Examination of Witnesses (Questions 60-75)
MR JOHN DUNCAN AND MR ROBERT AUDAS
TUESDAY 4 DECEMBER 2001
60. In part you referred to some of the cultural reasons in earlier responses to Chris Ruane. We are aware that we do have a culture of co-operation within British agriculture as well on the purchasing side. Do you think there are any other reasons why the producer co-operatives have flourished to a greater degree on the European mainland compared to the United Kingdom?
(Mr Audas) One of the big influences is if you look at the structures, for instance, taking Denmark as an example, there were something like 1,200 co-operatives 20 or 30 years ago and they have consolidated over a period of time and they have been allowed to consolidate because it was in the interests of the Danish economy and now basically one co-operative controls about 90 per cent of the market. They had a strong export market but they needed that consolidation and degree of scale. They have had a natural culture of small co-operatives growing into larger ones. We have had a very different structure in this country. We have stepped back in time and we have now got a very fragmented industry which is trying to merge and form stronger associations together.
61. Effectively we have moved in the other direction.
(Mr Audas) Yes, exactly, in 1994, and now we have got to start again and catch up several decades of development, hopefully following some of the successes of what has happened in Europe, and watching out for the failures so we make sure we have the right route.
62. Do you have any unit within your organisations that does monitor the successes around Europe, that does monitor the failures around Europe, so that you can learn from them?
(Mr Audas) We have not got a unit but
63. Is there a research and development side?
(Mr Audas) We have not got a unit per se but we are very conscious of trying to track successes in other businesses and make sure that we learn from them.
64. And spread them.
(Mr Audas) And, indeed, we make sure that we do go to the international conferences and so on so that we can actually start to understand what are the key factors of our potential successes in the future.
(Mr Duncan) I think also, to put that in context, you need to be mindful of the background from whence we as co-ops have all come. At deregulation, because of the pressure on us to pay prices, we had to be seen to be a lean, mean organisation that was low in admin costs and returned as much of the price we were getting from the market back to our members. The pressure on us has been very much of today rather than looking ahead and ploughing money into development.
65. Dare I say, is that not short-sighted for industry?
(Mr Duncan) Sure, but for the survival of our co-operative structure.
66. But for success within British industry a lot of it is down to research and development.
(Mr Duncan) Yes.
67. And if you have not got the same, surely in agriculture
(Mr Duncan) We have one arm tied behind our back in that respect, you are absolutely right. It comes back to the first question "What assistance did you get in setting up your co-ops?", we got nothing, not a ha'penny.
68. I come back to my previous point, that now you can have assistance, Objective 1 funding is there.
(Mr Duncan) Indeed.
69. So there should be no excuse for not doing that.
(Mr Duncan) We are working closely with the Welsh Development Agency and we have had a lot of assistance from them.
(Mr Audas) Objective 1 funding does not necessarily suit our organisation, for instance, which may be based in Cheshire even though we have got lots of farmers in West Wales. That does not necessarily mean that we can get funding for looking at the marketing and development of brands in general.
70. Yes, but in the Welsh Affairs Select Committee our primary focus is on new production within Wales.
(Mr Audas) Indeed, and we have a large number of producers in Wales. It is important, as an example, both organisations here today, along with others, believe that the future is going to be major co-operative businesses which will be investing across the country in regional brands, including Welsh brands, for the future. We cannot assume necessarily that there is going to be one co-operative which has all its bases in West Wales necessarily where you have Objective 1 funding.
71. Why not?
(Mr Audas) Because it may not necessarily be the strongest future for the industry of the future. We believe that there are obviously many specific Welsh issues with regard to Welsh brands and there are good opportunities there but it needs to be seen in the context of the national issues because at the end of the day also the OFT looks at things on a national basis. We have to ensure that the kind of grants that may be available in Objective 1 status are also more widely available to encourage co-operative businesses because one would need a greater strength than could be achieved in Wales, I would suggest.
72. Have you had any direct or indirect benefit from the Objective 1 programme to date, as organisations?
(Mr Audas) We have not.
(Mr Duncan) We are working pretty closely with the WDA in the first instance because for the last four or five months we have had ownership of the Aeron Valley Cheese Company. The problem we have there is to increase the value of the cheese and we have got to do that through marketing, so we are talking with them about marketing grants and how they can assist us. That is our experience to date. We have only been operational in that part of the market now for three months.
(Mr Audas) We have had some conversations with the WDA in terms of how in the future we can develop products which we want to produce in Wales, although we currently do not have any processing in Wales, unlike First Milk.
73. Can I briefly turn to the issue of the trade balance, if you like, in milk. I know there is some detailed data in the information pack you have given us but, again, briefly, could you tell the Committee how much milk and dairy produce do we import from the rest of the EU? To a certain extent you have already covered the price issue. What is the current trade balance within the EU on milk?
(Mr Audas) The trade balance, perhaps, is not a major factor of concern. The main increases have been cheeses and dessert products coming in largely from France, although some from Holland. If you look at the graphs I do not think you will see any major concerns over imbalance of trade. What we need to do in this country is to make sure that we are adding value to the products rather better than we are at the moment because a lot of our products are going into commodity markets and not getting full value.
74. I think you have given us a clear indication that you believe the future lies in co-operatives purchasing dairies and processing plants, and yet you have told us that UK based co-operatives are dealt with differently as far as competition is concerned than UK based plcs and overseas co-operatives. Can you spell that out for us and give us a clear indication because we are going to take evidence from the Competition Commission and that is the type of point that we will be wanting to make.
(Mr Duncan) We have a further paper here, which I do not have copies of, which it might be interesting to give you because we had the opportunity to give evidence to the Curry Committee which is looking more widely at the after-effects of foot and mouth disease and we did focus very much on competition law and how it inhibits the development of co-ops. From our perspective we do believe that competition law is important because patently the customer should not be disadvantaged by strong co-ops. What we are also deprived from doing is developing more efficient organisations to get size and scale into the operation that allows us to do that. We believe our member, the dairy farm and the co-op and the consumer would benefit from that. There are other aspects of competition law that would allow themselves to look at the operation of a large entity to ensure that it was not abusing its power, but at this moment in time they seem to take a broad brush and they use the figure of 25 per cent of one sector of the market and if you exceed that you have to stop, you are not allowed to exceed that, and we see it operational in other parts. One would like to think that in due course the Government might take the view if it wants to make agriculture less dependent on the taxpayer, less dependent on subsidy, it would see a value in allowing co-ops to develop as efficient organisations that do have the size and the skill and the ability to invest in the development of new products because the majority of niche dairy sector products are coming from Europe.
75. In relation to farmers' co-operatives getting more involved higher up the food chain, do you see the primary benefit as an increase in the primary product price or a dividend coming from the profits of the processing or retailing?
(Mr Audas) Without doubt, the main effect has got to be on the milk price. There may be a secondary effect in terms of whatever the investment structure has on processing but the main effect is going to be on the milk price.
(Mr Duncan) There is a second reason why I think it might be in the industry's interest to look at this because you will know that the supply of milk is supposed to be regulated by quota and for the last four or five years we have had a widespread debate as to the future of quotas. It is our view that eventually quotas will be dissipated and will disappear. Come that time it is important for the viability of dairy farming that we have an integrated co-operative structure that is able to manage supply and demand. It has to happen otherwise we will see, as we have seen in the past, supplies go up and come down, chasing the markets all along the route. I think it is in both the Government's and industry's interest to allow the industry to develop in the manner that we have addressed.
(Mr Audas) To add a point there. If you look at the successful exporting dairy countries, if they are going to compete on the world scale, and I mean countries like New Zealand, Holland, Denmark, Sweden, they have allowed a very high degree of co-operative integration which can reach 90-95 per cent in order to encourage the development of players who can compete on the world scale and, indeed, from those countries they are now investing in other countries so they can have some control on the overall world market. At the moment we are fragmented and looking merely at our local market. We have to have an understanding that a greater degree of consolidation is necessary so that we can invest in the future.
Chairman: If there are no other questions, thank you very much, it has been very helpful.