Supplementary written evidence submitted
by National Farmers' Union (NFU)
FOLLOW-UP
QUESTIONS TO
THE ORAL
EVIDENCE SESSION
ON WEDNESDAY
27 APRIL 2011
1. Please confirm if the NFU's view is that
milk contracts should specify a fixed price or pricing formula,
rather than allowing for price to be negotiated between the buyer
and supplier during the period of the contract? Is this a unanimous
view among members of the NFU? What are the disadvantages to a
pricing formula, from the producer's perspective?
The NFU believes that contracts should contain either
a clear price or mechanism for determining the price to be paid
to producers. This should be agreed mutually by both parties.
In practice, we believe it is right for farmer representatives
and dairy processors to agree on an appropriate price determination
mechanisms for their respective supply chain/market.
Many existing milk supply contracts do not contain
any mechanism for the determination of price, other than stating
that the buyer will notify the seller of change to price from
time to time, sometimes with a limited degree of notice, sometimes
retrospectively. This one-sided approach to setting prices throughout
the spectrum of British dairy contracts renders farmers with little
bargaining power, creates uncertainty and thus undermines fundamental
investment that is needed on farms. This is not only iniquitous,
but is almost unique as a contractual arrangement.
With a price mechanism as a compulsory term in contracts,
price adjustment by the buyer that was not in accordance with
the mechanism could constitute a breach of contract on behalf
of the buyer, which could subsequently trigger release of the
seller from part of or their entire notice obligation.
To put the 'status quo' into context; farmers supplying
Dairy Farmers of Britain in the months before its collapse farmers
had no choice but to continue to supply, despite many having the
opportunity to sign contracts with other buyers willing to pay
a competitive market price.
2. Do the Commission's proposals for contracts
need to be compulsory in order to ensure that they are adopted
widely, or would a voluntary approach work?
During the discussions of the Dairy Supply Chain
Forum it has become clear that transparent price determination
in contracts is not uniformly supported by dairy processors. This
of course is no surprise, as the ability to reduce producer prices
at will, is a luxury that gives processors the freedom to maximise
their margins. Together with long notice periods it means that
processors have limited fear of losing raw milk supply. The NFU
has encouraged a comprehensive debate on contracts across the
industry for the last four years. This has led to some changes.
However, processors are unwilling largely to relinquish the control
that they have over raw milk prices meaning that few contracts,
if any, stipulate clearly the price that farmers will be paid
or the means by which prices will be adjusted. Although the NFU
would like to believe that the necessary changes could occur voluntarily,
we are increasingly frustrated and believe that the compulsory
is necessary to ensure that changes occur.
3. The Committee requested additional evidence
on the number of dairy producers historically (10 to 15 years
ago)
In 1995 Dairy Farmer numbers in England and Wales
stood at 28,093, in 2000 this figure was 21,772, in 2006 this
was 13,778 and in May this year it was 10,896. A full breakdown
of producer numbers can be found on the DairyCo website in the
Datum section.
| England and Wales |
| 1995 | 28,093 |
| 1996 | 27,092 |
| 1997 | 26,110 |
| 1998 | 24,681 |
| 1999 | 23,286 |
| 2000 | 21,772 |
| 2001 | 20,191 |
| 2002 | 18,695 |
| 2003 | 16,977 |
| 2004 | 15,846 |
| 2005 | 14,732 |
| 2006 | 13,778 |
| 2007 | 12,867 |
| 2008 | 12,252 |
| 2009 | 11,743 |
| 2010 | 11,256 |
4. Your evidence stated that the price that dairy farmers
are currently receiving and perceiving is significantly less than
market indicators would dictate. For how long has this situation
persisted and is this time-lag longer than is usual for other
sectors?
The following graph, illustrates this point, by comparing farm
gate price average to a combination of MCVE and AMPE, the manufacturing
derived milk values used as a bench mark in the dairy industry.
Alternative permutations of MCVE and AMPE show a similar pattern,
with regard to time lags.
5. You stated that the "Commission's proposals do
not provide anything near the totality of the answer, they at
least provide a partial solution to one of the biggest problems".
What is missing from the Commission's proposals that would provide
a more complete answer?
The Commission's package cannot answer all the problems in the
British dairy sector since many of the problems are commercial
in nature. There are a number of supply chain issues that can
only be addressed by the supply chain. For instance, inefficiencies
in the processing sector can only be addressed through investment
and consolidation in manufacturing. However the dairy package
does present a possible solution to some of the recurring and
stubborn issues around price determination in contracts and also
the competition law barriers to farmer collaboration and collective
negotiation.
6. Dairy UK told us that farmers had to get involved in
milk processing to get a greater share of the value added. How
can farmers do this, and how feasible is it?
It is natural that a trade association representing the interests
of dairy processing companies will in some respects differ in
view from the NFU which represents farmers. We would agree with
Dairy UK that investment downstream in processing is one way in
which farmers can add value to raw milk and has certainly proved
successful (albeit over a long period of time) in some other EU
member states where vertical integration via co-ops is the norm.
However, the history of farmer investment in processing in the
UK is not always a happy one, with a number of ventures having
failed or not entirely meeting their initial aspirations. Examples
such as Amelca, United Milk (Westbury) and Dairy Farmers of Britain
spring to mind. This is not to undermine the progress that UK
co-ops such as Milk Link and First Milk have made but it is important
to appreciate the confidence dent that dairy farmers have received
in the past as a result of investments in processing that have
not proven to be successful and led to significant losses of investment
to farmers.
What is more, farmers have huge amounts of capital tied up in
the infrastructure necessary to produce milk. For instance a cow
with a value of between £1,500-2,000, requires at least an
acre of land worth £6,000-10,000 and capital infrastructure
investments of at least £5,000 on top of this. Where farmers
have made investments downstream through co-ops or other forms
of farmer controlled business, they should certainly expect a
fair return on this investment, in addition to a raw milk price
that reflects its value in the market place or reflects costs
of production.
The NFU encourages and aims to support any member who has the
appetite to invest in processing to add value to their milk. However
we do not believe such activities should be relied upon to cross
subsidise their core business activity of farming. What is more,
the value of all milk produced should, to some extent, reflect
its contribution to end use. The NFU has consistently argued that
there is absolutely no reason why raw milk produced for the liquid
market should track commodity market variables as its ultimate
use is divorced from these markets.
7. Would you agree with Dairy UK's claim that "dairy
companies pay premiums for security of supply. If they are faced
with mandatory contracts that link price and duration of the contract,
you reduce the security of supply and you reduce the incentive
for dairy companies to pay premiums"?
We do not agree with Dairy UK's assertion and we can see nothing
in the Commission's proposals that would prevent processors from
paying premia in order to secure milk. We understand that the
package would simply require contracts to specify either the price,
or price formula to be paid (this could take the form of a minimum
guarantee) and for this to be agreed by both parties in advance.
What is more, the benefits of the dairy package in terms of driving
certainty and predictability into pricing arrangements in contracts
cannot be under-estimated. At the moment, premia are paid over
prices that are not clearly set out in contractual terms (the
level of premium may be fixed, but the base price is not). If
adherence to a determination mechanism became a contractual clause,
which if broken can lead to a notice period break, the best way
for a dairy processor to maintain security of supply would be
to adhere to the terms of such a price clause.
A farmer who breaks contractual terms such as milk quality, risks
his security, likewise a processors who fails to operate within
certain price parameters, agreed between parties, should also
be exposed to such risk. Can you expand on your comment that the
Government should reconsider fiscal incentives to help deal with
the cost of cross-compliance?
Our comment was made in relation to capital investment in infrastructure
that helps dairy farmers deal with regulatory burdens such as
Nitrate Vulnerable Zone requirements on manure/ slurry storage
capacity. There are in essence two parts to this. The first of
these is the withdrawal of Agricultural Buildings Allowances that
allowed farmers to write off a proportion of investment in new
buildings, including slurry stores, against tax. This offered
an affordable fiscal incentive to induce investment and defray
the costs of essential infrastructure needed to meet regulatory
requirements (which is normally a depreciating asset). The ABAs
are being phased out and being replaced by a considerably less
generous Annual Investment Allowance.
The second issue relates to capital grants. Funding for projects
relating to NVZs in Wales and Scotland attract a degree of capital
support from the Welsh and Scottish governments. This support
is not available in England. Furthermore, rural development funds
could be targeted to help farmers with cross compliance requirements,
through investment and assistance with grant applications for
projects relating to environmental improvement (manure management/NVZs)
and animal welfare improvements on farm (cattle handling). In
addition there is still scope to improve the environmental credentials
and profitability of dairy farming through targeted help with
energy efficiency audits and capital improvements as a consequence
of these.
8. The implementation of the Fruit and Vegetable Producer
Organisation regime by the RPA resulted in the UK incurring substantial
disallowance for misinterpreting the regulations. Are the Commission's
proposals for Dairy POs sufficiently clear to negate this risk?
It is important to understand the distinction between POs under
the Fruit and Vegetables regime and the arrangements proposed
in the dairy sector. Under the former, POs are created and recognised
as a vehicle for drawing Community funds under the CAP to support
the activities set out under a PO's Operational Programme. These
activities include enabling growers to become more efficient,
improve the quality of their products and respond to environmental
demands. In the dairy package, no financial support is made available
to POs. Instead, the "incentive" is to allow the body
to collectively negotiate contracts on behalf of the individual
producer suppliers. As we understand it, the issues in relation
to disallowance under the FVP regime relate to the payment of
community funds to PO's that had been incorrectly "recognised"
by the RPA. Despite these problems, grower members of PO's in
the UK continue to express considerable support for the fruit
and vegetable PO regime and the way in which it has helped them
to respond to the demands of the market.
The Commission's proposals are not entirely clear as to their
scope: it is not clear how PO's would be formed, how they will
operate and how they can be organised. These are details we would
expect to emerge through more detailed implementing regulations.
However, there may well be potential for the formation of POs
in the UK dairy sector and we would hope Defra is proactive in
its engagement with the Commission in the interim.
Dairy farmers are limited in their ability to work collaboratively
to collectively negotiate terms and conditions of trade which
are favourable. Barriers include competition law, the nature of
the industry and farmers businesses and also the scars of attempts
to work collaboratively in the past, in Milk Marque. The commission's
proposals could be the catalyst and facilitator for collective
negotiation, through which price determination and other conditions
are effectively negotiated in a free manner between dairy processors
and farmers. As with all such undertaking the devil is in the
detail and the detail is still clouded by the legislative and
democratic processes of the European institutions.
June 2011
| 
