Milk Pricing in the United Kingdom
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House of Commons Environment, Food and Rural Affairs Committee Milk Pricing in the United Kingdom Ninth Report of Session 2003–2004 Report, together with formal minutes, oral and written evidence Ordered by The House of Commons to be printed 26 May 2004 HC 335 Published on 8 June 2004 by authority of the House of Commons London: The Stationery Office Limited £22.00 Environment, Food and Rural Affairs Committee The Environment, Food and Rural Affairs Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Environment, Food and Rural Affairs and its associated bodies. Current membership Mr Michael Jack (Conservative, Fylde) (Chairman)* Ms Candy Atherton (Labour, Falmouth and Camborne) Mr Colin Breed (Liberal Democrat, South East Cornwall)* David Burnside (Ulster Unionist, South Antrim) Mr David Drew (Labour, Stroud)* Patrick Hall (Labour, Bedford) Mr Mark Lazarowicz (Labour/Co-op, Edinburgh North and Leith) Mr David Lepper (Labour, Brighton Pavilion) Mr Ian Liddell-Grainger (Conservative, Bridgwater)* Mr Austin Mitchell (Labour, Great Grimsby) Diana Organ (Labour, Forest of Dean)* Joan Ruddock (Labour, Lewisham Deptford) Mrs Gillian Shephard (Conservative, South West Norfolk) Alan Simpson (Labour, Nottingham South) David Taylor (Labour, North West Leicestershire) Paddy Tipping (Labour, Sherwood)* Mr Bill Wiggin (Conservative, Leominster)* *These Members were nominated as Members of the Sub-committee. Mr David Drew was Chairman of the Sub-committee. Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No. 152. These are available on the Internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/parliamentary_committees/environment__food_and_rural_ affairs.cfm. A list of Reports of the Committee in the present Parliament is at the back of this Report. Committee staff The current staff of the Committee are Gavin Devine (Clerk), Fiona McLean (Second Clerk), Dr Kate Trumper and Jonathan Little (Committee Specialists), Andy Boyd and Louise Combs (Committee Assistants), Anne Woolhouse (Secretary) and Rebecca Flynn (Intern). Contacts All correspondence should be addressed to the Clerk of the Environment, Food and Rural Affairs Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 3262; the Committee’s e-mail address is: [email protected]. 1 Contents Report Page Summary 3 1 Introduction 5 2 Context of the inquiry 6 Deregulation of the dairy market 6 The UK dairy market prior to 1994 6 The UK dairy market after 1994 6 The UK dairy industry today 7 EU dairy regime 7 Government’s role in the dairy industry 7 Industry players 8 The UK milk market 10 Farmgate prices 10 3 Were the retail price increases of 2003 transmitted to farmers? 12 Evidence that increases were transmitted 14 Evidence that increases were not transmitted 14 Some transmission of price increases 16 Why do farmers believe that retail price increases have not been transmitted? 17 Who takes what share of the retail price of liquid milk? 18 Transparency in the dairy supply chain 20 4 The structure of the dairy supply chain: how efficient is the UK dairy industry? 22 Greater efficiency through horizontal integration 24 CAP reform 27 Further horizontal integration in the production sector 29 Greater efficiency through vertical integration 29 5 Conclusions and recommendations 33 Annex : Permanent milk quota held by UK county for 2002–03 37 Formal minutes 41 Witnesses 42 List of written evidence 43 List of unprinted written evidence 43 Reports from the Committee since 2001 44 2 3 Summary UK dairy farmers are in a financially difficult position and have been experiencing low incomes since the deregulation of the dairy market in 1994. It costs the UK dairy farmer between 18 and 23 pence to produce a litre of milk and yet, since 2000, average farmgate milk prices have varied between 16 and 20 pence per litre. Therefore, on average, farmgate prices are not high enough to cover farmers’ costs. The thrust of our findings is that the dairy market is not operating properly. The structure of the dairy sector is complex and there is a lack of transparency in the dairy supply chain. This has meant that, although the 2003 increases in the retail prices of liquid milk and cheese in fact appear to have been transmitted to farmers, farmers perceive that they have been treated unfairly. Moreover, despite our best efforts in this inquiry to determine who takes what share of the retail price of a litre of liquid milk, we were unable to account for some 18 pence. Our recommendations urge the Government to take steps to improve transparency in the dairy supply chain, in part by improving the information about the dairy market that is available and communicating that information to farmers. We also recommend that Government address the engrained adversarialism and blame culture that continues to characterise the dairy industry. Some of the answers we received in the course of taking evidence were at best opaque, if not disingenuous, making this a difficult inquiry to undertake and to conclude. Given the constraints under which it is operating, the UK dairy industry shows some evidence of being an efficient industry but it would appear that it could benefit from greater horizontal and vertical integration. We urge the Government to take steps to foster an environment that is conducive to such structural change and consolidation and that could result in greater efficiencies still. 5 1 Introduction 1. In the latter half of 2003, dairy farmers took direct action against processors and retailers on a number of occasions, to protest about what they regarded as a failure to transmit to them an increase of 2 pence per litre in the retail prices of liquid milk and cheese, made in July and September 2003 respectively. The lobby group Farmers for Action (FFA), which was responsible for organising the protest action, described the situation in July 2003 as “Processors playing the hokey cokey with our 2p!”1 The FFA website asked: Why is it every time there is an initiative to try and save [the] primary producers’ dairy industry with the consumer dipping their hand in their pocket to ensure this, supermarkets agree to collect it, but then processors become God and feel they should keep some of it? How many times have farmers been told we are out there working hard trying to get every half penny to pass back to the primary producer, and on this occasion FFA have caught at least one processor with its trousers down!2 2. It was against this background that, in November 2003, we decided to examine the market price and farmgate price of milk and investigate why recent rises in the former had not led to increases in the latter. We appointed a Sub-Committee to carry out the inquiry. The Sub-Committee was chaired by Mr David Drew; its other members were Mr Colin Breed, Mr Michael Jack, Mr Ian Liddell-Grainger, Diana Organ, Paddy Tipping and Mr Bill Wiggin. 3. The Sub-Committee received 24 written memoranda and took oral evidence from: the National Farmers’ Union for England and Wales; the Royal Association of British Dairy Farmers; Farmers for Action; Milk Link Ltd; Robert Wiseman Dairies; Dairy Crest; Arla Foods UK; the British Retail Consortium; the Federation of Milk Groups; the Dairy Industry Association; the Milk Development Council; the Minister for Food, Farming and Sustainable Energy, Lord Whitty of Camberwell, together with Defra officials; the Office of Fair Trading and the Competition Commission. We are grateful to all those who gave evidence or otherwise assisted with our inquiry. 4. Issues relating to the UK dairy industry have been examined by two other parliamentary committees within recent years. Our predecessor Committee, the former Agriculture Committee, reported on the marketing of milk in February 2000.3 In December 2001, the Welsh Affairs Committee took oral evidence from a number of witnesses on farming and food policy in Wales, including the Welsh dairy industry; this evidence was reported to the House in August 2002.4 1 www.farmersforaction.org 2 Ibid. 3 Agriculture Committee, Second Report of Session 1999–2000, The Marketing of Milk, HC 36-I 4 Welsh Affairs Committee, 5 August 2002, Minutes of Evidence for Tuesday 4 December 2001 and Tuesday 11 December 2001: Farming and Food Policy in Wales, HC 427-i-ii 6 2 Context of the inquiry Deregulation of the dairy market The UK dairy market prior to 1994 5. Until 1994, there were four Milk Marketing Boards (MMBs) which held a statutory monopoly on the collection and sale of milk in Great Britain. The MMBs were established to resist the downward pressure on producer incomes resulting from the increasing power of dairy companies. They became responsible for all the milk produced by dairy farmers, selling it on their behalf and pooling the returns in order to provide equal returns according to the volume of milk consigned by each farmer. 6. Although the MMBs were typically described as co-operatives, farmers were generally required to sell their milk to them; the MMBs were, in turn, required to buy milk from the producers and find a market for it. This meant that Boards acted not only as sole purchasers but also as monopoly suppliers of milk to the processors in their respective areas. The price of milk was negotiated and agreed by the MMB (on behalf of dairy farmers) and the Dairy Trade Federation (on behalf of the dairy companies).