The disturbing claims about UK dairy product prices

About 15 years ago I used to read the Sunday Times regularly. I have sinced switched to the Observer, although I have had cause to shout at that organ in recent months.

The Sunday Times used to run regular articles pointing out that in the UK we paid substantially more on average for food than shoppers in Europe and, particularly, the USA.

I have just spent an hour and £10 trying to search the Sunday Times archive for those articles, with no success. Suffice it to say that supermarket food prices in the UK were about 10% higher than in France and Germany, and about 15% higher than in the USA.

The intimation was, of course, that the domination of the large supermarket retailers produced a market where they could charge more and cream off large profits for building up land banks and more large supermarkets.

My suspicions in this direction were not helped when Sainsbury's in Newbury paid for a multi-storey car park to be moved from one side of a road to another so that they could have their supermarket in a better position and, soon after, they moved to another site anyway. Money seemed no object.

Since the Sunday Times reports we have had a major two-year investigation by the Competition Commission, which, to use the words of the BBC in 2000, "concluded that Britain's shoppers are, by and large, getting a fair deal from their supermarkets, but has identified a few issues that should be resolved by the Office of Fair Trading." The OFT has since set up a Code of Practice for the supermarkets, which it regularly audits.

But it is worth reminding ourselves of some of the Competition Commission findings:

On pricing, it concluded that there were two practices which were operating against the public interest when carried out by the largest multiples

• selling some frequently purchased products below cost which contributed to a situation where the majority of products were not fully exposed to competitive pressure (Asda, Morrisons, Safeway, Sainsbury and Tesco); and
• varying prices in different geographical areas in the light of local competition so that again the majority of products were not fully exposed to competitive pressure and competition in the supply of groceries was distorted (Safeway, Sainsbury and Tesco).

On the supply market, The Commission conducted a very thorough inquiry, and found that some of the larger supermarkets had sufficient buyer power that 30 of their practices adversely affected the competitiveness of some of their suppliers and distorted competition in the supply market.

In particular, 27 of these practices were felt to be against the public interest because they gave the five major buying supermarkets (Asda, Safeway, Sainsbury, Somerfield and Tesco) substantial advantages over other, smaller, retailers whose competitiveness was likely to suffer as a result.

Those were some fairly important findings. However, the general view seemed to be that all was reasonably hunky dory in the supermarket world and that the OFT would take care of things relatively straight-forwardly.

However, this week came news which, if it is proved true, is deeply disturbing:

The four big supermarkets and dairies were accused yesterday of illegally colluding to increase the price consumers pay for milk, cheese and butter.

The Office of Fair Trading said it believed the firms broke competition law by fixing the retail price, leading to an estimated cost to consumers of £270m. Asda, Tesco, Sainsbury's and Safeway, now owned by Morrisons, were named by the OFT, as were processors Arla, Dairy Crest, Lactalis McLelland, and The Cheese Company, which is part of Milk Link and Wiseman.

Of course, this all has to be proved and the involved companies strenuously deny the allegations. It will be December before the OFT's findings are clarified.

But the allegations are disturbing for three reasons:

1. They involve the issue of trust. Terry Leahy, boss of Tesco, recently said: "Tesco is the most loved organisation in Britain." He is probably over-egging the pudding a little, but the British shopper does trust the likes of Tesco, Sainsbury, Asda, Morrisons etc. They go to the supermarket every week and their supermarket tends to be a fixed part of their lives. So these allegations potentially undermine that trust.

2. Food is obviously a very basic part of life. The fact that these allegations concern some of the most basic of food staples - milk, cheese and butter - makes them even more fundamental.

3. Farming is a fairly fragile business these days, and has been for decades. I know the refrain "those poor farmers" is so familiar that it has become hackneyed, but it is true that farming is a very financially hazardous business. It is also a lonely business. Suicide rates are high. The mental health charity, Mind, reports:

A recent survey of over 500 farmers, conducted by Farmers weekly, found that one in three farmers feel depressed, while nearly two thirds said they feel more stressed than they did five years ago. Long hours, the BSE crisis, and the collapse of beef, lamb and milk prices have sent rural incomes plummeting. In 1992 over 14,000 people left the agricultural industry.

A more recent report from Fred Attewill in the Guardian says:

Over the past decade the price farmers have been paid for milk has dropped from 24.5p to 18.5p per litre - while the price in the shops has risen by more than 10%. Supermarkets deny profiteering and put the price rises down to factors including tax rises, booming property prices and higher wages faced by all businesses. But many farmers have been unable to survive on the price they have been paid and the number of dairy farms in the UK has crashed from more than 35,000 in 1995 to just 19,011 last year.So these dairy price allegations go to the heart of the crisis in the rural community. We are talking about the livelihoods of many here.

Here's what Chris Huhne has to say on this week's OFT news on dairy prices on Farmers' Weekly Interactive:

Contrary to the claims of the British Retail Consortium, the big supermarkets have been caught red handed charging excessively high prices for dairy products to consumers. The government must now use the full force of competition law to ensure there is no market rigging that will hit either consumers or farmers, who have long complained about the low price they receive for milk.

It is still early days. The OFT claims are still to be proven. However, it seems that my suspicions about the UK supermarkets, formed all those years ago when reading articles in the Sunday Times, are, possibly, about to be proved horribly true.