UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 538-i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Environment, Food and Rural Affairs Committee

Milk PricES

Tuesday 17 July 2012

Mansel Raymond, Paul Kelly and Mike Sheldon

Evidence heard in Public Questions 1-83

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Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Tuesday 17 July 2012

Members present:

Miss Anne McIntosh (Chair)

Thomas Docherty

Richard Drax

George Eustice

Barry Gardiner

Mrs Mary Glindon

Neil Parish

Ms Margaret Ritchie

Dan Rogerson

________________

Examination of Witnesses

Witnesses: Mansel Raymond, Pembrokeshire dairy farmer and Chairman, NFU Milk Board, England and Wales, Paul Kelly, Director, External Affairs, Asda Stores Ltd, and Mike Sheldon, Group Milk Procurement Director, Dairy Crest, gave evidence.

Q1 Chair: Gentlemen, good afternoon. May I welcome you most warmly to our session on milk pricing and the dairy sector generally? Just for the record, could I ask you to introduce yourselves and give your positions, starting with Mr Kelly?

Paul Kelly: I am Paul Kelly, External Affairs Director at Asda.

Mike Sheldon: I am Mike Sheldon. I am the Milk Procurement Director at Dairy Crest.

Mansel Raymond: I am Mansel Raymond. I farm in West Wales and I am Chairman of the NFU Milk Board for England and Wales.

Richard Drax: Can I declare an interest as a dairy farmer?

Neil Parish: I declare an interest as a former dairy farmer.

Q2 Chair: And I have two fields in the North of England that may have cows on them at some stage. Could I ask, Mr Raymond, just to set the scene, why do you think the crisis has suddenly hit farming in the dairy sector at this time?

Mansel Raymond: There have been cuts in the price we receive for our milk. There were price cuts in June and now there are proposed price cuts for August. We have seen a massive escalation in input costs, particularly over the last 12 to 18 months. Weather factors are bad but if you look at the cost of inputs and the cost of producing milk, all independent consultants and everybody else will state that the cost of producing milk is somewhere between 29p and 30p per litre, without leaving any margin. That is the dilemma that milk producers are facing: the massive cost of production, massive increases on input costs, and now a reduction in milk price over the last couple of months, which have acted as a pincer movement. Most farmers are therefore producing milk at a loss of 5p per litre.

Q3 Chair: Mr Sheldon, a lot of the price setting is attributed to the cost of cream, but the figures we have seen show that the cost of cream actually went up in May and June, when the first price decrease was announced. How do you account for the price decrease going ahead in those circumstances?

Mike Sheldon: The cream market is very important in terms of setting the milk price to farmers. The cream price peaked last autumn and then started to fall consistently through to spring this year. We have seen a recent small increase, but in fact we delayed a price reduction on the back of the cream markets, hoping that they would improve. In fact, the overall cream market halved in the space of a few months. We delayed as long as we could but, sadly from the point of view of our farmers, we had to reduce the price from May by a certain element of that cut, and then again we have announced a reduction from August. So the full impact of those reductions was not seen in the early months and we are still, effectively, trying to catch up.

Q4 Chair: Why are you unable to pass on the increased costs to the retailer?

Mike Sheldon: We have negotiations with all our customers, whether they be retail or other customers. In part, we can have those negotiations and try to get prices up, but it is a very competitive sector. If I may say, the issue is one of the entire supply chain. Farmers like Mansel on my right are clearly seeing increased costs from the point of view of feed; at the same time, we are seeing volatile commodity markets declining. Supermarkets are trying to give great value to consumers in tough times. We as processors are seeing our margins squeezed in the middle of that supply chain. It is not a simple issue, but clearly we attempt to get price increases whenever we can.

Q5 Chair: Mr Raymond, what impact will these price cuts have on your business?

Mansel Raymond: As far as my own business is concerned, the budgets that we have done for the coming year will now show a loss. We are going to be down just over £60,000 on one farm and £50,000 on the other farm, so £120,000 has come off the bottom line, which will go straight from a small margin into a lossmaking situation. What it means for our business is that we will not be able to invest. We did invest in milking parlours five years ago; the final payment on those will be completed this year. The plan was to do some housing investment for the cows as the next stage; that has been put on hold. We may have to get rid of one of the people looking after the cows because we just cannot meet the bills. On top of that, trying to get an extra overdraft or finance from the banks is very difficult in these present times. That is what is also hitting dairy farmers up and down the country: trying to get increased working overdrafts and whatnot for increased costs. Feed is going up, and I have been told today that feed is going to go up another £50 a tonne between now and the winter, so that equates to another penny per litre cost on the production of milk.

Q6 Chair: What is it, Mr Raymond, that you would like the Government to do?

Mansel Raymond: As far as the contract situation is concerned, we are trying to get a fairer balance through the supply chain, so we can have some negotiations with buyers up and down the country. We would like to get a voluntary code put in place. If that fails and cannot be put in place, we would like to see the Minister regulate and put something in place so we will have a stronger position in negotiations to see if we can get our milk price up. At the end of the day, if the milk price stays where it is, I can see the industry contracting substantially between now and the winter, because farmers will not survive the winter and they will not have the heart to go into the winter and try to milk cows under these circumstances.

Q7 Chair: Is there something we can learn from farmers and dairy producers in other countries? I must declare an interest, in that I have family in Denmark, and they seem to form co-operatives, which are very successful at both marketing and exporting. Do you think we can learn from them?

Mansel Raymond: There are strong co-operatives in Europe and they have done a very good job for their producers over the last 50 years. In the UK the industry is in a different place to our counterparts in Europe. Co-operatives have a much smaller stake in the UK; whether that will strengthen going forward will be for the industry and individual producers to decide. As far as UK milk production is concerned, we are a very strongly liquiddominated industry. 50% to 60% of the milk produced in the UK goes into the liquid market. I would say that it is a very cutthroat market. Producers are at the bottom end of the chain and the producers seem to be the ones that are getting hit.

Q8 Barry Gardiner: Mr Raymond, these are the same arguments we have heard for years, aren’t they? New Zealand and Ireland are island nations, remote from the rest of the world, yet they do very well. Why is it that British dairy farmers do not?

Mansel Raymond: We know what the cost of production is in the UK. I would say that dairy farmers have been cutting costs-

Q9 Barry Gardiner: Are you saying that the same costs of feed and bedding are not hitting Irish farmers or New Zealand farmers?

Mansel Raymond: We have a liquid market in the UK. If you are producing in a liquid market-7 billion litres of the UK market is in for liquid-you have to produce milk on a daily basis, whereas some of our Irish colleagues produce milk for manufacturing products and they tend to produce it off grass only.

Q10 Barry Gardiner: But we have talked about that for the past five years. We have talked about changing the industry so it does more processing, more cheese, more yoghurt and all of that, but you don’t do it, do you?

Mansel Raymond: I am a farmer; I produce milk as efficiently as I can at the end of the day. We have that supply chain, and we-

Q11 Barry Gardiner: What steps are you taking, within that supply chain, to change things?

Mansel Raymond: As I said earlier, what we want to do is set up a voluntary code.

Q12 Barry Gardiner: No, what you said earlier, with respect, is that you want the Government to intervene to set out some regulation that will make you able to negotiate better with the supermarkets. That does not seem to me to address the problem. That is a very narrow way of addressing the problem. Look, let’s go back-

Chair: Can we just moderate-?

Barry Gardiner: Okay. Let’s go back to 2006-07, Mr Raymond, when the average farm gate milk price was between 15p and 20p. The highest was 20p, in about October 2005. Then suddenly it hiked up to about 30p, and now we are talking about figures of about 25p. Yet, in 2006-07, in England, the average farm business income was £30,800. Today it is £84,000. Yet you are here saying that there is a huge problem. That is over a doubling of the average farm income for dairy farmers. How do you account for that?

Mansel Raymond: As far as farming income is concerned, that does not take into account what the individual has to live off out of that business, and secondly, it does not count the investment that is required for that business to go forward.

Q13 Barry Gardiner: In that case, let’s look at the performance by quartile, and the range of efficiency measures. You know the range of efficiency you have got between the lower quartile and the upper quartile in lowland herds. What should we be doing to drive up the total gross margins there?

Mansel Raymond: Farmers will do what they can to improve their own business. They have to do that. If you do not try to do what you can to improve your own business-

Q14 Barry Gardiner: But you know that we are talking about a difference in total dairy output per cow of 1,433 to 2,178. The fact is that those differentials have stayed the same for years, and farmers are not driving up their productivity. What are you doing as an industry? What are you doing, as the NFU, to make sure they do?

Mansel Raymond: Farmers can benchmark. I do it at home; I know exactly what my costs of production are.

Q15 Barry Gardiner: But your colleagues don’t.

Mansel Raymond: They do. The majority do.

Barry Gardiner: But that would not explain-

Chair: Order, order. Can we allow the witness to reply before we interrupt? Mr Raymond.

Mansel Raymond: There is a wide range of businesses out there. At the smaller end, there are people out there milking cows as family units who have 30, 40 or 50 cows. They are milking cows to stay in business just to earn a living. You have producers out there who want to build businesses, and they have built businesses over the last 10 to 15 years. They have had to borrow a lot of money to build businesses because the capital investment required for farming has grown intensely over the last 10 years. It costs £4,000 per cow to build a unit, set up the infrastructure and to buy the cow, before you even milk that cow. That is a lot of money.

Barry Gardiner: I don’t dispute that, Mr Raymond-

Q16 Chair: Order. Mr Raymond, can I ask a slightly different question? We have before us average figures for dairy farmers. I represent a hill area in the north of England, where I imagine the average income is a lot less. Can you give us an example for, in the hills of Wales, what an average hill farmer producing dairy would earn?

Mansel Raymond: I cannot give you an individual figure for what people on the hills or in less favoured areas in Wales would be earning, but I would come back to the consultancy figures, which are known by all consultants within the dairy industry. To produce milk in the UK and to have money to invest, without any profit, costs between 29p and 30p per litre. Those figures are known throughout the industry, whether by Kite Consulting, Promar or any individual consultant that is out there. There is no way you can produce milk efficiently in the UK and invest for the future unless you receive 29.5p plus. Those figures are there and known in the industry.

Q17 Barry Gardiner: In that case, how do you account for the fact that the difference between the upper third in less favoured areas is more than double the total gross margin? It is £1,143 to £567 per cow. In the upper quartile for lowland herds it is £1,301 to £550 per cow. Yet you in the NFU and the industry are not seeking to resolve those efficiency margins. You spoke about small herds, and indeed the consolidation of herds has been something that, again, has been talked about for years, but it has happened at a much slower rate in the UK than it has in the EU. What steps is the industry taking to take that on board?

Chair: Could we allow Mr Raymond to answer, and then we will move on?

Mansel Raymond: The NFU is working with DairyCo, which is the levy body that goes out on to farms. They are trying to improve the efficiency on farms to get farmers to produce milk cheaper and change their systems if need be. They are investigating whether dairy producers can do it any better and whether there are ways and means of doing it. Those could include looking at your milk contracts to see whether you are better off selling milk for manufacture rather than for liquid in order to maximise the value of your contract. That is ongoing; dairy farmers have been doing that for as long as I have been farming. At the end of the day, if you do not try to get into that top quartile, you do not have a future in dairy farming anyway. I will admit that the people at the top end, on paper, as far as gross margins are concerned, are doing better than the other 75%. However, I would counterbalance that by saying that the people in the top 25%-3,000 milk producers in the UK-have invested heavily over the last five years and have a lot of very heavy borrowing. As I said to you, it costs £4,000 a cow to invest on a dairy farm, so if somebody has 200 cows, that is £800,000 of investment. That money has got to be paid back and the interest has got to be paid. That is the pinch that these people are feeling at the moment with the milk price where it is in relation to costs of 29p to 30p. Whether you have 500 cows or 120 cows, the cost of production is somewhere between 29p and 30p per litre. The people who are the most efficient are the people who have invested and have the modern, efficient plant units, but they still have to pay their debt back and they have to finance. That is the dilemma that people are finding at the moment.

Chair: We are straying on to areas that we do not want to.

Barry Gardiner: Forgive me, Mr Raymond. I have to go on to another Select Committee.

Q18 Richard Drax: Good afternoon, Mr Raymond. Data from the Farm Business Survey for dairy farmers in England show that in the 12-month period ending February 2010 the average level of support received by dairy farmers was £32,300. That largely came in the form of a single farm payment; the average in 2009 was £27,300. This is not a technical question, but I want to be fair and explain how we get to this figure. Agrienvironment scheme payments averaged just under £4,000 per farm and the remaining £1,000 comprised compensation for bovine tuberculosis and other small payments. That is what makes up the £32,300. My question is: when producers are calling for the cost of production to be covered, are these support payments factored in?

Mansel Raymond: You have different models. The support payments are paid for environmental use, as far as the CAP is concerned; it is not for cost of production. Farmers have to adhere to crosscompliance and a lot of other issues on the farm, which a lot of this money goes to. You cannot put that into the output of your farm because, under CAP rules, you have to do environmental conditions as far as cross-compliance is concerned. It does cost a fair sum of that £27,000 that farmers receive as dairy farmers.

On top of that, Sainsbury's pays a milk price of 30.5p to their producers. In that Sainsbury’s model, where they class a cost of production of 29.5p, is the sum of 0.4p per litre. So it is in the output figures. On the back of those figures you have just stated that farmers do receive, Sainsbury's still pay their producers 30.5p for liquid milk, because they believe that is what they need to cover the cost of production.

Q19 Richard Drax: I have a question for you, Mr Kelly, if I may. Will Asda directly benefit from the cuts imposed by the processor?

Paul Kelly: No, we announced today that we will in fact increase the premium we pay to our 272 farmers to 3p, to offset the reduction they will be seeing from Arla, because we believe that, in the environment Mr Raymond has outlined, that is the right thing to do at the moment.

Q20 Richard Drax: I have your press release here. One could be cynical and say the timing just happens to be coincidental. Is it because of the pressure mounting that you have done this? For what reason have you now raised the price, which of course will help farmers?

Paul Kelly: We have been listening to our farmers and their representatives for the last 10 days. We have been looking at what the right way to help them is. We have a long term commitment, which we have had since we entered into the partnership eight years ago. The decision we have taken is that we will put the premium up.

Q21 Dan Rogerson: You said you have put the premium up; that is for liquid milk. For my farmers in Cornwall there are two places the milk goes: one is Dairy Crest and the other is the Milk Link co-op, which is now part of Arla. What are you looking at in terms of the prices that you pay through the processors? There is a little group that you have that direct relationship with-and other supermarkets have done the same. That is all very good in terms of PR, but when it comes to the overall dairy market, are you looking at how the prices you are paying feed back into that discussion? For example, are you looking at whether paying a fair price to processors for things like cheese is then able to go back to the farmers? If you happen to be close to a liquid milk plant that is fine, but if you aren’t then it doesn’t help you at all, does it?

Paul Kelly: The other thing we have said we are going to do is drive harder sales of British cheese and butter through our stores in order to create more opportunities for farmers. Clearly there is going to be a ripple effect out. Our primary concern, given the volume of milk sales we have, was to work with our 272 dedicated farmers to help their pressures. These are structural issues in the industry and, while every drama needs a villain, to simply point at the supermarkets and say that we are the solution to all the problems in the sector is perhaps a little bit misleading. We have to work across the supply chain to solve those issues.

Q22 Ms Ritchie: Mr Raymond, I represent a constituency in Northern Ireland, where prices for milk and dairy products are determined very differently. Could you explain the difference in production costs for Britain and Northern Ireland and the difference between what you as the National Farmers Union are arguing for and what your colleagues in the Ulster Farmers Union would be doing? I am very conscious of the fact that not all farmers earn £80,000 a year and that we have to take on board and try to reflect the difficulties of this particular year, such as weather, the high level of production costs and the prices you have received for milk.

Mansel Raymond: That is a long question. You will know what is happening in Northern Ireland. Northern Ireland producers produce a lot of milk off grass. They have cheaper costs of production. They produce milk for manufacturing and they look for export markets. They do not have to produce milk in the winter months because all of their factories are run down through the winter months; the milk is produced in spring and summer. They use an auction system, through their co-operative, which people can bid on and that virtually determines the milk price they receive in Ireland. The milk price in Ireland is also determined in large part by the value of milk globally, and that is why last year the Northern Irish milk price was a fair bit higher than the price in England, Wales and Scotland. I cannot remember the exact figures, but it was running at probably 3p to 4p per litre higher. At the moment it is under pressure because of the world markets, whereas in the UK, as I said earlier, we have a different market: 7 billion out of 13 billion litres goes for liquid, which is required 365 days a year.

The supply chain, in my view, is not working as far as producers at the bottom end are concerned. The approach taken by Sainsbury’s and what Asda has done this morning are steps in the right direction, and I hope it will be a rolling stone that moves on. Sainsbury's have been paying their producers in the UK 30.5p and Tesco are paying 29.5p for dedicated supply as far as liquid milk is concerned. However, the other people who are selling liquid milk outside of the dedicated supply chains are paying 5p or 6p a litre less to processors for the milk. Why that is happening is between processor and buyer, but that is where the squeeze on the industry has been in GB over the last 12 months. There has been pressure and we have been at the bottom end of the chain. As I said earlier, if we cannot get a voluntary code of practice to give us a better negotiating position as far as producers are concerned then we need regulation.

Q23 Ms Ritchie: Thank you. Mr Kelly from Asda, some supermarkets guarantee to pay their producers above the cost of production. Why do Asda not? I am very conscious of your press statement this morning.

Paul Kelly: We have looked at this long and hard over the eight years for which we have had the partnership with Arla. We believe that, through paying the premium to the Arla farm price and through a whole range of other initiatives and investments we have made that run into several million pounds with those farmers, what we have been able to do is help them do exactly what Mr Raymond has talked about, which is to find those efficiencies, to invest in their farms, to have those assurances of income, and to incentivise them to be more productive. That has delivered good results for those farmers. We would suggest that the farmers in our dedicated supply chain are probably seeing production costs per litre somewhat below the average that Mr Raymond has referred to.

Q24 Ms Ritchie: What would you say about supermarkets? Do you think they are responsible for the problems in the dairy industry?

Paul Kelly: You need to put this in context. There are 14 billion litres of milk produced a year; as Mr Raymond said, 7 billion goes into liquid milk. Around onequarter of the total milk produced is sold through the multiples. The other half of that liquid milk is in other areas. This is a chainwide problem and to point to a particular sector and say, "Therein lies the problem and therein lies the solution," is rather simplistic. This is something that is quite deeprooted in the industry and we need to look at ways of working collectively. I am hopeful that some of the initiatives the Government have been taking will deliver some benefits more rapidly than they have done today.

Q25 George Eustice: Mr Sheldon, how does Dairy Crest calculate the price it pays farmers? I know you made an announcement today about reducing the term of the contract to three months, which is welcome. The big complaint that has come from farmers is that they get locked into 12month contracts with no clear basis on which the price is calculated. What Tesco and Sainsbury’s seem to do is popular with farmers. I wondered how-and why-you calculate your price at the moment.

Mike Sheldon: We have a range of arrangements. We do have some pricing related to retailer contracts-for example with Sainsbury’s, Marks & Spencer and Waitrose. Those arrangements work very well. Both my fellow witnesses have talked about those already. We also have a cheese brand called Cathedral City and a facility in Cornwall; we buy a lot of milk for that brand as well. Then we have a third sector, which is milk that goes to other customers across a whole range of outlets. The way we negotiate both the Davidstow price and the liquid milk price is by meeting with our farmer representatives, Dairy Crest Direct, every month and having a discussion and negotiation around milk price. That revolves around what the commodity markets are doing; a discussion about our dairies’ profitability and the money we are making-or not making-from our dairies division; and the cost of production. That was one of the major reasons that the reductions that, from a market point of view, should have taken place last autumn did not in effect take place until the spring. It was because of the ability of our farmer representatives to negotiate with us.

On the voluntary code, we have listened to our farmers and the feedback we have had over the last few months and we have announced recently that we are prepared and have agreed to reduce the notice period on price change to three months, so that a farmer does not feel that, if a price cut is imposed, they have to stay with us for 12 months. We have sympathy with that position, so we have reduced that to three months.

Q26 Mrs Glindon: We have heard from Mr Raymond that the cost of production is 29p, and we have heard the reasons why you negotiate your prices, Mr Sheldon and Mr Kelly. Do you believe you are paying a fair price for milk?

Chair: That is to Mr Kelly and Mr Sheldon.

Paul Kelly: It is really important to understand that the 29p to 30p is an average. The same figures from the consultants suggest that cost of production for some farmers is maybe 5p to 6p less and for some 5p to 6p more. The industry is not homogenous; every dairy farmer will have a slightly different model, in the same way that every supermarket has a slightly different business model. We believe that, for the 272 farmers in our dedicated supply chain, the 27.5p we are paying is a fair price. I have spoken to a number of those farmers this morning and they are very pleased that we have taken that action because they believe it keeps them profitable.

Mike Sheldon: Our stated intent is to pay a fair, marketrelated price. We have some examples where we do that. At the moment it is clear that a number of our farmers are being paid below the average cost of production and that that puts that farm business under pressure. However, it is a broader issue than just cost of production. We are talking about a complete supply chain here. It is not simple; it is pretty complicated. That is why the price has fallen: because it is marketrelated. To answer your question: I think we do, but that does not mean to say that it is great news for all our farmers.

Q27 Mrs Glindon: This is to Mr Raymond and to Dairy Crest. If all supermarkets agreed to pay above the average cost of production, would this solve the problem in the dairy industry?

Mansel Raymond: There has to be more than one way of paying for milk. There will be some people who want to take the costofproductionplus formula, and that would fit into the liquid category more than anything else, where you want milk 365 days per year. Sainsbury’s, Tesco, Waitrose and M&S are paying around 30p per litre at the moment. These farmers are covering the cost of production and are able to invest in their businesses. These seem to be the people who are investing in their businesses, expanding and making their businesses more efficient.

My colleague from Asda talked about the cost of production. There are people producing milk off grass with a lower cost of production than 29p to 30p, but they will be producing milk for the manufacturing sector, whether that is cheese, powder or whatever. For a lot of these people, as long as it was a transparent price that they know they had the right to negotiate, they would take the world market price. They would take the ups and the downs because that is the world market price; it should normally balance itself out. There will still be money there for that business to make a margin, move on and grow the business to pass on to the next generation.

There will be more than one formula. Some people will take that costofproductionplus, and that is, to me, the necessity for liquid milk. Yes, every business needs to cover the cost of production and most producers will be out there trying to strive to lower their cost of production. However, if you do not make a margin, whatever formula you take, eventually the business will close down. That is a fact of life.

Q28 Chair: I would ask the same question to Mr Sheldon.

Mike Sheldon: It is difficult to see how that could work across the entire supply chain. What has been announced by Asda this morning is good news for Arla farmers. The more of that that happens, the better. However, we clearly cannot be in a position where prices are being put up to consumers other than on the basis of a decision by a retailer. The more of that that happens, the better. We have to bear in mind the market forces at play. I can only speak for Dairy Crest as a processor. If you look at our results for our dairies business last year, we made a small profit, the bulk of which was made on property. We did not make a return on our capital invested in our business last year and that is not a sustainable position either.

Q29 Chair: Could you just clarify, Mr Kelly, whether you are saying that all your farmers have low production costs? Is this something you know for a fact or is it an assumption you have made? Is it all your farmers?

Paul Kelly: I said we believe that the majority of our farmers have a cost of production below the average of 29p to 30p.

Q30 Chair: On what do you base that?

Paul Kelly: On the feedback they give us. We meet them on a quarterly basis. From the discussions we have had with them over the last 10 days, the indication that they have given to us is that 27.5p per litre, considering where the market is at the moment and where their input costs are at the moment, is a good price.

Q31 Chair: We are told the cost of production is 29.33p. Is that the case?

Mansel Raymond: 29.33p including investment costs of 2p per litre per year.

Q32 Chair: There seems to be a discrepancy there.

Paul Kelly: To clarify the point I am making, the 29.33p is an average. Across 16,000 dairy farmers there will be quite a spread of production cost, whether that is going into liquid milk or other dairy products. The evidence from consultants suggests that could be as much as plus 5p to 6p per litre. That is the spread we are really looking at. The average is right, at 29.33p, but not every one of those 16,000 farmers in the UK will have a production cost of 29.33p.

Q33 Chair: Mr Raymond, are you able to tell us how much liquid milk is imported?

Mansel Raymond: Liquid milk?

Chair: Or powdered milk equivalent.

Mansel Raymond: I do not believe there is any fresh liquid milk being imported, unless Mike Sheldon says anything different. There might be some UHT milk imported but not fresh liquid milk.

Q34 Thomas Docherty: You say that the average could vary by 6p. Maths was never my strongest point but that tells me that some of the costs to some farmers must be in the mid-30s. Are you saying that none of your farmers have a cost of production up in the 30s?

Paul Kelly: Not from what we are hearing from our farmers.

Q35 Thomas Docherty: Have you asked them all what their cost is?

Paul Kelly: We talk to our farmers on a very regular basis and we are not hearing anything back from our farmers that suggests their costs of production are above the average price. The vast majority have said to us that their costs are below the average price.

Q36 Neil Parish: My first question is both to Mr Sheldon and Mr Kelly. What is your view of the market for milk and cream? Is there evidence of oversupply or lack of demand? In particular Mr Sheldon, if there is, what are you doing about it?

Mike Sheldon: In 2010 and 2011 there was excess supply of milk, which created a very competitive situation in the liquid milk sector. At the same time we also had rising cream prices. Those eventually worked their way into farmers’ milk prices towards the end of last year. Then, through into this year, we have seen the reverse of that. In terms of capacity in the sector, we have sadly recently announced the closure of two of our major dairies in the UK, one in Liverpool and one in Fenstanton in Cambridgeshire, with the loss of around 500 jobs. Clearly, that is really bad news for those employees affected, but that is about Dairy Crest not accepting that all of this is about the farmers’ milk price and taking control of its own destiny to cut costs, reduce capacity and try to create a more competitive market.

Q37 Neil Parish: Dairy Crest has Cathedral City, which is a very good product and a very good brand. The whole idea of having these good brands is to get a better price for that brand and get the price of milk up. Good for Cathedral City, but what more can we do? There is too much milk sloshing around in the market; we are not exporting enough of it and we are certainly not getting enough branded products on to the supermarket shelves so that Asda and others will pay you a decent price for it. What more can you do?

Mike Sheldon: Cathedral City is a great example. In fact, we have extended the capacity of that site significantly. We have extended the range so we are into lighter products, more mature products, sliced, grated, etc. That is a great example of when it works well. We have had to invest millions in the supply chain but that benefit in part goes back to farmers. The cheese price that we pay to Davidstow producers is the best in the UK.

To replicate that across the liquid market is more difficult. There are some branded liquid milk products out there. We have a flavoured milk, called Frijj, but it is relatively small. One of our competitors has Cravendale, and clearly that is an option. At the end of the day, consumers drive that, and it will be a combination of what we can innovate with, what retailers choose to list, and what consumers ultimately choose to buy. That is definitely a way forward that we would advocate.

Q38 Neil Parish: Flavoured milk is a great idea. What about more yoghurt and all these things? I just feel that somehow or other, through the process, we have to get more product on the shelves and generate greater demand, because at the moment the supermarkets are just screwing us into the ground because there is too much milk about. Do you want to answer that? I am coming on to Asda in a minute.

Mike Sheldon: I don’t think it is fair to say that supermarkets are screwing us into the ground. We supply a range of customers. We have good examples of brands and we have a really constructive dialogue with all our customers, whether that be Asda or others, but ultimately this is a competitive market. It is tough and it has probably never been tougher for everyone in the supply chain. It would be wrong of me to suggest that it is easy and that that would be easy to do, because, as I say, there are always going to be tough negotiations.

Q39 Neil Parish: I am delighted with the press release from Asda that says milk is going up by 2p or 3p to the farmer, but how did we get here in the first place? In 2010 Asda slashed its price for four pints of milk from £1.53 to £1. It is all very well for Asda to run milk as a loss leader, but who the hell is going to pay for it? The farmer. The processor. While we welcome this, isn’t it you, Asda, who have helped to get us in a situation where we have 2,500 farmers in Methodist Central Hall in Westminster absolutely desperate with the weather so bad, the cost of feed, the maize silage not growing and all these things? Have you not actually driven the farmers to where they are now?

Paul Kelly: As I said earlier, every drama has to have a villain. It is very easy to point at the supermarket.

Q40 Neil Parish: No, but it is you in particular. You went on this price war. Once you start a price war, all the other supermarkets follow. If you are going to pay for it yourself out of your profits, I have no problem. You can sell milk at 1p a litre if you are going to fund that yourselves, but don’t expect the rest of the industry to do it. Then, when you get into a corner, you come here with this, saying you will give another 2p or 3p a litre for the farmers. That is great; I welcome that, but you got us here in the first place.

Paul Kelly: I’m sorry, I don’t accept that at all.

Q41 Neil Parish: Why not?

Paul Kelly: We have a duty and an obligation to both ends of the chain. We have a duty and an obligation to the farmer, and we are satisfying that. We also have a duty and an obligation to the customer, particularly at a time when they are finding it really difficult to make ends meet. Yes, we did take the price of milk down a few years ago, but we continued to pay a premium above the Arla price to our farmers for doing that. We have continued to do that. Today we are making that announcement of a 2p investment. That is not going to be coming out of the farmers’ pockets; it is going to be coming out of our pocket. It will not be coming out of the consumer’s pocket. That is because it is the right thing to do.

The tragedy we have-and it is a depressing fact-is that consumption of milk has been in decline for about 40 years. Over the last 10 years it has declined by 11%. All of us have to look at ways of innovating to get new products on the shelves, as you rightly say. The group of consumers that is not being recruited to drinking milk is children. We have seen some success with the "Make Mine Milk" campaign over the last two years, which is partfunded by the EU. It is a pity that funding is coming to an end later this year, but that campaign has certainly resonated with young people. Developing products that appeal to children is part of widening the market and beginning to drive demand again.

Q42 Neil Parish: So milk to you is an important commodity that will help get customers into Asda. How important do you see milk and the future supply of milk as being for your business?

Paul Kelly: It is very, very important. One of the things customers tell us is that they want to see British liquid milk for sale in all supermarkets. In parts of the country, they particularly want to see local milk on the shelves as well, which we source through our local sourcing hubs. It is very important, but it is also a key value item for customers: 50% of our customers tell us they look at the milk price every time they go in store, and that rises considerably for those who are on low and fixed incomes. It is an important value indicator for customers. That is why looking at product innovation and at ways we can add value through other products is important for the whole industry.

Q43 Neil Parish: I accept some of your arguments there, but do you not accept that when you knock a third off the price of milk you are actually going to damage the milk sector overall? The Minister for Agriculture and Food, Jim Paice, made the point at the meeting last week when he picked up a bottle of water at 53p and a bottle of milk at 46p. You obviously don’t sell water at a loss, but you seem to want to sell milk at a loss and put the farmers out of business.

Chair: Okay, let Mr Kelly answer

Paul Kelly: That comparison between milk and water is frankly slightly misleading. You can buy a twolitre bottle of water in Asda at a price of 0.9p a litre, 17p. If consumers buy Evian, or whatever the branded water is, at 53p per litre or whatever it happens to be, that is a choice for consumers. It is about choice. If you look at the time since we took the milk price down, which was the right thing to do and which other retailers in the sector had already done-some of the discount supermarkets were already selling at £1-what you have seen is us continuing to invest in our dedicated supply chain through Arla and through those farmers. Those farmers have continued to be profitable and grow and expand their businesses. That says to me that we have done the right thing for the farmer and the right thing for the consumer.

Q44 Dan Rogerson: I would accept some of the arguments you are putting to us. I am not looking at you as a villain; I am looking at you as a representative of a successful business that is part of a much bigger group across the world. I am looking at you as someone who is part of a supply chain, as you have been at pains to point out. Every analysis I have seen has shown that, in terms of the price the consumer pays, the retailers’ share has gone up, the processors’ share has stayed broadly the same, and the farmers’ share has gone down. How do you account for that?

Paul Kelly: I saw some of the reports over the weekend suggesting what the margin was on milk in supermarkets, and those are figures I certainly do not recognise. I would say that our margin is not that far out of line with those of the processors and the farmers.

Q45 Dan Rogerson: I am talking about the trend over years. If you look at the historic trend of what has happened, the farmers’ share has gone down and yours has gone up.

Paul Kelly: In a commodity market-and milk, particularly liquid milk, is now part of a commodity market-that is what happens. All of us have seen squeezes on our margins in that particular sector and as retailers, we have taken our fair share of that hit as well.

Q46 Dan Rogerson: So you are disputing that that is the trend and that the retailers’ proportion has gone up.

Paul Kelly: I am.

Q47 Dan Rogerson: That is interesting. We will have another look at that. A simple question: how does Asda set its price for milk?

Paul Kelly: We look to set our price for milk on the basis of demand from customers, and what we believe is the resilience of customers. On that basis, we will set the price accordingly.

Q48 Dan Rogerson: If you do a promotional offer, who bears the cost of that?

Paul Kelly: If we do a promotion, we take the cost of it.

Q49 Dan Rogerson: That is on liquid milk; does that also apply, for example, if you were doing a twoforone on cheese?

Paul Kelly: In milk we will do it because it is an Asdabranded product. When it comes to the way in which the brands particularly want to do promotions, in a market that is not growing very rapidly, that is about getting brand switching. The brand will very often come along and say, "We want to put some promotional money behind this because we want the customer to switch from our competitor to our brand."

Q50 Dan Rogerson: So that is a process driven by the processors and not driven by the supermarket.

Paul Kelly: It will be part of a negotiation strategy, but very often, from a brand’s perspective, in a market that is not growing very rapidly in the current economic environment, they will be looking to get people to switch from competing brands.

Q51 Dan Rogerson: That is interesting. So that cost is passed down the supply chain, then, for the promotional offer. The good news for the consumer is that in your shop it is cheap but that is passed down, ultimately, to the farmer.

Paul Kelly: I am not sure that is quite what I said actually, with respect.

Q52 Dan Rogerson: But it is the effect though, isn’t it?

Paul Kelly: No, that is not what I said. You can draw that inference but that is not what I said.

Q53 Dan Rogerson: A survey conducted by the NFU revealed that the majority of consumers would pay 5p more for milk if that ensured a fair price for dairy farmers. There are a lot of surveys that can show us all sorts of things, but are supermarkets misjudging the market to the detriment of the dairy industry?

Paul Kelly: I don’t believe so. If I go and talk to my customers, for example some mums up in the North East, down in Wales or up in Scotland, they will say, "It is important to us, but at the moment, what is also important to us is making ends meet." Putting up the price of milk is something that, theoretically, our customers say yes to, but when it actually comes to it, that is not what they want to see.

Q54 Richard Drax: I have one very quick question. To farmers, the effect of 1p a litre change either up or down is ingrained in our brains; we will work out how much we lose or gain. What would Asda gain, in round figures, if you put 1p on the price of milk? I am talking about the company.

Paul Kelly: I cannot work that out off the top of my head but I will very happily drop a line to the Committee.

Richard Drax: That would be very helpful

Chair: It would be very helpful if you would, please. Thank you.

Q55 Mrs Glindon: We have a £1.2 billion trade deficit in dairy. A lot of dairy products stocked by major retailers come from overseas. Why do you think this has happened?

Mansel Raymond: The figures that I have show that the consumption of milk and milk products in the UK is somewhere over 15 billion litres of milk. In the UK, we produce about 13.5 to 13.7 billion litres. There is a shortfall; we are not selfsufficient in milk. I do not want to carry on about this because last year was a better year for milk producers. However, generally, over the last 10 years, it has been very difficult for milk producers. You are not finding the next generation wanting to come in and it is difficult. We have seen 160odd milk producers go out of milk production in the last 12 months. I can see a lot more going out in the next six months unless this is redressed.

We as farmers want to close that trade gap of £1.2 billion. We can do it but we will not be able to do it unless we cover the cost of production and have a margin to invest in the businesses going forward. There has been a lack of investment in the industry over the last 10 to 15 years. We have not had the money to invest. Some farmers have. Farmers on better milk prices in the dedicated pools have-I will say that-but the others have not. That is why we are seeing a decline. We did see a pickup in milk supply in the UK last year because prices were better and the weather was good. However, I fear what is going to happen this year; I just see more milk producers going out of business. That is not something I want. I want to be in a position, as Chairman of the NFU, to see milk production expanding in the UK and I want to see us getting to a position of 15 billion so that we can take over the imports that are coming in.

Q56 Mrs Glindon: Do you think there is too much emphasis on the production of liquid milk?

Mansel Raymond: Yes, there has been a competitive element of people chasing liquid milk over the last two years. That is my opinion as a producer. I want to get in a position where the industry looks at ways of adding value more into manufacturing and taking out the products that we are importing into the UK. That is what we can do if we have the right tools to do it.

Mike Sheldon: We operate in three major markets. We have talked about liquid milk and there is little or no fresh milk imported. We do not import any and I am not aware that too many others do. Fresh milk is pretty much protected on this island. Cheese is a different case. We have a strong branded cheese business, which I have probably mentioned often enough now, but the cheddar market is susceptible to import penetration. Cheddar can be produced in Ireland, in Europe and as far afield as Australia and New Zealand. Once again, that is a matter for the retailer if they choose to buy cheddar from outside the UK and offer that as a choice to consumers. That clearly goes on. We do, as a company, export some of our cheese. We have even recently managed to gain a listing of our cheddar in France, which is no mean feat. So there is a bit going back the other way, but cheddar is a worldtraded commodity and the best we can do to protect that is build brands and innovate our own brand.

Paul Kelly: I would echo a lot of what has already been said. The other area where we have seen quite a lot of penetration from the import market is in yoghurts, particularly from some of the European manufacturers. I would say there is opportunity to innovate, develop new brands and work with producers who are UK-based to begin to redress that trade imbalance.

Q57 Mrs Glindon: All three of you have identified the problems, but what do you think the dairy industry needs to do to increase its share of the market?

Mike Sheldon: Could I come back to cheese? The answer on cheese is to continue to innovate, to produce a good quality product from milk produced in Britain, and continue to drive that innovation and that quality of product. I think we are doing that. We do not produce or manufacture yoghurt in the UK. I would apply the same to fresh milk to try to generate some brands and to grow those. However, once again, that is not easy.

Q58 Mrs Glindon: Can I ask that of Mr Kelly too?

Paul Kelly: I have the same answer: it is about how we create more valueadded products, through innovation and through the development of brands, that are able to attract a premium amongst consumers and will enable the benefits to flow right the way through the chain.

Mansel Raymond: World consumption of dairy products is increasing by 2.5% to 3% per year. We can produce milk as economically as anybody in Europe. Ireland is our nearest competitor. We can do it if the supply chain takes responsibility. Producers have to earn a profit as well for the longterm.

Q59 Mrs Glindon: Mr Kelly, where do you source your ownbrand dairy produce from?

Paul Kelly: The vast majority of our ownbrand dairy produce is sourced through UK farmers and UK processors. There is a small amount of import in relation to yoghurts, but only a small amount.

Q60 Neil Parish: Mr Raymond, you were talking about liquid milk. Liquid milk is very important, but only around 50% of the milk produced goes into the liquid market. The Minister has criticised the processors for being fixated with liquid milk contracts. Do you agree?

Mansel Raymond: There has been a large competitive element in the last 12 months to two years, with processors looking to increase their share of liquid milk. There has been enough pain in the last couple of months for people to realise that there is an increase in liquid consumption in the UK, and that is coming on the back of population growth rather than increased consumption per individual. At the end of the day, people have got to look at the manufacturing side and say, "That is what we are importing into this country and that is what we could take the benefit of. As world consumption is going up 2.5% to 3% per year, we are in a position where we can take advantage of that." We should be in a position to take advantage of that; there is no reason why not.

Q61 Neil Parish: Would it be fair or unfair to say that even our farmerowned co-operatives have almost chased the liquid market to a degree and, instead of driving the price up, they have potentially driven the price down? What do we do to reverse that?

Mansel Raymond: In a competitive market, where people are chasing market share, the danger is that the market does go down. That happens whoever chases, whether it is A, B or C. That is the way the market works.

Q62 Neil Parish: Aren’t those co-operatives in there to promote the farmers’ interests?

Mansel Raymond: The co-operatives are not in liquid processing. The two co-ops sell milk to the liquid processors, so they are not in liquid processing themselves.

Q63 Neil Parish: Should they be?

Mansel Raymond: I think they need to look outside to see if they can add value by other means. I would hope the merger between Milk Link and Arla will be a step in the direction that they can add value to product and look at other markets to try to increase value back down. That is why we support the merger between Milk Link and Arla. I hope it works out.

Q64 Neil Parish: My next question is to Mr Sheldon. Again, the Minister, at the rally last week, spoke about the fact that he had been to China and he had seen milk products from Germany, France, the Netherlands and Denmark on the shelves, yet there was no British product there. What do we do to get our product out there in China and across the world, so that we can produce more milk, process it and help drive up the price that way? What are you thinking about doing? Are you thinking about going to China?

Mike Sheldon: Not China specifically at the moment, but we do have an export division and we do sell cheese and some of our branded spreads in Europe and further afield, particularly expat countries. That is proving successful. We also have an export arm that sells skimmed milk powder, which is a commodity in the UK that we produce from surplus milk, and that gets exported outside the UK into Europe. In some cases it goes to South America for food aid programmes, and in some cases to Africa. So we do have examples of it. Could we do more? I feel sure that we could.

Q65 Ms Ritchie: Should the Government be doing more to help reduce the trade deficit in dairy?

Mansel Raymond: Yes. Politically, we have got to put the tools in place to give producers through the supply chain the confidence that they can produce more. I am thankful that Dairy Crest have come back to threemonth contracts. One thing that has been a bugbear and an annoyance for milk producers in the UK is being locked into contracts on 12month leaving terms, so if there is a price change or any change to the way the prices are set out, the majority of producers in the UK then have to wait 12 months before they can move on to another buyer. To get liquidity in the market, if a processor-whether competitively or for whatever reason-has gone out and tried to undercut the market and take it off their producers, producers need to be able to go out and see if there are opportunities to get a better milk price. When producers are locked into contracts for 12 months, they cannot move, they are restricted and they have to take the cost of that price cut or whatever is forced upon them. At the end of the day, we are looking for a voluntary code. If that can be worked out between both sides of the industry, we will welcome that. It has to redress the balance. Failing that, we would be looking, as far as regulation is concerned, for some legislation from Government to put us in a better place.

Mike Sheldon: I am not sure of where legislation can play a part here. We are a predominantly UK dairy business and we are rightfully proud of the quality of the products we produce. I am not sure exactly what legislation would do there and whether we could prevent imports. I am not convinced that that is the right thing for consumers, who might want to buy overseas products, particularly if they happen to be better value for money.

Paul Kelly: The role of regulation or legislation has to be very carefully considered because it always has unintended consequences. The way of fixing the challenge around trade deficits is through encouraging innovation and efficiencies in the sector, rather than necessarily creating a race to the bottom through trying to introduce regulation and legislation that will not necessarily have the desired effect.

Q66 Chair: Do you think that UKTI are doing enough to promote exports to China and other places? I am very mindful of the fact that a small country like Denmark is exporting large amounts to China.

Mansel Raymond: If there is a competitive element out there for product, whether that is yoghurt, cheese or whatever, it has to be beneficial to producers. I do not think a lot of people have looked outwardly. You get the ups and downs in the volatile market and you get that in the products that we sell; you have seen that on the global scene over the last 12 months. It would be nice for producers to get the peaks when the peaks are there. That is what I would be looking for.

Q67 Ms Ritchie: I would like to move on to contracts and ask the same question to the three of you: would you describe contracts in the dairy industry as fair and transparent? If not, why not?

Mansel Raymond: As I just said, I would say no at the present time and that is what we are trying to redress. The Commission package that is coming into being has virtually stated that throughout Europe there has to be change. The supply chain needs to be a fairer balance so that producers do not feel that they are at the bottom end of price setting and that they have to just take what is given to them. That is the biggest grumble, the biggest gripe and the biggest concern that producers have at the moment. They feel they cannot do anything about the milk price.

Mike Sheldon: We have a really constructive dialogue with our producer group. One of the things we talk about, other than price, is the way contracts work and the various elements within a contract. They are jointly agreed. The real sticking point over the last six months, and the two price reductions we have seen this year, has been the fact that a farmer is tied through the 12 months’ notice. That was jointly agreed, because it works both ways; it is protection for the farmer as well as for ourselves. However, where a price change, or price reduction, has gone through that is, understandably, not to the liking of our farmers, they feel tied into the contract. That is why we have recently moved to three, so that the farmer feels they have got a choice to move away somewhere else if they think there is a better option. That has been the biggest issue. Every other element is jointly negotiated.

Paul Kelly: I can only look at it through the contract we have with Arla. Our contract is with Arla and then they have the contractual relationships with the dedicated farmers. That is a very open and transparent contract. If changes are proposed under the voluntary code of practice and if that is agreed then that is all to the good.

Q68 Chair: Mr Raymond, in view of Dairy Crest’s announcement, do you think they have gone far enough in making the contracts fair and transparent?

Mansel Raymond: I cannot answer that because I have not seen what Dairy Crest have done, but I believe the ability to get out from a contract in three months is far better than for a producer to be held for 12 months, so that is a step in the right direction. We do need more transparency on how milk prices are set-that is a request and a demand by producers-but this is a start.

Q69 Richard Drax: Mr Raymond and Mr Sheldon, I have a question for you. Do you think a voluntary code to govern contracts between producers and processors will solve the problem?

Mike Sheldon: I think it will help but it would not, in the current situation, change what is going on with the commodity markets. They are a fact. It may have helped to give farmers more options and to feel they can look around a bit more, but it would not have changed the ultimate price. It would have put more balance into the discussions, and I think that is positive, but it would not have ultimately changed the answer, I fear.

Q70 Richard Drax: Mr Raymond, what do you think?

Mansel Raymond: It has to be beneficial but it is not the end of the game, as I would call it. It is a start. It will not revolutionise what could happen but it has to introduce a fairer balance between producer and buyer, rather than what we have today. We are talking about price transparency; shorter notice periods if there are price reductions; and we are also looking at some sort of exclusivity, particularly post-quota, when producers will have that second option if that is available. If that fails then there has be some sort of legislation as far as contracts are concerned. Outside that, it is obvious that the system is not working because, if you look at the average figures for the last four or five years-as you probably have-we have average 3p to 4p per litre less than our European counterparts in the major milk producing regions of France, Germany, Holland and Denmark. That just tells the story.

Q71 Richard Drax: You mentioned some things the code needed to say, Mr Raymond. Mr Sheldon, do you agree? There were three things listed there; do you agree that those should go in as part of the code?

Mike Sheldon: Yes, I think the concept of producer organisations is a good one. In effect, our famer representative board, Dairy Crest Direct, are a producer organisation in many respects. We are in the process of sitting down with them and constructing or deciding how that might work together, so that is a positive dialogue. In terms of transparency of price, about three months ago we started a conversation with our farmer board to talk about some sort of price mechanic that would be visible to our farmers, whereby the price could move up or down in line with a number of criteria. One of those would be the cost of production; there would be other components taken into account as well. We are working jointly with our farmers on that at the moment. I also see that as a positive step forward.

Q72 Richard Drax: Some farmers have direct contracts with supermarkets. Maybe this is a question to you, Mr Kelly, but I would be interested in some response from the other two. Should you be covered, also, by these voluntary codes?

Paul Kelly: Any direct contractual relationship we have with a supplier is currently covered by the Groceries Supply Code of Practice. I am not sure that an additional voluntary code would be needed.

Q73 Richard Drax: So you are happy with the code you have got right now.

Paul Kelly: Yes, we have signed up to that and it is working very well.

Q74 Richard Drax: What do you think, Mr Sheldon?

Mike Sheldon: I can see many positives in a voluntary code in terms of our arrangements with our farmers. That, as a stepping stone, as one element in our relationship with farmers, can only be positive.

Q75 Richard Drax: I am not too knowledgeable about the code if I am honest with you, but presumably if it works for you. Have you looked at the code they have directly written?

Mike Sheldon: Yes.

Q76 Richard Drax: Is there room there for some agreement or compromise between all three of you?

Mike Sheldon: We welcome the Groceries Code as well; that is about a different relationship, in effect, with our retail customers. I see the farmer voluntary code as a separate thing. It is important to establish that, get it working for both parties, and move forward from there. I would not necessarily mix the two up.

Mansel Raymond: I would say the Groceries Code is a must as far as primary producers are concerned. Hopefully that will happen. Then, as far as milk producers are concerned, I would like to give the voluntary code the benefit to see if we can get it into place. Failing that, we have got to go to legislation as far as contracts between farmers and buyers are concerned. Following on from that, as far as producer organisations are concerned, they may be forced upon us; that is the next step.

Q77 Thomas Docherty: If the Minister cannot get agreement on the voluntary code, would you both accept independent arbitration?

Mike Sheldon: We do not think we are going to need that. If the voluntary code is not agreed by the industry, we are going to get on with it anyway as Dairy Crest and move to agree that with our farmer representatives.

Mansel Raymond: I would like to have one last push on it and see if we can get it to where we want it to be. We think it will be beneficial to producers and, eventually, the supply chain. Failing that, as I said, we may have to look at legislation.

Q78 Thomas Docherty: Do you see producer organisations as a means to address the structural problems within the industry?

Mansel Raymond: I think there is a place for producer organisations. It depends how they are structured; they have to be structured well. If we can get 33.33% of milk in one producer organisation, that could have a benefit. There is a lot of work to be done, a lot of dialogue and a lot of discussion. At the end of the day I think producer organisations could offer the industry something better than we have had while people have, over the last umpteen years, been chasing contracts, volumes, tendering and everything else at the behest of producers, so you offer milk to the highest price. However, it has to be done professionally.

Mike Sheldon: I will speak from my perspective, and the view of our farmer board. It is very important that we work through the detail-the devil will be in the detail on this-and that we agree something with them that works for both parties. We will support anything they want to do and try to work with them. That is the best way forward in my view.

Paul Kelly: From our perspective, if the producers and the processors can reach a voluntary agreement, that is all to the good.

Q79 Thomas Docherty: Do you think there is a role for Government in establishing producer organisations?

Mansel Raymond: You would have to go through the legislation anyway to set them up so that they are legal. After that it is down to the industry, probably with the support of Government, to get them up and going. There has to be the willingness out there for people to want to set them up.

Mike Sheldon: As I understand it, they have to be legislated for. We are more than happy to work within the bounds of that regulation.

Paul Kelly: I have nothing to add.

Q80 Chair: Can I just sum up by looking at what you have shared with us this afternoon? There seems to be a common strand that two of you at least-Mr Raymond and Mr Sheldon-have said that there is a problem in the supply chain. You also talk about restoring the balance in negotiations. Do you believe that the measures the Minister has spoken of, most recently in the rally last week, and the amount of money the Prime Minister has said will be available, are going some measure to restoring the balance in the dairy industry and putting the dairy sector on a sustainable footing?

Mansel Raymond: Are you talking about the £5 million?

Chair: Yes.

Mansel Raymond: £5 million is not a lot of money at the end of the day. It sounds like a lot of money, but for what is required it is not. At the end of the day the industry is going to have to sort itself out but the Government is going to have to help; we need the Government’s support. I will not go back on what I have said about voluntary codes, legislation, contracts and appeals, but the dairy industry is an important industry for the UK. It is important for consumers; it is important for the whole economy, given the amount of people who work in the dairy industry. It is a very important industry and a £1.2 billion deficit is something the Government needs to take seriously otherwise we will see a contracting of the dairy industry in the UK and I do not think that is beneficial to anybody at all. That is why the Government has got to take it seriously.

Q81 Chair: Mr Sheldon, we should not really need legislation to restore the balance in the negotiations between them. Do you think that, going forward, we are looking forward to a better contractual relationship?

Mike Sheldon: I do. I say that primarily from the point of view of what has been described as the voluntary code. As Dairy Crest and Dairy Crest Direct, we have chosen to move forward with it, irrespective of whether it is agreed as a voluntary code or is legislated for. We are going to work on that feedback and get that moving. A number of those things are already in place, for example the month’s notice on price change. I do not see legislation as the answer; I really do see that the supply chain needs to sort itself out and we as Dairy Crest, in conjunction with both our customers and, more importantly, our farmer suppliers, work to resolve all the issues in the sector.

Q82 Chair: Mr Kelly, Associated Dairies started off as the saviour of the milk sector in the north of England. Do you think you have come a long way from your roots?

Paul Kelly: Not at all. If you look at support for the dairy, beef and sheep industries and the work we are doing to promote and develop small suppliers right across the country, our commitment is still there and still clear for people to see.

Q83 Chair: Do you think we really need legislation for you to be able to negotiate fairly, on an ongoing basis, with your dairy farmers?

Paul Kelly: If you look at the relationship we have had with our dairy farmers for the last eight years, we have been able to do it fairly, without the need for legislation.

Chair: Gentlemen, can I thank you most warmly on behalf of the whole Committee for contributing to our little debate? We believe there is a window open before 1 August and we will use our best endeavours to do right by every strand in the supply chain. For those of you who are interested, there are now going to be two little debates in the Chamber on the future of the dairy sector, so you may like to try to obtain entry to that. I wish you all a very happy summer and happy holidays. Thank you very much indeed and we hope we can see a light at the end of the tunnel for the dairy industry.

All Witnesses: Thank you.

Prepared 23rd July 2012