MILK PRODUCTION (LONDON ALLOWANCE) (Hansard, 21 January 1974)

§ Mr. Ivor Stanbrook (Orpington)

The problem which I wish to raise is ancillary to the general problem of the dairy industry. I shall say a few words about that before referring to the specific injustice which I hope my hon. Friend will seek to redress.

The current level of costs in milk production is beginning to grow to catastrophic proportions. Feeding stuff costs have risen spectacularly. In Kent, increased costs for dairy farmers have averaged about 4.5p a gallon over the past 12 months. There is no longer a compensating factor in the price of cull cows and calves, which has fallen by more than half over the past six months. An EEC meeting provided for an increase of up to 1.6p a gallon, but it would seem a minimum price rise of 5p a gallon is needed now if the milk production industry, which is so vital as a primary source of nutrition for our people, is to be maintained.

There is likely to be a severe milk shortage next autumn because costs and prices in the dairy industry are matters of balance with other factors and other products. Many farmers are going out of milk production altogether. The Milk Marketing Board estimates that production next autumn will be down by 100,000 gallons a day because of a drop in insemination.

It is against that background that I raise the matter of the allowances which are paid to producer-retailers of milk in the London area. It may be surprising to some hon. Members, but not, I know, to my hon. Friend, who knows my constituency well, that there are still dairy farms within Greater London. Some of them are in my constituency, which I believe is the largest in Greater London and which incorporates a large slice of the green belt in South-East London.

Some of my local farmers are, or have been, producer-retailers of milk. Their comparatively small size makes it uneconomical for them to provide heat-treatment equipment, so that farm-bottled unpasteurised milk is their product.

According to the Milk Marketing Board, there were 5,815 producer-retailers 1410 of milk in March 1973 in England and Wales, selling about 52 million gallons a year, which amounts to about 3½ per cent. of total liquid sales.

The Government encourage those who can afford to install heat-treatment equipment by paying each a heat-treatment allowance, which is now 0.83p a gallon of milk produced. No doubt that allowance is a useful and valuable addition to the income of the farmers concerned. All producer-retailers, whether or not they heat treat, enjoy a higher permitted maximum retail price of up to 1p.

Not every producer-retailer has a size of production or farm, or the finance, to enable him to provide heat treatment even if he wished. Several do not. In these days of sterilised and hygienic living, it is perhaps surprising how popular farm-bottled unpasteurised milk still is. One of my constituents, a Mr. Howie, of Holwood Farm, produces more than 300 gallons a day, most of which he sells to local people, including many who come to him from different parts of the South London area and have been coming to him for up to 20 years to collect non-heat-treated, farm-bottled milk regularly from his farm. One such customer collects 20 pints a week, once a week, and keeps it in his refrigerator, which just goes to show how fresh the milk is compared with standard milk. At the same time, Holwood Farm, through its roundsmen, supplies to local people each day about 500 gallons of bought-in pasteurised milk. It also supplies 120 dozen eggs daily.

There is no doubt, therefore, of the boon people like Mr. Howie in the London area are conferring upon hard-pressed Londoners. They should be encouraged and not penalised for the service they provide. But the heat-treatment allowance is not for them. It is not intended to be for producer-retailers who do not heat treat their milk. That may be fair enough.

There is also what is known as a London allowance, a concept that has been adopted in many spheres. It is designed to ease the general burden on those who live in the London area. It may be expressed as a form of cost-of-living allowance. It applies, for example, to civil servants, teachers and policemen. I understand that the general objective is to cover extra costs involving in living 1411 and working in the special conditions of London.

So there is a London allowance for those farmers in the Metropolitan Police District who both produce and distribute milk by retail sales. That allowance was introduced in 1965 and at that time it was a farthing a gallon. Today it is no less than 1.2p per gallon—a rise of over 10 times since it was introduced—and that is supposed to take account of the rapid increase in costs which has occurred over that period for London producer-retailers. It is significant that only recently that allowance was raised from 0.8p per gallon with effect from 1st October 1971.

Here comes the injustice. For some reason—I suspect that it is probably sheer administrative convenience—the London allowance is paid only to those producer-retailers who heat treat their milk. In other words, producer-retailers in the London area who heat treat get an extra 2.03p per gallon of milk produced. They get a heat-treatment allowance of 0.83p and also the London allowance of 1.2p, making a total of 2.03 per gallon of milk produced. Those who do not heat treat their milk get nothing, whatever the extra burden of production and distribution costs which arise for them through their location in the London area.

It seems totally indefensible that when a heat-treatment allowance is assessed at 0.83p per gallon for the whole country an additional allowance for extra costs due to the location of the farm should be confined to those already getting a particular allowance for a particular purpose, and yet nothing is given to those in the same location who have to bear extra costs such as production and distribution costs through being in the London area.

It is also indefensible because the cost of heat treatment is nothing like the allowance which is paid. The Milk Marketing Board and the National Farmers' Union calculate that the average cost of heat treatment is no more than 0.5p per gallon, so it is much less than the heat treatment allowance. In Scotland, where producer-retailers account for about 20 per cent. of the market, the heat-treatment allowance paid is only 0.26p per gallon, so one wonders what 1412 justification there is for the London heat-treatment allowance being more than 2p per gallon. As the heat-treatment allowance exceeds the cost of heat treatment, why is not the London allowance payable to all those producer-retailers who do London the service of producing the milk and have the burden of London costs to bear?

The recent increase in the London allowance must have been at least partly—I suggest, principally—due to the higher distributive costs in the London area. Therefore, leaving out those who are suffering from these extra costs because they do not heat treat their milk seems to be quite wrong. The distributive element within the London allowance might well be in excess of 1p. I ask my hon. Friend to seek to make that 1p available to all non-heat-treating producer-retailers.

I hope that my hon. Friend will not repeat the official explanation of the anomaly which has already been referred to me in correspondence, namely—and I quote not the exact wording but the gist of the explanation—that the London allowance is for London producer-retailers who heat treat and it would not be right to pay it to producer-retailers who do not. The facts of the matter challenge that explanation. If heat treatment costs justify a subsidy of 2.03p per gallon, let every heat-treatment producer have it. Do not mislead by calling part of it a London allowance. If, on the other hand, it is insisted that there should be a separate London allowance, we should not claim that it is all due to the extra cost of heat treatment in London, because we know that the extra cost of production and distribution in the London area must, as a matter of common sense, be a very significant proportion of the total extra costs.

The number of farmers concerned in this matter and the amount of money involved are minimal, but the injustice is great. I ask my hon. Friend to do something to remedy it.

§ The Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food (Mrs. Peggy Fenner)

My hon. Friend the Member for Orpington (Mr. Stanbrook) began by referring to the 1413 general position of dairy farmers in this country at the present time. The Government fully recognise the problems that the unprecedented rise in the costs of feedingstuffs and other costs have caused the industry.

The Annual Review discussions are now well under way and we are doing all we can to announce the determination of guaranteed prices earlier than usual, and if possible by the end of February. As my hon. Friend will know, my right hon. Friend the Minister of Agriculture was speaking to farmers in Kent only last Friday, so he is well aware of the problems and feelings of Kent farmers on this subject.

My hon. Friend the Member for Orpington had written to us earlier on this subject and I welcome this opportunity to explain in more detail, hoping that I shall not repeat the arguments which he has been given in writing, the factors which we had had to take into account in considering his proposal that the special London allowance should be paid to producer-retailers in the Metropolitan Police District.

It might be useful if I first describe the general arrangements which apply to the trade as a whole and, in particular, the special arrangements introduced in October 1971 to help dairy firms in London.

The Government set the maximum retail price of milk. They also determine the average costs of processing and distribution on the basis of sample costings. The difference between the retail price and the costs of processing and distribution determine the price which the Milk Marketing Boards receive for the milk they deliver to dairies. This is the broad basis of the arrangements.

In addition, however, provision is made, as my hon. Friend pointed out, for certain allowances. The most important of these is the heat-treatment allowance paid to dairies. This has remained unchanged for many years at 0.83p per gallon. It covers the cost of pasteurisation and other forms of heat treatment of milk by the processing dairies, and the dairy trade regards it as an incentive for the heat treatment of milk.

I should perhaps mention that the costings arrangements were simplified in 1971 by the introduction of what has become 1414 known as "the overall margin". In other words, the remuneration of the dairy trade since 1971 has been based on the average costs and profits of retail heat treaters. These are the integrated businesses—the processing dairies which carry out the whole operation of heat treating, bottling and retailing milk to the doorstep.

In 1971, special arrangements were also introduced for London. For a number of years there had been a small London allowance of 0.21p per gallon—an old halfpenny—paid on all milk heat treated in the London area. Even with this addition, however, the costings results for the London processing retailers for many years showed that their profits were unusually low compared with the average results over the country as a whole. When the margin adjustments which were designed to bring the average profit of the trade as a whole up to the agreed national target rate of profit had been made the profits of the London businesses were still well below the target.

To reduce this long-standing disparity between London and the rest of the country we introduced new arrangements which guaranteed London processing retailers 70 per cent. of the national target rate of profit. We do this by payment of a special London allowance—currently 1.2p per gallon—on all milk which is both heat treated and distributed within the London Metropolitan Police District.

This, then, is the background to our remuneration arrangements. How does all this affect the producer-retailer?

The Milk Marketing Board is responsible for ensuring that returns to producer-retailers, in their capacity as producers, are reasonable. The arrangements are based on the principle that as producers the producer-retailers should receive an appropriate producer price for milk and as retailers they should receive the distributive margin laid down by the Government. In fact, the producer-retailer enjoys certain advantages over the farmer who sells his milk wholesale to the Milk Marketing Board. His producer price, at 24.2p per gallon, is very close to the full guaranteed price and is thus about 3p per gallon more than the pool price received by other producers. In addition, he gets the current retail margin as determined from the costings. This combined entitlement 1415 is deducted from the current retail price for pasteurised milk. The difference is paid to the board by the producer-retailer concerned in the form of a levy.

A producer-retailer who pasteurises his milk is, of course, also eligible for the heat-treatment allowance of .83p per gallon. A producer-retailer who sells "untreated" or non-pasteurised milk does not get this, and we do not consider it appropriate that he should. It is also fair to make the point in this connection that the legal maximum retail price for untreated farm-bottled milk—the major proportion of milk sales by producer-retailers—is currently 6½p per pint, which is 1p per pint or 8p per gallon higher than the retail price or ordinary pasteurised milk. The levy paid by producer-retailers, however, is based on the price of pasteurised milk. The producer-retailer thus gets the full benefit of any premium for farm-bottled untreated milk.

My hon. Friend argues that the producer-retailer who is within the London Metropolitan Police District should be paid the special London allowance, or a proportion of it, even though he does not heat treat milk. I do not feel that this would be appropriate, for the following reasons.

As I have said, the level of the London allowance is based on the known costs and profits of London processing dairies which heat treat milk. Producer-retailers who sell untreated milk do not necessarily incur these high costs. The National Board for Prices and Incomes which looked at this whole question in 1967 was satisfied that the unusually high costs in London arose above all in processing and distribution to town depots in London". In setting a geographical area for the payment of the London allowance, we chose the Metropolitan Police District. This inevitably leads to some anomalies, particularly at the periphery of the area. The firms we are trying to help by these special arrangements are those carrying out complex processing and distributing 1416 functions in difficult urban conditions involving the use of distributing depots. These operations cannot be fairly compared with those of a producer-retailer bottling and selling untreated milk locally from his own farm. After all, although I know that there are farms in my hon. Friend's constituency, there are not many farms in central London.

My hon. Friend referred to this allowance as if it were an allowance for farmers to cover the cost of production and distribution. It is, as I have made clear, an allowance for processing dairies rather than for farmers. As I have said, the producer-retailer selling untreated milk already enjoys the considerable advantage of being able to charge 1p per pint over the price of ordinary pasteurised milk.

It can be argued of course, as my hon. Friend does, that producer-retailers within the Metropolitan Police District who are not eligible for the London allowance because they do not heat treat milk should be paid a portion of this allowance reflecting the costs of distribution. But this would introduce fresh complications in an already rather complicated system which would be difficult to administer and which I do not feel would be justified. As I have said, the London allowance is based on the average costs and profits of heat treating retailers who both process and distribute milk within the London area.

There are firms which process milk outside the London area and distribute within it. There are firms which process milk inside the London area and distribute outside it, and so on. We have steadfastly, and to my mind rightly, turned our face against special London allowances in those specific cases.

For all these reasons, therefore, I am afraid that I can see no reason to alter the decisions which have already been taken about the eligibility of producer-retailers for the special London allowance.