Andrew Doyle (Wicklow, Fine Gael)
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I welcome Mr. Denis Murphy, chairman, and Dr. Muiris Ó Céidigh, chief executive officer, from the National Milk Agency and thank them for coming before the joint committee to discuss the agency's annual report for 2013.

Before we begin, on the matter of privilege, I bring to the witnesses' attention that they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence in regard to a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I understand that both witnesses wish to speak. Does Mr. Murphy wish to make the opening statement?

Dr. Denis Murphy:

I will offer a general overview, if I may.

Andrew Doyle (Wicklow, Fine Gael)
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Absolutely.

Dr. Denis Murphy:

I thank the Chairman and members of the joint committee for giving us an opportunity to present the annual report of the National Milk Agency for 2013 and to discuss its contents. I will provide a brief general overview of the liquid milk sector in 2013, and the agency's chief executive, Dr. Muiris Ó Céidigh, will address in greater detail the contents of the annual report.

The first slide provides an overview of the Irish dairy sector in 2013. That was a record year despite adverse spring weather conditions and a fodder crisis. Domestic milk supplies amounted to 5.42 million litres, an increase of 4% on 2012.

It was a record year in terms of milk supply and composition. Some 92% of the domestic milk supply is used in manufacturing milk for dairy products, while 8% is consumed in the domestic liquid milk market. On the price side, the average producer price for manufacturing milk last year was the highest on record, representing an increase on the previous year of 7 cent per litre, or 22%.
The consumption of fresh milk in the domestic market is 563 million litres, an increase of 0.4% on 2012. It is the largest consumer market for milk and milk products in the State. The per capitaconsumption of 0.34 litres per day gives Ireland the second highest per capitaconsumption of liquid milk in the EU. Some 74% of the market is supplied from domestic supplies, while 26% is supplied from imported milk in package and bulk form, imported from Northern Ireland and processed in the State. Retailers distribute 79% of all fresh milk, catering distributes 11% and doorstep deliveries comprise about 10%. On the retail side, about 55% of retail milk is own-label milk.
The average retail price of fresh milk in 2013 was 94 cent per litre, an increase of 1 cent per litre on 2012. The average producer price for fresh liquid milk was 39 cent per litre, an increase of 5 cent per litre on 2012. It can be noted that even though the retail price decreased, the producer price increased. That is because the producer price for liquid milk is now mainly linked to monthly manufacturing prices for export, plus a winter premium. The differential, however, between the average producer price for liquid milk and the producer price for manufacturing milk was less than 1 cent per litre, compared to a differential average over the past 19 years of 4 cent per litre.
The structure of the domestic fresh milk market in 2013 is highly concentrated at retailer, processor and producer level. The five largest retail groups have a market share of 93%, and the three largest have a market share of 79%. Retailers have about a 70% share of the milk market. The five largest processors produce 91% of registered milk supplies, and of the 581 largest producers, 30% of the total number of registered producers supply 60% of registered milk supplies.
I refer to registered contracts and registered supplies in 2012 and 2013. There were 1,883 registered producers with contracts in the State, representing 10% of all milk producers. They supply 16% of domestic milk supplies. The total milk supply from this source was 830 million litres for the year, of which 50% was for the liquid market and 45% was for manufacture. From an agency point of view, the critical thing is the cover for domestic liquid milk consumption in the winter period; cover in the five prescribed months in 2012 and 2013 was 132%, while in the critical months of December and January, cover was 127%.
The next chart shows the milk supplies of registered producers and the contracts of active registered producers for the past 11 years. It shows great stability in the liquid milk supply sector. The average is around 827 million litres. Liquid milk was about 449 million litres, or 55%, on average over that period, and manufacturing milk was 365 million litres, or 45%, on average. The next slide shows that information in a graph. It covers 2002-03 onwards and refers to the period from October to February. We can see the cover for domestic liquid milk consumption.
There are references to the last item in the annual report. We are within a few months of the abolition of EU milk quotas, which have been in vogue in Ireland since 1983. It is an opportunity as well as a challenge, and is a completely transformational event for the Irish dairy industry. The projected increase in domestic milk supplies by 2020 is 50%, all of which will be destined for export markets. This will result in a sharp increase in volatility in milk prices for producers and will change the structure, scale and systems of milk production, processing and marketing in the State.
Dr. Ó Céidigh will deal with the annual report.

Dr. Muiris Ó Céidigh:

I will take the committee through the highlights of the annual report, with a particular focus on the level of contracts we have - that is, who is staying in the business to date, what the reduction has been, what prices have been like and a general overview of the activities of the agency over the past year. Copies of the presentation have been circulated to the committee.

The first graph refers to the classification of registered contracts by type. The committee might wonder what that is all about. There are two basic types of contract registered by the agency. One is year-round, which means that producers will supply liquid milk on a year-round basis for 12 months of the year, which is different from those supplying manufacturers, who only supply it on a spring calving basis. There are also contracts which last for some or all of the winter months - that is, October to February.

In the milk year 2012-13, to which the report relates, we had 1,769 year-round contracts registered. In addition, there were 114 winter-months-only contracts. As of the time of the last annual report, the number of people in the country engaged in liquid milk production stood at 1,883. The issue in regard to that in the run-up to 2015 and the abolition of quotas is whether people will stay in the business. They have the opportunity of choosing whether to go into total spring production, not bothering with liquid milk and moving into manufacturing milk, given that there will no longer be quotas.

The next graph shows that when the agency was established approximately 3,000 contracts were registered. When I first arrived I investigated how many contracts there were and whether the number stated was legitimate. Upon examination, I found there was duplication of contracts, and some people had two or more. We rationalised that in the first two years and the figure decreased to about 2,700 by 1998. There has been a decline, but it has been in terms of numbers rather than volume of milk. There are fewer people engaged in milk production, but the overall supply has remained pretty constant, which was shown in a graph in Mr. Murphy's presentation.

One of the things the Oireachtas empowered the agency to do was to decide whether to register contracts, and one of the requirements was that they provided sufficient compensation to people who were committed to the idea that they would calve not only in the spring but also in the autumn, working throughout the year in order that there would be milk available all year round.

In order to cover that cost and to recognise the extra commitment involved, including the lifestyle commitment, the Oireachtas or the members of the agency would have to be satisfied that the price on the contract represented adequate compensation for the economic cost of winter milk production. We are fulfilling that role. The first column in the graph shows the liquid price since 1995, and the second column shows the manufacturing price, while the third column shows the difference in price. The average differential over 19 years was 4.21 cent per litre. There is quite a range within the figures. The differential figure of 6 cent per litre for 1998 jumps out, as does the 0.8 cent per litre price differential for 2013. The price differential has varied, but the average figure is 4.21 cent per litre. The lowest differential was seen in last year's prices, but that is counterbalanced by its being the year with the highest price for milk generally, at 38.87 cent per litre for liquid milk. Those figures will have changed for the current year.

Prices vary under the contracts and different pricing systems. For the winter months, which we are particularly interested in, the price is 39 cent per litre, while in the summer months the price is 35 cent per litre, giving an average price of 37.5 cent per litre. That is roughly what happened in terms of prices for producers during the period covered by the annual report.

Mr. Murphy mentioned that there was a high degree of concentration at processor level. Ten processors had supplies in the range of under 1 million litres to 20 million litres. Three processors had supplies between 20 million and 40 million litres, while two processors had supplies of over 40 million litres. These two processors are in a pivotal position in relation to the entire industry. That is counterbalanced by the fact that the retail sector is also quite concentrated. The numbers also show that the number of producers involved in the business is beginning to concentrate to some degree.

The fact that there is milk available from Northern Ireland is another factor in the liquid milk business in Ireland. When the agency was established, only bulk milk was imported. In 1997, for example, 16 million litres of milk were imported into Ireland. No packaged milk was imported. The situation has been transformed over the last 15 years or so. In 2013, 57 million litres of milk were imported in bulk, while 89 million litres were imported packaged. This is a real change from the zero position which obtained in 1995.

The ratio of milk imports to liquid consumption may be seen. Packaged milk is depicted in red, while bulk milk is depicted in blue. The rise in the volume of packaged milk is clear. The share of the domestic market for liquid milk that was being taken up by Northern Ireland imports packaged in bulk was 26%. One in every four litres of milk consumed today in the Republic is produced outside the State. The increase in the number of imports over time is shown as a histogram. There has been a progression in the volume of imports, starting in 1995, which has reached a sizable share now. Why has that occurred? It may be because we are moving into a quota-free environment next year, but Northern Ireland has been operating in a quota-free environment since the very beginning. This is because it has the availability of quota for the UK, which allows the possibility of unlimited production. If one takes the base index level for the milk supplies available in Northern Ireland as being 100 for 1993, by 2013 it had increased to 153. That milk has to go somewhere, and we know where it has gone.

Grocery market shares are interesting, not only from the National Milk Agency's point of view but also from the point of view of what is going on generally in Ireland as regards retail matters. If one looks at the number of retailers on the market, the category of "all other" retailers, which represented 17% of the market in 2003, represented 3% of the market in 2013, and it will probably be a smaller figure for 2014. The independent corner shop has largely been wiped out over this period. In one decade, its share has gone from 17% to 3%. The top three retailers have a huge amount of control. Tesco, Dunnes and SuperValu together constitute 70% of the grocery market. This is not the liquid milk market; it is the grocery market. However, it would be pretty much the same for the liquid milk market. If a person is thinking of selling any product in Ireland in the grocery arena, there are three organisations that he or she must deal with to access 70% of the market. That is particularly poignant when it comes to a product such as liquid milk, or any fresh product that is agricultural in nature, where there is a lot of risk. The producers are very much in the hands of a very concentrated set of retail outlets. That has an effect on prices, what the value chain looks like, confidence in the sector, how the producer perceives what value is to be had for its product and whether the product is looked on as a commodity product or a value-added product. There are differing perspectives on this depending on what one is talking about and in relation to how milk is viewed in the State and in other countries around Europe.

It must be remembered, when looking at the annual report of the agency and when having a general discussion on liquid milk, that while in Ireland and the UK we drink fresh milk, on the Continent it is not generally possible to get fresh milk. It is a specialist consumer demand in that part of the world. A person will not get fresh milk readily when having a cup of tea somewhere such as Spain. This is a different product from ultra-high-temperature, UHT, processed milk, and that should be borne in mind when looking at the sector.

Éamon Ó Cuív (Galway West, Fianna Fail)
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I welcome Mr. Denis Murphy and An Dr. Muiris Ó Céidigh anseo tráthnóna. I always find their reports very informative, clear and useful. Dr. Ó Céidigh said in his presentation that the manufacturing price was now within 0.8 cent per litre of the liquid milk price. The question I have on price - allowing for a likely volatility in the market which has been indicated by the ending of the quotas and so on - is whether the liquid milk price is likely to follow the manufacturing price, or is the similarity just coincidental? Will it be more influenced by the availability of liquid milk from Northern Ireland?

In other words, is this link to the manufacturing price just a temporary phase, or is the real determinant the availability and the price at which those in Northern Ireland are willing to sell milk? Depending on the answer to that question, are we likely to get significant volatility in the price paid to liquid milk producers? If there is significant volatility in the market, how will the National Milk Agency ensure there is a liquid milk supply in the winter, which I understand is the role of the agency? Will it be possible to ensure there is a sufficient return for those in the liquid milk market who continue to produce liquid milk in winter so that the product is available?

What fascinates me is the fact that, although there is little or no difference between our climate and that of Northern Ireland, it has a much more even supply of milk across the whole sector. There is much less seasonal difference in the level of production. Is the open border likely to continue in the market into the future? What is the reason for the greater level of seasonal milk production in the South? What is the more profitable system for manufactured milk as well as liquid milk? Will that affect the National Milk Agency? Would the need for the National Milk Agency continue if supply levels were constant throughout the year?

The labelling of milk was alluded to, but not in great detail. I understand the National Dairy Council campaign was relatively successful. The own-label goods allow the multiples or supermarket groups to switch supplier or processor very quickly and to use milk from both North and South without anybody knowing where the raw material is coming from. That allows them more choice in terms of buying milk. Having a NDC label, by definition, limits the market to the South. My understanding is that the milk is the exact same quality and that there is no difference between milk from the North and milk from the South. I understand that buying milk with a NDC label and paying a premium price for it does not give one a premium product.

My final point concerns the price paid to farmers. We were given statistics previously, and when I get an opportunity to examine the NDC annual report in detail, I will have some indication of the percentage of the price of a litre of milk that goes to the primary producer. On a previous occasion, the NDC indicated that the price of a litre of milk as it was in 1995 had decreased by 11% in the intervening years. What is the view of the National Milk Agency on the concept of having an official observer at EU level, as they have in France, to inform the public of the cost breakdown of a litre of milk - in other words, the percentage that the farmer, the processor and the retailer get for a litre of milk? This would establish over time whether the percentage going to the farmer is rising or falling and whether that change is justified in terms of increased costs in the various sectors. It seem to me that the stability of farming depends on that information. I understand that 55% of milk production goes to manufacturing and the remaining 45% is sold as liquid milk; is that correct?

Mr. Denis Murphy:

Fifty-five percent is sold as liquid milk and 45% is used for manufacturing.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Is that the breakdown of all the milk produced?

Mr. Denis Murphy:

Yes. That is the breakdown of the total milk production by registered milk producers.

Éamon Ó Cuív (Galway West, Fianna Fail)
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That is fair enough. That answers my question.

Martin Ferris (Kerry North-West Limerick, Sinn Fein)
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I thank Mr. Murphy and Dr. Ó Céidigh for their presentations. This was quite a successful year for dairy farmers in particular, as the price was much better than it has been for some time.

What jumped out at me in the presentation was that the five largest retail groups have a market share of 93%, the five largest processors produce 91% of milk supplies and 581 producers provide 60% of milk supplies. That indicates quite clearly that liquid milk is controlled by a small number of retailers and processors. The 581 producers that are responsible for 60% of milk supplies are the largest producers and would be aware of the volatility in the market. Does the fact that this is confined to a small number of retailing groups, processors and producers give cause for concern to Mr. Murphy and Dr. Ó Céidigh? We are told that price is determined by demand. I think many of us would take exception to that, because in other sectors of farming, be it the beef sector or whatever, price is determined by the power of the multiples, the manufacturers or the processors. At the end of the day, the producer - that is, the farmer - is a hostage to fortune.

Are the witnesses concerned about the ending of the quota system and the expectation of volatility in the market as a consequence? All else being equal, one would assume it would be okay. As profit margins become more marginal, only the stronger and bigger producers will be able to survive. That is a major concern in the area I come from.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I must declare a conflict of interest in that I am one of the 1,769 year-round milk producers. The Department of Agriculture, Food and the Marine and Teagasc organised a very interesting conference entitled "Managing price volatility and expansion in a post-quota era" last Wednesday in the Red Cow. The buzzword for me was "volatility", because that is the way it will be in the future.

What I thought was the most interesting part of today's presentation was the slide that showed the price of liquid milk in 1995, which was 29 cent per litre, and the fact that we are back to a similar price nearly 20 years later. In 1995 the cost base was totally different from today's cost base. In my opinion, it will not be viable to produce liquid milk in the future.

Dr. Ó Céidigh spoke about UHT milk in Spain and other European countries. We have had the advantage of producing fresh milk.

We are going down the same road very fast. It will not be possible after the quota ends, when numbers will increase and the cost of producing milk during winter will be far too high, to keep the industry sustainable. I know many farmers in my area who are doing the same work as I have done and they will increase milk production off grass. They will not produce milk from November to February at a very high cost, and that is where we will have a big problem going forward. That is where there will be a big problem and it must be addressed. It would be a sad day if we had to put UHT milk on our corn flakes in the morning, so it will be a big challenge after the ending of the quota. There is a willingness to increase milk production but not at any cost. When we increase milk production, it will be to scale; there will be more milk, the price will be more volatile and farmers will have to be more efficient. The most efficient way of producing milk will be off grass and not during the winter. That is the challenge for the National Milk Agency and the primary producers.

Another interesting statistic is that 25% of milk used is produced outside the State. Are we importing 25% of what we use? If so, it is a fairly startling statistic, as we are oversupplying milk. Is it possible to address the issue or reduce the figure? Has the figure been growing steadily over the past number of years? The matter needs to be addressed, although it is not that I am against imports. We are producing milk at a serious cost and the committee produced a report not long ago which demonstrated that many supermarket multiples use milk as a loss leader at the expense of the primary producer. That issue must also be addressed.

Michael McNamara (Clare, Labour)
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Deputy Deering mentioned the milk we put on corn flakes. As a child I grew up on a dairy farm and I remember having unpasteurised milk on corn flakes. I liked the cream that was still part of the milk. Since that time, I have learned that such usage of milk was grossly reckless and irresponsible of my parents to the point that perhaps they could have been prosecuted for it. Certainly, some people in the State now would ban such usage. The witness mentioned that there is a demand for fresh milk in Ireland which there is not on the Continent - in Spain, France, etc. - but there is also a demand, albeit much smaller, for raw, unpasteurised milk. There is an ongoing debate and I understand the Department is still looking into the issue with a view to banning raw milk. Does the National Milk Agency have a view on whether it is desirable to ban raw milk? Such milk must be properly labelled and there is a voluntary assumption of risk by consumers, but should it be banned?

Much interesting data was presented, particularly concerning trends in the past number of years - up to 20 years, in some instances. One of those trends has been that the fresh milk market has fewer dairies, with a move towards one dairy being increasingly dominant, even to the point of producing milk for other dairies. Will the witnesses comment on that and particularly the trends in the spread of the market between the various processors or dairies?

Willie Penrose (Longford-Westmeath, Labour)
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I thank the witnesses for their very informative and helpful presentation. It lived up to the billing in terms of reporting. The concentration of power in the hands of a number of multiples will leave a very desolate landscape across the country. As the witnesses noted, corner shops and other very important institutions, particularly in rural areas, are being wiped out, as we are all acutely aware. That trend seems as if it could accelerate. It is worrying that the abolition of quotas will represent an opportunity and a threat; will this accelerate the trend and leave us with industrialised milk farmers, as opposed to family farm units that generate income across areas? The agency has examined the issue fairly and quite rightly presented us with documentation from the past 20 years, so we can see the inevitable trend. Will that be accelerated in a context in which we have a massive import market? We cannot stop free trade and we are all subscribed to it. We certainly avail of it at other levels.

The level of imports is staggering with this product, although we have some degree of prominence in the area. If we had not achieved world leadership in the highly tuned processing areas, such as the baby formula market and other associated and ancillary products of that nature, would we not be in a right mess? Where could we go? When the quota is abolished, where do the witnesses see us ending up? Are there opportunities to go into other niche markets across the world? We can take account of Brazil, Russia, India and China, as well as other parts of Asia. Will we get into those markets?

How many farmers will be left and how will they be concentrated? Will we end up with factory-type farms? That seems inevitable, as economies of scale will be achieved, leading to a gobbling process. That will lead to fewer farmers. Deputy Deering has indicated that the crunch is coming, with milk produced between October and February or March being so costly that he will have to revert to ordinary manufacturing, as opposed to liquid milk. Will we end up with just a few people in the sector? Will the people who served the market well over the years find no avenue in this new market? There will be opportunities, but I would like to hear the views on the threats as well.

Mary Ann O'Brien (Independent)
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I have a supplementary question related to Deputy Deering's comments. I hope Deputy Penrose is wrong about industrial farms, as that is an unpleasant thought. As the chief executive of Bord Bia has often pointed out, if a person Googles the word "Ireland", it will show an image of a green island. We are a green nation, so for any of us who have read about industrial milk farms in the US and those starting in the UK, it is a terrible thought.

Deputy Deering asked about the 1 litre in every 4 litres that is produced outside the State, coming down to the South and into retailers. I would like the witnesses to bear this in mind in answering Deputy Deering. Sterling is now at a level at which it is 20% more expensive for those producers outside the State to sell to us. It is very good for us to export to the UK and be paid in sterling, but it is very expensive to buy milk in sterling. How on earth can the milk farmers in the North be competitive? Yet we still have the extraordinary figure of 25% of milk being imported to this country.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Page 16 of the annual report details the percentage paid to the farmer. There is a sudden jump from whole milk to low-fat milk, with the percentage going to the farmer shooting up accordingly. The research examined 1 litre packs, but I imagine a small minority of milk is sold in 1 litre packs. Packs of 3 litres are becoming popular, but such packs and 2 litre packs would dominate the market. Is that right?

Dr. Muiris Ó Céidigh:

Yes.

Éamon Ó Cuív (Galway West, Fianna Fail)
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They are not double and treble the price of one litre.

In the farmer's favour, again, when he receives a certain price for the milk, there is cream in the milk. My understanding is that there is no cream in the milk any more, particularly in low-fat milk. The processor has the cream and can sell it at a high price. How comparable are the figures after all the pluses and minuses are taken into account, including low-fat milk and 1 litre cartons? On the other hand, the processor or someone in the middle has a big amount of cream that we are not counting in the finished price. We are only considering the milk element of the price rather than the cream element.

Andrew Doyle (Wicklow, Fine Gael)
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With the concentration of liquid milk among the five largest processors, there is a question about year-round supply. I presume these five processors are also engaged in manufacturing. They have a supply of milk coming in and, with capacity demands, they must incentivise people to produce at off-peak times for manufacturing and for liquid milk. Does that assist the National Milk Agency in trying to secure supply all year round?

Twenty-five percent of milk sold in Ireland is imported. Is there any breakdown available on the data? How much of the milk originated in the Republic of Ireland and was then transported to a processor in Northern Ireland before being packaged and sold in the Republic? We have all heard about one particular supply group in the south east that has switched supplier to a company in the North. Does that form part of the 25% figure?

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.

Mr. Denis Murphy:

The Chairman mentioned concentration and the five largest processors. This is a feature of the milk business worldwide, where some processors are processing the equivalent of the total milk supply of the Irish dairy industry. The Chairman also mentioned that processors of liquid milk in the State also produce manufacturing milk. This is a benefit to the agency, because winter milk supplies of liquid milk producers, which are not used in the liquid milk trade, are all being absorbed in other contracts. For example, the Bailey's Irish Cream contract would be a particular type of contract here. Therefore, in the winter period the non-liquid produce is important and processors are conscious of that, because it means we will not have a situation where there will be a total wipe-out of the liquid milk producers within the State. As we have seen, there is extraordinary stability within that group of producers and Teagasc has done some excellent work in this sector. It emphasises that it is not the scale or the system, but the efficiency with which milk is being produced by the farmer that is the real criterion of our cost effectiveness and profitability at farm level. There is huge work to be done in this area.

Another question raised concerned the quotas and whether they would involve the wipe-out of family farmers. Teagasc has done projections based on the 50% increase in milk production in the State and it believes that by 2020, we could end up with approximately 16,500 dairy farmers, with an average herd of approximately 85 cows. There is stability in that, but there must be efficiency at farm level in order to survive. In the current year, in the month of September the milk price was back by 8 cent a litre on last year's prices. This must affect producers. The collapse in milk prices has been occurring since June, but the average price for the year will only be back about 1 cent a litre or slightly over that on 2013. It is next year the crunch will be felt, because the price we have mentioned, 38 cent a litre in 2013, will reduce in 2014 to around 37 cent a litre on average and this will reduce further to 29 cent a litre in 2015, if the 8 cent a litre drop in price continues into 2015.

Senator O'Brien raised questions in regard to why we are getting so much milk from Northern Ireland. Dr. Ó Céidigh has already referred to the fact that Northern Ireland has, basically, had its Harvest 2020, because its milk supply has increased by approximately 700 million litres since 1993 - all due to the transfer of quotas from the United Kingdom - and some 500 million litres of that milk comes into this State.

A full 70% of it is being processed into manufactured dairy products and 15% of it is going into the liquid milk trade. Basically, capacity has not been installed in Northern Ireland to process the additional milk resulting from their own increase in supply. That is another factor.

Mary Ann O'Brien (Independent)
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Is it just because of the volume in Northern Ireland that they are able to do it so efficiently, given the 20% Sterling disadvantage inherent in selling to us?

Mr. Denis Murphy:

There is a mystery there. Going back over quite a number of years, the manufacturing price within this State and in Northern Ireland have been roughly the same. In effect, the producers in Northern Ireland have had an all-year-round milk production system which was under the remit of the old milk marketing boards and so forth. They have been stuck with that system. The most efficient system is milk production off grass, as has been emphasised by Teagasc. It is possible for a liquid milk producer to be an efficient producer off grass. The important elements are to ensure intense grazing, produce as much fodder off one's own grass base as possible and to minimise the use of concentrates. The two essential parts of efficient milk production are herd and grassland management. The farmers who are good at that, who have the right EBI cows in their herds and who reduce the amount of concentrate feed used do well. In that regard, Ireland is the New Zealand of the EU because our strength lies in our emphasis on pasture-based production.

The question of raw milk is really a public health issue. The Department of Agriculture, Food and the Marine is examining the issue currently. We pasteurise milk to reduce any risks to health. The pasteurisation process has been a basic of the dairy industry for many years. There would be risks involved in the consumption of raw milk unless the hygiene standards on the farm are absolutely top class, as verified by veterinary experts. The same applies to cheese produced from raw milk. Bacteria in such products can cause problems for consumers.

Michael McNamara (Clare, Labour)
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My question is whether the National Milk Agency has a view on whether consumers should be able to take that risk.

Mr. Denis Murphy:

We would leave that question to the Department of Agriculture, Food and the Marine. That is a matter on which the Department should decide. We deal with pasteurised milk.

Andrew Doyle (Wicklow, Fine Gael)
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The Department is working with the Food Safety Authority of Ireland on the issue.

Mr. Denis Murphy:

Mr. Ó Céidigh mentioned another issue concerning fresh milk which is consumed in Ireland, the UK, Denmark and New Zealand. That is the type of milk preferred by consumers in those countries and one will not find Irish consumers acquiring a taste for UHT milk on their cornflakes overnight.

Michael McNamara (Clare, Labour)
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Would it be safer?

Mr. Denis Murphy:

UHT milk? No, not particularly. It is not the same as pasteurised milk. The latter has a flavour whereas UHT milk is pretty sterile.

Andrew Doyle (Wicklow, Fine Gael)
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Deputy Deering has another question.

Michael McNamara (Clare, Labour)
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Sorry, but I have another question about the concentration of supply to the fresh milk market by one or other dairy. Has there been a change over the past decade in that regard?

Mr. Denis Murphy:

There has been a huge change in recent years. The milk is going to fewer and larger processors. There has been a big fall out in the number of plants. Within the past year alone, Donegal Creameries has gone out of the liquid milk trade, as has Wexford Creamery. A number of years ago, the Kerry Group got out of the liquid milk trade. The downward pressure from retailers is intense. In the past few weeks alone one of the biggest milk processors in the UK has begun the process of selling its liquid milk business to Müller, which also bought the Robert Wiseman Dairy two or three years ago. The latter company could not cope with the pressure from retailers in the liquid mild sector.

Michael McNamara (Clare, Labour)
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Is there a dominant player in the market now and if so, who is it?

Mr. Denis Murphy:

In Ireland? The biggest milk processor in Ireland is Glanbia.

Michael McNamara (Clare, Labour)
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What percentage of the market does it control?

Mr. Denis Murphy:

I believe it somewhere in the region of 45% to 50%. Our annual report states that the two largest processors in this State control 68% of the supply.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I have some supplementary questions I would like to pose. To go back to the situation in Northern Ireland, I am still at a loss to understand how processors in Northern Ireland can produce milk in the South, bring it back up North and then sell it back into the South and make money. I would like an explanation.

Mr. Denis Murphy:

We do not have an explanation because, as I have said, the milk prices are roughly the same in both jurisdictions. I do not know how ---

Pat Deering (Carlow-Kilkenny, Fine Gael)
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There is a lot of movement and movement costs money.

Mr. Denis Murphy:

It does, yes, there is no doubt at all about that. I think there is a play-off by the retailers. They are encouraging competition between the processors. If retailers can import milk from Northern Ireland in packaged form at a lower price than that which is available in this State, they will put pressure on the guys within this State. That is what is happening. If one goes to any supermarket, one will see that the price for two litres of own-label milk is between €1.49 and €1.69 while all other milk costs between €2 and €2.30. The price range is very wide.

Dr. Muiris Ó Céidigh:

Another driver in that is the NDC logo, which the consumer wants and identifies with. In that context, there would be pressure to acquire supplies to be able to use that logo. Importers supplying the multiples with milk from Northern Ireland might be under pressure from those multiples to meet the requirements for displaying that logo. Undoubtedly, there is a commitment by the consumer here to liquid milk and for that reason, there will be a market for liquid milk for the foreseeable future. The question is whether there will be producers to supply that market in current and future circumstances. The Oireachtas, in its wisdom, decided that liquid milk producers would be given a special position because of that demand. It further decided that adequate compensation was a necessity, which has a number of aspects to it because of the new situation that pertains. If we want to have home-produced liquid milk available to consumers, the element of the legislative provisions regarding producers being paid properly must be pursued by the agency, in conjunction with the notion of registering liquid milk contracts. That must be seen as a viable option for producers or they will opt to become spring-calving farmers. It must be worth their while to do it.

There is no running out of liquid milk into manufacturing at the moment. There is no big bang imminent, with liquid milk producers suddenly turning to the manufacturing sector next April. As it stands, most liquid milk producers would be approximately 50:50, in terms of liquid milk and manufacturing milk. However, to maintain their commitment to the liquid milk market, the adequacy of compensation issue has increased in importance enormously. There are no better lobbyists for that than the producer representatives on the board of the National Milk Agency who review the prices as they come in.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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While I agree with what Mr. Ó Céidigh has said, I wish to go back to the main point. At the moment we are at a figure of 29 to 30 cent per litre, which is what we were at in 1995 but costs have gone through the roof in the intervening 20 years or so.

Andrew Doyle (Wicklow, Fine Gael)
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That is a key point.

Éamon Ó Cuív (Galway West, Fianna Fail)
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I wish to return to a question I asked earlier about price.

Let us be honest about it, the supermarkets control the world with regard to beef, vegetables, milk and everything else. That is a big concern in the European Union and it is an issue we must tackle at EU level. Otherwise, they could destroy all European farming. They can play any game they wish because five of them in different countries - it might not be the same five in every country - are in control. That said, if there is demand for a product and they cannot get the product, that balances it somewhat back to the producer. In this case, the only people who can produce the product economically for this island are the northern and southern producers.

Over the coming two years do the witnesses envisage the manufacturing price, that is, the manufacturing price plus a premium for winter production, being the determinative price for the southern producer of liquid milk, or is it the competition from liquid milk producers in the North selling at discounts because of all the surplus milk they had from the free quota? The second question that puzzles all of us is how the Northern Ireland producer can not only compete but be the price setter on the non-branded or own-brand milk when they are producing milk all year round, which as the witness said is a more expensive way of producing milk in total and given that many of the producers are both manufacturing and liquid milk producers and, second, sterling has gone wrong. Are they still the big price determinant?

Finally, Dr. Ó Céidigh might recall that at an event organised by the IFA earlier this year he mentioned that there is one retailers' representative on the board of the National Milk Agency. I understand that representative does not come from one of the big five. Would it be in the interests of producer stability in the market and ensuring that the Deputy and his cohorts can make money from liquid milk production to have a representative on the board from the big five multiples? Would that add to the ability of the agency to try to ensure a viable price is paid for milk for the long-term production of liquid milk, or would it take from it?

Mr. Denis Murphy:

In connection with the additional retailer, we have written to the Minister in that regard. It is under consideration. The question is whether the big retailers would want to put a representative on the board of the milk agency. Would they wish to participate in that situation?

Éamon Ó Cuív (Galway West, Fianna Fail)
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Would the witness like to see them there?

Mr. Denis Murphy:

Yes. It would make the agency more representative of the market.

Dr. Muiris Ó Céidigh:

As has been pointed out ad nauseam, the agency represents every sector - producers, processors and retailers. However, the hole in the bucket is that the retailer representative currently on the board generally represents the smaller sized retailer, who is quite an important person to take into account given what I said about that sector being hit. However, if one wishes to have real questions on price and so forth addressed and discussed, where 70% of the milk is being sold through one channel, and if one wishes to have answers to the questions representation-wise, it would be better if there was somebody there. That depends on whether they wish to participate. They may think they are so powerful they do not have to explain themselves at all. There could be an organisation of which they are members which might wish to appoint somebody or otherwise, but that is a matter for the Government to decide.

The representative on the board at present has been there since the foundation of the agency and has made very valuable contributions. Bear in mind that there are other players apart from the multiples. As well as the smaller retailer there is the milk round man, whose business is coming back and improving slightly. It is a very difficult task given the difference in price for door-to-door sales. There is also the catering sector. One could do a masters degree on that sector because there is no brand and no traceability there. It could be viewed by catering as a product that must be supplied free, so I am sure that has an impact on how caterers look at the supply of milk.

There is a lot taking place but the short answer to the Deputy's question is that it would make it more representative, provided people were prepared to come along and engage.

Andrew Doyle (Wicklow, Fine Gael)
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I thank Mr. Murphy and Dr. Ó Céidigh for attending and answering the questions. I apologise on behalf of the Senators who had to leave the meeting for a vote in the Seanad and thank you on their behalf as well.

It is important to bear in mind that the National Milk Agency is charged with ensuring there is an adequate supply of liquid milk to consumers. The Irish consumer has consistently expressed a preference for fresh milk, through their purchasing, and it is the agency's role to ensure there is an adequate supply all year round so we are not obliged to take the route of having non-fresh milk. That is not wanted. It would be an irony if milk production increased by 50% and we could not buy fresh milk in this country. It would make no sense.

There is a greater challenge when one must factor in the variable of the Northern Ireland supply, which might not be as variable as one might think but which is outside the agency's control. It must be factored in. As Deputy Ó Cuív pointed out a long time ago, if the UK ran out of its own supply of fresh milk and decided to take milk for the UK from Northern Ireland, as it could do and pay a premium for it, that would goose up the supply here. We should not under-estimate the watching brief the agency must maintain on the supply chain for liquid milk.

I will suspend the meeting to allow the witnesses to withdraw and the Minister and his officials to take their seats.