Examination of Witnesses (Questions 180
- 190)
WEDNESDAY 14 OCTOBER 2009
MR GORDON
BROWN, MR
PETER PEARSON
AND MR
JOHN GREGORY
Q180 Chairman:
They were the accountants of the company at one time, were they
not?
Mr Brown: They were corporate
advisers. I do not think they were accountants as such to the
company.
Q181 Chairman:
I know they got replaced by PwC in the endgame.
Mr Brown: They were the corporate
advisers. Philip Moody was asked by someone, a farmer Council
member, "Are we going to buy ACC?" and his response
was, "If I knew anything I couldn't tell you and if I didn't
know anything I'd have nothing to tell you". That was all
we had to go on. We talked about it. I can only speak for myself
here, I am not speaking for the Council of DFB. My view was we
were a Council of 80 farmers and it was out of the question that
we could undertake due diligence as ourselves. What we did was
we appointed a board who had responsibility for the strategy of
this business and it was for them to take the decision and if
they got it wrong then by implication we had got it wrong as well
by appointing those people. That was where the accountability—political
and democratic accountability—lay with the business. I trusted
them. As a Council member I have a share of responsibility in
it all. The actual purchase was in the middle of August and the
Sunday before it went through we had small meetings round and
about, and we had one with Malcolm Smith, the then Chief Executive,
in Clifton near Penrith, and Lord Grantchester was there and Michael
Oakes, and they said, "This is what we are going to do".
It was ambiguous at that point as to whether or not we could have
stopped it. I thought we could not and they said we could. We
had the discussion with them, they went through it and we asked
the obvious questions: "Are we paying too much? What is the
strategy? What is the competition going to do?" There was
no sense that it might go wrong, they were super confident. A
couple of days later we had the Council meeting and took a vote
and it was as near as damn it unanimous by the Council to buy
it on the strength of the recommendation that came from the board.
Q182 Chairman:
Mr Gregory, as a keen outside observer of the scene, what is your
take on all of this?
Mr Gregory: Obviously the build-up
to it all was kept very hush-hush, it was not discussed and nobody
seemed to be getting any outside information. We were a customer
of Dairy Farmers at the time because we were purchasing our raw
milk from them and we had done through Milk Marque and Zenith
previously. We were getting little bits of rumours. We were speaking
to our area rep, Stuart Richardson, and we said, "Do you
not think it's a bad idea?" and you got the feedback, "The
board is confident that it's going to work" and we never
ever thought it would work.
Q183 Mr Cox:
You run a business.
Mr Gregory: Yes. We have grown
our business. We are a family business. In 1996 our business was
doing 1,200 litres per day and we are currently doing 120,000
litres per day. That is all through growth, partly by the collapse
of Dairy Farmers. We doubled our volume when Dairy Farmers collapsed
in June. Prior to that the growth was being made by being able
to give customers service, quality and produce and also pay farmers
a very fair price. As part of our contract we are paying the farmers
over two pence a litre greater than the middle ground price that
Gordon had. That was our benchmark and still is. Desperate farmers
who we took on when the receivers were appointed who had lost
their month's pay check, lost the first three days of June also
from the receivers being appointed, needed to know that somebody
would collect the milk. Some of them were outlying, some of them
had already put their notice in and were 11 months into their
notice period to leave. These people went straight on to our standard
contract which was giving them around about 24 pence per litre,
which was way more than the 18 pence they had previously been
receiving from Dairy Farmers. Some of the outlying farms that
had not put a contract in, we put them in on 21 pence per litre.
In November they will roll on to our standard contract so they
will be receiving 24 pence plus a litre for their raw milk. That
is the biggest key to making the farmers confident in the product.
You have had previous conversations with the NFU about terms of
contract and notice periods and stuff like that. I do strongly
believe that as a dairy, and also as a farmer, the dairy and farmer
needs confidence in at least a 12 months' notice period because
we have got to purchase raw milk for the contracts so if we have
not got enough raw milk to supply our customers' needs we have
got to go and look for that. If a farmer gives us a month's notice
to leave where do we go and find that milk from? Have we got to
pay a spot milk price which two months ago was low but today is
27 pence, 28 pence per litre?
Q184 Mr Cox:
I do not think the NFU was suggesting notice periods should be
reduced, it was only in a circumstance where the farmer could
not agree a contract with which he was happy and which he considered
to be fair.
Mr Gregory: The dairy needs the
confidence that the farmer is not going to pull the plug on him
in a month's time. On the question you asked earlier regarding
the tendering processes, when you submit a tender you have got
to enter into a minimum of a six to 12 month price guarantee for
that tender so you have got to know six to 12 months in advance
that you expect your costs to be roughly what they are when you
enter into the contract period. If you have got to go out and
purchase milk at a higher price because farmers have left it puts
you in a bad predicament serving the needs of the contract.
Q185 Chairman:
One of the things that intrigued me, bearing in mind the Co-op's
central part as a major purchaser from DFB, was as I understand
it they were not able to satisfy the Co-op in terms of the tender
process and were beaten by Wiseman. Given that so much depended
on keeping the customer base intact, how did they get it so wrong?
Mr Pearson: Chairman, as I understand
it the Co-op is one of the five major retailers that does not
have a farmer direct supply system. I would imagine what was going
through the directors' minds, although you should never take anything
for granted, was that two companies with the same ethos would
get together and form a direct supply system. The Co-op is in
competition as everybody else is in the retail market place.
Mr Brown: Co-operative Wholesale
Society (CWS) have come out of this very well indeed. Not only
did they offload the assets onto DFB at a good price, they have
not got a dedicated supply pool, they are the largest purchaser
of milk that does not have a dedicated supply pool. We all watch
the adverts on the telly saying how wonderful they are, how ethical
they are and how caring and sharing they are, but I have to say
I do not see it as a UK farmer.
Q186 Chairman:
Whilst that is a fair observation it still does not quite answer
my question as to how it went wrong. In other words, was it the
DFB's perception that everything would be all right because they
were like for like in ethos or was it they just had not realised
that the Co-op were going to be ruthlessly commercial?
Mr Brown: I was asking the same
questions in 2004: "What are our customers going to do? What
are all the other stakeholders that we are going to be dealing
with going to do to us?" The board seemed assured that it
would be fine, that we could just run the business. I am not sure
what more I could have done. They had seen the due diligence and
we, as a Council, placed our trust in them.
Mr Pearson: There was a lot of
information floating around not only in the previous 12 months
as to the future viability of DFB and as a purchaser of milk you
might be quite concerned as to where your milk was coming from.
I think in the receiver's report he said there were 320 people
under notice, something like that.
Q187 Chairman:
I think it was 322.
Mr Pearson: Of course, one of
the reasons that we ceased milk production was because we would
have had to have given 12 months' notice to leave and I could
not see that our business could sustain that sort of loss so we
pulled out of milk production. That was before the receivers allowed
everybody to go to various other places. In fairness, some members
have gone to an increased milk price. As I tried to point out
earlier, there is a lot of money involved and you can soon swing
either way. Gwyn pointed out one of the original factors was the
splitting up of the co-ops in that Milk Link had the bottom section,
First Milk had the middle and DFB had the top section.
Mr Brown: Geographically.
Mr Pearson: Thank you, Gordon.
I always felt that we had the most marketable region for the reasons
that environmentally we had the smaller farmers and we had those
farmers in the Peak District and the Lake District that tended
be smaller producers but had increased haulage costs because of
the very nature of the business. I think you asked earlier what
Defra should do and I think what people have to do is realise
what they want out of the UK milk industry: are we Europeans or
are we UK? A lot of the products can come from outside the UK
but the liquid milk industry is sacrosanct to the UK. Certainly
we seem to be getting a two-tier milk supply system at this moment
in time in that the liquid milk men are moving on fast and the
commodity men if they can produce at a lower cost are surviving
but probably further away from the market place. That is the first
thing I would say to you. Environmentally it is a big issue. I
know people will argue that the environmental payments are paying
them to maintain the environment, but as a farmer myself I would
sooner be paid to keep livestock and work than I would to be a
park keeper. I only have 36 years of agriculture, I have not got
400 years which some farming families have. There is definitely
an environmental issue there. I would also say that DFB's members,
as has already been pointed out, put £67 million in, and
DFB's members have rationalised the liquid milk side of the UK
milk industry and paid for that on their own. They have paid for
it out of the retention. This leads me to more issues in terms
of NVZ requirements. I know Hayley Campbell-Gibbons has already
indicated that is beyond the remit of the NFU, but another reason
why we gave up milk production is because of satisfying the EU
NVZ regulations coming in. There is also a matter which has escaped
me, I am afraid.
Q188 Mr Cox:
Could I possibly take advantage of the losing of your thread to
ask one question of both of you. You said that you were going
into another co-operative. Could you explain to me why would you
want to go into another co-operative? Secondly, can you give me
the practical advantages of belonging to a co-operative rather
than supplying Dairy Crest or one of the other major milk producers?
Mr Brown: With respect to First
Milk, it is beggars cannot be choosers.
Q189 Mr Cox:
Name me a practical advantage that a farmer has ever got out of
supplying Milk Link or one of the big co-operatives as opposed
to Dairy Crest or one of the other businesses?
Mr Brown: There are not any. If
I had the choice I would not, but Harper Adams is 27.7 pence.
I went to see them this September and they will not have me because
of where I am geographically, so you are left with the pickings
really.
Mr Pearson: Chairman, can I come
back on that point. As a personal view, and it is not an ideological
view, I have always believed in co-operation and not co-operatives.
I have followed Glanbia in Ireland and the Kerry group and these
are companies that started off as co-ops and developed into major
companies. Also there is a purchasing group up in Staffordshire
and if you had joined that purchasing group in 1972 and paid your
five pounds, we are now paying our members who leave £1,700.[11]
From my point of view it was a business decision that I hoped
other people would drive that company forward and that money would
come back because if you multiply it up, I did say to the chairman
one day I had £54,000 capital in plus I lost a milk cheque
and if you just took the £54,000 it would have turned into
13 million. As a business decision if they had increased at the
same rate, and do not forget that we were employing businessmen
who had been directors of Mars, professional directors, they should
have seen what was coming.
Mr Brown: As an addendum to what
I said, in theory the co-operative model works. It can work the
rest of the world over. As a primary producer to add value to
your basic commodity makes sense, but for all sorts of practical
reasons it has not worked in the UK dairy industry as yet.
Q190 Chairman:
Mr Gregory, you are on the other side of the fence. As a postscript
observation, what do we need to do to try and secure future success
for our dairy industry?
Mr Gregory: I do not believe that
the co-operative side of things does work. As a hands-on family
business the size of DFB is not something that could be run and
managed by a family structure, but to be able to pull things together
where you know what is going on in the business, where you have
got people who know and report to the right people to make sure
the business works and the model works, making sure of your customer
needs, making sure your members, your farmers are happy, this
is what we have done and that is how our business has succeeded
in giving people a better price for their milk and being able
to give customers the service that they require at a reasonable
cost. What is playing a big part in causing problems in the UK
is outside competition and very aggressive canvassing by certain
independent dairies in the UK. They hit dairy farmers hard in
April of this year, especially in the northeast, and I do not
think that has helped the business either. As a footnote, it is
as well not to have too many eggs in one basket, as Dairy Farmers
did with the CWS contract. That was the biggest part of the problem.
As Gordon said, once that was gone that was a recipe for the downfall
of the business.
Chairman: Gentlemen, may I thank you
on behalf of the Committee for your insightful and genuinely helpful
observations. You have made this thing live a bit more than sometimes
the cold, dry words on a piece of paper communicate. You have
also given us some very important perspectives on the way that
the business operated. I am most grateful to you all for coming
and joining us this afternoon. Thank you very much indeed.
11 Note by witness: To be absolutely accurate this
figure currently is £1,300 plus an insurance they take out
which is another £600. But the principle is still correct. Back
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