Environment, Food and Rural Affairs Committee
Oral evidence: Dairy prices, HC 817
Tuesday 2 December 2014
Ordered by the House of Commons to be published on 25 November 2014.
Written evidence from witness:
Members present: Miss Anne McIntosh (Chair), .Jim Fitzpatrick, Mary Glindon, Sheryll Murray, Margaret Ritchie, Mark Spencer,
Questions 76 – 117
Witnesses: George Eustice MP, Parliamentary Under Secretary of State for Farming, Food and Marine Environment, Defra, Tim Mordan, Deputy Director, Sustainable and Competitive Farming Strategy, Defra, and Mark Filley, Head of Livestock Policy Team, Defra, gave evidence.
Q76 Chair: Good afternoon, and welcome. Minister, can I thank you especially for being here today and rearranging what I know is a particularly busy diary at this time, and contributing to our inquiry into dairy? Would you just, for the record, like to introduce the team?
George Eustice: Yes. On my right is Mark Filley, and on my left, Tim Mordan. Mark specialises on the dairy industry within Defra, and Tim Mordan has overall responsibility for food issues.
Q77 Chair: You are all very welcome, thank you. Minister, at the outset can I just ask what particular representations you have received at this time about the impact of the low farmgate milk prices in the dairy sector?
George Eustice: I have had many representations, including from parliamentary colleagues writing to me on behalf of their constituents affected by the downturn in prices in recent months. Every six months we hold a meeting of the Dairy Supply Chain Forum; the last meeting of that I had was just a couple of weeks ago, on 19 November, where we were able to discuss some of the challenges currently faced by the industry—farmer representatives, processors and also retailers.
Q78 Chair: Do you think it is right that supermarkets are offering milk as a loss leader, at four pints for 89p?
George Eustice: One of the things that it is important to recognise is that the reason prices have gone down over the summer is partly because globally, and also in Europe and the UK, there has been an increase in production. Production in the UK is up by around 8% to 10%. That has obviously led to an increase in supply, and when we live in a world of supply and demand, where price is influenced by supply, obviously if you want to get rid of that additional volume you do need to see a fall in prices. Arguably you could say that some of those supermarkets, by putting milk on promotion, have helped to clear those additional volumes. The supermarkets themselves would claim that they are shouldering the cost of those promotions themselves. However, there is one valid point in this area, and that is that once you create a culture and an expectation of low retail prices for milk, you may be making it harder for things to return to normal.
A second point is that some of the smaller retailers, who perhaps are not in a position to shoulder the cost of such promotions themselves, nevertheless feel obliged to try to follow the cost of those promotions and to match them. They are unable to do so without exerting a downward pressure on farmers. I do recognise that there is potentially a problem in terms of changing people’s expectations about a milk price. Ultimately, in the long term, we need a sustainable milk price that enables efficient farmers to make a profitable return.
Q79 Chair: Are you concerned at the number of farmers leaving the industry? I think it was 400 farmers last year, of whom I understand 70 were from North Yorkshire.
George Eustice: The thing to recognise is that last year was actually a good year for dairy. We must not lose sight of the fact that, although two years ago the industry was in dire straits, with high feed costs and with prices even lower than they are today, the financial year 2013-14 was actually quite a good year for dairy farmers; it was almost a record year. They were making, on average, an £87,000 profit, and prices were actually quite good. So, what we have to recognise is that over the last 20 years there has been a progressive consolidation in the dairy industry. Our total output of dairy has remained broadly stable. However, there has been quite a significant decrease in the number of farmers and an increase in the average holding size.
Q80 Chair: In the last year we ran at a £1.27 billion deficit in dairy. Is this something that concerns the Government, and that the Government are seeking to address?
George Eustice: It is, and it is why Liz Truss, the new Secretary of State, and I have talked a lot about the importance of trying to develop the processing industry. There is a lot of potential to produce more cheeses in this country, for export but also for the domestic market. It is wrong, when we have such good conditions to produce dairy products in this country, that we seem to be importing too much. That is why we are putting quite a lot of emphasis on adding value to our dairy products. Just over half of all the milk produced is sold as liquid milk, and traditionally the UK has relied more on liquid milk than many other countries. But I think there are opportunities to add value to our dairy produce by producing more of those products ourselves.
Q81 Chair: We are going to come on and discuss the Groceries Code Adjudicator in more detail, but do you think that both the farmers and the public think that the adjudicator and the code apply to relationships in the dairy sector between the farmer and the processor, and that people think the Groceries Code Adjudicator has teeth? In fact, as we will go on to explore, she does not have teeth at the moment.
George Eustice: They are two quite distinct things. We have the Groceries Code, which is a code established in statute, and which is enforced by the Groceries Code Adjudicator, Christine Tacon. I have met a number of producers who have had discussions with her about some of the challenges that they face, and she is getting quite a good reception. Some of the larger agri-businesses supplying direct to supermarkets feel that this has been a good innovation and will be helpful. However, we have to recognise the role of the Groceries Code Adjudicator is to police the relationship between suppliers and the retailers; it is not really there to deal with issues between the producer and processor in the middle. What we do have to deal with that relationship is the dairy supply chain code; again, this is a voluntary code of practice. But actually, a recent review by Alex Fergusson, the MSP, has concluded that this has actually made quite a big difference, that it is working, and that it is a success. We have that code in place to police the relationship between processors and the farmers.
Q82 Chair: We will come on to that in one moment. How do you think the 2014 milk crisis scenario this year compares to the 2012 collapse in prices?
George Eustice: The prices are not quite as low yet, although there is quite a range, it has to be said, between those processors paying the lowest amount and those paying the highest. There is quite a wide variation at the moment if you look at their stated prices for December coming up. The key difference between now and 2012 is that feed costs are much lower. In 2012 we had the perfect storm in that we had very low prices for dairy products, but also very high forage costs. At the moment, animal feed costs are roughly 30% lower than they were in 2012. That means that particularly some of the more extensive producers—relying perhaps more on grass and not having so many expensive overheads—are finding that they are just about able to break even, even with prices as they are now. There will be others though, who have got perhaps more intensive systems with higher inputs, who will, with the current prices, be losing money.
Q83 Mr Spencer: Minister, you made reference to the better prices last year for milk. Is it unfair, then, for farmers to start moaning about low prices this year, if they had good prices last year?
George Eustice: No. I was a farmer once and I am never going to be someone to criticise farmers for complaining about low prices; I completely understand it. What we have to recognise is there has been something of a rollercoaster ride for the dairy industry: from 2012, when it was in dire straits with high feed costs and prices at that low level, we then saw quite a sharp recovery in prices during the course of 2013, and indeed as recently as February this year, at the NFU Conference that I spoke at, I commented that this was the first year in many that the dairy industry could face the future with such confidence. Of course, the industry published its own strategy for growth called “Leading the Way”, which it published at the beginning of the summer. So it is not many months ago that the industry was facing the future with great confidence. What we have to recognise is that in the long term the future of the dairy industry remains good, in my view. Global demand is growing by around 2% to 2.5% per year, and that is going to correct things longer term. We do now, as a result of this spike in production over the summer, have a short-term blip in the prices, which I absolutely understand is causing a problem for farmers.
Q84 Mr Spencer: Given that they find themselves in those circumstances, what is your response to the direct action taken by Farmers for Action in blockading processors?
George Eustice: All I can say is that I can understand their frustration. They do have to be careful. The processors themselves are trying to deal with a global fall in commodity prices. There has been an increase in production. It is not necessarily the processors’ fault in this instance that they are not paying the right price. Two years ago there was a real issue of some of the processors not dealing fairly with their suppliers. Since we have got the dairy supply chain code in place, that has been less of an issue. It is a bit of a danger; we do want Britain to be open for business. In the long term the prospects of the industry are good, and it does not send a good signal to those processors—some of these are big pan-European, or even global companies—to feel that that in Britain they are going to get sometimes quite aggressive protests that disrupt their business. It is one thing to have protest, but where you have problems with maybe lorries being blocked and the whole operation of business being blocked, that can actually be counter-productive to the industry.
Q85 Mr Spencer: Given the volatility in the market—obviously you have said that 2012 was disastrous and 2013 was better; in 2014 we are back to disaster—what can farmers and processors do to protect themselves from that volatility?
George Eustice: One of the things that came out of the last meeting we had of the Dairy Supply Chain Forum a couple of weeks ago was a very interesting discussion around whether there was potential to develop a futures market in milk in Europe. We know that there are a couple of exchanges—Liffe and Eurex—that since 2010 have been offering quite a limited futures market in skimmed milk powder. This is trying to learn from what has happened in the United States, where there is now quite a developed futures market—it has been established for about 20 years—where dairy farmers quite often will buy at a guaranteed price into that futures market, covering around 40% of their production, so that they know they have got some of their base costs covered with a guaranteed price, and then for the remaining 60% of their production they will take their chances in the marketplace. If we can develop something similar in the UK and in Europe, and make some of those embryonic futures markets that we have already got in skimmed milk powder more successful and more accessible, we might actually find that the farmers could help to manage the inherent volatility of world commodity prices.
Q86 Mr Spencer: Some 85% of the milk that is produced in the UK is consumed here. Export is the answer that seems to be glaring us in the face, so what can the Government do to assist processors and farmers to export more of our product all over the world?
George Eustice: We have quite a detailed programme that we work up with UKTI and others to do precisely that. Indeed, we are constantly trying to open new markets in countries such as Brazil and China for more of our cheese producers. Some of them do have historical arrangements, but we are keen to do more. There is actually a high demand now for British cheese—it is seen as a premium product internationally. Last February I visited the Gulfood exhibition in Dubai, and even there the things that were getting a lot of interest were British cheeses. Some companies were even manufacturing cheeses that were designed specifically for particular export markets, so exports is an interesting area. It is something we are keen to do more of, and that is why we have really prioritised trying to open some of those export markets.
Q87 Ms Ritchie: Minister, moving on to the European Union response, do current EU approaches protect the EU dairy farmer sufficiently from the impacts of price volatility?
George Eustice: I might ask Mark to come in on some of the detail on the European plans. Early on, after the Russian trade embargo, which had an impact particularly on some of the Baltic states and in eastern Europe, there was an EU scheme to help to cover the storage costs of cheeses so that it would be possible for certain dairies to have some assistance with the cost of storing stocks of cheese for which they did not have a ready market. That fund was quite quickly exhausted. Predominantly there were a number of countries that went for it, and it was subsequently then closed again. Since then, they have come forward with another scheme that aims to support specifically those countries that have been hardest hit. It is really the three Baltic countries, Finland, Latvia and Estonia, who did have big export markets in Russia. You have actually seen the price of milk there fall to under 20p a litre, which is lower than we have here. I do not know if there is anything to add, Mark.
Mark Filley: Thank you, Minister. That is absolutely right. The European Commission does have extremely wide-ranging powers to deal with crisis situations as part of the CAP package. It has a suite of emergency powers and exceptional measures; it has powers to vary and extend the scope of any of the normal market‑support measures that are available to it.
This year, as the Minister has said, in response to the Russian crisis we have seen the Commission extending the period where public intervention is open, extending the range of products that public intervention and private storage aid can cover. There is a lot of power and flexibility there for the Commission to step in. The issue is making sure that it does it in a sensible, targeted way some of the time.
Q88 Ms Ritchie: Minister, what representations have you made to the EU bodies on the actions they have taken in response to the current Russian ban on EU dairy imports?
George Eustice: This issue came up at the last Agriculture Council that I attended in October; I cannot remember the precise date, but somebody can provide you with that. It was on the agenda, and the UK recognised that there were specific issues around the three Baltic states. We were open to the idea of a package coming forward, but we wanted there to be financial restraint. We did not want a blank cheque or a scheme that would run away, as some of the earlier attempts did.
There was a period after that when, although there was a little bit of headroom in the budget, the Commission was entertaining accessing the crisis reserve fund to fund its scheme, which was quite unpopular because if you access the crisis reserve fund, it has a knock‑on impact on CAP payments and single farm payments right across the European Union.
There was a period of negotiation around three or four weeks ago and, in the end, the EU managed to come forward with a scheme that was once again funded out of headroom in the budget so that it did not have an impact on other farmers’ single farm payments. We made a contribution in that round-table discussion and officials, through various working groups, have contributed to the debate since.
Q89 Ms Ritchie: Did the implementation of the EU milk package help to stabilise dairy farmers’ incomes?
George Eustice: I am not sure that it had a huge impact here in the UK—I might ask Mark or Tim to come in—simply because we put in place our own voluntary code of conduct in the dairy supply chain between processors and the farmers who supply them, which in many ways goes further than the contractual requirements that were contained in the EU’s milk plan. The EU milk plan, and the CMO regulation that brought it into effect, only required that there should be contracts that stipulate things like time scales and prices to be paid. What it would not have allowed is the more detailed code of conduct that we have, which requires a farmer to be able to exit a contract with three months’ notice. What we have actually goes further and achieves more than the EU milk package. Mark, is there anything else?
Mark Filley: Thank you, Minister. No, those are the key points. The Commission actually published its own study on a review of the dairy package in the summer. It was in June that it was published. It basically concluded that it is too early to say whether the package is actually having a sensible impact. There seems to have been a positive effect on quality, transparency and fairness around contracts either because member states have implemented their compulsory requirement for written contracts, or because, like the UK, it has been the springboard for a better voluntary approach, but it is too soon to say whether the provisions on producer organisations, in particular, have had an effect.
Q90 Ms Ritchie: Last week, the Secretary of State told us that she is discussing labelling with EU institutions. What outcomes do you expect from the European Union to allow UK dairy‑produced products to be more clearly labelled with their country of origin?
George Eustice: I might ask Tim to come in with the detail on that in a moment but, in a nutshell, the point we are trying to make is that with beef, for the best part of a decade, in order to label a product as having country of origin, it has had to be born, reared and slaughtered in that country of origin. We are about to implement similar rules, which the UK pressed hard for, for poultry meat, pigs, lamb and goats, which will require that country of origin to be used only when an animal was reared and slaughtered in that particular country of origin.
There is something more to be done here in terms of dairy, because you can get dairy products such as butter or cheese that can be labelled as produce of the UK when, in fact, they are not using a dairy product—the raw milk—from the UK. They may be importing milk from other European countries, processing it in the UK and then describing it as “product of the UK”. There is an important agenda here to distinguish between a product that was processed and manufactured in the UK, and a product that actually has country of origin of the UK, where both milk production and the processing of that milk took place here.
Mark Filley: The Minister is quite right. The Commission has been carrying out a feasibility study and is looking at the costs and benefits of extending mandatory country‑of‑origin labelling to milk or to milk used as an ingredient in dairy products, as the Minister was saying. We have certainly had lots of conversations with the dairy industry and it is a very strong supporter of those kinds of mandatory labelling. It would allow it to say that British cheese is actually made from British milk. The Secretary of State and the Minister have been lobbying hard for that.
The Secretary of State had her first discussion a couple of weeks ago with Commissioner Hogan, the new Commissioner for Agriculture and Rural Development, to emphasise our support for the work that the Commission is doing. We expect to receive its feasibility study after Christmas.
Q91 Chair: Can I just ask which countries are benefitting at the moment from us not having that labelling? Is it Ireland or countries further afield?
George Eustice: Anecdotally—we encountered this when we had the beef problems as well—farmers will say that it is Irish milk producers that are selling Irish milk to processors. I am not sure that we have evidence that it is mainly Irish milk that is being imported and processed, but certainly that is what farmers argue.
Q92 Sheryll Murray: May we turn to the voluntary code, Minister? Is there a fair balance between the parties contracting to supply and purchase milk and dairy supplies?
George Eustice: Yes. Alex Fergusson, the MSP—I always say “the MSP”, because otherwise people confuse him with somebody who was quite famous in football—did conduct a review during the course of this year, which was published back in September. He concluded that the code was actually working quite well. He did make a number of recommendations that he thought might improve it. In particular, he highlighted that he thought there was confusion sometimes, in that if a processor wants to cut the price of milk they must give 30 days’ notice, but they do not have to give any such notice if they want to increase the price of milk. There was some evidence he gathered that suggested that processors were sometimes saying, “We cannot put the price up, because we need to give you 30 days,” and that is not the case in the code, so he felt there should be clarification there.
He also felt that there should be a good‑practice clause, basically to ensure that the producer was fully aware and that there was absolute transparency around the provisions in the code. There were a couple of other more minor points but, broadly speaking, he concluded that the code was working quite well.
The final recommendation he made was that some thought should be given to whether retailers could be brought within the remit of the code. Although the code does not specifically address them, he actually felt that if retailers were to make it clear that they were sourcing milk only from code‑compliant producers and processors, that might encourage the final 10% or 15% of generally smaller processors, who are not currently signed up to the code, to do so. He felt trying to get closer to 100% sign‑up was something that could be achieved if the retailers would send those sorts of signals.
Q93 Sheryll Murray: Can I take you back to the recommendation from the 2011 report on EU proposals for the dairy sector that this Committee produced? We concluded that the contracts should provide certainty and clarity to give both parties confidence to invest. The current system fails to achieve this, and contracts should include price, volume, timing of delivery and duration. Would you support the voluntary code becoming mandatory?
George Eustice: I have looked at this. The problem with making it a mandatory code is because this is a sphere where the European Union already has legislation through the CMO regulation. If we were to put it on a statutory footing, we would actually lose what is really valuable about the voluntary code. I remember sitting on the Committee in 2011 when we heard the evidence and contributing to the drafting of that report—it was a very good report. One of the key problems of putting the code on a statutory footing is that you would lose the ability to state in the code that farmers can walk away with three months’ notice. To me, making a market work properly between farmers and processors does require a situation in which farmers can say, “This is not good enough. I am going to walk away.” In my view, this has been the single most powerful element of the code in terms of getting some of those processors to respond.
Q94 Sheryll Murray: What is your view of the potential of the code to be extended further to the supply chain—for example to cover contracts between processors and retailers?
George Eustice: If you were to do that, there is a danger that you would lose the focus and dilute the purpose of the voluntary code. You would also effectively end up duplicating what is already provided for in the Groceries Code. I do see that they are two distinct things. There is a voluntary code that goes further than a statutory code would be able to, which helps to regulate relations between producers and processors. When it comes to the relationship between the processor and those large supermarket retailers, we already have a statutory code in the Groceries Code and we already have a statutory regulator in the adjudicator.
I do not really see a benefit in stretching the dairy code into the retail supply chain, because it is already covered.
Q95 Sheryll Murray: Would this help to meet the gap between the code and the Groceries Code Adjudicator?
George Eustice: I am not sure it would, because the Groceries Code Adjudicator and the Groceries Code already have quite a lot of provisions, such as that there should not be retrospective price changes or that suppliers should not predominantly cover the costs of promotions—i.e. all these loss‑leader sales. There also should not be retrospective charges for promotions, advertising or the entertainment of supermarket buyers.
There are many provisions in the Groceries Code that apply very specifically and have been tailored to deal with some of the historical abuses that we had, frankly, between supermarkets and their direct suppliers. We have a code that is tailored to deal with the problems we encountered with supermarkets, and we have a voluntary dairy supply code that is really focused on dealing with the relationship between the farmer and the processor. They have different objectives and different purposes, and it is better to keep them distinct.
Q96 Jim Fitzpatrick: Minister, gentlemen, good afternoon. You said earlier today that the provisions are not there to deal with the process in the middle. Some critics say that there is transparency at both ends of milk pricing—that this is very open at the farm gate and when the milk is paid for by the consumer—but that the piece in the middle is still not transparent. Is that a fair criticism?
George Eustice: I might ask Mark or Tim to come in on this. It was an issue that was raised by farmer representatives at the last meeting we had of the Dairy Supply Chain Forum. There was a feeling that there was a lack of transparency about where the costs lie between the processor and the retailer. I have to say that the retailers made clear in their strong defence that they publish all the prices they are charging people in the shops as a matter of public record, and indeed the amount they pay for the raw milk they buy is a matter of public record.
Many of them have their own sustainable milk contracts that quite often make up a portion of their supply, which are linked to cost of production formally in a very transparent way. They were very clear that they believe that transparency does exist, and of course DairyCo, which is the levy body—it is part of the AHDB—regularly publishes average prices for milk on a monthly basis and, indeed, publishes a league table of what different processors are paying and offering to pay in the months ahead. They already publish information that they have on what different processors are offering for December.
Q97 Jim Fitzpatrick: The adjudicator told us last week that she consulted last December on the level of fine that might be appropriate in the event that she had to levy one. The consultation was on the basis of 1% of turnover. Has the Department concluded that that might be where it ought to be once the regulation comes forward?
George Eustice: I am not aware that we have made a conclusion on that. I have to say that, because supermarket adjudication is predominantly the responsibility of BIS, I suspect that the final decision will come across the desk of a different Minister. I have not seen the outcome of her consultation yet.
I do not know whether either Mark or Tim wants to come in, but I am assuming it would be a BIS Minister who would make that decision, since the Groceries Code Adjudicator sits within their remit.
Q98 Jim Fitzpatrick: In that instance, does that mean that Defra has no role in the timing of when the statutory instrument is going to be led in respect of what level of fine will be appropriate? Does that also mean that you are not even sighted on when it is likely to come forward, having been consulted on 12 months ago?
George Eustice: All I can say is that before these things come forward—you will be familiar with this—there is typically a process of Government right‑round clearance. Because Defra has an interest in this and because the Groceries Code Adjudicator has a direct relevance to farmers, obviously this is something we would discuss with BIS colleagues before any SI came forward.
Q99 Jim Fitzpatrick: Have the discussions started or taken place?
George Eustice: Not at a ministerial level, but I am sure they will. They may well have started at an official level.
Q100 Jim Fitzpatrick: This comes back to the discussion we were having in Westminster Hall last week, when one of the strongest recommendations made by the Chair—you responded to her—was that we wanted you to be the champion on all these matters. Here is one that is clearly a significant matter of interest to the farming community, but it is a BIS lead, and you are not even able to tell us whether officials have completed the discussions on something that was consulted on 12 months ago. Is that as frustrating for you as it is for ourselves and, more importantly, for farmers?
George Eustice: I champion many different things, and indeed I was a member of the Committee that considered the Bill that brought the Groceries Code Adjudicator into being. Mr Spencer was also on that Committee, so he will remember that we were among those who pushed for fines to be a requirement of that Bill when it went through.
All I can say is that those types of decisions are a matter for BIS. BIS is the lead Department that looks after that, but I can confirm that there will be that consultation on a ministerial level before any decision is made.
Q101 Jim Fitzpatrick: Would it be possible for you to write to the Committee to alert us to the time frame between now and possibly next May—before Prorogation—when we might see this coming forward?
George Eustice: Yes, I am more than happy to do that.
Q102 Jim Fitzpatrick: Can I move onto the statutory framework provided by the Groceries Code Adjudicator Act 2013? The Secretary of State told us last week that amending the Act would require evidence that its current remit was insufficient. Have there been any discussions in government, with the adjudicator or with the Competition and Markets Authority about amending the remit, or are you very comfortable with where it sits at the moment?
George Eustice: As far as I am aware, BIS have already given an undertaking to review the workings of the Groceries Code Adjudicator in 2016, and that is the right time to do it. You need a period of time to see how it works before you review things, and 2016 seemed to me a sensible time to review its operations, a couple of years after it has got going. That is the current plan.
Q103 Jim Fitzpatrick: That was not based on evidence coming forward that perhaps it needs to be amended. That was just on the basis of, “That looks like an appropriate period of time to give it to bed in”.
George Eustice: My understanding is that when it was established it was just felt that that was an appropriate time to review its workings.
Q104 Chair: Minister, do you share our surprise that there has not yet been one inspection? The adjudicator told us last week that she would have the facility, the staffing and the resources to conduct up to two inspections during the course of any one year. Bearing in mind that she has no power to fine, because BIS has not set the level of fine yet, is the fact there have not been any inspections something we should celebrate, or something we should be concerned about?
George Eustice: There is probably a difference between having a formal inspection, where you have a really clear complaint, and getting general feedback from the agricultural industry about certain practices that are being passed on to the adjudicator, which she is then able to take up with supermarkets and deal with more informally.
I have to say that it is a decision for her whether to launch a formal investigation based on information provided to her. I suppose the only conclusion we can draw is that at the moment she does not feel as if she has been given a complaint that has sufficient credibility or detail for her to be able to carry out a full‑scale investigation, but you would have to ask her as to why she has not exercised those powers.
Q105 Chair: As a potential champion and St George of dairy farmers, would you consider that she needs the right to launch an own‑initiative report and she needs the right, as Mr Fitzpatrick said, to extend her remit into this chain between the farmer and the processor? The public out there think that is already happening and it is a source of some concern to them that it is not.
George Eustice: When the Bill was initially going through, there were some concerns. A number of farmers expressed concerns that there might be reprisals if they were to lodge a complaint. There already is provision for her to act on the basis of a complaint, for instance, from a third party. If a farmer were to go to the National Farmers Union and say, “We have a real problem with this particular supermarket,” she would be able to act on that, and that would protect the anonymity of the individual farmer. That provision is in there. I am not sure if that is not going to provide her with the evidence that she would need to think that she could carry out an investigation. I am not sure why having one that was simply trying, effectively, to have an investigation based on no evidence would take that forward.
I have previously argued with the NFU and others that there is a strong case for effectively having a panel of 500 suppliers to supermarkets who are asked quarterly a set of questions that judge each of the 10 main supermarkets against their compliance with the code and then publishing that data in a way that completely anonymises all those who have contributed, which would actually help to guide the adjudicator to a particular problem. It is something that the NFU could do, and I have raised that with it before. I know at one point it was actually in discussion with Cardiff University about taking forward such an idea.
Chair: I will leave you in the hope that the Competition and Markets Authority may read the transcript of our evidence. That was based on the original competition articles of the treaty of Rome, which gave DG Competition, as it now is, the right to swoop and investigate off its own back. The Committee believes that is a gap in the armoury that dairy farmers really would need.
Q106 Mrs Glindon: Chair, I apologise for not being here at the beginning of the meeting. Minister, what is Defra doing to ensure that producer organisations are established and supported?
George Eustice: We have been very keen to promote producer organisations. We have made it easier for them to form and to form larger groups. It is worth remembering that co-operatives at the moment are exempt from the provision that there should be a three‑month notice period, but only in circumstances when it is absolutely clear that their members control the co-operative directly so they can change things.
There is a lot of scope for producer organisations, because one of the historical problems we have had in dairy, as in many farming sectors, is that you have a small number of very large retailers who are the purchasers at one end, and then a very fragmented supply chain at the other end with the farmers. Therefore they have found it difficult to get clout in the marketplace, and often that has left them in the position of being price‑takers rather than in a position to negotiate. We have been keen to encourage the development of producer organisations. Tim, I do not know if you wanted to add anything further.
Tim Mordan: No, I do not have much to add, Minister. We have already covered producer organisations. It is something we discussed at the recent Dairy Supply Chain Forum that you mentioned, which took place a couple of weeks ago. We had a representation from an organisation that has benefitted from the formation of producer organisations.
It is clearly something we see as a way forward in giving dairy farmers more clout, as the Minister has said, and that was backed up an independent report published by the English Farming and Food Partnership this year. We are doing what we can to encourage producer organisations in all their forms.
Q107 Mrs Glindon: Could I also ask what you do to support them? Is there anything further you could say? Obviously you think it is a good idea, but what could you do to support producer organisations?
Mark Filley: There are several things that we have been doing. The first thing we did was to implement the new dairy package, so we have provided the legislative framework that allows producer organisations to form. The Rural Payments Agency, which would be the body that would administer producer organisations, has provided guidance that would talk prospective POs through the process so that they would know what to do if they wanted to apply and what criteria they would need to meet to be recognised.
We have provided some funding to try to help producers to look at the potential benefits of collaboration. We have provided £5 million from 2012 onwards through the Rural Development Programme in a ring‑fenced dairy fund, which has supported some positive projects. The Royal Association of British Dairy Farmers this year is using some of that money to launch a scheme to help offer training, guidance and advice to farmers on the benefits of collaboration.
As Tim and the Minister have said, we obviously use forums such as the Dairy Supply Chain Forum to have collective discussions about the opportunities and whether there is scope to take them forward. There have been a number of things that we have been doing.
Q108 Mrs Glindon: Building on what Mr Filley and the Minister said, given the independent tradition of many dairy farms, can getting them to work co-operatively be encouraging and successful?
George Eustice: It can be. You are right that in agriculture you can have this tendency for farmers to be very independent‑minded. Sometimes that is a good thing, but particularly when it comes to getting a fair price for their products, there is a lot of advantage to them co-operating. That is exactly why we have set up these various funds and the £5 million dairy fund package is there precisely to encourage more producer organisations to form.
Q109 Sheryll Murray: As the former chairman of a fish producer organisation and part of that industry, it is not dissimilar to dairy farmers, with the individual producers being very independent-minded. I find it hard to understand why we do not have any POs for dairy farmers in the UK. What has the Department done actually to go out there, besides giving financial incentives to start them up? Have you worked with the industry bodies to try to persuade them to come together in the form of POs?
George Eustice: As I said, the industry itself came together and launched its long‑term strategy “Leading the Way”. One of the elements of that was talking about the potential of working more closely together. We have these funds. I would say this: there is a point at which you need the industry to do it for itself. There is a limit to what a Government Department can and indeed should do. Really, it is not for us to prescribe that farmers should work together. The role for us is to facilitate it and to remove any legal barriers to them coming together. We have done that. We have put in place some of that seedcorn funding to help them to work out how they can achieve these things, but we cannot actually do it for them.
Mark Filley: In 2012, when the dairy package came in, obviously that was during a difficult period. I know the NFU put quite a lot of effort into talking to the industry, gauging levels of interest in forming producer organisations and trying to explain the benefit of doing that. One of the things that worked against them in a way was that we then had a period of increasingly good prices for 12 months following the introduction of the dairy package, which did take some of the impetus out of those discussions.
Q110 Ms Ritchie: Would you just clarify a point? Because of this volatility in the prices and the uncertainty of incomes for dairy farmers, what more does Defra plan to do to assist farmers in the dairy industry with cash-flow problems?
George Eustice: We do not have a direct role in helping individual businesses with cash-flow problems. What I can say, however, is that we have a number of things—we have discussed many of them today—and one is that we will be asking DairyCo to work with the NFU to see if more can be done to develop the futures market in skimmed milk powder that I talked about earlier.
Secondly, the Government are constantly striving to open new export markets for processed dairy products manufactured and produced here in the UK. We have also have the Rural Development Programme, and a big strand of that will be developing farm competitiveness. That will make capital grants available to dairy farmers to help them to improve the productivity of their business.
Of course, we also help through some of these other initiatives, whether that is making funding available to encourage the development of producer organisations. We have a number of integrated projects, as we are calling them, which will be funded out of the Rural Development Programme and will target such things as animal health and welfare issues. There is a range of grants and supports that we have there, but what we cannot and will not do is offer cash flow to individual businesses.
Q111 Chair: Minister, why are there only six member states that have producer organisations, yet there are something like 228 in those six? Are they only production, or do they extend to marketing as well? It is in your memorandum.
Mark Filley: Those figures come from the study that I mentioned earlier that the European Commission published during the summer, where it looked at the take‑up of the dairy package across different member states. I am sorry: I do not really have much more detail at my fingertips.
Chair: You do not know whether they relate to marketing as well as production.
Mark Filley: I suspect they relate to production, but we can provide you with information on the report.
Q112 Chair: If you could provide a written answer, that would be really helpful.
Earlier we touched on the futures market. Is there some merit in looking at futures for dairy along the lines of the wheat market?
George Eustice: Yes, it would be a similar principle. Traditionally, on milk, because it is a perishable product, it was difficult to develop a viable futures market. However, as I said, the fact that there are now examples around the world of successful futures markets in skimmed milk powder does create the potential to develop this as a possible tool. You are right that in some sectors, and notably cereals, the futures and commodities market have been used by farmers to help them manage risk.
Q113 Chair: In answer to a number of questions this afternoon, you have talked about, if you like, adding value. One is to boost the export market, but the other is to create a market for cheeses that we currently import. Is there more that the Government could do in that regard?
George Eustice: All I can say is that there are examples where Rural Development Programme grants have been made available in the past to dairy producers, precisely, for instance, to support them in buying the equipment they need to manufacture their own cheeses and to add value to their product. That will continue to be an element of our support going forward.
Q114 Chair: Looking at third‑country agreements, apparently the agreement between the EU and Canada will grant only limited tariff quotas for EU exports to Canada, but unlimited access for Canadian products to the EU. In terms of the TTIP deal with the US, surely this must allow for consumers in this country to be alerted to the fact that there might be bovine somatotropin, bST, in the meat. Is that something you are aware of in negotiations for TTIP, which presumably will be led not by Defra but by the Foreign Office?
George Eustice: Obviously, it will be led by the Foreign Office. However, Defra does have an input on that. All I can say—Tim might come in, because this is his speciality—is that we do recognise that none of these trade deals are simple or easy, but nevertheless we can work through some of those differences and, in some cases, the negotiating mandate the EU has already precludes some of these things that people are concerned about.
In others, such as animal welfare, there will be instances where we can recognise equivalents while accepting that regulations might not be identical. There are issues and challenges, but we can work through these, and if we can secure a TTIP deal, it will create a lot of opportunities, notably for British dairy products, and also for British beef. Tim, is there anything to add on that specific point?
Tim Mordan: I do not have much to add, Minister. Clearly there are big prizes to be had with TTIP, for example, but let me just say that we are working very closely with the National Farmers Union and various interested stakeholders, and we are fully taking on board their concerns as far as we can.
Q115 Chair: In the evidence last week and the written evidence from Dairy UK, it makes a plea for more joined‑up government between Defra and the Department of Health, particularly over things like salt, which is essential to cheese making. Could you reassure the Committee that you do have discussions with the Department of Health? Obviously, we are very uneasy about the governance issue, it has to be said—that the FSA reports to the Department of Health when we have very real concerns on this Committee with food issues that really relate to Defra.
George Eustice: The Committee will be aware that there are historical reasons around how the FSA was set up. It was set up in response to a particular food crisis at the time, which means that the Department of Health is the lead sponsoring Government Department for the FSA.
All I can say is this: I do have regular meetings, typically once a quarter, with the Chairman of the FSA, where we discuss a range of issues that are of mutual importance. Officials in the Department are in constant dialogue with the FSA. I also have regular meetings with Jane Ellison, the Minister in the Department of Health with responsibility for the FSA—indeed, I am meeting her tomorrow—and we do have regular discussions around some of the issues, for instance what the Department of Health and PHE do promoting dairy products. We are fully engaged in that and, in fact, a dairy partnership was established by the Department of Health at the beginning of last year to ensure that the industry is fully engaged in discussions around some of the promotion and advertising the Department of Health does in this area.
Q116 Chair: Presumably you have not met the Chairman of the FSA since June.
George Eustice: The Chairman of the FSA—
Chair: There has not been one since June.
George Eustice: There is an acting Chairman, and I have met the acting Chairman as recently as roughly a month ago.
Q117 Sheryll Murray: To take you back to diversification, you talked about rural development funding to assist people. What I have found in my constituency—I have quite a few who have diversified—is that it is so expensive for them to take up this funding, because it means they have to invest a lot more money in brand new equipment, for instance, rather than second‑hand equipment, that many of them have not taken that offer and they have gone it alone. If there is a message I could ask you to take away, it is that you make this funding a lot simpler for people to access. You might find that you have a lot more people diversifying. At the moment, some of the conditions are acting as a barrier to people taking that opportunity.
George Eustice: I will certainly take that away. All I can say is that we are constantly trying to make the application processes for these funds as simple as possible. I was very keen that we learned the lessons from some of the crisis funds we set up in response to the floods last year. For instance, the EFF fund was used, as you will remember, to provide a crisis fund to help fisherman replace static gear, crab pots and the like. We actually managed to get the application form down to something much simpler.
When it came to the farm recovery fund, which again came out of a European fund, we managed to move away from the requirement to have three quotes for everything and instead to have standard—
Sheryll Murray: There is no comparison, Minister, because you are talking about replacing equipment through the EFF funding. This is new investment for people who want to diversify. For instance, there was the Cornish Gouda Company, which did not take up the offer because it was too expensive.
Chair: Perhaps that is something you might like to discuss bilaterally with the Minister.
On behalf of the Committee—and, indeed, I am sure, the industry as well—can we thank you and your team for participating in our inquiry and rearranging the evidence session for this afternoon? We thank you very much indeed.
Oral evidence: Dairy prices, HC 817 6