EU Proposals for the Dairy Industry

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE    To be published as HC 952-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

 Environment, Food and Rural Affairs Committee

EU proposals for the dairy industry  

Tuesday 3 May 2011

Christine Tacon

Hermanus Versteijlen

Evidence heard in  Public Questions  99 - 214

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the  Environment, Food and Rural Affairs Committee

on  Tuesday 3 May 2011

Members present:

 Miss Anne McIntosh (Chair)

Barry Gardiner

Mrs Mary Glindon

Amber Rudd 

 ________________

 Examination of Witness

Witness: Christine Tacon CBE, Managing Director, The Cooperative Farms, gave evidence.

Q99 Chair : Good afternoon and welcome. Thank you very much indeed for being with us and participating in our inquiry. I think I am right in saying that you have rearranged your diary to be here, so we are particularly grateful. Just at the outset, would you like to comment on what particular difficulties the dairy sector is undergoing at the moment, in relation to other aspects of farming?

Christine Tacon: Yes, shall I just say what I do first? Would that be more helpful?

Q100 Chair : That would be very helpful if you would.

Christine Tacon: I am Christine Tacon. I am not from a farming background myself, but for the last 10 years I have been running the Cooperative Group’s farming business. My previous experience was as a production engineer, but I spent four years as marketing director at Fonterra, so I have an understanding of the New Zealand industry from that before I joined the Co-op. My position as managing director of the Co-op Farms is on our food executive board as well, so I will be able to give some insight on the food side. As farmers, we are not in dairy, but I have said that in my written evidence and I can talk about why we are not. We were in dairy when I joined the business, but we are not now. We are large fruit and vegetable, potato, cereal and arable farmers, largely growing fruit and vegetables to sell in the Co-op stores.

Q101 Chair : Why did the Co-op choose to come out of dairy?

Christine Tacon: When I joined the business in 2000 the whole farming business was losing money. I should explain that the structure in the group is that we do pay a market rent on the land that we own, but we also farm other people’s land, which clearly comes in at market rental or under contract farming agreements. In order to get the business back into profit, we were looking at every area of the business and, of all the areas, in dairy it was the most difficult to see how we would be able to make a suitable return on our capital. I can go into more detail if you want to ask any questions, but that was the main reason why we came out. It took me about two and a half years to take that decision. We looked at lots of different solutions, including whether we should go into processing, such as addedvalue products, and also whether we should go to a New Zealand grazing system, where you go for spring calving. We could not find any way to get the return on capital we were looking for as a business.

Q102 Chair : A lot of the thinking, particularly in the dairy industry, seems to be that the best way to add profit is to add value. Looking to Commission proposals, what measures do you think could be taken to enable that shift into valueadded production to take place?

Christine Tacon: One of the things we need to understand is how much of liquid milk production the UK could conceivably put into addedvalue; 50% of what is produced is liquid milk. I do not think the consumer wants addedvalue, they are quite happy with what they have. The addedvalue is really quite niche, such as niche yoghurts and cheeses and so on. Although I do not think that is a solution for the whole sector, it is certainly a solution for some small family farms, which are able to produce some outstanding products for local consumption. I do not think it is a solution for the industry.

Q103 Chair : Just out of interest, how much land do you actually farm?

Christine Tacon: We farm 50,000 acres, of which a third is owned by the group and the remaining two thirds is owned by other landowners.

Q104 Amber Rudd: How does that place you in terms of landowners relative to other landowners in the UK? Are you in the top x%?

Christine Tacon: In terms of what we physically farm and claim subsidies for in our own right, which is the EU definition of a farmer, we are by far and away the largest farmer in the UK. We are about twice the size of the next one. There are other farming businesses that will farm a bit more than us on different sorts of agreements, but you then also have a business like the National Trust, which actually owns more land, but does not farm it itself. It is all a bit confusing, but we are the biggest commercial farmer in the UK.

Q105 Chair : Is it spread across the UK?

Christine Tacon: Yes, about a third of it is in Scotland. We are not in Wales and we are not really in the south-west, although we are in Herefordshire.

Q106 Chair : Excellent. The British Retail Consortium describes the UK dairy sector as "well placed to meet increasing global demand". What do you think the Government could be doing to increase the UK’s dairy exports?

Christine Tacon: At the end of the day, if you want to export you have to be globally competitive. The key areas that are the most competitive in the world are New Zealand and the USA. So if you are going to trade skimmed milk, butter and cheese, which are basically commodities, you have to be able to produce at the same prices as them. New Zealand, Southern Ireland and maybe areas of Pembrokeshire are naturally going to be the most competitive because they have the perfect climate, but you cannot expand that. The Americans are hugely efficient because they have very large units, typically of 3,800 cows. They are very competitive and we actually have to be as competitive as that if we want to trade in the commodities. If we want to trade in the added value then that is different; apart from Stilton and such things, we do not have that many exportable added-value brands that already exist.

Q107 Chair : Are you surprised that there are not more cooperatives in this country, particularly in the dairy sector, such as you get in Denmark and other parts of the European Union?

Christine Tacon: I think it is a tragedy that we do not have a cooperative model in the UK. When you look at Fonterra and the very big cooperatives, they have been hugely influential in adding value and passing know-how back down to farmers. The farmers themselves are not necessarily particularly efficient; the UK farming industry is actually very efficient in its own right, but the cooperative structure has helped the farmers enormously. It just seems to be a feature of UK farming that we are not good at co-operating.

Q108 Chair : Do you believe that countries like Denmark and New Zealand do so well because they co-operate not just on production but on marketing?

Christine Tacon: Absolutely, definitely.

Q109 Chair : Would you like to expand on that? It would be helpful.

Christine Tacon: Fonterra, for example, has a dairy research institute dedicated to finding other uses for milk products. They are making plastics out of milk; they are making ingredients that will thicken yoghurts that are being bought by the likes of Danone to thicken yoghurts. All of this is being created in New Zealand. They are also naturally extracting the calcium from milk to create ingredients to enrich products with naturally produced calcium. The dairy research institute was set up with the sole objective of trying to add value to milk because the New Zealand Dairy Board’s statutory duty was to find a market for everything that New Zealanders could produce, so they were trying to find other uses. So a vast amount of work is being done and a huge amount of know-how is being passed back down to the farmers.

Q110 Amber Rudd: Can you give examples of how improved dialogue between suppliers and retailers are enhancing the sustainability of the UK’s dairy sector?

Christine Tacon: The industry? I will talk about the industry rather than specifically the Cooperative if you like?

Amber Rudd: Yes, please.

Christine Tacon: There are certainly quite a few retailers, such as Sainsbury’s, who have been working with their milk pool. Sainsbury’s has been supplying farmers with free veterinary advice and also has an ambition to help them reduce their carbon footprint. It has been working directly with them to help them measure it and then to make improvements. The Co-op, which has just made a new contract with Wiseman, is doing the same thing: working with Wiseman and paying for the carbon audits or the E-CO2 audits to help them reduce their carbon footprint. So even just on that basis there are improvements. I think all of the retailers are working with farmers on areas such as locomotion, to try and help with the hip problems that cows have as well.

Q111 Amber Rudd: So those are examples of making the supply more environmentally sustainable; are there examples of efforts to make it more commercially sustainable?

Christine Tacon: I think that all the people with milk pools are passing an additional premium to their suppliers. However, you should be aware that this is all for the liquid milk part of the sector. So yes, if you are in a liquid milk pool with a major retailer you are getting advice and you are also getting a premium, but not everybody is in those pools.

Q112 Mrs Glindon: With regard to the European Commission’s milk package, you state that the Commission’s proposals have been "monitored from afar rather than integral to developing business strategy". Will the proposals not have a significant longterm impact on your business?

Christine Tacon: Are you talking about the proposals saying that there have to be contracts?

Mrs Glindon: In relation to what the measures hoped to achieve: stabilising the market, improved transparency, particularly through the chain, and that sort of thing.

Christine Tacon: In reality, I think these will work as a proper market. I cannot see it making a significant difference in the UK.

Q113 Barry Gardiner: I want to look at the whole issue of contracts, the proposals for them and your response to them. You have said that you think that there is a danger the prescriptions of the EU may stifle the relationship, stifling innovation and efficiency. Can you imagine there ever being a contract that did not actually stipulate the end point of the contract?

Christine Tacon: You mean in terms of when the contract comes to an end?

Barry Gardiner: Yes, when it runs to. It is a sensible thing to have in a contract isn’t it?

Christine Tacon: Yes, or to include how you terminate it. Certainly when I look at my farming arrangements, I expect them to go on for decades, but they are all reviewed every three years and we have a timing for when we are going to review them.

Q114 Barry Gardiner: Do most contracts deal with the issue of price?

Christine Tacon: In farming they do not tend to. Bear in mind that we grow apples, broccoli, peas and potatoes and none of those have a fixed price. They might have a margin agreement in them, but they will not have prices. I do not think I have any contracts that have prices in them.

Q115 Barry Gardiner: Do they include volume?

Christine Tacon: They do include volume. If the volume is not fulfilled, there is no comeback. It is a commitment to saying, "We think we are going to need this much,", but there is nothing that says what happens if we use less or what happens if we need more. They are a guide on both sides for how much we think we are going to need.

Q116 Barry Gardiner: Are these four principles-seasonality, end of contract, price and volume-that the EU are saying should be in the contracts not sensible things?

Christine Tacon: No. I would hate to have a contract saying how much of something I have got to produce, because if you get hot weather like this you will get lower yields. As a producer you would end up being on the wrong side and you might have to buy product in at a premium price to fulfil a contract. So I think that these variable contracts have actually evolved to protect both sides.

Q117 Barry Gardiner: What precisely is it about the EU contracts that you do not like? Is it having to have the contract in the first place or is it the elements that they are saying ought to be in there?

Christine Tacon: The contracts that already exist, particularly the ones that we have, have termination clauses in them.

Q118 Barry Gardiner: You got out of the dairy farming sector precisely because you could make no money on the existing contracts. Does that not look like you are saying that contracts are all right as long as you are on one side of them, but not if you are actually the farmer trying to produce this stuff?

Christine Tacon: We did not get out because of contracts.

Q119 Barry Gardiner: Well, you got out because you said you were making no money.

Christine Tacon: We got out because we were making no money out of it.

Q120 Barry Gardiner: Presumably you were making no money out of it because of the relationship and the structure between the farmers-

Christine Tacon: No, because there were other people who were prepared to produce at a price that I could not afford to produce at. The difference is that you have a lot of family farms who will not factor in a rent for the farm; they will not factor in a labour cost that I would factor in. So I would actually end up competing with people who were not on the same basis. One of my main concerns was that I could not compete with family farms at the prices that they said they could produce for. I do not think that has anything to do with contracts, it is to do with the competitive marketplace.

Q121 Barry Gardiner: But equally those family farms would say that they are not making any money either.

Christine Tacon: They were at the time.

Barry Gardiner: At the time?

Christine Tacon: At the time that I am talking about yes.

Q122 Amber Rudd: Which year was that?

Christine Tacon: About 2003 was when we came out. So I do not think it is an issue of contracts; I think it is an issue of whether you are competitive.

Q123 Barry Gardiner: So what changes would you suggest the Commission makes to its proposals for an EUwide contract to ensure that innovation and efficiency are not stifled?

Christine Tacon: Allow each region to do what they want to do. Every dairy farmer in the UK will have a contract with their supplier at the moment.

Q124 Barry Gardiner: Do you not think there is an imbalance in the relationship between the farmer and people like yourselves?

Christine Tacon: Are you talking about me as a retailer now?

Barry Gardiner: Yes.

Christine Tacon: Of course there is an imbalance, because of the size. You are actually going through your processor and it is the processor that has the relationship with the retailer. I find it quite difficult when you are trying to solve all of the problems. If you are a retailer tendering your business and you have one processor offering this price and another processor offering that price, you might say that it is important that they are doing work environmentally and those sorts of things, but at the end of the day you will take the best offer. You are not actually negotiating with an awareness of what price is going to go down to the farmer.

Q125 Barry Gardiner: Would you support a modification to the proposal that stipulated that the written contracts should be voluntary in the way that you have outlined, but that the producer at least should have a right to demand one?

Christine Tacon: To demand a contract?

Barry Gardiner: Yes

Christine Tacon: Yes, but I think most producers have them in the UK.

Barry Gardiner: Sorry, not that I am being-

Christine Tacon: No, that is fine.

Q126 Chair : Looking at your written evidence, am I right in thinking that your contract is like a model contract, it is more transparent than existing contracts?

Christine Tacon: The difficulty with ours is that we are just changing to Wiseman, starting in August, so we are still putting the details of that contract together.

Q127 Chair : We heard evidence last week that indicated that at the start of existing contracts there is no transparency on price. Is there going to be more transparency with your contracts?

Christine Tacon: Not as I understand it at the moment. A clear price premium will be paid, but not, as I understand at the moment, in the drafts of them. To be honest, if you are a farmer you are not necessarily looking for a fixed price. Your biggest worry is what your inputs are going to be; at the moment a lot of our input prices are going up. For example, fertiliser price and everything is going up. The last thing I want to do is be in an agreement in which I have a fixed price, because that could be eroding my margin. Inputs can go both ways.

Q128 Barry Gardiner: I understand the principle, but why is it that farmers, in the form of the National Farmers Union last week, seem to think that the existing arrangements are not operating in their favour in the way that you would suggest they ought to be?

Christine Tacon: At the end of the day, you are competing on the global market as well. Liquid milk is a bit different from the rest of the milk chain and I do not know whether they were talking about the rest of the milk chain or liquid milk. The liquid milk pools do tend to be working a lot better, but if you are talking about contracts for milk for cheese, butter and skimmed milk powder, I do not know that they exist. At the end of the day, the processor can buy from anywhere in the world.

Q129 Barry Gardiner: In your evidence, you said that you, as a retailer, do not necessarily know the price that the farmer is being paid. Yet if I contrast that ethical blindness, if I might put it that way, with the Wiseman contract and what seems to be ethical foresight there, do you not think that as a responsible retailer you ought to know what price the producer is being paid here and if it is a reasonable one? If you are looking to have an ethical supply chain, should you not be looking back down that supply chain to say that the price that the farmer is getting is a reasonable one and it does ensure that they get a margin over their inputs and that you think you are running a decent supply chain and not ripping people off?

Christine Tacon: I should say it is not that we do not know. We do not set in the contract what the price is, but we do know what price the farmer is getting at the moment. We would know those figures, but it is not set in the agreement with Wiseman. As I said, it is a new contract we are putting together from August. As part of those agreements, in the future we will be having discussion groups with farmers and what I like about that is that it is not necessarily the price, but understanding all the input costs. That is one of the things that in our farming business we control to the nth degree. We believe that once we start to get involved in these groups the economies of scale and buying power we can use from our farming business with the dairy farmers can help them with some of their input cost management and buying power as well. So we are quite excited about some of the economies of scale. We are talking about something that is coming as opposed to something that is here today, unfortunately.

Q130 Barry Gardiner: I have one final question. Would an EUwide contract framework make it more difficult for you to specify additional elements, such as welfare, as you have done with the Wiseman contract?

Christine Tacon: No, I do not think so, you can always add to things can’t you?

Barry Gardiner: Good, thank you.

Q131 Mrs Glindon: There is reference to the Co-op Farm’s experience of Producer organisations in the horticultural sector and UK growers’ concerns about their impact on competitiveness, which you referred to earlier. If other European countries adopt the producer organisation model suggested by the Commission, this will result in a significant consolidation of the industry in Europe. What effect might this have on the competitiveness of the UK dairy industry?

Christine Tacon: First of all, I would like to talk about the impact of producer organisations in the horticultural sector. I have a lot of experience of this; we are in them in apples, peas and strawberries. It was brought in by the European Commission with an intention to encourage consolidation, so the words are almost identical to what they are trying to do with the dairy inside. In reality, what happened on the continent is that they tended to get some very big distributors that consolidated. So the distribution chain got consolidated, not the production. The producer organisations pull down significant grants, which are a percentage of turnover. Therefore, if you actually look at it as a competitive thing from our side of the channel, you see all of these competitors being able to pull down grants and you need to do the same.

What happened in the UK was that the industry was fairly well consolidated already. If you talk about soft fruit, there are probably only three big soft fruit suppliers, so it had already been consolidated. There was then a concern about how to compete when they were pulling down this massive grant, so you ended up with a restructure of what we did, to be able to pull down the grants in order to compete. This actually has not created consolidation, but it has maybe enabled some growth.

You may also be aware that the Rural Payments Agency has had an absolutely terrible time trying to monitor what is happening on the POs. At the moment it has paid as much in fines on disallowance to the EU as the EU has ever paid out in grants. All of us are currently either deregistered or being looked at all over again; it has caused absolute chaos in the industry. You have this situation where something that was set up to produce one effect in the EU has created a chaotic situation in the UK and we do not actually know where we are, going forward. Even at this moment, six years after it has been launched, we are all in chaos. I am quite frightened at the idea of the EU bringing something in with this wonderful end-goal, and when we try and interpret it in the UK it is very difficult.

Q132 Mrs Glindon: So in relation to competiveness it is not helping?

Christine Tacon: It has just caused chaos. Across the EU it has done very little, but it has created a consolidation with businesses like The Greenery, which you may not have heard of, but is a massive fruit and vegetable distribution arm which is bigger than the entire UK production of fruit and vegetables put together. That is one business and that pulls down a grant of 2% of turnover, which we then have to compete against.

Q133 Chair : Sorry, who set that up?

Christine Tacon: The Greenery.

Chair : Who set that up, who is in it?

Christine Tacon: It was set up as a result of bringing in the producer organisation regime.

Q134 Amber Rudd: Who is in it? Is it just an organisation made up of different entities?

Christine Tacon: No, it is a distribution arm for lots and lots of continental farmers.

Q135 Chair : Continental farmers?

Christine Tacon: So it doesn’t exist in the UK, this is a Dutch business. A Dutch business importing to the UK is one of our biggest competitors.

Q136 Barry Gardiner: Why does it get its grant from the EU?

Christine Tacon: Under the producer organisation regime and under the fruit and vegetable regime, which is a producer organisation. So the idea of a producer organisation getting grants to help people consolidate does not necessarily have the right competitive outcome in the UK and the retailer just factors it into the price that you must be getting this grant. So if you are not getting the grant you need to find a way of getting it.

Q137 Amber Rudd: So what is the upside to this particular set-up? You have described to us the chaos and the downside, what do you think was the upside?

Christine Tacon: I suppose the theory was right.

Q138 Amber Rudd: The theory, but not the practice?

Christine Tacon: Yes. The difficulty is that the UK farming industry is pretty efficient as it is already. It had already consolidated, therefore grants to encourage consolidation-

Amber Rudd: Worked against us?

Christine Tacon: Yes.

Q139 Chair : There is nothing to prevent our producer organisations setting a similar Greenery up in Holland and other parts of the EU and obtaining an EU grant to compete.

Christine Tacon: The established businesses we already had tried to do that and then found out that they had fallen foul of the principles of what the EU was trying to achieve because the business itself did not consolidate with anybody else. The objective of the grant was to get farmers to consolidate. If you have already consolidated, then it actually makes it very difficult to still be competitive if you do not pull down the grant.

Q140 Mrs Glindon: From what you have just said, the Co-op farms have always been protagonists for enhanced co-operation between farmers. How would you see the producer organisations enhancing this collaboration, or do you see that at all?

Christine Tacon: I worry about it. I think that farmers should collaborate anyway because it is the right commercial thing to do, not because there is a grant to be had if you do it.

Q141 Mrs Glindon: So, in other words, the producer organisations would not enhance that as things are?

Christine Tacon: I would worry about it having a similar effect to that in the fruit and vegetable sector.

Q142 Chair : In your written evidence you say, "Increased, and necessary, collaboration amongst farmers and growers is, in our view, possible within the framework of existing competition law". The evidence we heard last week was that there seems to be either a misunderstanding or an anxiety about forming cooperatives among farmers. Is there something we could do to make it clearer why cooperatives, for producer organisations, marketing organisations or distribution organisations could be formed within the constraints of EU law in this country?

Christine Tacon: I am always quite shocked at the limited understanding about what a cooperative is. Just after foot-and-mouth, as a charitable thing the Co-op put two people into Cumbria to try and help farmers co-operate there and some people actually thought they had to sell their farm in order to join the cooperative. They just did not understand what it was all about. More education of what it can be is great. In Denmark, when they are looking at whether something is anticompetitive, they compare the size of the business to businesses in the EU; when we are looking at it in the UK we do not tend to do that. I think the law is okay, it is just about how we are interpreting it, whether people have to be given choice within particular regions or whether it is sufficient to look at it within the EU.

Q143 Chair : I am baffled because I am half Danish and I have seen how well co-operatives are doing there with a little bit of pumppriming from the state. I do not know if there is something in the psyche of our farmers that prevents them, because they are so proud and so independent, or if it is just that they do not understand the legal structures on cooperatives, or if it is a little bit of both.

Christine Tacon: I think it is mostly the first and a bit of the latter. We have done a huge amount in our business to try and get people to co-operate with us, to buy with us and to do things with us. Fundamentally, I think a lot of farmers farm because they want to be independent. I have had people saying, "Yes you have demonstrated that if I buy with you I will be able to buy cheaper than I can on my own, but I am worried that my son will not learn how to negotiate". They are just desperate to be able to maintain that independence going forward.

Q144 Chair : Would you describe The Greenery as a cooperative?

Christine Tacon: Yes, but it is a distribution cooperative as opposed to a producer or grower one. It is not the growers that are co-operating, it is the distribution that has been made phenomenally efficient.

Q145 Chair : When you explained that it was chaotic, could you just be clear: which part of it is chaotic?

Christine Tacon: The Greenery is a brilliant solution.

Q146 Chair : So is it the way we are left to our own devices-

Christine Tacon: It is the way that we already have a consolidated industry-[Interruption.]

Chair : I am sorry to interrupt: could mobile phones be turned to silent or off? There will be a fine if that happens again.

Christine Tacon: For example, with strawberries there were three large organisations that had very efficient workings with retailers. It would be anticompetitive if all of those three consolidated and we had one supplier of strawberries.

Q147 Chair : If we just stick to milk?

Christine Tacon: You asked me why it was chaotic. What was chaotic was that these three businesses that were already big were saying, "Crikey, we have to pull down these grants because we cannot compete with people who have access to the grants". They were trying to work out how to do it within the rules of the regime and then the EU auditors did not like how it had been done so we ended up in chaos ourselves. It is nothing to do with milk, though.

Q148 Amber Rudd: There has been much discussion about the retail price of milk and who gets what out of that price. I would just like to ask you about some of those issues coming out at the moment. To what extent do you think the retail price of milk is affected by the farm-gate price?

Christine Tacon: In theory it should be, but in practice it is such a competitive product in front of consumers that, even though you might end up with retailers with milk pools trying to increase price, what we have had in the last couple of years is the discounters coming in with really cheap prices, presumably having bought through processors who were not buying from milk pools. You cannot have a major retailer selling at a significant premium to people like Aldi and Lidl, so what happens is that it then comes down. So I do not think it has been dictated by the farm-gate price. In theory, I think that is what the major retailers were trying to do.

Q149 Amber Rudd: So the farm-gate price is perhaps dictated by the retail price?

Christine Tacon: I think the farm-gate price is dictated by the global price. A point I thought you might be interested to know is that, if you look globally, only 7% of milk is traded. I do not know if you have had this information before, but only 7% of milk in the world is traded, of which 40% comes from New Zealand, about 25% from the USA and 25% from Europe. Really what seems to happen is that the price of milk seems to be driven by this 7% that is globally traded, particularly for those outside of the milk pools getting their premiums because there is always that amount of milk that will move around. In years when the global supply-

Chair : Excuse me, is that liquid milk?

Christine Tacon: No, this is all milk, so this includes milk powder. It is largely traded as milk powder, butter and cheese. In a year like 2007, when there was just 0.3% under-supply of milk globally versus the demand, the price doubled. In 2009, when there was 0.3% too much, it plummeted. So a tiny proportion of all the global milk is traded and if there is even just a slight imbalance in supply and demand it has a massive impact on the milk price. That is what tends to drive the farm-gate price, which of course has nothing to do with the input, the climate or whatever else is happening here.

Q150 Amber Rudd: So you could say it is highly leveraged in a way?

Christine Tacon: It is an enormous impact, yes.

Q151 Amber Rudd: We have had some comments from our Minister recently that the portion of the retail price that is going to the producer is insufficient and is declining. Do you think that is correct?

Christine Tacon: The facts are there, yes.

Q152 Amber Rudd: Do you think there is anything we can do about that?

Christine Tacon: If you are a retailer and you have processors bidding for your business, at the end of the day you are trying to get good-value milk for your consumers. You are trying to balance how cheap you want to go and what welfare you are going to insist on. What is happening is that the retailers are actually seeing their responsibility for their processors and then making sure that the welfare standards of this milk that is coming in is okay. That is where the balance has been, but because they all got worried about the price, they have just been putting the price premium on. So they are focusing on the premium rather than the actual price.

Q153 Amber Rudd: In order to be fairer to the producers?

Christine Tacon: To be fairer to the producers, but also to distance themselves from what they want to have as a commercial relationship with the processor.

Q154 Amber Rudd: If the producers are not getting sufficient payment, it is just not sustainable.

Christine Tacon: You mean the producers?

Amber Rudd: Yes.

Christine Tacon: I do not think there is any doubt that the processors are getting sufficient. Well, the other thing is: should every dairy farmer have a sustainable business? There are some of them that are small family farms on their own land and really it is a lifestyle choice for them; it might be that other members of the family are out bringing in another income. They will not be infinitely sustainable, although they will be sustainable for a long while. What tended to happen when we were exiting was that there were many other businesses exiting. People who were looking at dairy as a business were exiting, so you ended up with small family farms and other people saying that they had to be superefficient and had to get to 750 cows or 1,000 cows in order to make money.

Q155 Amber Rudd: I see, so it is an evolution of the process in a way?

Christine Tacon: I think it is. I am not sure whether you are going to ask me a question about what the Government can do, but I do not think we should accept that every dairy business should be here in even 10 years’ time.

Q156 Chair : If we were to go down that path, what happens in upland areas?

Christine Tacon: They are probably the most sustainable ones. They are probably the ones that actually are okay because they own the farms. It is the people who want to go into dairy farming as a business and, dare I say, the tenant farmers, particularly if they are paying high rent, who will struggle.

Q157 Amber Rudd: Do you think that the Commission’s milk package proposals will affect the share of the retail price of milk?

Christine Tacon: I doubt it.

Q158 Amber Rudd: You do not think they are going to be particularly affected?

Christine Tacon: It might make a shortterm difference.

Q159 Amber Rudd: According to Dairy UK, the reason why farmers receive such a low share along the supply chain is that milk is primarily a commodity product.

Christine Tacon: I think that was my global argument.

Amber Rudd: That is what you were saying basically isn’t it?

Chris t ine Tacon: Yes-that if they are producing in the US for 20p then why would somebody pay 30p in the UK?

Amber Rudd: And you would not-

Christine Tacon: At the end of the day, it is all very well to say that, but what if there arises a global shortage of milk? Then you can get these huge fluctuations in price.

Q160 Chair : I was just going to ask: what if you suddenly cannot import it? Surely we want to be selfsufficient or more than selfsufficient and then export out?

Christine Tacon: I do not think there is an argument for being selfsufficient in the UK. I think you need to try and be selfsufficient in your liquid milk because of the shelf life, but there is no need to be selfsufficient in butter and cheese. Only about 50% of all milk produced goes into liquid milk so you do not need to worry about that in the short term. Then you also have some new brands coming in that have much longer shelf life, so that actually lays us open to more competition from the continent.

Q161 Chair : How do you decommoditise milk?

Christine Tacon: Should you?

Chair : Yes, I mean-

Christine Tacon: You are assuming that we should decommoditise milk.

Chair : Should we?

Christine Tacon: The thing is that the general public wants to buy green, red and blue milk don’t they? Some of them want to buy higher welfare and they might choose some brands because they think they are higher welfare and, to a degree, I think they are choosing their retailer on the assumption of higher welfare. However, I do not think you are going to be able to take something like milk and decommoditise it in the eyes of the public. Is that what you meant?

Chair : Yes, thank you.

Q162 Barry Gardiner: Can I just pick up on that briefly? What restructuring would there have to be in the UK producer arrangements if we were to be selfsufficient in liquid milk, but clearly not concerned with anything beyond that? What sort of dramatic cutback would there be?

Christine Tacon: Well, at the extreme it would be 50%.

Q163 Barry Gardiner: Because 50% of our milk at the moment is liquid consumption?

Christine Tacon: Yes, 50% is liquid.

Q164 Barry Gardiner: I am not trying to put words in your mouth, but the logic of what you are saying seems to be that we should be getting anything other than liquid milk from wherever we can in the world, or if we can produce it at a profit that is well and good.

Christine Tacon: Yes, I think it is the latter point. If you cannot produce at a price that is competitive with the rest of the world, then your business model is at risk. I should say that the New Zealand model cannot be expanded, it is a natural advantage that they have. You cannot double the size of New Zealand because global milk demand has gone up. The American model can be expanded. That is 3,800 cows on a unit, with milking 23 hours a day with 72 points-that is where the magic number comes from. You can replicate those, but you will need four of those, you will not get bigger than that, but the model can be expanded. At the end of the day, the global commodity price will probably be driven by what the US can produce for. Although they can produce for 20p at the moment, it is also worth knowing that they generally have up to 5p of financing charges on top of that. So you then get a figure of 25p and there are many businesses in the UK that can produce at 25p.

Q165 Barry Gardiner: That was not what I wanted to ask you about.

Christine Tacon: Sorry, but I did answer the question.

Barry Gardiner: That was just a pickup. The area that I wanted to ask about was future developments. The Coop prides itself on being an ethical, responsible organisation. You have talked in your written submission about technological progress. Among all the different elements of technological progress, of course, are the super dairies, intensification, cloning and some issues on which I may have no problems, but many people in the country may well have serious ethical concerns. How do these play out in the Coop’s view of the future scenario?

Christine Tacon: Certainly I have not heard any support of cloning at all within the Coop. We are a consumer-owned Coop with 6 million members. The members are the general public and we do generally try to follow the advice of our members. I am not sure whether we have specifically asked their advice on cloning, but certainly within the Coop I have not heard any support for it.

Q166 Barry Gardiner: The Food Standards Agency in the UK has said that its assessment of the technology is that food produced from clones and their offspring is entirely safe and that any ban on food produced in that way would be disproportionate.

Christine Tacon: Again we would fall back on saying, "What do our members want?" Our ethical superiority has come from consulting with our members and saying, "What do you feel happy with and what do you want?"

Q167 Barry Gardiner: You would then say that selective breeding over hundreds of years is categorically different from doing it in a laboratory?

Christine Tacon: I think we would need to ask again on some things. It is one of these things where you could ask the question and know what answer you are going to get, but, to a degree, we may need a better education so that people do understand these things. Do you know what I mean?

Q168 Barry Gardiner: So what technological developments are you supporting? I think we have heard a green light for 3,800 intensification?

Christine Tacon: No, no, you have not. The sort of technology that we are talking about is the understanding of nutrition and breeds. Certainly when we did our cows we had milking three times a day and we were getting 10,000 litres per cow. A lot of people are getting nothing like that performance. So it is about understanding all of the things to measure, understanding the importance of monitoring herd health and doing something continuously about herd health as opposed to getting the vet in when something goes wrong. It is almost more important to have somebody there regularly just to get an idea of something and find things early. That is the sort of technological thing that I think we could make a difference with in the very shortterm.

Q169 Barry Gardiner: So no to super dairies?

Christine Tacon: I think you have to bring the public with you on super dairies. A proposal that initially had cows never going outside was quite difficult to justify to anybody who knows anything about the countryside. I also think that if you had said that the cows would go outside at certain times of year when the weather is nice and that sort of thing, and that all the methane from the cows would be collected and it would be the lowest carbon footprint milk in the UK, you start to realise how you can take people with you. However, you have to get the animal welfare bit right.

Q170 Chair : What percentage of cheese and processed milk products that you sell is produced from UK-produced milk?

Christine Tacon: I am afraid I will have to come back to you on that, I do not know the answer.

Chair : Could you drop us a line?

Christine Tacon: Of course I will, yes.

Q171 Chair : Do you anticipate DEFRA’s voluntary principles on countryoforigin labelling for dairy products affecting your buying decisions for dairy products?

Christine Tacon: The Coop is very, very hot on labelling. We have always been very strict and in fact some of our packaging is a bit tiresome to read because there is so much about where absolutely everything has come from on the label. So no, I do not think it will make any difference because it is something that we are very strict about already.

Q172 Chair : Increasing importance being placed on local things by consumers obviously brings real benefits to UK farmers; do you see a market for local milk in the future?

Christine Tacon: It already is for Scottish milk and Welsh milk, so it is regional rather than local. As you probably know, there are some brands on the shelves-I think we have had Yorkshire milk in the Co-op before. You were talking about decommoditising and, at the end of the day, milk is milk to a lot of consumers so if it means that there is a premium to be paid then it is up to them to decide if they want it or not. I do not think you could ever just have local milk.

Q173 Chair : Do you think there is a need for EU action on labelling?

Christine Tacon: I think they are looking at it at the moment; I am not quite sure how far they have got. My personal view is that what people can currently do, particularly with meat, is a disgrace. At the moment you can rear an animal in one country, process the dead animal in another country and say that it is the produce of the country where you have processed it. Some of that is so misleading and upsetting for consumers that it can actually do a lot of damage. People are looking to see where things come from, but you can blatantly lie, which is what I see it as, about the fact that this is British pork when it is not.

Q174 Chair : The only thing I would say is that our farmers do very well out of UK lambs being exported, fattened and processed as French, so I have to say that I am very relaxed about it.

We had conflicting evidence last week from the NFU and Dairy UK as to whether there is a systemic problem in dairy farming and dairy production. Do you have a view on this, given the fact that you have come out of it?

Christine Tacon: There is a chunk of people who are not making money and are looking for somebody to try and give them a solution to make money. Some of those people might not like the solution, which might be that they would be better off going into sheep, or consolidating with the guy next door so one can milk the cows and one can look after the dry cows. So they might not like the solution, but I do not think they should be given a right to survive when there are people at both the smaller and the larger end of the market who are being competitive and are surviving. You will hear it as a stuck record in farming that there is not really enough independent advice- what used to be Governmentsponsored advice-to help people. These are very proud people whom we are trying to help.

Chair : Thank you very much for being with us today, for being so generous with your time and for both your oral and your written evidence.

Examination of Witness

Witness:  Hermanus Versteijlen, Director of Economics of agricultural markets and single CMO, European Commission Directorate General for Agriculture, gave evidence.

Q175 Chair : Thank you very much indeed. Can I welcome you, Mr Versteijlen and thank you very much indeed for being with us this afternoon. For the record, would you like to give the Committee your full name and position?

Hermanus Versteijlen: My name is Hermanus Versteijlen and I am a civil servant in the European Commission, working as a director of agriculture markets. That covers all markets ranging from animal products to arable products, fruit and vegetables, wine and so on.

Q176 Chair : Thank you very much for being with us today and contributing to our inquiry. First of all, would you like to make a comment about the present state of the dairy industry across the EU, as you see it?

Hermanus Versteijlen: The dairy sector, as such, is in a relatively good state at the moment, in the sense that milk prices paid to farmers are at reasonable levels. We also expect for the near future that this will remain the case. We do, of course, see that there are differences in the European Community in prices. We also see that the average milk price paid in the UK, as compared to the rest of the Community, is less than the average paid in the community. The average in the Community at the moment is about 33 cents, while here in the UK you pay 29 cents on average.

Q177 Chair : What do you put that down to?

Hermanus Versteijlen: I think it is partly historical, in the sense that there is a lot of milk being sold in the liquid market, as was discussed here before; according to our figures, it is about 53%. Compared to other situations, that is a bit abnormal. Typically, in other situations you would see only 20% to 30% being sold in the liquid market. From my background, I am Dutch and there the liquid market is seen as the last end of the market; it is not the premium market. On average, I would say that 45% of milk in the European Union is turned into cheese; into addedvalue products. Here in the UK it is much less, it is about 27%, if my figures are correct.

Q178 Chair : If you feel that the price slump of 2009, which prompted the formation of the high level group on milk, has largely recovered, would you like to give your reasons why you think measures outlined in the milk package are still needed?

Hermanus Versteijlen: It is always a bit of a fragile situation in the milk sector. Relatively small quantities can give rise to disproportional price fluctuations and what we see is that the price risk is very much carried by the farmers. If you then look at price developments at retail level or at processor level, they form a more or less constant line. If you look at the same time at the price development at farmer level, they are much more erratic, going up and down. You see time lags, with farm prices being converted into consequences at the retail and the process level.

So the price risk we have seen over the last two or three years, the brutal fluctuation of prices and price volatility, has been very much carried by the farmers. We also think it is important in this context that we are going out to quota. We still have a quota system that took care of stability and we have never had such enormous price volatility as we have seen over the last three years. We still believe that we have to continue to get out of quota because quotas do not fit any more in a situation where, as a result of globalisation, our borders are opening up. They are already open to a certain extent, although not so much for milk. We want to integrate more into the world market, so the quota system cannot exist any more. On the other hand, we see that going out of this quota environment we have to take care that there will be better mechanisms for adapting supply to demand and improving, in that context, the position of the farmer in the chain so that he can better negotiate his price.

Q179 Chair : Given that there is a growing global demand, what do you think you can do at the EU Commission to increase EU dairy exports?

Hermanus Versteijlen: Earlier we had our export refunds; we do not use them any more, although we still have the possibility to do so. What we have in fact done is quite important. We had reforms over the last 10 years in the dairy sector; we adapted our internal price level towards the world market. On the other hand, the world price level has converged very much to our price. If you look at the present price situation, the European dairy sector has become quite competitive as compared with the world market. At the moment, we are exporting important quantities, especially of cheese, powder and even butter, without paying any refunds. This shows that we are quite competitive. We are exporting 600,000 to 700,000 tonnes of cheese without any export refunds so we can really compete, and that is the result of our policy over the last 10 years in the milk sector.

Q180 Chair : Do you find it surprising that there is currently no transparency in the contracts? The NFU has clearly stated that it wants clarity, certainty and predictability; do you believe that your proposals will bring that?

Hermanus Versteijlen: We see quite different situations in terms of contracts in the European Union. On the one hand, the cooperatives have their own structure. On average, in the community 58% of milk is processed by cooperatives, while in the UK it is about 30%. So in terms of cooperatives you are different. On the other hand, you have the private sector and there you see situations without any contracts and not all the elements of the contracts are very well harmonised. I think we have a responsibility to try and come with a proposal for a contract that contains at least minimum elements that are important for both actors.

What is important in this context is that these contracts are not only there to improve the situation of different actors in the chain-the producer and the processor-but they should also contribute to the better adaptation of supply to demand. I will give you an example of this. When the milk prices were at their lowest level, in 2008, we saw that in eight member states 6% to 7% more milk was produced than in the previous year when milk prices were at their highest. There were clearly no signals from the processors or cooperatives to the farms to say that they needed to adapt supply to demand. The farmers also, although they have all their cows lined up and organised to produce a certain amount of milk, can still influence the flow by a couple of percentage points based on their policy on feed and so on.

So we think that if you then improve the contractual situation there should be better contacts between the different contractual partners about the volume. Then, as a contrepartie, there should also be better information about the price. We think that any processor, either cooperative or not, should be able to determine over a certain period what sort of outlets against what sort of price he has. That should be converted into a raw material position on the basis of which he can then have contracts with farmers. Also in that contract, even on a monthly basis, the volume is determined as well as the price so that the farmer has a better indication of what his situation will be.

Q181 Mrs Glindon: You have outlined the model for the EU framework in relation to milk contracts. Do you think it is realistic, given the variation in the industry across Europe, to have a single framework and model? For example, in the UK the majority of milk producers already have a written contract.

Hermanus Versteijlen: What we put in our proposal are our minimum requirements, but we do not determine the parameters to be decided by the negotiating partners. We do not say anything about the price; we say that a price or a price formula should be there, that a volume should be there and that a date for duration should be there. All of those elements are supposed to be freely negotiated between producers. It is a minimum requirement, but it is up to the actors to fill in the contract itself based on those minimum requirements.

Q182 Chair : How much support has the Commission received from other member states for the milk package across Europe?

Hermanus Versteijlen: If I look at the development in the Council, we normally go to the Council and then we have working groups. There has been quite a favourable reception for our proposals. Do not forget that these proposals were prepared by a high level group in which all member states participated so, of course, the report of that group was adopted by consensus. We converted that into proposals so you would not expect all member states to be against it later on. There has been quite a favourable reception for the proposals. Of course there are certain things that I would like to adapt. There is always a discussion: we have the 33% issue, trying to answer to what extent a producer organisation can grow in a member state, whether it should be 33% or a little bit more or a little bit less.

Another issue in this context is that, after the Lisbon agreement, we have to reorganise our legislation into what we call implementing powers and delegated powers. They determine the role that Parliament and Council have to play in the context of Commission decision-making. There is quite a wide general discussion on that subject between the different institutions, but whenever we make our proposal for the future, in this case the milk sector, we also put on those elements. Those elements always give rise to discussion between member states, but they are not directly linked to the substance of the milk package.

So that is as regards the Council, but now of course with this proposal we are in codecision with the European Parliament. That is a new situation after Lisbon. Earlier, and in all my career, we were in the situation in which we made a proposal, Parliament gave advice, then the Council decided and the whole thing was in the official journal after six months. Now we are going through the process of a first reading and second reading in Parliament, and Parliament is fully co-deciding on this proposal.

I happened to be in a Parliament meeting yesterday at which Mr Nicholson presented his report and different amendments were discussed. There are 307 amendments on the report of Mr Nicholson that still have to be organised into mainstream amendments. Then he can finalise his report by the end of May if everything goes well. I would say, and the President Mr De Castro also concluded, that there is a broad agreement in the Parliament on our proposals. Certain parties are more ambitious and other parties want to change figures, so there are always the usual opinions, but fairly speaking they support our proposals. So if everything goes well we could even conclude in the first reading, but we need three lots and so on by the end of the year.

Q183 Chair : You mentioned price, what do you think the other minimum requirements on the face of a contract should be?

Hermanus Versteijlen: Volume, and also the timing of delivery is very important. I gave you the example of the first three to four months of the quota year in 2008, where we had 6% more. We just had another example of another cooperative that accepted. It is very important that, also in the context of cooperatives, the delivery right and delivery obligation is re-discussed. The delivery right is a better situation, where the farmer delivers all of his milk and he determines how much milk a processor then has to convert into milk products. Then the price is based on that valueadded situation later. So that has to be improved a bit. So I would say volume, then the timing of volume is important, and then the duration.

Q184 Amber Rudd: Do you think allowing member states to choose whether to make written contracts compulsory or not risks creating distortions among member states and problems between them as a result?

Hermanus Versteijlen: We proposed, of course, to leave it to member states.

Amber Rudd: Yes, to make it voluntary.

Hermanus Versteijlen: So I do not think it will cause problems. That was quite an issue in the high level group, certain member states said that they had nothing against contracts, but they would like to have it, for subsidiarity reasons, decided at a national level. So let us say that the best situation would be for the member states to decide on the basis of their own national situation. For instance, here in the UK you are more advanced in contracts than in France or in other countries. You come out of a different historical situation from the Milk Marketing Board; you have fewer cooperatives than in the rest of Europe. So your situation in terms of contracts is different, therefore we left the choice to the member state.

Q185 Amber Rudd: So the Commission has done its own assessment on the basis that if we allow member states to make their own choices, that will help with innovation. In some cases like the UK they want it to stay voluntary and do not want compulsory contracts. Have you made an assessment of what the difference is?

Hermanus Versteijlen: In this context, we only want to make an effort to harmonise the situation in the European Union. Therefore, we give an instrument that we think is useful to do that. The users then have to decide themselves to what extent they want to use this instrument, and that is also a decision to be taken at member state level. We think those contracts can be helpful, but, in the context of subsidiarity, we allow the member states to make their own judgment.

Q186 Amber Rudd: The National Farmers Union Scotland has proposed a new marketrelated formula, which it argues would be a fair and reasonable starting point to set a foundation for contracts. Would the Commission support a universal pricing formula approach?

Hermanus Versteijlen: Uniform price formula? Not necessarily. I think we would have to look at the formula itself, to what extent it imposes and what the duration and elements of it are, but in every contract it should be clear to the actor what the price formula is and on what basis a price is determined. That can be either a fixed price or a formula that is part of a contract. If there is a certain harmonisation there on the basis of certain elements, then I do not think we have anything against that, but I cannot have any opinion on that until I know what the formula is, what duration it is for and what it imposes.

Q187 Chair : Are you able to estimate how many member states make contracts compulsory at the moment?

Hermanus Versteijlen: I do not know. I think it is more likely that the southern member states tend to make them compulsory.

Q188 Amber Rudd: Which ones?

Hermanus Versteijlen: The southern ones. France already did so. In principle there is nothing in European law at the moment to prohibit member states making contracts compulsory. It is possible to do so and that is why we think that our proposal is also important and that where those contracts are made they should be in a harmonised model. An important factor in this context is the free negotiation of the elements. A couple of member states will ask whether they can fix the duration of the contracts.

Q189 Mrs Glindon: Would you agree that allowing producer organisations to capture up to one third of national production could create a monopoly that is not consistent with the concept of a marketled dairy industry?

Hermanus Versteijlen: We do not think so because with 33% you have an option, for any processor, to negotiate a price with three different producer organisations. So there should not be a monopoly and, if there is any indication that in a certain area this would still lead to a monopoly situation, we have proposed a safeguard for national competition law. Authorities could then look at very specific situations to see that no monopoly is being created or where a processor would have difficulties in sourcing his milk.

Q190 Mrs Glindon: The threshold is 33%, which is perhaps higher than our Government would have suggested. Why was that 33% of national production chosen?

Hermanus Versteijlen: There have been quite some discussions about it. In the Parliament it runs to 75% and to 38%. 33% is 100 divided by three.

Q191 Mrs Glindon: A mean amount of those?

Hermanus Versteijlen: Yes. What we think is important in this context is that we have a harmonisation of conditions to have a producer group around the community. This proposal is a derogation from normal competition law. Normal competition law typically defines, on an ad hoc basis, what is called the relevant market. As we found out in the high level group, it leads to different situations between member states. Every competition authority in each member state is defining its relevant market and that can differ then within the milk sector. So in order to harmonise the legal situation of producer groups in different member states we made these proposals and that is why we obtained this derogation from normal competition law. This is not something extraordinary in the agricultural sector.

Q192 Chair : Why do we have to harmonise?

Hermanus Versteijlen: Because otherwise producer groups could be treated differently in different member states. Their legal situation should be clear about on what basis they can ask for recognition. Maybe they do not start because they do not know to what extent they will be allowed or not. Now we have clear parameters which they can use.

Q193 Mrs Glindon: Going on from that, can I just ask what impact assessments have been used to examine the likely effects on competition and pricing of the formation of producer organisations?

Hermanus Versteijlen: We acquired some evidence in the high level group on our proposals and what to do. So we did not make a specific impact assessment here on this particular situation of the influence of 33% of producer groups.

Q194 Mrs Glindon: So did you look at different member states to look at the impact? I was just wondering how representative the impact assessments were across the member states?

Hermanus Versteijlen: In the high level group, we had different statements and witnesses from competition authorities in different member states reported on their situation. For instance, I remember there was one from Germany and there was one from France, who reported what I was just saying about the situations being different. European competition law intervenes only if there are crossborder effects for the rest. If there are not crossborder effects, it is the Member state’s competition authorities who determine whether or not the relevant market is there.

Q195 Mrs Glindon: How much demand do you anticipate from European Union producers to set up the producer organisations?

Hermanus Versteijlen: I am curious about what will happen now. There was nothing against setting up producer organisations until now; they can do it, but within certain limits from a competition point of view. Our proposal has given a stimulus to do so. Whether in the end they will do so depends on to what extent they are able to work together. I have also seen many witnesses saying that for producer organisations to negotiate a common price with processors is not always easy either. One producer organisation member has told me that he negotiated the price and his farmers were always unhappy about the price, but if he could obtain 1 cent more than the neighbour then the farmer was happy, and that was the basis.

So there will always be discussions, as there are cooperatives and producer groups and to an extent they will obtain a better position. In the context of rural development, we will also make proposals to stimulate setting up producer groups by administrative support, not making any investments, but setting them up. So in the future our legislation will stimulate working together and will also fall more and more under the second pillar of rural development as an item to be used by farmers. So from our side we will do what we can to have farmers working together and to improve their bargaining position visàvis processors and retail.

Q196 Mrs Glindon: I know that you touched on competition law before, but the UK Government argues that producer organisations should still be subject to national competition law. How would this affect the EU common market if some countries allowed large producer organisations and others did not?

Hermanus Versteijlen: If our proposal is adopted by Council and Parliament, the UK can no longer apply its own competition law. European competition law on the basis of the 33% will be applied.

Q197 Chair : Are we not understanding the competition rules in this country? I spent six months in DG Competition. I think I understand the rules fairly clearly and I do not understand why we cannot form cooperatives in this country. I asked the previous witness whether this was something to do with our lack of understanding of EU competition laws or something in the psyche of the UK farmer. Do you think there is something we could be doing to explain this? If we are not exporting, if the milk or dairy product is not crossing a border, why can we not have more cooperatives in this country?

Hermanus Versteijlen: I do not think the position on cooperatives in the UK is linked to competition law.

Q198 Chair : One of the witnesses seemed to think that EU competition law prevents it.

Hermanus Versteijlen: No, no, not at all.

Q199 Chair : Could we just get that on the record?

Hermanus Versteijlen: Let’s say that there are certain exceptions in European agriculture law for cooperatives. Co-operatives are fairly well treated and you know as well as I do that there are many well organised and big cooperatives. So I do not see that the situation should be different here in Britain. We never contest-my colleagues from competition law-the situation of cooperatives. I think that the reason why there are not that many cooperatives here in the UK is to do with history. You had the Milk Marketing Board, which organised the price and organised the distribution of the milk. You were in a very tight shop and maybe there was no necessity for these cooperatives.

Q200 Chair : Can we just have a statement on the record that there is nothing in EU competition law to prevent the formation of cooperatives in this country, either at distribution, producer or marketing level?

Hermanus Versteijlen: There is nothing in law to prevent it, unless of course they do unlawful things. That always has to be checked and notified, but if you had a normal cooperative working as anywhere else in the community I do not see why in the UK it should not work.

Q201 Amber Rudd: In the UK, the retail price of milk received by the farmers has decline in the last decade, while that of supermarkets has increased. Is it the same in the rest of the EU or are we unique in having this particular development?

Hermanus Versteijlen: I am not sure whether you are unique, maybe. What I see when I remember the graphs that we produced was a steady increase of retail prices for agricultural products, also for milk and also for processor prices. As I said before, when you see the milk price of farmers you see a time lag in the retail price as compared with the development in the milk price paid to the farmers. Sometimes you see small reactions, but a common phenomenon in the UK is to use milk as a kind of attraction product, especially local milk, to attract people.

Q202 Amber Rudd: A loss leader?

Hermanus Versteijlen: What do you call it?

Amber Rudd: Loss leader.

Hermanus Versteijlen: The loss leader. You see milk prices coming down. The liquid milk price has also come down another 4p per four-pint bottle over the last month, which is a bit against the normal trend of milk prices that are now paid to farmers. Any retailer will of course try and translate that reduction to the ones that deliver the milk; he will try to obtain his raw material or his product as cheaply as possible. So indirectly it has an influence.

Q203 Amber Rudd: My point is that the proportion of the money that the producer gets is slowly diminishing compared to what the supermarket gets. We think it is a problem in the UK, but is it a similar problem in the rest of the EU?

Hermanus Versteijlen: In the context of different forums, we are looking at that margin distribution between the chains. There is a forum that has been constructed of the different actors in the food supply chain to look at the development of margins and so on. They have a whole programme for 2011, and if you like I can give you more details.

Amber Rudd: Yes, it would be nice if you could let us have that information.

Chair : If you could give us that in writing that would be very acceptable.

Hermanus Versteijlen: Yes, there is a certain Mr Jim Paice, Member of Parliament, who is part of this forum. It is a decision of Council and I can give you that in writing if you like.

Q204 Amber Rudd: Apart from the milk package, does the the Commission have any other ideas for improving competitiveness and encouraging innovation in the dairy sector?

Hermanus Versteijlen: With our milk package, we have put some ideas on the table. We will always continue to have new ideas, but not for the moment. There are of course always all the possibilities in the second pillar to improve competitiveness by farmers and so on. It is a matter of how you take them up with the member states in the programme.

Q205 Chair : You mentioned that contracts should include price. Would a formula relating to margin be permitted under the Commission proposals?

Hermanus Versteijlen: As I said, it is to be freely negotiated between-

Chair : But it is something you would encourage?

Hermanus Versteijlen: There is nothing against it. There is a situation here; I think Tesco is doing that on that basis. Although I think it is a bit of a pity that an entrepreneur is being paid on what his production costs are, I understand that here in Britain farmers are quite happy with that situation-that they have their production costs plus something.

Q206 Chair : The previous witness spoke about The Greenery organisation. In your view would dairy producer organisations be eligible for the same grants for consolidation that were offered in the fruit and vegetable sector? So would dairy producers be eligible for the same things?

Hermanus Versteijlen: No.

Q207 Chair : Why?

Hermanus Versteijlen: The fruit and vegetable sector has a specific market organisation, which is not there in the dairy sector. In the fruit and vegetable sector we have support for producer organisations. Producer organisations consist of farmers, and the support is that if farmers work together in producer organisations to concentrate the offer and to improve the addedvalue on the offer, we are ready to pay something like 4% on their turnover on condition that this 4% is 50% of the expenditure of their actions.

Q208 Chair : This is for dairy?

Hermanus Versteijlen: This is only for fruit and vegetables. Such a system does not exist in milk.

Q209 Chair : The whole thrust of the evidence we have been hearing for milk and dairy is that we are only going to increase profitability if we increase added value. I personally do not understand why we are seeking to increase added value in fruit and vegetables when we know that we need to increase added value in milk and dairy as well. So would you now come back and perhaps reconsider?

Hermanus Versteijlen: No, because we spent €850 million in the fruit and vegetable sector to stimulate certain actions of producer organisations. I was a bit surprised by the previous witness’s statement on The Greenery. The money was used for distribution. The money, in principle, is used to improve the working methods of the members of a producer organisation. For instance, they have to improve their environmental methods of producing. It is a compulsory action. It can be used to withdraw certain products in an excess situation. It can be used to improve packaging and to add value up to the outlet of a producer organisation. So that is where it is used. It is really there to add value to fruit and vegetables in the fresh state.

Q210 Chair : So you do not see a parallel with adding value when there is clearly a need in this industry?

Hermanus Versteijlen: In the milk sector, the only way the milk producer can add value is if he starts processing at his farm. The number of those who process, for instance, into their own cheese is very limited in the community. Some 95% or 98% of European milk is delivered to dairies-so to the industry. We normally do not have improvement programmes for industry. Industries themselves have to come to add value to the milk. That is why it is important, especially in the UK industry, to invest in addedvalue. So it is not for milk producers to do that. A milk producer is not in a position to add more value to his milk. Of course his milk has to be of good quality and so on.

Q211 Chair : I would be very grateful if you could send us a written note on that. I am not getting the difference and I would be very grateful if you could do a written note for the Committee’s benefit.

Hermanus Versteijlen: I think it is fairly clear. We have different market organisations. You have the fruit and vegetables organisation, which has a certain support-

Q212 Chair : But is it because the markets developed differently in the different-

Hermanus Versteijlen: No, but in the milk sector, for instance, as a support we have a safety net intervention, we have export refunds and we have private storage. For historical reasons, all market organisations have different support systems. In fruit and vegetables all the support was concentrated on producer organisations. Now we are setting up producer organisations in the milk sector, but the only thing we will do is stimulate their bargaining power. We might give an aid for setting them up, but there it finishes. We are not going to pay for investment in processing or anything like that.

Q213 Chair : I just think that it would be helpful because I do not see the difference personally. Could I just turn to milk quotas? You touched on a change in behaviour. How do you and the Commission anticipate that EU milk production will change following the abolition of milk quotas in 2015?

Hermanus Versteijlen: We have done studies on the change in attitude. You must not forget that when we abolish milk quotas we will be in a situation where there is more milk quota available than milk produced. In the UK, you produce 9% of the quota already and the general situation in the community is about 5% to 6%. A couple of member states are close to their quota and risk paying superlevy; this year there are about five. However, for the rest they do not, so on a general basis we are going for what we call a soft landing. That means that the quota end is supposed to be zero. That is a price difference between a situation with or without a quota. There should not then be any upsurge in production because there is not any additional stimulus to produce milk.

Q214 Chair : You did say that,even though the price was lowest in 2008, bizarrely, production was up. So what I would like to ask is what the impact on one member state would be of another deciding to increase substantially its own production once the quotas are lifted,and what would the Commission do?

Hermanus Versteijlen: I have difficulty hearing you; can you speak a little louder?

Chair : If one member state decides to increase substantially its own production once the quotas are lifted, would the Commission look to intervene in those circumstances?

Hermanus Versteijlen: Of course.

Chair : If there was a distortion of trade?

Hermanus Versteijlen: Yes, no member state has a right to intervene above what is allowed already in our legislation. They have no right to stimulate production that is not-

Chair : But after the quotas have gone?

Hermanus Versteijlen: Yes, after the quotas have gone. It will be a free market and no member state has a right to stimulate production.

Chair : Okay. Thank you very much for being with us and for being so generous with your time. I personally would find a background note very helpful, as broad as you are prepared to make it, on what support is given to fruit and vegetables as opposed to milk, just for our better understanding. We thank you very much, Mr Versteijlen, for being with us today. Thank you very much indeed. We stand adjourned.