AGRICULTURE

HL Deb 27 April 1977 vol 382 cc560-72

3 p.m.

Lord MIDDLETON rose to draw attention to the situation in agriculture; and to move for Papers. The noble Lord said: My Lords, I beg to move the Motion standing in my name. Just two years ago British agriculture could show an excellent record of growth and efficiency. Net output was growing steadily at a rate of about 5 per cent. a year; output per man was increasing at a rate of 7 per cent. a year, double that of manufacturing industry; farmers and farm workers, in number about 670,000, were producing from a shrinking acreage 68 per cent. of the temperate foodstuffs required by 57 million people.

At that time world prices of cereals and protein foods were rising very steeply, as were the prices of energy and other inputs. The value of the pound relative to that of other currencies was falling, so that the rising cost in sterling terms of bringing in supplies from abroad would seriously affect the balance of payments. There was a strong economic case for increased home food production. In April 1975 the White Paper Food from our own Resources was presented to Parliament and was well received by the industry. It showed that in the previous two years the United Kingdom's net deficit in trade in respect of food and drink rose from £1,750 million to nearly £3,000 million. The Paper concluded, first, that world and Community foodstuff prices were likely to rise between 1975 and the early 1980s, and that the risks of shortages and price fluctuation justified a policy of expansion of food production in the United Kingdom; secondly, that the industry's net product could expand at a rate of about 2½ per cent. a year and should be encouraged to do so; thirdly, that the Government would frame their agricultural policies in the light of these conclusions.

I am grateful for having the opportunity of drawing your Lordships' attention to what has happened to the agricultural industry since 1975. Perhaps the most alarming trend has been the marked decline in net output. Instead of expanding, output is falling at a rate of 10 per cent. a year. The industry's costs have increased sharply, and net income is falling. The Government's own estimate is for a fall this year of 9 per cent. in real terms. The level of farming net income in an industry that is largely self-financing provides the basis for subsequent capital investment. This is clearly stated in the 1977 Annual Review. It says: Retained earnings are a principal source of investment for the industry and this fall in net income is associated with a further reduction in the volume of new investment, particularly in buildings and works. In volume terms new investment in plant, machinery and vehicles is expected to be between 2 and 3 per cent. lower than in 1975, and that in buildings and works to be some 19 per cent. lower. That is the Government's estimate.

Last year's stock returns showed fewer dairy cows, fewer beef cows and fewer sheep, and the Review tells us that the pig breeding herd is contracting. That is borne out by the large numbers of sows being slaughtered in the last month or two. This is not a very happy picture if we are looking for expansion. However, in the Annual Review the Government say cheerfully that there is nothing whatever to worry about and that it is all due to the weather. Had it not been for the exceptional weather"— we are told— the level of production could have been expected to show reasonable progress. I believe that this optimism may be misplaced. I believe that there is a growing lack of confidence that stems from more fundamental causes than the vagaries of the weather, and that this must cast doubt upon the ability of the industry to show progress towards the Government's 1975 projected expansion. I therefore ask your Lordships to consider some of the disabilities which together are having a depressing effect on farming confidence.

I suppose the first shock to the mood of confidence with which British farmers entered the EEC was caused by the difficulties with beef in 1974. The noble Lord the Leader of the House is only too familiar with the problems that then arose. Very briefly, at the first round of EEC price decisions, the incoming Labour Government decided not to operate the EEC intervention system for beef. Producers were therefore left without any floor in the market. Many suffered serious losses, and there was a sharp reduction in the breeding herd until variable premiums were introduced in November 1974.

Far more serious and far more intractable is the problem of the rapidly eroding competitive position of British farmers resulting from the fall in the value of sterling. These marketing and monetary matters were debated in this House just over a month ago with a very high degree of knowledge and expertise, and I do not propose—even if I had the skill to do so—to cover that ground again. I would merely say that it is very easy to see the dilemma facing a Government, who are battling against inflation, trying to keep down costs to consumers, and trying also to have regard to our balance of payments.

Nevertheless, Government have a responsibility for the agricultural industry. No more than any other industry can industry remain healthy when margins are squeezed unmercifully by Government. Action, or rather inaction, on the green pound has led to a feeling among farmers that Government have found a way of permanently insulating British agriculture from Community farm price levels. This unease has been confirmed recently by the Government's bargaining posture on the green pound. Consumers may feel that they have a champion in the Minister of Agriculture, but producers know that their returns are suppressed because of the artificially over-valued green pound while their costs increase in line with the actual depreciation in sterling.

The gap between the market and the green rates for sterling against the unit of account rose this year to 35 per cent., and even after last Monday's agreement in Brussels the price differential is still of a similar order. No British industry could for long compete in Europe in a situation where, as for beef producers, prices are some 70 per cent. higher in Germany, or, for pig producers, 35 per cent. higher in Denmark, than they are in the United Kingdom. The list of these price differentials is endless, and they are largely, if not entirely, due to currency differentials, and the operation of MCAs—monetary compensation amounts.

Apart from the land itself, probably the overriding factor governing the productive capacity of agriculture is the availability of finance. It has never been easy for farmers to pay for capital from sources outside the industry, and, as the Government so readily acknowledge, a large part of its capital requirements are financed out of income. Let us not forget that it is the occupier's income which normally provides the working capital and it is the owner's income which must provide for investment in land, in buildings and in works of all kinds. In relation to 56 per cent. of the farmland in Great Britain the occupier and owner are the same person. The remaining land is farmed on a landlord-tenant system, which is acknowledged to be extremely beneficial to the economic efficiency of food production.

It is the industry's view that one factor which contributes to no small extent to that decline in capital formation, which is acknowledged and described in the Annual Review, is the present system of taxation, both revenue and capital. Farmers believe that the present system of revenue taxation ignores the particular circumstances which they face. Profits can be expected to fluctuate from year to year and the income tax system should permit the prudent farmer to husband the moneys earned in a good year against the contingencies of a hard year. Furthermore, a fairer way of dealing with the income derived from the business of letting land is to treat it as any other business for income tax purposes. Those are two ways in which action by the Government would undoubtedly provide more favourable conditions for capital formation.

However, no single fiscal action by the Government would provide a boost to confidence and investment of the kind which would be provided by a mitigation of the threat of capital taxation as it affects the owners and occupiers who farm land. The taxation of capital is a matter about which all noble Lords feel strongly. The matter is bound up with the whole question of private and public ownership and with the social structure of our society. The arguments have been well aired on many occasions in this House, and I do not propose to cover that ground again. I would merely say that if a tax is to be levied on the transfer of assets, including productive assets, farmers and landowners will expect to bear some burden. However, the structure and especially the rates of capital taxation are now urgently in need of review. At current rates the cumulative effect of capital transfer tax, capital gains tax and stamp duty on low yielding long-term assets can only damage the efficiency of British agriculture.

Farmers are concluding that, despite the available reliefs, taxes can be paid only by selling land, machinery or livestock, which are essential to carry on the business. They believe—rightly or wrongly—that for many years the burden of capital taxation has been placed upon them for political reasons rather than for revenue reasons. They believe that it is progressively inhibiting investment without which expansion of production is impossible. They regard the present penal rates as certain to erode the capacity to invest of just those businesses—of the many which go to make up the industry—which produce the bulk of our food. Although the larger farm businesses in the United Kingdom make up only 15 per cent. of the total, they produce more than half the total output. Individual farmers and landowners are increasingly aware that their European competitors do not face similar burdens. Such comparisons of rates as I have seen show that French and German farmers I are able to reinvest a much higher proportion of their profits.

One of this country's great assets is its farm structure. The average size of holding is 150 acres compared with 50 acres for the nine countries of the EEC. In the long run the periodic removal of large slices of capital must cause fragmentation and our relative advantage will decline. If we are to preserve and make the best use of this advantage in efficiency of food production, tax rates on existing owners need to be reduced.

In addition to these financial disabilities, there are the various political and fiscal threats which are not conducive to a feeling that the industry has a particularly happy future if the more extreme elements have their way. On top of the likely impact of existing taxes there is the threat of a wealth tax. Based on the type of wealth tax shown in the original Green Paper, it can be shown that in his lifetime the owner of a modest 350 acres would be bankrupted by a wealth tax alone. That proposal was hardly a morale booster.

Then there is the question of the rerating of agricultural land which was proposed in the Layfield Report. Whatever the theoretical advantage, the fact is that if this were implemented it would impose a burden of £120 million a year upon the industry, quite apart from the problems and costs of valuation both initially and annually. That certainly would be one way of increasing the cost of food production.

It is hardly a signal for investment for expansion when the National Executive of the Labour Party in its document, Public Ownership of Agricultural Land—Immediate Proposals for Action commits itself to what it describes as an interim measure to all-out nationalisation, to the creation of an ever-expanding public stake in agricultural land by what it calls the "voluntary transfer of ownership" as a means of paying CTT and wealth tax.

Nationalisation has usually been justified as a kind of rescue operation for an industry that has failed the nation. Does the performance of British agriculture up to now demonstrate failure? I should have thought that it provided an excellent example of how an industry can perform when it is unhampered by dogma—where success depends upon personal effort and where the pride of private ownership provides the incentive to invest for the future.

Then there is the legislation factor. The Agriculture (Miscellaneous Provisions) Act and the Rent (Agriculture) Act and their passage through this House are too fresh in our minds to call for any rehearsal of the arguments. Just how severe the effects will be on the landlord-tenant system, which was a matter of concern to the Young Farmers' Federation, or on the manning of our livestock farms, only time will tell. However, the fact is that this type of legislation has an unsettling effect and it certainly does not produce any extra food.

Finally, there is a strong feeling that we have no firm strategy with regard to land use in this country. We have about 47 million acres of agricultural land, of which only about 40 per cent. is capable of growing crops. The estimate in Food from our own Resources was that about 70,000 acres a year were being permanently lost to development of various kinds. Some depressing figures were recently provided by Dr. Alice Coleman in an article published in the Architects' Journal to show that far too high a proportion of these acres are taken from our best farming land where yields are high and food is therefore produced most economically.

The Centre for Agricultural Strategy, under the chairmanship of Lord Rothschild, last October produced its first report entitled Land for Agriculture. I expect that by now many noble Lords are familiar with it. The report concludes by saying: It is no exaggeration to say that, without a more positive approach to land use planning now, there is danger of land scarcity in the future". It goes on to say: It is essential to insure against this unacceptable outcome by instituting more effective monitoring of land use together with harmonisation of the work of various bodies involved in land use planning". My own experience of planning leads me to agree wholeheartedly with these conclusions and with the recommendations which are contained in the report.

Those then are some of the factors which I believe to be damaging to confidence within the agricultural industry. I appreciate that two years is only a short time in which to assess a trend, but we simply cannot explain away the whole of a 20 per cent. drop in net output by blaming the weather. Of course we had exceptional conditions last summer. We had a very difficult autumn and winter, and no farmer is particularly pleased to see a white Easter. However, whatever the causes, the 2½ per cent. a year expansion has not taken place and instead output is falling.

The industry now needs to know what the Government's policy is. The Annual Review White Paper states that, the policy of expansion and the priorities set out in Food front our own Resources are still valid and should continue to guide decisions on Agricultural Policy". There are, however, a good many indications, both in the form of positive action and where no action has taken place, that the Government feel that the 1975 case for modest but sustained expansion no longer has priority. If that is so, then I beg that they should say so and tell the industry what is expected of it into the 1980s. If it is not so, then the Government must take steps to dispel the deep-seated fear among farmers that the Government are flirting with the short-term advantages, which are political rather than economic, of going back towards the turning which leads to a cheap food policy. The reality is that such a policy is a mirage and its pursuit can only weaken the whole country.

Quite apart from price decisions and green pound decisions, there is much that could be done by Government action to resolve some of the disabilities that I have indicated as having a damping effect on confidence and, therefore, upon output and upon investment for the future. Unless some attention is paid to these matters it will be very hard to convince farmers that the Government really intend to promote the health of that industry which, above all others, has served our people so well and, with encouragement, can play a vital part in our national recovery. My Lords, I beg to move for Papers.

3.22 p.m.

Baroness ROBSON of KIDDINGTON

My Lords, may I thank the noble Lord, Lord Middleton, for introducing this subject in your Lordships' House today. The industry whose future we are debating this afternoon is one that has probably served the nation better than any other industry within our country. It is an industry where there is a better relationship between labour and management than in many others in this country. It is an industry where both worker and manager have the land, as such and food production, as such, basically at heart rather than their own personal advantage. It is one to which this nation owes an enormous debt of gratitude.

I am grateful to the noble Lord, Lord Middleton, although in many ways I want to deal with the subject in a different way. I want to do this basically because there are a large number of expert speakers in your Lordships' House today and I think that it is probably better if one sticks to making one or two points. The noble Lord, Lord Middleton, took the decision that he was going to avoid discussing the general economic inflationary impact on agriculture and deal with agriculture itself. I have taken the opposite decision because I do not believe that you can discuss the agricultural problem without setting it in the context of the general inflationary position this country finds itself in. So I hope your Lordships will hear with me if I bring in one or two general economic points in order to try to put the agricultural industry in the context of the general inflation.

The other day in the other place, in his Budget speech, Mr. Healey made the point that the recovery of the pound from its low point of 1.54 dollars to 1.70 dollars—.a rise of 16 points—had reduced the cost of our imports between £2,000 million to £3,000 million. One must therefore, I believe, logically assume that if over the past few years the value of the pound had not fallen from 2.4 dollars to 1.71 dollars, the present rate, we would have prevented raising the costs of our imports by no less than £12,000 million to £16,000 million. I believe that the failure to keep our currency sound is one of the principal reasons for the rate of inflation still running in this country.

I suspect that it is this depressingly high rate of inflation, and its impact on the cost of living, which has resulted in Her Majesty's Government's instructions to Mr. Silkin firmly to resist the devaluation of the green pound to the extent expected by our partners in the European Community and to the extent rightly expected by the agricultural industry in this country. This resistance, as we know, has created enormous difficulties in the livestock industry generally. Your Lordships have read ad nauseam of the fashionable economic concept that a substantial devaluation of sterling leads to a British export boom. I personally question this theory as it appears to leave out of account the inflationary impact forced by the additional costs of our imports to which I have already referred. In actual fact, devaluation is equivalent to a 38 per cent. to 40 per cent. tariff on imports, without collecting it. And what appears to he forgotten is that the increase in the cost of imports of these substantial, enormous sums must be recouped in the prices of British exports, which must erode their competitive advantage. This goes to the root of the popular theory that a reduction in the exchange value of the pound will lead to increased exports.

I was therefore astonished to read Mr. Brian Gould's letter in The Times yesterday asserting that our export prices remained uncompetitive, and asking for further devaluation. Surely this would again add to the grievous burden on British agriculture by raising the cost of imported feeding stuffs, which leads to our Ministry of Agriculture resisting even more strongly adjustments in the green pound, and making it impossible for the British dairying and livestock industries to function on a profitable basis. Would it not therefore be better, and the only longterm solution for British agriculture in common with other industries in this country, for Britain to cheapen her imports by allowing the value of sterling to rise?

One has the impression, when reading the financial columns of our Press, that the Bank of England has actually intervened to prevent the value of sterling from rising above the apparently set level of 1.70 dollars to the pound. In the Sunday Times on 1st April 1977 there was a quotation from an economic study by Messrs. T. Burns and A. Budd. With your Lordships' permission, I should like to quote from it: What should the Government do? We argued in January that the most effective way to control inflation is to allow the exchange rate to move up under the free influence of market forces. We did not expect such pressures to emerge until 1978 but it is already apparent that the upward movement is being resisted. This strategy of attempting to maintain competitiveness by holding down the exchange rate overlooks the fact that the squeeze upon the money side such as we are experiencing now can only have an impact upon the inflation rate if it is accompanied by the recovery of the exchange rate". Your Lordships may ask me why I have repeated these, to many of us, obvious problems of the overall inflation within our nation. I have done it for a particular purpose: because I believe that in the policy of containing inflation the heaviest burden has been put on the agricultural industry; the burden has been carried at the expense of agriculture in the forlorn hope of trying to help the rest of British industry. In doing it, I believe it has not in fact achieved its purpose, and that is one reason why Her Majesty's Government have had to insist that our approach to the green pound has not been as generous as one would have hoped.

Another problem in agriculture caused by inflation is that it has affected the industry quite differently depending on whether one is a grain or livestock farmer. The forecast on the London Grain Market at present for futures is that barley will be priced at between £88 and £94 a ton from November onwards and that wheat will rise to £94 in November and to £100 in March of next year. If one happens to be a cereal farmer in Britain capable of growing two tons to the acre, an income of £200 is no doubt extremely acceptable; but it is the cause of unqualified gloom among livestock farmers, particularly in pig breeding and dairying, and this is a stark indication of the heavy decline in the value of the pound.

Had we been able to maintain the value of the pound at 2.40 (or should we at the moment allow the pound the natural rise that it appears to be having) our grain imports from Canada and the United States could have been at as low as £60 a ton. If that had been the case, it would have strengthened the negotiating power of Mr. Silkin and enabled him to support amore generous devaluation of the green pound. I believe that these sort of figures vividly illustrate the true course of Britain's high rate of inflation and the reason for the imbalance of British agricultural prices as between arable and livestock farmers.

Another way in which the high rate of inflation has affected agriculture was touched on by Lord Middleton; that is, the effect of CTT particulary on the owner farmers of this country. If one has a 300 acre farm and the land is valued at £500 an acre, the gross duty under ordinary CTT would be £31,000 on which, thanks to hard negotiating, agriculture got a 50 per cent. discount. That is manageable in many ways—it is hard, but manageable—but because of the loss of the value of the pound, the value of land in the devalued currency has increased at such a rate that a 300 acre farm today is valued at £300,000, on which the duty would be £104,000, and, even with a 50 per cent. relief, that would still saddle the son of a farmer with £52,300 to find from income. The farmer who is dedicated to farming his land is not interested in the artificial increase in the value of his land; he wants to go on farming, he wants to hand the farm on to his son, but he does not wish to saddle his son with a mortgage for ever and ever.

Inevitably there is the problem whether the farmer should hand over his farm before he himself gives up farming, to try to avoid some of the higher duties; I but he then has to pay capital gains tax, which of itself turns out to be the same amount of money. Thus, on the whole, he will tend to hold on and his son or family will have to pay the capital transfer tax. This for a farmer will come at a time when he is quite an adult; he has probably worked on his father's farm for the whole of his life. He may inherit it and have to pay the capital transfer tax when he is 60 or older, and it could easily mean that he would not manage to get himself out of debt before it was his turn to hand over to his son at a similar age.

This is an unforgiveable state of affairs and something the Government must look at—although not necessarily because they were not aware of the problem. It was agreed that land should have special relief, but that has been eroded completely because of the inflation that has hit our currency. It is high time we looked at this problem once again, otherwise I fear we shall find the farmers of this country—the owner farmers of whom we are particularly proud, because land is best farmed if it is farmed by the owner and his family—selling out and taking a secure tenancy, and that will mean that our countryside will not be the countryside that we in Britain are used to. The countryside is of benefit to the whole of our nation, it is the garden of England and it is an environmental asset, due largely to the efforts of the owner farmer. Let us make certain that he can keep his farm.