our customers, the dairy trade. It is well known that under the Milk Marketing Act we have certain restrictions placed on our negotiations. It means that we, the Boards, have the statutory management of the entire milk supply, but likewise, through the Joint Committees mechanism where there is only one vote on each side and no casting vote without going to arbitration, the Dairy Trade is the sole buyer.

So, in effect, we have a monopoly supplier and a monopoly buyer. Small wonder that we cannot always agree, especially as we are being reintroduced to the arena after an absence of 40 years in the liquid milk sector.

In spite of all these problems, am I despondent? The answer is definitely no! I believe that we will see many rationali-

zations, both on the producers’ side and in the trade, but we have a major industry here which we cannot allow to decline: readjust, yes.

The way ahead for milk producers will not be smooth, and I would say that this applies to the whole of agriculture. Therefore it no doubt follows that this will be reflected in the dairy trade.

The next decade will be different from the last decade, but if we are prepared to accept that there is a difference, then I see no reason why the outlook for the future should not be viewed, if not through rose-coloured spectacles, then at least with a degree of optimism.

Prospects for the United Kingdom dairy trade G A WILKINSON Chairman, Creamery Proprietors’ Association; and Trade Relations Director, Express Dairy UK Ltd, Victoria Road, Ruislip, Middlesex

Several factors at present influence the dairy trade. The Milk Marketing Scheme within the UK conflicts with normal EEC arrangements and is a source of friction; the change i,u the price support system, and particularly the differences between the systems for butter and powder, and for cheese, has caused difficulties; the original balance between buyers and sellers in price negotiation has been disturbed; and the market is changing rapidly with increases in shop cartoned-milk sales and in the demand for reduced-fat milks. Surplus of milk production within the EEC is likely to continue, and the effect of this on market prices will be transferred to the UK via imports. Ultimate& producer milk prices will have to be contemplated in relation to the development of new products to extend the market. Health considerations must be taken into account, but it is important that the quality and purity connotations of dairy products are not eroded.

The main theme of this conference is ‘Europe - a threat or a challenge?’ To me, an ex-Eurocrat and a convinced proponent of the further integration of the European Community, this title has an unhealthy ring to it. It implies that Europe is something external to the United Kingdom and is to be seen as either a threat from which we need to protect ourselves, or as something essentially alien which is challenging us. It is, of course, unfortunately the case that this is indeed largely how the EEC has been perceived in the United Kingdom since 1973. But we must learn to see ourselves and our economy as part of the larger entity. If we d o this, then it is no longer ‘Europe’ which is a threat or a challenge but the specific issues of production, distribution and marketing in a European context which any industry has to manage.

The European Community is the sea in which we have to swim or be left aimlessly flapping around on the sea shore.

The theme of this paper is ‘Prospects for the United Kingdom dairy trade’; it follows, and implies a contrast with, Andrew Howie’s paper on ‘Prospects for United Kingdom milk producers’. While it will always be the case that there will be some area of trade-off between the prospects of sellers and buyers, nevertheless within a properly balanced framework the prospects for both can be good.

Predicting the future is always a hazardous task, and I will restrict myself to considering those areas in which the European dimension is of the most significance. The shape of things to come is usually strongly influenced by the shape of things past and present, and so I shall try to pick out from the

very great number of issues currently facing the industry those which I believe will be of most importance in the coming years. I will focus in particular on those issues in which the institutional arrangements of this country and of the European Community have the greatest bearing.

It would be unrealistic not to begin with our current national milk marketing arrangements.

The Milk MarkI2ting Scheme was introduced out of the circumstances, economic and political, of the inter-war years. It was based upon the intention of finding a balance between the interests of the producer as a seller of raw material and of the processor or nianufacturer as buyer. The producer was provided with a countervailing power to that of the dairy companies by the formation of Milk Marketing Boards. These had both the sole right and the obligation to buy from producers; and thc sole right to sell milk to the trade. The trade, though it may not have perceived it a t the time, received the benefits of an assured supply of milk, of negotiations for its prime raw material with one organization only, of national arrangements for the distribution of milk and an understanding that processing and manufacture would remain in its hands. Individual companies, like the individual milk producer, forewent any comparative advantages that might have been used, of location and size.

Like all institutionalized arrangements, those of the Milk Marketing Scheme developed over the following 40 years to meet new circumstances as they arose and came to encompass a quite complex set of agreements, rules and procedures.

Journal of the Society of Dairy Technology, YoL 39. No. 1. January 1986 19

In the years since 1973, there have been many changes which have modified some of the basic balances within the arrange- ments. The extent to which these balances are restored will be of considerable importance in assessing the prospects of the trade.

Firstly, on accession to the Community, and particularly since 1978, the Scheme became an exception to the normal CAP arrangements. Within the Community it is an anomaly, notwithstanding that Regulation 1421 /78 provides that any Member State may make similar arrangements if the basic criteria are fulfilled. The difficulty is that the basic criteria were designed, and were seen to be designed, solely to fit the circumstances of the United Kingdom. Having an exception means in Community terms that there is constant exposure to pressures from commercial interests elsewhere, to be treated according to quite different rules. It also means that in any Community negotiation, most of the negotiating capital is spent in fending off demands to remove the anomaly. Very rarely are the negotiators able to move forward to new ground. It is partly for this reason that UK negotiations on the CAP over the years have been so signally unsuccessful. Much of the negotiating capital has been spent defending one ‘anomaly’ after another: the beef premium, the consumer butter subsidy, the Milk Marketing Scheme, access for New Zealand butter. We, of course, see these things as rational and desirable; elsewhere in the Community they are treated as hostages.

Secondly, the changed support system from deficiency payments to intervention has resulted in a spectacular increase in milk supply, which, combined with the decline in liquid milk consumption, has greatly shifted the proportion of milk going to manufacture. The increased supply of milk has been a phenomenon throughout the EEC and, together with the elimination of protective barriers around the UK market, has led to intense competitive pressures from imports in virtually all the dairy market sectors in the United Kingdom.

The relationship between, on the one hand, the butter and skimmed milk powder markets, supported by the political decisions of Ministers, and on the other the cheese market, open to competition, has proved to be a constant source of friction between sellers of milk and buyers. The seller expects to be able to maximize his milk price by taking advantage of the opportunities offered by intervention. The buyer wishes to be able to sell into commercial markets profitably. The introduction of quotas and the beginning of a more restrictive approach to milk support pricing have meant that these problems, latent while milk supply was growing rapidly, have become very real issues. The situation is rendered even more difficult when the milk pricing mechanisms devised in the UK to cope with the real differences between intervention and commercial markets are seized as hostages by commercial interests in other Member States and by the Commission itself.

Thirdly, the original balance within the Scheme of sellers negotiating with buyers has been dramatically altered. There are now on one side of the negotiating table both sellers and buyers and, on the other side, buyers. This has led t o a confusion of roles and to distortions in the normal process of negotiation and competition. This situation is inherently unstable and can only be harmful to the investment on which any industry depends. The restoration of a balanced and competitively equitable framework will be an important component of the industry’s future.

Fourthly, the market has changed rapidly and continues to d o so: doorstep milk is giving ground to carton milk; low-fat products are increasing rapidly; the range of fresh products is expanding continuously; product distribution systems are being transformed; the multiples have become an ever more dominant force in retail food sales; the balance between brands and own label has shifted dramatically.

All these factors, and many more besides, have emphasized the differences between companies within the trade and has made each one ever more aware of the need to seek its own markets and its own fortunes. The corporatism of the Milk

Scheme inhibits this process and sets up tensions between large companies and small, specialist and multi-product, liquid and manufacturing. The trade in particular will have to learn how to cope with this greater diversity of interest within the constraints of the Milk Scheme. The answer will, I think, have to lie in separating out the interest groups within the industry. Nevertheless, I see this as a real problem: how to reconcile this greater diversity with the need to ensure equity between buyers of milk, and to ensure that the 1930s are not reversed, with a weak and divided trade negotiating with a unitary Milk Board.

I have dwelt on these factors because I believe that they are important to an understanding of the strains that are widely felt a t present on the institutional arrangements of the dairy industry. They are not transient factors but will be important in guiding the shape of the industry in the future. It is clear to me that unless ways can be found of ensuring that the strains can be released, then there will be more radical changes than any of us would wish. We shall need to find the means to release our hostages from the EEC and not to provide any more; we shall need to ensure that our pricing and allocation arrangements d o give priority to commercial market needs; the basic relationship between sellers and buyers must be restored; and we must seek to maximize the scope for freedom of action within the Milk Marketing Scheme.

These are elements which are largely within our national control. If we have the will and the skill, then it is possible to influence the shape of things to come to our benefit.

In other areas it is much more difficult to have more than a restricted impact on the development of the industry; it is important to attempt to identify what is inevitable and what is, as it were, evitable.

Nowhere is this more important than in those areas where market or commercial trends come up against legal and institutional constraints. Increasingly, this frontier between the institutional and the Commercial is located at the European level, and the extent to which this frontier will shift will be determined in the context of the European Community institutions and of the European market. We see this every day in the supply of milk, in milk pricing, in the technical conditions of production, of import and of distribution, in matters monetary, in the composition of our products themselves. The prospects for the future of the trade in the United Kingdom will depend in large part on its success in identifying the frontier areas, and in assessing correctly the strength of the forces on either side of it. Business, like politics, is the art of the possible: too often our own industry has failed to recognize the reality and inevitability of the changes that are actually taking place around it. It is much easier to alter the direction of a moving vehicle from behind the steering wheel than by standing in its path.

Let me turn to some of these frontier areas. Firstly, milk pricing and supply. I hope it will not be thought that I am trespassing on ground covered by Andrew Howie. Too often issues of EEC policy on milk pricing and milk supply are seen by Government primarily as of concern to the farming community. Quotas have, of course, been a traumatic experience for producers after a long period of unconstrained growth of production. Nevertheless, there are also very major effects on existing investment and employment in manufac- turing industry. If a creamery closes as a result of quotas, what alternative prospect d o those who work in it have, located as they will usually be in areas of limited alternative employment? Can they apply for Government benefits under the outgoers scheme? What compensation is there for the loss of the investment itself?

The EEC farm price settlement just concluded has, I believe, shown that the process of change will continue to be as it has been in the past, a gradual one so far as changes in the CAP are concerned. The refusal of Germany, one of the most vigorous supporters last year of reduction in the budgetary costs of the CAP, to permit a reduction of just 0.9% in the cereal target prices, despite previous undertakings,

20 Journal of the Society of Dairy Technology. Vol. 39, No. I , Januar.v 1986

demonstrates the seriousness with which the social and political aspects of the CAP are treated. It is not, on this basis, to be expected that there will in the near future be any dramatic change in the nature or level of the basic support mechanisms. The analysis currently being undertaken within the European Commission under the general title ‘perspectives on the CAP’ will result in the publication of various ‘option’ papers later in the summer. These will, I expect, address a number of important issues in respect of environmental matters, of social policy and of export policy; they may also set a long-term direction for the development of the CAP support system, with a greater use of direct income aids. But I think that support price levels will continue over the medium term to be only gradually eroded in real price terms. If quotas are maintained in the milk sector - and I personally do not believe that this is a foregone conclusion - then volume growth will be limited despite continuing yield increases. Unless the Commission can persuade the Council of Ministers to agree to a system of buying-in of quotas, I think it improbable that present reference quantities will be further reduced. This means that at the level of the EEC there will continue to be a surplus of supply over demand for a considerable period to come. Within the United Kingdom, the continuation of the transfer of milk from the liquid sector to the manufacturing sector, and the additional fat supplies from the growth of demand for low fat products, will erode the otherwise serious impact of quotas on the levels of capacity utilization in the manufacturing sector.

Two issues of consequence will continue to face the United Kingdom: firstly, the continued impact on market prices of surplus milk production in the Community as a whole, being transferred via imports to the United Kingdom market. This effect will continue to be significant in the cheddar market, where the effect of the additional milk supplies allocated to Ireland will be of particular consequence, but also in other base product markets. In the liquid milk market, it is probable, despite the lack of impact made by imports of UHT milk since the removal of import restrictions, that imports of UHT and of pasteurized milk will come to influence United Kingdom market prices. The speed with which this will happen, and the extent of its impact, will depend largely upon whether any of the multiple chains are prepared to move away from their present preference for the domestic product.

Secondly, the extent to which the pricing mechanism negotiated in the Joint Committees will continue to permit market forces to be passed through to the producer milk price. This is a hard truth for milk producers to accept: that in the end it is the producer milk price which will have to bear the consequence of surplus milk production if the dairy industry of this country is to maintain a significant share of its domestic market. That is not to say that there is not a critical role for the trade to play in improved efficiency of its processes, in the development of new products and in the aggressive marketing of these products.

Quite apart from this general principle, which has to continue to form the basis of our milk price negotiations, I think that it will be necessary to give careful thought to a number of other aspects of our milk pricing arrangements. I hope that the United Kingdom Government will win the European Court case on multiple pricing early next year, and I think that there is at least reasonable cause for optimism. Nevertheless, should it be lost, then the industry will have to consider with the Government how the EEC regulations governing pricing arrangements under the Scheme can be modified to put the United Kingdom back onto an equal competitive footing with the dairy industries of other Member States. This would be all the more critical if the Commission, under further pressure from commercial interests in other Member States, were to apply the same logic to other products, such as cream, cheese and liquid milk, as it has to butter, skimmed milk and exports.

However, the steady growth of a far wider range of dairy products than we have in the past been accustomed to produce in this country, by an increasing number and variety of specialist and multi-product companies, will also cause problems for milk pricing. Firstly, it will be increasingly difficult to define appropriate separate categories for the different product prices; secondly, companies with new products will wish to know in advance the price which they will have to pay for the milk, but will at the same time be increasingly reluctant to have the nature and prospects of their new product discussed within the pricing committees of the Joint Committee. ‘Thirdly, and perhaps most important, the industry will need to consider whether new product develop- ment is not being inhibited by the present system under which a significant part of any value added is automatically passed back to the producer.

While I would not wish to overemphasize such matters of milk pricing and supply, I do believe that they are of central importance, and they will increasingly be influenced by the EEC institutions. Their resolution will to a significant degree determine the extent to which the UK dairy industry will keep its share of present product markets, and develop a dominant share of new product markets. The aim must once again be to maximize the freedom of the different components of the industry to act within the corporatist tendencies of the Milk Marketing Scheme.

There is one furlher set of issues that I would wish to touch on, and which Rill be important in deciding the trade’s prospects. These are the interrelated matters of health, nutritional labelling, product standards and composite dairy and vegetable fat products. These are difficult and intricate matters involving technical considerations, marketing techniques, legal and regulatory controls and political negotiations. In my view, the industry needs to pay more attention to considering the interrelationships between these matters.

We are all aware of the barrage of adverse comment that has been directed at fats in general and at dairy fats in particular. This has been growing for some time, was stimulated by the COMA report and will be sustained for some time to come. As a result of these developments, consumers have sought, and the dairy industry has provided, a remarkable variety of low- fat milks and products. No doubt the growth of skimmed and semi-skimmed milks will move rapidly towards a 25% share of the market; low-fat yogurts and cheeses are growing rapidly; perhaps we shall even see the development of low-fat butter. But at the same time, milk whatever its fat content, is perceived as a healthy drink; cream is a luxury and desirable product; cheese is not perceived as a ‘fat’ product.

These perceptions, which have grown up over many years, are very important, and in developing and promoting low-fat products the industry will d o itself serious long term damage if it does this by implying that it accepts that dairy Fats are ‘not good for you’. In health conscious Germany, butter remains a most important cooking fat, competing with the vegetable oils. Butter consumption in this country is now the lowest in Europe other than the Netherlands and Italy. We should, I think, look to develop high and low fat products as complementary, both being ‘good for you’ and both being widely available. Above all, dairy products must not be isolated in the requirements placed upon them in terms of nutritional information. This is an area where the development of EEC legislation could be of considerable help, since I believe that at the European level there is a much more balanced view of these issues. We have come to the fat issue all in a rush, unlike elsewhere in Europe where the industry response has been developed over many years. In this context be wary of Codes of Practice. These are, on the face of it, a common sense approach to providing both common standards and flexibility which legislation lacks. Nevertheless, imported products are not bound by National Codes of Practice, nor

Journal of the Society of Dairy Technology. Vol. 39, No. I , Januarv 1986 21

indeed by legislation except in the rather specific areas of public health requirements.

Closely linked to the preservation of a positive perception of all dairy products of whatever fat content is the growing development of products of mixed dairy and vegetable fats, marketed under names or slogans which trade on the positive image of pure dairy products. I am, of course, fully aware of the argument which says that any method of increasing the sale of dairy fats is worth pursuing. I do not accept this and I remain unconvinced that these products are not very largely substitutes. But the more important point is that once again we are in danger of putting across the message to the consumer that, in diluting the dairy content of the product, it is being improved. Slogans such as ‘the real alternative t o cream’ are to be expected from companies with no interest in the dairy industry: what is more difficult to understand is the move by dairy companies and the Milk Marketing Board to follow and indeed outdo them. Again in this matter it is important to consider the European context. Many countries actually prohibit the manufacture of mixed products. Indeed, Luxembourg is currently before the European Court of Justice for refusing to permit the sale of mixed products from other Member States on its territory. On the other hand, the Council has asked the European Commission in the recent farm price

Experiences and views from a H TORSSELL Chief Executive, Stockholm Division of Arla, Box 23

negotiations to submit a report on the whole issue, and this could lead to renewed legislative proposals from the Commission next year.

I d o think that of all the marketing issues which face the industry, it is these which will have the greatest impact on the prospects for the trade in coming years. The consumer’s perception of an industry and its products is built up slowly over many years. Once undermined it will be difficult to recover. What would be the ultimate irony would be that imported European dairy products should come to be distinguished from our own by their connotations of purity, luxury and desirability.

The prospects for the United Kingdom dairy trade are good, bad or indifferent, depending entirely on the way in which those who work in it and lead it deal with the type of issues that I have considered, albeit briefly. If we fail to resolve quickly the problems within the scheme, then the resulting distortions can only cause great uncertainty for the future. Unless we address the supply and pricing issues we shall be undermined by imported competition in our own markets. Unless we maintain the integrity of our dairy products, our customers will abandon us.

I consider that there is enough expertise and experience, enough leadership and enough goodwill to ensure that the prospects are good.

non-EEC country

49, 104 35 Stockholm, Sweden

Theproblems of the Swedish dairy industry are compared with those of fhe EEC. In spite of a government subsidy on fluid milk, there is a continuing slight decrease in milk consumption. Present overproduction is about 8%. To reduce this, a two-price system of payment will be introduced in 198.5, combined with a retirement scheme for milk producers. Development of new products, some of which have been taken up outside Sweden, have helped to maintain consumption. Problems exist with imports of cheese, milk powders and fruit yogurts from the EEC and with exports in competition with the EEC. Some observations are made on the situations of Norway and Finland.

The title of my talk might give the impression that I am going to deliver an official Swedish statement. I therefore kindly ask you to accept that I am here just as a private person.

I was pleased to accept this invitation as it indicates a continuing interest from your side on what is going on in Sweden in general and within Arla in particular. Last June I had the pleasure of welcoming many of you to our new consumption milk dairy Kallhall, north of Stockholm. Consequently, many of you already are well informed of the activities of the Arla Group. However, I think it is appropriate to start by giving you some general information on the company where I am employed.

All Swedish milk producers are members of dairy cooperatives, which operate from one to several dairies. There are some private dairies but they are so few and so small that they are merely the exceptions to the rule. Arla is by far the largest dairy cooperative - in fact it receives 60% of ail milk produced in Sweden. In principle, each dairy cooperative is responsible for the marketing and distribution of fluid milk products and butter within the area from which it gets its milk.

You might, however, immediately realize that many of the 24 other Swedish cooperatives are too small to be able to fulfil such a task. They just produce cheese or milk powder. Thus they have negotiated with a neighbouring dairy company to produce and distribute the products to be sold on their local markets. In some cases Arla is the company to d o this job. Arla has three wholly owned subsidiary companies, marketing their products all over Sweden and to some extent also exporting: Semper for baby food, powdered products and soft cheeses; Frodinge for dessert products; Swedish Milksugar for lactose, hydrolysed lactose, chocolate and jams (mainly to the ice cream industry). The dominating ice cream company, Glace-Bolaget, is 60% owned by Arla and 40% by Unilever. The turnover of the Arla Group is some f800 million, putting Arla somewhere around 350 on Fortune’s list of companies outside the United States.

For its daily operations Arla is divided into nine regional divisions and I am in charge of the Stockholm division. Thus I am responsible for supplying 1.5 million Swedes with their daily requirements of fluid dairy products.

2 2 Journal of the Society of Dairy Technology, Vol. 39. lVo. I , Januarj 1986