 Welcome to the 19th meeting in 2015 of the Rural Affairs, Climate Change and Environment Committee. Remind those around the table and also those in the gallery that your mobile phone should be switched off, or at least in silent, they can interfere with the broadcasting system. You'll notice that some members are using tablets during the meeting, which provides them with the papers in digital format. We have apologies from Jim Hume today and welcome Alison MacKinnon's MSP to the committee this morning in his place. Agenda item 1 is to consider whether to take item 3 in private. That's on your agenda just now. Are members agreed? We are, thank you. Agenda item 2 is about first milk. The second item today is to take oral evidence on the impact of the first milk turnaround plan that was announced on 1 May this year. I welcome the witnesses to the meeting, Mike Gallacher, CEO of First Milk and Jim Baird, the Scottish director of First Milk. I open up to questions. First of all, I would ask you gentlemen if you could give us an idea, particularly Mike Gallacher. What did you find when you came in to take over this company? What was the state of affairs? What was your prognosis at that time? Good morning, everybody. I've been enrolled for about eight weeks now. Clearly, the first few weeks were to get a rapid assessment of the state of the business. Of course, the first thing, I'm new to the dairy category. The first thing that struck me was quite how difficult the category was. I've been an outside observer working in different parts of business, but clearly dairy is going through a perfect storm in terms of a number of factors hitting at the same time. I think that you will be more familiar with them than I am. The situation in Russia, the situation in China, the global prices, the quotas being lifted, let alone some of the retail pressures in the UK have amounted to a significant pressure across the board in dairy businesses. It's evident that that is having its impact. We've seen the impact of profitability of some of the companies, and we've also seen the consolidation that's going on to deal with those pressures in the industry. Certainly, the first thing that struck me was quite how difficult the competitive environment is. In terms of first milk, a business that's had a turbulent recent period, a business that is struggling financially and also struggled to deliver a good price to its members, which of course is unacceptable. There are elements of strategy and focus. I think that I've been very clear that my view has been that there's a need for us to focus back on our core business. There's been a lot of time spent on smaller parts of the business, so that was an issue that I saw. Also, we had some costs that we needed to attack and deal with. Sadly, that has an impact on people. In order to deliver a decent price to our members, we have to keep our costs under control. A series of issues that I found when I joined the company, and obviously an absolute imperative to move very fast, because in this situation, when I've been in this situation before, you have to move fast. You don't have a lot of time, and you have to make progress. You see the smaller parts of the business. What does that include? I think that the business had a strategy that I think directionally is very sound, which is very common, which is to get into areas that are more premium. When you're in a tough, commoditised, highly competitive core business, then going into areas where you can make a bit more money, particularly if a high-growth, high-margin areas is a very sound direction. We had made some steps in that direction with a number of businesses, but those businesses were not yet delivering, were not yet accretive to the financial performance of the business. They were dilutive to the financial performance of the business. Some of those businesses don't include a business called CNP, a sports nutrition business, which is not related to milk. It is related to milk in terms of some of its raw materials, but it doesn't take milk from first milk. That's one of the examples. Then you commented on costs, and I think we'll just explore some of those in detail. Who wants to come in next? Thank you. Good morning. I just wonder in terms of the plan to take the business forward. Obviously, your members, the ranking file farmers, are very much feeling the pain. What are those steps that are being taken to reduce overheads across the business? I'm thinking of areas such as directors, remunerations, staffing centrally. I think some action had been taken prior to my arrival, so I wouldn't say there's been no focus on that. There's been some difficult choices made already in the business. When we looked at it as a board when I arrived, the reality is that you have to maintain a certain overhead structure. As the business has changed in size and as our cost has developed, we have to address that. Where that's fallen at the moment, it's across the board. Elements of it are clearly confidential in terms of who's directly impacted. We're still finishing the consultation programme, so it's not yet finished, but it will be widespread across different levels of the business. And at director level? Do you plan to reduce the number of directors or the remunerations, that sort of thing? I've answered it in saying that it's hitting every level of the business. Okay. First of all, Sarah Boyack asked to speak and then Mike Russell. Thanks very much, convener. Good morning. In the brief that we've got for today that looks at the industry and we did the milk inquiry a couple of months ago, a key issue that kept coming up was the issue of milk prices. One of the things that's really striking about first milk is just how low it is in the ranking of price paid to producers. I'm wondering what your general comment is on that and what the scope for upping that is, because it's always a very competitive market, but at the producer end we spent a lot of time discussing how people could reduce their costs, but to be right at the bottom of that, it's obviously creating a huge issue for people who supply you going forward. First, in terms of our position, my view is that the first question that I had from our farmer members was, why is our milk price where it is? I've been around the country, I've talked to 600 farmers face to face in the last two weeks and shared my conclusions on that. I've just given you some idea. There's cost issues there, there's been some performance issues in the business and there's been, as I said, subsidiaries that have not been delivering, so a basket of issues. It is fair to say that going back, that's not always been the case. It's also fair to say that some of our contracts pay up in the upper quartile, so you'll see that some of the contracts that we have do pay better, but I'm not happy with where we are and we need to do a better job and we need to do it fast, particularly with the market as it is. Traditionally, part of the business model was based on brokering to predominantly liquid players and that part of the business had declined in particular in the last 12 to 18 months. That has left us exposed more to the commodity markets and we have had to put a lot of milk down to a drying plant down at Westbury. That has been exacerbated by the fact that there has been a lot more milk produced in the last 12 months, which is why there is such a supply, demand and balance at the moment. We are more exposed to that commodity end of the market than other players in the UK. To some extent, we find ourselves balancing the whole UK market, which is not exactly where you want to be when the commodity market is where it is at this moment in time. Am I talking about milk from Scotland going to Westbury, is it? Effectively, there is an excess of milk in Scotland, which does not go direct to Westbury, but it has shuttled down the country, so there is a net cost to transport, there is a net migration of milk down the country. Sorry, Sarah. Did you want to do that? I was just thinking about it. One of the things that we looked at in our inquiry was about local demand. What opportunities are there to increase local demand in Scotland? You said that we are producing too much milk, but one of the things that we were discussing was issues related to milk products, not just liquid milk. What is the scope for doing more in terms of yogurts, which is the one that everybody mentioned, that we are not doing enough off in Scotland, butter and cheese? What are the opportunities for a company like First Milk to try and get into those markets? Just to finish off your earlier point, you talked about getting the milk price up. Clearly, some of the announcements that we have had, as I have gone round and spoken to large groups of farmers, I have been able to explain the impact of our cost reductions, have a direct correlation to milk price, so I am able to quantify that. Similarly with other changes in the business, we are able to say that this is worth 0.4 pence, this is worth 0.2 pence, and that we are working to deliver it as fast as possible. In terms of the other half of the equation, which is adding value to milk, clearly that is a big focus. There are lots of ways of doing that in terms of the mix of the products that you deliver, be it cheese, soft cheese, yogurts, SMP. Getting that mix is clearly part of both balancing your risk in the business and maximising returns. The opportunities internationally are obviously there, and the opportunities for brands are there. I would say that the board has kicked off a review of our strategy. As we started on the turnaround plan as a board, we also said that we need to review our strategy. That process is probably a bit less than halfway through, and in the coming months we will conclude that strategy review. In time, effectively, as we complete our turnaround and cost reduction programme, we will be ready so that we can validate our existing strategy. That work is on-going. I want to focus on the situation in Bute, because I think that is particularly serious. On the point that Graham Day raised with you about overall costs in the business, you said that you were looking at the overall costs of the board and director's ships. However, that was a confidential matter. In as far as it impacts individual people, I think that we are looking at how we can just cost in the board and whether it is our remuneration of whether it is a number of board. We are looking at every aspect of our business. In front of me, Jim Pace's declaration of interest in the House of Commons in March 2015 shows that he gets paid between £85,000 and £90,000 a year to chair the company. Given the difficulties of the company of the last year, is that a fair remuneration? You are asking me to comment on the remuneration of the chairman of my board. I do not know what you expect me to say. I am simply making the point that that is on the public record and is a matter of concern to some of your members who have raised it with me. Absolutely. It is a democratic organisation. That salary is agreed democratically within the structures of the organisation and it is externally validated. I do not know what else we can say. My position is that I want to support First Milk to succeed. I think that you have come in as a new broom and the new broom was very much required. However, new brooms sometimes have to clear out things that are required to be cleared out. I think that we will come to prices later on. However, when you have individual farmers who are getting less than that for a month's work of producing milk, they find it difficult to understand, to be blunt. That may seem a simplistic question, but I want to get a handle on what is happening here. You have a plan. You are presumably in your conversations with your members, telling them where you think you might be in six months' time, 12 months' time, and two years' time. In hard figures, what sort of milk price do you envisage the company paying six months from now, a year from now? What I have been doing is showing them where I see the opportunities and how that equates in terms of milk price. We reduce the cost in the business by x and this equates to this amount on the average price per litre. Clearly, it would be foolish for me to sit here and comment on where I expect milk prices to be in six months. We have just seen that every day I get updates from what is happening around the world. The update that I saw yesterday was from New Zealand to Europe to Ireland, people making announcements about milk prices that are in the region of 19.5p. Those are big organisations, big dairy organisations. I cannot forecast where the market is going to go, so it would be foolish for me to stand here and say where it is going to be in six months. I ask the question because I am sure that your members are asking this question, because some of them are faced with going out of business if they are having to make tough decisions about whether to remain in the sector or not. What hope can you offer them that things will be better even in six months time, a year's time? A farmer who is in exactly the position that you talk about, we hope again for milk that does not cover the cost of production for the vast majority of producers. We cannot sit here and say what the milk price is going to be. We are into a very volatile period for the dairy industry, and it seems to be that it was predicted that that is what it is going to do. I do not think that any of us believed that it would be as volatile as it has been, but that is a new reality of the world that we are living in, unfortunately. All of us as producers have to rule out our businesses and see where we can shave costs. Obviously, we cannot shave them to the extent that the milk prices come back, but that is the reality that we are in now. Some of us will have to decide whether the future is endearing for us, and that is a very valid question for all of us to ask, but we cannot sit here and see that the milk price will be 25p in six months time. What strikes me is that, as someone new to the category, and in the conversations that I have had over the past two weeks around the country, with 600 farmers, very frank discussions, both in large meetings and afterwards one-to-one, is that there is an awareness that this thing is cyclical. This is now our third cycle, I think, since 2007. It is deeper and higher. The gap is bigger than it was last time, but it will get better. That is what I am hearing from farmers. They said that they are saying, Mike, this is going to get better. What we cannot do, and I think that if you look at all the best forecasts around the world, you will see a consistent message that there is significant uncertainty in the medium term. Ferguson to Mike Russell to Angus MacDonald. I was just on the subject of pricing convenience. Good morning, gentlemen. Since April, you have changed the range of contracts that you had, and you now operate an A and B pricing structure. I just wondered for the record if you could just explain that a little bit more how that operates, what constitutes being in the A price and the B price, and whether there is likely to be much movement between the A and B prices. The basis for the A and B was based on the last two years production, and we said that your A volume was 80 per cent of your last two years production. The idea is that the A price will be on a sterier plane and be more predictable, and the B price will be more determined by what we get from more like the commodity markets, as it were. However, there is no question that we ran into difficulties last year, because we weren't responsive enough to the market, and the market ran away from us, and we just really never caught up. That was where some of our difficulties came from. That gives us some levers that we can play with. If people have an A price of 80 per cent that they can produce to that, and if they don't fancy producing whatever B litres they are, that's fine. The B price could go higher than the A price, and that gives us a strong market signal that you want to produce a lot of milk here, guys, if you want, if you can. It gives us a bit more flexibility than we previously had. Just for absolute clarity, the 80 per cent figure is fixed, is it? It's not fixed, but it will move on a smoother plane than the A, the B. We set the A price ahead, sorry, it's fixed in that regard. Sorry, I didn't mean the price that you're giving for the A price, I meant the 80 per cent figure that will be paid the A price. That is fixed. Yes, that's fixed. On an annual basis, that's fixed. That's what I wanted to talk about. We're rolling to over your last two rolling 40 months, as it were. Thank you very much, thank you. Right, Russell. I think it's quite important to put this. Somehow, there's got to be a way found of ensuring that those people, like you, Jim, who are producing milk, are able to do so, because it's not sustainable to produce a product even in the medium term without recovering the cost of production. That's simply a bit of reality. I think that it's important for members of the committee to understand what that means precisely. I've gone front of me to Milcon voices from your company, one from last April and one from this April, and they're both from the same producer in Bute. In last April, in April 2014, for 46,139 litres, that producer got £15,1723. This year, for a slightly smaller volume, 44,583 litres, the same producer got under just over £7,000 after retention, so that was more than half of that income gone. Interestingly, when I mentioned retention, the retention on the first, that's the money that the company holds on to, you would agree that that's a definition for whatever reason, that's the money that holds on to. The retention last year was £145.94 on £15,000. The retention this year on that much lower price was £1,190. Now, I'm not criticising those figures, though they're horrific, but I really think that the question is, how do people survive in those circumstances? Because of the cost of production must be higher than the A price on the milk there was £15.576 a litre, and the B price was £11.176 a litre. The cost of production, even with the best producers in the best circumstances and on islands, the cost of production will be higher. Must, Jim, you would agree, be £23.24 at minimum, you know, you would agree? And that kind of bullfart, I don't know. So, we have a farm, an identifiable farm there, on bute, which is losing that amount of money month after month. I have another constituent who is losing £200 each day at the present moment. This isn't sustainable. Does the company expect to have suppliers in the Scottish milk fields, frankly, if that situation is sustained for more than the next few months? What's your projection on this? I mean, this isn't just a Scottish problem. No, I'm not saying it is, but that's a reality. This is a national problem right across the UK. I've had discussions with bank managers recently, and we all have to go and have a chat with a bank manager and see whether, you know, because we will need support through this, and there's no question. As one of them put it, it's, you almost need to make another investment in your business, and that is predicated on whether you think in the future there's going to be an upturn in the market. It's also been predicated on whether your own family situation, have you got succession, all these things have got to come into play. But yeah, I agree, it's not a sustainable situation at this moment in time. Question for Mike, really, if you don't mind me asking this. What do you believe as a company is sustainable? How many suppliers would you expect to have in six months' time if this continues? I mean, there's an existential threat for dairy in the UK if this continues, of course. I mean, it won't just be us. It will be all the producers. We'll find that our farmers can't sustain themselves. That clearly is a significant issue. To the extent that we're a bit away from that, we do work regularly to look at contingency plans for our volumes and how that would affect our business. But I think that you've stated the problem very, very clearly. This is exactly the issue we're dealing with. That's why we, to the extent that there are things within our control and things we can do, that's why we need to move very fast. And it's also why we need to work effectively together across all different agencies with local government, across different businesses working together to find best solutions possible. You spoke to 600 farmers. Are many of them in Bute, Arran, Kintyre, Gia? My meetings, obviously, had meetings across the country—Midlands, Wales, Cumbria, Central Scotland. I had meetings in Kintyre and in Bute over the last two weeks. They've been, all of the farmers, pretty much 100 per cent attendance at those meetings and with other people from other agencies. So we've had these Scottish NFU at those meetings, local estates at the meetings, and I have to say they've been very productive. I mean, it's not good news. I've been sharing stuff about the business, which we're not happy with. But the focus is what we are going to do as a business and what we're going to do together, as a co-operative, to get the position better. Angus MacDonald then, Claude Evie-Mitch? Yes, thanks, convener. Taking the price issue a bit further, particularly the global price, you mentioned earlier that, I think, from New Zealand to Europe to Ireland, it was sitting around about 19.5 pence. Now, I'm curious as to whether, realistically, there's any prospect of an EU intervention price being introduced, albeit temporarily, and whether you've lobbied Defra on that point recently. I'm very conscious. I think I said to you at the beginning on eight weeks into this, and so my knowledge of the category in the dairy industry is not as great, I'm sure, as many of you. I understand that there is an EU intervention flaw, and that we're getting close to that level. Is there any prospect of that intervention price being increased, albeit temporarily? Claude Evie-Mitch? Thank you, convener. Good morning to you both. I'm actually a member of the co-party, and I'm in the parliamentary group of co-operative members. I would like to ask you both. The significance of the fact that First Milk is a co-operative, and what you see the strengths of that being, and if you could explain something of the engagement, we took evidence at the previous inquiry into the dairy industry quite recently, and asked questions about the strength of producer organisations. I wonder whether you see that as a strength, and what the strengths are going forward. It was one of the reasons that I took the role. I see it as a potential strength, and I think that if you look empirically, it's not always been the case for co-ops. Speaking in the UK recently, we've seen a number of co-ops struggle with being successful businesses as well as being successful co-operatives. For me, benefits include the fact that it's a democratic organisation. It's owned by the members. The members have a stake, and they set the strategy for the organisation. I think that there are potentially some great strengths there. We've announced that we're reviewing how we've done business in the past couple of years, and we quoted the miners' review of what happened in the co-operative group. We share a review that there are probably some lessons that we can learn about how to run a co-operative better to deliver a better result for the members. I've been a stalwart of co-operation all my days, but there's no question that it's a challenge. We fall prey to commercial organisations that want to cherry-pick our best producers. Ultimately, a co-operative has to be as commercially driven as any other business. If I'm honest, sometimes that's not the easiest thing to do, because you find that producers are a natural instinct to be more socially aware than some of the commercial organisations, and that can leave us at disadvantage. Through the convener, do you see it as a strength in relation to anything to do with negotiating price or any of those issues? It can be a good story. Sometimes it can be an advantage to go with that story, but traditionally retailers are maybe not good enough at shouting that tune or valuing it in terms of actually paying a premium for it. Mike Russell. Surely one of the strengths of a co-operative would be equity of treatment for all the members of the co-operative? I can understand the real pressures on price. Nobody is disputing them. I can understand and in a sense support some of the efforts you're making to turn the business around, but my sticking point, and Mike Garner knows this because he had a conversation this very morning before this meeting about it. I think he could about that in case anybody saw us talking. I am concerned at the lack of equity of treatment of the 13 producers on mute who are receiving a penny a litre less as a result of the turnaround plan. That seems to be against the principles of the co-operative. A lot of good work has been done by a lot of people, including the company, the farmers, the estate and others in the Scottish Government, to get a new dispensation for transportation for the next six months. That will essentially reduce that difference to about three pence. Wouldn't it be in the spirit of the co-operative if the co-operative accepted that that one penny cut should now disappear before implementation so that there was an equity of treatment, at least across Kintyre and Butte? I think Mike you make a couple of points. Of course I'm new to this role and to working in a co-operative organisation, but I think what is very clear, and maybe there's a misconception about this, is this co-op for years has had different prices for different groups of farmers, and those prices have been based to a greater or lesser extent on the value of that milk. I've sought advice as I've gone into my role. I've understood from others who have got expertise in the co-operative field that if you look across the world that's not an established principle that everybody should get the same price for, regardless of the value of what they're producing, the commercial value. So I don't accept that principle. I do accept a principle of consistency of treatment, and I think that's why as we made these announcements about the new milk fields, a large number of people were adversely affected, a large number of farmers were adversely affected, and it was important that we applied some consistent principles across the organisations. One, that's the right thing to do. Secondly, we're accountable to our farmers for the consistency of treatment, and so that's why it's important that farmers on Bute are treated consistently with the 337 farmers in the Midlands, which we talked about this morning, who had the same impact from the changes. I would also stress this point, and I've stressed this as I've gone around talking to farmers across the country, that in changing the way that we set prices to something that's based on value, so that the farmers have a line of sight either to the creamery or their customer, and therefore in my view can be more involved and engaged and hold people to account for that performance. But as we make that change across the country, there will be some volatility in the prices. So we've announced it, and of course the impact is when we've announced it some prices have gone like this. Now next month, given the volatility in the market, some volatility in the market, some of those prices could go like this, and the following month they could do this, and so there will be some changes, and so to the extent that some have had a point to increase, some have had a 1% decline, these are monthly numbers that will change. To the point about our discussion, in as much as the focus should be about what are we going to do to help farmers, there may be some implications around that in terms of farmers need to be able to deal with that volatility, because that's their life now. Is that hedging? Is that better advice financially on how they manage their businesses? That's certainly on our agenda in terms of how we can help. Another key point here is that, if we're going to go down the route that we have, is this requirement for transparency? That's something that I know you guys have been critical of us as a business in terms of before, but that's an absolute must now. If we're going to pay people different prices based on different, we have to be accountable, as Mike says, for how that has worked out. I've been chairing a working group in the contire out there, and with the last meeting that we had with those guys, we put the profit and loss for that creamery up in front of them that night, and we're absolutely clear to them what would drive a price for them, what the issues were in terms of what we need to address, and it's all about getting by in it. With the guys in butte, we've been perfectly upfront about the cost of the haulage, and we put that out there in terms of, as a target, how can we address that? You can reduce the cost of the haulage. You've had that demonstrated. The Government has put in resource to support the cost of the haulage. The estate is putting resource in. I'm very keen to support the company in recovery, but, as I said to you earlier, the sticking point for me is the unfairness in butte. It seems to me that you are asking your members in butte to pay the same to be members of the co-op because their retention has not been reduced by any percentage at all, but what they get out of that is the lowest of anybody in the co-op. That is basically unfair and inequitable. Those farmers stand an even bigger risk, and we talked about the risk of going out of business anyway. They stand an even bigger risk because that is exacerbating their problem. I'll make the point again, and clearly we're not going to agree on this, but I'll make the point because it's important. Given that one-pence difference has been substantially bridged by actions that have been taken by the Scottish Government, by the state and by others, and that there is still the potential for the company to save on haulage, then I think that the company's intention to create an equity with Kentire—no one's asking you to do anything else—that intention would be tremendously valuable in terms of goodwill towards the company going forward. As we've discussed before, I absolutely understand the strength of your view. We equally have, as a Board, a very strong view that we need to treat all of our farmers across the country consistently and that if we were going to treat this differently, to treat the 337 farmers in the East Midlands or even, in principle, all of the other farmers who are getting a price based on the value, the commercial value of their milk, if we breach that principle, it would be very hard to stand up in front of any other stakeholder and talk about fairness and consistency. To your point, I think that what I would welcome is that immediately this decision was made in the Board. We set up task forces to address those issues, and those task forces were set up by farmer directors and members of the business and local farmers. We've made significant progress in a number of areas about dealing with issues that are very long-standing. The issue on bute has been the case for five years. There's been, effectively, a hemorrhage of money in that organisation. I'm glad to say that the Scottish Government has helped enormously with the announcement that made yesterday. We've galvanised some action on logistics costs, which are now coming through, which will substantially close that gap. Actually, we've also galvanised the local group, the local farmers, to develop a four-week action plan, a business development plan, about other options for getting a sustainable, longer-term, higher price for that milk. That's got to be a good thing. It is about what we do about it, because, as I said to you earlier, these prices will be volatile and they will change month by month. This issue today in bute could be in Wales tomorrow and could be somewhere else the month later. I'm a true co-operative. Those things are difficult. I don't underestimate that by any stretch of landisation, but a lot of the positive things that have happened in the last few would not have happened if we had just kept going on and doing the same as we've been doing forever. Sometimes you've got to really ask yourself, can you keep doing the same thing, you'll just get the same result? That's where we are. We really have to think radically. Particularly the galvanising effect has been there. The transportation cost issue has been forced, and I'm glad to do with that. This committee recommended it in its report. Other things have happened. What I'm saying is, the company, if Mike is saying that he believes that this inequity, because that's what it is, will be resolved within a few weeks by other actions, because there will be an improved price, because the farmers are doing various other things, then that's a step in the right direction. I didn't say that. I thought you were indicating that you thought- I said the prices will be volatile. I said what will happen is a point two difference or a one penny difference here could go either way in the coming months, and these prices are adjusted every month depending on the value of that milk, and that value of that milk is volatile at the moment. What I'm saying is we can argue today about this difference, but the differences could be different next month. The real issue we need to focus on is about how do we add value properly, and this issue on Bute has been the case for five years, at least. What we need to do is say, how can we create more value with that milk for our farmers on a sustainable basis? I just put the fact on the record. I believe you should either reduce the retention to make a difference on that if you don't want to change the formula you've just said, or you should take other actions to take away that inequity, which I think is a barrier to the full and whole hearted support that many would like to give the company in its recovery, but this seems the wrong thing to have done, and indeed its contribution to the financial problems you have is absolutely infinitesimal. I appreciate we discussed this a lot over the last couple of weeks. I would also point that we talked about the miners review of the co-op. I think one of the, and this has been established in a couple of reviews of co-operatives in the last year, is that businesses have, co-operatives have not made the decisions that they've had to, and they've called it a values issue. In my view, this is not a values issue at all, and this is a decision that had to be made. To Jim Swin, having made it, it means that we get the energy directed to fix the long-term problem. So I think this is one of the issues with co-operatives, is that they haven't faced into some of the difficult decisions that needed to be dealt with. I would like to come at this from the direction of the public purse. We've seen the Scottish Government commit to investing in the Cambleton Creamery. We've had the announcement yesterday that there are £65,000 to assist the farmers. I guess my question would be, how long do we have to wait until first milk Scottish operation is standing on its own two feet, or can we anticipate, over the next six months, whatever further approaches to the Scottish Government, asking it to step in and support the Scottish farmers who are part of the first milk co-operative? First, I welcome the support that's come from the Scottish Government. I think some of these discussions have been going on a long time, and it's great to see that support. I think the transportation support has been requested by this committee. Indeed, it seems that we're now treating dairy consistently with other parts of agriculture across the Highlands and Islands, so I think that's a good thing. I understand its impact on the public purse, but it's something that I think this committee is argued for. In terms of further help, I had a good meeting with Richard a couple of weeks ago, and we explained that we were developing very fast business plans, detailed business plans, and that we would be coming to him with requests for more help. That's not just financial, that's in terms of leadership and bringing people together, which I think the Scottish Government has also been doing very effectively. Richard, welcome that. There will be more requests for help, and I think that's the right thing, because I think that we need to work together. Thank you. Good morning, gentlemen. I'm a wee bit confused and just like a wee bit of clarification on the price issue, you mentioned that the price differential would be based on, I think, if I recollect what you said correctly, quality and value, but surely the one-pence reduction on bute was not stated to be because of the transport issues. That's not quality and value of the product. If you take that to its logical conclusion, you should have differential prices for all your producers, depending on how far they are from their point of delivery to creamaries and all the rest of it, because if it's a principle that holds good for bute, it must hold good for everybody. It's not a principle that I would agree with, but it's not a quality and value issue. It's purely a transport issue. I think that value in terms of the value that's delivered from that particular farm, the way that this work was done was backwards from the customer through down to depot to farm level, so there was a very complicated spreadsheet that had all of our declection depots, all of our customers and all of our farmers, and that approach was consistent across the country. In response to your question, it did take into account delivery mileage to each depot. It was returns minus cost of delivery, so that was part of the whole. You could take it to the ultimate conclusion with it. You take it down to every farm level, but you have to stop somewhere, and we stopped at depot level, and that was how we worked it out. I get maybe to get back to the point that Claudia Beamish was raising about the principles of a co-op, if they're going to mean anything. Something like transport costs are a really good example of something that should be equalised and absorbed across the whole organisation. I think that you'll find that even green co-ops, distance to the mill and, for example, are just part of the on-going business that's taken account, and maybe we'll just catch it up a bit in that. I'd like to follow up both my first question about price and Claudia Beamish's comments about the companies that are co-operative. If we were to go into stores and buy first milk, milk, would we know what was your milk and would we know what was produced by a co-operative or is it branded with other companies? Part of our business goes through brands, so products coming out of the Glenfield Creamery under the Lake District brand, for instance, are quark products, which are very good, and I encourage people to buy them, and are available in retail. A lot of our other product, particularly in cheese, goes through a business partner of ours, which is the Irish Dairy Board. We have a strategic partnership with them, and they're marketed under our own brands by them and also under their brands. So, do we do a nice to sell milk per se? We don't have a liquid offer. You're just supplying it to other people, will you? I'm supplying it to third parties. It goes back to your point about value and about what consumers are prepared to pay. If you look at the whole debate about fair trade movement, people pay a premium, and the issue about sourcing locally, people aren't necessarily paying more, but they are paying for a particular product. There's clearly an issue about the value of what you're producing as a co-operative, because you've got lots of farmers banded together trying to make their own business. It's just an observation from somebody who either buys co-operative milk, which is presumably somewhere on this list of prices. Or, I buy from two different farms, and when I go to the shop, I have a choice of which of the two local farms I buy from. So, as a consumer, I'm not really having an option to buy first milk here, am I? So, it's just an observation about going forward about the value of the product, which is partly about your brand and about the farmers that produce it. Nobody knows it's coming from buttes or all the different parts. This is part of the conversation. We had meetings on Kintar and Bute, as I said, and I think, to your point, these were truly co-operative. These were the whole local community there looking at real P&Ls and talking about how we developed our business together. That was a key topic of the discussion, because if you're making milk on Bute, the reality is that consumers are willing to pay for a premium provenance product. This is very high-quality milk, and people are willing to pay for it, either as milk or in another format. So, clearly, we discussed that as a possibility for us as a business, and we need to move that forward. Claudia Beamish Thank you, convener. I'd like to just explore a little bit more about the equity issue and the co-operatives. I'm obviously aware of the big challenges and the minus review that you highlighted. I still am a bit perplexed by how some of the comments you've made today and my understanding of the situation actually fits with the co-operative ethos. You're talking about the commercial value of milk. Obviously, you have to be a business, and you are a business, and we are going to go down like any other business, and although they need support at some times. Is it really the case that there's the mutual support that I would expect to see within a co-operative business when you're talking, Mike, about the volatility that can change one month and another month in a different area of Scotland or the UK and changes in value and niche markets and all that? I would expect to see, in any way, suggesting how you run the business going forward, but I would expect to see more, if I may say so, of an ethos of mutual support and sharing of risk. I think that the point that I would build off of that is the guarantee of our ability to provide better support to our members, better prices and also better support, is predicated on our commercial success and financial success, so the absence of that makes it very difficult to provide better levels of support to our farmers. All of that boils down at the end in a very difficult market to being more commercially successful, because, frankly, that gives us the resources to do a lot of things that we would like to do. I think that, if you look at Arla, Arla has got a really extended pedigree of being a co-operative, there's a huge amount of capital being built up in that business over generations and generations and there's a real ethos behind it. They've got such a scale now that they can do, as you suggest, an even price across Europe and that's great. We don't have that luxury at this moment in time. We're in a business that has its challenges. There's no point in pretending otherwise. We don't have all that strength of capital behind us that they have. I'd love to be able to do what Arla has done and maybe in time we'll get there, but at this moment in time we have to deal with the realities that they are in front of us and get through. What about the ethos of which I'm suggesting of perhaps consideration of more mutual support between members when there's a difference between what the commercial value is and the transportation costs and the volatility month by month that you're describing? I'd go back to the point. As I said, James, the Scottish co-operative, he was forceful in his point that he said that this is not a principle of co-operatives, that it is very common to pay on the value. Clearly it would be an alternative approach to pay everybody the same. We haven't had that before in our business and it's not our intent going forward. I do understand the point and some co-operatives could choose to do it that way, but it's not been our approach and it won't be going forward. I think a lot of this has been about the future. What do you think this committee, the Government, Scotland should do to support the producers and yourselves going forward? Apart from getting out of your way and letting you get on with what you want to do, which I suspect might be Mike's initial reaction, the question would be what do you think you now need and what predictions can you make if you can make any but where you think the situation will be in the next year to 18 months for all your Scottish fields but also for your company? I think that this is entirely helpful. The conversation that I had with Richard allows us to work together more effectively and galvanise all the stakeholders to deliver for the farmers. That has to be our priority, getting a better outcome for our farmers and we cannot do that alone. To your point around predictions, that's predicated on prices and what's happening in industry. I don't have a crystal ball. What I do have is we have a plan to work on the things that are within our control. I think that we've explained those, which is that we're going to get our costs down, we're going to operate more efficiently, we're going to engage our farmers with a clear line of sight about the different business units and those different business units have different challenges, very different challenges and we need to address them. Ultimately that means earning our way in the world and getting a better commercial return for our milking, whatever format it's in. I think what we need to do, and this is what I committed to you, I've committed it to the farmers, we've committed it as a board to Richard, is that we will develop some very clear business plans and say in order to become the international business that we want to be branded business, this is where we're going to be and this time we're going to say year one, year two, year three, the building blocks of that because businesses are not built overnight and we'll be very specific about the help we want as well. People have to live within security, they have to live with doubt but there's been an awful lot of this in here. I think, speaking insofar as I can for my constituents who are engaged in this business, what they want to hear from you, I think, is that FirstMilk believes that it has a future in Canterbury and is going to work very hard to make sure that that future does exist for the company and for the producers. Can you give them that assurance today? I can tell you, so I can't give any guarantees about what the market's going to look like in a year or two. What I can say, if I put my marketing hat on and I leverage some of my international experience, that Kintire and Bute and Arran have a fantastic product which consumers want both here in Scotland and around the world. Our task is to deliver that as quickly as we're on in the right way, under the right brands, with the right route to market and a premium price. So we have a fantastic asset, we have consumers that want that product here and around the world, our job is to build that bridge. Personally, I think it's doable and that we must do it in the coming years. That's helpful. I bought some mull of Kintire cheddar in Sainsbury's a couple of nights ago. I'm aware, obviously, that the Scottish dairy brand is going to be launched at the Royal Highland show. The thing that attracts me is that I know I can get a local product and that it's branded in that fashion. It's one amongst many, and unfortunately in the shops I go into, the promotion of Scottish brands have not been beneficial, I think, yet for what is a good product, as you say. Do you think really in the end that the production of cheese, for example, in Campbellton, Arran, et cetera, actually needs to be part of the co-operative structure that you've got to win that niche market? Does it need to be part of that? Clearly, I would want it to be part of First Milk. Clearly, that business model could succeed in different ways, but our intent is to make it successful as an organisation. Having said that, as we do the strategy review, we're open to all options that are in the best interests of our farmers. This is a co-operative and whatever is in the best interests of the farmers will be the best outcome for First Milk. Are you trying to expand the co-operative to have more farmers than it? No, not currently. I'll make a point around this. We haven't really talked much about the reasons behind the strategy of having our milk pools structured in a different way, but as we have aligned our farmers to our creameries, one of the things we need to do over time is concentrate our milk fields, make them more efficient, reduce our logistics costs and build the connection between those farmers and the creameries more clearly. As we see expansion opportunities in Campbelltown, so if you saw us essentially increasing the tonnage coming out of that, clearly we would need more milk. Changing this way of working, we've enabled that by giving an organisation that is very clear with milk fields associated with creameries, so that's the thinking behind it. To the extent that we would say now that we want to expand this and recruit people, it enables us to start recruiting. It's been very difficult for us as a business to recruit farmers. That's quite well known. Essentially, we've inherited farmers across the country and we haven't been able to, like many commercial organisations, go out and recruit farmers, as effectively as other organisations. On this point, or similar one, Sarah Boyack? Just the convener has prompted me to think what the contribution of Co-operative Development Scotland has been in terms of being of assistance moving forward, because you've obviously got a Scottish year of food and drink, the co-operative issue at the local level is quite important and it's obviously the ethos of the company and there's clearly lots of lessons to be learned from what's gone before, but there's your organisation, but there's also promoting co-operatives in the farming world. It's got to be more than just a good aspiration. There's some real business issues and it seems to me co-operative development Scotland either needs to be learning from that or helping you to move forward. SCOS has had a big role to play and continued to do. In terms of the working group that we have in Campbelltown, there's two members of SCOS sitting in that. Yeah, they've been a big help. They were involved in a scenario plan exercise, which is what you're alluding to in terms of other potential models out there. So, no, we take help wherever we can find it and we find SCOS a great organisation. Thank you, convener. My question is on a slightly different tack, but it's prompted by something that Mike said earlier, quite rightly, in pointing out that, as a co-operative, the producer members have a stake in the company. I represent Galloway in South West of Scotland, which is a hotbed of dairy production, as I'm sure you're aware. Over the years, as is almost inevitable in this field, a number of members of First Milk have moved on and left First Milk, handed in their notice for their contract, and moved to other processes, whatever it might be. As part of that contract, they were required to leave their capital investment in the company for five years. Some of my constituents came to me this year, they were due to be paid out on the 1st of April, I believe, some quite significant sums of money. For understandable reasons, First Milk has opted to utilise its right, as I understand it, under the terms of the contract to delay payment, delay repayment of the capital, which they would get nothing this year, I think, and a proportion over the next three years. I just want to know, and I think this may be difficult for you, what guarantee is there that they will get their repayment over the next three years, and does the company have the ability to further extend the period of that repayment if it's financially necessary to do so? Can I also ask if you're able to tell me what sort of size this total burden of debt, if I can call it that, is on First Milk as a company? The issue that you're talking about, as you well know, we deferred payment on our members, we asked them to contribute more capital to the business, and we were getting a fair bit of heat from them in terms of, look, we're paying more capital and these guys are taking the capital out of the business, so it was a hole in the bucket, as it were. And so it was a no-brainer in terms of the board, you know, to do that. Yeah, we can't give any guarantees with capital, you know, we can't give any guarantees with members' capital or, you know, it's part of the ongoing capital of the business and, you know, it's a substantial sum, I can't remember offhand just exactly what the figure is, but it's a substantial sum. But, you know, we just, it's one of these issues that we have to work with as a co-op. Other co-ops don't pay out if you were in Arla, for example, you wouldn't get your full capital out of the business, you only, you leave a percentage, but I think there's a little bit 30% of the capital. In the business it's just one of the ongoing things. The capital structure that we as a board have inherited says that we will pay out in full, and when a business is shrinking, that creates a challenge for us. There's no, you know, when there's no one going to duck that issue, it is an issue for the business. But it is what it is, and we just, we have to deal with it. But it would remain your intention? Yes, oh yeah, the intentional thing. All things being well to the... Yes, oh, no question, yeah. To repay on the terms that were agreed this year, or that were notified this year to these people. Yes, that's intention, yeah. Okay, thank you. I think we've reached a point where, you know, we're looking for a way forward. We've had some indications of that from you. We aren't entirely happy with the understanding, I think, of the various elements of where you're trying to retain capital in the business through the retention money, through the deferred payments, et cetera. And we understand obviously why that is. But, you know, I think we need to know from you what commitment there is by FirstMilk to make sure that there's actually going to be a Scottish arm of this in the way forward, because although there's variety within that, and you've inherited businesses to give you milk, you know, there must be some clarity from the point of view of people out there that they believe that FirstMilk is going to be able to deliver in the next period of time. We can't predict long into the future, but we're left wondering seriously whether FirstMilk's going to be a going concern for Scottish farmers in this next two or three years. We've had conversations across the country with different farmers explaining the market conditions and the turnaround plan that we've got. If FirstMilk is going to be successful, it will be successful, because we all work together in what is a very, very challenging market context. The request that I've got is that all of us work together for that outcome for the farmers. Okay, thank you very much. Mike Gallacher and Jim Baird, both of you, for enlightening us so far in this, I think we'll need to speak to you again sometime soon once we see how this starts to pan out, because we have a particular responsibility to make sure that there is a future for Scottish dairy produce, and if it's, as you say, something that is demanded by customers, then we'll want to see how best to deliver that. So thank you for your evidence, and that will conclude our meeting today. Just to tell everybody that at the next meeting of the committee, well, it concludes the public part of the meeting today. At our next meeting on the 3 June, we'll consider three pieces of modern legislation, take evidence and implementation of the CAP application IT system from stakeholders, and we'll also further consider petition PE 01547 on the conservation of wild salmon. And we now move into private. As agreed earlier, I close the public part of the meeting and request the public gallery to be cleared.