Dr. Muiris Ó Céidigh:

I hope I can remember all of the questions. In reply to the last question, it is a recent development that milk is being acquired from producers in the South and processed in the North before coming back as an import into the South in packaged form. It is a recent development and has not been taking place to date. It will take place going forward. The impact is that now we have people purchasing milk for liquid production who will not come within the remit of the agency. They will be importing milk acquired in the South from Northern Ireland after it has been processed. The only thing we can say is that the compensation to the producer - I do not wish to comment on any one processor - must be matched in some way with the others in the Republic. People watch how their payments match up against other processors.

At the core of most of the questions is what is happening post quota. Deputy Ó Cuív asked about this. There will be volatility, not just in liquid milk prices but in dairy prices. Charts in the annual report show that, in recent times, the compensation mechanism was 75%, and this was a fixed price that was not linked to composition. The world began to change in the past three years, and most prices for liquid milk producers are based on the world manufacturing price as reflected in the manufacturing price of other producers plus a premium. The world price will fluctuate. At the meeting we attended last week and on the news quite recently, it was suggested the dairy prices worldwide are under some pressure. They will go up and down from April, because liquid milk producers are linked to those prices. Our job is to consider the adequacy of compensation given the economic cost of production, and this becomes more central in the environment created by that. The adequacy of compensation and the premium paid, if maintained, reinforce the long-term commitment of liquid milk producers, but this also takes on the role of something that must be adjusted to reflect changes in the world price for milk if it is to be passed on as a base price as liquid milk producers. What was legislated for in 1995 has gained a second significance given the removal of quotas and the link to the compositional nature of milk.

This also relates to the question raised by Deputy Ó Cuív concerning the table showing prices. The price we are monitoring has moved from whole milk to skimmed milk and low-fat. A retail price for milk is very difficult to get as an exact figure. It is a poignant figure from the point of view of everyone in the industry in respect of the percentage everyone is getting. Initially, when we started this table in 1996, we thought the best figure was the CSO figure. That was fine until the CSO decided to stop reporting the price of 1 litre of full-fat milk and moved to low-fat milk. In an attempt to maintain consistency, we note that it is the price given by the CSO for the past two years for low-fat milk and we make a broad assumption that the price of one litre of low-fat milk is the same as the price of full-fat milk, using that as a basis for comparison. That is the reason for the adjustment in the statistics, which is not very satisfactory. We thought about various ways of dealing with it, but there must be some degree of acceptance by all players. The CSO is the independent organisation that we reached for.

Another question concerned the compensation payable to producers and the percentage thereof. In respect of low-fat milk, the cream was being used and sold separately. That is true, and I remember doing a project with Avonmore in this regard. Avonmore Super Milk was being launched at the time and there was quite a degree of money to be made from the fact that the milk was purchased at a flat price and the cream was taken from it to make low-fat milk. It was being resold for dessert on a Sunday but had already been paid for. That was the argument made. It is true, but it is now going away because most of the prices are moving towards a compositional-based pricing mechanism. Farmers are paid according to the constituents. It applies in most places but not everywhere.

With regard to the introduction of quota, there will be an increase in manufacturing milk and an opportunity cost to the production of liquid milk. There is the possibility of producing as much as one can, and it is up to the producers to choose whether to stay in liquid milk. That is a third factor that goes into the adequacy of compensation idea.

Adequacy of compensation must now be considered not only in regard to the economic cost of winter milk production, but also in regard to providing some buffering against the volatility of world prices with which we are now linked. The compositional nature of the industry must be recognised also.

Northern Ireland represents a sizeable proportion of the market. In the United Kingdom, milk is largely seen as a commodity and there is little branded milk to be seen there. Here, there is a much greater loyalty to brands. This is important here and the brand is part of added value from the point of view of consumers here. People like to know where their milk comes from and who has produced it. That is reflected in the fact that the Avonmore brand is up there with Coca Cola here in terms of brand recognition. The public tends to be loyal to brands.

A question has arisen out of all of this as to why we need to have a national milk agency now that all of this milk will be produced. The answer is that if we want to maintain confidence and the desire to be in the liquid milk business, the concept of adequacy of compensation, which the Oireachtas introduced, has three important aspects that must be borne in mind. In regard to liquid milk producers, the agency is where these are brought to mind.

The issues of the National Dairy Council, NDC, logo and own-label and branded milk were raised. It is important to realise that we are in an EU environment in terms of movement of capital and freedom of movement of goods. In the agricultural sector in general - not just the liquid milk sector - the freedom of movement of goods is significant for Irish farming. Products must be able to move to their markets throughout Europe. It is perfectly acceptable therefore that milk moves between Northern and Southern Ireland. The NDC logo came about in response to consumer need and desire when dealing with a fresh product. I mentioned loyalty to local brands and the concept of Irish milk, and the NDC responded to that. The logo is also a response to the background issue of traceability and the desire to know from where one's milk comes, a desire felt throughout the agricultural sector. Consumers have responded to the logo and it is important to producers and the industry generally. We are not alone in having a logo. People would be aware of the little red tractor label also. Obviously, the State cannot get involved in that because of the freedom of movement of goods. The NDC, as a private organisation, took on the work of developing the logo and both producers and consumers see it as a benefit.

The issue of transparency of prices was also raised. If committee members read this document from cover to cover, they will not find any reference to the wholesale price of milk or to what the multiples pay for milk. This information is missing. If I or the chief executive was asked directly or personally whether we thought it would be good to have transparency in that regard, I would say "Yes", because that would help us understand better what is going on. There are significant pressures associated with a concentrated retail market. If one must rely on three outlets for the control of 70% of the retail market and if one has a spread of products, such as cheese or other dairy products, one might negotiate on a single product or across the board.

In this regard, we have been particularly interested in the grocery code which is now being made introduced in general terms in legislation. I believe a statutory instrument will flesh this out and it is important in regard to how producers and customers are treated. From the perspective of producers, the stronger this code the better, because their confidence has already been undermined. As Deputy Deering said, if producers see milk being sold below cost or close to that, this undermines their confidence, particularly in the context of a quota environment, where if milk being sold is a loss leader, this will not engender confidence to remain in the liquid milk business. There is an opportunity cost to liquid milk production in that one must commit to that because it is a very different and specialised method of production when one chooses not to go for seasonal production. It is up to the processors and the retail market to respond on this issue.

Mr. Murphy will add some further comments now.