Appendix: Government response
Introduction
1. The Government welcomes the Committee's report
of its inquiry on dairy prices. We share the Committee's view
that some of our dairy farmers are struggling with the current
low prices for milk. We have asked HMRC and the banks to take
a sympathetic stance with dairy farmers in this period, and we
have ensured that farm payments for dairy farmers have been prioritised
by the Rural Payments Agency (RPA). The Government wants to build
a competitive and resilient world leading dairy industry that
can take advantage of increasing world demand for dairy products.
Exports are at record levels topping £1.4 billion last year,
a 51% increase since 2009.
2. The Government also welcomes the opportunity to
clarify the jurisdiction and powers of the Groceries Code Adjudicator
(GCA).
The way forward
Given that the major opportunities to tap into
increasing world demand for dairy will arise outside the EU in
China, Russia and Africa, the need for a strategy for greater
export is clear. Defra must explore with the industry practical
steps to ensure that export opportunities are identified for the
industry to tap into.
3. The Government strongly endorses the Committee's
findings about the positive long-term prospects for the UK dairy
industry with worldwide demand expected to continue to grow. The
Government is working hard to promote our world class food and
drink industry in key overseas markets. In the past year, the
Government has opened new markets for UK dairy which supported
a 25% year on year growth in non-EU dairy exports in 2014. Our
strategy is to focus on the most lucrative opportunities such
as trade with China and the US and on opening markets in the economies
of the future—including dairy markets in Latin America and
sub-Saharan Africa.
4. Defra will continue to organise meetings of the
Dairy Export Users Group. This brings Government and industry
together on a regular basis to discuss challenges and opportunities,
prioritise market access negotiations, and encourage a successful
and thriving UK dairy export sector.
We welcome the commitment given by the Secretary
of State to explore with farmers the creation of producer organisations.
We agree with the Government that it is a matter for farmers themselves
whether they see opportunity in combining to increase their collective
bargaining power and influence. We note the reluctance that exists
among farmers and their representative organisations, and recommend
that the Government identify reasons for that caution and the
barriers that may exist to prevent farmers taking this course.
5. The Government has taken a number of steps to
encourage and support the creation of dairy producer organisations
(POs) and we will continue to discuss this with the NFU and other
industry leaders. We have implemented the relevant provisions
of the EU "Milk Package" to allow POs to form. The RPA
has published guidance on the procedure for setting up dairy POs
in the UK and the requirements that need to be met. In addition,
the Government has provided £5m of funding to help producers
explore opportunities for collaboration.
6. As the Committee has recognised, the creation
of dairy POs and the organisation of collective negotiations,
require time and a strong dynamic from farmers themselves. On
26 February 2015, the RPA formally recognised Dairy Crest Direct
Ltd as a dairy PO. DCD represents 1,050 dairy farmers in England
and Wales supplying 1.5 billion litres of milk. This development
may encourage other dairy farmers to consider the advantages of
a PO model.
We recommend that Defra seek a commitment from
the EU Agriculture Commissioner Phil Hogan that the current intervention
price for milk of around 17 pence per litre be reviewed before
the end of milk quota arrangements in April 2015, and ask the
Secretary of State to work with counterparts to keep under regular
review thereafter.
7. This was the subject of detailed discussion by
Ministers at the EU Agriculture and Fisheries Council on 26 January
2015. Commissioner Hogan made clear that it would not be appropriate,
in his view, to raise the intervention price for dairy products
and it is more important to pursue long-term solutions like developing
new export opportunities. Higher intervention prices could also
serve to undermine the development of a dairy futures market.
None the less, the Commission has taken steps to provide immediate
"safety net" support for the EU dairy industry; for
example, private storage aid schemes for butter and skimmed milk
powder have been extended until 30 September 2015 in response
to the Russian trade ban. The Commission is also considering how
the EU Milk Market Observatory could be further strengthened to
provide better quality, more accurate and timely information for
businesses to work with. The Government is sceptical about increasing
the intervention price since it is likely other countries would
benefit most, whilst the cost of implementing it would fall on
UK farmers.
We strongly support the Secretary of State in
seeking clearer EU regulation on labelling of 'country-of-origin'
products. Country of origin should imply that the raw materials
contained in a product were born or grown within that country,
and not simply processed there.
8. The Government is grateful for the Committee's
support on country of origin labelling. Improvements are needed
so shoppers know when they are buying quality British dairy products.
The Secretary of State has raised this issue with the EU Agriculture
and Health Commissioners. The Commission is due to publish a report
on the feasibility of mandatory labelling of milk and milk products
soon.
The voluntary code
We recommend that the dairy industry code of best
practice remain voluntary in order to retain the flexibility and
scope it presently offers. The current crisis affecting dairy
farmers is, however, a significant test for the arrangements introduced
after the 2012 price crunch. The code is subject to annual review
and we expect the 2015 review to take full account of the lessons
learned from the present market conditions.
Neither a statutory nor a voluntary code can set
or regulate prices in an open market. None the less, the instability
of current pricing within the dairy industry in general and for
milk in particular implies that closer attention is needed in
the next review of the code to the damage that sharp and rapid
shifts in price do to the industry, not least in forcing the exit
of producers for whom short-term market fluctuations may prove
fatal. Greater guarantees of likely future income are required
if farmers are not to continue to depart.
9. The dairy code of practice has been successful
in helping farmers get fairer contracts with their milk buyers,
and we agree with the Committee's view that a voluntary approach
is preferable. Having said that, the Government believes that
it is important to build on the code's success and broaden its
adoption. Ministers discussed this with the NFU, Dairy UK and
other industry figures at a roundtable meeting on 11 February
2015. It was agreed that a new industry-led group should be established
to explore the recommendations of Alex Fergusson's review and
what more can be done to support our farmers during periods of
uncertainty about prices, such as the creation of a futures market
in dairy products.
Review of the GCA
We believe that the terms under which the Groceries
Code Adjudicator may operate are too restrictive and that a means
must be found to protect suppliers of products to major retailers
whether or not they are direct suppliers, as under the current
arrangement. We note that the Government is committed to review
the operation of the GCA in 2016 but we recommend urgent consideration
of how the GCA remit can be extended to incorporate suppliers
throughout the supply chain.
10. The GCA's jurisdiction is tightly defined by
the Groceries Supply Code of Practice. The Groceries Code pre-dates
the creation of the GCA, and reflects the findings of an investigation
of the supermarket sector by the Competition Commission from 2006-08.
This established that the most significant problems in the sector
were focused on the commercial relationships between the ten largest
supermarkets and their direct suppliers. There are no powers within
the Groceries Code Adjudicator Act 2013 that would allow Ministers
to extend the GCA's jurisdiction. Changes to the GCA's remit would
require either a decision by the Competition and Markets Authority
to conduct a further investigation into the sector or primary
legislation to amend the 2013 Act.
11. The provisions in the GCA Act for reviews of
the Adjudicator by the Secretary of State focus on how effectively
the Adjudicator has exercised her powers and enforced the Code.
They permit the Secretary of State to make changes to the GCA's
modus operandi; but not to amend the Groceries Code itself.
Ministers have no power to conduct this statutory review before
2016.
12. The Government believes that concerns about fairness
and transparency in the dairy supply chain should be addressed
through an industry-led approach. Defra has established and is
facilitating a dairy industry group to look at contracts in the
dairy sector and build on progress under the existing voluntary
dairy code of practice. BIS and the GCA will participate as required
in the Industry Group. Its findings will be considered as part
of the statutory review of the GCA in 2016.
We repeat the recommendation we made when the
Groceries Code Adjudicator was created that she should be able
to accept complaints from indirect as well as direct suppliers.
13. The GCA's own statutory guidance, published in
2013, makes clear that the Adjudicator can take account of wider
evidence beyond that submitted by direct suppliers. It states
that reasonable grounds for suspicion of a breach of the Groceries
Code might be based on evidence supplied by direct or indirect
suppliers; third parties, such as trade associations; other retailers;
whistle-blowers; or information that is already in the public
domain.
14. In practice, the GCA has been pro-active in building
relationships with stakeholders throughout the supermarket supply
sector. BIS has recently approved the GCA's request for an increase
from £800,000 to £1.1m in its levy funding for 2015-16
to help to further its industry engagement; and will continue
to work with the GCA to ensure that the extent of the Adjudicator's
evidence-gathering powers is understood.
We note that the GCA has not yet conducted an
investigation. Following our own pre-legislative scrutiny of the
Bill which created the Groceries Code Adjudicator, we recommended
that she should have the power to launch pro-active investigations
as well as respond to complaints, and we repeat that recommendation
now.
15. Ministers have welcomed the announcement by the
GCA on 5 February 2015 that she has launched a formal investigation
into suspected breaches of the Groceries Code by Tesco Plc.
16. The Government does not accept the view that
the Adjudicator cannot pro-actively launch investigations, and
must rely on receiving complaints from suppliers before she may
act. This is not an accurate reflection of the GCA Act or the
GCA's own statutory guidance on investigations. Section 4 of the
2013 Act gives the Adjudicator wide powers to investigate where
she has reasonable grounds to suspect a breach of the Groceries
Code. It is for the Adjudicator alone to satisfy herself when
there are reasonable grounds and whether to carry out an investigation.
Ministers are confident that the Adjudicator will continue to
use these powers to be an active and visible guardian of the Groceries
Code. BIS will work with the GCA to promote greater understanding
of the Adjudicator's powers of investigation.
The powers of the GCA
We find it extraordinary that the Government has
left the Groceries Code Adjudicator for more than a year with
no practical ability to use her legal powers. We recommend that
a statutory instrument setting out the level of fine the Groceries
Code Adjudicator may levy be laid within the remainder of the
present Parliament. We seek a clear explanation of why the GCA
has been left so long without the teeth she needs to do her job.
17. The Government understands the Committee's frustration
about the delay in bringing forward legislation to give the GCA
the power to impose financial penalties for breaches of the Groceries
Code.
18. BIS Ministers laid the Groceries Code Adjudicator
(Permitted Maximum Financial Penalty) Regulations 2015 on 28 January
2015. The Regulations, which set the GCA's maximum penalty at
1% of UK turnover, have been assented to by Parliament and will
come into force on 6 April 2015.
Conclusion
19. Some of our farmers are struggling with low prices
and we are doing everything we can to help them through this period.
However, there is great potential for significant long-term growth
in the UK dairy sector. UK milk production is at a 10-year high
and exports are at record levels. The global market is expected
to grow at a rate of more than 2% a year for the next 10 years.
To meet such an enormous increase will require the equivalent
of bringing on-stream an extra New Zealand dairy industry every
year. There are opportunities at home too. The UK is self-sufficient
in liquid milk, but we are importing significant quantities of
dairy products such as ice cream, yoghurt and cheese which could
be produced in the UK.
20. At the dairy roundtable on 11 February, the industry
agreed to work together to develop actions to end the current
trade deficit in dairy products and increase exports. Defra is
facilitating an industry-led group to look at contracts in the
dairy sector, the findings of which will feed into the statutory
review of the GCA in 2016. Through the new Countryside Productivity
Scheme, the Government will be helping farmers to develop world
class production and supply chains, improve skills and start up
new business ventures. Through the Rural Development Scheme additional
support will be available to help dairy farmers invest in new
equipment, fund start-ups and support young farmers entering the
industry.
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