Oral evidence: Farmgate prices, HC 474Wednesday 4 November 2015

Oral evidence, 4 November 2015.

Witnesses

Afshin Amirahmadi, Vice President, Milk and Member Services, Arla Foods UK, and David Christensen, Member of the Board of Representatives, Arla Foods UK, gave evidence.

Chair

Good afternoon, gentlemen. Thank you very much for being patient. We have until about half past four, if we can, so we will keep going, but we are very keen to hear your evidence. Very quickly, please introduce yourselves and we will get straight on to business.

David Christensen

I am David Christensen. I am a tenant dairy farmer from Oxford. I milk 600 cows on one farm and, just last month, I started a second herd of 100 cows. I was a director of a co‑operative called Milk Link, and we merged with Arla in 2012 and effectively brought Arla into the UK as a co‑op at that point.

Afshin Amirahmadi

My name is Afshin Amirahmadi, but you can call me Ash—that is what people normally call me. I am the Vice President for Milk and Member Services, which basically means I am responsible for the farmer relationships in the UK for Arla. I sit on the leadership team of the UK business.

Chair

Thank you very much. There are a small number of processors now in the UK. Do you have an unfair advantage over farmers when negotiating a price? Linked to that, what was the mind set behind the link‑up with Arla from the previous co‑op?

David Christensen

What we found as a UK co‑op was that we were caught in that dangerous ground of being too small. We had a turnover of £600 million, but we were just too small to be big and too big to be small, without sounding too clichéd about it. We did not have the money to develop brands. We did not have the money to develop export or to do it fast enough, and we recognised that and had to do something about it. We were adamant that we wanted to stay as a co‑operative, because a co‑operative is the key difference. It means all the money goes back to us as farmers and does not get lost in shareholders. The obvious tie‑up was with Arla, so we approached Arla and put together a merger in 2012. Can I just say that I do not view Arla as a processor? I view it as a co‑operative and, actually, I view it further than that—as an extension of my business. I am quite frequently asked by my non‑farming friends, “Why do you not diversify, David?” and my answer is, “Actually, I am diversified. I just do not do it at a farm level; I do it at an off‑farm level.” I employ people like Ash and his colleagues to do it, real professionals, which allows me to focus on my core business, which is milking cows.

Chair

Do you believe that Arla is a force for good as far as the price of milk is in this country is concerned, at the moment? Basically, it is a tough market out there. We all know it is a tough market out there, so what is your analysis?

David Christensen

If you take the decade prior to the merger, so before 2012, the UK was always receiving about 2p per litre less than our European colleagues. Sometimes we were just about near parity. At other times, it was 5p, but the average was 2p. The only reason for that was the lack of a strong co‑operative to keep the market straight. Fundamentally, I believe, the presence of Arla in the UK has been a good thing for dairy farmers. Now, the current situation is miserable. We have heard that very eloquently from my colleagues before, but that is not a UK issue. That is a global issue of supply and demand. The reasons are well rehearsed—China, Russia, overproduction—and none of us can do anything about that on a micro level or on a country level. We just have to get through it. In terms of delivering best value back to farmers, I strongly believe that Arla is doing a good job there.

Chair

The second part of my question is how farmers decide which processors to sell their milk to. One of the problems for some farmers is that there are very few people to sell their milk to, physically, in that particular area. What can we do about that?

David Christensen

It is a difficult one. Right now, none of us are recruiting, because there is too much milk out there. Frankly, that is a pretty desperate situation; none of us is happy about that. We are seeing other companies struggling, and we would like to recruit, but we cannot do it, because my first responsibility is to our existing members and we have to make sure we look after our own business first. There is an acute situation right now and there is a longer‑term situation. This will work its way through; I am absolutely confident about that, to the extent that, as you have heard, I have put my money where my mouth is and started a second business. I am very confident that the future for the UK dairy sector is terrific. It is how we get from where we are now to that point. Once global demand picks up again, recruitment will be less of an issue, but I do not have an easy answer for you right now.

Rebecca Pow

Last year, we saw changes almost by the month in the price paid to your farmers. I am just wondering why that was. In 2014, you received negative publicity for the amount of notice you gave, i.e. three days, I think, if you were going to reduce prices. Is that normal? Is that a typical way to treat your suppliers?

Afshin Amirahmadi

It is not the way that we treat our suppliers. David, as a democratic representative of Arla, chooses how the money is divided between the farmers. There is a very clear distinction in Arla that the management of the business does not set milk price. In quite simple terms, the management is responsible for increasing the turnover of the business and managing the costs. Whatever is left over is what is paid out.

Rebecca Pow

The farmer members set the price.

Afshin Amirahmadi

The farmers set the formula by which the price is set. To keep the management honest, the farmers want the milk price to equal the performance of the business and, therefore, the last thing the farmers want is for the managers to have any influence at all in the way that milk price is set, because that could hide poor performance. Our pricing mechanism is fully transparent; the formula is on our website for anyone to go and see. All of our owners on the secure area of the member website can see every single payment settlement period, so they can plan ahead and know when the settlements happen. After two or now nearly three years of being part of the European co‑operative with British owners, British members are getting used to that. Of course, there is a quid pro quo that, when prices go up, they also go up monthly with the same level of notice.

Rebecca Pow

When we saw all the demos from the farmers recently, there obviously were no Arla farmers there, because they are happy to get three days’ notice for a change of price. I thought that was what the demos were about.

David Christensen

There would have been some Arla farmers, I suspect. I will not try to pull the wool over your eyes and say there were no Arla farmers at those demos. I do a lot of member meetings because, at least twice a year, we formally meet our members. This year, we had an additional round of meetings in the summer. The notice period has genuinely never been raised with me. The bigger issue is the absolute price.

Rebecca Pow

It was raised just now, though, by one or two people on the panel.

David Christensen

There is a historic perspective here and there is a current perspective. Historically, Arla acted as a PLC in the UK and their role was to make as much money as they could and ship it back to their Scandinavian and European owners. There is nothing wrong with that; that was their ethos and rationale. The difference has come since we have been a co‑operative in the UK. The formula works as Ash has explained and it is very simple. From the revenue that comes in each month, 3% is taken off and labelled “profit”. I will come back to that in a minute. The costs are taken off the revenue and everything else drops off as milk price and is paid out on a monthly basis. The 3% that is left, the profit figure, is treated the same as any of us could do with profit in our business, just as I would do at Kingston Hill Farm. Some of it will get reinvested and some of it will get paid out to farmers in a 13th payment, as a dividend at the end of the year. I vote on that formula and I take hearings from all the members at these meetings as to how I should vote. The process is open and transparent to all members. The farmer directors get that.

Rebecca Pow

That is interesting. You do not regard that the farmer always has to make 3% profit before you make your changes. It comes from the other end, the shareholders. The company gets the 3% profit.

Afshin Amirahmadi

The shareholders are the farmers.

David Christensen

We are one and the same.

Afshin Amirahmadi

There is no difference.

David Christensen

That money, the 3%, which is not paid out to the farmers goes back into the business for capital expenditure. It is not paying wages or anything like that. It is going to new cheese plants and new power plants. We have invested £500 million in the last decade in the UK. We talk about efficiency and trying to add value. I am not absolutely sure of my facts here, but I doubt many would have invested much more than that. I suspect that, by some margin, this is the leading amount of money invested, as a co‑op, with all proceeds going back to farmers.

Rebecca Pow

The second part to my question is about the voluntary code, which does not apply to co‑ops, so does not require you to give 30 days’ notice of milk price changes. Do you think that gives you an advantage over other processors in the UK?

Afshin Amirahmadi

It depends what you mean by “advantage”. If it is whether that allows us to pay less to our farmers versus everyone else, history would say that we are the top of the league table. I would rather be in the middle of the league table at 30p than at the top of the league table at 23p at the moment. There is no evidence that it gives us an advantage. I would just say that co‑ops are not exempt and it is a voluntary code anyway, so there is no: “Are you exempt or not?” Co‑ops are covered. The reason why co‑ops are treated differently in the code is that the code is looking at the relationship between the buyer and the seller, the processor and the farmer. With a co‑op, they are the same thing. Who are you then looking at in terms of the relationship? It is important for the Committee to realise that co‑ops are not exempt from the code. It is just that price determination is different in a co‑op from a processor. In a processor, the farmer has absolutely no control over the setting of milk price. Therefore, when the farmer has no control over the setting of milk price, it is quite right that they should be treated differently. In Arla, David has 100% control of how the price is set and, therefore, co‑ops are treated differently.

David Christensen

Chairman, very briefly if I may, again this has never been raised with me by a member. I am not lying—genuinely, it is never raised. My members are much more interested in what the market is doing and what we are investing in. All that stuff delivers the milk price. Those are the questions they are asking, because they know that that is going to come back to them ultimately.

Chair

In the 23p that you pay farmers, is there likely to be a dividend at the end of the year? What happens? Is that 1p or 2p, or what?

Afshin Amirahmadi

That dividend is forecast to be 0.75p this year, Mr Chairman. It is typically in that sort of ballpark. It does change, because again it is formulaic.

Chair

Did you say 5p?

Afshin Amirahmadi

0.75p. It would be great if it was 5p, Mr Chairman, but it is not.

Rebecca Pow

At the end of October, your milk collection depot in Derbyshire was targeted by a group of dairy farmers, and they were arguing that processors have not substantially increased milk prices yet, despite concessions from supermarkets. Some of them have helped. How would you respond to that?

Afshin Amirahmadi

We actually increased our price in October. To explain that, you also have to ask the question of why it is that milk prices have gone from 18 months ago, when we were paying the highest milk price that we have ever paid in our history, at 35p, to paying 12p lower than that now, 23p. That is a fundamental question: why has that happened? If you look at the mix of our business, approximately 30% goes into what we call commoditised or ingredients‑type markets. Some 70% of our business is retail business, and it is that milk that goes into ingredients and commodities that has collapsed in price. The price of a litre of milk that goes into commodities has gone down by over 20p. If you divide that by the third of our milk that goes into that, you can see that the vast majority of our milk price reduction is because of those markets. We welcome what the retailers did over the summer. Mr Simpson asked the question about Morrisons. We are fortunate enough to be the farmer co‑op that is supplying that milk. I have to say that I was one of the cynical people when they announced they were going to do that, and I have had to eat a lot of humble pie over the last couple of weeks. It is in its fourth week and it is already selling at seven times what we forecast. We have an independent auditor tracking that money, and all of it is going back to dairy farmers. Over £5million will be passed from Morrisons back to us this year.

Rebecca Pow

That is very interesting. Does it not highlight that perhaps you could be encouraging more things like that?

Afshin Amirahmadi

The mission of the business we are in is to maximise the milk price. We welcome any retailer that wants to support an initiative. Indeed, Morrisons is just one of the customers that we have that are very interested in promoting the fact that they source milk or dairy products, because it is not just about milk, as one of the other panellists said earlier on; it is about the full dairy range. We are trying to promote to consumers by having much clearer labelling to say, when you buy this product, regardless of whether it is a branded product or a private‑label supermarket product, you can have more information about where that product comes from and where the money flows. When consumers have that ability, they can then make a choice. I would not want to work in an industry where consumers did not have that choice, because they should have that choice. The world that I want to work in is more clear and transparent around the choice.

Rebecca Pow

Did we not say just now that you cannot have UK country‑of‑origin labelling on dairy products, though?

Afshin Amirahmadi

Country of origin is a different question.

Rebecca Pow

You do not mean that.

Chair

I think we can do it, but not on‑product.

Rishi Sunak

I do not know if you are able to share this with us, but it was very heartening to hear your comments about the Morrisons farmers’ milk. Do you have a sense of what share of their milk that is?

Afshin Amirahmadi

Yes, I do. It is commercially sensitive, but I will tell you that it is a significantly high teen‑digit number, so between 10% and 20% already, and it is four weeks into launch.

Rishi Sunak

That is fantastic news.

Afshin Amirahmadi

We are being very careful, because it is very relevant at the moment. We have just conducted a piece of research with YouGov that demonstrates clearly that consumers have a clear desire to support dairy farmers. We think that is great. Therefore, as a consumer proposition, that is very much hitting what consumers buy into. We need to make sure that that proposition works over a long period of time, because we do not want it just while we are at the bottom of a market with our farmers. We want this to be every day.

Rishi Sunak

Is the research you have done with YouGov something you would be comfortable sharing with the Committee or is it commercially sensitive to you?

Afshin Amirahmadi

I would probably need to take some advice on that, Mr Sunak, but that is something that we will come back to.

Rishi Sunak

I understand if you do not want to but, if you are comfortable sharing it, we would appreciate it.

Afshin Amirahmadi

Thank you very much. I will consult with my legal team on that and come back to you.

Chair

It is good news, so anything you can give us, please do.

David Simpson

That is certainly welcome news from the Morrisons point of view, but you did hear the evidence prior to that when the others said that, at this stage, they did not see any benefit coming from the increase in pricing in the retailers. That is their opinion, but it is welcome news. There is no doubt about that.

David Christensen

The money has to flow through the chain first to get into the system.

David Simpson

Absolutely. It is certainly good news and I hope it will continue on that side. I want to deal with the volatility from the processor’s point of view. How has the processing industry itself been coping with the volatility in the prices? When I talk to processors at home through powdered milk or whatever, there have been a number of issues there. How has the price you have been paid by the retailer changed in the last few years?

Afshin Amirahmadi

That is a very good question. If we just consider the Arla business in the UK, the sorts of developments we have seen over the last 10 years are retailers wanting to get more involved upstream of the supply chain. We have seen various different models and the co‑op model is able to embrace all of those. Some retailers require direct pools of farmers and they are prepared to pay a formulaic price, and some of those prices are called cost‑of‑production‑type prices. You have other retailers that also want to help, but they do not want to go down that route. We have been able, with those retailers, to develop a transparent model, which is again independently audited, but they do not want to commercially publicise what they are doing. That is what we have developed for them. UK retailers are making strong efforts to be able to demonstrate to their consumers that they are behaving ethically upstream of the supply chain. Arla and other dairy companies have definitely benefited from that. The challenge we have, as seen from the processing side of the business, is that, in times of downward cycle, what is happening, by rights, is that more products are being sold in commodity‑type areas as a percentage, which is really driving down the price. This year, David and the board of representatives set the management a challenge in Arla to move 500 million litres of milk from commodity products into retail products. This is basically trying to hedge and de‑risk, in a way. The way we do that is by providing offers on our branded products so, even on promotion, we are able to receive more money for David’s milk by making sure we divert that milk into our branded retail products, rather than selling it into ingredients. That would be a practical thing we are trying to do to manage the bottom of the market. Let us not make any bones about it. I echo the comments made earlier on: the milk price at the moment is unsustainable, even for the most efficient farmers, and we have some extremely efficient farmers. There is a lot of pain out there at the moment. However, what we have to be careful about as an industry is not portraying to consumers an industry that is lurching from crisis to crisis. What we need is consumers to buy into the positivity that there is in the industry.

Chair

While you are talking about promotions, do you believe that, if you promote your product, you will increase the consumption of that product?

Afshin Amirahmadi

Is that a rhetorical question, Mr Chairman?

Chair

I just want an answer from you.

Afshin Amirahmadi

Yes, absolutely. Promotion and marketing is a vital part of how we develop competition.

Chair

That is fine. I do not want to prolong it too long. It is on the record.

David Simpson

Maybe David could answer this part of the question. You represent the co‑operative and you speak on behalf of a vast number of producers of milk. You would be open and transparent, in the sense that you would be told by your members how to vote or whatever the case may be. How do you react to some commentators who have said that there is not enough transparency, when it comes to the contracts between retailers and processors? How would you respond to that?

David Christensen

In a business like ours, I lay off my trust to those further up the chain from me, so the board of directors. I have complete confidence in that board of directors, who will get more involved in that commercial process. There are commercial sensitivities here obviously, and I would not expect Ash and his colleagues to share all those relationships with me. I put my trust in the guys higher up the food chain than me.

David Simpson

Are you saying that the sensitivities would be in the price and how contracts would be negotiated? In other words, if you were a dairy farmer milking 700 cows, you would get a better price than somebody else.

David Christensen

No, everyone within Arla gets the same price. Let me be absolutely fundamentally clear about that. That is the crux of successful co‑operation, because differential prices are the enemy of co‑operation. All of us within Europe, all 12,700 members, are getting paid on the same basis. We are not exactly there yet. We are working towards it, because we have come from a load of different backgrounds, but that is a key point of co‑operation.

Chair

What about the transport, if you are picking up 1 billion litres or you are picking up 100,000 litres a year?

David Christensen

Historically, we have tried to incentivise larger production because, after the cost of the milk, the cost of transporting milk is one of our biggest costs. Again, our producers have broadly been happy with that. We always get some niggle. I get some niggle in particular, because I am a large producer and they say to me that I am getting benefit at their expense, but a lot of the smaller ones go, “No, I get this, David. You are actually benefiting the business, because you are picking up a lot of milk in one hit. That is going to benefit our cost base as well.” As always, it is a balancing act for us.

David Simpson

Very quickly and briefly, are you able to tell us today what percentage of the price you receive from the supermarkets is passed on to the farmers?

Afshin Amirahmadi

100% in Arla.

David Christensen

There is nowhere else for it to go. All the revenue comes back to us ultimately.

Afshin Amirahmadi

Clearly the business has costs. We have to run dairies, but everything goes back to the farmers.

David Simpson

Okay, you have been very clear. Thank you.

Chair

The profits go into the dividend and that is what makes up the 0.75p or whatever, at the end of the day.

Afshin Amirahmadi

Exactly, Mr Chairman, yes.

Rishi Sunak

This is a question about long‑term contracts, just to get your thoughts on those. Have you discussed them with your farmers? Is there appetite? Obviously, given your scale, it is potentially something that you are in a position to offer more quickly and more so than other buyers.

David Christensen

From a farmer perspective, I am very comfortable with the model as it is right now, because I have confidence that the returns come back to me directly. In terms of longer‑term contracts, I feel comfortable to ride it out at the moment, but I would understand if some of my colleagues wanted a further degree of security. For instance, if I had just gone and bought my tenant farm and had a huge debt, I might be quite happy then to lock into half my milk production or something like that, of a winter, so I could get some security. As I said earlier, I can lock into my food price for the winter, which is my single biggest cost, but I cannot lock my milk at the moment. Again, it has not been raised with me at the moment, but that is not to say it will not be in the fullness of time. People are waiting to see how long this trough lasts and I suspect, when we come out of this trough, review what has happened and look at recent history, it will be a topic for then.

Afshin Amirahmadi

For the Committee to be clear, when someone becomes a member of Arla and a farmer that owns the business, Arla cannot serve notice on them, so the contract length is forever. If that farmer wants to leave, contractually that farmer can leave within a year. Actually, he can leave sooner than that if he wants to and some do, from time to time. The movement can happen one way, but the co‑op does not work unless we have that relationship. The business is the farmer’s. There are no other stakeholders in the business.

David Christensen

That difference is fundamental in the UK, because we have not had that historically, and the fact that Arla buys all the milk you produce at one price. There is no A and B model within Arla, and that is really important too. Both of those two points are key.

Rishi Sunak

From a farming perspective, when you speak to the supermarket or whoever else you are selling to, do you talk about entering into some kind of long‑term contract?

Afshin Amirahmadi

Yes, absolutely. I thought some really interesting points have been made about risk and where the risk lies in the supply chain. Every part of the supply chain, because we are now in a more globalised world, is trying to de‑risk and the retailers are as well. Mr Simpson asked what has changed in the last 10 years with retailers. The general trend with our retailer contractual relationships is that they have become longer, so multiple years. As long as we stay within the competition law, which does not allow you go beyond a certain number of years, we are talking multiple years. Actually the trend has happened, and the benefit then for us as a business is to have more confidence, then, to be able to, on the processing side, invest in processing facilities and get behind brands, because we know we have the security of that contract. That is a trend that has come into the retailer—

Rishi Sunak

Have they expressed any interest in saying, “Fine, we will contract with you for the next five years at this fixed price, for this amount of supply, X% of our needs”? That would in turn enable you to say to your farmers, “Here it is. If we go up to 40p, tough luck, but it means that you are going to get this stability.” Has that conversation happened with the supermarket, where you can say that this is something you would like to offer to farmers? I take it that they have not raised it yet, but people seem to raise it in these meetings and with us individually.

Afshin Amirahmadi

Actually—and I cannot discuss the details of the commercial relationships that I have—the unique nature of our business is that David allows us, as managers, to have the benefit of deciding what those commercial relationships should be. All I would say is that my commercial team has the full ability to negotiate what they believe. If that means putting in some smoothing mechanisms in the way that we sell products that is open, but I cannot discuss the exact details of that.

David Christensen

Right now, and I am not a commercial operator—I am a farmer—but historically in my life with milk income, prior to that, I can recall back to one of the commodity spikes before 2007, when the milk price was high and milk was short. I sat in a meeting one day with a buyer from Masterfoods, in charge of buying milk powder for Masterfoods. She was desperate to get fixed contracts. When the ingredient price is very high because milk is tight, they are very keen. Right now, they are not so keen, so this sort of thing is about timing. The more this cycle goes on, I suspect we will start to get some common sense, because it is going to burn both of us. It is going to burn farmers at the troughs and it is going to burn the supply trade higher up, which is going to want some common sense out of this.

Dr Paul Monaghan

Just developing that theme, gentlemen, what is your view of a futures market for the dairy industry?

David Christensen

My last answer probably covered a lot of that off. From a farmer’s perspective, it is about managing risk. Each farmer will take a view according to his own personal situation. My view, with regards to coping with the volatility and thus the futures, is the Arla model, in that we have our fingers in lots of products in lots of markets in dairy. You mitigate risk to some extent by doing that. When you have a complete slump, like right now, you can never escape market forces. Futures would have offered it to some degree. The trouble that I always find with futures, and I am not a grain farmer so I do not currently do futures, is a) at some point you have to make a decision you have to fix, and b) there is a cost to fixing as well. It is an insurance policy, so there is always a premium. Each of us will take a decision ourselves. To date, it has not been raised with me by members. It has not been a big issue. We have just started another round of member meetings. I have not done one yet, but am due to do a couple next week. I will get some feedback then. We had a round of member meetings in August. I did a couple of those meetings and it was not featured then, so I am taking my steer from my membership.

Afshin Amirahmadi

Arla as a business already hedges on a number of different inputs in the business, so the resources that we use. The one thing that we do not use financial hedges for is the output side, so the milk price, although we do have certain retailer relationships where some level of hedging is built in. There are two key challenges. Arla has looked at this strategically and actually worked on projects with some of the key organisations that operate in it to look at doing trials and how they work. The two key fundamental questions are liquidity, so the ability to have a hedge that is an accurate bet for hedging, and the second point is where the risk of that hedge sits. When our farmers have democratically sat down and discussed it, what they have not wanted is the co‑operative as a whole to take that risk, because they do not want that to happen on their behalf. If we ever enter into a world of futures, I would suggest that will probably have to be an individual farmer choice. If democratically the farmers decide that they want Arla to introduce the process for an individual farmer to be able to hedge, that will happen. The challenge with all of these things is that the desire to be able to hedge and use futures is very prevalent when you are at the bottom of the market. It probably takes about three to four years to set something like that up. The time to work on it is probably as we come out of this trough, but I suspect that as we come out of this trough and go up, the interest for futures is going to go away again, and that is a shame. My personal view is that, over time, we will see these mechanisms in place.

Dr Paul Monaghan

I take your point about where the market is at this point in time. Going back slightly to your comment about choice, do you find or do you know if the views of your members across Europe differ in relation to futures markets?

David Christensen

Three times a year, I meet up with my equivalent positions in Denmark, Sweden, Germany, Holland and Belgium, and we have a meeting to discuss how the co‑operative is going. It is more of an issue for some of those guys than it is for us here, because they have a higher production cost in Europe than we do here, so they are even more exposed to this than the UK dairy farmer right now. I suspect it is more of an issue for some of those, and that is another reason why I suspect this will end up being done on an individual farmer basis, rather than a whole co‑op basis.

Chair

My next question is supply and demand. It is great that you offer everybody 23p. It could be more, naturally, but you are taking all production; you have no A and B quota. Therefore, what is stopping farmers from just trying to produce more and more milk? What are you doing about the situation regarding over‑production because, playing devil’s advocate, it could be argued that your process, while good in some ways for the farmer, is actually fuelling production, not reducing it?

David Christensen

I should answer that, because I was honest with you at the start and said I have just started the second unit. I was in Ireland yesterday and I was speaking at a conference of Irish co‑operative organisations, and they wanted to know about the UK dairy experience. I knew this before, but what was abundantly clear yesterday was that they are very happy to come in and fill the gaps in our market. We can cut production here, but it will just get filled by other people and I do not think that is right. The two best countries in Europe for producing milk are Ireland and the UK. The biggest manufacturing sector in the UK is the food sector. I think we should be producing as much milk as we can here to fuel that growth. Now, what we have to do as a business, and we have demonstrated we are doing it, is to go on developing export markets. Let me give you an example. When Milk Link was our small south‑west‑based business—that is not fair, UK but relatively small business—we had a fantastic cheddar made down in Taw Valley in Devon, called Tickler. It was really good. We only had sales of about £7 million or something like that, a very low turnover when you compare it to something like Cathedral City at £300 million. We did not have the resources to get it out there. Having joined Arla, we now have the resources to promote it, both within the UK but, more fundamentally, overseas. Growth is up 30% now and it is going up. It is the same with our stilton plant; we have much greater reach. I think the answer here is not to stop UK production, but to charge these guys.

Chair

Your argument is to produce as much milk in this country to try to stop, to a degree, some of the pressures from milk coming in.

David Christensen

It will just get filled in and those export markets will be filled by others. We can do that. We have the second‑lowest production cost base in Europe after Ireland. We should be going out there and doing that, because we have some really good farmers, some great production assets and now we have a co‑operative that delivers all that extra money back to farmers. We should be doing this.

Rebecca Pow

Mr Chairman, with respect, how are you going to get the retailers to buy the stuff, because they are the ones purchasing the imports? They are buying all the different cheeses, the butter and yoghurt? Is it because there is not enough British already? They are fuelling it, really. You have to convince them, so how are you doing that?

Afshin Amirahmadi

These are very relevant questions and very important questions to answer. The challenge of the UK dairy industry is that it comes from a history of being very inwardly focused, and therefore we are only 80% sufficient, in terms of meeting the needs, but that is only half the story. What has actually happened, in that period of time, is that countries like Ireland, Denmark, New Zealand and the Netherlands, which have had an external view and an expansionary policy on farm, have actually grabbed the growth of the demand for dairy products. You are absolutely right; the demand for dairy products, not just in the UK but in Europe, is not increasing other than the slight population increase that we are getting. The demand for dairy products and the bright future of dairy is the ability for northern European farmers to be able to own the supply chain and to be able to have access to these global markets, where we are seeing the growth of the middle classes from 2billion probably to UN estimates of 5billion, over the next 20 years. What that means is that people are starting to introduce protein into their diet. The key job that we need to do in the UK is being able to link into that because, if we do not link into that, there are other markets that are well placed to do that and are doing that at the moment. That is why the Arla policy, when it comes to David or our 3,000 British farmers, is that the choice for how much David produces is his choice. Our job is to be able to link that production. Of course, it is our job to forecast that growth, and David helps us in that process, but link that growth to a demand. The demand, you are absolutely right, is not a European demand. It is a global demand. If you look at the investments that we have made over the last five years, it is all about taking British and European milk, and converting it into products to sell in China, Africa and South America. That is really what we have to do over the next few years.

Chair

I am mindful of time. The last bit of my question is quotas across the whole of Europe. How will the rest of Europe react? The Netherlands will produce more milk. Possibly Denmark will produce more milk. How does that affect Arla directly? Is it your argument that those countries that can produce the milk most efficiently at the lowest price cost of production will fare well? Is that bluntly your view?

David Christensen

Absolutely. It is the business view provided you have a milk buyer that will pass back the benefits of those growth markets to you, and that is the crux of someone like Arla—you need someone to keep the market straight. That is why we are so important.

Rishi Sunak

We talked a little in Rebecca’s question about the self‑sufficiency deficit we have, when it comes to desserts, yoghurt, ice cream, butter and cheese. You talked about your role in that, which is great. What do you think Government ought to be doing, if anything, to promote increased investment in our processing capacity domestically, so we can start to correct some of that lack of self‑sufficiency in dairy products?

Chair

Capital allowances for co‑operatives is it, perhaps?

David Christensen

One of the topics that they were discussing in Ireland yesterday was using the European Investment Bank, and talking to them about very low‑cost interest rate loans to co‑ops, but also building in volatility protection. There were mechanisms so that, when the price did go down and the co‑ops were struggling, there were payment holidays or some mechanism to cope with that. That sort of mechanism would help us, so there is validity in what you say.

Afshin Amirahmadi

It is difficult to answer it in a simple way, but I was quite struck by the answer that was given by one of the panellists earlier on about getting everyone in a room and banging their heads together. While I would not use those words, the sentiment behind that was very interesting. If you look at the industries that have been successful globally, New Zealand, Denmark and Ireland, what is common between all of them is that there is a very clear policy around how to develop that industry. That is where we are not in the UK, at the moment. Quite often we take delegations of producer organisations over to Denmark to demonstrate how joined‑up the thinking is. When you have that sort of joined‑up thinking, it gives confidence. Everyone is working in the same direction and, actually, you get a bit of positivity. One of the key challenges—and Government can play a role in this—is that we have to make sure that the world knows that the UK is open for business when it comes to business. We have to make it really easy when countries like Brazil want to come over here, whatever countries want to import. Again, Government can play a very important role in that. There is a trade delegation going out to China next week. We fully supported that and will be part of that as well.

Chair

Thank you for that. I know the Secretary of State is quite keen on the European Investment Bank, so it is probably something that we can include in our report.

David Christensen

Just one very brief thing: we need to make sure we do not have any more animal health scares. TB would be my key horizon there, so we need to get that nailed, because we have a fantastic opportunity. It would be retched if it were derailed by health embargos.

Chair

Your message is heard loudly.

Rebecca Pow

We talked quite a bit about labelling and marketing earlier. I think you have introduced a new farmer‑owned marque on your products. For British supermarkets with this stamp, will it be from just British farmers? I know you also have farmers who are members from across Europe, so how are we going to distinguish that?

Afshin Amirahmadi

That is a really good point. Part of the challenge that Arla has in the UK is that, yes, we have 3,000 British owners, but the truth about our business is we are a European business and we cannot hide from that. When we present ourselves to the consumer, we have to be transparent to the consumer and talk about who we are, as Arla. Yes, we can talk about the Britishness and we are very clear with our labelling. If it is British milk processed in British dairies or, for that matter, Scottish milk in Scottish dairies or Welsh milk in Welsh dairies, it is labelled that way. It is very, very clear. What we are trying to do with the farmer‑owned is not talk about particular provenance there or necessarily quality. We are fully supportive of the Red Tractor marque. What we are talking about with the farmer‑owned is trying to raise public awareness. Even though we are a farmer‑owned business, people do not know about us, and we believe it is quite motivating for consumers to know that the dairy products that they are buying are actually coming from farmers who own the business. That is the objective with that marketing campaign: to raise awareness of that.

Rebecca Pow

Even if some of the farmers are European, you are still saying you would completely distinguish if it is from your British farmers. Is it British farmer‑owned and European farmer‑owned?

Afshin Amirahmadi

We do not talk about British farmer‑owned; we talk about farmer‑owned. The labelling is not instead of; it is as well as the marques that are on the packaging.

Ms Margaret Ritchie

Export markets and strategy: do you believe that export markets have the potential to lift farmers out of their current difficulties? Secondary to that, do you think that Government are doing enough to identify and open markets for British goods? If not, where can they improve?

David Christensen

With respect, we have probably covered off a lot of the first part of the question. I fundamentally believe that the export market is the way to go because of, as Ash talked about earlier on, the limit in European population growth, so we need to go to the developing countries. That bit is nailed down for us.

Ms Margaret Ritchie

In that respect, what countries do you think the Secretary of State should be pursuing? For example, she is in China next week.

David Christensen

China is the first one on the list. The relaxation of the one‑child policy is fantastic news. As a great Irishman said yesterday, “I wish they would hurry up and start breeding.” That was the comment from my Irish dairy farmer colleagues.

Chair

They will certainly need milk powder, will they not?

David Christensen

That is what I mean. That was the point. India is another big potential. The Middle East and North Africa are a big market for us, South America potentially and even North America potentially. The big ones are those developing markets, China and India. Ash, you can explain more.

Afshin Amirahmadi

No, that is the perfect answer. The key here again is that Arla has had over 25 years’ experience of selling into some of these markets. The key thing here is to be able to produce products here that people actually want to buy and use. If you are selling to African consumers, they want to buy powder, but they cannot afford to buy bulk powder. You need to produce small 7‑gram sachets, and they want that milk to be fortified, so they want extra vitamins in that product. If you are selling to the Chinese market, they are quite happy to buy UHT milk, so the key to the export thing is about being able to produce what people actually want to buy, not force on them what we consume over here.

Ms Margaret Ritchie

How much have you given that message to the Defra department and, in particular, to the Secretary of State and her Ministers?

Afshin Amirahmadi

We are part of the delegation next week that is going to China and we are fully supportive of it. Not only do we think China is an opportunity; we have actually invested, so we are in a joint venture with a Chinese dairy company and we have interests in China because of that.

David Simpson

Very quickly, as I know time is very short, you will have heard previously that Commissioner Hogan has rejected or resisted a call to the changes in the intervention prices. What is your view on that and what other measures could be put in place to ease the burden for farmers?

David Christensen

My concern about putting more intervention in is that it would just delay the recovery because, at some stage, it has to come out again. It is a question of whether it is short and sharp, and hopefully the recovery is sharp and quick, or if we smooth and soften it. My personal view, as a farmer, is to get on with it. It also starts to mask market signals. If it means the milk price is higher, then we cannot produce it and it would then be counterproductive to what we need here. I know that everyone will not share that view, but that is a personal view. What else can any Government do? Are you specifically asking me about what Hogan can do or Governments generally?

David Simpson

What more can the EU do to assist or ease the burden?

David Christensen

Anything that can help us export and promote the business overseas and the general stuff—relaxation of red tape as much as possible, sensible red tape. We have to have it. It actually gives us a bit of a unique selling point when you go to China. Much as we farmers hate it, they love our standards, but it is all about balance. In terms of what else Europe can do, they can get the basic payment out on time, although that is more of a UK issue right now. Ash?

Afshin Amirahmadi

I think David has answered the question very well.

Rishi Sunak

This is a broad question, but I would appreciate a specific answer to it. In terms of retailers, what would you like to see them do differently or better, which you think would be helpful for the industry? In your written evidence, you talk a little bit about transparency of sourcing of own‑label products, but what would be the two or three things that you would like to see from the retail industry?

Chair

What is your wish list?

David Christensen

They are our customers and, at the end of the day, any successful business listens to and reacts to their customers, so we have to be cognisant of that. That is the fundamental thing. I, like my colleagues behind, hate the idea of milk being cheaper than water. It really hacks me off. What we have to do is find a solution to that, and the solution to that is adding value and making the customer appreciate a different product and pay more for it. That is about investing in marketing in the long term, and stuff like that. It is about different milks, differentiation, and we are doing that. We are on the case with that, but it is does not happen overnight. One of our brands, Cravendale, is a good answer to that: very long‑life milk that differentiates. We have to do more of that. We are not looking for charity; we are looking for a good, sound commercial relationship.

Afshin Amirahmadi

I believe that retailers are actually part of the solution. As David said, they are definitely our route to market. Especially at the moment, we need those retailers because, if we are not selling products into retailers, we are selling into ingredients. If we look over a longer period of time as well, what we need retailers to do is to support dairy companies not just like us, but dairy companies like us that are innovating and producing products. We believe that dairy has a really vital role, because what you can do with milk is so versatile. It is fantastic. Dairy has a vital role to the benefit of the health of the nation. This is a shocking number to share with you: in terms of how much milk that is actually drunk, 30% of the liquid milk drunk by consumers is drunk by children under the age of five. That drops down to almost zero after the age of five. Why? It is answering those sorts of issues. It is so relevant to children, probably because mum and dad are choosing. We need to be able to have products that are relevant to children when they go to school and so on and, therefore, what we need retailers to do, as we launch these sorts of products, is to support them and give them a prominent feature. I believe they will, because it is to their advantage to do that as well.

Chair

Just one very quick question on sport and sporting drinks, there is no doubt that dairy fats and proteins are very good for sportsmen and women. Can we get more of a product into the sports centres? Can it be something that lasts a little bit longer than milk? Are you doing any research into that?

Afshin Amirahmadi

We have actually launched a product that we are calling Protein. A very clever marketeer came up with that name. It is in yoghurts at the moment. We actually have the drink ready and I do not think it will be too long before you see it on the shelves. It is absolutely flying. Where we are selling it is the interesting point. We are not selling it in retail supermarkets. It is in gyms and places. Part of the answer is also about getting our products where consumers are when they want to buy our products but, yes, we have already launched a sports product.

Chair

Well done. Thank you very much. You have given us some very good evidence there to put on record and make part of our report, so it was very useful.

Afshin Amirahmadi

Thank you, Mr Chairman and the Committee.

David Christensen

Thank you for the invitation. Oral evidence: Farmgate prices, HC 474 2