SUMMARY OF SCOTTISH MILK MARKETING BOARD AND CO-OPERATIVE WHOLESALE SOCIETY LIMITED: A REPORT ON THE PROPOSED ACQUISITION BY THE SCOTTISH MILK MARKETING BOARD OF SCOTTISH MILK BUSINESS OF CO-OPERATIVE WHOLESALE SOCIETY LIMITED

The Scottish Milk Marketing Board (SMMB), one of the United Kingdom's five statutory milk marketing boards (MMBs), has agreed to acquire, via its subsidiary undertaking Scottish Farm Dairy Foods Ltd (Scottish Farm), the Scottish milk business of Co-operative Wholesale Society Ltd (CWS). The CWS business comprises two processing dairies and a wholesale operation selling primarily fresh milk through seven depots in southern and central Scotland. We have been asked to investigate the proposed merger and report on whether it may be expected to operate against the public interest (see Appendix 1.1).

Under present legislation SMMB has the right, with minor exceptions, to buy all raw milk produced on farms in its area of responsibility and the duty to find a market for it. The prices at which it sells raw milk vary according to end use and are decided by a Joint Committee in which buyers have an equal say with SMMB, any disagreements being settled by arbitration. For a given end use the price is the same to virtually all buyers.

SMMB itself owns facilities for processing liquid milk and for manufacturing milk products (such as butter and cheese). These are referred to as commercial operations, as distinct from its statutory functions in relation to raw milk. SMMB is required by the legislation to treat its commercial operations on an equal footing with independent milk buyers and not to give its own operations any preferential treatment.

In 1988 SMMB expanded its commercial operations by acquiring Scottish Farm, the biggest fresh milk processing dairy in Scotland. As a result of this and other recent acquisitions SMMB now supplies 32 per cent of processed fresh milk in Scotland. Its commercial operations taken as a whole buy 33 per cent of the raw milk which its statutory arm sells, equivalent to 27 per cent of total supplies in Scotland. The Galloway Cheese Company Ltd, a joint venture in which SMMB has a 60 per cent holding but shares control with its minority partners, buys a further 15 per cent of the raw milk produced in Scotland. We found that Scotland is and is likely to remain a largely separate market for both raw milk and processed fresh milk.

The Government is committed to introducing legislation to abolish the statutory milk marketing schemes and to enable the MMBs to be replaced by more market-driven arrangements in order to increase competition. SMMB has proposed that it should be succeeded by a single voluntary producers' co-operative which would retain ownership of the commercial operations. The MMB for England and Wales, by contrast, has proposed that its commercial arm, Dairy Crest Ltd, should be hived off into a separate company.

The merger would enable SMMB's commercial operations to improve efficiency in their milk processing. However, taking over CWS's business would also add four percentage points to SMMB's 27 per cent share of raw milk purchases in Scotland and nine percentage points to its 32 per cent share of processed fresh milk supplies in Scotland.

Current legislation provides safeguards for independent buyers of raw milk and for competing processors such that the merger would not harm competition as long as the present position continued.

If, as we expect, deregulation proceeds as currently proposed these safeguards would disappear. The co-operative succeeding SMMB would be able to give preferential treatment to its own commercial operations in the supply of raw milk and to raise prices of both raw and processed milk. The increase which the merger would bring to SMMB's already large share of the market for both raw and processed milk would add to the potential for the successor co-operative to abuse its dominant position and vertically-integrated structure. We therefore conclude that the merger would operate against the public interest.

There are alternative possible structures for the new arrangements to replace SMMB which would remove the adverse effects we foresee. If SMMB's own proposals are implemented, however, new safeguards would be needed for independent buyers and competing milk processors. In the absence of suitable safeguards, we recommend that the merger should not be allowed.

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Last Revised: June 1999