Memorandum submitted by the National Farmers'
Union (DFoB 13)
1. The NFU welcomes the opportunity to respond
to the EFRA Committee inquiry into Dairy Farmers of Britain. The
NFU represents 55,000 farm businesses in England and Wales
involving an estimated 155,000 farmers, managers and partners
in the business.
2. In addition to the response provided here
the NFU has provided an appendix, which includes extracts from
members' accounts of their own experiences to better illustrate
the impacts and issues reported here.
THE IMPACT
OF THE
COLLAPSE OF
DFB ON DAIRY
FARMERS AND
THE INDUSTRY
3. There are over 100 milk buyers in
Great Britain, but until recently six major players dominated
the market. Dairy Farmers of Britain, with around 1,800 supplying
members, was one of three big farmer co-operative businesses.
Its farmer members are predominantly situated in the North of
England and Wales. DFB was handling over one billion litres of
milk (just under 10% of national milk production) making a range
of products including cheese, milk, butter, ingredients and desserts
for supermarkets and own label. Its collapse now leaves two farmer
owned co-ops (Milk Link and First Milk) and three privately owned
companies (Arla, Dairy Crest and Wisemans) operating with the
largest market share.
Farmers' Financial Losses
4. The NFU expressed its bitter anger and
dismay on behalf of its dairy members on hearing the news that
DFB had gone into receivership on 3 June. Over 1,000 NFU
dairy farming members were affected by this and over 1,800 farmers
in total have been left without pay for their milk collected in
May and up to 3 June. The NFU understands that an average
supplying member will have lost in the range of £10,000-15,000 as
a result of this.
5. The receivers (Pricewaterhouse Coopers,
PWC) stated that they would pay for milk collected from the date
that they were appointed. Farmers would be paid for this milk
on a twice monthly basis at an undisclosed price until 19 June,
at which point any remaining suppliers were offered a rolling
four week contract, with a price that was, at the time, undetermined.
Subsequently, the receivers paid members 12 pence per litre
(ppl) for all milk collected, and later made a one off payment
to reflect improved returns from the milk, equating to c.16ppl.
6. With the average cost of milk production
currently estimated to be within the range of 24-27ppl this situation
left many dairy farmers in a desperate financial state. Many businesses,
while normally profitable and viable, are likely to have experienced,
and may continue to experience, substantial cash-flow difficulties.
What is more, the outcome for each business in terms of securing
a new buyer that is able to offer a reasonable price for milk
collected has proved to be extremely varied.
7. In addition to these short-term issues,
the NFU is concerned by the loss of financial investment that
DFB members, past and present, made in the co-op. It is understood
that an average sized DFB member may have invested upwards of
£50,000 in the company as debt through so-called Member
Capital Accounts and other vehicles. The receiver has confirmed
that any members and former members will not see their investments
returned.
8. Case studies 1 to 5 in Annex
1 highlight examples of individual member losses.
Alternative Milk Buyers
9. The NFU believes that the industry as
a whole rose extremely well to the challenge of picking up milk
from 1,800 farmers and, although not all of it has received
a sustainable price, a market crash was prevented. It was extremely
difficult for farmers in remote locations, or with small volumes
to find a new milk buyer as they were not considered attractive
prospects to the larger milk buyers, most of whom recruited their
maximum capacity of additional supply very soon after DFB went
into receivership. The NFU was particularly disheartened to receive
reports from young dairy farmers, who had expansion plans that
were caught out by these events, as well as a number of progressive,
enthusiastic and specialist producers who passionately wished
to remain in dairying.
10. All dairy farmers were ultimately offered
a milk contract. On 29 June Milk Link offered direct supply
contracts to any remaining farmers that had not been offered a
contract by any other buyer, for commencement from 1 July.
PWC agreed to waive the existing one-month period that farmers
supplying the receiver on the four week contract had, to allow
farmers to take up this offer immediately.
Ongoing Concerns and Impacts
11. The NFU is particularly concerned about
the impact these events and the ongoing situation of low returns
for many famers will have on the continued health of the dairy
sector in general. In particular, the NFU believes that some milk
buyers may be exploiting farmers' vulnerability, and buying milk
cheaply in order to build margins, and undermine other sellers
in the market (case studies 6 and 7).
12. The table below highlights where DFB
milk has been reallocated and demonstrates the range of milk prices
being paid to dairy farmers. Current spot milk prices are quoted
to be around 21-23ppl, which raises concerns as to why this milk
is being bough for such low sums.
13. Table 1. Allocation of Ex-DFB suppliers
by Milk Buyer
|
| Buyer | Number of
farmers recruited
| Contract offered and current average price
|
|
| Arla | 72 |
Market related temporary contract; 18.4ppl June, July, August—Contract to be reviewed March 2010, when producers may be offered permanent contract.
|
| Dairy Crest | 110
| Transitional contract paying around 24ppl (around 10 are on an AMPE contract paying 1.5ppl below AMPE).
|
| Wiseman | 70
| Only signed producers who had already been offered a Wiseman contract.
|
| First Milk | 400
| Direct supply (3-6 month notice) 22ppl (June-July) 18.25ppl (August)
|
| Milk Link | 558 (339 from Llandyrnog creamery and the remaining 143 left without a buyer)
| Producers supplying the Llandyrnog creamery will be offered permanent contract circa 23.5ppl. Other producers offered a Direct Supply contract (3 month notice period) at c.18.25ppl
|
| Meadow Foods | 100
| Market related contract price circa 18ppl for June and July
|
| OMSCo | 82
| Standard supply contracts. |
|
Source: DairyCo.
14. The impact of DFB's collapse has raised concerns
for NFU members regarding the tax position of any money lost (case
study 8). The tax position regarding non payment for supplies
is that any money that becomes irrecoverable will be treated as
a bad debt. This will reduce the level of profits for income tax
or corporation tax purposes. The NFU has discussed the difficult
financial position that many Dairy Farmers of Britain may find
themselves in with HMRC and awaits a response from HMRC to the
issues raised.
THE GOVERNANCE
AND ACCOUNTABILITY
STRUCTURES OF
DFB
15. Dairy Farmers of Britain and the farmer directors
that governed the company had an undeniably huge responsibility
for member investments. A number of our members have questioned
the professionalism and ability of Dairy Farmers of Britain executives,
Directors and Council members in light of the collapse of the
company. Some of these issues and concerns are reflected in case
studies 9 and 10.
16. The NFU fundamentally believes that co-operative
businesses should be subject to the same scrutiny as other business
structures when it comes to their financial and business performance.
Whilst Limited Companies are the subject of constant internal
and external scrutiny, it is debatable whether co-operatives always
undergo the same degree of rigour. Of course, the ability to hold
a co-op to account resides with its shareholders (farmer members),
nevertheless, the question should be posed as to whether the corporate
rules that govern co-operatives, including the Industrial and
Provident Societies Act and the Enterprise Act 2002, confer the
same degree of scrutiny that private companies undergo.
17. Communication is one area where the NFU considers
DFB to have been ineffective in the run up to its collapse. There
is no doubt that tremendous damage was done by the inaccurate
and uninformed level of reporting that surrounded DFB. This undoubtedly
had an impact on the confidence that DFB's customers had in the
company, and caused a great deal of confusion, and distress amongst
DFB's members. DFB should have communicated more openly and transparently
with its members (case study 11).
18. At a meeting on 17 November at NFU's Headquarters,
which had been scheduled at the NFU's request following the restructure
and retrospective price cut that took place in November 2008,
DFB's Chief Executive and the Famer Director present offered us
reassurances as to the current financial stability of the company
and stated that they were planning for the long term, particularly
through their continued investments and development of added value
brands. In addition, DFB reported that sales of Local Choice milk
were increasing. This had apparently been assisted by Tesco offering
Local Choice milk at a promotional price, more aligned with the
retail price for conventional milk. The information contained
in the Receiver's report would appear to contradict this claim.
GOVERNMENT RESPONSE
TO THE
COLLAPSE OF
DFB
19. Government responded swiftly and sympathetically
to the situation. The Secretary of State, Hilary Benn made a very
supportive and encouraging statement to the House of Commons on
9 June, and later prepared an update for Parliament on 30 June
pledging Government's commitment through various business support
schemes that would be made accessible to dairy farmers.
20. Defra also chaired an emergency stakeholder meeting
to discuss the situation and identify solutions and measures to
ease the financial and emotional pressure facing dairy farmers.
21. The NFU sought clarification from the Government
about its plans to support dairy farmers who faced having no alternative
buyer for their milk and, in particular, urged the Government
to make funding available to dairy farmers through the RDAs a
priority case. This was raised at the stakeholder meeting and
addressed in the SoS's statement to the House on 9 June.
In particular the work of the North West Development Agency, Yorkshire
Forward and One North East in providing support and advice to
ex-DFB members in those regions should be recognised.
22. However, there is one area where Government has the
potential to make a real difference. In light of the instability,
uncertainty and financial losses incurred by a large number of
dairy farmers as a consequence of the events surrounding the collapse
of DFB, the NFU strongly believes that Government can send a strong
signal to farmers that it recognises the need to be sensitive
to the demands it places on the industry and is willing to reduce
the burden of legislation wherever possible by extending the current
timetable requirements for implementing the Nitrates Directive
for another year (case studies 12 and 13).
23. A recently published survey by DairyCo has revealed
that those farmers that are required to invest in slurry storage
are facing costs of between £40,000 and £80,000 (copy
of letter to Minister provided in Annex 2). To date, no response
to the letter has been received.
24. On 15 July 2009, Minister of State, Jim Fitzpatrick,
announced that 50% of the English allocation of funds from the
European Economic Recovery Fund would be prioritised towards the
dairy sector through the Rural Development Programme for England.
Although small (estimated £3.5 million), this decision
was welcomed.
25. Welsh Rural Affairs Minister, Elin Jones announced
in a written statement on 6 July that dairy farmers in Wales
may be eligible to receive advance SPS payments in light of the
DFB collapse. The NFU was disappointed that the RPA and Defra
were not prepared to make a similar commitment in England. The
NFU followed up this point with the RPA Chief Executive in writing.
The RPA's reaction was that while it would theoretically be possible
to advance Single Payments it might have a knock-on effect on
other farmers and jeopardise the RPA's recovery.
THE CAUSES
AND LESSONS
TO BE
LEARNED FROM
THE COLLAPSE
OF DFB
26. The NFU has not conducted its own analysis of the
causes of DFB's collapse, nor is the NFU privy to the inner thinking
or financial accounts of DFB so it is difficult to comment on
the exact causes. However, accounts from our members (case studies
14 and 15) and the information contained in the Receiver's
Report appear to indicate that the underlying causes of DFB's
problems include a flawed business plan, poor management and bad
decision making, which gradually eroded the profitability and
viability of the company.
27. There are of course certain events that stand out—the
huge sums of money spent on the ACC business, the disappointing
failure of Tesco's Local Choice brand and the loss of the Co-Op
supply contract—all of which delivered devastating blows
to the business.
28. The NFU has no doubt that the impact of the retailers'
actions in contributing to the company's demise could have been
alleviated, or prevented. In the case of the Co-Op, the NFU believes
that had the Co-Op established direct, dedicated relationships
with its DFB farmer suppliers then the relationship between DFB
and the retailer would have been stronger, based on long-term
partnership and offered greater transparency and stability. There
are a number of dedicated supply chains that are operating successfully
between other retailers and their farmer suppliers, by bringing
retailers closer to farmers and getting farmers closer to the
end market.
29. The introduction by Tesco of a tertiary brand of
milk, FreshnLo undeniably had an impact on the sales of Local
Choice. At the meeting between NFU and DFB on 17 November
2008 both parties recognised that the launch of FreshnLo
was a dangerous strategy, which had the potential to undermine
the good work that had gone into developing dedicated chains.
30. Most importantly, this must never be allowed to happen
again and it is time now to consider the lessons learned:
Response of Milk buyers
31. The NFU was genuinely encouraged and impressed by
the actions of some milk buyers that responded so promptly in
the immediate aftermath of DFB's collapse.
32. However, the NFU was extremely concerned by the number
of reports received from our members about some milk buyers behaving
unscrupulously towards Dairy Farmers of Britain ex-suppliers.
The NFU stated that it would not tolerate buyers found to be exploiting
and profiteering on the back of this difficult situation and committed
to expose any buyers that are found to be doing this.
Industry collaboration and support
33. It is a credit to the industry that so many organisations
pulled together at this time with a common interest to support
as many famers as possible. In particular, the farming charities
have been on hand from day one to offer that crucial lifeline
to farmers who are understandably distressed, anxious and stressed.
Many have also made financial donations to farmers to alleviate
some of the short term financial difficulty they face.
34. The NFU would also like to acknowledge the support
and sensitivity shown by the major agricultural lending banks
to the affected farmers. At the emergency meeting of interested
parties all the major agricultural banks were in attendance to
discuss how best to support their clients. Many of these banks
have also written to the NFU to set out the support measures put
in place for DFB members that may be facing short and longer term
cash flow difficulties.
35. The NFU, EFFP and Dairy UK pulled together to provide
a linkage system which enabled farmers to make contact with smaller,
specialist buyers and dairies who may be interested in taking
on new suppliers. EFFP also offered advice to those farmers who
wish to stay in dairying and believed that, with help, they may
have a viable future.
Receivership Process
36. The NFU would like to acknowledge the good work that
has been done by the receiver. The process has been openly transparent,
well communicated, with a practical and clear strategy. While
it is extremely disappointing that the receiver doesn't expect
that any monies owed to farmers will be paid out, the improved
milk price and, in particular, the news that no steps will be
taken by the receiver or the bank to call in member guarantees,
are a huge relief
Milk Contracts
37. The NFU has identified a number of issues and lessons
to be learned regarding the crucial role of milk contracts.
38. Termination clauses: The contract held between DFB
and its members did not contain any clause which allowed the contract
to be terminated with immediate effect if either party appointed
a receiver, or filed for administration. Consequently, DFB suppliers
had to be granted permission from the receiver to leave DFB. While
the NFU believes that the receiver acted promptly and rightly
in providing farmers with a window in which to leave DFB and find
an alternative buyer, there was some initial uncertainty with
regard to members' legal positions. The NFU believes that the
need for all milk contracts to have more balanced rights and obligations
to reduce farmers' vulnerability in these events is vitally important.
39. Notice periods: These events have demonstrated some
of the weaknesses inherent in raw milk supply contracts. The price
cuts that DFB enforced prior to its collapse[1]
have highlighted how vulnerable a farmer is with the current terms
and conditions contained within the majority of these contracts
that allow buyers to impose price changes, even retrospectively,
whilst producers are compelled to continue supplying the company,
sometimes for in excess of 12 months. This can lead to the
financial ruin of a farm business with no chance to mitigate losses
by seeking another buyer The NFU believes that milk contracts
should be more mutually balanced, and not tie farmers in to long
notice periods while unilateral price decisions can be enforced
at the discretion of the buyer (case study 16).
40. Clarity and understanding: At this time many dairy
farmers were in a very vulnerable position, with some facing the
traumatic prospect of having no buyer for their milk. Under these
circumstances it was extremely alarming and unacceptable to hear
reports from NFU members that some buyers were taking advantage
of farmers by offering contracts with unreasonable milk prices,
pressuring farmers to sign contracts in very short timescales
and requesting long-term commitments from them with no period
for "cooling off". The NFU clearly communicated the
vital importance of a farmer looking very carefully at any new
contract and making sure that they understand and are comfortable
with the terms and conditions of that contract.
41. Secretary of State, Hilary Benn also stated in his
statement to the House that "farmers should not feel pressurised
into signing up to contracts with alternative buyers that they
might regret". This highlights the need for clearer,
more understandable contracts generally in the dairy industry,
and for closer scrutiny to be placed on milk buyers' behaviour
if an event such as this were to happen again.
Benchmarking performance
42. Developing clear performance benchmarks for farmer
controlled businesses. Ideally these need to be simple benchmarks,
beyond milk price leagues or company accounts, that farmers can
understand.
Governance of Co-operative Businesses
43. Many of our members have questioned the integrity,
professionalism and ability of DFB executives and council members
in light of its collapse. The Receiver's report shows no evidence
of wrong-doing but makes it clear that the main responsibility
for the long line of bad decisions, aborted projects and lack
of any clear strategy within DFB rests with the board and the
executive team. This underlines the need for Farmer Directors
to be properly supported, trained, highly skilled and have the
ability to manage large and complex businesses. These requirements
are not easy to find when most farmers are accustomed to running
single operations or sole trading businesses.
Independent evaluation
44. The collapse of DFB has served to reinforce the call
that the NFU made in its Vision for the Dairy Industry of 2005 for
independent evaluation of the business performance of co-ops.
This independent evaluation would aim to provide an objective
judgement for members as to the performance and business strategy
of the company. It should be confidential, reporting back to shareholders.
45. We feel that such a move would give dairy farmers
confidence, remove much of the damaging gossip and media speculation
and allow executives to concentrate wholly on the business and
not expend time and resources fire-fighting false allegations.
Although DFB's ultimate fate might not have changed, emerging
concerns that could easily be concealed in financial accounts
might have been spotted sooner and dealt with differently. Increasingly,
for many dairy farmers, it is about how their investments in farmer
businesses (milk groups and co-ops), money they can ill afford
in most cases, are being handled.
CONCLUDING REMARKS
46. While the NFU believes that the long term future
for British dairy farming is extremely bright, the impact of the
collapse of DFB has further compounded the fragility, uncertainty
and low levels of confidence that currently exist. It is vital
therefore that every part of the supply chain, and government,
recognise the crucial role and responsibility they have for creating
a more profitable, competitive, stable and secure climate in which
dairy farming businesses and the British dairy industry can thrive
for the long term.
SUMMARY OF
RECOMMENDATIONS
47. There is an urgent need for more frequent financial
appraisals of co-ops, including regular trading statements, financial
updates and a full annual audit.
48. Government should extend the current timetable requirements
for implementing the Nitrates Directive for another year.
49. HMRC to treat financial losses as trading losses.
50. All retailers to establish direct, dedicated relationships
with their farmer suppliers to bring about long-term partnerships,
greater transparency and stability.
51. All raw milk contracts to have more balanced rights
and obligations to reduce farmers' vulnerability. In particular,
an ability to terminate with immediate effect if either party
appoints a receiver or administrator.
52. Raw milk contracts should be more mutually balanced,
and not tie farmers in to long notice periods while unilateral
price decisions can be enforced at the discretion of the buyer.
53. There is a need for greater simplicity and clarity
in raw milk contracts, so that farmers can clearly and easily
understand the terms and conditions of that contract before they
sign.
54. There is a need to develop clear performance benchmarks
for farmer controlled businesses. Ideally these need to be simple
benchmarks, beyond milk price leagues or company accounts, that
farmers can understand.
55. There is a need for Farmer Directors to be properly
supported, trained, highly skilled and have the ability to manage
large and complex businesses.
56. Co-operative businesses should be independently evaluated
to provide an objective judgement for members as to the performance
and business strategy of the company. It should be confidential,
reporting back to shareholders.
The NFU is happy to provide any additional information requested
and looks forward to giving oral evidence to the EFRA committee
in the near future.
National Farmers' Union
September 2009
1
DFB cut its milk price by a total of 4.2ppl between November 2008 and
April 2009. Back
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