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Stackyard News Jul 06

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OFT clarifies approach to dairy processing consolidation

Industry perception is hindering further consolidation of the dairy sector required to improve its competitiveness, efficiency and marketing clout, not the Office of Fair Trading, according to its director of mergers, Simon Pritchard.

dairy heifers

However other issues regarding the current demise of the dairy sector are Parliament’s responsibility and are out side the OFT’s narrow remit of competition policy, he said.

“The industry’s perception that the OFT is opposed to vertical integration, the merger between farmer co-ops and processors, is simply not true,” he said addressing members of the All Party Parliamentary Group for Dairy Farmers in the House of Commons. “That perception goes back to the Monopoly and Mergers Commission’s decision in 1999 against Milk Marque which was focused on the co-op’s market power. The case was not a precedent,” he said.

“Very few mergers raise competition issues and we only intervene in the select minorities. In fact, the dairy sector is not subject to stronger scrutiny than any other. Furthermore, there would be no political opposition to the greater formation of co-ops, for example, enlargement of existing co-ops or formation of new ones,” he said. Since 1996, the OFT had cleared 16 proposed mergers out of the 19 examined.

James Paice MP expressed frustration that the OFT worked within the constraints of a legal framework which was less stringent in mainland Europe. The OFT agreed and cited for example in Denmark, Arla had secured an 80% market share, while the New Zealand processing sector was dominated by Fonterra, however the OFT’s objective was ‘to make markets work for consumers and the UK economy’.

Sir Nicholas Winterton MP argued, along with other MPs, that current dairy prices meant dairy farming was no longer sustainable. Simon Pritchard indicated the OFT was ‘thoroughly aware’ of the current demise of dairy farming. However in response to a question from Geoffrey Cox MP on introducing a crisis cartel, he said the OFT was ‘unaware of any dispensation’. “We would not want to see a huge relaxation of competitive pressure within the industry, because that would eventually lead to milk price increases. Milk is a commodity product purchased by all, including very poor people.”

Geoffrey Cox also called for the introduction of a national interest test to protect UK dairy farmers and prevent production being driven overseas. “Public interest issues are often political and referred to the Secretary of State for Trade and Industry to make judgement,” said Mr Pritchard.

He added: “UK merger control and competition law apply to any sector without special provision and exemptions, but periodically industries find themselves in dire straits, and we respect the will of Parliament to decide something that is in the best interest of the consumer economy.”

APPG for Dairy Farmers’ secretariat, the Royal Association of British Dairy Farmers’ chairman Tim Brigstocke commented: “We were pleased to have the opportunity to provide a full and frank discussion between the OFT, MPs and peers and to hear that the OFT does not appear to be a barrier to further consolidation in particular, to vertical mergers. We are now aware that for any other structural changes to be made within the industry, they would have to be agreed by Parliament.”

APPG for Dairy Farmers’ chairman, Daniel Kawczynski added: “This group has certainly taken off and is going from strength to strength. We will be making sure that the Government is fully aware that there is a problem here. MPs are armed with considerable knowledge of the matter now that we have met with the OFT and are determined that Defra provides adequate solutions. I will be meeting shortly with the Agriculture Minister, Lord Rooker to raise some of the issues discussed at the meeting and also with the Secretary of State for Environment Food and Rural Affairs, David Miliband. I intend to make sure that the problems facing dairy farmers are high on their agenda.”

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