Mr. Denis Murphy:

I thank the Chairman for inviting us to attend today's meeting of the committee. We welcome the opportunity to make a submission on the important issues of the proposed code of conduct for the grocery goods sector, pricing and its impact on primary and secondary suppliers, support for local produce, and labelling. I am joined by the colleagues the Chairman announced, as well as by Mr. Walter Maloney, our distributor representative.

The National Milk Agency was established under the Milk (Regulation of Supply) Act 1994 to regulate the supply of milk for liquid consumption throughout the State. The governing body of the agency consists of an independent chairman appointed by the Minister for Agriculture, Food and the Marine and 13 ordinary members, of whom five producer members are directly elected by registered producers. The four processor members, two consumer members, one distributor member and one retailer member are all nominated by trade organisations and appointed by the Minister. The agency is a unique organisation, representative of all stakeholders in its sector. It is funded by a levy of 0.115 cent per litre on liquid milk purchases at farm and processor level and has a staff of five.

Domestic milk supplies to creameries and pasteurisers last year amounted to 5.2 billion litres, supplied by 18,000 dairy farmers who milked more than 1 million dairy cows. Domestic milk supplies are mainly based on grassland milk production. Milk production follows a highly seasonal production pattern, with almost 60% of supplies produced in the five summer months, that is, April to September, and just over 20% produced in the five winter months, namely, October to February. The manufacture of dairy products for export markets utilises more than 90% of domestic supplies, with less than 10% being utilised for processing for liquid consumption as fresh milk in the home market.

The fresh milk market is the largest consumer market for milk and milk products in the State and requires a year-round supply of more than 11 million litres of high quality fresh milk per week. Irish consumers love fresh milk and have the second highest per capita consumption in the European Union, more than double the European average. The role of the agency is to ensure the availability of this year-round domestic supply of fresh milk for consumers in the home market. Milk produced within the State cannot be sold or supplied for liquid consumption unless it has been purchased under a contract between a registered producer and a registered processor. Such a contract, if it is to be registered by the agency, must provide, in the opinion of the agency's members, adequate compensation for the producer for milk supplied under the contract, taking into account, particularly in the winter months, the economic cost of production of milk of suitable quality. Liquid milk producers registered with the agency are specialist producers who contract to supply milk to registered processors for 52 weeks of the year and whose premises have reached the required quality standards. Last year 1,869 registered liquid milk producers, or 10% of all milk producers, had registered contracts and supplied 15 processors.

A year-round supply of milk for liquid consumption gives rise to additional production costs in the winter months as cows producing milk over the winter, when pasture grazing is not available, require to be fed a high quality forage diet and supplementary protein feeds. Increased labour costs and a substantial management commitment are also a feature of winter milk production. Since the establishment of the agency, registered milk producers have received annual milk prices that were, on average, more than 4 cent per litre higher than the annual prices paid for seasonal milk supplies for manufacturing. Last year the average producer price for milk for processing for liquid consumption was 34 cent per litre, which represented an average differential of 3 cent per litre over the estimated average manufacturing price. Since last year more than 70% of milk supplies for liquid consumption have prices based on compositional manufacturing, plus a winter premium.

There has been no shortage of winter milk supplies for processing for liquid consumption. Even in the most recent prolonged winter period, the margin of safety of winter milk supplies by registered producers has been 21% over total consumption requirements, including imports of liquid milk. Given the bruising outturn for the 2012-13 winter period, however, many registered producers are likely to review their commitment to autumn calving in 2013-14. Accordingly, the above cover could be significantly reduced, particularly in the context of the abolition of EU milk quotas in April 2015.

The agency has no role in milk imports which are specifically excluded from its remit. Since 1995 milk imports into the State from Northern Ireland as packaged fresh milk or in bulk form, for processing and packing into liquid milk in the State, increased from zero to 145 million litres in 2012. Imported milk packaged for liquid consumption amounted to 86 million litres and bulk milk imported for packing for liquid consumption in the State amounted to 59 million litres. The graph in the document circulated to members illustrates that position. Imports of fresh milk now represent more than one in every 4 litres of fresh milk consumed in the State. However, these imports for liquid consumption comprise less than 30% of the total imports of 492 million litres of milk from Northern Ireland that were imported by creameries and pasteurisers and as packaged liquid milk last year.

The agency has no role in retail or wholesale milk prices. Since 1995 the annual average retail price of fresh milk in 1 litre packs has increased by 28 cent per litre, or 36%, to 105 cent per litre, while the liquid milk producer's price for 1 litre of milk has only increased by 1 cent per litre, or 3%.In 2012 the average producer price for liquid milk supplies was 34 cent per litre compared with 33 cent per litre in 1995. Even if the EU dairy premium payment of 3.65 cent per litre paid to eligible milk producers since 2004 is taken into consideration, the producer's return has increased by less than 5 cent per litre, or 18% of the increase in the retail milk price. Since 1998 producers' costs for liquid milk production have increased by approximately 9 cent per litre.

Since 1995 the fresh milk supply chain at retail, distribution, processor and producer levels has been changing and consolidating. At retail level, two multinational discount retailers have entered the market. The number of processors registered with the agency has fallen from 20 to 15, while the number of processing plants operated by registered processors for liquid milk has fallen from 30 to 16. Two major processors have sold their liquid milk businesses and one major processor has downsized its involvement in the business. The number of registered producers with contracts has fallen by 41% as more than 1,300 producers exited the fresh milk market. Retail multiples have now become the main distribution channel for fresh milk, with three multiple groups in a dominant position with an 80% share of the grocery market. In fact, five multiple retailers control 92% of the market.

Last September, following the adverse summer weather conditions which reduced the quality and quantity of conserved silage and seemed bound to increase the costs of winter feeding, the agency commissioned an expert report from Teagasc on the increases in the economic cost of milk production in the current EU milk year, particularly in the forthcoming winter months. The report concluded that while all milk producers would incur increased feed costs in 2012, specialist producers of milk for processing for liquid consumption would incur additional feed costs in excess of 4 cent per litre on their milk supplies during the winter months of October 2012 to February 2013. The agency issued a press release and advised producer and processor organisations, together with the major retailers, of the agency's concern that the exceptional increases in the production costs of fresh drinking milk in 2012 were making the production of winter milk supplies for the domestic fresh milk market unviable and unsustainable.

There was no market response to the agency's warning, nor was there a response to street protests by some liquid milk producers aimed at bringing public attention to the crisis relating to liquid milk farms. The agency was the regulator that barked last winter but nobody listened.

The prolonged winter conditions which obtained from 2012 into 2013 depleted winter fodder stocks, emptied silage pits and created an increased reliance on purchased feedstuffs. The cold, wet spring of 2013 and the lack of normal grass growth to date to allow for the grazing of cows has resulted in the current national fodder crisis. The Government intervened in April as the crisis heightened in order to subsidise the transport costs relating to the unprecedented importation of fodder supplies from the UK and France. Serious cashflow problems have now emerged on all grassland enterprises but particularly on liquid milk farms. The confidence of registered milk producers in the all-year-round supply model for liquid milk for the domestic market has been shattered by the increased costs incurred in winter milk production in 2012-2013 and by the absence of any market response to these increases. The future of the all-year-round milk supply model for the domestic liquid milk market is now vulnerable and has reached a tipping point, especially as liquid milk producers review their returns for 2012-2013 relative to those from seasonal milk production for manufacturing and in the context of the opportunity to increase milk output for export markets which will arise following the abolition of EU milk quotas in April 2015. In the absence of adequate price incentives and encouragement for winter milk production for the future, many liquid milk producers are likely to switch their business models to seasonal milk production.

I will now ask Dr. Ó Céidigh, our chief executive, to present the agency's views on the draft code of conduct for the grocery food sector.