Examination of Witnesses (Questions 100
- 119)
WEDNESDAY 14 OCTOBER 2009
MS HAYLEY
CAMPBELL-GIBBONS
AND MR
GWYN JONES
Q100 Mr Cox:
Other countries do have a much more flourishing co-operative sector,
do they not? For example, they give loan guarantees and they have
all kinds of encouragements and incentives to co-operatives.
Mr Jones: Yes, I think we should
remember that some of the European co-operatives are anything
up to 100 years old and well invested, and some them are very
good and very big, such as Campino or Arla, for example, but many
co-ops have also failed and have not done particularly well in
Europe either. So I think it is not so much the model on its own,
though that may be part of it.
Q101 Mr Cox:
Forgive me. I hear what you say about that, but we have had one
of the main five go out of business and go bust; we hear that
First Milk is making a loss of, what was it, seven-odd million;
we hear stories of problem in others. I do not buy this story
that somehow co-operatives are all fine and dandy, and what I
am offering you is the opportunity to tell us how we should improve
the prospects for these co-operatives to flourish.
Mr Jones: I certainly do not think
that we should start getting too nervous about First Milk or Milk
Link simply because DFB has failed. There are good reasons, and
they have been explained, as to why First Milk incurred that loss.
It is a very difficult time, the industry has gone through quite
a recession, but I hear what you say and I agree with you that
it would be a good idea to look at the rules and regulations.
Q102 Mr Cox:
Take Milk Link. If you are a farmer who suddenly finds his price
docked by a couple of pennies, as was happening a year or two
back in Milk Link, because the cheese factory is not making sufficient
margin, you are not terribly happy, are you?
Mr Jones: No, but the same goes
for all milk buyers, whether they are co-operatives or plcs. They
all have the ability (and this is why we make such a point of
the contract) to deduct and adjust the milk price as they see
fit, when they see fit, regardless of what farmers might say.
Q103 Mr Cox:
I want to make plain, certainly speaking for myself, and I am
sure others on the Committee, there is a tremendous friendliness
towards co-operatives and we want to see them succeed, and that
is why my question is targeted at perhaps what steps might the
NFU think it would be worth taking to free up the co-operatives
to allow them to capitalise more easily. Perhaps you would like
to think about going away and putting something in writing on
that.
Ms Campbell-Gibbons: We can certainly
do that.[2]
More generally, if you are asking how do we believe that the structure
around co-ops in general could be improved, I think independent
evaluation of co-ops, and those reports would be confidential,
made available to the shareholders, commenting on the executive
performance of the company, would be a very good start. I think
you could have performance benchmarking. We are very pleased that
DairyCo has recently contracted a company to investigate the UK
milk processors, so co-operatives and plcs, on a range of indicators
to look at their performance. I think that will be publicly available,
and it is good for farmers to know that the company they are supplying
is a strong company. I think also, as I mentioned, much more stringent
financial accounting for co-operatives as well. I think those
three things would be a very good start.
Q104 Mr Cox:
They are always very good safeguards and guarantees. What I am
looking for as well are steps that could be taken to assist co-operatives.
I do not necessarily mean Government money, but in the framework
would it be helpful to allow them to raise money more easily,
the capital and so on? We need to understand what the Union's
position is on what positive steps might be taken to assist the
prosperity of these companies as well as the governance issues,
which you very rightly referred to. I think there is a real problem
over transparency and accountability and how the lines of accountability
work in co-operatives and whether we have got the legal for a
model right. You would agree with that.
Ms Campbell-Gibbons: Yes. We will
submit a response to you on that.[3]
Chairman: That is entirely consistent
with paragraphs 16 and 17 of your written evidence. A brief supplementary
from Anne and then we will move on to David Taylor.
Q105 Miss McIntosh:
Do you think there is anything to be learnt from the way that
co-operatives are formed and organised in other Member States?
I am thinking particularly of Denmark and how efficient they are.
They seem to be more marketing co-operatives. Is there something
we can learn from the legal structure of co-ops in similar structures
elsewhere in the European Union?
Mr Jones: I cannot claim to be
an expert, obviously, on European co-ops. All I would say is that
the co-op structure was set up here—take Milk Link for example—in
close conjunction with Rabobank, who are our expert in co-ops
in Europe, and I believe that the advice and the structures were
taken on from both Rabobank and other co-operatives in Europe.
I think there was some survey and intelligence brought into the
start up of the co-ops, but I would agree if there are other things
that we could learn, other things that would assist the co-ops,
we should maybe look into that, and I will make a note of it.
We can do that.
Ms Campbell-Gibbons: There was
a report that was conducted for Defra by KPMG in 2007 that actually
benchmarked or looked at certain indicators from UK dairy companies
with global companies and other EU organisations, and they suggested
that UK milk processors would be wise to invest more in the non-liquid
sector, spend more on R&D, increase their capital expenditure,
look to export more product and to vertically integrate as well.
So I think there are a number of areas where we could certainly
learn from what European co-ops are doing.
Chairman: One of the interesting things
that follows on that very helpful answer and also when you were
commenting with reference to Mr Cox's point is what are the barriers
for UK co-ops in actually doing that? I think that is part of
the problem that got DFB to where they are.
Q106 David Taylor:
As the Chairman noted right at the very start, in your evidence
you have in a sense regurgitated much of what the Receiver had
to say, I guess, proving that we can infer from that that you
endorse it, but one comment that you make which is separate from
the Receiver's report is your paragraph 17, to which the Chairman
referred a moment or two ago, where you say that an inaccurate
and uninformed level of reporting surrounded DFB and you imply
that was a factor in its rapid collapse.[4]
Is that how you see it? Are you talking about communications with
the outside world, or with their members, or what type of communications?
Are you saying one more spin doctor would have prevented them
from collapsing?
Mr Jones: No, quite the reverse
actually. There was certainly some damage done by outside commentators,
who seemed to sometimes have remarkable inside knowledge as to
what was going on. If a co-operative itself was not communicating
effectively with its membership, they lost faith, they lost trust
in the co-operative and many of them handed in their notice and
a lot of them left. They were seeing a lot of members leaving
and others handing their notice in, and the point we make is if
you do not communicate effectively others will do it for you,
and that is what happened. Of course, to have so much noise, if
you like, in the media and on the Internet and everywhere else
does not bode for good relationships with your customers either,
because customers very often do not want to be related to companies
where there is so much going on that it serves to be outside and
there is all the worry, and there is no doubt at all that that
did contribute to doing some damage both to the membership and
customers.
Q107 David Taylor:
What would have been different had there been better communications
within the co-op from the board to its members? What might it
have forestalled or headed off?
Mr Jones: I think it will be interesting
to hear what the farmers answer if you ask them this question,
but I would have thought if I was a farmer supplier of DFB I would
have been much happier, however bad the news was, to have somebody
be straight with me all the way through. I must commend DFB's
council here, because they did repeatedly ask very good questions,
poignant questions, and also kept confidence. Even at the end
when things were very, very difficult for them, they were asked
to make very, very difficult decisions, they did not leak that
information. So the Council was actually doing a very good job
and I felt that they were certainly let down in that they were
not given the information, as they should have been, and they
were not told exactly what the position was.
Q108 David Taylor:
So not only was the information inadequate, was it inaccurate?
Did it lead to irrational exuberance amongst the members of the
DFB?
Mr Jones: Again, we were not there,
but what I can say is that I am pretty sure the Council were reassured,
as we were several times, that things were in good order, and
I think there was a statement or two made that talked about "on
the road to profitability" and "things are now going
to be different", and that patently was not the case.
Q109 Chairman:
Do you think that the Council should have had access to independent
financial advice? You have just said they were not getting the
information that they should have done. With no disrespect to
the Council, were they necessarily framing the questions in such
a way that it would elicit the important answers that they were
seeking?
Mr Jones: In all honesty, there
will be very few farmers in the country that would be capable
of really holding a multi-million pound company to account, if
one was being perfectly honest here. So, I think whether they
are farmer directors, whether they are Council members or merely
supplying members, this is exactly why we have suggested, or did
suggest in 2005, that outside independent analysis was necessary,
for precisely that reason.
Q110 David Taylor:
You talk about financial advice, which would include independent
evaluation of the performance of co-ops. In your vision for the
dairy industry in 2005 you made the very point that you felt independent
evaluation was necessary, but what sort of organisation would
conduct the evaluation and how might it work in practice? Who
would finance it, and so on?
Mr Jones: I would suspect that
it would have been along the lines of what DairyCo, the levy body,
are doing now. They have put it out to tender and they will award
that contract to a qualified company, or individuals, to carry
out this research; and it has to be, of course, in conjunction
with and in confidence and have the co-operation of those co-operatives
that are being looked at. We will see how it works, but they have
now put it out to tender. We could send you a copy of the criteria,
if you like.[5]
That might be helpful.
Q111 Chairman:
Yes, that would be very helpful.
Mr Jones: And you will see what
it is they have asked for in terms of expertise.
Q112 David Taylor:
You quote, and presumably endorse, the Receiver's comment that
there is no evidence of wrongdoing, but for a farmer director
to transmit to members wildly optimistic predictions of revenue
or profitability would be wrong, would it not, if it was knowingly
done, or if it was recklessly done?
Mr Jones: Yes, if it was done
knowingly or recklessly I would agree. I wonder whether that was
the case. I think maybe here there was an element of believing
in the dream, if you like, and taking it too far.
Q113 David Taylor:
Who was feeding the dream? Who was feeding the farmer directors
with the continuing information which until very late in the day
they were unaware that the dream was turning into a nightmare?
Mr Jones: Again, I would probably
suggest that maybe there was a lack of knowledge, a lack of expertise
on their part, in that on their own they maybe did not have enough
understanding of the position they were in or what they were doing.
I honestly cannot answer that question.
Q114 David Taylor:
You said a few minutes ago (and I paraphrase a little) that farmer
directors are sometimes, maybe often, not the right people to
be on the boards of large businesses.
Mr Jones: I think they have a
role to play.
Q115 David Taylor:
In what form?
Mr Jones: Looking after the membership
and making sure that the decisions taken by the executive do not
have necessarily huge impacts on a farm, for example, because
the executive do not necessarily know enough about dairy farming
to realise that some of the decisions they may make may have huge
impacts on a farm, but what I do not think they are capable of
doing in the main is holding the executive to account and knowing
exactly what a multi-million pound business is doing.
Q116 David Taylor:
The NFU talk about clear performance benchmarks for farmer controlled
businesses, and you exclude some obvious ones: milk prices and
company accounts, and so on. What on earth do you have in mind.
What other benchmarks are you going to suggest to them and to
us would be worthwhile, accurate, robust and relatively straightforward
to collect? What suggestions do you have? You must have something
in mind?
Ms Campbell-Gibbons: We do. I
certainly would not exclude the milk price. I think you have to
look at profitability, but that also includes what your raw material
cost is, so I think that has to be included. Your technical performance
based on the market you are actually operating in and then, as
we have said, the criteria that DairyCo set out in its performance
benchmarking goes into a lot more detail about the sorts of things
that you can compare companies on, and we would endorse all of
those. We will supply you with copy of that.[6]
Q117 David Taylor:
Did your vision for the dairy industry in 2005 incorporate in
its recommendations any reference to benchmarks of this kind?
Ms Campbell-Gibbons: Yes, it did.
Q118 David Taylor:
Why did you not, in the interests of your members, when you were
aware that such benchmarks were not in use, urge them on Dairy
Farmers of Britain?
Ms Campbell-Gibbons: We pursued
this on a number of occasions actually and we recently published
a survival plan to the British dairy industry, and that reinforced
the need for this performance benchmarking. Initially we called
on Dairy UK, the processors trade association, to set up this
exact thing, and I think there was such resistance from the membership
of that organisation that it did not really happen. There have
been some developments, there have been master classes that have
been run for processors, so I do not think it has been wholeheartedly
ignored, but I certainly think that we need something much more
robust, and DFB has highlighted that.
Q119 David Taylor:
It is relatively easy for the Receiver in a sense conducting the
inquest on the dead body of DFB to identify what caused the fatal
collapse. What you are suggesting is that there are things which
you were unhappy about which, if incorporated at a much earlier
stage, would have led to a much healthier DFB with maybe a long-term
future. Are you not partly culpable for not ensuring these things
happened on behalf of your large membership of dairy farmers?
Ms Campbell-Gibbons: I think you
would have to recognise the NFU's role. We are not a delivery
body, we are not buying or selling milk, but we are in a position
where we can lobby and we can influence, and certainly this has
been a consistent lobbying message we have pushed at all levels
in the dairy industry for the last four years.
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