Memorandum submitted by the Department
for Environment, Food and Rural Affairs (DFoB 10)
EXECUTIVE SUMMARY
1. DFB was already considered by observers
to be the weakest GB dairy before global demand for dairy commodities
decreased and UK milk prices dropped significantly. DFB announced
restructuring in autumn 2008 and then approached BERR in
February 2009. BERR Insolvency Service approached Defra before
offering DFB assistance under the Redundancy Payments Scheme,
which DFB declined.
2. DFB kept Defra informed as they tried,
but failed to recapitalise the business and before they appointed
Receivers (PwC) on 3 June 2009. Defra continued to liaise
with DFB, PwC and other parties with the aim of ensuring minimum
disruption to milk supply.
3. Ministers judged that DFB was not viable
at national level so did not provide public funding for the business.
Defra worked with RDAs and as a regional priority with ONE North
East to keep Blaydon open while an attempted management buy-out
sought funding.
4. Within one month of DFB entering Receivership
virtually all producers and milk had been contracted to new buyers
and no milk had been destroyed.
SUMMARY OF
BACKGROUND TO
INDUSTRY AND
MARKET SITUATION
AND DFB
5. Global and EU milk and dairy commodity
prices boomed in 2007-08 (in some cases by 150%) leading
to a rise in production just as the economic downturn gathered
pace. Global demand decreased in 2008-09 and global prices
slumped (well below previous levels) as a result, with UK milk
prices down by 20% in sterling terms, less than in many other
Member States.
6. DFB had for several years been considered
by observers the weakest GB dairy company with half its business
in milk brokerage and poor returns on its liquids business which
was struggling to compete against more efficient competitors.
Speculation over DFB's viability reached a peak in autumn 2008 as
DFB announced significant restructuring, dairy closures, job losses
(25% of staff) and producer milk price cuts to c.15% below the
UK average. The Chairman resigned, and Lord Grantchester took
on the role. DFB publicly blamed the fall in cream prices, declining
doorstep sales and increased input costs.
DEFRA APPROACH
AND ACTIVITY
7. Defra were contacted by BERR in February
2009. DFB were closing some loss-making dairies (liquids plants)
and asked BERR about public funding under the Redundancy Payments
Scheme. BERR advised DFB they were eligible for this support but
DFB declined it. We understand this was because Scheme conditions
mean only statutory redundancy payments are made by BERR while
DFB and their employees agreed they would pay enhanced payments.
8. In late March 2009 Lord Grantchester
(DFB Chairman) approached Defra, meeting Jane Kennedy (Minister
of State) and then officials to explain in confidence DFB's financial
situation. PwC, acting for HSBC as DFB's bankers, attended the
officials' meetings. DFB's liquids business continued to lose
cash, the number of farmer-members continued to decline as farmer-members
resigned, and they were reaching the limits of their financing
agreement with HSBC. To counter this DFB were asking their members
and loanstock holders to convert their investments and loanstock
into equity and to raise equity via retention from members' milk
cheques. This would have enabled DFB to raise further cash, without
which the payment of the mid-April milk cheque was at risk. However,
while the DFB Members Council agreed the conversion of loans to
equity, the retention from milk cheques was rejected. The Bank
allowed DFB time to sell or find an alternative solution whilst
ensuring the business continued throughout the spring flush (peak
milk production). PwC were also trying to raise cash by through
selling profitable parts of the business.
9. DFB did not formally ask for government
money, but it was clear they were exploring whether any was available.
With the agreement of the DFB chairman, Defra contacted the North
West Development Agency (NWDA) to put them in the picture in confidence
and give them Lord Grantchester's contact details. DFB declined
NWDA's offer of a meeting. Officials also discussed the situation
with BERR's Insolvency Service. Defra Ministers discussed the
situation with officials and concluded that there were weak grounds
for investing public money into a business that was on the verge
of bankruptcy, whose business model was uncompetitive, and where
there were sufficient competitors to take over viable elements
of the business without significantly affecting the competitiveness
of the milk supply chain. It appeared unlikely that it was a viable
business without major restructuring, requiring significant sums
of money. It was for NWDA to explore with DFB what help they might
be able to offer in accordance with regional priorities.
10. Ministers concluded there was a possibility
that at some stage in the near future DFB could be put in the
hands of Receivers. In that case the critical issue for Defra
would be working with DFB and other parties to ensure that milk
producers continued to be able to get their milk off-farm to avoid
any being thrown away (risking environmental damage). New buyers
should be found for their milk so that economically viable milk
producers could continue to produce milk if they wished to and
UK milk production should not be reduced significantly.
11. As a result of these discussions Defra
officials encouraged Lord Grantchester to start contingency planning
to maintain the milk supply chain in the eventuality of financial
collapse, and also spoke with Dairy UK to discuss the hypothetical
situation of how the industry might work together to maintain
the milk supply chain if a large processor failed.
12. DFB announced the splitting of its business
into two divisions on 21 April: the loss-making liquids business
and the profitable milk supply and cheese business. The CEO also
resigned, and on 23 April the Co-operative (retail) Group
announced it was not going to renew its contract with DFB for
liquid milk. This was DFB's largest liquid milk contract. The
sale of its profitable Nene Valley Foods business was announced
on 20 May. In late May, and as part of continuing contact,
Lord Grantchester intimated that events were about to take a new
turn and he wanted to meet officials in the following week. However
on 3 June 2009, Lord Grantchester informed officials that
DFB had appointed PwC as Receiver and Manager (publicly announced
later that day). It became clear that while Lord Grantchester
had been expecting to tell officials of a planned receivership
(anticipating members' rejection of refinancing plans) to take
place in mid-June, the Board had had to act immediately.
13. Officials spoke with the Receiver that
day who confirmed their arrangements for continuing to take milk
off-farm and the other arrangements subsequently made public,
and agreed to meet the Receiver early the following week. Officials
also contacted Dairy UK and other industry representatives to
ask for cooperation to ensure continued milk supply and manage
emerging issues. The industry shared these goals and willingly
assisted, acting to minimise disruption. On 8 June Defra
hosted a meeting with the Receiver, the chair of DFB Members Council,
representatives from WAG, GOs, RDAs, and BIS Insolvency Service
(formerly BERR) to ensure that all parties had the full picture,
to facilitate information exchange, and to ensure everyone was
focused on the priorities of maintaining the milk supply chain
within the constraints of Receivership. Defra drew attention to
existing public schemes and sources of advice and support that
might be useful to affected farms, businesses and employees. Over
the following days officials remained in close contact with key
parties particularly the Receiver, DFB Members' Council, GOs/RDAs
and WAG.
14. With DFB farmer-members leaving DFB
for other milk buyers at very short notice, Defra put the RPA
in touch with the Receiver to ensure the administrative procedures
required for monitoring milk quota were managed appropriately.
15. Defra officials discussed with all parties
and provided advice on the appropriate use of RDPE funds (eg expansion
and development of value-added dairy products, diversification
out of dairy and retraining on land-based skills) and Business
Link's Enterprise Guarantee Scheme (both through RDAs), and tax
deferrals available from HMRC under the Business Payment Support
Service. The National Parks were contacted to explore any subsidies
available under environmental schemes for vulnerable farmers.
On 8 June the Secretary of State telephoned the Chief Executives
of One North East and NWDA and wrote to the British Bankers Association
and Agricultural Industries Confederation to request sympathetic
handling of farmer members who would be suffering cashflow difficulties.
16. On 9 June the Secretary of State
updated the House in a written parliamentary statement, providing
further updates during debates on the rural economy on 15 June
and Food, Farming and the Environment on 18 June then in
a further written parliamentary statement on 30 June.
17. On 11 June the Secretary of State
telephoned Mark Allen, Dairy UK chairman, to discuss the situation
and commend the industry for its positive and constructive actions,
including Dairy UK members' clear position against exploitation
of DFB members by offering them unnecessarily low milk prices
as was rumoured to have occurred in some cases.
18. Throughout this period the Receiver
had been selling as much of the DFB business as he could as going
concerns. These sales had included the Lubborn cheese business,
the Llandyrnog creamery, and various depots. The Receiver had
approached HMRC requesting sympathetic tax treatment of DFB members
and Defra had liaised with HMRC who confirmed their staff were
aware of the situation.
19. On 11 June discussions with One
North East and the Receiver revealed that there was a possible
Management Buy-Out for the Blaydon dairy. To be viable the MBO
needed sufficient customers and Defra officials explored with
a leading customer who had withdrawn from their contract with
Blaydon whether they would be willing to reconsider if the MBO
was successful.
20. Defra officials liaised with the Receiver,
One North East and HM Treasury to consider the use of limited
public funds to provide a small amount of working capital to allow
the MBO time to succeed. Ministers were advised that such support
was unlikely to be successful and could not be approved by Treasury
officials. However, given the number of jobs at Blaydon, the impact
of the DFB collapse in the region and the possibility of a management
buy-out, Ministers agreed that they would, together with One North
East, to provide funding to keep Blaydon open over the weekend,
so that those attempting the MBO had time to agree financing with
their backers.
21. On 12 June the MBO's financial
backers refused to provide sufficient financial backing in the
timescale needed. Defra immediately contacted the Receiver and
the Receiver moved to close Blaydon. In agreement with the Receiver,
Defra organised a further meeting on 17 June bring all parties
up to date with developments and to address outstanding issues.
Jim Fitzpatrick (Minister of State) attended part of this meeting.
Other attendees were representatives of: the Receiver, DFB Members'
Council, WAG, RDAs & GOs, Dairy UK, NFU, FUW, the clearing
banks, RABDF, ARC-Addington Fund, RABI, TFA, CLA.
22. The meeting heard that half of DFB's
producers (active farmer-members) had already found new buyers
for their milk. Actions that were agreed at this meeting included
the following:
i. The Receiver agreed to consider easing contractual
obligations on remaining farmers so that they could move more
rapidly to new buyers once they had found one, and the following
week implemented this;
ii. The banks agreed to take a more proactive
approach to contacting their DFB farmer customers to discuss their
financing needs;
iii. RDAs agreed to contacting remaining DFB
members in their regions who had not found new buyers for their
milk to make sure they were aware of advice that was available
to them to help them make what were going to be difficult business
decisions;
iv. Dairy UK also described how it was working
with others to match remaining farmers and potential buyers, and
Defra subsequently agreed that EFFP could use £10,000 of
its existing funding to assist this process.
v. Defra agreed to draw up a "suite of options"
for all parties to use to ensure appropriate assistance was provided
to farmers and subsequently circulated this.
vi. Defra requested enforcement agencies to take
a sympathetic approach to DFB members if they were planning inspections
during this period
23. On 26 June the Receiver announced
that all remaining producers were being offered a rolling 18.45ppL
contract by Milk Link. This was included in the Secretary of State's
30 June written parliamentary statement. The following day
he spoke to Stephen Yates (Chairman of DFB Members' Council).
24. After that weekend virtually all farmers
had decided their immediate future (1,759 of 1,813 on
new contracts) with 45 retiring from dairy farming and nine
undecided (within a few days the remaining nine had decided what
to do).
25. On 22 July a Defra official met
with the Receiver to review what had happened and consider remaining
issues leading up to the main creditors meeting on 7 September.
The Receiver explained he would be writing a report similar to
those written by a Receiver and Administrator, and when settling
the accounts he would determine what action to take on members'
and ex-members' Loan Guarantees.
DEFRA
September 2009
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