Co-ops should be spearhead

13 October 2000

Co-ops should be spearhead

By Robert Harris

THE UK dairy industry must restructure and invest in multi-product factories in order to compete effectively on the European and world stage.

And farmer co-operatives should take the lead, says Roland Williams, formerly director of economics at the Milk Marketing Board. But an "intellectual crisis" among UK governments and their advisers which has prevented progress must be overcome.

In an article entitled Crisis in the UK Dairy Industry, in the recently published Plunkett Foundation yearbook, Mr Williams no other country in Europe sells raw milk competitively in such vast quantities.

Vertical integration has proved much more popular. Farmer co-operatives buy and process most farm milk and make a range of products, creating a more flexible business that leaves private dairy companies in the UK looking distinctly inefficient. The co-ops pay their farmers a better price, but consumers pay no more for the products, says Mr Williams.

For the past three years, the UK has been at the bottom of the EU price league. According to recent Eurostat figures, Irish producers received Ir£26.39/100kg of milk in June – about 16.3p/litre. Germans farmers were paid 17.6p/litre, while the Danes got almost 19p/litre (July). UK farmers averaged just 14.3p/litre.

"The break-up of Milk Marque is regrettable," says Mr Williams. "But it should be seen as an opportunity. The three new co-operatives should develop bold plans for the processing/marketing area as quickly as possible."

Membership loyalty will be crucial to raise the necessary finance, as will expertise, he says. "The industry probably needs to recruit from Europe and some of its successful co-operatives."

Such change will also need government support. But Mr Williams believes the industry is suffering from a new malaise – an intellectual crisis among UK governments and their advisers.

Nowhere is that more evident than in the recent Monopolies and Mergers Commission investigation which found Milk Marque had effectively raised prices to consumers.

The inquiry was the result of three years of intense pressure on the OFT and the MMC by the Dairy Industry Federation, which bitterly opposed the creation of Milk Marque.

Mr Williams still regards the MMCs findings as unbelievable. Milk Marques selling system was effectively placed in the hands of the Office of Fair Trading, and it was prevented from further processing, leaving it no choice but to break up. "I sincerely believe that farmers have been strung along," says Mr Williams. "When the minister acted on the OFT findings, he threw farmers to the wolves."

Although Milk Marques selling system was not perfect, it did not lead to a massive increase in prices. The first selling round after deregulation in 1994 achieved a headline 2p/litre milk price rise – a key reason why the MMC eventually ruled against Milk Marque. But the rise applied only to manufacturing milk, following the removal of excess capacity and overdue currency exchange rate adjustments, and had nothing to do with monopoly power, he says.

Neither the OFT nor the MMC understood this, adds Mr Williams. Also, they took little notice of the way buyers pushed up their own raw milk prices to weaken Milk Marque.

The MMC report was a deeply flawed analysis on which the government acted in undue haste, says Mr Williams. Milk Marque and the NFU are now jointly challenging it in the European Court.

"There is a clear need for better thought-out policy with public debate followed by legislation which reflects the rest of the EU."

Milk Marque may be gone but farmers could still play a central role in a revamped dairy industry.

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