Liz Lynne

"THE STATE OF THE DAIRY INDUSTRY" (Liberal Democrats Consultation Paper)

BACKGROUND

The British dairy industry is self-evidently in serious crisis. Depending on who you speak to, dairy farmers need between 18 and 21 pence per litre simply to cover the basic costs of production. Presently farm gate prices for liquid milk are between 17.1 and 17.6 pence per litre. This compares with 25 pence per litre in 1995.

The UK's countryside accommodates around 230,000 farm holdings. Between 1995 and 2002, registered dairy production holdings in the United Kingdom fell 30% from over 35,000 to 25,000. The number of farmers engaged in dairy production has dropped from 48,000 in 1997 to less than 41,000 in 2002. This trend is reflected across other agricultural sectors, pointing to a difficult future for rural communities which depend upon either dairying or mixed and livestock holdings.

HISTORY

The Milk Marketing Board was set up about 70 years ago. At that time, the dairy industry faced a similar crisis as today. Farmers could not sell their milk and prices, along with other agricultural products, were at rock bottom. The MMB's commitment was to collect and market all milk, guaranteeing prices for milk sold into various sectors.

However, in 1996, the Conservative Government closed down the MMB and deregulated the milk market, leading to a more fragmented industry. Dairy farmers found themselves in a relatively difficult negotiating position, compared with supermarkets and processors.

Farmers could sell to Milk Marque, the MMB's successor, which could handle at the time around half the milk produced, or they could sell direct to the processing companies, which had previously been obliged to buy from the MMB.

For a while, milk prices reached 26p a litre.

But in 1999 the then Competition Commission, following a request by the Dairy Trades Federation (on behalf of the processors) decided that Milk Marque was abusing its monopoly position and should be broken up.

Three Farmer-owned Co-operatives were set up in 2000 to act as brokers, buying from producers and selling to the processors and manufacturers. Since then a series of mergers between these three smaller, independent groups have left three big Co-ops - Milk Link, Dairy Farmers of Britain and First Milk - and a handful of even smaller companies.

WHO MAKES THE PROFITS FROM MILK?

Needless to say, the question as to who makes money out of milk is one which is hotly disputed, depending on which sector you speak to.

What cannot be disputed is that the average retail price for a litre of milk is 42 pence, whereas farmers get between 17 and 18 pence per litre.

The remaining 24 pence has been argued to be made up of:

• Processing costs/ 'profits'- 11p
• Supermarket handling and cold storage - 2p
• Supermarket 'profit' - 11p

The attributable costs with regard to dairy milk products (yoghurt, cheese etc.) are even more opaque.

COMMENTARY

We objected to the break-up of Milk Marque, arguing, at the time, that the market share which Milk Marque controlled was already significantly below what the Competition Commission at that stage considered to be monopolistic - i.e. 33% of the market. We also argued that this would undermine the market position of producers who would be vulnerable, not to the vagaries of the free market, but to the very significant muscle which the very few large processors, and more especially supermarkets, had within that market. Like others in the industry, we predicted that this would significantly undermine the position of dairy farmers and result in plummeting farm gate prices. That prediction has proven to be correct.

Despite CAP mid-term review negotiations - which include the eventual phasing out of milk quotas and the temporary introduction of a dairy premium, dairy farmers continue to struggle and their current position in the market demonstrates a significant weakness in being able to negotiate an adequate farm gate price.

Dairy farmers have quite understandably had to resort to demonstrating in an increasingly direct manner against their beleaguered place in the market. After all there have been changes to both commodity prices and the weakening position of sterling which should, on the face of it, provide a climate for improved farm gate prices, but this has, clearly, not happened.

Farmers cannot understand why things haven't improved with the weakening of the pound so they have had to resort to blockades and crisis style meetings with the larger retailers and processors.

However, we believe that to base the settlement of farm gate prices - whether for milk or anything else - on a process of 'special pleading' or bad publicity for the reputation of those companies is neither desirable nor sustainable. The current round of protests and meetings will only succeed for as long as protests and crisis meetings are next required - perhaps only months away.

This is merely a demonstration that the market place is not operating effectively. It may be a product of the system of public sector interventions already in place. In the case of the dairy industry it is clearly not a simple 'supply/demand' arrangement; after all the quota system is still in place which presents a 'target' for dairy farmers to produce and deliver into the market place. There is presently nothing on the demand side to compensate for that.

POSSIBLE ACTION POINTS

We are taking an unashamedly producer perspective in this paper and seeking ways forward which might provide a mechanism to deliver a sustainable and stable farm gate price for milk. In doing this we clearly want to avoid the unnecessary introduction of inappropriate regulations and bureaucracy.

That having been said, action is needed and we suspect that Government intervention is probably unavoidable unless we want to see a situation in which the recent rapid exodus of dairy farmers from the industry turns into an unmitigated flood.

The possible options for Government action are relatively self-evident, but we set out a few below for the purpose of providing the basis for a discussion with producers, producer representatives and producer cooperatives.

1. The "do nothing" option.

We could simply say that the current situation is an inevitable consequence of a market which faces an over supply of milk, falling consumer demand, which in turn has resulted in the placing of a very significant squeeze upon the primary producers of the raw product. One could take the view that we should leave it to market forces.

2. The "lobby and influence" option

We could take the view that the supermarkets and processors are not giving farmers an adequate farm gate price and that we would join with others in threatening to give them "bad publicity" and otherwise warn them that we hold open the options of investigation, regulation, etc., to persuade them to offer something above the marginal cost of producing the milk in the first place.

3. Voluntary Codes of Practice

We could argue that producers and their representative/supplier co-ops on the one hand and the Dairy Trades Federation and larger supermarket chains on the other should negotiate a new "Code of Conduct" which would form the basis on which farm gate price negotiations are concluded. This could provide a method upon which a price could be "benchmarked" to inform the industry generally and against which disputes could be settled and complaints resolved "within the family" of those responsible for resolving the negotiations in the first place.

4. Using existing regulatory regime

We could recommend referring the whole matter to the Competition Commission, asking them to investigate whether either the supermarkets or the processors were acting in an monopolistic manner. Alternatively, we could use the facility of a complaint to the Office of Fair Trading to ask that the contractual or other basis on which the negotiations are founded be fully investigated.

5. Creating a new regulatory regime

There could be a number of options here, but one on which we think we could focus might be the creation of a Retail Food Regulator operating within the Office of Fair Trading. This office could, for example, (i) work with the Food Standards Agency to regulate the proper labelling of British sourced produce; (ii) produce league tables on the delivery of "food miles" targets and; (iii) as far as this issue is concerned, provide an accessible, but objective basis on which farm gate price disputes are resolved.

CONCLUDING COMMENTS

This is a necessarily brief consultation paper.

We recognise that the market for milk is a relatively dysfunctional market. Dairy quotas are still in place and that provides a target for the supply side - whether or not consumers actually want that amount of milk. We have a responsibility to dairy farmers to balance this system until the quota system is phased out.

There is no suggestion that a resolution to achieve higher farm gate price would result in the 'sucking-in' of cheaper liquid milk imports. This has not happened so far and although Britain has amongst the best farm structure, achieved amongst the greatest efficiencies and has amongst the best of climates for livestock grazing and milk production in Europe, farmers are paid a significantly lower amount for their liquid milk than their European counterparts:

Andrew George: To ask the Secretary of State for Environment, Food and Rural Affairs what recent assessment she has made of the farmgate prices for milk in the UK; and what the farmgate prices are for milk in other EU nations. [135775]

Mr. Bradshaw: The table gives the most recent data available from Eurostat on the average farmgate price of milk of 3.7 per cent. fat content in euros per 100 kg for the EU 15. This data shows the UK farmgate prices are consistently below the EU average. The reasons for this were examined by KPMG in their report on "Prices and Profitability in the British Dairy Chain", which was commissioned by the Milk Development Council. The report concluded that the lower prices were the result of the structure of the UK dairy sector, the comparatively low value of the mix of dairy products in the UK and a low level of innovation. It also suggested a number of areas where the efficiency of the dairy supply chain could be improved.

Selling price of raw cows milk, 3.7 per cent. fat content:EU 15 (euros per

kg) 1998 1999 2000 2001 2002(4)

Belgium 27.47 26.33 27.44 29.93 26.37

Denmark 30.8 30.26 30.86 32.34

Germany 29.52 28.47 30 32.82 29.98

Greece 32.72 33.69 33.47 35.62 34.55

Spain 27.99 27.33 27.05 30.33 28.12

France 28.52 28.11 28.81 29.99 29.26

Ireland 27.92 26.66 27.2 28.56

Italy 34.84 34.23

Luxembourg 31.45 30.65 30.53 32.73 31.89

Netherlands 30.59 28.62 29.15 31.27 29.65

Austria 27.64 27.76 27.83 31.76 30.14

Portugal 28.39 28.49 28.97 32.17 32.87

Finland 32.05 32.15 32.72 33.97 34.36

Sweden 32.71 33.11 34.74 31.22

United Kingdom 26.76 26.13 26.09 25.57

(4) Eurostat data for 2002 is not yet complete; Source: Eurostat Cronos Database; Official Report 12 Nov 2003 : Column 300W

We do not believe that the 'do nothing' option is either responsible, fair or sustainable for our dairy farmers. It is simply not acceptable to stand aside, as the Government has, and hope that the market will resolve this problem without a level of intervention.

We would welcome the views of those who represent the dairy farming industry before taking specific proposals to Government.