 We'll make a start now with the formal part of the meeting. Welcome to the fourth meeting of 2015 of the Rural Affairs, Climate Change and Environment Committee. Before we move to the first item, I'd like to remind everyone present to switch off their mobile phones. They could affect the broadcast system. Of course, some members may be using tablets et cetera, for work in the committee's business, and that's quite understandable. I have apologies from Sarah Boyack, and David Stewart will be attending in her place, and I welcome him to join us in the committee for this session and invite him to declare any relevant interests that he has. Thank you, convener. I have no relevant interests to declare. Thank you, David. Agenda item 1 is a decision on taking business at private, and this relates to consideration of agenda item 4. Evidence heard this morning and future plans for the inquiry on dairy industry in private. The committee is also asked to decide whether to consider its EU priorities in private at a future meeting. Are we agreed? Yes. Thank you. Agenda item 2 subordinate legislation, and this item considers three negative instruments as listed in the agenda. Conservation of salmon annual close time and catch in release Scotland amendment regulations 2014, SSI 2014 slash 357. The designation of nitrate vulnerable zones Scotland regulations 214, SSI 214 slash 373, and the sea fishing points for masters of fishing boats Scotland regulation 2014, SSI 2014 slash 379. The first of those on the conservation of salmon annual close times and catch release Scotland amendments. Drawn up by Parliament, we brought to the attention of the fact that there had been some mistakes in it, and therefore it did not comply with the 28 day rule. However, the Delegated Powers and Law Reform Committee have agreed in the grounds that the Scottish Government is seeking to make the corrections to satisfy that committee's prior report. I remit fair members to the paper. Are we agreed about that first item on the conservation of salmon? Are there any comments? There are no comments? Okay. The designation of nitrate vulnerable zones, second SSI, Alex Ferguson. It's a very brief comment, convener, if I may, that in these zones were introduced in 2002, and I noticed that once we approve this statutory instrument, the total area that's currently covered by NVZs will decrease by 24%. I do remember a heated debate in this or the equivalent of this committee in 2002 in which I argued that the zones as proposed were far too big. I just want to put on record how delighted I am that some 12 years later somebody agrees with me. Thank you for that. Are we agreed that there's no other comment on that nitrate vulnerable zones SSI? Agreed. The third item is the sea fishing points for masters of fishing boats, Scotland regulations. Any comments on that? I have—I'd just like to get some detail from the Government please about how the register is kept and how it's available, and indeed how it pursues people who perhaps have broken the rules, the EU fishing rules. I think that it's something we need to know about whilst passing the actual instrument. It allows for the register an update of it. I think that it would be useful to hear from the Government just in a letter if we can about some of the detail of what it does, because it is germane to our future planning of the seas and our discussions regarding the national marine plan. Are we agreed on that? We agreed that we make no comments on the SSI. Thank you. We move on to agenda item 3. This is an item for the committee to take evidence on the dairy industry from stakeholders in a round table session. I refer members to the paper. I'm the convener of the committee. I'm the MSP for Kate, Ness, Sutherland and Ross. My name is Robert Gibson. Just in case you can't read my name there. Once we get past the clerks in the official report, if you just say who you are, that would be fine. My name is Robert Mattontire, dairy farmer from the island of Bute, and I'm a member of supplies for smilk. I'm David Stewart. I'm the Libby member for the Highlands and Islands. I'm George Jameson. I'm the milk policy manager for NFU Scotland. I'm Clodio Bymysh South Scotland MSP and Shadow Minister for Environment and Climate Change. I'm Robert Graham, Graham's family dairy. We're dairy business based in Butch Valmer and also dairy farmers. I'm Dave Thompson MSP for Skylachaber and Bednoch. I'm Kenneth Campbell, dairy farmer from Castle Douglas. I'm Mike Russell, member of the Scottish Parliament for our Gail and Bute. I'm James Othes. I'm the chief executive of Scotland, food and drink, and maybe relevant for this. I'm in 2013, I chair a review of the dairy sector. I'm Alex Ferguson MSP for Galloway and West Dumfries, and if I could declare a slight interest in that I last year chaired a review of the want to go to practice, which reported in October. I'm Judith Bryant. I'm the chief executive of Dairy Kay. I'm Jim Hume, MSP for South Scotland. I'm Claim Jack, co-operate affairs director of Muller UK and Ireland group. Good morning. I'm Angus MacDonald MSP for Falkirk East. I'm Nigel Evans, vice-chairman of First Milk and also a dairy farmer and a farm director. Good morning. I'm Graham Day, MSP for Angus South. Thank you very much. Let me kick off with a general question. You can just indicate if you wish to come in on this. This inquiry has been triggered by the low prices of milk and indeed the First Milk decision about its delayed payments, et cetera. However, I want to ask you first of all, because we'll come into the detail quite soon, why does there seem to be a particular problem in Scotland at this time with the milk supply prices, et cetera? If anyone would like to comment on that, it would be very helpful to us. I'll bring you in. Firstly, it's not just Scotland. This is a global situation. New Zealand farmers are the prices have dropped more than anybody else because they're more exposed to global commodity markets. Since 2007, nobody can expect the globalisation of dairy. All farmers in the UK across Europe have all dropped to a similar level. There are particularly problems in Scotland. Probably 40 per cent of the producers in Scotland will supply first milk where they have their own distinct problems that are caused again by the global situation. Also, there are in particular markets. The worry in Scotland possibly going forward is a lack of processing investment. Farmers losing confidence, that sort of thing, but it's definitely not unique to Scotland. It's definitely a global issue, but there's particular—probably we can differentiate Scotland in some ways in trying to identify ways to mitigate against the short and medium and long term. I'm looking at a table here from a source that dairy UK suggests that Scotland's situation is that it's not developing as well as England or Wales or indeed Northern Ireland. So there seems to me to be a specific issue about Scotland that needs to be explored further. There's particular lack of modern investment in Scotland because one thing Scotland could do is produce milk. We have the rain and we have the grass and we have the farmers. In Scotland, I agree with that, it's not developing as much as we would like it. There seems to be investment across the country, especially in the big liquid processing plants and there's a lack of investment in processing and marketing in Scotland to take Scotland forward. In terms of prices, there shouldn't be a great deal of difference because Scottish farmers supply the same companies as English and Welsh and they tend to get the same prices. A family business, our track record for our milk price being a second to none over 20 years, but I absolutely agree with what George is saying about processing investment, and that is critical. We have a situation in both in the UK, particularly in Scotland, where our biggest brand for butter is Danish, our biggest brand for yoghurt is English, our biggest cheese brand is English. We need processing investment. On processing investment, we have plans that we would like to do and what we would like to see is a Government strategy on sustainable economic development being translated across all of national government and into local government. I think that there are a few challenges around that, but I think that there is a lot to go at in terms of adding value with the opportunities with this investment. Looking at spreadable butter, if the spreadable butter is not Graham's, it's not Scottish, and that equates to 96 per cent of all the spreadable butter that is sold in Scotland at retail. Three quarters of that is Danish. That alone is £60 million of lost opportunity in the economy, in the dairy industry, for our farmers, and that is something that we are working on. We have got new products coming out, but it all takes time, energy and investment. I would like to make a comment on that as well. Support George and what he is saying, we have very much seen that this is a global issue, it's not just a UK issue or a Scotland issue, this is very much a global issue. We know that volatility is inherent to the milk market and has been for a number of years. If you look at the GDT auction trends for the last 10 years, about every two and a half years, we hit a cyclical dip. What we have not been in this country is perhaps as resilient as some people, for example, New Zealand farmers who have had more experience of the volatility than we have. At the moment, there are maybe not the private mechanisms to deal with what we are seeing at the moment. If we think back to 2014, what happened in 2014 was that we had really good weather, people had grass, people had silage, serial costs went down, but we had a Russian trade ban. We were already expecting more milk than the global demand needed, but what we couldn't anticipate was that there was a Russian trade ban. People will say, how does that affect this country? Not too much product goes to Russia. We have had members with containers turned around, but beyond that direct impact, what you also have is that product rebounding onto the EU market and it's just there in excess. Beyond that, we saw very much slowing down by China in terms of their buying in of dairy products, which was huge for the dairy market. On top of that, I think there's a slight misconception about the fact that in the UK, we have a rather unique liquid milk market and therefore that shouldn't be affected. Well, of course, a lot of milk in this country also goes into cheese and butter, which is internationally traded, but even when you come to the liquid milk market, when you're producing low fat milk, you're taking off the butter fat, that goes into the cream market and the cream is affected by the global butter price. So we have seen a whole confluence of events over 2014 that have created a perfect storm. In terms of Scotland in particular, if you're looking at a lot of cheese makers, it's very difficult sometimes to have a resilience because if you have a mature cheese, then sometimes the costs don't translate over the market dips and peaks. So as an industry in the UK, Scotland, England, Wales, all of the UK, Northern Ireland, we have to develop somewhat more resilience. Well, we'll explore that a bit further. Graeme Jack, first of all. I wanted to talk from the more UK and Ireland perspective. We are part of a privately owned company owned by a sole shareholder in Germany who has the opportunity to look across Europe and the rest of the world at markets, which offer opportunities for him. His view is that the UK is a market that offers opportunity and the reason for that is just speaking to a point made by George Ellar on the UK suffers from a historic and chronic lack of investment in added value processing capability. A measure of that as far as our company is concerned is that the UK is currently importing £2.2 billion worth of dairy products every year. We've given away a share of our domestic market to companies in Europe and in Ireland. We see that as being an opportunity. Our view is that we are part of the solution rather than the problem in that we are investing. We've invested around £500 million in the last three years in the UK and we're alive to opportunities to continue to do that. That's our assessment of this market. There's not enough added value processing and we're giving away too much of our home market to overseas competitors. In addition to that, the deficit between importing and exporting, we're only exporting about £1 billion worth of products, so we see that as an opportunity to. Okay, thank you for that insight. Robert McIntyre, first and then James Wither. I'm here really to talk about the circumstances of the milk producers in the periphery. That is Buten Cintyre. We are all members of First Milk and I can give you an illustration of Price Dive. January 14, I received 32.35 pence a litre for my milk supply to First Milk and I'm a less than average producer for First Milk and that's what I achieved. From that 32.35, we contributed every producer a 0.5 for penny capital contribution. January 15, our price will have dived to 20.98 pence and from that 20.98 pence, we've got a capital contribution of now 2 pence a litre, so you can see a net price is an appalling 18 point something which is way, way below the cost of producing a litre of milk. NFU Scotland says that it takes 30 pence a litre to produce a litre of milk. My college adviser says that we might be able to do it for 27, 28, but that would be difficult in the periphery because we've had extra hollies costs. As far as processing goes, in Bute, we lost our creameries. First Milk shut our creamery in March 2008, 2010, sorry, and at that time we had 13 milk producers left producing 15.5 million litres. We've still got 13 producers producing that same amount of milk, but you can understand many of them are now totally disillusioned. Where we go from here, we're depending on First Milk for a survival and that's the case, it is survival because we're faced with the summer, we're faced with buying fertilizer to make next year's silage. Where's the money coming from? As an illustration, our 13 producers now in the Bute, if you project a year forward, there's £2 million off our bottom line. £2 million is essential to our all tenants to pay rent to Bute estates, to buy all our inputs, fuel, feed, fertilizer. It's a very worrying situation where some of us are losing sleep over. Thanks very much. The sound is dealt with automatically via the sound man, so you don't need to switch it on and off for everyone. No, no, just to let you know. Thank you for that. We'll be coming specifically to First Milk questions just in a moment, but that was a good tee-up of what the particular Scottish problem is, because around 40 per cent of our milk in Scotland is dealt with by First Milk, as far as I understand. James Wither. Thank you, chairman. Probably to echo some of the comments so far, the last 15 to 16 years in the Scottish Dairing City has been the story of peaks and troughs, and I suppose it's become more volatile in the gap between the tops and the bottoms at the milk price end have become more extreme. Those Robert figures, I think, just demonstrated what's been particularly noticeable about this current drop, is the steepness of that curve and how deep it's gone. So it's definitely a more concerning position they've been in for a while. It is a global situation. There's nothing I can see that can be done in Scotland that will change that global dynamic, but we can absolutely be better prepared to deal with it, and I'm picking up due this point to be much more resilient. The reality is that in Scotland we're overexposed at the moment to these global peaks and troughs, and we should be underexposed. And many other sex, our food and drink industry have got ourselves into a position where they are underexposed because they're invested in strong brands, and the premium end of the market always holds up well, and even in the last few years of tough economic times globally has held up particularly well, and we've seen that in other sectors. There has been a chronic lack of investment generally across the UK and in Scotland in added value and in processing, and that needs to change, and I think maybe if one message the committee can send out is that any dairy company in Scotland looking to invest in added value and extra capacity, we need local planning authorities to fall over themselves to support that at the moment. That's critically important. Scotland is good at producing milk, and we have a growing national identity for food and drink. I'm hugely optimistic about the future of the dairy industry, but we have to invest into added value brands. There are real opportunities in the UK. There's no doubt around import substitution, as Robert has outlined, but with the real opportunities overseas, 92 per cent of the dairy products that we've produced in Scotland are sold within the UK. We have a hopelessly small number of customers, and we need to get into overseas markets to balance out that risk that is facing the industry just now. Thank you. Does anyone else want to come in at this stage who hasn't spoken if you wish to? Don't worry, everyone doesn't have to answer every question, but don't feel shy about coming forward. Okay, that's a general start. We've got to move into thinking about the reasons for the first milk decision and what are the implications for the first milk members and other dairy farmers in Scotland. Does anyone want to talk further? We've had a teat-up by dairy farmers who are tied to first milk, like the rules have it. Does anyone want to come in? Thank you. Nigel Evans. It might be useful to go back a little in terms of what first milk is and where it comes from and how it operates. We are 100 per cent owned by our farmers. We operate with an element of farmer equity capital in the business, and we also operate with a level of bank debt. That, along with the market conditions, has been the two reasons for the decisions over the past couple of weeks. To expand on that further, we had a direct trade-in issue in the spring in that milk prices started falling away. With the benefit of hindsight, we could have cut prices a month earlier, but significantly not much more than a month earlier because market signals were quite slow coming through to the main market at that point. However, the underlying commodity market was falling away quite rapidly. That allowed a loss-making situation to arise in the early part of the year. It was significant that it was not threatening to the business. A bigger issue to the business was the fact that the cheese stock value started to fall rapidly in the autumn. Why that is significant, Judith mentioned it earlier on, cheese is a process that you purchase milk today and lay the cheese down to time the material before you market that cheese. In effect, you are paying a price for cheese today that you do not really know what the market value is going to be, six, eight, nine, twelve months out. Additionally, because the business is funded with a level of bank debt, that bank debt was secured against cheese stock. As the cheese stock fell away effectively, the loan facility to the business actually dropped as well. In that scenario, we could have borrowed more money or we could have raised money from members. When we looked at it, particularly as farmers, as five farmer directors that sit on the board, what we assessed was which was the most beneficial to members, which would structure the business better and secure a long-term future for members' milk. We took the decision to raise further capital from members. In doing so, we reversed a price cut part of a price cut that we'd announced, which we'd anticipated using that money to take additional lending. Robert is quite right in terms of state in that view of milk and those prices. Those are typical prices across the membership at the moment. Having made the decisions that we've made, the fact is that the capital retention will be until August, at which point it reverses, reverts back to the hapenealita that we have traditionally contributed as members to the business. Following that point, because of a reduction in the debt levels and more equity capital within the business, the milk price will rise about 0.6 of a penny per litre. The big issue for us was the deferrable of a milk check. The reason that that was determined to defer that, by 14 days, was to allow an immediate injection of cash into the business and remove any need for additional borrowings. Thereby, creating a scenario where members supplying the business would ultimately be much better off. That's a basic outline. Graham Day has got a supplementary first. I'd like to explore the island issue. It's a huge issue for the whole of Scotland, but let's look at the islands. Take the example of Gia, which I very much enjoyed visiting a couple of years ago. We read from written evidence that, for the farmers on Gia, they're faced with a situation where, in addition to the cut in the milk price, the capital figure increasing, they now only have their milk collected every second day. They were told to put in bigger tanks, which, presumably, they had to meet the cost of. They have to pay for the courage of the milk tankers on the ferries. As a layman, I'm left asking the question, just what benefit do the farmers on Gia and other islands actually derive from being part of first milk? I think that it's the same benefit that all farmers get. The issues that you specifically raised about milk tanks and collections, we all pay for as members, and we all have those elements attributed to us as members, so there's no differential in that respect. In terms of why would any farmer wish to be a member of first milk, that comes back to some of the fundamentals that are happening in the market at this point. What I mean by that is, we're in unprecedented market conditions. We are seeing a number of farmers at this point, and I'm told that there's something like 360, 370 farmers that are out of contract or about to go out of contract, and that is milk that's not being picked up by anybody. It's actually being traded on a spot market, and some of it is only picked up Monday to Friday and dumped on a weekend. Now, that's because of an oversupply situation and what being a member of the co-op of being first milk, if you like, what that does for us as farmers, wherever you actually farm, is to give you a guarantee that your milk will get picked up and that you will get paid for it. In this current situation, those are two critical things for farmers, because if you like, as one farmer described it to me, first milk is the mothership that underpins my business, and it's the same for every one of the 1,300 members that supply first milk. Can I just be clear on this? Are you saying that the farmers in gear did not, between the four of them, have to bear the cost of putting in the bigger tanks, and it's not just the four of them who are paying for the carriage on the ferry? In terms of the specifics on the tank, every farmer supplies his own bulk tank, his own milk pad. Every one of us as farmers have to do that, and as a business, we have had every other day collection. In fact, it's been in the industry for a number of years, 20 odd years or more, so it's something that every farmer bears. In terms of the carriage of the cost of the milk across from those guys, what happens is in the milk pools and the markets that those guys go into, that forms part of their transport cost, and different milk pools have different elements of transport cost to them, so they will be part of actually the kintyre and gear volume milk pool, and that will have a transport cost element applied to it, yes. If I could just push this point from a moment convener before I want to make a wider point. To be absolutely honest, it's not just a mothership, there isn't another ship, is it? I mean, if you are a producer in kintyre or gear or bute or aran, there isn't an alternative. So you essentially have a captive market for those who are providing for you. You see, I think there are two issues presently, and I speak unashamedly as a member for a gallon bute at this stage. It seems to be two issues. The first issue is that for my constituents or dairy farmers, they're actually getting a pretty awful deal from First Milk, which from the outside looks like a very badly run company which is making its member suffer. There's a wider issue, which I'm very struck by reading the papers for this meeting, which is everybody around this table who's made a submission, written submission, whatever, actually knows the answer to the problem in Scotland. There's partially world prices, but actually world prices are used as an excuse in all the papers. The answer is that there needs to be a far better focus on taking milk products and promoting them and selling them and marketing them, both nationally and internationally. The person who put this best, I have to say, I don't want to embarrass him around the table is Robert Graham, who's at the end of a very long period of reading. He was the only submission that I enjoyed because I thought you had the point and you wanted to do it. So there are two questions. I just want to put a couple to First Milk before this becomes wider. In that context, your stewardship, for example, in Cintar of the brand, the Mollif Cintar brand, has been pretty awful, hasn't it? On Saturday, I went looking for it in Tesco's in Oben. Now, you might want to blame Tesco's, but I found it one type lurking at the back of a shelf for what would be a premier Argyll product, in Argyll. So what are you going to do to actually make sure that there's a custodium brand like that, that you're actually selling them and helping the farmers who are producing for you? What are you going to do in Campbellton, particularly with the creamery? In terms of Campbelltown, there has been a submission for some time in terms of what we do to develop the site there. What part of that you're right is about marketing. It has to be about marketing. There's no point in producing a product that doesn't have a market and part of that comes down to actually developing the market. So there's a market in spend required. Why has it historically not been, and your point about not finding it in stores today is a valid one. Why is that happening? It's partly to do with what's happening in the marketplace in general. What is happening to cheese market in the UK? You're starting to see a situation where there's something like 70-odd cheddar brands alone in the UK market and creating elbow for room for a brand in that marketplace is a significant effort and expense required. Have we put sufficient effort towards it? Probably not because the market is changing very rapidly, but I keep coming back to the same point. We are a farmer-owned business. The capital for all of this comes from farmers and when you have a market situation as we have at the moment where price is really under pressure, where does the capital spend come from? Are you saying you are not capable of taking these brands and making them work? I'm not saying that. What I'm actually saying is, does it need more effort? Yes. Are you capable of that effort and are you telling your members that that effort is going to produce results because they don't actually see that. They are now the poorest paid of all the suppliers. When are they going to see the benefits of their faith in you and your management team? You ask a question in a way that states that they're not seeing the benefit, but they are actually seeing the benefit. They're seeing the benefit in a number of ways. They're actually seeing the benefit in the investment in the creamery and bear in mind that the investment in the creamery is a function of the co-op. It comes from all members. Which creamery? In Muller-Contair. There's going to be investment in Camelton Creamery? There is investment. There has been investment on this continuing investment. When are the new cheese vets to be installed, for which the Scottish Government has offered money? There are already elements of that have taken place. We've already invested a million and a half into the way processing. We're now looking to go into the boiler section. There's a six million capital spend, planned spend there over the next few years, as well as other efficiencies into the way that we've looked through the markets. I'm sorry to press this, convener, but okay, even if I accept it that that was to produce a more efficient use of resource. It hasn't said anything then about how that product is going to be pushed and marketed and pushed forward, because presently you're selling that as bulk cheese. You're not selling that as Muller-Contair cheddar. How do you focus—I'm sure that James will want to come in and Scottish food and drink—how do you actually make something of the product that you have? Gear, for example, used to produce gear cheese. There is no small cheese producer on gear. That strikes me, given the excessive gear halibut, to be an issue that should be looked at. Arran, bute cheese, that milk now goes to cowden beef. So how are you going to make the best of those resources? I don't hear the detail of that. It's exactly as James commented on earlier on. If we're going to make the best of the resource that is Muller-Contair cheese, it has to be exports, because if you try to make a place in the market, place in the UK, you're not likely to succeed, because the UK market is dominated by very large brands, and where we can actually get significant traction in the export market, Muller-Contair is a great provenance, and it has a great provenance in Farragam, say, in the US and in the Middle East, and those are the markets that we're continuing to develop as we speak. I mean, we've just had one of our members of staff at a trade fair in California, and that's where we will actually get traction and additional added value, if you like, for the Muller-Contair cheese. That's where the effort is to go. Is it an easy process? No, it's not, but it is a process that you have to pursue, and it takes cost and time and effort, and it will not happen overnight, but it will happen over time. Yeah, but as the time goes on, and I just want to make this final point, as the time goes on, there will be fewer and fewer dairy producers in Contair and in Gia and in Bute, because, if I may quote the book of Proverbs, hope deferred to make us the heart grow sick, people can't go on forever expecting it's going to be better this month or next month. There are bills to pay, Robert's just said that, so there is a heavy responsibility on your company, and to be honest, I think you're letting a lot of people down at the moment. I will actually disagree with that. I think we are actually supporting an awful lot of people at the moment in what is a very difficult market, as witnessed by the fact that a number of people are out of contract and are not getting them picked up. At least our membership have that as a stop-gap. I agree with the do-prices need to be better, yes they do, but again that's a function of what is happening in the global markets and how that impacts us all as dairy farmers. It is interesting that when you compare prices both within the UK and also across Europe, particularly our nearest neighbours across the Irish Sea and also in Western Europe, where prices sit relative to the UK are present, and they are going through every bit as much pain as we are in the UK currently. Is there a higher? Their prices are lower, they're significantly lower. In fact we had prices come back from Northern Ireland yesterday where their members are already under 20 pence a litre, and a lot of Irish farmers are being told to expect prices under 20 pence a litre to come in the spring. That is a function of the market and every company that operates in the market has to face that, and we as a farmer-owned company are no different to that. What will we find out about comparative prices in our further questions on this? I want to move on to the question about the prices charged for milk by some supermarkets, and Dave Thomson wants to ask a question about this. Thank you, convener, and good morning to everybody, and thank you for coming along to this committee session. A couple of points, really, I'd like to get a comment from members people around the table. One is the comparison between the farm gate price and the cost of production. If people could comment on that, people are getting a lot less than what it's cost them to produce. The second point is really to do with retailer's margins. I have a graph here and I have some figures that show that the retailer's margins have increased from 5 per cent in 1996 to 35 per cent in December 2014. That strikes me, and that's a massive increase. Farmers and processors have been squeezed. I would like to get people to comment on why that is happening and what we can do to redress that a wee bit and get some of the profit pushed back down the line to producers. Those are the two points that I would appreciate some comment on. Who wants to come in on that, Graham Jack? On the question around how we determine the milk price that we pay, the price that we offer is based on a number of factors, including the returns that we achieve for the products that we sell and our competitive positioning. Those returns, particularly for cream and butter, have been badly affected by the oversupply of milk and the impact of weakening demand. We have seen the value of cream and butter sliding by between 30 per cent and 40 per cent, which has a significant impact. We continue to add value to farmgate milk through a range of branded and unbranded products. We are still able to pay a leading price, regardless of the overall market situation. That will not necessarily equate with cost of production, because cost of production is an entirely different metric. We have to work with the market that we have, and we consider our job to present a competitive price in the context of that market. On retail prices, I have a very simple response as far as we are concerned. Retail prices are for retailers. They are a matter for retailers to determine and there is a function of competition between retailers and we just wouldn't get involved in the setting of a retail price as a business. I have a brief supplementary at the moment just before we move on to ask a question from Graeme Dey. What is the price that you pay currently? I am paying £25.9, so it is almost £5.00 higher than the first note. The cost of production model, if there is about 15 per cent of farmers, will get the cost of production formula. That is Sainsbury's test, because Marks and Spencer's way throws slightly different formulas, but their price is certainly a cost of production. To the retailers, credit is factored in family labour as well. At the moment, those prices are £30.30 to £31.32. Now, as an organisation, we have always been in a juxtaposition here. Our sister union NFU are very keen on those. We are slightly more circumspect because it is a minority. We also believe that we have to be market orientated as well. There is going to be times when the market cannot support £32. What I would say before I get the sack is that there is a lack of symmetry in price movements. This has been proven by university studies independently that when prices go up at wholesale and retail level, they do not go up as quickly and when they go down, they go down more quickly. NFU Scotland put a lot of time and effort into an example of an objective price and mechanism that is really based on the returns for commodity dairy products, such as butter, powder and mild cheese. The graphs on that are quite symmetrical. They follow it, but the UK prices do not. There was a bit of a change in 2012 after the code of practice was signed in the mass demonstrations where our graphs actually coincided with the European graph for the first time in 15 years. We did get a shift from processors and retailers, and it took a lot of moving, but we still lack that symmetry in pricing. That transparency also gives farmers the confidence that what they are being paid is reacting to the market. Farmers are realists, so they will work with that if they know the prices where it is because it is where it is. The market indicators at commodity level should be the basis, the floor in the market. Everybody has agreed that adding value, export and import substitution should raise as above that. We have the wherewithal to do that if we have more transparency or more collaborative supply chain, and that is what we are pressing for. On the liquid market, there is a real lack of transparency. I have a great deal of sympathy for processors, but we do not know, Dairy Code, the organisation that does this data collection has given up on liquid milk margins, but we do know in cheese that 50 per cent of the end price goes to the retailer. A very small proportion goes to the processor, who has taken more risk, I would suggest, than the retailer and the farmer, because there is lack of power and pricing, as at the bottom of the heap, so to speak. Transparency is really important. I do not want to get into retail kicking because there are some good retailers out there, and there are some bad retailers, and the code of practice, the adjudicator, needs to have more powers to look into those things. I just want to last comment on cheese and butter, as Grimes already referred to. The wholesale price of cheese and butter has dropped 35 to 40 per cent year on year. The retail price index on butter has gone up 4.6 per cent year on year, and the retail price index on cheese has gone up 1.2 per cent year on year, and milk has gone down 2 per cent because of the supermarket price wars. Cheese has already taken a massive margin, and it has not shifted, so that goes back to price symmetry. Now, with cheese to certain extent and butter to lesser extent, there is a lag, I accept that, but for wholesale prices to drop 35 to 40 per cent year on year and for retail prices not to have moved, now we are not wanting to devalue cheese, do not get me wrong or butter, because if we keep dropping the price, people will get a perception that these are not quality products. However, in a current situation, where we are difficulty shifting dairy products and we have too much milk, lowering the price of cheese for the family might shift more cheese. I think that there is a question to be answered there, but I do not want it to be an excuse that it is all the retailers fault, because it is much more complex than that. You have our support for making sure that this clear message about transparency is central, and we will be pursuing that. However, are there particular supermarkets that you are concerned about at this time? You mentioned that it is not all supermarkets. As I said, we meet with retailers, but we will meet with our PR people. Occasionally, we will meet with buyers and all the rest of it. I am sure that the processes will have a story to tell and how the grocer magazine has done some really good investigative work. However, I would not point the finger at anybody in particular, because there is good practice and bad practice. Tesco, Sainsbury's and Mark's inspenders on liquid milk are paying 32 pence or so, which is way ahead of the market. However, on other branded milk—the farmer has not got that guarantee—they could be buying Robert's milk, and Robert's farmers will be getting paid 26 to 27 pence, because that is what your business can afford to pay at the moment. They are doing the right thing on liquid milk, but on branded liquid milk, and on cheese, butter, yogurts, they will be driving as hard a bargain as anybody else. So there is a bit of smokes and whirers there. There is good practice and there is bad practice. We hear from Aldi and Lidl that there are difficult companies to work with, but they are straightforward. I get the impression that there is no upfront process. A lot of this could be perceived as anecdotal, it probably is, but you hear stories of if you are bidding for a big supermarket contract, you have to pay to bid. You have to buy shelf space. Now, small cheese companies cannot do that. They cannot compete, and this goes to Orkney and Kintyre and all those sort of things. So I would not point the finger at anybody in particular. It sounds as though the little dark back shelf in the supermarket in Oben was not paid for very much, and they might have got more if they had been able to buy something more prominent, while who knows. In order to get some more answers for Dave, we have Robert Graham first, then Jim Hume, then Robert McIntyre. Thank you. As a business, we have purchased about 12 or 13 per cent of all the milk produced in Scotland, about 10 per cent of all the farmers. It is interesting that George is talking about the cost of production that it only applies to liquid milk. It does not apply to cheese, it does not apply to yoghurt, it does not apply to butter, and also some of the same retailers that have cost of production models will still be 75 per cent of the butter sold in their stores in the UK will come from Denmark. We are a private business, so as George said, we pay 26.5 pennies to our farmers. It is a highest price paid by any of the dairy companies in Scotland to farmers. Particularly with private businesses in Scotland, we have, as a family business, we have been in this since deregulation. We have got a record second to none, but, certainly, when we reference to us, but also with private businesses, the prices we pay to our farmers versus farmer-owned businesses, and there are two main operators in Scotland, there are significant differences right now between both private businesses and the farmer-owned businesses. In private businesses like ours, as a family business, we do not go to our farmers and say, can we have also on top of this lower price, but we do not go to them and say, can we also get some capital money in the investment? We invest our own money and take risk upon ourselves. Our margin last year was less than 2 per cent on our profit, £2.00 a pound was our profit. We are making profit, which is good, but this year we will invest three times what we made back into capital investment, new product development, new product capability, investment in brand. It is having right management and working hard, as our farmers do, to try and deliver upon all the opportunities, processing, investment, building brands, and very much else to say about our business, but building brands. As a family business, it takes time, it takes a long time to build brands. There is a lot of fire, a lot of hard work, and that is what we do when we invest our money and we try to look after farmers as best we can in tough retail margins. I cannot talk specifically about retail prices, but on milk just now, I would think that retailers will not have much margin in the games now, because the frosty of that retail competition across all the retailers is a seismic shift in what has happened in this retail world, both in terms of new entrants and consumers changing shopping habits from large stores to big stores. It is seismic for retailers, and we are seeing that, unfortunately, in the retail aggression. Jim Hulman wants to ask a comment or question. Thank you, convener. I was just following on what George Jameson was saying just regarding Dairy Co and their league table. They still produce their league table, albeit they do not put in what the margins are. There is quite a large variation, and again, that will be across the UK. It mentions, of course, other parts of the UK processors. Dairy Crests are paying producers about £36.54 per litre. That is off November 2014, whereas Dale Farm Northern Ireland is at £22.93, so that is a 59 per cent difference across the UK. I just wondered if there are any thoughts on why there is such a disparity in what farmers are getting across the UK. We can wrap that in to come back in a minute, but we will have Robert MacIntyre first, please. My view is that the power of the supermarkets and everything that you write in this room probably agrees is extremely powerful. Really, they control what happens. We have heard from George about his view on supermarkets, Robert Graham's view, and we have heard from a gentleman—I cannot remember who it was—who said that the margin that they used to have was 5 per cent and it had gone up to 30 odd per cent. They will have these margins as long as we produce the milk. We are now in a situation where it does not pay us to produce milk, and if Robert Graham's producers are receiving was at 26 pence, I would not pay them either because the NFU paper says for clarity and context the current cost of producing a litre of milk is an agent of 30 pence a litre. How long do we go on producing milk until we are burst, until the banker says that we cannot write cheques at the end of the month? That time for many of us is with us. We are encouraged, and George says that he was one of the commentators from the NFU who encouraged us to produce more milk in the last 18 months. We have produced more milk. It has caused a huge problem, but we did not get any advice on where that milk was going. We are in a situation that is critical. I will just say that if farmers go out of business wholesale, where is the milk coming from? We have a huge surplus just now, but in a short space of time there might not be a downturn, and the people in the more better parts of the UK that can produce milk. The vice-chair in the first milk said that his cows are about grazing grass in February. My cows won't be out. If there's bad weather, they won't be out till the beginning of May, so I've got extra costs. I just have Scottish farmers, so I'll just finish by saying that it's an all-divided world. I wonder if Kenneth Campbell has a view about that from your neck of the woods. The one comment that I would make coming back to George Jamison mentioned in cost of production, there's no question that cost of production is there about 30p for most people. Certainly my personal cost of production is a good deal higher than the milk price I'm getting, but cost of production models for pricing milk are dead against. As an industry of producers, we need to be fit to operate in a global market. If we're not fit to operate in a global market, we'll need to rationalise until we are fit to operate in a global market. If we can't do that, there's really no goodness in what we're doing at all. It's been said more than once that the clarity of our milk pricing is the most important thing. From my point of view, cost of production mechanisms are cloudy and are very difficult to measure and to understand. I think that we are getting a far fairer milk price now than we perhaps did before the voluntary code and perhaps before Arla got so involved in the United Kingdom. In essence, I don't like cost of production. I think that we need to live by the market a wee bit. There are things that possibly could be done in the short term, but I don't think that we would want to knee-jerk things to artificially increase the milk price in the short term. Okay, Mike Russell. I just want to press a little on this. If the global market dictates that there should be no milk production in bute or gear or cintire, is that acceptable? I think that's a Scottish Government issue. I don't think that getting back to what was asked earlier by the other end of the table, there would be a limit to how much the rest of Scottish milk producers can subsidise the people in gear and cintire and bute with respect to them all. I wish them every success. I think they're in a terrible position just now, but if their cost of production is going to, forever and a day, be three pence higher than everyone else, it's going to be up to them whether they produce milk and up to the Scottish Government to agree whether they produce milk. I don't think we've got this rather wrong. If you look at it, essentially the end point of your argument is that those who can produce milk cheapest, wherever they are in the world, those who can produce milk cheapest, wherever they are in the world, will be the ones who will produce milk. Those who have a higher cost of one sort or another, no matter the quality of the product, no matter what can be done with the product or isn't being done with the product but could be done with the product, those are the people that will go out of business. Now, I think if that is the model that we're going to apply to agriculture and to rural life, then frankly it is not just as Robert McIntire said, an old divided world, it's not a divided world that many people will wish to live in. I mean, I do think economic determinism as the absolutely only way in which we can decide how we organise our agricultural and rural industries seems to be a little unfortunate. Robert's paper, if you've read it for this committee, actually projects a much, a very different view whereby you can have imaginative fleet of foot businesses that want to compete globally and are able to do so with different cost bases because they're actually better at doing it and they're selling a valuable product. Would that not be an equally valid alternative? Tyla, I couldn't agree more. But it takes time and a great deal of money. Well, it takes a lot of imagination and persistence and it perhaps also takes, in the one area I might agree with you on, in this Scottish Government, it takes government and local authorities to be flexible to support this, it's taking place, for example in the Bute case, to have a system whereby empty tankers do not pay full ferry fares when returning to the island. That is something which perhaps we could, with a very small adjustment to our overall policy, make a big difference. We've got a lot of questions to bring in many people on, but on these two points, while Alex Ferguson first and then George Jameson on this particular point. No, sorry, I can save you a little time, convener. We've moved on from what I was going to ask. I'll try and cover Jim's query on the diversity of pricing and also chip in Mike and Kenny's spot. There's an absolute place for all of these things, for absolute certainty. The highest milk price in Europe for years has been in Finland and Italy, and these are the highest cost of production in Europe. We've got the highest price for the milk because they've developed brands, they've developed PGI and PDO and they've worked hard at it. I remember speaking in Italy to a chap in Parma who sells a bespoke cheese, and he himself went to meet 100 customers from corner shops to Asda in the UK. He said, how did he sell it to Asda? I just told him what I wanted because he can't get it anywhere else. We've failed miserably to compete at that level. It's partly due with our... We do have a liquid milk market that's the envy of the world, but will we even abuse that? We don't get the benefits of that. The supply chain doesn't get benefits of that. The retailers use it as a wee badge of honour, but we're not getting the benefits of that and getting back to the diversity of prices. One of the reasons that the retailers are prepared to pay a cost of production model is that these guys need a flat profile, which is a much more expensive way to produce milk than spring carving. Those guys have to produce the same level of milk all the time, which means that they have to feed in the summer and the winter at the same levels. Kenny's costs will be higher than a lot of people on grass-based systems, but the retailers want that. In 2007, we had a massive spike in dairy products, and the retailers knew that the British housewife needed fresh milk. They introduced cost of production models, and they ring-fenced a lot of the more efficient, flat-line producers to produce liquid milk. To finish up on Mike's point, I absolutely agree that we cannot afford to be without peripheral milk fields because they're so important to the local economy. They're good farmers in Buton and Contire and Orkney, and I've been there several times to help things. There needs to be more collaboration between the farmers and the factory and the farmers and the marketing. We need to put a lot of effort into that, and the Scottish Government can help as they can help Robert Graham, but it needs real investment. I've got Paul Grant and James Withers working on it, but it needs more than I would argue. It needs much funding. If Robert's prepared to put £300,000 into a TV advert, can we get some money to double that effect? I think that we can do both. Where Kenny's farming is getting an Arla price, an Arla is a European price. Getting on to Jim's comment, the big difference is that the retailer lined up at £32. Consistently, since 2007, they've had the highest milk price, but there was a period in 2013-14 when the market price overtook the cost of production model, and that was because the market was working. The code of practice and processors put in a different price in systems, and the market was working. In 2013-14, just to have a wee answer to Robert's comment about us asking you to produce more milk, we never asked anybody to produce more milk. What James's review and we are fully behind it was that we can grow our industry by improving our marketing, investment in processing and production reacts to that. The reason in 2014 that we had too much milk across the world was that everybody was getting good prices because the market was strong, and every region in the world had good weather. If you turn cows out even if you're the worst farmer in Scotland, they'll produce more milk with good weather than they will with bad weather. It's the alignment. We need to market, process and milk. That has to be in line. The variation in prices, cost of production is at the top, but since 2012, there has been a change of attitude. There has been processes put in formulate pricing that reacts to the market. dairy crests have a formula that's based on cost of production and the markets. It's still sitting at something like 28 pence. Dairy crest direct who represent the farmers have acknowledged that that's slightly higher than the market can stand, and they're prepared to take a penny off that in the interests of the company. That's collaboration. Will there wise men offer a pricing formula based on something similar to NFE Scotland, Nampie McVie? For a good part of those two years, that has been paying more than the standard leader. Now it will be below the standard leader. We've got different areas. Arla is a European price. It's a cooperative price. It's agreed by the farmers. The mechanism that Arla pays the price is agreed by all the farmers in Europe. It's set very basically on every month how much money does Arla bring in, how much does it spend, and the rest goes to the farmer minus capital retention. That now is round about 24-25 pence. That's what Arla are making. Now back 12 months ago, Arla's price was 34-35 because that's what Arla could afford to pay. The co-ops are paying as much as they can pay. First milk can't pay as much because the business isn't returning as much at the moment because of their particular circumstances. PLCs—this is where I see something positive—the private companies now, as I put it, are paying as much as they can. They're taking their profit and they're paying as much as they can because Robert's price at the moment is higher than Muller's and Dairy Cres formula is higher. I see some that that's a good thing because in the past all the liquid process paid the same. If one drop, they'll drop. If one lift, they're all lifted. However, now we've got diversity, which tells me in my optimistic moods that the processes are starting to pay as much as they can. We've got a lot of questions to deal with, but that was a very good explanation. Thanks very much for the detail. We need to round up this. This is like our second question, kind of thing, about 10. James Withers, Judith Browns and Alex Ferguson wanted to come in at the end of this one before we try to move on. James Withers, a couple of very quick points. I feel compelled to, I suppose, support where Kenny was heading. I also have a problem with cost of production models. I don't know many industries in the world where a buyer of a product would guarantee that they're going to cover their supplies, cost of production, irrespective. Farmers need to be able to compete in the marketplace. The absolute key is picking the right battles and picking the right markets. Let's not take on cheap value cheddar coming from Ireland or cheap commodities. We need to forget Scotland as a producer of dairy commodities. We should no longer consider ourselves as a commodity producer of dairy products. It's about picking the right markets. The challenge that we have in Scotland is that we have peripheral milkfields and peripheral plants. The huge advantage that they bring is their strength of provenance. Almost the more peripheral you get, the better the brands can be and the better that whole provenance story can be gear, Malachyntire. We've not talked about Orkney, a great island brand with a creamery up there needing to forge a future for itself as well. It's about picking the right markets to compete in and then farmers are going to have to structure themselves properly. There is an issue about farm efficiency and technical operations. The gap between the top performers and the bottom performers is too wide in Scotland. It's a personal view that others in the room can decide whether that's right or not. To join George's wave of optimism for a second on the market development, as we speak, there are individuals on the ground in Tokyo, in Toronto, in the Middle East working on behalf of industry and SDI jointly looking at dairy opportunities, speaking to importers, distributors, brokers, retailers, the food service and catering sector. I think that we've got more support in Scotland than we've ever had around international and export development to drive into these new markets and having that in a balance with doing that added value in local markets is where the answer lies. I suppose just one very quick common Dave Thompson's point about supermarket pricing. I suppose my plea to the committee would not be to spend too much time trying to work out supermarket pricing on margins because it's a road to nowhere and most committees have seemed to try to give up. I think that Dairy Co have given up. It is what it is and, as Robert says, there is a fundamental shake-up happening in the UK retail sector just now, like we haven't seen for a generation. That means that the cost cutting and the price cutting that will be to drive footfall in those stores is going to be remarkable. I don't think that we'll change that dynamic, but we can be better at building brands, attacking the right part of that retail market and going international. We hear what you're saying, but obviously we have a wider interest in making sure that Scotland has an opportunity to sell our premium product. We may well have to ask the supermarkets about some of that because clearly these margins that they're taking are not helpful to the producer, like in many cases. I have a long history in this. Sarah Boyack and I and Richard Lochhead at the early stages of the competition commission inquiries about that. We've reached a point where we haven't got any leverage yet over the supermarkets because Caroline Tackon has not got the powers to this for indirect producers. This is crazy after 10 years that we haven't got some sort of handle on this and we still have voluntary codes and things like that, which we know in many cases don't work, so that's my little rant over for this particular moment. I just very quickly respond to the rant because I understand the point. I suppose I think that a greater impact can be made focusing on areas like brand development, market development and also investment in processing. I think that a lot of years have been spent trying to tackle the supermarket question and I think that it's done a bit of a disservice to the industry because it's distracted from the real issues around farm efficiency brand development and export development. I don't know that we have avoided the question of investment and we'll probably come back to that in a wee while. We've got to move on because Judith first of all and then Alec and Robert are finally in question 2. I'll be very quick. On cost of production again we would reiterate some of the things other people have said. It's not market oriented. There's a great diversity in cost of production. The variables change. It's very difficult for a processor to accommodate that and still be competitive both in the national and the global market. But I was delighted to hear James mention food service because the one point that I wanted to make as we've talked about retail, yes we would recognise that retailers are the root to market for most area products but actually food service and public procurement are another big root for dairy products to reach people's stomachs shall we put it like that. One of the things that we would say at the moment one thing that could be quite helpful for the dairy industry in general is if there was more procurement into hospitals, schools, prisons, whatever it may be of Scottish British product that would be quite a helpful and useful thing to do. So I think my point is just that the dairy industry is not just producer, processor, retailer it's far more complex than that. We have to think about diet as well which is another interesting satellite in the year of food and drink. Alex Ferguson. I just want to raise a point convener that the NFUS had put in written submission in terms of the floor price for milk because an issue that you suggested to us was that both Scottish Governments and UK Governments should make representations with Europe to raise the intervention price for milk, which is currently very low, 12 pence a litre I think or something like that. Could you just explain in one short sentence if increasing it to 17 pence a litre or 14, 15 pence a litre, whatever, what practical difference would that make to this current situation? Maybe I have three sentences. 2007 was a bit of a sea change with the McSharrion fishlor reforms that moved all agriculture away from market support as far as possible. So in 2007 they reduced the reference price for intervention for skim milk powder and butter. The sort of ballpark figure for skim milk powder in 2007 and 10 years before was round about 2,000 euros. In 2007 they dropped that to 1,740 euros. The view and in recompense farmers were given two to three pence, dairy premium, which then became part of a single farm payment. It was acknowledgement that Europe couldn't afford all this market support but also that they wanted to drop the price so that Europe could compete in the growing world markets. That was the plan. But in 2007 there was a perfect storm in a good way for the industry because prices rose hugely to $5,000. Since then the average price of commodities has been from $5,000 and there was an expectation that it wouldn't go below $3,000. This year it's obviously gone below that. The point with that is 1,740 euros, so it's equivalent to about £1,400 a tonne that UK prices is round about £1,400 a tonne just now for skim milk powder is that it's taken. For me it's out of context. Cost of production has risen considerably since 2007 as have the value of commodities, so it doesn't have the same context. It's too low in the context of cost of production and the actual price of commodities. Now bear in mind that it was meant to be a floor in the market. It was meant to come into play and it could effectively take 250,000 tonnes of skim milk powder off the market at £110,000 at that price and then tendered. In 2009-10 there were 250,000 tonnes of skim milk powder. That's about 2.5 million litres of milk equivalent. That worked. That stopped the decline in 2009. Not only that but the commission actually made money out of every kilo of skim milk powder because they very carefully leaked it out onto the market all at an increasing price level. What we're calling for and have done for months and everybody's joining us now is that there's a review of that. Why is it still at 7,840 and where should it be now? We're the last to ask for too much market intervention. We were quite in favour of most of the soft landing agreements in Brussels but that's too low now in my opinion but I'd like the boffins in the commission to have a look at it again and at what level should it be at. My argument would probably be around about 2,000 euros because that would tain us back a few months and we could have intervention now. We could have powder in store and it would take the pressure off, for example, first milk's powder price. It needs analysis. There's a bit of doubt in the Scottish Government about how quickly that can be changed as to go through certain processes. I read an article yesterday. The commission seemed to think that they're in control over the Parliament. I think that they've got a say in it but I would like some clarity on that. I'll try to find out myself. There's a bit of a debate on who can change that reference price but I believe that there should be some effort in looking at it. Mr Hogan believes that we should leave it alone but Mr Hogan is from Ireland and he might want to put everybody else out of business and keep the Irish in business with the low costs but we need to look at it because it's not just Scotland in the UK but there's a lot of farmers in Europe. Can it afford £1,400? That is probably £12.30 a litre. Speaking to the cabinet secretary about those matters and related to the next agriculture council next week and we believe that he's already asking for the UK to raise this matter so it's in hand. The two farmers we've got here, well I know there's more than two, but Robert and Kenneth to finish up at this point, at least we've dealt with question 10 now. You're allowed, chairman. You're allowed to take issue with other members' points a few. I can take issue with George Jemison then. You talked about Tesco sainsburys who sign up farmers because they're the most efficient. I would say that's not because they're the most efficient, it's because they're geographically placed. That's a point. Also, back to the lady said we need to do this, we need to do that but that's in the future. That takes time and we don't have the time. Our backs are right to the wall. There's a general view in our island and I suppose in contire, the actions that Nigel Evans at First Milk, who we're all members of, had to take with delaying payments. They stabilised the business of First Milk but in doing so they've jeopardised a lot of their members' businesses. Where we go from now, as I've said already this morning, is a huge worry. I'm writing saying Nigel at last March, we lost a Weissman contract which was 200 million litres a year and then we lost that so we really don't have this lucrative market for First Milk and liquid sales. That milk, obviously that 200 million litres was diverted to powder and cheese which has attracted a much lower price and now the powder, the loss of the Russian market, the Russians have believed to 350 million pounds worth of dairy products in this country. So all these factors have combined to put us really in a position which we're working up at five o'clock every morning and I don't think anybody else in the UK does this. We're working up at five o'clock in the morning to work for nothing. Russell reads his papers at five o'clock in the morning. You're not the only one that's up at five o'clock in the morning. He's not working for nothing. Take your point now. Right, I am paid to do so. The point is that these are the things that we can raise with the Cabinet Secretary in particular about what the Scottish Government can do to help at this time and we will raise those matters that you've brought in just now. Kenneth Campbell, on this point. Just very quickly, I would like to concur entirely with George Jameson about rising the intervention prices for commodities in the short term. I talked earlier about rationalisation of the dairy industry but we're not going to see rationalisation this spring. It's going to be far worse than that. It's going to take out a lot of farming businesses that hitherto thought they're a good future in the dairy industry and deserve a good future in the dairy industry and have been perhaps out of contract or for various other reasons are going to get taken out of business. We're not going to lose the week here. We're going to lose a cross-section of the whole industry, which I think is worrying. I think that a rising in the price of skim milk powder could go some way to stopping that. That's very helpful. We must move on at the moment because we've got a general question now from Jim Hume, which I hope won't take too much time. Oh, here might do. I certainly hope not. I'm not totally convinced about the supply and demand argument, to be honest, so far. Basically, in Scotland, by itself, production has stayed fairly stable in the last certain years, according to the facts that we have. I'm just wondering if what we're facing at the moment is a blip, because we have heard of the peaks and troughs of supplies and demand and prices throughout the years. We've already known that the Royal Association of British Dairy Farmers think that the Russian ban accounts for two to two and a half pence of that later. That may be something that's not going to be forever. That's their view. Arla have stated that there is a change in the demand growth in China, but there is still a demand growth that's changed from 10 per cent to 2 per cent. That's still growth. It's not like the market's collapse from China, so somebody's having to take that up. I'm just really wondering what people's views are is the glass half full or is the glass half empty? Is this a blip, medium term, short term, or longer term, if you can survive? Are we looking at a rosier future? Judith, first then Graham and then George. We know that the global demand for dairy is still growing around the world and it's growing around, depending on who you listen to, 2.5 per cent. Every year, according to the Food and Agriculture Organization, in the south-east Asia alone by 2030, we're going to see a predicted growth of 125 per cent for their desire to consume dairy products. We're aware that that demand will increase in south-east Asia, in China, in sub-Saharan Africa and in Latin America. These are things that are going to happen in the future as quota ends and as more of the, if you like, milk production in Europe heads north and west towards countries like the UK and like Ireland, we have opportunities for the future. The future of the dairy industry, I don't like to talk the dairy industry into the ground because I think the future for the dairy industry has potential bright spots but it will always have areas of volatility. Chinese farmers at the moment, with some of their joint ventures from European countries, are seeing their own profit warning. Some of them are throwing away milk but China still is sitting on a lot of stock and it's using up that stock and some will say it's using up the stock until the prices drop because of the oversupply of milk then they'll come back in and when they come back in and start sweeping up that supply again of powder and when some of the production equalises we will be back on a good footing and that's why predictions by people like Rabobank say that we will be on the incline again towards the second half of the year. Of course none of us have a crystal ball and given what happened last year we're loath to make too many predictions but we do think that the future for the industry is bright and global demand is increasing it's just that we have so much excess production in 2014 that it's difficult because it's still a stripping. I mean from our own organisational perspective I'm bringing in EDA congress here, European congress, I'm bringing the European dairy industry to Edinburgh in October to talk about British dairy and vesting in British dairy so you know we definitely don't want to talk the industry into the ground we recognise all the hardships. I have 200 members most of them will be small to medium members some of them are the very large members who are the household names all across the board from farmers to processors it's tough out there at the moment but the future is bright. Sorry that took a while. Being precise is very helpful but it's important for us to understand the detail. Graham Jack followed by George Jameson. Yeah I just wanted to give you our take I think the answer to Jim's question is certainly short-term pain but medium to long-term optimism for this industry so to try to quantify or put some metrics around the short-term pain the impact of the ramping up of milk production in the UK over the past year I guess a statistic that struck me was that every week there's an additional 825 farm milk tankers worth of milk being produced in the UK each year every week it's an awful lot of milk and quite simply in the UK there is not the processing capacity to deal with that volume of milk right now so by necessity some of that milk is having to be diverted into these low-value base commodities that's the reality in the medium to long term I think the reality is that the Scottish and the British public want to buy products made in Scotland and made in Britain from milk produced by Scottish and British farmers there is a deficit as we mentioned before I can give you a good example of how that demand can be satisfied we spent a fair amount of money on a butter plant which was commissioned just about a year ago now and it's now working at full capacity it's about 40 000 tons of butter a year it's producing 30% of that is being exported to places as far afield as north Africa into Europe, Egypt and so on so there are processors out there I think Allah and ourselves at a national level certainly Robert Graham in Scotland are investing because there is an opportunity but I don't think any processor can buck a market and we're having to deal with a severe overproduction and a weakening in demand and I understand your cynicism Jim but the reality is the value of these commodities has collapsed you know the returns are not there and that's the short term reality that we've got to work through at the moment so we would certainly as a company we would err on the side of optimism and ambition for the UK dairy industry because that's how we see it righto we must try and be precise and not you know continually repeat issues about investment and so on the details of which we've got quite clearly now so George Jameson I agree with everything Judith says so that'll save a lot of words I think there is general optimism I don't like the word blip no offence but George Eustis used that and it infuriated me and if you speak to Robert and Kenny this is this is not a blip this is a long period of very low prices that needs exceptional measures taken I believe then we will get the benefit of all that the prospects that Judith has mentioned so this is more than a blip this this is really serious and to use the word blip as George Eustis did was a wee bitty from him a wee bit disrespectful to the farmers I haven't really had time on the x-800 tankers I agree to a certain extent but this is not the biggest milk production year we've had in in UK history and in May and June we had something like 42 million litres a day and now we're down at 37 million litres a day I was suggesting there is processing capacity it's just that we don't have that in the right markets because the extra milk that an individual company can't handle has been put on to the spot market and there's nobody picking that up to add value to it so I don't think it's the extra milk that's the problem it's our inability to put it into products that have got a strong market and and there's definitely potential for that in terms of going forward just to finish off quickly the way forward is to develop more collaboration between farmers and processes and marketers I'm repeating myself but that is the absolute key to all and the code of practice is fundamental to that if everybody would buy into that code of practice and if it's not as people want it then Chipwell will change it but we need to get that collaboration forward because the countries that are successful in this world have been collaborative your Friesland companies, your Arles, your Fonterras, this collaboration now that doesn't need to be co-ops it can be PLCs that work well with their farmers thanks Nigel followed by Robert Graham followed by Claudia Beamish. When you start looking at as Graham said increased production coming through the marketplace you get tankers and milk floating around where does it go? It does not go into added value markets it does not go into markets that are existing at reasonable value it goes straight to the bottom of the market and that's the issue. Does that change rapidly? On the downside it does not actually sorry that's wrong what I mean is on the downside when the market's on the way down it drops incredibly rapidly when the market starts rising it rises very slowly in fact you could argue that it rises as twice as slowly as it falls and that creates a problem and the issue is is how long does it stay down because that ultimately affects the sustainability of anybody in this industry because the longer it stays down the harder it is will it go up again yes it absolutely will and I think the long term price trend for the industry is upwards but the peaks each peak will be higher than the last and each trough will be slightly lower than last but that volatility that we've seen over 40 to 50 drop in price I think is here to stay because of the lack of support in the marketplace. Okay we have Robert Graham and then Claudia Beamish. I agree with a lot of what George says about farmers and processors working closely together we have to work increasing milk production increasing sales we do need more investment in more products for us our 90 farmers on average are up 9 per cent on milk from a year before which is there's 10 arctic loads of milk a week 30 300 000 liters of milk so we have to work closely I've heard voluntary code mentioned a few times and voluntary code on in terms of commodity markets we have seen markets tend to go overcorrect at the top maybe overcorrect at the bottom lots talk about farmers and commodity markets are high lots of commodity markets that's a place to be some farmers are encouraged to join I think a lot of them to go into the first milk is not as caught members but as commodity contracts suppliers a lot of them now come in the March because they're not needed now as commodity don't have a business and that's concerning we have to keep focused on what we're trying to do which is add value commodity markets will correct but I think in terms of the opportunities where it's butter or cheese yogurts there's a lot to go at and we as a business just want a chance to be able to crack on with that. Claudia Beamish, I hope it's not a long question it's a it's a quick question it's actually a question for Judith which is I'm seeking reassurance in the medium and longer term you seem fairly confident if I'm reading you right that the Chinese market's going to improve and I wonder really what you're basing that on but some economists would say that there's a lot of question marks over that we're talking global I think it's very dangerous to be if I may be frank making statements about the future you know when there are people on each side for sure as I said when I talked none of us have a crystal ball and I we after what happened last year we can't predict but what we have to do is look at what other people who are in the business of predicting are predicting now as I said the Chinese have had profit warnings with some of their jb some Chinese farmers are throwing their milk on the ground but the Chinese also have a large number of stocks that they're progressively using up and Rabobank and others who are in the business of analysing what China is doing and looking at how their stocks are and looking at when they might come back in have given it a prediction for the second half of 2015 we absolutely think that the next few months are going to continue to be difficult and we've seen some very small positive signs I wouldn't bet my house on the small positive signs but I do think that we have to recognise the fact that milk is an aspirational product in lots of countries there is global growth and not only are new lives coming into the world and as economic situations improve do people want more dairy we also have a growing ageing population where there are opportunities for the dairy industry and the growth we we need to maintain the consumption in the UK the massive growth will be in other areas of the world but we do see a bright future for dairy from the predictions that we're seeing from those who do the analysis okay thank you okay final point of this from Jim Hume it was just just to sum up the question that started off what's coming out it's come out from Graham it's come out from Robert it's come out from George's the lack of capacity for processing milk is not just milk it could be many many things but if you can't make it into many things then then that causes that problem for that liquid milk so that's just really what for me came out of that question quite strongly okay sorry James you said reluctantly I think just one thing on the global and I don't think Nigel meant it this way that the peaks are going to go higher and the troughs are going to go lower I think that's true in the global market but I think it's for me important that we don't think that's Scotland's destiny you know I think that's a rollercoaster but we can get off that so I don't see a future where we'll be exporting a huge amount of products to China aside from the fact we don't even if we exported all our cheese we'd barely feed a suburb of Shanghai and I think our opportunity are in the really targeted really targeted markets and that's where there are models of other sectors have done that well salmon's a good example they're not in China they're not competing with no way at retail level they've gone at the really top end hotel chains you know a few Shangri-la's ritzes in top end China and that's where they've gone because that's the amount of product they've got so I think this global up and down will happen I just don't I don't think that's Scotland's future at all I think we can get off that the global peaks and troughs by really targeting that premium end which will hold up even in the toughest markets what we're going to have to be able to support our producers in the meantime you know because we're not aiming at the kind of cheese in America where it's only for pizzas or for burgers and we are in the quality end of that so yes we will explore that in due course but in terms of the problem facing us just now we've got a voluntary code of practice introduced in 2012 agreed that it should continue in 2014 85 per cent of UK milk productions covered by the code but you know should this continue as a voluntary code other producers processors retailers not covered by the code and in the light of recent experience are further changes in the code needed Robert Graham voluntary code we have a huge issue with it I think we look at as a family business and and a family business starting when I started there was less people working in the business than sit at this table a dairy a fraction of the size of this room weak compete against private private business we compete against co-ops both in the market and for supply of milk and we have co-ops like Arla who are better moffs at 25 billion globally who pay a European price but they've still paid two pence a liter less than we do and we compete against them on contracts that we will we will be tendering for this year but a voluntary code that is biased towards co-ops against private businesses so in terms of whether it's a first milk or an Arla the um the bias against family businesses against Scottish businesses a Danish based co-op has the ability to hold on to our farmers for 12 months according to voluntary code but I could only keep mine for three months in terms of notice and that brings a whole lot of challenges and in terms of how do we maintain our supplier base and of course we pay a great price and the deal with us personally but I think it is it is not right where that bias can be in place because it's not right where we have and with first milk for other challenges and obviously huge importance to peripheral areas where we've had such a massive difference in PPL terms and capital levy yet farmers can't leave with less than 12 months notice they can't get our capital money back for goodness knows how long so I think for me it is not fair not fair that a private family business works hard should be predicated against by voluntary code Graham Jack next Nigel Evans and then Robert McIntyre right yeah our business in terms of how we feel about the code is some similarities there the voluntary code is a source of some frustration to us and we comply with the spirit and the intent of the voluntary code and we give our farmers one month's notice of any price change and if farmers are unhappy they can give us 12 weeks notice and and they can move to another another buyer so our contract is characterised by simplicity and flexibility it's as simple as that but yet it seems to be acceptable in the UK dairy industry that farmer cooperatives are able to send our members new prices by text with two three days notice and that they're able to insist on 12 months notice if a farmer is unhappy with that and we don't see that as a level playing field it is a matter of some frustration we decided that we will continue with our without with our approach because it's part of our our offering in a scotish contest we we have 263 farmers supplying us we had 23 new starts in the year up until april the first 2014 I suspect we would have had considerably more than that had that freedom of movement being applied across the industry I think the code has been useful because it's brought a lot of issues out into the open and everybody's dealt with them I think from our perspective is it is it perfect no it isn't because you know there are elements of it that actually cause the business difficulties and one of the ones has been the effect that we do announce a price at least 30 days before we implemented action but then again you know by the time when you're in a falling market situation having to do that actually creates difficulties because trying to match income against what you're actually paying gets quite difficult because quite often we're up to 10 12 weeks out by the time we've got cash in from the milk we've paid for to answer both the criticisms about the or the comments I should say around the sort of 12 weeks worth versus the 12 month rule I mean that was an EU agreed function that should sit within the code and why does it sit there why was that need felt to be of use to farmers a co-op is owned and managed by its members and we have a governance structure that allows members to actually appoint people to the board and to have a say in how the business is run and also it is farmers ultimately that are helping to set the price within that business when you have a private company doing that farmers don't have any insight or capability of influence on that they are simply given or dictated a price now that actually creates a differential in terms of how you should leave or not leave I mean and again we have we do actually put cash into the business as farmers and again we have a right to sort of control that etc etc we don't tip up at a mellow wiseman meeting or or a Graham's meeting board meeting and we don't have any say in terms of how that business is run yet within first milk farmers actually control the business so that was the understanding why there should be a differential in terms of leaving terms a creme day on that point just just an obvious observation that may well be the case but both of these two companies are paying a better rate than you are at the moment so perhaps it works better with I think the operative word there that he just uses at the moment and I think it's again when you look at prices and when you look at prices over periods of time you see a lot more commonality of pricing that that's the truth of the matter there will always be situations because of product mix different markets that each company works in that there's going to be differential in pricing and I think just as he uses an example if you if you take skim milk powder pricing which is currently as we've talked about this morning trading at a price equivalent of 14 pencil litre and yet 12 months ago that was trading at a price that was near a 40 pencil litre and that has a substantial impact on the price in that different elements of the market will have if I make you mean us so if we were to look back over the last three years and analyse the price that was being paid by the private companies set against the cooperatives are you telling me the cooperatives would be performing better and how they were responding to their members or worse in terms of our price in relative to our competitors yeah we'd be responding we would be performing a lot better right well we'll find out well it'd be a good idea yes we could do with some of these figures talking about transparency just to have the last two or three years in that fashion uh Robert McIntyre and then George Jamieson finally on this point no I'm back to what Jim Hume said about utilising the capacity we do have in Scotland and I was glad to hear Nigel say today that they're going to proceed with the new vats and the new boilers and really the refurbishment of Campbellton Creamery and I'm told by farmers in Kentire who I'm very friendly with that Campbellton Creamery could utilise 80 million litres a year once it's it could it's got the capacity for that so given that there's 30 million litres a year been produced in Kentire take the 15 million litres on the island of Bute take it down and making Isle of Bute cheese again because it was a winner and then it was stopped in its tracks in 1920 six years ago it was so you're going to have a facility there that could produce a magical name like Mullif Kentire and another magical name like Isle of Bute and you'll have the the place to utilise and make that top quality cheese so urge you to do that okay I'm George Jamieson you're on the code ad dubious pleasure of being involved in the high-level working group the dairy package and then the code the dairy package identified two key issues one was producer organizations more collective power for farmers now there was compulsory contracts now Jim Pace and the industry decided they didn't want compulsory contracts now the reason for that was there was a minimum requirements within that compulsory contract that that was quite uncomfortable with it because it effectively meant zero days notice in both parties which we asked government to look at to see if that could be made more flexible but be that as it's made Jim Pace at the time decided to go for a voluntary code and all parties willingly came to the table including Dairy UK NFU and NFE Scotland and there was six people sadly that sat through that for 14 months and we had a huge amount of discussion going back and forward and back and forward one thing I would say that there's far too much emphasis placed on the three month termination clause far too much because you've got a good working relationship that's not necessary Wiseman Dairies have had a three month contract from the word go and you've got one of the best retention policies of anybody Lactalis similarly it didn't change that Dairy Crest another private company had 12 months they switched to three months almost immediately signed the contract it's not hurt them it's helped them because what has developed within Dairy Crest is an independent farmer organization that will be applying for PO. Dairy Crest have benefited from that independent farmer organization because it's funded by the farmers we have full time members of staff who understand the dairy industry can sit beside the Dairy Crest executive and discuss things like the formula that they've developed now the big on passes Judith will agree with me is the difference between the coops and the PLCs on the subject of prices if you look at Friesland Campina and Arla's prices they tend to be amongst the best in Europe consistently and the Arla price in the UK has been higher than everybody else's it's now lower because it's a European price and it's dropped with that European context now the big issue the high-level working group on compulsory contracts exempted coops because only and only and NFE Scotland that push this in Europe only if they could pass a governance audit we wanted coops to be coops and prove that they were coops in other words run by the farmers and if you Scotland got the job with the code to audit the coops and they did so willingly and we spent days with the executives and the farmers of Arla and the coops I'm not pro-coop or pro-plc I'm totally objective because this code is not being used as effectively as it can be now in alex chaired the review process we went through this in great depth but both Arla and first milk have a governance structure that gives the farmers the ability to set pricing and set pricing mechanisms on the 30 day notice I'm not precious about that Arla set a price every month based on an objective formula agreed by the council of representatives which are all farmers that mechanism can only be slightly changed month on month but after 12 months it has to be reconciled with the formula now the farmers of Arla want that monthly reconciliation because it holds management to account they know that Arla paying as much as they can and at 12 months they have to give everything that the farmers do it's a farmer decision the first milk change their price has to go through the board of directors which is a majority of farmers now it's up that the structures are there and where I have probably got some criticism and this goes across plc groups and co-op groups is the lack of communication back and forward to members and that's a real challenge because we have that challenge as well but the structure in place for farmers to run both these businesses now within the review process we looked very hard at how we could help plcs now in the original code of practice there is the option if the farmers democratically say that we would rather have three months six months nine months 12 months they're perfectly a liberty to do that so the farmers supplying plcs can agree with the company to have a longer retention of normal termination clause and beyond that we haven't got this into the code yet but we strongly recommended that where plcs feel they don't need a producer group then when the farmer signs the contract there has to be a clear understanding that the farmer fully understands what he's signing up to and that the company has to say they have made the farmer fully aware of what he's signing up to because many farmers especially in 2013 when there was a real competition for milk that there was a desperation it was like buying a new car you know and they signed the contract without looking at it and he may say well hell mend them but that's where we are so we would like a clause in that contract where if there's no producer group and the farmer signs up they know very clearly that this is a 12 month contract so there's clarification there so there's ways through this and I don't think it's helpful for companies to nitpick at other companies and things like that the co-op is a derogation because the farmers can dictate and a plc is discretionary pricing so Robert can change the price without consulting with his farmers and that works for as he says and there's historical evidence that he pays a decent price so his farmers will generally be happy so we need to get through this on pass and there's a way through it if folk will just see that this is a benefit that the opening lines of the code of practice was to improve supply chain relationships for all parties and that is crucial okay I have to ask then you know would it be possible for the Scottish Government to introduce a compulsory contract in Scotland if so should it and if not should it call in the UK Government to do so because we've reached a point of another crisis and one of many George it's quite a technical detail that Judith speaking this as well but the technicality is that the member states cannot for a compulsory contract and there's a very clear minimum standards of that contract now we've asked Defra to do an impact assessment on that because we don't believe it's as bad as it is as it may appear but the fear and Judith can correct me if I'm wrong is that as it stands in that European Dairy package if a price changes at all that price change has to be negotiated and until that time and the contract is broken what we if we went down the line of compulsory contracts we would like an impact assessment done first but would far prefer that the voluntary code worked but if there was an impact assessment done and there was some flexibility in that we would argue that on a price change yes there must be negotiation but it doesn't mean the contracts broken it only means that clauses to be negotiated that's what I would want to ask of the commission okay thank you for that Judith yeah if we look at the idea of a compulsory code as George has said there are things within the EU package which are a minimum Defra has consistently interpreted what's in the EU package to mean that every time there's a change a new contract has to be given over and in a time where there's an oversupplied market that would actually mean lack of security for the farmer there could be farmers losing contract because a new contract would have to be put in place so actually a compulsory code could be counterproductive okay alec Ferguson just to add to that convener if I may very briefly the beauty in my view of the code remaining voluntary is that it allows the word George used flexibility to be maintained within the parties negotiating a contract and that flexibility does also allow any plc be it family company or otherwise to negotiate 12-month contracts with their producers if they wish to do so so I've discussed this with Robert Graham in the past but I'm not totally convinced by his accusation of bias which I think is a little bit strong because the flexibility within the code allows differentiations of contract to be negotiated and that's part of the beauty of it and I think that would be under threat that flexibility would be under threat if the code become compulsory in my opinion well well mull over these sort of things Dave Thompson yeah thank you convener just a very small point I noticed that 12 member states have gone down the road of compulsory contracts I just wonder if there's any evidence that they are doing better or worse because of that maybe it's something that we could get a bit more information on I don't know if anyone around the table just now does anyone have any information the 12 countries that have got compulsory contracts to see what was happening and they all seem to have interpreted things slightly differently but at the end of the day what's clear is that the code as it stands was never put in place to address the pricing issue and no compulsory code that would be put in place could address the pricing issue or volatility fine thank you for that Dave Stewart you have a question I think yeah thank you convener I'm earlier this morning we touched on how we develop an export market for Scottish milk can I ask the panel to come perhaps give us more detail on that specific point so almost exactly a year ago a new export strategy was launched for food and drink in Scotland it was a product of a partnership with through Scotland food and drink with most of the main trade associations covering seafood salmon bakery red meat dairy were involved as well whisky association involved as well in determining what our priority markets would be 15 key markets are identified and in the top seven of them which were North America France Germany Middle East Japan Hong Kong stroke China and then Singapore Southeast Asia new dedicated food and drink specialists we put on the ground and that was done following the model of other countries that have been doing that for years like New Zealand like Ireland like Scandinavia the delivery model is through Scottish Government international Scottish Government ministers put money in sdi put money in and the industry bodies put money into the tune of about four hundred thousand pounds over a five-year plan the team of 10 specialists which builds on six that already are in existence are being phased in over a two-year period so their job is very simple they don't sell products but their job is to build the relationships across retailers across the food service sector across the supply chain distributors and porters to look for opportunities to develop exports the seven markets are identified because they had the most cross-sectoral opportunity across seafood salmon whisky so building Scotland as a brand overseas but in a number of those markets is real opportunities on dairy and as I mentioned earlier on the first two of the new specialists are on the ground in Canary in Tokyo are specifically looking at dairy opportunities at the moment does anyone else have a point in here whether there are subsequent questions about this Mike Russell yes it does seem to me that this is pretty of the hub of the matter if we are going to have a sustainable future for the Scottish dairy industry then it has to speak to the same quality of production and quality of product as other successful Scottish food and drink industries it doesn't seem to me that it will be able to compete in volume because by definition we are a small country in no matter how big our output it's not going to compete in volume terms so I just want to know from those who are actually doing it what they are you know specifically doing to make sure that the quality and the niche nature of this product is being promoted in international markets I mean that goes for processors you know I'd be keen to hear what their role is and also how that relates to the domestic market because I'm you know again struck by Robert's submission that you know getting a strong presence in the domestic market is part of solving this problem and it seems to me that neither getting that domestic position and nor getting an international position appear to have been prioritised for example by First Milk so I'd be keen to hear what's happening or Robert Graham's first that I think it's a bit talking about milk and football sounds in the same sentence is a bit weird but I think it's familiar it's a bit like football in that we have to win home games and winning home games and looking as I'm talking particularly about spedual butter there's 150 tons of spedual butter a week being sold in Scotland that isn't Scottish we've got to win these home games the number one cheddar cheese brand is not Scottish in Scotland it should be Scotland how do we win that and that's about steps in investment and processing capacity right type of capacity in terms of investing in NPD and investing in marketing and these are these are all big numbers but I think we have to win the home games how do we get the the relevance how do we have the products how do we also identify the products that consumers are going to be buying in three five ten years time one of the products is fast and fastest growth and the chill cabinets just now is chilled coffees you get in supermarkets they come from Switzerland and Denmark so how do we identify that winning home games being relevant making sure retailers are making giving us a Scottish companies the right enough space on Scottish shells for retailers taking your spreadable butter because it is cheaper or because it's Scottish or because people ask for it all three well I think for as a business we have pulled by our products of Scottish people buy it because it's family people buy it because it's a farming business how we will compare against the brand leader as we will be more affordable which is good as well so I think it comes across getting that shelf space for any company in both in Scotland and having the the retailers giving us the right space enough space making sure we get access to promotional activity but brands don't get wiped out with a UK national overlay from a cheese brand and that's all that sells when that's on is important how do we get relevance going into England you go to an English supermarket you could buy Welsh butter Irish butter French butter Danish butter lost Danish butter and English butter but you can't buy Scottish butter but you can buy you can buy all of those again in Scotland but I think winning home games but export is important I think it's a huge amount volume wise to go for in Scotland for kick-off and it's right in our doors but export is important and it's how do we and I've been to Shanghai and Tokyo and the same opportunities are but it all takes it takes time it's not just about time it's also what we do for NPD and having right products right products and maybe with some of the products we make now we might need to be slightly slightly changed when we do different packaging to go more slightly slightly more super premium from even what we make and we make some great products so it's it's not just about the time being out in the sales team it's actually what we do from a product development point as well sorry okay Jim Hume yes I've mentioned before about New Zealand and also of course I've been on island New Zealand's all two islands stuck out in the middle of the Pacific but they've their dairy exports have grown rapidly from about two billion New Zealand dollars in 1990 to about 16 billion New Zealand dollars with the recent figures a lot of that has been into China the Chinese imports of powder milk from New Zealand have went from in the last 10 years from about about zero to about three and a half billion US dollars sorry for mixing up the dollars there but that's just what's the stats in front of me now I heard what James is saying that you know we must just talk about going for premium project products and that's absolutely right we should of course go for premium products but how come a small island stuck out in the middle of the Pacific with half the population of Scotland has done so well where where we haven't okay simple answer yes Graham day thank you just a supplementary when we're talking about the domestic market which is obviously hugely important can I ask how optimistic and I asked us against the backdrop where we're hopefully having the supermarkets in front of us next week how optimistic the panel members who have any experience of dealing with supermarkets are that they would play ball in this regard because every time I walk into a supermarket I see essentially two brands of cheese heavily promoted given the premium the prime shelf locations in these stores and I really wonder how confident you would be that they will be receptive to promoting high quality Scottish cheese I think I think from what we see from retailers and there is a variance some are some are big local Scottish teams some of you don't have such big local Scottish teams and they do realise it's important to be supporting Scottish produce but it varies it varies from if some retailers got big teams some leaders are really on it giving them good displays giving local teams lots of authority and maybe some are less so I think it's about what a consumer wants but I think also the government making sure that the retailers will just keep it relevant keep it front of mind but it's important to our whole economy that they are giving us enough oxygen I've got a couple of points to make I think from people who want to go back to the grocery code adjudicator and producer organisations so Claudia Beamish was there anything further on producer organisations that we needed to ask? Just briefly yes I mean George you've covered you've touched on producer organisations but I'd like to get the views of the panel on the comments by the UK government which I quote believes that forming a producer organisation could give dairy farmers greater clout in the marketplace and the farming minister suggested that producer organisations might help the imbalance in the market in which a small number of major retailers are the significant buyers but the majority of sellers are comparatively small-scale producers and also the Scottish Government has highlighted support in 2012 in a five-point dairy action plan and said there that they sought to ensure that the Scottish agricultural organisation society commonly known as SOAS have sufficient resources to accelerate their existing work on producer organisations and corps and I'm just wondering if there are comments from anyone in the panel about the the clout of producer organisations beyond what you've already said George? Well we've heard that producer organisations are an important part of this but yeah if there are specific points on this matter about POs that would be helpful. Yep do you Judith? To comment thank you convener we haven't seen a vast interest initially when the ability to put producer organisations together came into play and I think that was because it was the difficulties around making them a legal entity and the red tape and the reporting that would have been involved and how they would have had to have worked through the RPA. We know that there are about six organisations at the moment who are getting close to registering as producer organisations whether they will or they won't is a matter for the future but we know that they have been considering that and looking at it. In terms countries where there are more producer organisations around and on the ground and have been on the ground for a while I guess they haven't been on the ground long enough to see if they've been of any benefit in terms of what's happening at the moment in the global market but from what we can see those countries where the producer organisations exist they're not really doing any better on the milk price just at the minute maybe that's because there hasn't been time to assess and there haven't been enough volatility cycles but we haven't seen a benefit at the minute. The idea of the producer organisations came up in the high-level working group and it was a basic very fundamentally just get farmers together. The issue is a little bit more complicated in the UK because we already had a number of producer groups and the Muller Wiseman had a well established producer group Dairy Cres had them and there was producer groups. The uncertainty about POs was the legislation and although the high-level working group of the dairy package identified that POs should be introduced there was very little guidance. It was a real uncertainty of just we knew the scale that could grow to but we didn't know really the terms of reference and it wasn't until Defran the RPA worked out a terms of reference. There's a fear amongst farmers to join a producer organisation that just handles supply because in a situation like this they've nowhere to sell it. The idea was you'd have enough milk and you could have several customers and you could organise that sales. Where POs will probably grow in this country is a bit like the Dairy Cres direct operation when there really is a producer group and there's a trust in that producer group but RPA agreed that we could basically write your own criteria as long as it covered what the Europe wanted. So at the very base you could have a producer group that applied to be a PO but they would agree only to deal with the company, the one company and the contracts crucially would remain between the farmer and the company. But Dairy Cres direct, the benefit of PO is professionalism. It's not just about how much milk he pulled together but it's professionalism it's having people employed to represent the farmers that can sit down meaningfully with the processes and agree common actions including volume control. If Dairy Cres direct for example of all these members they could say to all the farmers look everybody dry thin cows off everybody cull cows with mastitis and immediately you could pull back five percent without having any effect on that japs business 12 months down the line. So the benefit for POs for me is not leverage it's just having a more professional farmer representation that can deal better with processor. Robert Graham It is important for farmers and process to work together. I am concerned about producer POs as a farmer business abuse. Our first two farmers joined in 1994 and the feel of that relationship sitting round the kitchen table in front of the aga is very important to us then. It's very important how we keep that for 90 farmers, 90 families that we work with. Having that direct connection between us as a family business and them as farmers and not through different family liaison people or PO liaison people is really important to our business because it's about family whether it's about farmers people working in the business our customers that they can actually phone us directly not going through some legislated or something structure which is takes away from that really important feel about our business and our relationship with them. I just wondered if anybody wanted to address the point that I made about New Zealand and how it's been that successful in marketing its products briefly. In New Zealand exports 85 per cent of its milk as does Ireland. In New Zealand they took the substances away overnight and the government crucially allowed Fonterra to grow to an enormous size so they ever basically had total control over that. They also invested heavily in the markets and powder. New Zealand tariff in negotiation with China is massively advantageous because in New Zealand there's been good salesmen convinced the Chinese that there's no milk powder like the New Zealand milk powder and to be fair it is probably better than American milk powder so they put the infrastructure in place, the farmers became efficient, they're all in the same production pattern, the process and investment in skim milk powder in particular where the market was. They built that. In Ireland it's largely co-ops and the Irish dairy board do a fantastic job. 85 per cent of the Irish milk is exported and all the wee co-ops have the umbrella of the Irish dairy board that looks after the majority of their marketing. The Irish dairy board have got hundreds of young folk out selling Ireland and Irish products. We're behind the curve with that, it's not to say we can't get there but both these countries have majored on skim milk powder but interestingly both these countries now as James is referring to are now looking at that markets there but we need to diversify, we need added value so there's all sorts of joint ventures going about to try and get the cream as well as the cake in these countries and that's a lesson for us all. We relied on our liquid, we need to get out there and sell other products as well. Thanks, I thought that that would be the answer but that was useful. That's one of the answers. They're not equally similar answers but marketing's obviously very important. Mike Russell and then Graham Jack. There's another similarity which has been discussed here which is worth thinking about. The subsidy thing would not be as enthusiastically embraced which is a focus on local food and drink and the importance of that within the local market. I was there last year and it is very noticeable how the high quality local food and drink being sold into a population that's not very different from Scotland. People want to buy New Zealand product, they buy New Zealand product and they think highly of that product and that of course is also true in Ireland that there is a fondness for Irish products and Irish products are marketed in such a way that it is the right thing to buy them and we do need to learn that lesson in Scotland. Buying Scottish produce actually preserves and develops Scottish jobs. Thank you for that. Graham Jack, just to round this little bit off because for two more questions. Sorry, I just wanted to pick up a point there on the Irish and the New Zealand markets. They don't have the opportunities within their own home domestic markets that I think we do in Scotland and the UK export certainly has its place but I think there's a big impact that can be made by taking care of and nurturing our whole market. I do sometimes feel that the whole notion around exporting is quite sexy and attractive but you know we need to obviously take care of the home front. I think that message is coming through. I agree with you Graham and I agree with. You know we have a big market here but in Germany and France their export on added value is huge and they've got a massive population both in these countries. He can get the best of both worlds. Export has got to be the added value of the cream of the crop if you like but it can be done. If your home market is controlled by retailers who are often based outside your country, then it leads to the issue that Robert has raised. You can buy Irish, English, New Zealand butter in England but you can't buy Scottish butter. We have to define this home market issue much more clearly and we have to work out that it is the home market that leads to a Cornish produced cheddar being the number one seller on Scottish supermarket itself. Let's talk about home market accurately and let's promote into the home market in a way that we get an advantage from it. We'll take some of that forward. A question from Angus MacDonald, a patient Angus MacDonald. You mentioned earlier the issue of the groceries code adjudicator Christine Takorn. We've seen discussions recently that the powers of the groceries code adjudicator are quite limited and we know that the House of Commons Ephra committee recommends changes to remit, including the power to launch proactive investigations. In the submission from NFUS, they back that up in which they say that they consider it essential that the GCA is given the power to receive complaints from indirect as well as direct suppliers. As inevitably, it's the primary producer who's impacted during periods of volatility and they go on to say that it would also be valuable if the GCA were able to levy fines in cases where unfairness has prevailed in the supply chain. I'd be interested to hear the panel members' views as to whether they agree that the groceries code adjudicator's remit and powers should be improved or increased and any ideas of how that could happen, how we could go about that. We will eventually be speaking with Takorn possibly at the end of next week, so it's very relevant to us to know some of your views about that just now, if anyone would like to kick off on the grocery adjudicator. I suppose that from where I sit, I don't see an awful lot of farmers who are direct suppliers to retailers and therefore extending her powers to me. It sounds very nice but it's quite nebulous. Most of the relationships with the processors, whether they're PLCs or cooperatives, the farmers, the primary producer already has a mechanism to talk to their processor, their supplying processor about what's happening in the market and about the price that they're receiving, so we're not entirely clear as to when people talk about extending Christine Takorn's powers exactly what they see her doing. In a lot of cases, it's the farmer ultimately that suffers. If processors are being unfailytreated by retailers, however well they define unfailytreated, the impact inevitably falls on the farmer most of the time because they're the lowest common denominator. If processors are getting squeezed, farmers are getting squeezed, so the impact is on the whole industry. Understandably, processors are unwilling to raise issues with retailers because these are huge retailers. If you lose a contract, it's a major issue, so they're not going to hold their hands up and complain. I would like to think there's no complaints needed given that there hasn't been any complaints in the dairy sector since the adjudicator was set up and that there's clearly some bad practice out there, so something needs to be done to make the adjudicator more relevant. I would like to highlight the retailers that are doing the good job, doing the right thing because it's putting pressure on the whole supply chain. Milk sold cheaply is fine for a while, but it becomes the norm and you cannot produce milk sustainably at these low prices, similarly with cheese. So something needs to be done to make the adjudicator more relevant to the whole of the supply chain. I want to go back to something that George Jameson said earlier. I don't want to put words in his mouth, but I think he said something along the lines of retailers were charging for self-space, if I remember correctly. That would be potentially in contravention of the grocery supply code, because it states that a retailer must not directly or indirectly require a supplier to make any payment in order to secure better positioning or an increase in the allocation of self-space for any grocery products of that supplier within a store unless such payment is made in relation to a promotion. So there is potentially an area where the grocery code adjudicator could get involved, so can I ask the panel if you're aware of breaches of this type that are actually taking place? Robert McIntyre. After the time I was on the board of Scottish Milk, I was also on the board of a company that had Scottish Milk products, which sold the cheese from Arran, Bute and Contire creameries. We used the Irvins of Niclele and Serious the Strong people to sell us. That was a contract when Scottish Pride went bust, we utilised them to sell us cheese. They were always on about shelf space and having to stump up for shelf space. Unless that is moved in the last five or six years, that was very common then. Does George Jamieson want to come back on the point that he commented on earlier? Nobody's going to admit to that. A process is not good to admit that they bought shelf space in a prime location. It's highly unlikely anyway, because they want that shelf space and they have to buy it, they have to buy it. It's all anecdotal. Similarly, the anecdotal evidence that one of the big supermarkets tended for a cheese contract, which was worth a lot of money, clearly, and both the companies that were tendering had to pay for the right to tender, and they were talking millions. A small company can't do that. I don't think that's fair play. We also hear processors who are maybe going through a thin time and they need a volume through who they'll offer cheese to retailers at an up-down price, which unsettles the market. I mean, all these things are happening, and that's not the retailer's fault. If somebody's offering a cheap cheese, you're going to probably take it. We would like to see more sustainable contracts for cheese with processors so that they get a longer term contract. I know that that's happening, and that would help the market to gain stability as well. But getting back to peripheral milkfield, are these small companies at a real disadvantage if these practices are going on? A anecdotal or otherwise, these examples are really important to us, because we will have the supermarkets in front of us, and we'll be speaking to the grocery store adjudicator, so it's important to have this on the record as much as we can have for us to take forward. Are other panellists of the same view that this sort of thing is going on? Is there a wall of silence? I hope not. We have pretty much not come across, so maybe we're close as we've come in some element of listing fee, but it's been very, very small. We do obviously see things, payments around promotional support, and that can vary depending on if it's just the UK promotion or if we're promoting products that we do sell full UK-wide. That's our experience. Okay. In that case, I had just a wrap-around question about dairy development, which Alex Ferguson might like to ask us now. Yeah, and it's almost in an effort to try and end on a sort of optimistic note, if we possibly can, because we've had a fair share of understandable pessimism and difficulty raised around the board, but I think we're all aware that the Scottish Dairy Review produced a report in 2013, ambition 2025, which looked at a virtual doubling of milk production by 2025, obviously, and also recommended the establishment of a dairy growth board, and really quite simply, I think my question possibly to the two dairy farmers, whether it's all the two dairy farmers, is, you know, are you planning to expand in view of these recommendations, or are you batting down the hatches, and perhaps somebody could say what, you know, what has the growth board done, what's happened since it was put forward? Kenneth? Well, I'm going to speak personally, of course, Alex. I remain entirely enthusiastic about dairy farming, and I would very much like to expand my business. I think there's obvious environmental restrictions with land. You can't milk cows without land, and we've seen great growth and herd sizes over the last generation or so. I think there's a limit to how big these herds can go, not so much for producing the food for these cows, but it's getting rid of the slid at the other end. There's great costs involved in hauling something with such a low dry matter, any great distance, but in principle I think we will continue to see the average size of the dairy herd in the UK. I don't know how many years it's taken to double, but it will double again. There's no question about that, and probably just as quickly as it doubled the last time. I would certainly like to be part of that, but I can't seem to be spending a whole lot in the next six months. We took the decision last year when my son decided to come home after being away working in a different job. We had to expand. We were fortunate enough to get extra land from beauty states to make the farm around 260 grass acres. We went out to immediately get going with purchase of extra cows. That went on to overdraft. We made extra with an extension to the cubical shed. All those things went on to overdraft. We did a four-year budget with the SAC, which is based on a price of £30 a litre. You can see that budget has been blown to hell now. To a reasonable amount, we were only going from 80 to 100 cows, and we look after those cows as if they're part of the family. I'm sorry to say this, but I'm maybe disagreeing with Mr Campbell that what I don't like about the Dairian situation is that, along the south of Scotland, there's what Ian Bute describes as factory farms, where there's cow numbers four, five, six hundred. Poor Brutes never see any grass, because they're under a roof 365 days a year. We hear stories about these places, but I've never been at one, but that's not dairy farming to my mind. That's factory farming. But it's the market, I think you would agree as well. I think you'd have to agree it is also the market as well. Well, as the expansion in these farms has been startling, and many of them have contributed to the surplus that we can't handle nowadays. George Jameson won't agree with that, but that's a fact that we think. James Withers first and then George Jameson, hoping to end up on an optimistic note. Some hoax. I'll answer the question about the day of growth on what's happened next, because it's an important question, just quickly by way of context. The Ambition 2025 talked of the potential for a 50 per cent increase in production to go from 1.1 to 1.6 billion. It's probably important to state that it was never a target, and whether that figure was going to be used was debated for a while. It was designed as a statement of potential that we should move from talking about managing decline in Scottish days to being optimistic and thinking about growth. The second key point about that 50 per cent growth figure was that it had to be market-driven growth. It would be suicide to produce more and hope that we could find a home for it. It had to be market-driven, or else we'd end up with a real challenge for some of the reasons that we've talked about before. That's by way of context. The Dairy Growth Board is now established. It's chaired by Paul Grant, who is the chairman of Mackay's Jams. That's taken someone from out with the dairy sector. He's taken a business from what was producing a commodity into one that's a strong brand now. I don't know if the committee is looking for any further evidence, but I imagine evidence from Paul might be useful in terms of what he's doing. In terms of short-term work, we've seen the launch of the Scottish dairy hub, funded by the dairy co, the levy board, and half by Scottish Government, designed to provide a one-stop shop for farmers looking for advice and support. There's a requirement for a bit of a culture change in the use of advisers, I think, in Scotland, compared to where our Scandinavian counterparts would be. It's designed to make that easier, so it's independent. It's not provision of advice from someone who's got something to sell. So no vested interests, just pointing farm as to where the best source of advice might be. That's now up and running. The second main thing is again around this international agenda. Paul is working closely with a number of Scottish dairy processors looking to enter three to five new markets this year, having done research last year. Fingers Cross would be heading towards the launch of a new Scottish dairy brand in international markets at the back end of this year at one of the world's big food and drink shows. So the milk bottle half full and George James in the milk bottle half empty. Don't quote me on this press because they'll accuse me of making excuses again. I repeat, there's potential to grow the dairy industry in Scotland. There's absolutely no doubt about that. If we can market more products at the right value and get investment in processing, farmers will react. In answer to Robert's criticism, I was a farmer for 25 years with 150 cows and then I was a consultant for a number of years. Then I can assure you there's many many farmers that have only got 100 cows or 150 cows that are just as efficient as the big guys. I don't like the term factory farming because I've been on many, I've advised many people that have got 500 cows, 1,000 cows and these cows are looked after fantastically well. Absolutely fantastically well. Now there's room for everybody in this industry and that's what we need to do. There's room for everybody just to put it in context. Last year we produced another hundred, another almost a, get my figures. We're good weather and we're good prices. Now one litre a day from the 165,000 animals in Scotland equates to about 500 million litre, that's 40 or 50 new farms. Average herd size rose by four over the thousand herds. That's another 300,000 litre. That's where it came from. That's where the extra milk came from. The guys that have grown in the south west have just taken up the space that others have left for obvious reasons, mostly economic. But to say there's, we mustn't, we mustn't split the industry between big guys and wee guys because it's about efficiency, it's about being fit for purpose and small family farms can be incredibly efficient because I was one. Well we're going to finish up with Nigel Evans just now and I mean we're going to finish up because we'll have a lot of very interesting reading from the evidence that we've already had before we tackle the next panels next week. Nigel Evans. This is as much a comment about the industry and where it's head in Scotland and in the wider UK. It's for us as an industry to be very positive about the future. We've talked about New Zealand a few times this morning. There are lessons there for us to sort of compare ourselves to New Zealand. If you look back at New Zealand 20 years ago, the removal of subsidies from their market, in fact just over 30 or 30 years ago nearly, what was the effect of that on that industry? It had a catastrophic short-term effect. It actually caused people to question a number of people who went out of their business. But if you look at that industry over that period of time, since, they've actually grown volume of production and value to the New Zealand economy by three times. There is a future out there, it's a very positive future and I think it's about us as an industry understanding where we add true value. Value is not something that we say it is, it is something that the consumer says it is. It's the customer at the end of the day that determines that value. New Zealand looked at it from the perspective of where is the value and they went out there and they addressed that market. That applies to us in Scotland and across the wider UK. It is there for the taking. What are some of the lessons that we can take from it? We've talked about cost of production this morning. Personally, I think a cost of production formula applied to Darien or any other commodity is actually a route to diminiation of value, not increased in value. It's because it stifles innovation and one of the things that you have to look at and again what happens across New Zealand and the US etc, these are not about growing herd sizes and factory farms. It is about the number of people that are employed in the totality within the industry and that's something that we need to look at and that demands innovation and that comes from true value creation. My view of this industry is very optimistic. I think that there is a huge scope up there and a huge opportunity to create value. Thank you very much for all your evidence. All of you. It's been very valuable to have this round table. It's given us a wide variety of views. It's given us a particular focus as the Scottish Parliament looking at the future of the Scottish industry in all our geographical diversity. We shall be tackling the various other panels in due course. I'd like to thank you very much for your evidence as witnesses. There are one or two people who are going to provide us with some more information who we've asked and the clerks will remind you at the end. As we agreed earlier, we'll move into private session. The next meeting will be on 4 February of the committee and we will continue the inquiry on the dairy industry and hear from the cabinet secretary for rural affairs, food and environment. I would now ask you in the public gallery if we can clear this within five minutes. We need a short break as well. We'd love to stand and chat and there's a lot of questions to ask, but thank you very much and goodbytes now.