Examination of Witnesses (Questions 145
- 159)
WEDNESDAY 14 OCTOBER 2009
MR GORDON
BROWN, MR
PETER PEARSON
AND MR
JOHN GREGORY
Q145 Chairman:
Could I formally welcome a different Gordon Brown and Mr Peter
Pearson, who are former DFB members, and John Gregory, who is
a Director of Rock Farm Dairy. May I thank you all for coming
before us this afternoon, particularly Mr Brown, who very kindly
sent some evidence which I have read and found a very useful and
helpful commentary on some of the things that went wrong. We will
come back to those in just a moment. If we could start, first
of all, with Mr Brown and Mr Pearson, I think, Mr Brown, in your
evidence, in fact, the second paragraph talks about the impact
in the starkest possible terms on your business. You said that
the losses that you and your family had incurred were in the order
of £120,000 in terms of capital investment and bad debt.
That is a pretty big hit on anybody's business. I am trying to
put that into context about the size of your milk business because
£120,000 is a big enough amount of money in any terms, but
it is useful to know: £120,000 as a proportion of what?
Mr Brown: The turnover for last
year, the financial year 2008-2009, would be around about half
a million pounds. The turnover this year, because of lower milk
prices and lower milk volumes, will be a lot less. It will be
somewhere between £350,000-400,000. One hundred and twenty
thousand pounds is more than the net profit I would expect to
have in any one year. Effectively, it means that looking at the
bad debt I would have to work for two years for nothing.
Q146 Chairman:
It must have been a very difficult period for you psychologically.
There you were obviously realising that DFB was in difficulties.
Particularly in the spring you were soldiering on, I suppose,
more in hope than expectation, hoping that you would get paid
and then, all of a sudden, the world falls in on you. Give us
a feeling as to the whole problem, and perhaps, Mr Pearson, you
might like to add your own thoughts. When did you first get wind
that things were not right?
Mr Brown: I always knew that Dairy
Farmers of Britain had taken on a tough task; I had no idea that
it was that tough. This time last year, actually slightly earlier—we
are in October now, are we not—in July, August last year
the price that I was being paid by DFB was on a par with the non-aligned
pools from Arla and Dairy Crest.
Q147 Chairman:
Just for our benefit, when you say "the non-aligned",
what does that mean?
Mr Brown: The three majors—Arla,
Dairy Crest and Wiseman's—now have separate milk pools within
their business. You have got the supermarket prices which pay
a premium and then they have a non-aligned pool, which is everything
else. That milk will be heading towards the sort of places that
DFB's liquid milk would be heading to: the garage forecourts,
the middle ground, the discounters and people like that. Their
price was comparative to mine, a point two, point three difference,
but not a great deal.
Q148 Chairman:
Just tell me, Mr Brown, where is your farm?
Mr Brown: It is near Carlisle.
It is six miles east of Carlisle just south of the Scottish border.
Q149 Chairman:
Mr Pearson, where are you located?
Mr Pearson: The Staffordshire
moorlands.
Mr Brown: That was the situation
we were in. We had been promised for the first time real cash
as a return on our member investment—6.5% I think the figure
was—at a time when base rates were low and falling. It seemed
like things were not great but the business was heading in the
right direction. The crunch point was at the end of September
when that cheque did not turn up and from that moment on it really
was at descent, and psychologically it is the not knowing that
kills you. When I was voted off the Council in 2008, but I was
asked to go back on for a final few weeks, when the Receivers
were actually called in, there was a sense of, "Thank God
that is over". It was a sense of closure almost, that chapter
was ending. Through May I did not know if I was going to get a
milk cheque, and you set the vac pump off every morning to milk
the cows not knowing if you are going to get paid for these cows.
You have got all the costs coming in, everyone still wants paying—the
staff, the electric, the feed, the fertiliser, all that is to
pay—but I spent the spring not knowing if I would get paid.
Psychologically that was the worst part. Then 3 June came round
and you felt, "We are starting to build up again from now."
I thought I had got rescued by First Milk, but that turned out
to be a bit of a difficult situation when they cut my milk price
back to 18 pence a litre. I visited Harper Adams, my old college,
in September where they have just built a brand new dairy unit.
They get 27.7 pence a litre for their milk from Robert Wiseman
Dairies on a Tesco contract. At that time I was on eighteen. So
there is that obvious impact. I could not compete, so I took the
decision to start selling my cows.
Q150 Chairman:
Mr Pearson, do you want to add your own testimony to that?
Mr Pearson: I am in a slightly
different position from Gordon in that we took the decision to
sell our cows, so we no longer milk cows. There were a number
of reasons for that. I have been involved in milk politics for
a number of years, so the build up, with the fact that DFB was
not successful, I was quite concerned about where the future of
the milk industry was going. We had a sale arranged for 18 June,
and, of course, DFB went bust on 3 June. So there was quite a
traumatic period leading up to our sale as to what effect it would
have on the rest of the milk industry, but we also farm in a marginal
area just outside The Potteries, 550 foot to 750 foot above sea
level.
Q151 Chairman:
Mr Gregory, where are you located?
Mr Gregory: We are located in
Durham. We supply milk throughout the north-east of England from
the borders of Yorkshire up into Northumberland. It is a family
business. We were dairy farmers producing milk until round about
20 years ago when we had problems with some contaminated cattle
feed, so I can understand the plight of these gentlemen as well.
We had to make a decision then, where we were not financially
sound enough to continue to replace the herd. We lost the herd
and we were in a position where we had to make a step forward.
Then we started to purchase our raw milk in and process it in
the dairy and retail it on doorstep milk rounds, and that is basically
where we have progressed through the family where we have started
in milk production since 1907.
Q152 Chairman:
Did you buy any milk from dairy farms?
Mr Gregory: We were a customer
of what was, obviously, Milk Marque, Zenith, Dairy Farmers. We
used to purchase all of our milk from Dairy Farmers for our production
until around about six months after they actually purchased ACC.
We found there was some politics going on where we were paying
a hell of a premium on our price that we were purchasing the milk
for and other independent dairies in the north-east were also
facing the same problem, so we all elected to go out and purchase
milk direct from the farms. We were pretty much outcast by Dairy
Farmers, we were then treated as an enemy, but it actually took
seven weeks from not purchasing any raw milk from Dairy Farmers
before anybody actually realised to even make contact with us.
So I think on the background of this, there were a lot of people
not watching, as obviously previous people have commented, what
was actually going on with the general running of the business
from the actual collection from the farms.
Q153 Chairman:
So you divorced buying from them, started buying from somebody
else and nobody noticed.
Mr Gregory: Nobody noticed for
seven weeks. We put our own milk tankers on the road. The farms
were Dairy Farmers' farms. They put the notice in as per the contract
stated to come with us—at the time we only actually took
four farms on—and nobody actually noticed for seven weeks.
Chairman: Incredible.
Q154 Mr Drew:
I would like to touch on a couple of points. Two of you have mentioned
politics in the dairy industry, which is fascinating as an industry
in itself. Mr Gregory, you were saying you were carrying on with
your business almost oblivious to what the rest of the industry
was thinking or doing. I am just interested in how information
exchanges in this industry. I thought everybody knew everything
about everybody else's business in dairy, but it almost implies
that even if you were in the know, and you were on the Council,
it was difficult to obtain pretty basic information about the
future of this firm. What was it that made it so difficult, given
that you are pretty tightly knit as a group of people, that apparently,
until the very end, people did not realise how bad the situation
was? Perhaps Mr Brown wants to respond to that.
Mr Brown: The dairy industry is
a very political industry. I do not have great experience in any
other industry to benchmark it, but I have always been frustrated
by the level of politics. I am a straightforward businessperson
and, with all due respect—I am sitting in front of politicians—there
seems to be an absolutely unnecessary level of politics and personalisation
in the dairy industry that has always frustrated me and I think
it will be there for a long time to come. Why, I do not know.
In terms of getting information, it was difficult to get at the
information I really wanted to know. We had presentations from
our executive and from the directors and I would not say it was
fraudulent but certainly the overall impression that was given
of the business was incorrect as events have proved. Within a
year of the collapse Rob Knight, who was paid an awful lot of
money by us, was continuing to insist, "Your business is
in good heart". The chairman of a struggling company may
well represent the business to the outside world in that manner
but when you are up in front of the owners of the business, in
effect your institutional shareholders if you are a plc, he was
being less than honest.
Q155 Chairman:
Mr Pearson, was that your impression?
Mr Pearson: Could I first make
the point that I am not a farmer's son, I came into this industry
from outside. I actually married a farmer's daughter, which eased
the way into it, but I am not a farmer's son so I maybe have a
slightly different viewpoint. I would agree with what Gordon said
about the difficulty of getting correct information. We were told,
"You can't allow this out into the public". As has already
been mentioned by Gwyn Jones, the industry commentators were very
quick to pick up some of this information and to broadcast it
on the Internet and they seemed to be better informed than the
Council were. I came up through Milk Marque, Zenith and Dairy
Farmers of Britain and I sat on the Dairy Farmers of Britain Council
from the takeover through to about 2008, a similar time to Gordon.
I am not particularly good at asking questions in an open forum,
so I would ask questions of the chief executive, the directors
and everybody else after the meeting and the answers we got appeared
on the whole to be satisfactory taking into account the fact that
on the league tables the milk prices were one or two pence lower
than what they should have been and the fact that sometimes I
do not think they really understood what the league tables were
trying to say.
Mr Brown: As a Council member
I always had to have a continuing dialogue with the directors
on a telephone basis. If I had relied upon what had come from
Council meetings, what had come through on the official channels,
I would have had a completely erroneous view of the business.
It certainly was not a perfect view I got of the business but
you had to ring the directors up on a Sunday night and say, "Look,
what's happening?" and even then you did not get the full
story, as events have proved.
Mr Pearson: The milk industry
is a very complicated industry. I have had the benefit of being
a member of the European dairy farmers organisation and I have
travelled and been involved not with the NFU but for my sins I
sat on the CLA Milk Policy Committee, which did not meet very
often. One of the major points about the milk industry is there
is a two-tier market: the liquid milk market which governments
in the past and processors tend to protect and then there is the
commodity market. Depending on who you supply, and as Gwyn Jones
pointed out the farmers can be next door to each other, I have
a league table with me and there is eight to 10 pence a litre
difference and on a million litres that is £100,000 quid.
You are talking about large amounts of money.
Q156 Paddy Tipping:
You lived through this and you have been involved with it for
a long time. If you were pointing the finger and saying, "This
was what went wrong", what were the significant things that
went wrong?
Mr Brown: There was one significant
event and that was the purchase of ACC. When you make a big strategic
move like that if you get it right you are a hero and if you get
it wrong you end up where we did. At the time the questions were
asked. I look back on it and I do not reproach myself because
I asked all the right questions, as did many others members of
the Council: "Have we paid too much? What's the state of
this business? Aren't we just holding up rationalisation of the
industry?" We were told at the time that if one director
had dissented from the purchase of ACC it would not have happened.
Q157 Chairman:
Can I just ask, and I am sorry if I am going to sound ignorant,
is the ACC the old Co-op's dairy business? Is it one and the same?
Mr Brown: Associated Co-operative
Creameries.
The Committee suspended from 4.20pm to
4.31pm for a division in the House.
Q158 Paddy Tipping:
You were saying the difficulty was when ACC was acquired at a
cost of, what, £81 million.
Mr Brown: It was
of that order. When we acquired ACC we acquired liquid processing
at Blaydon, Fole, Portsmouth and Cardiff, an ingredients plant
at Llangadog and a cheese plant at Llandyrnog. I was speaking
to a director at the Dairy Event and it seems that there was a
cover-up going on with the vendors of the business and a very
large cost was not apparent in due diligence and came to light
at a later date.
Q159 Paddy Tipping:
What do you mean by a "cover-up"?
Mr Brown: When you are selling
something and you have got problems with what you are selling
you might wish to cover it up.
|
