Milk and milk products Implications of 1992 for the UK dairy sector
Michael Evanson
The Common Agricultural Policy has been the bedrock of the EEC since its inception. However, milk quotas and monetary compensatory amounts are obstacles to the 1992 programme. This article discusses the prospects of removing the health and hygiene barriers to intra-Community trade in milk, and agreeing mutually acceptable product standards for dairy products. The future of the milk marketing boards in the UK is considered, particularly in the light of a pending European Court decision on the legality of their charging a levy on producer processors and retailers of milk. The author is Commercial Director of the Dairy Trade Federation, 19 Cornwall Terrace, London, NW1 4QP, UK. This text is an edited version of a paper presented at the conference, ‘The EEC’s food industries: completion of the internal market’, organized by the Department of Agricultural Economics and Management, University of Reading, UK, in September 1989.
‘Peter Pooley, address to the European Dairy Trade Association (ASSILEC) Assembly, Edinburgh, UK, 16 June 1989. ‘Regulation 804/68 of the Council of the European Communities of 27 June 1968 on the common organization of the market in milk and milk products: Official Journal of the European Communities, No 148, 28 June 1968, p 13.
132
When asked what he thought was the significance of the French Revolution, the Chinese Premier Chou En-lai is reported to have answered: ‘It’s too soon to tell.’ If 200 years after a major European event which had such far-reaching consequences is too soon to tell, then how much more difficult is the task of trying to forecast the implications for the UK dairy industry of what has been loudly trumpeted as an event of greater significance several years before it is due to take place? What can be predicted is that as far as agricultural products, or food, or the food industry are concerned, 1992 will be largely a non-event. It has been said that the only thing that will change on 1 January 1993 will be the date. In an address to the European Dairy Trade Association (ASSILEC) in Edinburgh Peter Pooley, then Deputy Director of agriculture in the Commission of the European Communities, said, ‘I don’t think 1992 is all that important for Agriculture. We achieved our Common Market long ago and it just needs tidying up a bit.” The Common Agricultural Policy has been the bedrock of the EEC since its inception, and if 1992 is about anything at all it is more to do with bringing other aspects of commercial, social and economic life into line with the agricultural regime than with any dramatic changes in agriculture itself. The milk regime in particular is already very communautaire. The founding regulation - the famous 804/68 - is 21 years old.* In theory it is now (or should be) entirely possible to sell milk or any dairy product produced in one EEC country in any other EEC country just as easily as selling from England into Scotland has always been. In practice of course it is not quite that easy. The artificial constraints of monetary systems and quotas distort the purity and simplicity of supply/demand and buyer/seller interactions. In addition, the often competing concepts of consumer freedom and consumer protection cause confusion. Labelling, compositional standards, additives and health and hygiene are all issues that are causing some concern, and a number of problems have yet to be resolved. These are not, in a strict sense, 1992 issues and, although some of the detailed matters might be settled by then, others, already agreed
0306-9192/90/020132-13
0
1990 Butterworth
& Co (Publishers)
Ltd
Milk and milk products:
implications of 1992 for the UK dairy sector
perhaps long ago, will come forward for review and amendment. This is inevitable. Indeed it is a never-ending process reflecting changes in market demands, new technology, health standards and so forth. A further area of the UK milk industry which is under the threat of change and which has even less to do with 1992 is the structure of the industry. This is the most interesting, and almost certainly will be the most far-reaching, of all these areas of concern. There are thus three broad sections that should be looked at, each of equal significance to the shape and performance of the UK dairy industry in the future: 0
l l
the formal and intrinsically artificial constraints of systems and quotas; the legislative issues involving health, labelling, product tion and so forth; and the fundamental structure of the industry.
monetary composi-
None of these sectors stands alone, of course. They blend and merge into, and impinge and impact upon, each other. However, different considerations underly each one, as will be shown in the following survey.
Formal constraints Although the foregoing comments were intended to imply that 1992 is more about focusing people’s attention on the desirability of getting on with the job of erecting the Common Market that the Treaty of Rome envisaged in 1958, rather than being a date for a sort of European Big Bang, there are certain matters that will have to be resolved by then if a truly free market in milk and dairy products is to be realized. Since these concern price and supply they must be regarded as fundamental if not crucial. Green money and monetary compensatory amounts
30n MCAs and green money, see Swinbank’s article in this issue of Food Policy.
FOOD POLICY April 1990
If free and orderly movement of goods throughout the Community is to take place after 1992 then the whole structure of green rates, monetary compensatory amounts (MCAs) and other support measures will have to be completely removed or, at the very least, radically altered. Although these three features have different functions they are inextricably linked and one could hardly remove one without interfering in some way with another. Ideally a stable central exchange rate, with all countries in the Community participating in the exchange rate mechanism of the European Monetary System (EMS), would obviate the need for green rates, which in turn would remove entirely the need for MCAs. Since this is not an ideal world, however, the whole paraphernalia has had to be invented.3 MCAs were introduced in 1969 as a temporary measure - but, like other temporary measures such as New Zealand butter imports, they have gradually assumed an aura of permanence. In the case of MCAs this has been enhanced by the way in which they have gradually been transformed from a simple device to balance short-term disparities in exchange rates in member states into a highly sophisticated fiscal weapon. Agriculture ministers have manoeuvred the revaluation or devaluation of green rates to protect their farmers in highly refined
133
Milk and milk products:
implications of 1992 for the UK dairy sector
ways. The whole procedure has taken on the aspects of a game whose rules have become so complex that only the true cognoscenti can play. The expressed intention is, however, that all monetary barriers to the single Community market should be dismantled by the end of 1992. Only national exchange rates should remain as an element of national separation and some even hope that in time those will go as well and that Europe will be as much a true common market as Scotland, Wales and England are now. However, unless there is some exchange rate stability the maintenance of common agricultural prices will become impossible. Of course, if you remove the support systems, especially intervention, which is intended to establish a guaranteed minimum market price, you do make things easier. A freer market would be created in which prices would move up and down in response to supply and demand. The milk sector is almost there and, while intervention has not been formally removed, the current system of tendering for sales into intervention, allied to the lower levels of supply created by the application of quotas, has rendered it largely inoperative. In a few years it may be just a folk memory. Note, however, that supply and demand are at present distorted by the application of quotas (discussed below). The removal of MCAs would effectively leave prices to fluctuate not only in response to supply and demand caused by the availability of supplies but also in relation to national currency fluctuations. There would be daily changes in farm prices with presumably developing opportunities for trading in milk futures. It is difficult to speculate on the consequences of this in terms either of payments to milk producers or prices to consumers, although presumably if supplies are relatively short goods will move to those countries that can pay the highest prices. In the UK prices would probably rise, not only because UK milk prices are currently out of line with those in most other EEC countries, but also because the UK is a net importer of milk products. Certainly one of the major preconditions for the removal of MCAs without the creation of major problems is some exchange rate stability between the member states. The attitude of the UK government is by no means clear in this regard and some of their recent statements have been ambiguous, to say the least. This article will not attempt to deal with the way in which the dismantling of MCAs could or should be achieved. Any mind that can recognize as real a concept called ‘Newly created artificial real monetary gap’ without doubting its ability to understand the meaning of words is definitely on some other plane. Yet this is but one of the essential factors used in the formulae for calculating the changes needed to bring about the eventual elimination of MCAs. The future of milk quotas The present quota system is due to end on 31 March 1992. There is considerable speculation about what will take its place. In theory and in practice quotas, when applied nationally, and even more so when applied regionally as between England and Scotland, are imcompatible with the principle of a free internal market. They should therefore go. If they did go, however, then given the extraordinary dynamism of the milk producer, production would leap up, surpluses would reappear, prices would fall, support mechanisms would be reintroduced, MCAs would be reinvented, disposal schemes would come back, Community
134
FOOD POLICY
April 1990
Milk and milk products:
4Eamonn Pitts, ‘Recent structural changes and future shape of the European dairy industry’, paper presented at Agra Europe’s conference ‘Dairy ‘89’, London, UK, April 1989.
FOOD POLICY April 1990
implications of 1992 for the UK dairy sector
spending would increase and the whole sorry saga would start all over again. Prudence and wisdom therefore suggest that quotas will remain. The Commission has suggested that they should be more ‘flexible’ in operation, and it will be interesting to see what this means. At the time of writing the Council was wrestling with a Commission proposal for, effectively, a 1% increase in the quota which would be specifically applied to hardship cases where the rigidity of the present system has tended to fossilize the industry. (This increase in the quota has since been approved by the Council.) Given that there is still a surplus of milk in the Community - some S-12% of production (the difference is largely a matter of interpretation) is subsidized for either export or domestic consumption in some form - this would merely increase the surplus. For real freedom the national and regional constraints should be removed even if it is decided that a total Community quota should be retained. Already regional shortages are appearing and companies in certain areas with manufacturing capacity for products of quality and with real added value are unable to obtain supplies of milk to meet their market demand, whilst elsewhere supplies are going into products producing lower returns. There are signs of an emergent trade in milk between member states that has little to do with product marketing but a lot to do with supply/demand equalization brought about by regional raw material shortages caused by quotas. This can produce some curious results. For example, in 1989 creameries in England and Wales experienced a shortage of milk for cheese manufacture. At the same time concentrated skim was being shipped out of the UK to the Netherlands where it was converted into powder for animal feeding. This released milk supplies in the Netherlands that would otherwise have been used for animal feeding and which thereby become available for manufacture into cheese for shipment to the UK to meet the demand caused by the shortage of milk! Quotas can also have the effect of distorting competition by keeping uneconomic producers in business. If the links between farm quotas and farm land were to be broken and regional allocations were abandoned, milk quotas would tend to move towards the more efficient dairy farmers. This would, in fact, be achieving one of the cardinal princples of the CAP: ‘[to ensure] the rational development of agricultural production’. This presumably means that you encourage production in those areas best suited geographically and climatically to provide quantity with quality at lowest cost. Tomatoes would be grown in Italy and not in Ireland, oranges would be grown in Spain and not in Scotland. But what about milk? In the UK it is already evident that milk is produced in greater quantities in the rich, warm pasturelands of the west than in the cold arable lands in the east. Since the introduction of quotas this tendency has, if anything, increased. If MCAs were removed and agricultural products were traded at market rates of exchange, and if quotas were freely transferable or tradable, milk production and subsequently milk product manufacture would undergo some significant geographical shifts. In simple terms they would move to those areas which had a combination of favourable climate and low costs. Eamonn Pitts, a notable commentator on these issues, has attempted an analysis of who the likely winners and losers might be.4 The problem is complex, but if milk prices realized is a criterion then presumably
135
Milk
and milk
products:
implications
o,J 1992 for
the UK duiry
sector
Denmark, which has constantly been at the top of the list of countries whose farmers achieve more than the target price, is certain to be a winner. On the other hand if low cost is the criterion, and the ability and willingness to go on turning out volume, almost as a way of life, is a major factor, then Ireland, a sort of New Zealand of the northern hemisphere, is likely to gain. The Netherlands - which is in a way a blend of the two, being both a good marketeer of product and an intensive producer - is also likely to gain. The position of the UK in all this is less than clear. The milk marketing boards (MMBs) and the National Farmers’ Union (NFU) have frequently made the claim that the UK dairy farmer is the most efficient in Europe. Farm costs are notoriously difficult to identify, and defining efficiency is not easy. Certainly UK dairy farmers do on average farm larger herds than most others in the Community, but yields per cow, if that is a measure of efficiency, are not as high as those in Denmark or the Netherlands; and average milk prices as a percentage of the target price, which has to be a measure of something, are near the bottom of the league table. It must be recognized that the history of the UK dairy industry has influenced, and will continue to influence, the country’s position in the European scene. Historically milk production was encouraged up to the level necessary to meet the demands of the liquid market - which itself was protected by import restrictions - while imports of milk products were freely encouraged from world suppliers. Entry into the EEC changed ail that. Milk production, supported by the intervention system, rose substantially and there was an upsurge in butter and hard pressed cheese production as the UK approached self-sufficiency. However, milk quotas cut butter production sharply and even cut into cheese; and the dry weather conditions of 1989 made matters worse. The self-sufficiency ratio has been declining and the UK would have reverted to its previous role as a major importer of dairy products were it not for the fact that demand has declined significantly. Per capita consumption of almost all the major dairy products-with the exception of cheese - has been falling steadily. This has meant that there is no real urge or incentive to export. Liquid milk, cheese and butter absorb almost 90% of total milk production and the balance goes into a variety of products each of which uses only a small percentage of the total milk. There is thus plenty of scope to import, and indeed the UK seems culturally to prefer this situation. The country enjoys importing exciting varieties of cheese, for example, from all over the world. Writers of articles on food are forever tracking down further exotic delicacies from overseas, and the word ‘continental’ has quite a cachet - so much so in fact that when UK firms do produce a home-made version of some new product they seek a marketing advantage by referring to it as ‘continental style’. Usually, of course, products of this type are in the upmarket, premium end of the range. In fact, consumers are much more inclined to demand imported products than UK producers are to demand that their products should be available in foreign supermarkets. The total exports of the UK’s most famous delicacy, Stilton cheese, amounted to 779 tonnes in 1988. This is equivalent to 7 million litres of milk, which is 9% of all milk used to make Stilton but only 0.05% of total UK production. All of this may sound like a digression, but it is not. The point is that even if quotas were to become tradable across national frontiers - and in
136
FOOD POLICY
April 1990
Milk and milk products:
implications
of 1992
for the UK dairy sector
a truly common market they certainly should be - then, whether or not it would be economically feasible for the UK to be a potential purchaser of quotas, it is not clear that milk production would rise a great deal. 1 suspect that nationally, for a variety of reasons, the UK would continue buying imported milk products instead. My own prediction is, firstly, that quotas will remain and that they will, in the main, be constrained within national boundaries. To unleash them completely would serve the requirements of economic efficiency but would undermine the social obligations of the CAP. A shift of milk production from one country to another, or even one region to another, could seriously unbalance the rural economy and create new social security burdens. In addition, of course, local supplies of speciality dairy products, where these have existed, would tend to dry up. Secondly, I suspect that under these circumstances the UK dairy industry would tend to use its indigenous supplies to protect its own markets, especially the liquid market which is still the major volume outlet for milk in the UK. There is after all little point in producing more milk if you are going to ship it elsewhere for manufacture and re-import. In summary, there is a rather foggy outlook. Green rates and MCAs are unlikely to disappear completely, let alone quotas. The risks are altogether too great. Next to air and water food is the most essential ingredient in life and therefore highly sensitive politically. The speed with which surplusus can change to shortages, and prices rise and fall, is alarming and the social consequences are considerable. Once institutions and mechanisms have been put into place to try, however crudely, to regulate these conditions, and a bureaucracy installed to administer the systems, it is difficult if not impossible to do away with them. It is my view that, come 1993, such changes as we shall see - and there will undoubtedly be some - will be more of detail than of principle.
Milk and dairy products legislation
5Directive 85/397 of the Council of the European Communities 5 August 1985 on health and animal health problems affecting intra-Community trade in heat-treated milk: OfHcial Journal of the European Communities, No 226, 24 August 1985, p 13.
FOOD POLICY April 1990
The most notable development that has taken place in the UK dairy industry in recent years is the final removal of the health and hygiene barriers to the importation of fresh liquid milk. Imports of UHT and sterilized milk have been permitted since November 1983. In brief, EEC Council Directive 851397 laid down standards for heat-treated milk intended for intra-Community trade.’ These prescribed two standards for milk, known as Step 1 and Step 2. Domestic legislation became necessary in each member state requiring producers to comply with, at least, the lower of these two standards with the intention of improving quality to the higher level in due course. Only milk meeting these standards could be traded between member states, and where a member state demonstrated satisfactorily that its own supplies met the higher standard it could reject any imported milk that was not at that level. The UK, together with Denmark, succeeded in convincing the Commission that it met Step 2 standards and thus achieved in some degree a further respite from the risk of a flood of competitively priced imported liquid milk from other member states unable to meet Step 2 standards. (Only milk that could meet Step 2 standards was permitted.) However, all member states will be required to meet Step 2 standards both for intra-Community trade and for domestic trade when new health and hygiene regulations finally come into effect.
137
Milk and milk products:
implications of 1992 for the UK dairy sector
Of course, the UK had already been fortunate in its timing. The delay over the removal of the barriers to imports of liquid milk over the years had meant that when the UK was forced to permit them from November 1988 quotas had already begun to bite across Europe and the resultant decline in milk production followed by the virtual disappearance of intervention had led to higher prices for milk products on domestic and world markets. The UK liquid market, previously seen as a tempting, high-price opportunity to potential importers, no longer looked so good. The threat had begun to recede before the door was opened. In addition to the proposed new health and hygiene regulation governing milk for the liquid market, the Commission is intending to introduce one to cover standards for raw milk for manufacturing purposes and also for finished dairy products. The timetable is interesting. Firstly an overall regulation laying down general hygiene rules for the marketing of products of animal origin will be introduced on 1 January 1990. The specific health and hygiene regulation covering milk for the liquid market should come into force on 1 January 1993. However, no date has been proposed for the introduction of the subsequent regulation to cover milk for manufacture for finished dairy products. This seems quite reasonable since the task of formulating this second regulation is a form of Community job creation scheme -there is plenty of scope here to keep a small army of dairy chemists, microbiologists and food scientists engaged for quite a few years. Classifying correctly the wide variety of products already available will be a daunting enough task, quite apart from wrangling over differing standards and acceptable manufacturing processes for each product in every member state. No country, of course, is going to admit to being less concerned about the health and safety of its citizens than any other, so each has to defend its current practices as giving just that required degree of protection. In so doing, each country will also seek to protect the present customs and practices of its home industry and perpetuate, for as long as possible, a permissible ban on unwanted imports. There is a general point that should be made here. Although there is a widespread belief, expectation or hope that 1 January 1993 will see a Europe without frontiers where goods will move easily from country to country without tax or documentation, it must not be forgotten that Community law provides for member states to maintain some barriers on the grounds of, for example, public morality, public security and the protection of health (Article 36 of the EEC Treaty). Equally importantly, there will be the need for each member state to be able to distinguish between imports from another member state and those from third countries. There will thus be a continuing need for some form of border controls. These will always be available to operate any other checks or controls that may seem desirable. This could include useful activities like the collection of statistics - essential for the informed measurement of economic activity - and, if one wishes, presumably, the calculation of MCAs. Hygiene standards are by and large not something that should worry the UK unduly. The dairy industry has a creditable record of hygiene practices and standards that are amongst the best in Europe and the only thing that need concern UK industry is that the application of these regulations will require other member states to match UK standards, thereby increasing the potential for import competition.
138
FOOD POLICY April 1990
Milk and milk products:
implications of 1992 for the UK dairy sector
These apart, however, there are a number of specific issues that will have to be faced in the UK milk market. Imports of liquid milk, for example, though small at present, will undoubtedly grow; and while they are never likely to be large, if only for physical reasons (though the Channel Tunnel might change this), they are going to impinge on the consumer’s awareness. Producers will have to find a way of helping the consumer to differentiate fresh UK milk from imports. Slogans like ‘British and Best’ on bottles and cartons emblazoned with the Union Jack are not likely to be permitted. The question of the pint versus the litre will need to be faced. The UK may well be permitted to keep the pint for domestic sales, but the consumer will be making price comparisons with half litres and htres. Standardization will reappear as a problem. At present, countries wishing to export whole milk to the UK must standardize their product to the average butter fat content of UK milk - at present 3.9% - while UK producers may continue to supply ‘as it comes from the cow’ with a varying fat content but a minimum of 3%. Quite apart from the fact that this seems a tiresome hindrance to importers, it scarcely conforms with the single market concept and certainly not with the ‘mutual recognition’ approach to harmonization. UK producers may well like to rethink this issue and consider what opportunities standardization might now provide. The very question of advertising and promoting milk generically under the aegis of the National Dairy Council will need to be looked at. Companies may wish to devote more of their funds to brand advertising both across the Community where they may have export opportunities and, more probably, as a defence against imports. At the same time there might be a move on the part of some member states for a Community-supported pan-European campaign promoting natural milk. Not directly connected with 1992, but an essential feature of any survey of the liquid milk business, is the future of doorstep delivery. The slow but steady decline of milk volumes through this service continues. Shop sales now account for nearly 30% of all liquid milk sales in the UK. Any imported packaged liquid milks will almost certainly be targeted at shops, and competitive pricing will further widen the gap between the retail price on the doorstep and the shop price. Although consumers may well be more prepared nowadays to pay a premium for the doorstep service there is clearly a limit to this as well as a general change in buying habits and lifestyles. The doorstep delivery service has stood the test of time - its demise has been predicted for many years but I have an uncomfortable feeling, for no reason that can easily be rationalized, that it will come under major pressures over the next five years that will change its pattern forever. The decisions of the European Court on the legality of the levy applied by the milk marketing boards to producer processors and producer retailers are relevant here, and will almost certainly have a profound effect on the structure of the industry - an issue discussed in the next section. At the time of writing these decisions are not expected for another 18 months or so, and although they are also not directly connected with 1992 as such, their timing is likely to coincide. Turning to dairy products, there is some evidence of a shift in the attitude of Commission officials - at least in the Directorate General for
FOOD POLICY April 1990
139
Milk
und milk
products:
implicaiiorzs
of 1992 for
“Dairy Legislation in the EC Member Countries, proceedings of a seminar on
Preparation for the Internal Market, Kiel, FR Germany, 2527 October 1988, Bundesanstalt fijr Milchforschung, Kiel, FR Germany, 1989.
140
the> UK dairy
srctor
Agriculture (DG VI). The original attempts at vertical harmonization were frustrated both by the complexity of the issues involved and by the difficulties in reaching unanimous agreement. The legislation on health and hygiene standards for the heat treatment of milk, for example, took nearly 15 years before agreement was reached. In 1979 the famous Cassis de Dijon case appeared to open up a new route to harmonization and the Commission’s sentiment appeared, in simple terms, to swing behind the concept of ‘mutual recognition’ whereby a product that could legally be made and marketed in one member state should be made legally available in all member states. This apparently enlightened view gave great hope to those who believed in liberal marketing practices subject only to strict labelling requirements, but caused great concern to those who subscribed to the lowest common denominator theory and feared that poor quality or, worse, imitation products produced in one member state would drive out the high quality and pure products of another. The Commission appears latterly to have developed similar worries and has been actively looking at the prospects of some form of harmonized legislation to protect butter and to regulate the compositional standards and the designation of yellow fat products such as spreads. A seminar in Kiel, in October 1988, under the aegis of the FR German government, discussed amongst the member states the possibility of reaching some consensus on harmonizing the many diverse laws that currently exist in the Community for such dairy products as butter, cheese, natural yogurt and others of a similar nature.” It seems to be generally accepted that it would be impossible to contrive an outright ban on imitation or substitute products - now known by the Commission under the euphemistic name of ‘competing’ products - but it is hoped that by having some rigid controls over the composition and nomenclature of such products it will be possible, in some way, to avoid the risk of confusion in the consumer’s mind and to preserve the purity and integrity of, and hopefully the consumer’s preference for, the real thing. These endeavours will continue. It many aspects of these matters the UK is something of the odd man out in Europe. For example, most countries have some standards for yogurt stipulating at least that it should contain live bacteria. The UK does not. In theory and in practice it is possible to call anything yogurt provided that it looks and tastes as the consumer would expect to find it. Most countries stipulate that a product called ice cream should contain cream. The UK does not. These are cultural differences that have been preserved by legal devices and they will not be easily done away with. This is understandable: no one likes their cherished delicacies undermined by poor imitations. The UK desires, for example, to protect Stilton cheese, and does not want second-rate products made in a foreign country to masquerade as the King of Cheeses. But the Dutch could not prevent the Germans from selling in France a product they called Edam although it had a different composition from the Edam cheese as traditionally made in the Netherlands. There is quite a degree of ambivalence in people’s attitudes to these matters. I suspect the solution will be some form of compromise. Those countries with rigid controls will be required to liberalize a little, and the UK will be required to accept some form of standards in the name of both consumer protection and freedom of choice. Whether this will happen before the end of 1992 is another matter. And whether the outcome will
FOOD POLICY
April 1990
Milk and milk products:
implications
of 1992 for the
UK dairy sector
be to create greater opportunities for exports to Europe by UK coffee whiteners and filled milk manufacturers of dairy spreads, powders is altogether another matter again. The arguments about whether legislation is protecting the consumer from exploitation or his or her own ignorance, or whether it is denying him his legitimate rights to purchase what he likes without excessive nannying by officialdom or, more sinisterly, the hidden influence of vested interests, are likely to continue as long as people are unable to agree on where the line should be drawn. The one particular issue that will have to be faced up to in 1992 is the future of New Zealand (NZ) butter. Recently Kieran Dooley, an official in DG VI, said that after 1992 it will not be possible to limit imports of NZ butter into the UK.’ He did not mean that unlimited supplies would be able to come in, but rather that within its quotas NZ butter would be freely available throughout the Community. This would be of little consequence in its present form since, as a salted butter, it would be unattractive to the average European consumer. It might cause a greater stir, though, if the New Zealanders were to sell several thousand tonnes of lactic butter to Denmark or the Netherlands, for example. As far as the effects of legislation for milk and dairy products associated, however loosely, with 1992 are concerned it is therefore possible to foresee modest growth in liquid milk imports to the UK; the introduction of standardization; some compositional and quality standards set for certain products; some standardization of designation; a growth in substitute products with opportunities for exports into the rest of the Community; and imports of many new and exciting products from the continent into UK supermarkets.
Structure of the UK dairy industry
‘Kieran Dooley, ‘A review of current and future European Community policy for the dairy industry’, paper presented at Agra Europe’s conference ‘Dairy ‘89’, London, UK, April 1989, p 13. ‘There are five milk marketing boards in the UK: one for England and Wales, one for Northern Ireland, and three in Scotland. ‘Charles Runge, ‘Adapting to the single European market: marketing boards and cooperatives’, paper presented at Agra Europe’s conference ‘Dairy ‘89’ London, UK, April 1989, p 3.
FOOD POLICY April1990
Recently there has been a spate of comments in a number of publications ranging from the farming press through The Times to Which? along the general lines that the milk marketing boards (MMBs) will have to go as their existence is somehow incompatible with a single European market.s Charles Runge, Chief Executive of the Milk Marketing Board for England and Wales, dealt with this at an Agra Europe Conference when he said that the milk marketing boards operated under UK primary legislation as well as EEC regulations.” Furthermore, not being in receipt of taxpayers’ funds, they are private organizations and there is nothing in law to prevent them carrying on past 1992 in exactly the way that they do now. What will cause changes will be the impact of other developments upon them although these, once again, are not specifically related to 1992. The future position of producer processors and producer retailers was mentioned earlier. At the moment these categories of milk producer can withhold their milk from the MMBs under certain conditions and sell it themselves retail or wholesale. One of the conditions is that they should pay a levy to the MMBs as a contribution to the services that the MMBs provide to all producers and which others pay in the form of a deduction from the monthly price the MMBs pay them for their milk. This in effect goes some way towards equalizing the returns between producers who sell their milk to the boards and who receive the ‘pool’ price from the average returns from milk sold into all markets and producers who withhold their milk and sell it only to the higher-yielding liquid market.
141
Milk und milk products: implicutions of 1992 for the UK dairy sector
‘OSince delivery of this paper the Advocate General has issued an opinion on this case which fully supports the MMB’s rights to charge these levies. The formal judgement - which will now probably be sooner than forecast - may not, of course, support this opinion. “Milk Producer, Vol 36, No 8, August 1989, p 5.
142
At present, therefore, a producer withholding milk from the boards can sell into the retail trade at prices that can undercut the private dairyman whilst still achieving a better net return than can producers whose milk has only realized the average price from all sales. Relief from the levy would enhance this advantage, and competition between these two classes of supplier to the market would intensify. Some producers both in Northern Ireland and in England and Wales have challenged the boards’ right to charge these levies and the case is before the European Court. The outcome will not be known for some 18 months or so, but it will be in time for 1992, it would seem.“’ If they win - and it is by no means clear that they will - two consequences are predictable. Firstly, a number of other producers will enter the business of retailing their own milk in competition with the private dairy companies, and secondly, great pressure will be put on the boards by the private companies to reduce the price to them of raw liquid milk. The problem for the dairies is that, as the Milk Marketing Scheme stands at the moment, they are legally prevented from buying milk direct from milk producers. They can only buy from the MMBs and all buyers have to pay the same price for the same end use. The price for liquid milk is the highest in the range, prices of milk for other uses being lower as the products made from that milk have to compete with low-priced imports. The boards themselves have shown some signs of discontent with the present system of pricing milk, which they seem to feel unfairly prevents them from exploiting their monopoly position and from taking advantage of the present shortage of supplies to charge higher prices. They also feel that the present system causes difficulties in the allocation of supplies. The England and Wales board’s own publication, the Milk Producer, has said that the present system of pricing (by end use) has lost its relevance and that the normal laws of supply and demand should be allowed to operate.” There are two fallacies in these statements, and quite a lot of question-begging. Firstly, the pricing, or valuing, of milk by end use is the only logical or even practical method. A milk producer operating through a cooperative, for example, receives only as much for his milk as the product in which that milk is utilized earns in the marketplace less all the associated costs. As market values go up and down, so does the return from his milk. The dairy companies in the UK buy their milk from the milk boards according to formulae that achieve precisely the same effect. Secondly, the normal laws of supply and demand operate in a manner that usually results in supplies increasing to meet the demand in response to higher prices. With quotas no such consequence can result unless the price of milk rises by such an amount as to compensate the producer for the penalties he would have to pay for exceeding his quota. As this is equivalent to the target price itself it would mean paying anything up to nearly double the current price. Where supplies are artificially constrained in this way it would be iniquitous if the boards were to exploit their monopoly powers - even if the scheme were to permit it - in such a way that buyers were encouraged to compete with each other for supplies. Inevitably those with deeper pockets would get the greater share, albeit at higher prices than at present, and equally inevitably the consumer would ultimately pay. However, by 1992 the position could be different again, especially if quotas are significantly eased.
FOOD POLICY
April 1990
Milk and milk products:
“Alex Turner, ‘Food processing and 1992’, EC Brief, No 7, July 1989, p 4.
FOOD POLICY April 1990
implications of 1992 for the UK dairy sector
I suspect that any move by the boards along these lines would be met by the dairy companies demanding that the boards give up their monopoly powers and that the dairy companies be permitted to negotiate directly with milk producers. If buyers are asked to compete with each other for supplies, sellers should be free to compete for their custom. This would be tantamount to putting the clock back to the days before the creation of the milk boards, and although conditions are vastly different from those in the late 1920s and early 1930s - there are both fewer and larger producers as well as fewer and larger dairies - the consequence would be the same. Not only would there be winners and losers - some buyers would be unable to get supplies of milk at economic prices and some producers would be unable to get economic prices for their milk - but the losers would inevitably be exceptionally disadvantaged, having developed their business, whether a dairy or a farm, within the constraints of a legally imposed system that has been in existence for over 50 years. A cool consideration of the consequences could cause both parties to think again. That is not to say that the present systems will not change. I suspect they will, but that the changes will be, as they have always been, evolutionary. Certainly the boards and their customers will have to face up to the prospects and consequences of buying and selling raw milk in bulk from and to other countries in the EEC. It is happening at present and will undoubtedly increase. With present quota constraints the impacts on both supplies and prices are likely to be disproportionate to the actual volumes moved, and cool heads will be needed to avoid distortions and acrimony developing. Of equal interest to the fate of the milk boards will be the future of the dairy companies themselves. Very few of them are involved in any significant way in other than their home territories. It has been estimated that of the 46 largest European food processors (and few of the dairy companies are in this group) less than half operate in one other EEC country in addition to their home market and only some 10% of the 46 operate in up to four EEC countries.‘2 In fact, the two best-known major food companies with substantial dairying interests that operate in what might be called a pan-European way are not even based in the Community. Nestle is Swiss and Kraft is American. There are signs of change, however. The Irish co-ops are converting themselves into public companies with access to funds which will enable them to purchase companies outside their borders, and some have already done so. BSN in France is expanding into other European countries including the UK and many other companies are exploring the possibilities of some form of manufacturing and marketing franchising or cooperation. Certainly it would not be easy to establish strong brands across the Community: it would take a lot of time and a lot of money. Nor, in many ways, would it make much sense given the problems of differing national tastes and the untranslatability of some brand names. Quite apart from this, raw materials would have to be obtained locally at local prices which, post-MCAs, could be at significantly different levels. Both the available routes to a company’s growth and development of its own brands, whether by takeover or by strategic alliances with reciprocal licensing, joint ventures and mutual distribution arrangements, are fraught with problems, and those who leap impulsively down either path could well find themselves in difficulties.
Milk and milk products:
implicalions
of I992 for the UK
dairy
sector
Conclusions In none of the three areas reviewed - MCAs and quotas; legislation; and structure - has this article come up with any predictions that are categoric and positive let alone novel or radical. Close familiarity with the industry and its ways has taught that change comes very slowly even when the direction has been evident for some time and the consequences confidently predicted. It is uncertain how questions of MCAs and quotas are to be resolved, but this uncertainty merely mirrors that of the politicians and bureaucrats who have to resolve them. The view that changes will be gradual is a comforting one. It recognizes that developments will occur as they always have, but that dramatic changes are not necessarily for the best.
144
FOOD POLICY April 1990