, for the first time before the Select Committee since his appointment, Jim Fitzpatrick who is the Minister for Food, Farming and the Environment. He is supported today by an old friend of the Committee's, John Bourne, the Deputy Director from Livestock and Livestock Products, so you are very welcome indeed. Minister, I think it is clear that people recognise the very considerable, helpful role that Defra played in helping to pick up the pieces when Dairy Farmers of Britain went into receivership, and certainly I think those of us who observed the sort of aftermath would recognise that a lot of farmers found a home for their milk very quickly, and Defra have played a very positive role in doing that. However, this inquiry is trying to get to the bottom of what went wrong and what lessons we can learn from this because obviously there are still milk co-operatives in existence and co-operation within the agriculture sector is an important part of life, so there are some wider issues. Can I just ask about the overall role of Defra in monitoring the health and performance of different sectors in agriculture, like dairy. Do you have any kind of regular watching brief and do your officials keep you posted, not so much on a company-by-company basis, perhaps that would be asking too much, but in terms of a sort of sectoral analysis of strengths, weaknesses and issues? How does it work?
Jim Fitzpatrick: Well, first of all, can I say that it is a pleasure to be appearing in front of the Committee for the first time, Chairman, and I look forward to other occasions in the future. I am very pleased to be here today with Mr John Bourne, as you say, our Deputy Director of livestock issues. I think Defra's role is that there are no statutory powers and responsibilities in respect of the accounts of agricultural co-ops. Obviously, the Department monitors performance, production and all the usual things, like animal health, et cetera, but, in respect of the financial health of companies, we do not have the responsibility for that.
Q452 Chairman: Perhaps I have not made myself clear. What I am interested in is that the Dairy Farmers of Britain organisation was part of the dairy sector, and Defra has always taken a very keen interest in the health of that, bearing in mind that, when difficulties come, sometimes it is because there are particular pressures on a particular part of the agriculture sector. I merely ask, not on a company-specific basis, how Defra monitors, if you like, the health of the different sectors within agriculture for which it does have a responsibility.
Jim Fitzpatrick: Well, we have got 190 accountants in the Department who are monitoring all manner of issues and the performance of the various sectors of agriculture. It is a matter of obvious, natural interest that we make sure that the sector is as healthy as it possibly can be, and it is our role to do what we can to assist and to support all the different aspects of the sector, but, as I say, we do not have a statutory responsibility in terms of ----
Q453 Chairman: No, I know that, but you like to know what is going on.
Jim Fitzpatrick: Well, I think we do.
Q454 Chairman: When you go out as a Minister and somebody says, "The dairy industry's having a rough time, Minister", you have got to be able to answer the question, so you need to know about it. The reason I am asking that is whether anybody sort of keeps different sectors on the radar in case there are problems coming up that could affect the well-being of individual companies. For example, if there were to be a significant price war on the price of milk, one might say, "Oh yes, that might affect the well-being. What can we see on our radar?" You have, as a Department, very close links with the world of agriculture, you listen and people come and talk to you, and you have a dairy industry council, whatever the appropriate title is. I just want to get a flavour of what information you have about the general healthiness of sectors and, in this case, the dairy sector.
Jim Fitzpatrick: There is constant monitoring of all manner of information and trends, Chairman, in respect of monitoring price fluctuations, monitoring the volumes that are being produced, monitoring how much is going into which different products and what the performance of different companies is. This is a daily activity within the Department that we are ----
Q455 Chairman: So, when Dairy Farmers of Britain was first constituted, did anybody from within Defra write a little note to a Minister which said, "The Minister might like to note that there is a new co-operative come on to the radar made up of X, Y and Z", just giving a little background information because obviously, now the thing has failed, somebody might have got such a note out and said, "Oh look, what did we say when it came into existence? Do we note anything's happened subsequently and can we try and explain why we think it failed?"
Jim Fitzpatrick: Well, obviously we have been monitoring very closely the examination of what went wrong, the receiver's report, and we are very interested obviously in your examination and what you conclude as the background to reasons for lessons to be learned. We have monitored the company from the start and we are there to assist companies, but it is not our responsibility to run the companies for them, whether they are private or collectives.
Q456 Chairman: Nobody is suggesting for one moment that it is, but in the way that ministers are kept informed and information is given to them, I just wondered if you had had any commentary from your officials as to what they thought were, if you like, the reasons it failed.
Jim Fitzpatrick: Well, we became aware, I think, initially anecdotally in late 2008 that there were problems, but we did not actually get formal notification until early 2009, so we do keep track of how companies are performing, but, given that we do not have the statutory responsibility to look at their accounts, then it is not our role to run companies as Government; that is the companies' responsibility.
Q457 Chairman: Nobody, Minister, is suggesting that that is your role, but you do have the watching brief as the Agriculture Department, and I was just interested to know whether anybody had sort of given you the benefit of their views about it because your evidence, for example, describes DFOB's business model as "uncompetitive". Now, that conclusion could not have been reached unless somebody had analysed it, so I do not think it is an unreasonable question for me to ask why did you think it failed when somebody had come to the conclusion that it was uncompetitive.
Jim Fitzpatrick: Well, the lessons learned in
the analysis of the problems that clearly arose give rise to a number of
explanations: global market production;
Q458 Chairman: That is all very interesting, but I did not hear an answer to the question I asked which is in paragraph 9 of your evidence. You indicate that, when the company went belly-up, "Defra Ministers discussed the situation with officials and concluded that there were weak grounds for investing public money into a business that was on the verge of bankruptcy", and I quote, "whose business model was uncompetitive, and where there were sufficient competitors to take over viable elements of the business", et cetera, et cetera. All I am asking is: when the person who wrote this evidence to the Committee wrote, "whose business model was uncompetitive", why did they come to that conclusion? What were the elements that led you to that piece of analysis? That is all I want to know.
Jim Fitzpatrick: Forgive me, Chairman, I thought you were asking about the period leading up to their difficulties, their obvious public difficulties, our being informed of them and our response.
Q459 Chairman: I was.
Jim Fitzpatrick: In that instance, that was before our responsibility. When we got involved and it was looked at to see what we could do to help, obviously questions were asked, "Should we step in? Should we not step in? What are the conditions of the company? What are the prospects?" and the evidence quite clearly says that at that time, having looked at it, the viability of the company did not suggest that what we should be doing would be ----
Q460 Chairman: The viability was not what I asked about. What I asked about was the competitiveness, and somebody has written down here on your behalf, "whose business model was uncompetitive". I just want to know why you felt that the business model, which was the one which it must have started out with, was uncompetitive. Mr Bourne, can you help us? How did you come to that conclusion? You obviously advised the Minister that his evidence was perfectly good enough to send to us and, therefore, there must be something that underpins it. That is all I want to know.
Mr Bourne: I think the very simple answer is that it was, almost by definition, uncompetitive or it would not have been in the situation it was compared with its competitors, so its competitors were healthier than it, so I think, in a sense, it is stating the obvious, that it was uncompetitive.
Q461 Chairman: I just wondered if you would develop that point a bit. In other words, why was it not as good as its competitors, in your opinion?
Mr Bourne: Well, I would not put myself up as a business expert, and we had talks ----
Q462 Chairman: But the Minister has just talked about economists and accountants coming out of your ears.
Mr Bourne: They are slightly different from business experts, but we had talked with other stakeholders for quite some time over Dairy Farmers of Britain because it was not unknown amongst the stakeholder community that it had its issues and, if you took a sort of collection of thoughts from what most people were saying, I think what we are doing is reflecting what we were being told by other people.
Q463 Chairman: What kinds of issues were the stakeholder community communicating to you were the problems that they faced?
Mr Bourne: I think very largely the one the Minister has referred to and as you will see in the receiver's report. I think it is fair to say that there is a considerable consensus of opinion about what the issues were.
Q464 David Taylor: I too was intrigued by that response, that Dairy Farmers of Britain was uncompetitive because it had collapsed. That is a little like a pathologist being faced with a corpse on the slab, having the prime conclusion of their report that that person has died. This is self-fulfilling surely. There must have been other aspects of the activities, the structure and the performance of DFOB which had led to a more sort of insightful assessment before it actually collapsed.
Jim Fitzpatrick: Well, as I have said and as Mr Bourne has said, looking at where they were in terms of their viability and the fact that they had paid the price they had for the assets that they had, the lack of investment in modernising ----
Q465 David Taylor: Like ACC, the price they paid for the investments they had?
Jim Fitzpatrick: The price that they paid for the assets that they had taken on was felt to be high, the fact that they had not invested in modernisation, the fact that their competitors were in a better position in respect of products, the price of milk going down, the global demand downturn; there were a whole number of factors which indicated that they were not in as good a position.
Q466 David Taylor: So this is powers-talk rationalisation then, is it?
Jim Fitzpatrick: This is an analysis of how they got into the difficulty. We were not tracking the company and saying to the company, "We'll look after you, we'll do your accounts for you and we'll give you advice as to how to run your business"; that is their job.
David Taylor: No one is suggesting that that should happen, Minister, but this was a co-operative that was responsible for a sizeable proportion of the liquid milk market.
Q467 Chairman: Let us move on to the question about co-operation because it is an important model for organising activity in agriculture and obviously in the dairy sector. From the Defra standpoint, could you just give us your views as to what you think the advantages and the disadvantages of the co-operative model in the dairy industry are?
Jim Fitzpatrick: The advantages straightforwardly would be, in terms of scale, the ability of bringing a whole number of things together to be able to allow them collectively to do that which they could not do as individual, smaller operations. I think that is obviously the most significant. The difficulty they have, by virtue of being smaller operations, is the ability to secure the investment and that is a major obstacle which would still be there for them because, despite the fact that they come together as a larger co-operative/collective with an ability to produce products and to combine together to purchase equipment which allows them to diversify into that which they can produce for market, it is more difficult for them to be able to secure investment to secure finance from the banks because they do not have the collective identity that one company would, so there are advantages of scale, but there are still disadvantages in respect of being a number of smaller organisations combining together in a co-operative/collective fashion.
Q468 Chairman: Well, given that the Friendly Societies Act, as was, the Provident Societies Act, I think it is now called, determines the legal framework in which the co-ops operate and the Financial Services Authority, a statutory body, looks at the governance issues and given your observations about the financial strengths and weaknesses of the co-operative model, has Defra at any time in the last five years done any analysis to see whether, given the statutory underpinnings of co-operation, there needed to be reform?
Jim Fitzpatrick: There is certainly consideration being given in Government by the Treasury to the rules of governance for co-operatives and collectives and, given that they, via the Financial Services Authority and other agencies, are responsible for overseeing the workings of the co-operative sector, it is their responsibility to modernise, to update and to amend those rules of governance, and I am aware that they are looking at those and I know that the NFU have been asking to make sure that that has been happening.
Q469 Chairman: Well, given the Secretary of State's very strong statements in recent times about the importance of the food chain, the importance of domestic agriculture, the need to sustain our productive capacity and Defra's lead role as the advocate for the agricultural industry within Government, have you been given any information, observation or views about what you think the Treasury ought to be looking at in terms of strengths and weaknesses and how this exercise you have just described should be addressing those factors for the benefit of achieving the objectives which the Secretary of State has laid out in terms of UK agriculture?
Jim Fitzpatrick: Mr Bourne has been in direct contact with Treasury officials on this, Mr Jack, so I suspect he may be able to throw more light on the answer.
Mr Bourne: I have, but not for the last five years. I have done it largely in the light of Dairy Farmers of Britain. I am not aware, to answer the question directly, that Defra has done a specific analysis of co-operatives in the form that you ask, but the Treasury has been leading on it and it has come up in relation not just to agricultural co-operatives, but, as you will be aware, the much wider financial issues related to some co-operative societies or co-operative-type societies in recent years.
Q470 Chairman: Well, I suppose I am a little bit surprised at that because it was encouraging to hear that the Treasury are looking at this, but perhaps a bit disappointing that Defra has not been giving them some feedback, some input, from what I might call the 'front line' because, am I not right in saying, something of this scratches at the back of my mind, that there was an English Food and Farming Partnership set up by Defra and was it not expressly tasked with assisting the development of co-operation? When was that partnership formed?
Jim Fitzpatrick: Well, the EFFP business work on this was, as I understand it, taken over in March 2008.
Q471 Chairman: No, that was not the question I asked. The question I asked is because the partnership has changed over time from what its original objectives were, so let us start back at the beginning. This was after Don Curry's work, right?
Jim Fitzpatrick: Yes.
Q472 Chairman: And this body was established, as I recall, but my memory is a bit rusty, to encourage the development of co-operation within English agriculture. Is that correct?
Jim Fitzpatrick: Yes.
Q473 Chairman: So when was that?
Jim Fitzpatrick: Well, EFFP was formed, as I understand it, in 2003.
Q474 Chairman: So in 2003 you were happy to underpin the role of a body which was designed to strengthen co-operation. Did Defra monitor what the partnership was doing, its work, its achievements, its information? Did you do any of that?
Jim Fitzpatrick: There was a report prepared for Defra on the Food Chain Development Division in April 2008, Chairman, to look at this particular ----
Q475 Chairman: So this partnership sort of tootled away for five years, tasked by Government to encourage co-operation, and then in 2008 some kind of report appeared. That is quite a long time of silence really. The reason I am asking this is because it was quite interesting and the Government at the time, I remember, when Curry came out, felt that the co-operative model was a good one to encourage and, therefore, if it had taken five years to produce a report, one might deduce from that that all might not have been well, that the move to co-operation which typifies much of mainland European agriculture had not moved forward in quite the way that you had hoped. Therefore, not unreasonably, one might have asked the question why and, if the answer to why, if you like, reflected on the work that Mr Bourne had said, you might have thought that Defra would have learnt from the partnership's work and advised the Treasury accordingly, but I do not get the impression that that occurred.
Jim Fitzpatrick: Well, the report was produced, Chairman, and I would be very surprised if the Treasury had not taken on board the recommendations.
Q476 Chairman: That again is slightly ducking the issue because you are the lead body for agriculture and food in Government. You guys are on this great Cabinet Sub-Committee that pulls it all together, so you are number one in this and I would have thought that, if there is work going on in the Treasury, given that you have experience in the field of co-operation, you would have been drawing upon that to inform this exercise. Now, if it has not happened, just say so because it helps us to understand where Government is in terms of examining the co-operative model.
Jim Fitzpatrick: I do not think we are saying that it has not happened. I think what we are saying is that EFFP have produced a report, there are a number of recommendations in there about governance, about directors, about training and about collectives and, at the same time and subsequent to that, the Treasury have been looking at the governance rules and modelling with the FSA and they have had consultations earlier on this year about the amount of money that can be staked in co-operatives about governance, and they are looking at that, so forgive me for not being able to answer the question directly as to whether the Treasury read the EFFP report, but I would be very surprised if they did not take on board that background and research work when they are coming forward with recommendations and consultations.
Q477 Chairman: If you are looking at governance, then would it not have been sensible to have examined the governance structure of DFOB to see if there were some lessons in the governance area, the training area, which might have helped to inform the work that has been going on? Was that done? Has that been done, Mr Bourne?
Mr Bourne: What I can say is that EFFP during this process worked closely with DFOB, so that was actually part of the work they did.
Q478 Chairman: And over what period was that?
Mr Bourne: I cannot give you the answer to that as I do not know.
Q479 Chairman: Well, could you find out for us and let us know? The reason why I am asking all these questions, and I am not just being awkward for the sake of it, is that I am trying to establish whether the real world of experience with a co-op which, sadly, has gone is helping to inform the work which Government is encouragingly doing to see if there need to be improvements not just in governance, but let me move on. Does governance act as a shorthand proxy for structure and, to pick up on a point the Minister made earlier about capital-raising, is that all part and parcel of the Treasury's work? Is it looking at the whole package, effectively?
Mr Bourne: Yes, I think, is the answer. I have spoken to the Treasury and those are certainly some of the issues that they are concerned with, and it is not just the Treasury. If you look elsewhere in the world, if you look at what is happening at the AGM for Fonterra on 18 November in New Zealand, you will see that they have got proposals for capital restructuring over there, so there is an example of a really big and successful co-op that has some of the same challenges which, I suspect, you will be looking at in this Committee.
Q480 Chairman: I have no doubt about that, but I think what I am hoping to hear is that you are making an analytical input to this work based on the lessons learned from real-world problems, like DFOB, and I am sort of just beginning to get the inkling that there might be a bit of that, but I do not get the impression that there is a thorough piece of economic or structured analysis being done on it to help inform the Treasury. When is the Treasury going to conclude all this work?
Mr Bourne: I think it would be fair to say that, in a sense, you are right in that we are at the beginning of this, we are looking at DFOB and its collapse, just as you are, and we will look at everything, including your Report, in order to determine what should happen next. Yes, I think this has raised some issues and we will be looking more thoroughly at them, but we have started and we are engaged with the Treasury on it now.
Q481 Chairman: Well, let me ask about one aspect of the operation of companies. A lot of companies now, in some way or another, report quarterly to the markets about their progress. A sort of FTSE 250 mid-cap company will normally issue some kind of statement on a quarterly basis, so two quarterly statements, a half year and a full year, which gives people some indication of how they are doing, a sort of trading update as to what their performance is. In the case of dairy farmers, it is a £500 million turnover business, so it would certainly be a FTSE mid-cap, but there is no requirement for it to report either to its members or to the wider marketplace about how it is doing. Sometimes, when you tell people how you are doing, it concentrates the mind about how is the business doing. Do you think that is the kind of development that should be happening in the world of co-operatives?
Jim Fitzpatrick: It does not sound at all unreasonable, Chairman.
Q482 Chairman: So we will take that as a tick in the box as something that needs to be looked at. Now, Mr Bourne, you very helpfully mentioned Fonterra and I think members of the Committee who were privileged enough to visit New Zealand some six or seven years ago got some idea of the strength in New Zealand's dairy market in Fonterra, a very impressive organisation, but we are equally aware that in the UK dairy farmers, for example, are up against the might of Arla, a €6 billion turnover company. I just wondered whether you had done any analysis of other co-operative models, as you yourself alluded to the strengths and weaknesses, to see whether there were lessons to be learned about the structure, governance and funding arrangements which, if you like, were benefiting competitor co-ops both abroad and globally, but which are not applied here.
Mr Bourne: I am not sure I would agree that producers are up against the likes of Arla because I think that, if you look at a supply chain, what we would like to encourage is greater collaboration. EFFP talked right the way around the world when doing their work on co-operatives, including America where there are some very big co-operatives as well as in New Zealand and elsewhere, and I think it is fair to say, to summarise what they have said to me, and you would need to ask them in detail if they agree with this, that a lot of it is around the fact that you get good co-operatives and bad co-operatives and there are different structures around the world which look at things in different ways, but the structure is less important than actually how well it is governed, et cetera, and it is not just around regulation, it is around how they do it which is as much about training and leadership as it is around the sort of, what you might call, hard, concrete structure which they operate.
Q483 Chairman: Have you done any analysis to compare the elements of good governance that this work has clearly identified with Dairy Farmers of Britain to see what was missing?
Mr Bourne: I cannot say that we have, no, not yet.
Q484 Chairman: Are you going to do it?
Mr Bourne: I think, as I say, we would like to look at what comes out of this review and others and that we have read the receiver's report, and there plainly will be lessons to be learned from the collapse of DFOB.
Q485 Chairman: Could you let us have in writing what the report says about what the elements of good governance are because they have done that piece of analysis, so can we see it?
Mr Bourne: I see no reason why not. I am sure we can do it.
Q486 Chairman: Good news ought to be promulgated widely, so would you send us a copy of that and anything else that is relevant to the enquiries that I have made. Can I just conclude this section by asking a question that arose from an earlier evidence session. One of the farmer members of the board said that, when they were investing their money into DFOB, they ended up having to pay tax on it. I just wondered whether that matter had been drawn, Minister, to your attention and, if so, why?
Jim Fitzpatrick: It has not, Chairman, no.
Chairman: Well, now that I have, could you ask your friends in the Treasury, in HMRC, why because we were a bit mystified as to why that was the case.
Q487 Paddy Tipping: Mr Bourne, you spoke to us about co-operation in the dairy sector and I think that is right, but there is a body, the Dairy Supply Chain Forum, in Defra. What does it do?
Jim Fitzpatrick: The Supply Chain Forum brings together all of the constituent parts of the industry from the producers, the processors, the retail sector, NGOs and Government so that we have an opportunity to collectively look at issues concerning dairy to try to co-operate, collaborate and help the industry to be as productive, as efficient and as profitable as it can be, so it is a twice-yearly meeting, which I have chaired once, and the next meeting is on 1 December and, in that instance, it has, from my reading of its history, been very helpful to the industry.
Q488 Paddy Tipping: Because there is a lot of tension and mistrust in some of the relationships in the dairy sector. I once tried to work out who was making a profit in the milk chain and everybody told me a different story.
Jim Fitzpatrick: Well, if the forum does anything in that instance, then it helps reduce those tensions by simply bringing people together in the same room and with the opportunity to express each other's suspicions or challenges or opportunities so that the communication in that forum which, as I say, in itself is only twice a year, but in terms of working groups and the opportunity to identify areas where there can be greater co-operation outside, then, if the communications are strong, it ought to help the individual parts to be able to work better together by simply being able to communicate.
Q489 Paddy Tipping: But you will know better than I do that many of the producers, many of the dairy farmers, feel that the big supermarkets rip them off, and that is how they would put it. What do you do about that? How can you ensure that there is a more co-operative spirit in the industry because, by joining it together, everyone would benefit, would they not?
Jim Fitzpatrick: Well, certainly the fundamental of the forum is to try to make sure that everybody can benefit from the opportunity to discuss these issues, and there are tensions because we do have the suppliers, the processors and we have the retail chains, so they are working together to all be able to profit and to survive, but they are equally in a straightforward market relationship where they are trying to get the best deal for their different constituent parts. In that instance, making sure that there is a greater awareness of the pressures that each other works under and the frameworks within which they are operating ought to make sure that, whatever conclusions are drawn in the negotiations, they are certainly not arrived at from a position of ignorance as to the problems that the different constituent parts face. Clearly, the retailers want to be able to buy at the cheapest price and the producers want to sell at the highest price and therein lies the tale. Our view obviously is that we want good products, we want safe products, we want farmers who are able to earn a living and, from the retail point of view, they know that it is in their, I believe, long-term interests to make sure we have a healthy dairy sector within the UK, so it is not just a matter of beating the price down to the minimum, and most of the big supermarkets have now got their premium contracts with chosen producers to pay above market price for a whole number of different reasons, so those relationships are continually in the dynamic.
Q490 Paddy Tipping: And you support that notion of premium prices or niche marketing?
Jim Fitzpatrick: Do we support it?
Q491 Paddy Tipping: Yes.
Jim Fitzpatrick: We will support anything which makes sure that the agriculture sector can be as healthy as it possibly can be and that the consumer gets the best possible products at a reasonable price, and we naturally support industry. The arrangements within those premium contracts seem to work extremely well for the supermarkets and for the farms, the producers and the holdings with whom they have contracts. They both seem to benefit from it, they both are very positive in explaining how it operates and the benefits that accrue are not just financial, but they are environmental as well, so it does seem to be a very positive development, although obviously, simply by the nature of it, not every farm and not every producer has been able to sign up to a contract, but these are the chosen ones, as it were.
Q492 Paddy Tipping: So the whole process of a supply chain is about creating a forum, sharing knowledge and building relationships. When you were talking to the Chairman earlier on, you were very keen not to be seen to be intervening in the market. Can you envisage any scenario where the Department would intervene?
Jim Fitzpatrick: Well, as you are, I am sure, aware, Mr Tipping, the Agriculture Council has set up a high-level strategy group to look at dairy within the European Union. We are participating in that at senior official level and that will report to the Agriculture Council. The Supply Chain Forum, we see, will have a role in making sure that the UK's evidence to it, working within the high-level group, is as effective as it can be in looking after our industry and making sure that that which we want to see coming out of the high-level group is helpful to the UK and to UK producers, so, in that instance, we are looking quite closely at the arrangements that the Commission and the Ag Council conclude and how that will influence the market overall, so, in a European sense, there is some very important work going on at the moment. We certainly want to see the Supply Chain Forum making a big contribution to that, and I have written today or yesterday to the constituent members, saying that this is going to be a major item at the next forum meeting on 1 December and, in that instance, I think that will stimulate the normal excellent turnout at a very senior level from all the constituent parts.
Q493 Paddy Tipping: I think there has been a suspicion, not now, but in the past, that the major supermarkets have been driving the price of a litre of milk down as a loss leader to get people in. If that pattern were continuing and the price that was given to producers was going down and people really were suffering, what would you do then?
Jim Fitzpatrick: Well, I think that is one of the major issues that the high-level group is doing because it is not just a UK predicament, but the evidence seems to suggest that it is even more prevalent amongst European partners, so, in the relationship between the retailers and the producers and processors, the farmgate price is one of the issues that they will be examining. You will know that the Competition Commission has produced its conclusions and that is being studied by Government at the moment to see whether or not the arrangements ought to be amended and Government will come forward in due course with its conclusions on that.
Q494 Paddy
Tipping: I asked you this in
Jim Fitzpatrick: I think it is sooner than it
was in
Q495 Chairman:
I
will bring Anne McIntosh in in just a second, but I just want to follow one
thing up. Are we still wedded to, from
the
Jim Fitzpatrick: That is still very much the policy and that is what, we anticipate, will be happening. I certainly assume that, having attended the last few Agriculture Council meetings and learning about the differing views of European partner states in respect of support, intervention and quotas, we have made it quite clear that we expect the agreement and the policy that we will be getting rid of quotas to be followed. There has been no indication that certainly the Commission are anything other than supportive of that position.
Q496 Chairman:
The
reason I ask that question is that we have, if you like, seen in the United
Kingdom a continuing trend of rationalisation within the dairy sector and you
might ague that Dairy Farmers of Britain's demise is a continuing part on the
processing side of the rationalisation because many of their members have been
absorbed into other organisations because there is still a demand for that
quantum of milk, but in mainland Europe you have a dichotomy. You have big people like Arla and within
other parts of Europe you have got a lot of very small-scale producers,
processors and what-have-you, and there is a tendency to want to support the
status quo by almost trying to freeze the market in aspic when in actual fact
we would take a different view, that a healthy, dynamic market is a market that
changes. If natural advantage is to play
any part in this, the further west in
Jim Fitzpatrick: I think the best way to describe the balance of forces is that at the Agriculture Council in Brussels last week, which was lobbied by 1,000 farmers with tractors with all the attendant elements of burning tyres and firecrackers, loudspeakers, riot police, tear gas and water cannon, we were in a minority position in respect of the proposal that was put forward by a group of 21 principally led by the French Minister of Agriculture, which managed to persuade the Commission to further subsidise, with €280 million, the dairy sector. We raised a whole number of questions about how that was going to operate and we are continuing to ask those questions, so, if you were to ask, as you have, what is the balance of forces, well, we were a minority of four out of 27 last Monday in respect of a particular proposal that was being put forward. Whether we would be in such a minority in terms of fundamentals, that is supporters, I really could not answer that. I would not suspect that we would be in that much of a minority because the Commission had agreed with the statement of the 21 to accept some of their requests and recommendations. You are right, there is a dynamic here and there are different cultures and different ways of operating. We clearly are trying to do our best to represent that which the NFU and the dairy sector are telling us is what they want, and they are telling us, "You hold the line and you make sure that we don't get back into the ballgame of artificial subsidies which will distort the market" because we have made progress, we have a sound dairy sector in the UK and we want to make sure that that has the opportunity to flourish in the future, and subventions and additional distortions to the market will not help our producers and, therefore, we are doing what we can to make sure that we present the British view and support the British farmers' view of how the CAP ought to be operating and how it ought to operate in the future.
Q497 Miss
McIntosh: When you, Minister, review the role of the
Competition Commission, will you look at the evidence that we just heard this
afternoon, that co-operatives like Arla in
Jim Fitzpatrick: I cannot say that Government collectively would be able to look at the evidence that you heard this afternoon because, as I said to Mr Tipping, we are getting towards the end of our consideration and the conclusions should be out relatively soon, although, I am sorry, I cannot say when because we have not got a definitive date, as I understand it, as yet, but I would be surprised if there had not been some evidence and some submission during the course of the consultation from a variety of organisations, perhaps the NFU, if not individual co-operatives and companies, that had not made that point.
Q498 Miss
McIntosh: I would be surprised if they had though
because it was only in answer to a direct question that they made the point,
and I am only aware of it because I have got family in
Jim Fitzpatrick: I am certainly familiar with the points you are making because I have heard them mentioned within Defra over the past few months since I have been there, so, if the Department is aware of the different operation and the fact that a Danish co-operative would not conform to the rules that we have, then that is why I say I would be surprised if it has not been fed in somewhere along the line about the consideration of where we go in respect of the Competition Commission's proposals.
Mr Williams: The money that has now been
determined by the Commission to be available for the EU dairy industry,
presumably our opposition to it will not preclude us from taking that
money. Has Defra got any ideas on how it
is going to be spent in
Q499 Miss McIntosh: Matched funding.
Jim Fitzpatrick: Well, the €280 million, we actually asked the question, Mr Williams, about how it was going to be divvied up because, although €280 million is a huge amount of money, across 27 countries with the numbers of farmers and with the number of dairy producers, if you start breaking it down, and an official or an NFU official mentioned the other day what the sum was, it is trifling in the overall scheme of things.
Q500 Mr Williams: That is why I am asking.
Jim Fitzpatrick: We asked the question, but we have not got the answer yet. We asked the question of how is it going to be distributed and what are the criteria going to be to determine who can apply and what will it be spent on. These are matters which are being examined. I am sorry, I do not have the answers yet.
Mr Williams: I am only suggesting that that might be an input that the British Government might like to make in this matter, that it could be a help to sustain co-operatives.
Chairman: You are not bidding for some of this money, are you!
Mr Williams: Are there any
Q501 Miss McIntosh: It is called 'matched funding', and presumably it is subject to matched funding.
Mr Bourne: We do not know, we are not clear as yet. The debate in Europe at the moment is around the total, the sum, and all the details are yet to be discussed, so I think it is too early to predict whether we will get the money, whether it will be compulsory, whether it will require any matched funding, et cetera, et cetera, and we will have to see, but I am sure, Mr Chairman, you will be pleased to hear that we have already started talking to people about, if we had it, what would be the most rational and proportionate use of it.
Jim Fitzpatrick: Can I just say that the one consequence which was made clear by the Commission was that this was draining the bottom of the barrel for next year's budget and, were there to be anything that required some kind of urgent assistance from the Commission, then the account was dry and there was not going to be any and, if the Member States wanted to spend that money, then do not come later on asking for support if something else happens, and that was a very serious consequence, but the majority decided that was the way they wanted to go.
Q502 David Taylor: A few minutes ago, you said, and I wrote it down quite quickly, "We will support anything which ensures that agriculture is as competitive as it can be". That is what you said, I think, is it not, Minister?
Jim Fitzpatrick: Well, "anything", that is probably too wide a comment, but the essence was that Defra is in business to support British agriculture and, if there are proposals coming forward that they think we ought to be implementing, then obviously we would look at them.
Q503 David Taylor: I was taken by the word "competitive" because you have been at pains to stress that you do not want to intervene in the market and it seems to me that you could construe "competitive" in that context to mean that you would be phlegmatic or relaxed about the weakest animal from the dairy herd, in a sense, and this might have been DFOB, falling behind and having to be put down because it would make the industry more competitive, so you would not see that you had any role, as Defra, in trying to sustain the scale of the dairy industry or to make a more secure future for dairy farmers? You do not see that there is any role there?
Jim Fitzpatrick: I think the Chairman made the point in one of his questions or observations a moment ago that the British dairy industry had rationalised itself over a number of years and was, from our point of view, in a far healthier state than it had been previously in respect of the products, the volumes and the quality that it is producing. Our difficulty obviously always is that, if there is a Dairy Farmers of Britain situation and it is clear that there are difficulties, we would have to assess whether or not it is appropriate to be of assistance and, in that instance, we concluded that it was not.
Q504 David Taylor: Six weeks ago today, your officials were in discussion with our Committee and I think that we are struggling to establish what Defra feels is its role in relation not just to the collapse of DFOB, because you are obviously trying to say that you had no part in its downfall, but what you see as your role in ensuring a vibrant dairy industry. We asked the officials and they said that one of their main roles was horizon-scanning, which, to me, makes Defra sound like some sort of parliamentary home guard that are looking for incoming missiles or something like that, a reactive role, in other words, and not especially a proactive role. You said you would help if it did not involve interfering in the milk market, but you do have resources and you do have powers which will not interfere in the market and which will not unbalance anything, yet you gave a flat refusal, not you personally. I do not know, but at what point did you take up your role, Minister?
Jim Fitzpatrick: The reshuffle in late June/early July.
Q505 David Taylor: It was your predecessor then. The NFU wrote to the Department in June 2009 to ask, not unreasonably, that, in recognition of the disruption caused by DFOB's collapse, and you had the powers to do it, you had the resources to do it, it does not interfere with the market and it would have helped secure in the medium term various parts of the dairy industry, whether you could extend the implementation period for nitrate-vulnerable zones by a further year. We heard from the NFU, and presumably the response was from your predecessor, that there was a flat refusal, a flat rejection. That, to me, does not sound like a department that is focused on supporting British agriculture or a significant part of it.
Jim Fitzpatrick: Well, in the conclusion, certainly we were not able to accede to the requests that were being made by the NFU, although there was at the margin an extension of one year in respect of elements of it. The Nitrates Directive, again as I understand it, has been in force for 16/17 years.
Q506 David
Taylor: Currently,
Mr Bourne: Yes.
Q507 David Taylor: And you refused to extend beyond that, or the Department refused to extend beyond that?
Jim Fitzpatrick: We have been in a position previously in respect of the action plans of being 'infracted' by the Commission because we had not complied with the Directive which, as I say, has been in being for some 16 years. Were we able to do so, then we may have done, but the examination, as I understand it, concluded that it was not appropriate that we undertake that request.
Q508 David Taylor: The second and final way, and this time it is not your Department, but you are a part, in which the Government could have assisted those that were affected by the DFOB collapse, and in fact you note it in paragraph 18 of your submission, the final sentence, is that, "The Receiver had approached HMRC requesting sympathetic tax treatment of DFOB members and Defra had liaised with HMRC who confirmed their staff were aware of the situation". That, to me, sounds like a classic Civil Service brush-off. This is to do with the debt-for-equity swap and the difficulties which farmers have in classifying the money that they had invested with DFOB and lost as a capital loss, and they cannot now do that as the law stands, but they were asking HMRC to treat this rather more sympathetically. It was in your submission at paragraph 18. Where are we on that because that was 41/2 months ago and you presumably have been chasing HMRC for a more positive response. What is happening?
Jim Fitzpatrick: As far as we are concerned, the request for HMRC to be sensitive to the plight of farmers caught up in the collapse was a sympathetic one. We certainly did not get further requests from individuals to say they were being badly treated by the Treasury and could we revisit or put pressure on to -----
Q509 David Taylor: No, that is true, they were seeking, what shall we say, a sympathetic interpretation of the law as it stands, which is not entirely unambiguous.
Jim Fitzpatrick: My understanding is that they got that sympathetic treatment and hearing.
Q510 David Taylor: We have not heard that and the NFU have not heard that.
Mr Bourne: I think that there are two issues here, Mr Taylor, one of which is the generic one about, if you had a farmer who had been a member of Dairy Farmers of Britain and they were, not surprisingly, going through short-term issues, including struggling to meet their tax commitments in general, whether they would get a sympathetic treatment, and we pursued that as part of the wider Government approach to dealing with businesses that are suffering during the recession. As far as I am aware, no one has come back to me to say that that has not worked okay, but I cannot guarantee there are not any issues. The separate issue which, I think, you might be mentioning is the one around what is the tax treatment of losses that farmers have endured as a result of the collapse of Dairy Farmers of Britain.
Q511 David Taylor: Yes, I have just said that, that they have difficulty in getting the capital loss, which they have undoubtedly suffered, treated as a taxable loss because of the debt-for-equity swap that occurred in March 2009, I think it was.
Mr Bourne: All I can say is that the receiver told me that that was a very complicated accounting issue which certainly went well beyond my skills. We note that that has gone to HMRC and no one has come back to me to say that it is unsatisfactory.
Q512 David Taylor: Could you recheck on that and write to the Committee as a matter of urgency before we draft our Report because it is a very important matter generically and individually because some DFOB members have had tax bills in the thousands of pounds for this period when they have made very substantial losses.
Mr Bourne: And the other issue which, I know, the receiver was concerned about was consistency of treatment because it was so complicated, so there was an issue of consistency as well as actual treatment.
Q513 David Taylor: So you will check with your colleagues in HMRC and give us an unambiguous reply on that?
Mr Bourne: Yes.
Q514 Chairman: Let us go back to the NVZs because one of the things which, I think, is genuinely concerning about this whole incident is that, when we have had farmers in here, they have given evidence and, when we have asked them how much have they lost, sometimes their losses are running at over £100,000 because they have lost their milk checks, they have lost the monies which they invested in dairy farmers and the loans that they gave to the business, so the practicalities for some of these people in making the necessary investment in appropriate facilities to comply with NVZs, it turns out, if you like, for some of them to be an absolute impossibility. Under those circumstances, and I accept the point you make, Minister, about Britain being somewhat laggard as far as the Nitrates Directive was concerned, but, given that we have here exceptional circumstances and also given the fact that you gave us a helpful commentary on the discussions in Europe about sustaining the dairy industry, I am a little bit surprised to hear that you did not go and have some conversation with the Commission to ask if, for perhaps one year, those farmers who have suffered like this could be given a derogation from the necessary requirements to give them a chance to recoup because practically I do not see how they are going to have the money to make these big investments in appropriate facilities.
Jim Fitzpatrick: Well, during the course of the consultation which was had in respect of NVZs, there were a number of amendments made to the original proposal which, it was felt, were responding to the concerns that were being articulated from farmers, and those amendments were written in. As a result of that which was submitted to us, we believe that those amendments were relatively significant in that which was introduced.
Q515 Chairman: Nobody is disputing the advocacy which you undertook on behalf of UK agriculture, but, when one looks, for example, at the kind of financial flexibility which the Commission has given in, for example, saving some of the banks, I do not think it is unreasonable for more modestly funded businesses, like farmers, to say, "Couldn't you give us a bit of a break?" The very fact is that, outwith the general application of the differing circumstances, Minister, that you have just enunciated, you did not go back and say, "Look, there's a small group of farmers here who in practical terms just haven't got the cash to make this investment. Could they be let off the hook for 12 months?" so did that question not get asked and, if not, why not?
Jim Fitzpatrick: I am not aware of the reasons why it was not asked if it was not asked, Chairman. All I can say is that the responses which we received through the consultation that was run created a number of amendments to the position that was consulted upon, and there were a number of actions which were also taken by Government, short of providing direct financial support, in terms of the lead-in time, the advice and guidance, the money from the Rural Development Programme for storage on farms, et cetera, so there were some adjustments made and there were some initiatives undertaken.
Q516 Chairman:
I
know all of that, but the practicality of the kinds of losses that these quite
modest farmers have suffered does raise the question as to how are they going
to do it. A business of this size losing
over £100,000, that is a major sum of money, and I am just a little bit
surprised that somebody has not gone to the Commission. They are not always that bad. If you ask for some special help for
particular circumstances, they are quite willing to agree to a
Jim Fitzpatrick: Well, I guess, given that the Directive is some 16 years old and there have been rollouts over a number of years and a whole range of different elements brought through, when we had the discussion at Ag Council on EID, electrical identification, which is almost seven years old, the vast majority of Member States and the Commission were saying, "You've had enough time and you don't need more time", and this is not a surprise or ought not to be a surprise as these things are quite clear.
Chairman: I have been where you are sat and I know that you can have a conversation with the Commission about these particular issues without, in the nicest sense, trying to make a case out as a sort of Trojan horse to slow the job down yet again. One recognises, because we did some work on this, that changes have been made, and I do not think that is the issue, but anyway I think it would be nice if you could at least re-examine the case as to whether there can be some kind of derogation because these guys are facing a practical problem. If I had lost £100,000 and I had to spend over the next two or three years some thousands of pounds for a new slurry system, survival of the business or take a chance?
Q517 David Taylor: Could you put into the public domain the refusal letter that you sent to the NFU with their consent?
Jim Fitzpatrick: What I will undertake would be to research and write to the Committee via yourself, Chairman, with our assessment and the action that was or was not taken and the reasons behind it, and I can get that research done and supply the information, as requested.
Q518 Mr
Williams: In
Mr Bourne: Yes, as soon as Dairy Farmers of Britain went into receivership and indeed before that, we had been in discussion with the Welsh Assembly Government at official level and they attended our meetings and we shared information with them throughout the process.
Q519 Mr
Williams: One thing which was asked by the Farmers'
Union in
Jim Fitzpatrick: We have said, in response to
the issue being raised about advance payments/early payments, that it would
not, in our view, be appropriate. Where
exceptional circumstances were raised, we would look at that, but, given that
the RPA's performance over recent years has been improving, given that 75 per
cent, if I remember correctly, of the money last year was paid out by the end
of December and that payments would be starting on 1 December, we felt,
particularly with the workload that the RPA are working under at the moment
with the whole remapping exercise which is going on, that to distract them from
that and to divert attention into saying that there was a possibility of early
payments and allowing people to come forward would perhaps mean that there
would be extra pressure brought to bear on the RPA which we did not think was
appropriate. I have not come under any
pressure from the NFU to say, "That is a wrong decision and we want you to
revisit it because we think there need to be early payments", such as was
decided for in
Q520 Mr
Williams: Well, all I can say is that it probably is
some reflection on the way the RPA still is performing, and I think the
Committee might be looking at that again then perhaps after the Christmas
break. In
Jim Fitzpatrick: Well, I do not think I have got very much more to add, Mr Williams, to the comment I made which was that, unless we were approached with exceptional circumstances, the decision of the Department and the RPA was that we would not go for early payments. Outlining the work that the RPA is undertaking at the moment in terms of getting the mapping completed so that we can re-populate the maps within the appropriate timeframe for next year to make them more efficient and make them more accurate to reduce the problems created for the industry, and incidentally, for them, that was a bigger priority, I have to say, as I outlined, I have not had pressure and I bump into the NFU or meet them on a weekly basis sometimes and usually more frequently.
Q521 Mr Williams: It is a bit late now, is it not? The time to make that sort of decision would have been when this collapse had happened and you cannot address it now because you are so far down the process of processing the Single Farm Payments, but, from my point of view and from the point of view of lots of farmers and the farming community as well, Defra could have been very well advised at that early stage to make that commitment.
Jim Fitzpatrick: Well, we felt we made the right strategic decision in respect of the issue, Mr Williams, and obviously that is a matter of history now.
Chairman: Well, Minister and Mr Bourne, thank you very much for your contribution. You have agreed to provide the Committee with some additional information which we look forward to. Can we thank you for your written submission towards the evidence of the inquiry and thank you very much for coming before us this afternoon.