Examination of Witnesses (Questions 20-39)
MR JOHN DUNCAN AND MR ROBERT AUDAS
TUESDAY 4 DECEMBER 2001
20. Is there something cultural within British or Welsh farming which works against co-operatives? I have travelled around Europe and I have seen fish co-operatives in Italy, wine co-operatives, cheese co-operatives, and this is going back 25 years now. They seem to have a more co-operative approach. I have a friend who is a farmer back in the Vale of Clwyd and he says, "Chris, we would sell our own grandmother for an extra penny a kilo." Is there a cultural factor?
(Mr Audas) I think it is cultural but it was a culture which was enhanced by the structures we had such as the Milk Marketing Board which was only a quasi-co-operative in a sense as it did not involve full membership and control of the business, it was a state structure which allowed only one method of selling your milk. Because that existed for rather too long perhaps it did not allow modern co-operatives which are focused on developing modern businesses to grow. So you are right in a sense, although there may be some cultural issue there in terms of what people want to do, part of the culture was created by the alternative boards, if you like, which provided more of a state structure which they saw as not serving them well, and this has perhaps created in the past some feeling that co-operatives are not in their interests. I believe, as we move close to Europe in many ways and as we learn from what is happening in Europe, more farmers are realising that the co-operative structures in dairy and indeed in other industries are the only way forward.
21. Finally, on the matter of encouragement to set up their own cheese co-operatives, can I give you an example from North Wales, Snowdonia Cheese which is 70 farmers across North Wales based in my constituency at Llanddyrnog Creamery. They have had tremendous success and in fact we have the cheese on the menu in the House of Commons, but they had a tremendous fight to get the resources together and I think they had to pay Manchester University £10,000 to do the market research. With Objective 1 in place now, is any use being made of that funding to do the marketing and the research for farmers across Wales?
(Mr Duncan) I can say that our co-operative is working with the Welsh Development Agency and we have had significant help from them. You may or may not know about our co-operative called the Aeron Valley Cheese business, and I do not know whether it is time yet, Chairman, to press the issue of the Competition Commission and the Office of Fair Trading, but I think it would be interesting to spend a bit of time on that. First and foremost, I can say with regard to Aeron Valley it has traditionally been producing commodity cheese. There is no way that commodity cheese in the increasingly competitive market we are looking at would support a farmer's milk price which we believe would be competitive, so that cheese has to look for branded markets and better outlets, and we are working with the Development Agency to do that. So that assistance is being made available at this moment in time but it will take time. So far as developing brands are concerned, that is a very high cost exercise and one which we just do not have the resources to put into it at the moment, because we find ourselves competing with PLCs who have been in the branded market for 60 years. It is one of the disadvantages that as co-ops we have, we are competing not just with the processors in Great Britain but with co-ops which have evolved over the last 60 years in Europe. Another element of why the structure is different, you have to look at the hereditary structure of farming in Europe, where farms tend to be broken up through the hereditary structure into much smaller units so that owners of the farms become that much more dependent on the co-op to manage their business because many of them also have a job in the Renault Car Factory. Although we may have to be looking at alternative employment for farmers, we do believe through the co-operative structure the strategy which we all agree is the right one will develop in due course better returns for farmers, but it is going to take time and we are going to need more assistance than we have presently.
22. Would you say that obstacles have been put in the way of the development of large producer-based co-operatives but not on processor or retailer operations?
(Mr Duncan) Yes. The dairy sector has seen I think eight competition inquiries over the last seven or eight years. There is no point in going into all of these but you know the major one, which was into the structure of Milk Marque, and at that time Milk Marque handled 37 per cent of milk coming off the English and Welsh farms, in fact British farms, and the Competition Commission, on the basis that co-ops saw their future in developing added value, moving into processing, required them to sub-divide into three successor groups. To give you an example, I mentioned the Aeron Valley Cheese, that creamery processes about 10 per cent of milk produced in Wales, our co-op had no sooner bought it, no sooner was the ink dry than we had a letter from OFT to say they thought this was a major change in the structure of the industry and wanted to conduct an inquiry into that, which they did, and remitted us a bill of £5,000 to cover their costs. That is the frustration we are up against. We see it as a way of resolving the Government's problem as well because patently, from other politicians we have spoken to, Governments want to see farming being able to stand on its own, and dairy farming in particular cannot do that unless it can take its commodity nearer to the supermarket door, so we need assistance and flexibility and the opportunity to compete in that fashion. We have made reference to other co-ops with whom we have to compete, operating from other parts of the world. You may or may not be aware that Fontera Co-op has been set up in New Zealand, and that co-op takes from farms, processes in markets, 98 per cent of New Zealand milk, they have come over here and are now competing with us. As Robert said, they were no sooner operational in Britain than they set up a joint venture with ARLA, a Danish farmers' co-operative, working in the interests of Danish dairy farmers, and that co-op now has the ability, because it has been cleared by the Competition Commission, to manufacture and retail close to 60 per cent of yellow fats, which effectively is butter and marg.
23. In New Zealand there was 90 per cent
(Mr Audas) 98 per cent.
24.in the other countries 60 per cent, yet when it approached 37 per cent in this country the Government said, "You are getting too big"?
(Mr Duncan) Yes.
(Mr Audas) I think also, looking at the chart on the front here, there is no evidence to suggest that when businesses are operating in more controlled co-operative structures with co-operatives taking much higher proportions of the market, consumers are losing out. They are not losing out in terms of price, and it is probably fairly evident to you, if you go to Holland, Sweden or France, there is far more innovation and far more products in the dairy sector than there are in the UK, so if they are winning on innovation and price, as far as consumers are concerned it is a benefit. In those countries, farmers are getting more support back from the consumer in terms of their pricing than we have in this country with a highly fragmented structure, where the farmers and farmers groups have a relatively small leverage on the overall market.
25. One of the key themes of a previous inquiry of the Committee was the influence exercised by the retail multiples and indeed the main processors, the five or six PLCs you referred to, on the whole of the sector. Would you see that aspects of their behaviour could be described as anti-competitive, I would not put it any stronger than that?
(Mr Duncan) As much as anything, and I believe it is an American technique, it becomes a diversionary aspect. The OFT will not raise an investigation unless there has been a complaint, and so there is no doubt that processors have raised over the years various complaints about the actions of co-ops, therefore the OFT look at it and decide whether to conduct an inquiry. Whenever they do that, and our co-op has been involved in four of those, it is a huge demand on management time and cost and we have had to go and employ legal advisers. If I refer in the first instance to Scottish Milk, where we have a longer history, over the six or seven years of the life of that co-op before we merged, we had paid close to £1 million in legal fees purely to protect our position with regard to the various competition issues which had been raised against us. Both ourselves and Robert are looking at developing the business, we need to get larger and get development into processing, but we know the way the competition law is handled at this moment in time that we probably would not get clearance.
26. The processors themselves are very quick to use competition law when it suits their purposes, are their aspects of their own behaviour which could be called into question? Is there a sense in which they are deliberately trying to prevent your own producer co-operatives getting into the processing industry?
(Mr Duncan) I would be reluctant to say that because, do not forget, they ultimately are our customers. Because of the structure of the business at this moment in time, 90 per cent of the milk which we do not process ourselves we are reliant on these customers to bid for. One could deduce in the past they may well have taken a common view, particularly when Milk Marque was operational, because they were obliged to sell the milk under an incongruous 90 per cent rule, but when they put milk out for tender at a price 90 per cent of it was not bought and they had to re-offer it at a lower price, so it seems logical then that the prospective, potential customers would make sure they did not bid for 90 per cent of it. So the structure of the industry at that time allowed that to happen. I would say that now we see probably a more mature relationship betwixt ourselvesRobert can speak for himselfand our customers. They are aware that it is the one food chain and we have all got to get a reasonable return from it. I think the message got to them quite clearly just over a year ago when the milk price was at 16p, these companies are all dependent on a supply of fresh milk coming off English, Welsh and Scottish dairy farms every day, and there was a serious threat that dairy farmers were going to exit the industry in their droves, because the quality of life they were achieving at a milk price at that level was just non-existent.
27. Are you saying, because of that crisis there is a greater sense of common purpose throughout the industry?
(Mr Duncan) We will have an interesting challenge this winter because once again we see external pressures on the milk price, pressures which certainly in the past would have driven the milk price down and quite significantly. We would like to think, but we have not yet got there, that this more mature attitude may help the industry to address what may become a temporary over-supply without driving every litre that is sold everywhere right down to the base levels we have seen. That may be wishful thinking.
28. Would it be unfair to say, Mr Duncan, that when this process was happening, the milk price was going down, that there was some kind of cartel operating with the supermarkets? Would you put it as strongly as that?
(Mr Duncan) The interest of a PLC is to protect the interests of and pay a dividend to its shareholders. That is fundamental. The major companies have to operate in the commercial market place. Approximately 50 per cent of milk which is produced goes into supermarkets in the liquid form for the daily pinta. One would say there is no logical reason why that price should be reduced except that if you took the major companies, for example, Dairy Crest, they process beyond what they sell into supermarkets for liquid usage milk into cheese and into powder. That area of the market has to compete with cheese which is coming in here from Ireland and indeed we believe there is liquid milk coming in from Ireland at this moment in time as well, because the Irish are more exposed to the commodity market and if they have a surplus it comes over here, we welcome it in and our price suffers. So there may be a common interest in the PLCs saying the price has to go down.
(Mr Audas) I do not really think there are primary issues of cartels. I think the platform we are on really is to say there has to be a greater counterbalance of power within the supply chain. The producer and producer groups have been put in a very weak position and we have to attend to that counterbalance of power and indeed have a greater understanding that we need to follow the track of getting further into vertically integrated processing, which will in fact rely on the acquisition of processes by and large, not by much greenfield site building but by acquiring processing business, developing it, much as has happened in the rest of Europe. I think it is really the issue of making sure we are operating on a level playing field as far as the OFT is concerned but also that we are given the encouragement, if you like, to develop vertical processing business because it has been fairly well proven throughout Europe as being one way of providing some protection to the farming industry which actually works and can apply in other sectors as well, otherwise it does fall upon Government to provide support if it has a fragmented farming structure. We understand the way things are going in terms of CAP support, so it is vital that producers have the opportunity to put more of the control of their own future in their own hands, and that has to be done by grouping together in co-operatives and developing vertically integrated processing businesses.
29. Is there any evidence that supermarkets use milk as a loss leader product which reduces the price expectation of the consumer which it is sometimes difficult to reverse and that is having a detrimental effect on the raw milk price?
(Mr Duncan) I think they may have in the past but certainly since the militant action to which we referred earlier, they have become ultra-sensitive to the perception they are using the heavy hammer to hold back food producers, in this case dairy farmers. It is also interesting that at the two previous selling rounds which we alluded to, the first one in September 2000, a number of the multiple retailers volunteered effectively to pay 2p a litre more for their milk providing it went back to dairy farmers and did not stay with the processor. At the second selling round in March, April this year, by some supermarkets there was also the more sympathetic attitude taken but perversely in that situation we had some of the processors saying they did not think a 2p a litre milk price increase was justified, so they had their customer effectively volunteering it and them saying they did not think it was necessary.
30. I would like to ask some specific questions about prices now. What is the current price paid to dairy farmers per litre?
(Mr Duncan) At this moment in time I suppose we would average that at just under 20p.
(Mr Audas) Yes, on average.
(Mr Duncan) That is per litre.
31. What was it before you took over?
(Mr Duncan) Before we took over you are back to the days of the Milk Marketing Board. It was probably about the same, 18 to 19p. Then, as we said, over the next two or three years it rose fairly quickly to a high in 1996 of 24, 25p on average.
32. How much does it vary within a 12 month period?
(Mr Duncan) It does vary but co-ops tend to sell on annual contracts, which have a price modifier half way through the year.
(Mr Audas) There has been a linkage to the euro which has had a considerable effect on the price paid to dairy farmers over the last few years as the pound has strengthened versus the euro. That has been one major factor.
(Mr Duncan) We have provided you with detailed graphs on this.
33. Is it in the package you first gave us?
(Mr Audas) Yes.
34. I have not had a chance to look at it yet. How much does it vary during a 12 month period?
(Mr Audas) It will vary quite a lot if there is instability in the currency market pan Europe and secondly in the international markets, which is what is going on at the moment and is likely to happen over the next few months.
35. Let us take the last 12 months.
(Mr Audas) There were two major factors. One, which John referred to, was the desire to get more and there was some support from supermarkets to improve prices to farmers over the last 12 months, but the situation has now changed slightly in the sense, particularly after 11 September, there is concern in international markets that the value of internationally-traded products has fallen by about 20 per cent in the month of October for instance. We cannot isolate ourselves from those international effects which may have an influence over the next six months or more. One of the basic things we are looking for is to provide structures within the industry which will allow a dialogue in the supply chain where producer groups can have an influence on consumers and supermarket prices to make sure we have a sustainable and viable industry in this country. To a significant degree, supermarkets accept that if they want all the benefits of fresh products in this country they have to ensure a viable market in the country for the milk producer.
36. How would you explain the fluctuation?
(Mr Audas) The main factor is the pound versus the euro. The factor of leverage, as John referred to, on the liquid price in supermarkets to ensure farmers get better returns, has improved over the last 12 months. The main risk over the next 12 months is the international forces causing a depressing influence on the market and indeed, for instance, milk which is not required for processing in Ireland because of low international prices coming into the UK, so you get the international market effect as well.
37. Let us look back over the last 20 years, how would you describe the general trends in the price for milk over that period?
(Mr Duncan) The preceding ten years goes back to the statutory Milk Marketing Board where the price by negotiation went up every year to cover the added cost and to take into account inflation. Effectively at that time we had a managed market. As I said, dairy farmers' increasing costs were more or less covered over that period. Now we are much more exposed to the international market, for the range of reasons to which Robert alluded, the more willing attitude of the multiple retailers last year to pay the 2p extra did also coincide with the fact that the market for traded product also was very strong. So we saw the Irish milk which is now coming over here going into powder, going into the market, and was able to support at that time a milk price of 22 or 23p. Again for the reasons which were referred to earlier, we have added to that also the foot and mouth effect on all British exports which is discouraging a lot of international buyers from taking British product. So it is a range of factors which are all effectively operating against dairy farmers' interests.
38. Going back to prices again, what price do the supermarkets or the processing firms pay per litre?
(Mr Duncan) I would have to generalise because the price that we sell to each customer is different and, to a degree, it is confidential. If I say we are paying our members 20p, it costs us about 2p a litre, ballpark, on average to take the milk from our member's farm to the processors' facilities and to cover our costs. You can take it then on average the processors are paying 2 to 21/2p more than we are paying our members. What they are selling it on to multiple retailers for, you would need to ask them.
39. But supermarkets?
(Mr Duncan) I do not know.
(Mr Audas) It will depend on what product they are buying and the packaging format and so on.
(Mr Duncan) And what the service levels are.