Written evidence submitted by Dairy UK |
1. The future of the UK dairy sector is strongly
positive. From the restrictive legacy of the Milk Marketing Boards,
the sector has taken on the challenges of a de-regulated market
and is transforming its competitiveness. The industry is now driven
by the needs of the consumer, supported by product and process
innovation; it has led the European Union by creating close supply
chain relationships between farmers and processors in a sophisticated
system of supply chain producer groups; and is undertaking sustained
capital investment in factories and farms. The economic outlook
for the sector is for rising global demand driven by income and
population growth. The UK industry will benefit from this, and
our growing competitiveness will allow us to thrive in this environment.
2. In assessing the Dairy Package, Dairy UK's
priority is to secure a profitable future for British dairy farmers
whose prosperity is clearly fundamental to the future of the whole
dairy supply chain. We have taken a long term perspective. We
recognise that there are serious short term pressures on the industry,
primarily as a result of volatile input costs. We also recognise
that volatility will be a permanent feature of dairy markets,
and we have assessed the Dairy Package on whether it will help
the industry to improve its competitiveness to accommodate this
3. In summary, our views on the Dairy Package
3.1 Dairy UK supports the establishment of arrangements
which would see the requirement for contractual arrangements between
dairy farmers and processors throughout the European Union. This
situation has prevailed in the UK for many years, but it is not
universal practice in mainland Europe. However, within this, it
is imperative that the content of contracts is established on
a voluntary basis, allowing clear market signals to be communicated,
trust to develop and, through close understanding, ensure returns
from the market place are maximised.
3.2 We believe that the imposition of regulation
into these arrangements would work against these objectives. We
anticipate that it would lead to increased instability and, in
a situation where regulation did not extend across the whole market,
the farmer would experience less, and not more, certainty about
3.3 Dairy UK fully acknowledges the natural right
of farmers to organise collectively to market their produce. Producer
Organisations are a model for this and they may instil greater
confidence amongst farmers that they are legitimately maximising
their bargaining power.
3.4 At the same time it is imperative that such
organisations remain subject to the normal laws of competition,
and that national authorities have discretion to intervene on
a case by case basis. The European Commission has recognised this
requirement in its proposals and we support its inclusion. If
this does not apply, we would anticipate a significant reduction
in forward investment by British dairy companies, and this would
be detrimental to the future of the British industry.
Inter-Professional Organisations and Transparency
3.5 Given the existence of bodies such as Dairy
UK and DairyCo it is not clear to us what the IPO model can contribute
to the sector. We have no difficulty with the requirement for
purchasers to continue to provide data on milk collection. At
the same time, we submit that disclosure of commercially sensitive
information would be to the industry's disadvantage.
4. We are disappointed that the Dairy Package
will do nothing to increase the wealth of the British dairy industry.
More fundamentally it does not address the issue of improving
competitiveness. Addressing the challenge of the market is the
primary mechanism by which the industry improves its competitiveness.
There is a risk that the package will simply impede, or may even
distort, the operation of the market to the long term detriment
of the industry.
THE UK DAIRY
5. In line with the clear policy direction of
both the European Council and the UK Government, the British dairy
industry has been preparing to operate in a deregulated market.
We anticipate that the removal of the milk quota regime in 2015
will be the final substantive step in the process of market deregulation.
We consider that the potential re-introduction of regulation into
contract determination would represent a major change in policy
direction that would only be valid if there was clear evidence
that the UK market was not working.
6. In our view, the dairy market in the UK is
fiercely competitive and is working despite the effects of the
recession. There is ample competition for milk supply amongst
a large number of milk buyers, none of which is in a dominant
position. Over the past six years the volume of milk on direct
supply to the top six milk buyers in Great Britain fell from 7.6
billion litres to 7.2 billion. There is also ample competition
between a large number of retailers and industry customers.
7. We believe that the underlying process of
price formation continues to function. Market returns for commodity
products determine the underlying trend in farm
gate prices. This relationship has not broken down, as evidenced
by the following graph which shows the relationship between the
UK farm gate price, and the base value for milk (the Actual Milk
Price Equivalent adjusted for transport costs).
8. The graph shows a strong relationship over
the long term. It is also clear that, as with any market, there
are lags but over time these average out. In the latter part of
2010, the market has been affected by new commercial factors which
have served to accentuate these lags. These include a surge in
milk production in the UK (milk production over May to January
2011 was 4.5% higher than 2010); and a move by retailers to place
greater emphasis on delivering value to consumers as a result
of pressure on incomes.
9. This has led to a particularly tough negotiating
environment with retailers as they seek to meet consumer demands.
But the market is still responding to underlying fundamentals.
There has been a flurry of upward movement in farm gate milk prices
in January and February this year in response to the strength
in commodity markets.
10. Farmers are suffering a major squeeze on
margins. Regrettably, as prices are determined by commodity markets,
there is no automatic recovery of input costs in dairy. We submit
that this situation does not demonstrate a non functioning market.
It is in fact a characteristic of the market.
11. Key to the industry's development in the
UK has been the continuous and rapid development and differentiation
of contractual relationships. To facilitate product innovation
and the development of greater value added, milk buyers in the
UK differentiate their supplying farmers into separate pools to
meet the requirements of individual plants, products and customers.
Amongst the UK's major dairy companies, the number of different
contracts offered to their suppliers ranges from three up to 13.
12. Investment by buyers in developing relationships
with farmers requires stable contractual relationships. Dairy
farmers benefit through greater price stability and the payment
of premiums. These premiums are not paid at the expense of other
13. We submit that the regulation of contracts
would be fundamentally at odds with the dynamism and innovation
shown by the UK dairy industry in this area. At the very least,
it could also undermine the stability of contractual relationships
to the detriment of both milk buyers and dairy farmers.
14. The Commission's stated intention is that
Producer Organisations would only effectively deal with private
dairies. This suggests the introduction of discrimination in the
market place. We can detect no grounds for doing this, either
in terms of milk prices paid, investment commitments, or financial
performance. We remain concerned about this aspect of the Commission's
proposals pending further clarification.
15. It is not clear how Producer Organisations
can work in the UK's current commercial environment with the existence
of Processor Supply Groups and multiple contract types offered
by individual buyers.
16. Granting an exemption from EU competition
law to permit one segment of the supply chain to create a dominant
monopoly is flatly at odds with the concept of a market led industry
striving for competitiveness. It would only retard industry development,
reduce investment and create inefficiency.