House of Commons - Dairy Prices - Environment, Food and Rural Affairs Committee

Dairy Prices - Environment, Food and Rural Affairs Committee Contents

3 The way forward

The longer term

Global demand

10. In spite of the gloomy short-term picture, there is general agreement that long-term prospects remain positive for the dairy industry with worldwide demand expected to continue to grow. The NFU, the farming Minister, Dairy UK, processors such as Arla Foods, and trade organisations including the British Retail Consortium and the Provision Trade Federation all support that view. Arla, for example, cites rising middle classes in China, Russia and Africa, all seeking improved nutrition.[17] Among other conditions supporting optimism, animal feed costs are currently 30% lower than they were during the 2012 price drop period.[18] Russia's ban is currently expected to last until midsummer 2015.

EXPORT POTENTIAL

11. Most raw milk from Great Britain is processed into liquid milk, with about a quarter becoming cheese, and about 10% converted into powders and butter. The reverse position obtains in most EU countries, with about 30% of EU raw milk becoming fresh liquid milk and more going into cheese production. In consequence, Great Britain exports less than most EU countries in this area (Northern Ireland differs substantially, exporting 85% of its milk products[19]). GB also imports significant amounts of butter and cheese.

12. 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.

13. UK exports have risen in recent years. Defra reports exports of milk powder up 65% to £152 million in the last year, with cheese exports rising 12% to £234 million and milk and cream up 19% to £155 million. Overall, the total value of dairy exports has risen 39% since 2009, last year reaching £1.3 billion by value.[20] Defra has also worked to open new markets for processed dairy products, citing China and Brazil as particular targets.[21] The Secretary of State, Rt. Hon. Elizabeth Truss MP, has also made clear her commitment to seeking wider markets for UK produce: "I think dairy has a great future. I think there is going to be a much bigger market out there, as we see growing middle classes in developing countries".[22]

14. Great Britain is, however, to some extent playing catch-up in this field. As Dr Judith Bryans, the chief executive of Dairy UK, told us, "Countries such as Denmark, Ireland and Northern Ireland, uniquely within the UK, have a culture where they have always exported more. They have opened those markets already, and they work very strongly to maintain those markets. […] Export will come, but other countries have more of a culture of it".[23]

FUTURES MARKET

15. The unpredictability resulting from volatile price shifts makes forward planning and investment difficult for individual farmers. The question has been raised whether a futures market, of the sort that operates for grain, for example, could ease matters by bringing some level of medium-term predictability to pricing structures. The Royal Association of British Dairy Farmers notes that markets in grain and sugar beet enable producers to hedge against risk by knowing prices about a year in advance.[24] The NFU has also expressed cautious interest, although smaller farmers are less persuaded: George Dunn was doubtful that even cereals futures markets had worked well, while David Handley of Farmers for Action thought only a very small percentage of dairy farmers themselves would want to "play" a futures market.[25] The farming Minister told us that two exchanges—Liffe and Eurex—have offered limited futures markets in skimmed milk powder since 2010.[26] The potential for more futures market trading, offering farmers mid-term price predictability for at least a proportion of their production, seems an idea worthy of further exploration.

Action at EU level

Producer Organisations

16. The Government told us it is keen to assist the setting up of Producer Organisations in the UK. At EU level, these are associations of farmers that must be recognised by their Member State; they differ from agricultural co-operatives in that farmer members of a co-operative transfer ownership of all their milk to the co-operative and become joint members of it. Producer Organisations have been set up in six EU Member states, allowing farmers to negotiate collectively over contract terms, conditions and milk prices.[27]

17. No Producer Organisation exists in the UK, however, and there is some resistance among farmers to their creation: David Handley of Farmers for Action, for example, said: "Putting a bunch of farmers together and saying, 'You have got to co-operatively work together, the volume of product will give you a better place in the marketplace' has just been proven to fail, time after time."[28] Nor, as Dr Judith Bryans told us, have milk prices necessarily stabilised in the six Member States where 228 Producer Organisations currently exist.[29]

18. None the less, the Government believes that forming a Producer Organisation could give dairy farmers "greater clout in the marketplace".[30] The farming Minister suggested that Producer Organisations might help the imbalance in a market in which a small number of major retailers are the significant buyers but the majority of sellers are comparatively small-scale producers. The Secretary of State, also supports Producer Organisations and wants to explore their creation with the farming industry.[31] It is, however, up to farmers themselves to choose to co-operate; as Mr Eustice put it: "Really, it is not for us to prescribe that farmers should work together. The role for us is to facilitate it and to remove any legal barriers to them coming together. We have done that. We have put in place some of that seedcorn funding to help them to work out how they can achieve these things, but we cannot actually do it for them".[32]

19. 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.

MILK QUOTA

20. Since 1984 the EU milk market has been regulated by a quota system. This is due to end from 1 April 2015. Since 2003-04, UK milk production has been consistently beneath the quota limit, and the final quota limit of 15.3 billion litres is nearly 12% higher than UK milk production last year.[33] The major farming and processing organisations generally welcome the ending of the quota system. The NFU in particular argues that it has both prevented some EU Member States from producing more and encouraged others to produce more than they would under freer market conditions.[34]

21. None the less, the ending of the quota system will add a new element of unpredictability to EU production from next April: the Farmers Union Wales warns that any increase in production as an immediate result of quotas being lifted would mean more downward pressure on prices and the processor Arla agrees that greater exposure to the global market could bring new volatility to pricing.[35] Germany, already one of the big three EU milk producers (along with France and the UK), could produce above its quota level, with the Netherlands and Ireland also cited as countries where production might increase.

INTERVENTION PRICE

22. Under EU arrangements, Member States must intervene to buy products when they fall to a certain level. For milk, the intervention price is currently about 17 ppl (although exchange rate fluctuations may mean it is as low as 15 ppl), and a number of witnesses have suggested to us that that price is too low and should be raised. Dairy UK chief executive Dr Judith Bryans told us intervention might be necessary in the short term if milk prices continue to decline: "[The EU] really needs to look at the intervention price, because the intervention price is far too low at the moment".[36] NFU Scotland, the Ulster Farmers Union (UFU) and the NFU would all support some increase in the level of the intervention price. As UFU points out, the end would already have come for many dairy farmers by the time prices fell to 17 ppl.[37]

23. 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 ending of milk quota arrangements in April 2015, and ask the Secretary of State to work with counterparts to keep under regular review thereafter.

LABELLING

24. We were encouraged to hear the Secretary of State tell us that she had sought the support of new EU Agriculture Commissioner Phil Hogan in pressing for better labelling of dairy products. She added: "better labelling for dairy products is important, so that British consumers know when they are buying a British product and when they are not".[38] For over a decade, beef labelled as 'country of origin' beef has had to be born, reared and slaughtered in that country. The same is not the case for dairy produce: butter or cheese, for example, may be labelled as products of the UK even if the raw milk has come from another EU country but processed here.

25. 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.

17 Arla Foods UK (DAI0008) Back

18 Q82 Back

19 Ulster Farmers Union (DAI0018) Back

20 Defra (DAI0016) Back

21 Q86 and Q110 Back

22 Oral evidence taken on 26 November 2014, HC (2014-15) 802, Q 113 [Secretary of State] Back

23 Q75 Back

24 Royal Association of British Dairy Farmers (DAI0007) Back

25 National Farmers Union (DAI0009), and Q16 Back

26 Q85 and Q112 Back

27 Defra (DAI0016) Back

28 Royal Association of Dairy Farmers (DAI0007), and Q24 Back