Memorandum submitted by W Paul L Peters
(DFoB 21)
EXECUTIVE SUMMARY
I am a dairy farmer from West Wales, farming
300 acres, predominately dairy—120 pedigree Holsteins
and followers, with some beef and grow about 30 acres of
spring barley. I farm with my 78-year-old father, have two casual
staff when needed, and use a relief milker. I work 14 hrs
per day, seven days a week. I am the 4th generation to farm here,
and hope that my son will follow in my footsteps. I love my vocation,
and have done since I left college in 1979.
The collapse of DFB has had a devastating effect
on my business, not only with our working cash flow, but reinvestment
in my business. The money we have lost will be most, if not all
of our profit for 2009-10. Also, it has caused months of worry
by my partners and myself. I farm to the best of my ability, producing
milk to the highest standard, and often have the highest price
for my beef at the local mart.
My biggest mistake is that I have been too trusting
and accepting of the management of DFB, assuming that they were
managing our co-operative to the same standard as I farm.
ROOT PROBLEM
In my opinion, the root of the problem is that
farmers have lost all the power in the market place. Firstly,
the disbandment of the Milk Board in 1994, which was replaced
by a voluntary co-operative Milk Marque, which some farmers joined,
and the remainder moved to other milk buyers. Because Milk Marque
had 40% share of the milk market, the Government said that this
was too large, and instructed that it break into three farmers
co-operative:
— Milk Link (still operating today)
— Zenith, who later merged with another
farmers cooperative, The Milk Group, which formed DFB
— Axis, who later merged with Scottish
Milk, which was then called First Milk
This weakened the farmer co-operative power,
because the smaller co-operatives had no assets, no cash reserves,
and a lack of experienced Management staff. Tesco currently has
40% of the grocery market share, but the Competitions authorities
seem to think this is acceptable.
Also, producer numbers have fallen from 32,000 to
11,000 in those 15 years, mainly due to the low milk
price, hence the lack of funds to reinvest in their farms and
update milking facilities.
DFB
In my opinion again, the collapse of DFB was
entirely due to poor management, which includes lack of accountability
by the Chairman and non-executive Directors to the Farmer Directors,
and also the complete lack of ability to purchase further companies
at the right price, ie Golden Vale in Bridgend, ACC and Lincoln
Dairies.
REPORT
1. Terms of Reference
Following the collapse of Dairy Farmers of Britain
(DFB), I wish to tell you about the impact this has had on my
business, my business partners and myself. The four areas to be
covered are:
1.1 The impact of the collapse of DFB on
dairy farmers and the industry;
1.2 The governance and accountability structures
of DFB;
1.3 DEFRA's response to the collapse of
DFB; and
1.4 The causes and lessons to be learned
from the collapse of DFB.
1.1 The Impact of the collapse of DFB on dairy
farmers and the industry.
1.1.1 Caused massive disruption to the dairy
industry as a whole.
1.1.2 1800 farmers looking for a new
milk buyer at the same time.
1.1.3 Buyers cherry picking farmers, and
paying low price to their new suppliers
1.1.4 Worst example—First Milk signing
up around 420 farmers to a headline price of 22.05 ppl,
then dropping the price by 3.4 ppl after just eight weeks.
(Tesco have provided costings, which show that dairy farmers need
26 ppl to make a reasonable profit and have money to reinvest
in their business).
1.1.5 1800 job losses in the dairy
processing industry
1.1.6 Over 50 farmers forced to quit
the industry + 350 will quit in the next 12 months because
of unsustainable milk price (estimated by British Dairying).
1.2 The governance and accountability structure
of DFB
1.2.1 I don't understand why DFB was allowed
to continue trading, and get further into debt, whilst at the
same time its customer based evaporated, hence the company was
worthless as a going concern.
1.2.2 In regard to member's retention, the
investment accounts were converted into shares in April 2009.
The decision to convert to shares was made by the Members Council,
and individual members were not given an opportunity to vote,
despite our personal £32,000 investment in DFB. Was
this legal?
1.2.3 DFB had 30 days to announce a
price per litre change, therefore on 29 November 2008, there
was a price cut announced of 2ppl, which was backdated to 1 November
2008. This apparently was to raise £10 million to close
Portsmouth and Fole Dairies, with a promise that this would put
the company back in the black!!! Therefore, from November 2008 to
April 2009, our farming business lost approximately £10,000 due
to the lower milk price. (Basically it was retention by the back
door). What happened?? In my opinion, DFB should have been wound
up at that point.
1.2.4 During the last month, our farm accountant
has looked at DFB Annual Accounts for the past five years, and
commented that DFB was insolvent in March 2007 (our mistake,
not giving a set of the accounts to our accountant when we received
them). There was no Auditors note to say that DFB would have trouble
continuing to trade—negative equity in this set of accounts.
1.2.5 Directors Salaries and payment to
associated companies—and what were we paying for?
1.2.5.1 Philip Moody—Director, Finance
Committee. Looking at Annual Accounts to 31 March 2007—DFB
paid a Salary of £88,000. DFB also paid the Accountancy Practice,
Smith and Williamson (where Mr Moody is head of Corporate Finance)
£679,000 for the same period. During the four year period
April 2004 to March 2007 DFB paid Smith and Williamson
£2,397,000—what for? Obviously not to do any accounts
work or internal audit functions—otherwise we wouldn't be
in this mess. It all seems very cosy to me. The 2007-08 Annual
Accounts do not disclose the amount DFB paid Smith and Williamson—why?
1.2.5.2 Richard Fisher—DFB Director.
Looking again at the 2007 Annual Accounts, DFB paid Oh (Surprising
Solutions) Ltd (of which Mr Fisher was a Director), £90,394 for
four months "Consultancy" work (between 6 November
2006 to 31 March 2007, as he stepped aside from his
directorship duties on 6 November 2006. What work did this
company do for that much money? I have a copy of Oh (Surprising
Solutions) Ltd Abbreviated Balance sheet as at 30 September
2008, which I obtained from Companies House—and it states
that the Fixed assets for 2007 were £377. What company
is equipped to earned £90,000+ from one customer (DFB), with
only £377 fixed assets. This does seem astounding!!!
1.2.5.3 One other point on P Moody and R
Fisher—in the Annual Accounts to the year ending 31 March
2008, it states that Philip Moody was Head of Corporate Finance
with Smith and Williamson, and Richard Fisher was Director of
Oh (Surprising Solutions) Ltd, as in other years, but in this
set of accounts, no reference is made of how much DFB paid the
two companies. Why? If it's above board, then what have they got
to hide.
1.2.6 Rob Knight was paid £508,000 during
2005-06, this being for his Executive Chairman role, and in addition,
the Chief Executive Officer role (May 2005 to December 2005)
when Chief Executive Malcolm Smith left DFB. How can one man be
paid for two jobs? Maybe a bonus payment was in order, but surely
not an additional £260,000?? I have attached a five-year
pay summary (Appendix 1) of the salaries for Rob Knight, Philip
Moody, and Richard Fisher, and their associated companies, respectively.
A relative salary comparison for a chairman of a dairy company
would be Simon Oliver, Chairman of Dairy Crest paid £120,000 per
annum.
1.2.7 I realise that the monies quoted with
regard to Rob Knight, Philip Moody and Richard Fisher are not
large percentages of the overall financial picture, but they are
all we (as members) have access to, via the Annual Accounts, and
these points are surely indicators of the way the Directors were
operating the business. I have attached a summary (Appendix 1)
of these monies, which amount to £4,665,394. With the massive
financial mess DFB has found themselves in, surely some of these
directors should never be allowed to practice as company directors
again.
1.2.8 The format of the DFB Annual Accounts
to the year ending 31 March 2008 was changed, which
made comparisons to earlier years difficult. Why was it changed?
1.3 DEFRA'S response to the collapse of DFB
1.3.3 Early SFP—to be paid in October,
for Welsh Farmers only
1.3.4 Hilary Benn—Only interested
in the job losses in the North East (Blaydon Liquid Processing
Plant)—not interested in the farmers and what they have
lost. Yet, when the Receiver was called in, he stated that the
Liquid Division was the part of the business which was losing
the money, and not the cheese division.
1.3.5 The attitude of the Government was
that because everyone had found a new milk buyer, then everything
was fine. But the prices being paid by the new milk buyers are,
in many cases, not sustainable for the farmers concerned to continue
milk production.
1.4 The causes and lessons to be learned from
the collapse of DFB
Causes
1.4.1 To many Directors, resulting in large
management salary costs.
1.4.2 Individual Director salaries too high
1.4.3 Poor management
1.4.4 Paid over the market value for processing
plants—eg purchase of ACC for £70 million. Valued
at less than half of this at the time by another dairy company.
1.4.5 Lack of transparency—HSBC would
not lend all the money to purchase ACC, so the Co-operative Bank
themselves lent DFB £15 million in a secret loan deal,
which was not communicated to farmer members.
1.4.6 Farmer Directors out of their depth,
and not able keep control of non-executive Directors from industry.
1.4.7 Too much spin, and not enough substance.
EG Management stating that everything was going well—August
2008 Monthly Newsletter—Headline: A Business on Track.
October 2008—DFB failed to pay the interest on the Capital
Invested. Not a business on Track!
Lessons to be learned
1.4.8 Our business—after losing so
much invested money with DFB and not being paid for 34 days
milk, don't sign up with another farmer co-operative
1.4.9 A recognition that privately owned
processors do not want Farmer Co-operatives treading on their
toes, and will do anything to weaken and destroy.
W Paul L Peters
September 2009
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