11/05/11

The House of Commons Environment Food and Rural Affairs committee met with Tesco representatives in the House of Commons yesterday (10 May) to discuss the European Commission’s milk package proposal, which will provide for written contracts between milk producers and processors, alongside measures for enhancing transparency in the milk market.

The session aimed to examine the EC proposals, by asking a representative of a leading supermarket and a member of their dedicated supply chain whether the changes would ensure a “soft landing” for UK dairy farmers when quotas end.

The committee members first questioned the Tesco representatives, Tesco UK corporate affairs director David North and Andy Bloor, chair of the Tesco sustainable dairy group and himself a dairy farmer, over their current dedicated supply scheme. North and Bloor outlined the Tesco sustainable dairy group, which was formed in 2007 and currently pays its 700 suppliers 29.78ppl (pence per litre) under a costing system based on price of production. The farmers in the scheme’s herds range from 55 to 890 head; they are chosen on the basis of “haulage efficiency”.

However, the Tesco representatives were challenged on several aspects of their policy by committee members, who were unconvinced by the benefits Tesco claim their scheme accords to its members. EFRA committee members expressed their fears that fluctuating dairy prices, without proper regulation, can be transferred onto producers and, under the current system, retailers receive the lion’s share of the profit. Dairy UK figures demonstrate that of the three tiers of players (producers, processors, retailers) in the milk industry, the share that goes to retailers has increased whereas the share received by processors has fallen.

The Efra MPs asked whether under Tesco’s system this imbalance is addressed, and if their model would stand up to EC reforms. Mr North responded that the Tesco model was merely a different approach to the model advocated under the EC package. He said, “there are two different approaches to collaboration, there are models based on producer groups and co-operatives and there are models like ours which work through the supply chain and I think that’s working very well.”

Parish addresses double standards in milk supply chain

It was the contention of Neil parish that while the liquid milk sector has increasingly and publically benefitted from rising prices, the situation is different for cheese producers under this type of scheme. He expressed the belief that this is the case because the media has raised awareness and interest in liquid milk prices, but is less conscious of milk prices for processed products such as cheese.

The Tesco representatives were also asked what the impact of the EC policy reforms would be on their model, should they come into force. The new measures are intended to boost the position of the producer in the dairy supply chain and will, according to EFRA, “prepare the sector for a more market oriented and sustainable future where production quotas come to an end in 2015.”

The package has won the support of many producers. Speaking at the NFU Cymru Dairy Strategy Roadshow earlier this month, Dairy Board Chairman Mansel Raymond asserted that the EC recognised that contractual relationships between milk producers and purchasers were fundamental to ensuring fairness. He said, “We’re heartened that the European Commission has recognised that the contractual relationships between milk producers and purchasers are essential to guarantee a fairer deal for farmers within the dairy supply chain. There are some exciting proposals on the table that would significantly strengthen the position of dairy farmers within their supply chains.”

However, corporate affairs director North advocated caution in introducing the regulatory measures until , as he put it, the government is sure that they will lead to the benefit “that is intended.” North broadly agreed with the Cooperative’s response to the EC’s proposals that “a prescriptive EU-wide approach to contract negotiation risks stifling and innovation and efficiency.”

Neil Parish asked Andrew North whether the Tesco model will meet the standards set by the Grocery food adjudicator when one comes into power. North’s response was that Tesco did not believe an adjudicator was necessary in addition to a code of practice. Mr North said he could not comment on whether or not, if the package was implemented, it would affect the price of products imported from the rest of the EU

George Eustice referred to the council’s proposal encouraging producers to organise. He asked whether the secret to creating a more productive dairy industry was to give “more clout” to producers. North acknowledged that the EC’s proposed course of action was “one potential route,” however, he claimed, “We have taken a different route through our scheme which has delivered the benefits that the commission wants to achieve.” He continued, “While many understand the reasons behind the commission’s proposal in terms of reducing volatility, increasing confidence etcetera, not all of them are sure that the specific proposal in respect to contracts will actually deliver that.”

What do you think? Should the Government allow large scale retailers to have a direct influence on its view of the EC dairy package?

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