Memorandum submitted by the Farmers' Union
of Wales (DFoB 07)
EXECUTIVE SUMMARY
On 3 June 2009, Dairy Farmers of Britain
took the decision to call in receivers, resulting in major financial
losses for one in every eight Welsh dairy producers, and threatening
more than 450 Welsh jobs, with similar repercussions for
farmers and DFB employees in other regions of Great Britain. The
average financial loss for those FUW members who have contacted
the FUW is £31,563, with individual losses lying in the range
£5,000-£110,000.
The receivership came as no surprise, and brought
to an end months of speculation regarding the financial stability
of DFB, during which the Farmers' Union of Wales (FUW) had held
numerous meetings with suppliers, DFB management, and legal advisors.
While the collapse, and subsequent receivers'
report,[1]
raises a number of pertinent questions about the events that led
to the collapse, it also raises wider questions regarding the
governance structures and regulation of producer owned cooperatives,
and the contractual relationships that exist between producers
and processors in general.
Given that matters relating to DFB's receivership
are still developing, it would be inappropriate for the FUW to
comment on the precise events that led to the receivership of
DFB. However, it is suggested that the collapse raises wider concerns
relating to the relationships between suppliers and processors,
and that these warrant significant action by government in order
to ensure transparency and redress imbalances within the dairy
supply chain, particularly given governments' promotion of more
cooperation amongst farmers.
THE IMPACT
OF THE
COLLAPSE OF
DFB ON DAIRY
FARMERS AND
THE INDUSTRY
1. The impact of the collapse of DFB on
dairy farmers and the dairy industry as a whole is many-fold,
but can be divided into a number of general categories:
(i) The impact of the financial problems faced
by DFB prior to the collapse, and the collapse itself, on the
dairy industry as a whole, in terms of commodity prices and farmgate
prices for non DFB members. In particular, while it is nigh impossible
to quantify the impact of DFB's financial problems on GB commodity
and farmgate prices, there is little doubt that these led to downward
pressure on the market as a whole (Figures 1 and 2).
(ii) The direct financial impact for DFB suppliers,
both prior to and after the collapse of the cooperative, resulting
in reductions in investment on farms, severe cash-flow problems,
and, ultimately, the departure of some from the dairy industry.
Such effects will have been concentrated within those geographic
areas associated with DFB's milk fields, and it is likely that
these will have had a knock on effect on other businesses within
those areas.
Figures made available by FUW members show that
the collapse resulted in an average loss of £31,563 for
those DFB suppliers, comprising an average loss of £23,154 in
terms of milk supplied in May/early June, and a loss of £8,409 in
terms of assets. The losses upon which these averages are based
lie in the range £5,000-£110,000.
(iii) A significant reduction in confidence regarding
the viability of producer-owned cooperatives, at a time when UK
and devolved governments continue to encourage such cooperation.
(iv) The collapse had a particularly acute impact
on smaller family farms, many of which found it difficult or,
in some cases, impossible to find replacement milk buyers following
the collapse, as highlighted in the receivers' report, published
on 24 August 2009. It is also notable that the collapse effectively
created a "buyers' market", allowing some companies
to offer new contracts at reduced farmgate prices to businesses
that had little choice but to accept such offers.
Figure 1
COMPARISON OF GB FARMGATE MILK PRICES WITH
THOSE OF DFB BETWEEN AUGUST 2008 AND APRIL 2009
Figure 2
MILD CHEDDAR PRICES BETWEEN AUGUST 2008 AND
JULY 2009
THE GOVERNANCE
AND ACCOUNTABILITY
STRUCTURES OF
DFB
2. In the months running up to the collapse
of DFB, the FUW was contacted by numerous DFB suppliers who were
concerned regarding the finances of the cooperative, including
calls from Council and Regional Council members, and numerous
meetings were held with suppliers, DFB management, and legal advisors
in order to discuss these concerns.
3. Foremost amongst these was the concern
that projections and assurances made by DFB officials regarding
the financial wellbeing of DFB were unfounded, and that a lack
of transparency regarding such matters was restricting the ability
of DFB members to make balanced business decisions.
4. While it would not be appropriate for
the FUW judge the validity of such claims, it must be acknowledged
that cooperatives, by their very nature, rely on the continued
support of their members, and maintaining the confidence of suppliers
is therefore of utmost importance. However, where such confidence
is engendered, this should be done on genuine grounds.
5. The FUW therefore believes that the concerns
of DFB members who believe that information regarding the financial
status of the cooperative may have been withheld should be addressed
through the release of all relevant correspondence and paperwork.
6. Notwithstanding such concerns, it should
be noted that the contracts under which members supplied DFB severely
restricted the options available to those who suspected that the
cooperative was in financial jeopardy.
7. Thus, had substantial numbers of DFB
members believed that the cooperative would enter receivership,
their business options would nevertheless have been extremely
restricted, and in this context it is worth drawing attention
to the receiver's statement that "Legal advice suggested
we could have held members to existing contracts and enforced
the 12 month notice periods".
8. Thus, the events leading up to and following
the collapse of DFB raises significant concerns regarding the
inflexibility of supply contracts with all processors, be they
private companies or producer-owned cooperatives.
9. While the principle concern with regard
to inflexibility relates to the notice period, it should also
be noted that such contracts invariably limit a producer's ability
to supply other processors, thus preventing businesses from spreading
potential risks.
10. With regard to this issue, the FUW also
acknowledges that the introduction of more flexible contracts
by any one processor ahead of similar moves by competitors may
make it vulnerable to large migrations of producers over short
periods, thus weakening its position within the market place,
and leaving it particularly vulnerable to aggressive moves by
companies wishing to expand their milk fields.
11. The FUW therefore believes that there
is a clear need for government to introduce regulations that allow
more flexibility for all producers.
12. Moreover, given the clear need for greater
flexibility in terms of contracts, concerns amongst former DFB
suppliers regarding transparency, the failure of the Enterprise
Act 2003 to account for cooperatives, and concerns expressed
by the Office of Fair Trading and the Competition Commission regarding
the supply chain, the FUW believes there is a strong argument
in favour of introducing regulations that redress the imbalances
that currently exist in the dairy supply chain.
DEFRA'S
RESPONSE TO
THE COLLAPSE
OF DFB
13. Notwithstanding the above statement
regarding the need for regulations that address concerns regarding
the dairy supply chain as a whole, as a Welsh farming union operating
within a devolved region, the FUW is not in a position to comment
on the role played directly by DEFRA in relation to the collapse
of DFB.
14. However, regarding the parallel role
played by the Welsh Assembly Government (WAG) following the collapse,
the Minister for Rural Affairs, Elin Jones, gave assurances on
4 June 2009 that moves would be made by WAG to safeguard
jobs in Llandyrnog and Bridgend, and protect the livelihood of
producers who supply affected processing plants.
15. The FUW has attended a number of meetings
with WAG and the receivers following the collapse of DFB, during
which a numerous possible courses of action have been discussed,
in terms of supporting both former DFB employees and suppliers.
16. Information, provided both during such
meetings and in the receivers report1, suggests that potential
buyers did not regard the purchase of DFB's Bridgend plant as
a viable option. While the subsequent loss of 279 jobs in
Bridgend is a significant regret for the FUW, the union is unaware
of any possible actions that might have been taken by WAG to secure
the sale of the plant.
17. Conversely, the purchase of DFB's Llandyrnog
plant by Milk Link, along with the transfer of DFB's Llandurnog
suppliers, has significantly reduced the impact of DFB's demise
within Wales.
18. During meetings with WAG, the FUW discussed
possible actions that might be taken to reduce the impact of DFB's
collapse for members. These included Farming Connect[2]
contacting those DFB members who had failed to find new processors
in the weeks following the collapse, giving priority to DFB members
applying through Farming Connect for business development grants,
and making advance Single Payments to affected members.
19. Given that all actions relating to Farming
Connect have now been taken, and that Single Payments amounting
to 70% of their full value will be accessible to affected businesses
from 16 October 2009, the FUW commends the actions taken
by WAG following the collapse of DFB, and acknowledges that the
courses of action available to WAG were relatively limited.
20. It is also notable that WAG's commitment
to make such early payments should not affect the payment of around
90% of all Single Payments in early December 2009.
THE CAUSES
AND LESSONS
TO BE
LEARNED FROM
THE COLLAPSE
OF DFB
21. Given that the Committee has already
been provided with a copy of the receivers report, the FUW does
not intend to reiterate the numerous problems that led to the
Directors of DFB inviting the appointment of Receivers and Managers
on 3 June 2009.
22. Moreover, the complexities of the issues
surrounding the collapse, and ongoing considerations, including
forthcoming meetings between the receivers and members, anticipated
reports, and legal considerations, make any significant dissection
by the FUW of the events that led to DFBs collapse inappropriate
at this time.
23. However, Committee will note the concerns
expressed by some individuals, as referred to in paragraph 3,
and the subsequent comments made in paragraphs 6 to 12.
Farmers' Union of Wales
August 2009
1 PriceWaterhouseCoopers: Receivers' report to creditors,
members and ex-members, 24 August 2009. Back
2
Farming Connect is a Welsh Assembly Government run service for
farm businesses, funded through the Rural Development Plan. The
service provides business help and advice for farmers and their
families, including the administration of farm business development
grants. Back
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