Select Committee on Welsh Affairs Minutes of Evidence



Memorandum submitted by the Federation of Milk Groups (UK)

 

INTRODUCTION

  The Federation of Milk Groups (FMG) welcomes the opportunity to submit comments to the Committee's inquiry into farming and food prices. Considering the appalling state of farm incomes in Wales and other areas of the UK, as well as the massive disruption within our industry as a result of almost yearly crises, it is an opportune moment to consider how we can best ensure a viable dairy sector in the future.

 

  The FMG is a trade association representing farmer controlled milk groups, which exists to promote the common interests of its members and their dairy farmer suppliers by working to achieve industry wide solutions to the challenges they face. Membership of the Federation includes both co-operatives, who pool their members' milk before either selling it to processors or processing it themselves, and milk groups made up of farmers who each have an individual contract to sell their milk to a single processor. In all, the FMG's membership represents somewhere between 70 and 80 per cent of milk produced in the UK.

THE FUTURE OF DAIRY FARMING IN WALES AND THE UK

  All those involved in dairy farming are cognisant of the multitude of questions that need to be addressed in order to assure the industry of a viable future. These range from assessing the impact of any change to the dairy regime brought about by the mid term review of the CAP next year or the imminent expansion of the EU to how the sector will have to change as a result of the FMD crisis. The Federation accepts that these questions are important. However, in giving evidence to the Committee we would wish to address that issue which we feel is of greatest importance to the future of not only Welsh dairy farming but also UK dairy farming in general—the impact of competition policy on the corporate structure of those selling milk.

  The UK Government is clear in its ambition for farmers to earn a viable income from the market as opposed to relying on a combination of market returns and subsidies. If this ambition is to be fulfilled it is vital that farmers are allowed to develop those marketing structures that allow them to both negotiate a fair price for their output when it is sold in its raw form and, just as importantly, that allow them to process their output—so capturing a greater proportion of the value added in the dairy sector. Any encouragement and support that the Government can provide dairy farmers in developing their own marketing and processing operations would further assist the fruition of the government's ambition.

  The points set out below are intended to provide further information on the problems faced by UK dairy farmers in developing the corporate structures they feel appropriate and some examples of how dairy farmers in other countries are reaping the rewards of marketing structures not yet developed in the UK.

The Effect of UK Competition Law on the Dairy Sector

 

1.  UK DAIRY INDUSTRY DEREGULATION IN 1994.

  Initially ex farm prices increased with the competition between processors to persuade producers to leave co-ops. By 1996 ex farm prices had increased from 22ppl to 25ppl.

  By 1997 less than 50 per cent of GB dairy farmers were members of Milk Co-ops and from that point prices dropped steadily until April 2000 when the ex farm average was little more than 16ppl.

  Milk Marque, the largest dairy co-op, membership represented only 36 per cent of GB milk yet after a Competition Commission inquiry it was required to sub-divided into three regions.

  Over the same period processing/manufacturing sector consolidation has led to a situation where the two largest processors now account for 58 per cent of the market.

  In the multiple retail sector similar consolidation has left 4/5 major players.

2.  REGULATORY INTERVENTION SINCE DEREGULATION

    —  Milk Marque selling system

    —  Milk Marque report

    —  Supply of milk in Scotland to middle ground retailers

    —  Competition Act investigation into R Wiseman & Sons

    —  Various merger reports and ongoing inquiries

    ie into Co-op leaving terms

    Co-op milk haulage

    —  Most recently First Milk has been required to justify its purchase of the Aeron Valley Cheese Company—A relatively small cheese manufacturing in Wales. This has cost the co-op a great deal of money in terms of both fees and management time.

3.  CURRENT MARKET STRUCTURE

    —  The supply of raw milk is fragmented

    —  Dairy processors claim they are receiving poor returns

    —  Multiple retailers are returning a reasonable profit.

4.  UNCERTAINTY OVER WAY FORWARD

  The Competition Commission's report into Milk Marque recommended its subdivision into 3 regional co-ops. This artificial structure is proving over-restrictive and may be unsustainable.

  Farmers would prefer larger co-op with processing capability. However, there is considerable uncertainty whether this would be permitted by the competition authorities. The question this raises is why shouldn't such a structure be permitted given the degree of consolidation in both the processing sector and the multiple retail sector?

5.  EUROPEAN COMPARISON

  There are a number of European examples of successful dairy sectors which are founded on strong producer based market structures. For example, Denmark/Sweden where ARLA Co-op collects, processes and markets close to 90 per cent of country's milk. That company is also a major processor in Great Britain—where it works to maximise its returns from the UK dairy sector for the benefit of the Danish dairy farmers who own it!

  In similar example is also available in Holland where Campina has grown to become a major international player.

Internationally

  New Zealand has recently seen a merger to create Fontera which will collect, process and market 98 per cent of milk produced in New Zealand.

  It has recently been announced that Fontera and Arla intend to set up a joint venture that will market 60 per cent of butter and spreads sold in Great Britain—again this venture will look to maximise returns from the British market in order to assure the incomes of dairy farmers in New Zealand and Sweden.

6.  CONCLUSIONS

  The milk industry has probably had more investigations than any other industry and for what? It is still no nearer a viable market structure.

  Those involved in the supply of milk and milk products in the UK are not competing with other companies in the UK alone—rather they are fighting for markets with huge dairy companies (often co-ops in their home country). These markets are domestic, European and international.

  If it is from the market that the Government wishes agriculture to obtain a viable income it must be allowed to restructure in a way that permits it to replicate the size and scale of international competitors.

  Competition Law into the abuse of market power should quite properly be policed.

  But size is essential to provide the resource to compete, and to generate efficiencies that are of benefit to all—farmers and consumers alike.

Dr Alex Solomon

Secretary

26 November 2001

 


 
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