Dairy Review - Mr J Giles, Promar - Transcript - 11 December 2006

STATES OF JERSEY

Economic Affairs - Dairy Review Sub-Panel

Monday, 11th DECEMBER 2006

Panel:

Deputy A. Breckon of St. Saviour (Chairman) Deputy A.E. Pryke of Trinity

Deputy K.C. Lewis of St. Saviour

Deputy R.G. Le Hérissier of St. Saviour Deputy S.C. Ferguson of St. Brelade

Witnesses:

Mr. J. Giles (Promar)

Deputy A. Breckon of St. Saviour (Chairman):

This is a hearing into the dairy review. This is part of the process. The Members present are the Deputy Chairman, Anne Pryke; Deputy Sarah Ferguson; Deputy Roy Le Hérissier and Deputy Kevin Lewis . We intend sitting over the next 3 days to hear a number of people as part of this process. The joint review is being carried out between this panel and the Chief Minister. It began in August 2006. The terms of reference are a joint agreement and as a result of those terms of reference Promar were appointed, who are an internationally renowned consultancy firm who have some experience in this area, and a few days ago produced their final report after a number of drafts and discussions with people in the industry. The first witness is John Giles, an executive from that organisation, and just before we get to you, John, I would just like to inform you of the process. Before you is the statement for witnesses who are not members of the States and this is so you understand it. "The proceedings of the panel are covered by parliamentary privilege through Article 34 of the States of Jersey Law 2005 and the States of Jersey (Powers, Privileges and Immunities) (Scrutiny Panels, PAC and PPC) Regulations 2006. Witnesses are protected from being sued or prosecuted for anything said during hearings unless they say something that they know to be untrue. This protection is given to witnesses to ensure that they can speak freely and openly to the panel when giving evidence without fear of legal action, although the immunity should obviously not be abused by making unsubstantiated statements about third parties who have no right to reply." The panel would like you to bear this in mind when answering questions, which we will do at the end of your presentation if that is okay. The proceedings are being recorded and transcripts will made and published on the Scrutiny website. In regard to those transcripts you will be given a copy. If there is anything you take exception or perhaps there might be a mistake then there will be an opportunity to have some editing facility over that. It is fairly relaxed, John, but I would like is if

you could tell us a little bit about yourself, Promar and your involvement with the report and then if you could then speak to the report and we will ask you questions at the end. So if you would like to proceed in your own time. Thank you.

Mr. J. Giles (Promar):

Good morning, Chairman, fellow members of Scrutiny. Just for the record my name is John Giles, I am a divisional director at Promar International. Promar International is a UK (United Kingdom) and internationally based agricultural and food consulting company. We work across the whole agricultural supply chain and across a number of particular industry sectors but the dairy sector is an area where we have a particular strong track record. I have been with the company for 16 years. In that time we have been involved in dairy projects, not only in Jersey in the last few months but also a number of other sort of key dairy producing countries around the world - Denmark, New Zealand, Wales, Ireland, the US - and we have looked at international markets around the world on a regular basis as well. My involvement in this project is I have been the project director. We started work, as you said, Chairman, back in August. There has been a whole series of visits to the Island in the intervening period where we have met a whole range of stakeholders on the project. I have been heavily involved in this process but also I have had a team of 3 other senior members of the Promar staff working with me in developing our recommendations and conclusions, which has been discussed with, again, a range of stakeholders as we have been going through the project. So, the report is obviously quite a lengthy document. What we are trying to do here this morning is encapsulate what we believe to be the key points that need to be taken into account. It is a PowerPoint presentation. I will run through the key messages of what we believe and then obviously are happy to answer questions at the end. So, in terms of our role as consultants looking at the industry and obviously responding to the specific terms of reference that we were given at the start of the study, how do we see the current status quo of the Jersey Dairy industry? We see it as an industry which has got a huge amount of heritage, not least it is the home of the Jersey breed so an industry with a huge heritage to build on and that is very good. I think it is fair to say also that we have met a number of impressive people in the dairy industry, both among some of the primary producers and also at the factory at Five Oaks. I think we have also recognised or made reference to this in the report on a number of occasions that we do recognise that it has been a very difficult operating environment on Jersey for a number of years and there have been some positive developments at the Milk Marketing Board and the Jersey Dairy over the last few years. I think we have made reference in the report that the management of the Board and the dairy have done, in our view, a pretty good job in very difficult operating circumstances. I think also we recognise that Government is supportive to this industry. There has been ongoing support over a long period of time to the Jersey Dairy sector in a sense that the Government infrastructure here does want and is willing to support a dairy industry into the future. I think also from talking to some of the customers on the Island there is a - we have encapsulated it there at the bottom - reservoir of goodwill. Talking to some of the customers on the Island they would like to source Jersey dairy products, they would like to deal with Jersey dairy farmers and that, in our view, has to be positive because it is not always the case when you talk to maybe other customers in other parts of the world. So, we have encapsulated that at the bottom. A reservoir of goodwill on the Island towards the dairy industry, huge heritage to build on, that is very positive. Good people, good farmers, good people at the factory, positive developments, supportive government and supportive customers on the Island. So a reservoir of goodwill. I think also, having said that, we also, in our role as consultants looking at the industry, see a sector which perhaps at times has struggled to get to grip with the real drivers of change that it faces in the future. They can be summarised in a number of sort of fairly small points when it comes down to it but essentially we believe that at farm level and through the supply chain the price of liquid milk is too high, particularly when you look at the future threats that impact on the sector. It is also an industry - and we have used the term "subsidy aware" - where the farming sector here have benefited from subsidies in the past but in some cases they have almost become over reliant in some of the subsidies that are available and a sense that the way out of any difficulties they face is to load more subsidy and we are not sure that is really the case. There are some very good farms on the Island. I think we have identified in our report there are too many farms that are not efficient enough. The issue of genetics, again we understand that this has been a long running issue on the Island, the fact that genetics are not allowed to be imported on to the Island, but it seems to us that the decision not to use the best available genetics is akin to fighting what is -- the Jersey dairies are going to be increasingly operating in a competitive environment, or highly competitive environment, and the decision not to use every available resource to ensure you can compete effectively as possible is a bit like fighting with one arm behind your back. The factory at Five Oaks we believe to be too old, that the equipment there is out of date. One of the key things we believe for the future is the need to build exports and at the moment most of the mainland UK customers would look at the factory and say: "This is not up to the technical standard that we need it to be." There are no exports. We believe, again, that is one of the key areas for the future to be addressed. I think also customer and consumer loyalty is coming under pressure. We have made comment in the report that in talking to some of the major customers on the Island, yes, they are supportive of the Jersey dairy industry per se, they would like to source Jersey dairy products but that support is not always conditional and, as pressure comes in, maybe particularly from imports from outside the Island, that basic loyalty to the Jersey dairy industry would be put under extreme pressure. Then the last point is that if imports do come in to the Island, and I think from the work we have done over the last few months the general consensus is it is not a question of if they come in, it is when they come. From analysis we have carried out in the report, the price level they would be able to come in at would cause severe stress in the Jersey dairy industry, a number of the issues we are talking about here become almost irrelevant. I think the reason we have bolded "no exports and imports" is we are aware that clearly there are a number of key internal issues on the Island at the moment but I think we feel at Promar that, yes, those internal issues are important to deal with but the real challenges that this industry faces are its ability to build exports to the mainland UK market as soon as possible and also its ability to deal with the threat of liquid milk imports coming on to the Island at substantially cheaper prices. I think the last bullet point is just one again that we feel is important that over quite a long period of time

Deputy A. Breckon:

Thank you for that. Would you like to take a seat and make yourself comfortable? Can I say you have done that presentation before in a number of areas and arenas to a number of people, so some of these questions you may have heard before. I would like to start. I wonder if you could expand and give us some facts and figures on the current processing of the dairy about the liquid milk market - that is the local liquid milk market - and the other present uses made of product. Could you just comment with some details which are contained in the report on that?

Mr. J. Giles:

Well, as I said in the presentation, there is a whole range of products made in the -- made at the current Jersey Dairy. One of the key issues of the future development of the industry is that the factory at Five Oaks, built in 1960, is not really up to scratch with what modern customers would require, basically. We have talked about in the report about the sort of product mix and essentially, without going into masses of detail now, quite a high proportion of the products that are made are broadly in the category of relatively low value commodity products: skim milk powder, bulk butter, bulk cheese, these sorts of things. Relatively small amounts go into perhaps the higher added-value products that can be made by a dairy factory. We have said in the report that over a period of time we would recommend that all efforts are made to change the balance a little bit, basically. Milk, obviously no great secret, milk price on the Island sort of ranges depending on where you buy it and who you buy it from, but the price differential between the average price on the Island at sort of 85 pence, 90 pence, depending on where you are buying it, maybe a bit lower in some cases, and the ability of if a major retailer came on to the Island, which we understand again is not an impossibility, that they could get it here for significantly cheaper. Therefore, I think our view, Chairman, would be that Jersey, can it ever get its price down to compete against 65 pence a litre? That might be very challenging, but it can do quite a bit to close the gap to make sure that when liquid milk does come to the Island the price differential is not so -- if the price differential is 25 pence, 30 pence, for consumers it is stretching that loyalty to the absolute limit. If the price differential is 5 pence, 10 pence, some consumers will switch but I think a lot of consumers would probably, based on our experience, stay. But to do that, you have to get farm costs down and also that efficient factory.

Deputy A. Breckon:

I would just like to ask one more question, John, on that and then pass to other members. You mentioned in your presentation about exports and the fact that it was essential and exports were prospects to drive some real growth and Jersey perhaps needed a niche market and only a small share of, say, the UK market to make that happen and be achievable. Have you uncovered any evidence that supports that that could happen?

Mr. J. Giles:

I think in discussions with senior management at Jersey Dairy we have identified that there is ongoing discussion with most of the major retailers in some shape, form or manner. Obviously converting the promising discussion into commercial reality is always a challenge. We understand that in one or 2 cases the discussions are further down the line than they are with others. What do you need to build exports? Well, you need good products. Is the Jersey Dairy capable of producing good products? I believe it is. The evocative image, the provenance: Jersey is dripping with provenance, basically. You need good people. Jersey Dairy has got some good people. It might need a bit more concentration and focus on the marketing function in the future. You also need a receptive market, and at the moment I would say that the UK mainland market is probably as receptive to the provision of high value niche added-value products than perhaps it ever has been for a whole plethora of reasons, not least there is a huge amount of interest. I think sort of 5 years ago the mainland market in the UK was getting very excited about the opportunities in the organic dairy product sector and organic food sector. I think it is still interested in organics, but I think also there is a huge degree of interest from customers about products with local regional provenance and Jersey has got a great opportunity in that area.

Deputy R.G. Le Hérissier of St. Saviour :

Thank you, John. I was going to ask about exports but Alan has partly beaten me to it. So a 2-part question, John. You argued very strongly in a sense with your points against exports. You mentioned this was a tremendously high-cost place. I got the impression from the way you put the case forward that, in fact, you were in a sense speaking against yourself. You were suggesting that the effort was a mountain to climb. It would take an enormous amount of initial effort in order to get the export situation sorted out. Do you really think at the end of the day that your option where liquid milk was the priority might, in fact, be the best option because the dairy has been down this road before, as you well know, with the mini pot issue and of course it got seriously burned. I am not saying those reasons still appertain now as appertained then. So, that is the first question and, sorry, a very different question. As you know, there has been talk of a different approach essentially based on the free market approach. Do you still hold to the option you put forward and the comments you made about that option that if the free market were to come in it would essentially place what you see as a weak industry at the moment into freefall?

Mr. J. Giles:

Okay, first question. Are exports difficult to achieve? Well, we are talking about supplying the UK mainland market, so is supplying the UK mainland market a challenge? Yes, it is. To pretend that anybody can walk into a major retailer in the UK and suggest, well, here we are, whether we are from Jersey or from anywhere in the world and supermarkets are falling at their feet to accept new supplies, in some cases they have been looking to reduce the number of suppliers they deal with. So, is it a huge challenge? Yes. Can it be done? There are some very good examples, not least from places not too far away from here, where people have been able to develop high value export niche products into the UK market and the beauty is that you do not need a massive -- the dairy market in the UK is worth about £3 billion per annum at retail value. You do not need very much of £3 billion to turn around your industry here, basically. To do it, to try and build those exports in the current situation with an old factory, at the moment I think your industry for whatever reason is trying to do it the hard way, with the old factory, no genetics, and these sorts of things, really. So, is it challenging? Yes. Can it be done? Yes. Are there plenty of challenges out there? Yes, I think. Have other people managed to be able to do it? Yes, they have. Is the market big enough that you are not going to cause massive disruption and maybe even adverse reaction in the UK marketplace? By Jersey taking a relatively small part of it, it is not going to produce a great backlash of competitive activity. In fact, some people may even welcome you into the market, what have you. Just a last point on that, again it depends on which part of the market you want to play in. Again, having said that we do not want to go back and look at the past too much, I mean, the mini pot exercise was a decision to play in part of the market which is extremely price-sensitive, ultra- competitive and where you can be knocked out of situ quite easily. So, essentially, the lesson there for Jersey is do not play in parts of the UK market where that situation could arise again. In terms of the different approach, what we have said in the report is that, again, in its current state option 3 -- this is what we are talking about in the nub, is it not? We believe in the current state, if the objective is a sustainable industry, that option 3 we are -- I mean, no regulation. We also talk about in option 3 that there be liquid milk imports coming on to the Island fairly quickly. We think option 3 will not meet the objectives, and it will happen fairly quickly, of brown cows in green fields, basically. The one we have pointed out in the report and it is there for all to see, that clearly if you were looking to benefit consumers you would say: "Fantastic, we can get milk on the retail shelf at 65 pence a litre, maybe even a bit cheaper" but whether that meets the requirement of a sustainable industry per se on Jersey, you know, I do not think it does, basically. What it does show is that without the compelling reasons to set out a new vision and a new way of doing things, that people -- and again the evidence is not just in Jersey but in other areas where people have deregulated without a strong vision. Farmers, being quite logical guys, will say: "We will try and do this ourselves." I think our experience is in many other parts of the world that when farmers try and do it themselves they sometimes find it a damn sight harder to do it themselves, moving from being a farmer to market-focused entrepreneur, I think we called it in the report. But making the change, doing it yourself, has sometimes proved to be a lot harder than you first think, with no strong vision set out farmers will either say: "Right, we will have a go at this ourselves. Might find it easy; might find it difficult" or will say: "Well, crikey, this might be the time to get out of farming altogether." We have said in the report that option 5 will not stop some people getting out of farming. In fact, if you look at deregulation around the world, occasionally in the very short term it has speeded up the process as people come to those difficult decisions themselves.

Deputy A.E. Pryke of Trinity :

Thank you, John. Thinking about the exporting side, but also going on to you talked about the internal threat, are you surprised by that? What are the main issues that you have picked up during the last months about the internal threat?

Mr. J. Giles:

Well, I think following on from the last point, are we surprised that one or 2 people are challenging the jurisdiction of the Board? No, that is not a particularly new issue. That has been going on for quite some time, really. In terms of what is the answer to that, well, you have to take a view on what is the legal implication. If the jurisdiction of the Milk Marketing Board and the Milk Marketing Scheme is challenged, is that going to be upheld or whatever? I think it seems to me that from what we know that there is a strong chance that it will be found that the Milk Marketing Board is non-compliant. What we have said in the report is that the answer to these issues, whether it is the internal situation or whether it is the external situation, is broadly the same: good farms, best possible use of genetics, short supply chain, strong customer focus, accepting market challenges and not pretending we can hide behind legislation and that they will not impact on our industry.

The Deputy of Trinity :

Just to take that a step further, I know you have presented this report to the farmers.

Mr. J. Giles: Yes.

The Deputy of Trinity :

Can you tell me what response you had from them?  Were you surprised by their response?

Mr. J. Giles:

I do not think we were surprised by the response because I guess we have probably done it around the world, not just in dairy but in other sectors, really, so I suppose maybe we were not too surprised at the response. The response would have ranged from people who were probably quietly supportive, saying: "Yeah, okay." You know, what we are asking to do is for people to change the way they have maybe farmed and the way they operate their business in the future. We all know, it is conventional wisdom that sometimes we feel uncomfortable with change and what have you, and it produces new uncertainties. One of the questions we were asked was is there any risk-free solution to the situation that the dairy industry finds itself in, and the answer to that is -- well, I think we said: "We wish there was." There is no risk-free solution to this, but there are more risky solutions and less risky solutions. In terms of reaction from the farmers, I think probably it went from those who were quietly supportive and sort of: "Yeah, okay, we can see the logic of this and this is the way we have got to go and it is going to take some time and take some change and we need that time to allow us to change." As always, one or 2 people found some of the messages less palatable, but that does not surprise us.

Deputy S.C. Ferguson of St. Brelade :

Thank you. In the report, you talk about parts of the industry being subsidy hungry. How do you address this? How would you see this being addressed in the context of an FCB?

Mr. J. Giles:

I think, just to put into context the comments about subsidy hungry, I mean, I think our view is that if you look at the figures of the industry here, maybe for reasons which are well understood it is subsidised to 7 pence a litre whereas on the mainland UK it is subsidised to 2.5 pence a litre. Subsidy is a fact of life in farming and in dairy farming in particular, so I think it would be undesirable to have a situation where, you know, all -- we could go to the New Zealand model and say: "Right, next week we will get rid of all subsidies. We will watch the bloodbath unfold, basically." But I think in the future it would seem ... and there are subsidies available there for production, there are subsidies available for slurry conversion and other areas of farming activity, and we have heard people saying -- and, yes, in extreme cases the whole building of a new factory should be subsidised. By who is not quite clear. I think probably farmers, whether they are in Jersey, whether they are on the mainland, whether they are in Denmark, Holland or anywhere else in the world, have to accept that probably in the future there is going to be less subsidy, less direct producer subsidy. So farmers may not be compensated for just producing raw materials, whether it is milk or wheat or fruits and vegetables or pork in the future, but they may be compensated for good provenance, good environmental practice. That is the trend not just in Jersey but around -- and that is driven largely by influences in Brussels does not want any more grain mountains, butter mountains and these sorts of things, but they will compensate farmers for good environmental practice in the future.

Deputy R.G. Le Hérissier:

One of the issues, John, that seems to be always present in the background is the size of the buffer, the size of the so-called necessary over-production. In a sense is your plan based on the assumption that we have to keep a current herd and because we have had a perverse incentive - in other words, the dairy has to take all milk produced - it is dealing with a very high rate of intake which it would not normally? In other words, in a funny sort of way we have not got the optimal size herd on the Island at the moment. But somehow you have to come up with a plan that will deal with the production that we do have on the Island. Did you feel you were being driven by this in the way you came up with your export plan?

Mr. J. Giles:

Well, I think ... yes, I think the short answer to that is that all dairy processing operations have a buffer of some sort. It is just a fact of life, basically. It depends a little bit on what you tend to do with that buffer, basically, and I think, to come back to earlier comments, that at the moment a lot of the buffer goes into low value commodity products which Jersey is always going to find it very hard to compete internationally and it comes down to what do you choose to do with the buffer. If more of the buffer can be diverted into high value, added-valued products, then that would be desirable. Again, sometimes, you know -- but you have to find markets for it, basically. Producing commodity products for commodity markets is relatively straightforward because you will sell it somewhere, at the end of the day, being blunt. Maybe not for the price you would always like, but commodity markets will find a home. Moving the emphasis towards higher added-value products, that is where you need the focus on the marketing and strong customer relationships. What we have said in the report is that obviously again there has been an ongoing debate about what is the optimum level of production on the Island. I think again what we have said in the report is that at the moment it would be very easy to say: "Right, let us just reduce production down to perhaps the level of the liquid milk market only on the Island" but I think we have said in the report if you are serious about exports, once you start reducing milk production, it is easy to reduce; it is quite difficult to build back up. What we have said in the report again, at least in the short term at the very moment you might need all the milk you can get because if you do hit the jackpot of one of the major retailers in the UK, what you do not want to turn around and say is: "I am terribly sorry, we have not got the milk." But if ultimately you have not got a market for it, then it seems a logical decision you have to look at that very, very closely.

Deputy A. Breckon:

John, can I ask you about the genetics? You touched on that. Could you expand on the possible productivity gain if this was a process that was allowed in the Island?

Mr. J. Giles:

Well, again, we know that the genetic ... the question of Island genetics is a long one, it is an emotive one. It would seem to us that again if you are looking -- what makes up a sustainable dairy industry? Well, all sorts of things, but being as efficient as possible would seem to be quite an important part of that, basically. The decision not to use the best possible genetics out there, as we said in the report, Chairman, would appear to be sort of trying to fight a difficult battle with one hand behind your back. I think there are several things that you would need to take into account on the use of genetics. One is, as we said earlier, it is part of a long-term process. I am afraid there is no magic wand, that you start using imported genetics and, hey presto, the next year the world is a beautiful place. It takes between 7 and 10 years to get the improvement. We have said in the report that we believe that you could reduce the cost of production by between 1 pence and 2 pence a litre over a period of time. Also, the point that has been made a few times has been that, okay, if we use better genetics, well, we will just be producing maybe more milk and adding to the buffer problem. I think using genetics gives you just much more flexibility, really, because you might need more milk. You might need more milk from the same number of cows because you have built a very successful export business. You could have the same amount of milk from a fewer number of cows. You can also reduce feed costs, and we have said that one of the key areas - if you look at the discrepancies between how a Jersey dairy farmer operates with his counterpart on the mainland -- the differential cost is a number, but one of the key costs is the importation of feed. Using better genetics could reduce those feed costs quite considerably. So, I think, as I say, we know it is an emotive issue on the Island but I think at the end of the day if you want a sustainable, efficient industry it is something that you have got to bite the bullet on.

Deputy A. Breckon:

Can I ask you a question about the Howard Davis Farm? You have come out now positive in favour of that. Did you evaluate any other options to Howard Davis Farm and could you comment about how soon you became positive about Howard Davis Farm?

Mr. J. Giles:

How soon did we become positive about Howard Davis? I think we have always been quite positive

about Howard Davis Farm. I think what surprised us when we first came into the project -- I guess we are coming into it relatively late in the day. We have been working here from August. I think when we first came on to the Island we said: "Well, look, talk us through some of the issues." "Well, we have got this site at Howard Davis and it has got planning permission; it has had the environmental audit and it has had it for some time. The site plans are all drawn up." We were saying: "Well, why are you not getting on and using it?" basically. We know again there is a sort of complex issue, covenants and relations on the other side of the world that need to be consulted and what have you, but it seemed to me that overall, as an outsider looking in, you are 95 per cent of the way there and then there is a standoff, really, basically, and further delay, and that delay is not doing anybody any good. So I think we were always quite positive about the Howard Davis site. It seems fit for purpose. It is available. You have got all the planning permission, the site audit, you know, so wow, go ahead and use it. In terms of the other possible sites, well, obviously one site is Five Oaks. I think quite quickly we came to the conclusion that unless you are going to completely knock the whole thing down and start all over again, which will probably cost a lot of money, take a lot of time, and the reality is that again ... You know, I am not quite sure what the -- well, in 1960 presumably that was a slightly less densely populated part of the Island. It is now hemmed in by housing. We just think it is not the place to be for all sorts of reasons. Then we were made aware of one or 2 other sites that in theory could be available for this sort of activity over a period of time. We looked at them briefly. I think again you come down to the conclusion that, okay, they might be available but hey, they might not be. Time, planning, environmental audit, site plans; how long do we want to wait? Two years? There may not be 2 years to wait.

Deputy A. Breckon:

Can I ask you, John, from that, is time a critical factor, in your opinion, for the Jersey dairy industry?

Mr. J. Giles:

Yes. That is the short answer. Yes, it is. I think the sooner some clear statements can be made by a range of organisations on the Island about what they are going to do and how they are going to do it, the better, really. A lot of it links back to this compelling vision. Without the compelling vision, you are asking farmers to buy into something which is unarticulated and you have to give them as clear an indication as possible about what the future might look like. One of the best ways they can buy into a future vision is to know they have a modern, efficient, working processing factory which will allow them to compete both internally and externally. As I say, without the compelling vision you will have what has been indicated over here, perhaps people thinking about doing their own thing or giving up or whatever. So I think time is critical.

Deputy K.C. Lewis of St. Saviour :

Following on from that, John, it has been suggested from several quarters that the Milk Marketing Board

should be disbanded. You have given a few options today. What is Promar's preferred option to that? A farmers co-operative, limited company or what? Do you believe that the Five Oaks site may be overvalued?

Mr. J. Giles:

The Five Oaks site, the value that has been indicated to us is in the region of £9 million. I guess the value -- you know, like shares, the value of the site can go up and down depending on who is looking at doing what on it, basically. We have heard the site value could be and we have been told it could be more, it could be less. We try to take what we believe a cautious midpoint in the way that the development of a factory -- I think our view is that development of a modern food factory, there is almost a sort of lowest level of cost of about £5 million and, again, we have heard the cost of a new factory on the Island could be a bit more, it could be a bit less. So we have taken what we believe to be a sensible estimate of £6 million to £7 million and the site value being about £9 million. In terms of the future options, we believe option 5 is -- again, we were asked at the meeting we had with the 33 dairy farmers a few weeks ago: "Is this a risk-free option?" Well, we wish it was. Clearly it does rely on a number of things being put in place: the PPE, the factory location, the building of exports, so there is a lot to do, basically. But we believe, in terms of if you want a sustainable industry here, option 5 is the best one to go for. In terms of the fine detail on more specific legal ownership structures, limited companies and what have you, again we have said that is an area where there may be some further work to be done. But there are plenty of good farmer-controlled businesses around the UK and further afield. If you want to look at good case studies, there are plenty there, plenty there, and essentially you choose the bits of the models that you like the look of and create a Jersey model, basically. I do not think you can say: "Look, that is what the New Zealanders did so we will plonk it down on Jersey" or: "That is what the Danes did, plonk it down on Jersey." I think you look around the world and see which bits of these models you like and you come up with your own model, taking into account there are some specific circumstances in Jersey that will not apply in other parts of the world.

Deputy S.C. Ferguson:

Given a sort of following wind and a certain amount of hard work and perhaps passing the propositions in January to approve the sale or lease or whatever to sort Howard Davis Farm out, how long would be a realistic goal to say we want all this up and running by?

Mr. J. Giles:

Again, you can look at the precedents set by other similar developments. There is a large dairy operation being built in southwest England which is up and running in 12 months, basically, 350 million litres per annum. So, you know, 12 months. How long does it take to build? We are talking about a modern, efficient factory but it is not an overly sophisticated or complicated structure to build. It is a shell to food industry hygiene standards with equipment in it. It might be 12 months. I think if you have it up and running in 12 months you will have done well. You might want to give yourself a little bit of leeway for product testing and all that sort of stuff, but it is that sort of timescale rather than 3 years or 4 years or whatever. But yes, if you put your foot down you could do it in probably 12 months or maybe just a little bit over to give yourself a bit of ... What you do not want to do, I think probably to some extent, is say: "It is going to be going in 12 months' time" and then get to 12 months and say: "Oh, sorry." This thing about setting the broader picture, setting a vesting day for change and sticking to it; you want to say: "Our factory is going to be ..." You do not want to get into a Wembley Stadium situation where: "Well, it will be ready for the Cup Final but not this year, next year." Again, it is confidence building. I think people will feel confident when they see the first signs of activity on the site, when they see the foundations going in, when they see the first bit of the structure going up and what have you. What you do not want to do is create an expectation and then disappoint them by saying: "Oh, sorry, we are not quite ready." So you might just err slightly on the side of caution, but it is a 12 to 18-month job maximum, not a 3 year one, that is for sure.

The Deputy of Trinity :

Just thinking on from that, what would you see the most important thing to put in place first? Let us say first, second and third?

Mr. J. Giles:

First, second and third? I think the 3 most important things, one is sort out whether you are going to get a PPE or not and then how you are going to use that. Second, get the factory situation sorted out. Thirdly, go for the FCB structure. Fourthly, start building export markets as soon as you can. So I have 4 there, I am afraid. I think on the basis that time is tight, in some cases you might have to be doing -- and this is where again, you know, what is the role of Government in there? We are asking quite a lot to be done quite quickly. You might say: "Well, there are 3 or 4 things here need to be done and, whoa, it is quite a big task." This is where maybe Government needs to add some assistance.

The Deputy of Trinity :

They are all done within a fairly quick timescale?

Mr. J. Giles:

Yes. I think, you know, where are we now? 11th December. These are all first quarter activities, if not earlier.

Deputy R.G. Le Hérissier:

John, did you do an analysis? We are often asked this question: why does the farmer at the gate earn I think it is 33 pence as opposed to the selling price, which sort of hovers around 90 pence? Did you do an analysis of why there was the difference and what was the finding, if you did it, of your analysis?

Mr. J. Giles:

Well, it is a good question that is not just asked in Jersey. Sort of, you know: "Here is the farm gate price and here is the retail price." In Jersey, I mean, the short answer is the differential goes from farm gate price and then there are some transport costs involved and then there is a processing cost and then there is a wholesale margin involved and there is a retail margin involved, really. Conventional wisdom is that the closer you get to the retail point of sale the larger the margin you get. So retailers work on a base margin of maybe 35 per cent, 40 per cent, but in some cases it can be up to 100 per cent for very high value products. The margins in Jersey, particularly at the processing level, again are higher than they would be in other parts of the UK and also you have this discrepancy of the 7 pence subsidy against the 2 pence subsidy. So I think in the presentation we said the price starts high in Jersey and once it starts high it does not get any lower, basically. In fact, in the current structure it cannot get lower.

Deputy R.G. Le Hérissier:

When you analysed the margin, John, was there any particular factor which you said: "If only we could deal with this, we could make a real impact on the situation"?

Mr. J. Giles:

I think, again, it is a question that is asked in many parts of the world, Roy. The ability of individual farmers or group farmers or even food multinational companies to impact on retailer margins, it is very, very difficult. The people that have perhaps been most successful at it have been some of the fair trade groups, who have looked at the retail margin made and said: "Maybe some of that should be passed back to really hard-pressed farmers in Central America and West Africa" and what have you, but for even the largest food processing groups in the world, the ability to impact on a retail margin is very, very difficult. So I think you have to look at other parts of the supply chain and in those cases it is cost of processing, farm gate price per se. I think we are saying at the moment the farm gate price in Jersey is 33 pence. Is it ever going to get down to 19 pence? No, of course it is not but in the future over a period of time, better genetics, better farm management, lower feed costs, better efficient processing, we can get it down to a level where it needs to be to have a chance of competing. But on a head to head basis it is never going to be 19 pence and we are not suggesting that for one minute.

Deputy A. Breckon:

Can I ask you something about something you said in your presentation, John, about ring-fenced assets and possible asset stripping. How important, in your experience - you mentioned other areas - is it to have a managed strategy for this, some protection and also an exit strategy?

Mr. J. Giles:

I think, well, the evidence is in other parts of the UK, for example, and other areas around the world, it

has been managed and it has been a feature of the deregulation process, really. We can see why it might be very tempting to look at the asset value of Five Oaks and think: "Right, that could be divided up by a relatively small number of farmers on the Island and here is the end of our problems, basically." But I think we just feel it is not the -- if the answer is a sustainable industry in the future, a new factory is absolutely critical, basically. If the assets are divided up, you are not going to get the new factory and you are not going to get any exports, you are not going to get any growth. So it is an area where legislation needs to be seriously considered to prevent that happening, basically.

Deputy A. Breckon: (Offline question)

Mr. J. Giles:

Again, in parts of the UK what they do with the shares that were reissued to farmers, going on a bit, there were restrictions on when you could sell those shares. Rather than giving shares to farmers and them being cashed in the next day and producing the same sort of effect, I think the shares were issued with restrictions on. You could not sell them for somewhere between 3 and 4 years, I believe it was, and even then there were some restrictions on who you could sell them to. So they could be sold to family members and to other dairy farmers, but not ... Yes, so again, we thought about the need for careful and sometimes brave management from Government on this sort of issue. This is one area where careful consideration of the legal implications and a popular statement would say: "Right, okay, let us divide it up between 33 farmers." Well, very popular for the farmers, I am sure, but it is a brave decision to almost sort of intervene in the market but it is for the longer term benefit of the dairy industry.

Deputy K.C. Lewis :

John, as you are no doubt aware, there is the strong possibility of a breakaway group of dairy producers in Jersey. Notwithstanding the fact that you and your colleagues have worked all over the world, have you come across a similar situation to this in a small jurisdiction and what were the results?

Mr. J. Giles:

Well, over a period of time there has been one farmer with a well-documented challenge to the jurisdiction of the Marketing Board. I think in terms of will other people -- what we have said is in option 5 we suspect that there will be a -- what you normally find in a deregulation process is that one organisation, usually the organisation that that was, emerges as a new structure and finally sort of farmers tend to cluster around the new structure. We said in the report that under option 5 we would expect to see a small number of niche producers choose to operate outside the main body, basically, and again you might argue that if there is more competition in the local market, if there is a more competitive environment, that might bring prices down to consumers. Well, it could be argued that is quite desirable. The propensity of people to do this is higher when there is no strong vision about what is going to happen because farmers are logical guys, they are often pretty smart guys; if no one is setting out a vision for us we will come up with our own. So I do not think we are surprised at all that is happening. I do not think what anybody would think is a good idea, to be honest, if you took that to the logical extreme you could have 33 farmers with 33 dairies on the Island, and that is not desirable at all, basically. But I think in option 5 we would expect one or 2 people to operate independently. As we said in the report and said this morning, saying they want to operate independently is one thing; making a success of it is another thing altogether. So there is no guarantee that people who choose to operate outside the main structure will find it particularly easy, particularly in what is a fairly small, competitive local market.

Deputy R.G. Le Hérissier:

On the issue of the smaller farmer, I think I heard you state in one of your many previous presentations that a smaller farmer is not necessarily an inefficient farmer. Even bearing that in mind, do you feel if option 5 went ahead that there would inevitably have to be a shakeout and would the shakeout be at the smaller end of the producer spectrum?

Mr. J. Giles:

Will there be a shakeout? My understanding is that 1955, 1,000 dairy farmers on Jersey and everybody was a dairy farmer, basically. We are now down to 33, so there has been a long, ongoing decline. Again, if you look at the UK dairy sector from the end of the First World War, there has never been one year when the number of dairy farmers has gone back up, basically. If you trace the line down, short- term blips or accelerations of people exiting the industry, introduction of quotas, deregulation, single farm payments, produce a small ... So, shakeout of the industry, I think if we came back in 10 years' time will there still be 33 dairy farmers on Jersey? I think that is probably a bit unlikely. What we have said in option 5 is the decision to exit the sector may even be somewhat accelerated. Our experience is that dairy farmers are often extremely resilient. Agriculturalists generally are quite resilient individuals and quite resilient businesses, depending on how they are financed and so on and so forth. But there is an ability to hang on sometimes when all logic says they should not be. The range of numbers of cows on a dairy farm range from sort of 300 down to less than 10, basically. Logically, you would expect that probably the people who are going to -- you know, what we are going to have is a more competitive market here, basically. Logically, the people at the bottom end of the scale will find it more difficult to compete, but we have also in other parts of the world and certainly in the UK seen sometimes they are the very guys who hang on right to the bitter end. Whether they should or not is another matter. Yes, I think we said in the report we sort of see -- looking forward, 33 dairy farmers in Jersey? No, probably not. The amount of milk that is needed to be produced could be quite adequately produced with 20, 25, a few less, a few more.

Deputy A. Breckon:

Would you like to comment in general terms about how you have been received and getting information? Do you think from producers, from the dairy, from the Jersey Milk Marketing Board and from community officers, and even us, have we been helpful or otherwise? Is there anything you would like to say and place on the record, be that a criticism or praise, indeed?

Mr. J. Giles:

I think in terms of -- yes. In the report there are a number of acknowledgements made to one or 2 key individuals who have been exceptionally helpful in the course of our work. They are there for all to see. As a general comment, obviously we are aware this is a sensitive issue on Jersey and it is an emotive issue on Jersey. I think bearing that in mind people have been remarkably open with this and made our job, I guess, a bit easier. So we have got no complaints on have we have been denied access or information that we felt would be useful. I mean, we have been pleasantly surprised how open people have been and prepared to hand over information, documents, and engage in discussion with us about what is a wide-ranging remit. So we have no concerns on that complaint, Chairman. I think the stakeholders' meetings we have had have been sometimes quite long but on the whole conducted in a constructive way. So, we met your organisation; we have met members of the Council of Ministers; we have met staff from JMMB (Jersey Milk Marketing Board); the Jersey Dairy; we have met the 33 dairy farmers themselves; the Chief Minister. So, again, I do not think we can have any complaints that we have not been given a chance to air our views and opinions to the Jersey dairy sector. I think probably on this sort of project we have spent more time -- I mean, the phrase that is used, you know, stakeholders, I think we have spent more time discussing and consulting with stakeholders than perhaps we would have done normally. That has been I think not least a desire from Jersey to get these issues out into the open. In terms of any sort of concluding thoughts, I could do the whole presentation again, I suppose, but yes, concluding thoughts, the Jersey dairy industry has potentially got a lot going for it but clearly it has been managed over a period of time in a way that is very different from other parts of the UK, other parts of Europe, and the reasons for that are understood. But it seems to us that we have talked about waves breaking on the beach, basically, and there is an internal wave breaking at the moment on the industry structure, but there is also this huge big external wave somewhere out there in the Channel: you know, the need to position yourself that if imports, when they come on to the Island, that you have given yourself the best possible chance to compete against those; the need to build exports as quickly and as effectively as possible. For that to happen there needs to be the new factory. I think to have an organisation which is compliant is very, very important, which sets out this compelling vision for dairy farmers on the Island is very important. Yes, I think we have said all along we are not pretending that any of these issues are particularly easy to deal with, but they do need to be dealt with and I think not least the ability to get bogged on internal issues. I think if there is anything that surprised -- perhaps we should not have been surprised, but I think one of the things that maybe did surprise us when we went through the project was the amount of time, effort and energy that was being spent on what we believe to be internal issues, obviously issues which are held dear to heart to those people concerned, but the amount of time, effort and energy that is going in dealing with internal issues when we believe the big issue is more externally driven.

Deputy A. Breckon:

Thank you for that. I will just ask you, is there anything else you would like to add that we may have missed?

Mr. J. Giles:

The short answer to that, Chairman, is no, I think, at this stage. But I think we are also aware that -- I mean, our report has now been submitted, but I do not think we -- what we would say is that the report has been submitted and the recommendations are being discussed, not least in these sorts of meetings. To some extent the last 3 or 4 months, doing the report may be the easy bit. It has not always felt like it, I can assure you, but the report is one thing; implementation and the things I talked about a few minutes ago, these are not to be implemented in 2008. They are all first quarter things, 2007.

Deputy A. Breckon:

I will just thank you, indeed, John, for attending today, for the presentation and for answering our questions. We thank you most sincerely for that. What we will do, the process is that these proceedings will be transcribed. You will be given a copy of that on which to comment and any ums and ahs and whatever will be taken out, that is all, but if there is anything in there that you think is inaccurate then you have the option to come back to us to do that and we will try and do that fairly quickly.

Mr. J. Giles: Yes, fine.

Deputy A. Breckon:

So I will just conclude again by thanking you for your attendance and your professional presentation and for answering our questions.  We will now adjourn until 1.45 p.m.