HL Deb 10 February 1988 vol 493 cc275-302

8 P.m.

Lord Gallacher rose to move, That this House takes note of the Report of the European Communities Committee on Agricultural Stabilisers [9th Report, 1987–88, HL Paper 43].

The noble Lord said: My Lords, the presentation of the report by the Select Committee in your Lordships' House is normally a fairly pleasurable occasion because it means that a great deal of reading, some painstaking drafting and various other intermediate problems are now over. When we are accorded the additional accolade of time in your Lordships' House in which to discuss the report, particularly when it is so well-timed as this discussion tonight, I think we are entitled to feel that the work has been truly worthwhile.

However, any pleasure we may feel about that is overshadowed this evening by the sad news of the death of one of our colleagues, Lord De La Warr. I shall say no more than that he was a member of both the sub-committee and the Select Committee and he was valued as much for his personality as for the contribution which he made to our debates.

Agricultual stabilisers by themselves are not particularly significant. They require the complement of set-aside if they are to become in total really significant and to achieve anything like the purpose for which they are intended. It is said that in order to be a true European you need to be bilingual. That means not that you should speak two languages, but that you should have reasonable competence in your mother tongue and have a mastery of technical jargon. Towards that end we have taken the liberty in this report of giving you on pages 16 and 17 a glossary of technical terms. For this we are indebted to the Ministry of Agriculture, Fisheries and Food, and I acknowledge that debt this evening.

In the glossary noble Lords will find "agricultural stabilisers" defined, as the Commission defined them, as: any mechanism to keep market support for agricultural commodities within budgetary limits". The proposals for agricultural stabilisers were only part of the package proposed by M. Delors for balancing the Community budget and indeed for extending that budget. Even so, they constituted a fairly formidable package running to over 200 pages. Apart from their complexity, they raise economic questions—for example, the use of the gross national product as a basis for contributions to the budget by member states. They also raise the question of improved regional and social assistance for member states in the Mediterranean area.

In making the proposals, the Commission claimed that previous budget measures had been taken to deal with the common agricultural policy. For example, they said that there had been more restrictive pricing. They said that there had been controls on sales into intervention, that quotas had already been imposed on commodities like milk and sugar, that a co-responsibility levy existed for milk and cereals and that there were guarantee thresholds already in existence for cereals and oilseeds. The effect of these measures either in concert or separately has been variable for divers reasons which need not concern us unduly this evening.

Because of this background and the complexity of the proposals, the Select Committee decided to concentrate on the proposals for the arable sector, which we defined as cereals, oilseed and protein crops as well as sheepmeat. The other commodity proposals were not considered by us partly because of the time factor, partly because of the resources available to us and partly because of their nature. For example, tobacco is not a commodity in which we are greatly interested in the United Kingdom. Although we have an interest in fruit and vegetables, it is I believe limited to four commodities, and esoteric things like nectarines and satsumas pass us by.

In the case of sugar there is already a regime which, if properly operated, should be self-financing and ought not to make any claim on the budget at all. It does not; but that is a question of mechanics rather than principle. Neither do we look at wine at all because the Select Committee reported some while back in detail on the wine lake. Although wine is a major source of expenditure to the common agricultural policy, we did not feel it appropriate at this time to go into that question again in any depth. It should however be said in passing I think that the wine regime is in part due to the endeavours of Mediterranean states. As part of the Delors proposal is to increase funding for these areas, the benefits which they already get from over-production need to be taken into consideration.

In the case of beef and milk we were aware that in the final months of the United Kingdom presidency of the Commission in 1986 the UK Government proposals for beef and milk were accepted. Consequently we did not at this time feel that it was necessary to re-open the question of beef where the market is thought to be reasonably satisfactory at the present time. In the case of milk, the evidence available to us is that the quota system is working very effectively, perhaps too effectively, having regard to the closure of creameries throughout the United Kingdom which is now taking place and which is due to take place on a fairly extensive scale.

Mention of milk allows me to suggest also, now that the European Court has decided against Britain in the matter of the use we are making of the Importation of Milk Act 1983, and that we can expect to see milk from other member states entering freely into the United Kingdom, that the question of the enforcement of milk quotas in those member states becomes of even greater importance to us. We have in the past perhaps taken a somewhat lighthearted attitude to non-observance of quotas by certain member states. It would be a thousand pities I think if the doorstep delivery system in this country were badly affected by the introduction of milk from other member states which is over quota.

The tax on oils and fats was also part of the original proposals by M. Delors. We understand that that proposition has now been dropped, but as it was expected to produce a revenue of no fewer than 2 billion ecu for the Community budget, we wondered how the shortfall would be made up in the light of the decision to drop the proposed tax. That is not to say of course that we shall have any sympathy for the proposition as such. We think that the decision to drop it was entirely justified.

Therefore having defined the area in which we were going to make inquiries, the Select Committee asked itself first of all whether the proposed stabilisers would have any effect on spending. If so, would they also limit production? We also asked ourselves—quite properly I think—what effect the stabiliser proposals would have on markets and consequently on farmers. The originally proposed maximum guaranteed quantity under the stabiliser proposals for cereals was to be set annually in the price fixing process. The document which we saw included a figure for 1988–89 of 155 million tons for cereals. This figure, it was said, would take account of the Community's requirements in the year and also allow for the proper level of imports of cereal substitutes.

The idea behind the stabiliser proposals was that if production in any year exceeded the target of 155 million tonnes for 1988–98, as I said at the outset, then one or more of three measures would be taken. First of all, there would be a reduction in prices. Secondly, there would be an increase in the present co-responsibility levy for cereals, but the price reduction and the increase in the levy would be limited to 5 per cent. in 1988–89 and 7½ per cent. in the years after that. In addition, the third arm was that there would be a change in the date when intervention buying could take place. That is of consderable significance so far as the cereals market is concerned. In the case of oilseeds, the maximum guaranteed quantities are already established, but the proposal here was that there would be an earlier phasing of a cut on price limits under the stabiliser regime.

For sheep, the proposed stabilisers are part of an overall review of the sheepmeat regime which is due to take place in 1988 anyway. The Commission is proposing for sheep a guarantee threshold of 87 million head, which is said to be equal to the Community flock size in 1987, with a directly proportionate reduction of basic price if that guarantee threshold is exceeded.

The Commission also envisages phasing out the United Kingdom variable slaughter premium, and consequently clawback, plus intervention with a new annual premium per ewe calculated on the basis of separate coefficients for northern and southern member states. Headage limits were also proposed. Initially, these were to be 500 ewes per farm, with 1,000 ewes in less favoured areas. It is our understanding that in the discussions which have taken place subsequent to the publication of the proposals these headage limits have been dropped. The Select Committee are not displeased about that.

The powers which the Commission was seeking under the stabiliser proposals were of an executive kind, and the Commission sought power to trigger the stabiliser mechanisms across the board, that is to say, for all commodities. Therefore it would not have to rely on a decision by the Council of Agriculture Ministers or on meetings of the various agricultural management committees. This new power and the concept of triggering a mechanism was of importance to the sub-committee, and we sought to take evidence especially on it.

We asked the organisations which gave us evidence, both written and oral, how they thought stabilisers as such would work. Their response in evidence is summarised in the report. Since the report itself—that is volume 1—was published, volume 2, which is the verbatim record of evidence, has also become available. However, for the busy reader, I think the summaries given in volume 1 are adequate. I would express at this stage our gratitude to the many organisations which repeatedly and regularly respond to requests from Sub-committee D for evidence, usually with timeliness, on a fairly wide variety of topics.

Your Lordships will be aware that there was no agreement on the stabiliser proposals at any of the Agricultural Council meetings preceding the Copenhagen Summit. We understand that the whole question is to go before the Brussels Summit to be held on 12th and 13th February. It is also understood that the new proposals on set-aside and extensification, which appeared subsequent to the preparation of our report and which we are now investigating, will also be on the agenda for the Brussels Summit. I shall not say much about set-aside, although I shall not be surprised if other members of the Select Committee who are well informed on the subject choose to do so this evening.

Having taken the evidence and asked what I hope were sensible questions, we reached our opinion, which can be summarised under a number of headings. The Select Committee accepts now, and always has accepted, the need to restrain the cost of the common agricultural policy both in absolute terms and, indeed, as a percentage of budget spending. As a Select Committee we regret that the rolling programme of agricultural price cuts we recommended more than eight years ago, with socially supportive measures for small farmers—repeated many times since we first made the recommendation—has never been acted upon by an Agricultural Council. This lack of political will is undoubtedly the root cause of many of the CAP's problems. We regard the price cutting route as being too late now because the cuts which would be necessary to be effective would be of such a nature that they would be politically unacceptable and would devastate the rural economy throughout the European Community.

We regard the agreement on agricultural stabilisers as only part of a package necessary for fresh budget resources. The original proposals which we considered have been weakened in subsequent negotiations. Even when they were first tabled, we thought they were a second-best solution. The fact that this weakening has taken place raises once again legitimate doubts as to the political will to implement stabilisers and to give executive powers to trigger mechanisms.

We accept the principle of automaticity which is necessary for the use of trigger mechanisms but, in view of the novelty of this concept, we feel it necessary to suggest machinery to allow a regular ex-post evaluation of how the Commission has implemented the trigger mechanisms so far as stabilisers are concerned.

We make the point, I hope legitimately, that stabilisers alone will not freeze budget expenditure. Neither can they control what seem to us the three key determinants of agricultural spending—world market prices, the US dollar/ecu exchange rate and the weather in any given year. We see stabilisers as part of a common agricultural policy and budget strategy. Other parts are not specified because they were not available when this report was prepared. Set-aside is now on the table and therefore has to be considered in addition to stabilisers.

The disturbance to markets which the use of stabilisers may create is significant. These disturbances are not necessarily covered by existing futures markets, which were created for, and indeed exist for, different functions. Therefore, in the opinion of the Select Committee, the effect on farm incomes of the use of stabilisers is unpredictable and depends partly on how large the consequential price cuts are.

As regards the sheepmeat proposals, we would have little hesitation in agreeing that the proposals as drafted discriminate against the United Kingdom. We are told that the European Community is 80 per cent. self-sufficient in sheepmeat. Although we accept that if farmers divert into the raising of sheep an oversupply position is possible and could quickly be reached, we feel that as the sheepmeat regime at present is based on the deficiency payment principle, it is not as such disadvantageous to consumers. As the whole of the sheepmeat regime is due to be reviewed in 1988 in any case, we believe that the present proposals for sheepmeat could well be deferred until that review takes place. However, if there must be a stabiliser for sheepmeat in the meantime the suggestion by the Select Committee is that this should be set on the basis of ewe numbers.

That is the report. I have very much pleasure in moving its acceptance.

Moved, That this House takes note of the Report of the European Communities Committee on Agricultural Stabilisers [9th Report, 1987–88, HL Paper 43.]—(Lord Gallacher.)

8.16 p.m.

Baroness Elliot of Harwood

My Lords, before I begin my short speech about the report I should like to add to the words of the noble Lord, Lord Gallacher, about the tragic death of Lord De La Warr. I knew him as a boy. His father was Under-Secretary for the Ministry of Agriculture when my husband was Minister of Agriculture in the early 1930s, and I have been closely associated with the De La Warr family for more than 50 years. The shock this morning was really terrible, and I am sure we would all like to send our sympathy to his wife and his family for this terrible event.

When I first heard the word "stabiliser" I could not think what it meant. Today, having listened to and questioned so many different societies and agricultural interests, I understand its meaning. It is much the same as what we have recommended in several of our Sub-committee D reports. We have always agreed that there should be a close liaison between what farmers produce and what consumers want to buy. "Do not produce what you cannot sell' is a good principle. Unfortunately, it is not always adhered to.

In the words of the report, the delicate balance between budget production and market needs requires careful attention. That is putting it mildly. I have been stressing that consumer needs are vital to the farmers. We do not think enough about that. If a policy of stabilisers can help, this is certainly the moment to start. There is one thing which I always find it difficult to assess about quotas or restrictions. How can we follow the fluctuations in demand as well as production? Sometimes one is told that milk is overproduced. Then the next day one reads in the Scottish papers that we cannot meet the demand for making cheese because there is not enough milk. How does one cope with that? Agricultural supplies take time to produce. Things cannot be altered in a matter of days, months or even years. If I concentrate first on the subject which I know most about, it is to discuss what has been said about sheep. Your Lordships know that I am deeply involved in that particular section of the industry and I have had very long experience.

First, I think we must realise that there are two very different periods in the production of edible mutton. There is rearing and there is fattening. The main areas for the production of sheep are the areas which are only fit for breeding and grazing. Of the total area, 57.2 per cent. is given over to that type of production. As I think your Lordships know, those areas are called "less favoured"—why, I have never known. To illustrate what enormous importance they have in all our countries, in Scotland they represent 98.6 per cent. of production, in Wales the figure is 79 per cent. and in Northern Ireland the figure is 76.6 per cent. Those figures are in the report.

Without sheep production, those areas would be wasted. The sheep farmer in the United Kingdom has an average of 389 sheep per farm. In the EC, the number is 80. In the real hill country in which I live, and also in Wales, Cumbria and other parts of Scotland (both the Borders and the Highlands), the number of sheep involved on a bigger sheep farm would average between 1,000 and 3,000 ewes.

That system also provides arable mixed farmers with sheep for fattening because we sell our sheep into areas where they can be fattened. The farmers who buy them raise them for the butcher and the public. The industry is tremendously important because it covers such a wide experience in the farming world. That is why we are all opposed to the limited proposal put forward by the European countries. We wish to see that the sheep industry is not overproduced or the public oversupplied. If it were not for the fact that we can produce what we in fact produce, we should go bankrupt. I therefore strongly support the recommendations in the report at paragraphs 59, 60 and 61, which have been mentioned by the noble Lord, Lord Gallacher.

As regards the actual effect of stabilisers on limiting certain produce, I agree with the report that the outcome is doubtful. We can only tell how the various countries will work out the critical introductions from experience. To date, although European countries have talked about the matter for a long time, the will to carry it out has been lacking, and it remains to be seen whether it will be done in the end.

There is one other principle which I feel sure cannot be ignored. If farmers are to crack down on production, there must be some compensation. That brings in the worrying matter of how to provide compensation. Will the set-aside policy help? I think that that will be very difficult to carry out. Our next inquiry will deal with that very matter. I hope that we shall reach some useful conclusions and that our next report will be as useful as I believe some of our reports have been in the past.

8.25 p.m.

Baroness Robson of Kiddington

My Lords, I join, from these Benches, with the noble Lord, Lord Gallacher, in expressing our deep sorrow at the sudden death of Lord De La Warr. I should also like to thank the noble Lord for the way in which he introduced the report and for the report itself. It is not lengthy but it brings out, in my view, all the essentials as regards the suggestions which are coming from Brussels.

All of us in every political party agree on the need to control expenditure on agricultural support. If the Common Market is going to survive, that must be done without too much damage to the agricultural industry. It is a great tragedy that an industry which has excelled in increasing its productivity, both per acre and per man—probably more so than any other industry—should find itself in the position of having been too efficient.

We must also never forget the place of agriculture in creating the countryside which we all love and in providing employment in remote rural areas. There are some of us who can remember the state of the countryside in the 1930s. None of us would care to go back to that.

There is no doubt in my mind that the arable sector of the Common Market produces the greatest problems of surpluses and rising coasts. As the noble Lord, Lord Gallacher, has said, the use of the price structure as a means of curbing production is at best an ad hoc response to the problems of a particular year. That was also stated in the report. To be politically acceptable, such responses would have to be minor and followed through year by year. It is therefore a tragedy that the advice of this country was not taken eight years ago when the proposals for using the price structure to prevent the creation of too many surpluses were put forward. Such responses would also have to be introduced in such a way, and be so minor, that they did not impose too great a hardship on the agricultural community.

As the noble Lord, Lord Gallacher, has said, to look at stabilisers in isolation will not achieve the desired reduction in production. Those policies must go hand in hand with a policy of set-asides. I am delighted to hear that the committee is now looking at the proposals for set-aside. It is only if the two matters go hand in hand that we can achieve a reduction of surpluses.

I believe that set-aside, in itself and properly introduced, is probably the quickest way of controlling budgetary expenditure while maintaining a reasonable income for the farming community. However, there are dangers, and I make no excuse for talking about the matter because I find it desperately important that we look at it together. There are dangers in a set-aside policy, and I think that compensation should not necessarily be contemplated on a long-term basis. However, it would give the Community breathing space in which to reduce its surpluses. During that period, the Community should concentrate on the marketing of produce to avoid further surpluses, perhaps by the creation of cheap credit facilities for third world countries.

The set-aside policy would have to be adequate to safeguard the farmers' income. But there are problems even there; we only have to look at what has happened in the United States to see that. A straight acreage payment would obviously favour the large farmer and care would also have to be taken that not only the most unproductive areas of land were taken out of production. It might be necessary to think in terms of a sliding scale of compensation under set-aside.

For those reasons, a policy of set-aside should be contemplated to stabilise the market on a short-term basis in the first instance. Stabilisers without set-aside will not work without creating excessive hardship.

As has been mentioned, the most controversial proposal from the Community is that dealing with the sheepmeat regime. Like the noble Lord, Lord Gallacher, I should like to question whether it is necessary to introduce stabilisers at this stage when only 80 per cent. self-sufficiency has been achieved within the Community, when Continental Europe is nowhere near achieving self-sufficiency and when in a butcher's shop in France a leg of lamb is twice as expensive as an equal weight of sirloin. In many parts of Europe lamb is still a luxury meat. Therefore, I do not see that it is necessary to deal with the matter now, particularly in view of the fact that the sheep regime will come up for review in 1988.

It would be quite wrong to introduce stabilisers which militated against Great Britain. The whole principle of the CAP is that it is a common policy and the whole of the Community should be treated equally. Britain should not be penalised because it is more efficient.

I was pleased to hear that it is now unlikely that the limit on ewes will be reintroduced. We are quite happy with the acceptance that the premium should be paid on ewes, but we should have been strongly opposed to the introduction of a limit of 500 ewes on good land and 1,000 on hill land. Like the noble Baroness, Lady Elliot, I farm sheep—in the Western Highlands and also in Oxfordshire—so I have a personal interest.

The sheepmeat regime at present in force in England, which, as has been said, is a deficiency payment system, has worked well for many years. Perhaps the Government should try to persuade other countries within the EC to accept a similar regime. I believe that farmers in this country feel keenly that they are being penalised in many ways. If we are to have a proper common market all countries within the Community should be able to compete on equal terms.

I do not know whether any noble Lords present tonight watched "Panorama" on Monday. It dealt with what was termed the "rip-off"—fraud in the Common Market. The programme mentioned figures of £2 billion, or 10 per cent. of the Community budget. I have no idea whether the figures are correct or exaggerated, but if the fraud amounts to only half that figure it represents an enormous slice of the Community budget. Fraud occurs on the Irish border, in Germany, and all over Europe. There is no incentive for member states to prosecute because if they do so they have to pay back the levy. In my view the Commission must be given greater power and allowed to set up a much stronger fraud squad than that which exists at the moment, which I am told employs only about 15 people. I mention that point only because the sums involved are so large that they have a tremendous impact on the whole of the Community argricultural budget. I believe that that is also something to which we should turn our attention.

8.35 p.m.

The Duke of Somerset

My Lords, as a member of the sub-committee I find that this report makes rather gloomy reading. That is not a criticism of the drafting but a comment on the Commission document on which the report is based.

Nearly everyone with a passing interest in the countryside expresses dismay at the CAP and its runaway budget. This report makes clear that the stabiliser proposals will not be very effective overall but will have a considerable effect on many individual UK farmers. Onlookers are not impressed by that inability to find a solution; but if there were an obvious answer to oversupply, it would long ago have been implemented. There are no magic alternative crops or enterprises.

There are many commodities in surplus in the EC and tonight we are only considering two—cereals and sheep. Any proposals have to cover such a wide climatic and social range that whatever is proposed will be felt to be discriminatory in some region or country. That is an inherent problem with the CAP.

Worldwide oversupply is unlikely to ease in the immediate term, with the USA also overproducing cereals. Perhaps even more seriously, Chinese peasant farmers are becoming more organised and are likely to become net exporters in the near future. Thus the fact that Community cereal acreage has been reduced slightly since 1984 is dwarfed by that last fact alone. Likewise, the effect of recent inclement harvest weather in Europe is balanced by the great strides that scientists are making to increase plant yields and performance each year.

All those factors call for a more determined policy that looks to worldwide rather than narrow domestic considerations. One member can upset any agreement, as in the example of the infamous guarantee thresholds quoted in the report. There is a great mountain of food in the world, but famine still claims endless victims because political will can override human considerations and group benefits with narrow-mindedness of outlook. Surely this is a worldwide problem calling for larger scale thinking. We have gone from domestic markets into the EC: should we not be thinking now of worldwide markets?

However, to return to the immediate problems and in particular to those affecting many farmers in the UK, there has been a gradual squeeze on income combined with milk, sugar and potato quotas, leaving limited room for manoeuvre. I should like to emphasise paragraph 49 of the report. There is a very real danger that many farmers will see the price cuts, as part of the continuing 'cost-price' squeeze which encourages producers to greater efforts to improve efficiency, rather than to cut production. The obvious move has been into sheep but the Commission is forestalling that move with a maximum guaranteed quantity scheme provisionally set, as we have heard, at 87 million head, the existing Community sheep count.

We have already heard about those proposals, so I shall mention only that fencing is a more basic and expensive difficulty. Another danger for the typical mixed farm is the lack of grain storage facilities. Often grain is held in cattle yards until November and sold just before the dairy cows come in for winter. Intervention buying, delayed until the 1st November as is proposed, would have an immediate effect on the prices that this type of farm could expect to receive. It is the cereal producers who are suffering particularly from the effects of the green pound. A devaluation would greatly help British agriculture.

The conservation, tidyness and prosperity of the countryside are dependent on farmers having a little left over in their pockets at the end of the day for such non-income producing activities. However, there are partial solutions on the horizon in the form of either the government-inspired farm woodland scheme or the EC proposals for set aside and extensification. Either of those could be a help to farmers, but their degree of usefulness is dependent almost entirely on the rate of incentive. It is in this regard that stabilisers, in conjunction with the measures that I have just mentioned, could play a useful role in cutting production but still keep a reasonable rural economy in place.

On a budget level there is a danger that the administrative and policing costs of the alternative schemes will mop up much of the savings of the stabilisers; but it must be right to pay as much attention to safeguarding rural communities and jobs. Our committee looks forward to reporting on set aside. The rates must be high enough to cover fixed costs, meaning at least £300 a hectare; but workable schemes to produce less of the same acreage and encouraging organic farming are most welcome. Whatever combination of stabilisers and other schemes are chosen, I am sure that all farmers will put in a plea for another type of stabiliser; namely, stability of policy. There must be a long-term plan which is stuck to, so that farmers can plan their cropping and budgets and avoid the farcical situation that has developed in the past two seasons, when farmers have deliberately grown more cereal acreage in the fear of some quota system being based on their existing acreage. That has only had the effect of pushing up production of barley and wheat of course.

The farmer knows that he cannot go on producing commodities in oversupply. Let us create a system that will work to cut production and thus eventually cut central costs. The long-term answer must be as stated in the report: price cuts over a period of years with direct payments to small farmers and in addition a financially worthwhile set of extensification schemes.

8.43 p.m.

Lord Carter

My Lords, as a member of the subcommittee I should like to begin by thanking the noble Lord, Lord Gallacher, for the excellent way in which he introduced this report which reflects the splendid way in which he chaired the sub-committee. With a rare combination of wit and firmness, he guided the committee safely through a very complicated subject.

The report makes clear that stabilisers are one method of budgetary control. They are an attempt to combine production capping with cash limits. Taking the worst view of them, they can be regarded as impractical, unfair and based on very dubious statistics. One obvious unfairness which concerns us as farmers is the difference in harvest performance not just across the Community but within each country. To take the 1987 season as an example of a year's harvest, the north-east of Scotland and East Anglia had one of the worst harvests in living memory, the West Country had a good harvest, and the middle of England, as always, had a fairly average harvest.

That shows what can happen in one country. Let us look at the problem on a European scale. The stabilisers are to be based on an estimate of the total of the European harvests. There could well be a situation in which one country has had a bad harvest and the other countries have good harvests, and the total of the harvests triggers off the stabilisers and cuts in prices. The country with the bad harvest would be hit very hard indeed.

The report also makes clear in paragraph 38 the preferred policy of Sub-committee D. The Committee's preferred instrument for controlling agricultural production is a policy of rolling price-cuts sustained over a period of years and announced well in advance with direct payments for small farmers". Those members of the committee who are farmers must have wondered when that sort of recommendation was produced whether we should not be compared to the proverbial turkeys who voted early for Christmas. We have to agree with this recommendation. It is logical. However, as the noble Lord, Lord Gallacher, said, it is probably not now politically possible.

Further to confuse a very confusing situation, there are the proposals for set aside. I do not propose to go into this matter in great detail and pre-empt the discussion that we shall no doubt be having on a subsequent report. The proposals, which were produced by the ministry as a consultative document, were overtaken to some extent by the Commission's proposals. In the evidence given to it, the committee was very clearly told that there was a political linkage between stabilisers and set aside. If there is no agreement concluded in Brussels this week—and let us hope that there will be—on the stabiliser proposals and there is a linkage, presumably that means that it will not be possible to have a set aside scheme for the 1989 harvest, or 1988 and planting.

If one must await agreement at the summit in Hannover in June, one must wonder whether it will be possible to devise a set-aside scheme and start this autumn. Should that prove to be the case, it will be another opportunity that has been missed in a year when cereal stocks in the Community are declining rapidly.

I must say that I did not entirely understand why there has to be the political linkage. In the long term, as was said by the noble Lord, Lord Gallacher, there has to be such a relationship; but in the short term, if we do not have the stabilisers and cannot reach agreement on them but do have a set-aside scheme which is mildly successful, it would reduce the need for stabilisers. That is the point. If we cannot have stabilisers it will be better to start off with set aside until we can reach agreement on the stabiliser system.

A further complication that was touched on in the report refers to fluctuations in currency and their effects. There was a debate last week in this House on the common internal market in which I made the point that one of the major implications of the common internal market is that MCAs and the monetary and compensatory amounts can be applied: only in a way which acts as a barrier to free trade. Therefore the Community is committed to removing all MCAs in four years' time at the latest so as to comply with the Single European Act … It is just not possible to abolish the green currencies and the MCA system unless the market rates of currencies are kept in a very closely controlled relationship, namely the EMS". I drew the inexorable conclusion that we must join the EMS if the agricultural support system is to survive. That was confirmed by the noble Lord, Lord Beaverbrook, when, replying for the Government, he said: MCAs are an integral part of the current system of agricultural pricing in the Community and we should like to see them abolished in a phased way. However, a number of our partners would not be able to accept that easily. The single market will not be achieved while MCAs remain".—[Official Report, 3/2/1988; col. 1154.] That point should be borne in mind when considering the stabiliser proposals. When the Minister replies, I hope that she will explain to the House exactly how the stabiliser system relates to the paraphernalia of the green currencies and MCAs and how the whole shooting match, with the stabilisers as well, will in turn be affected by the proposals for the common internal market by 1992.

The report refers to uncertainty as something with which we must deal in the Community. Paragraph 62 states: The extent to which stabiliser mechanisms are triggered and to which the resulting penalties would impact on the cost of the CAP is not easily quantified, but there are uncertainties as regards harvest yields, exchange rate fluctuations, and stability of markets". Another uncertainty was raised by the noble Baroness, Lady Robson of Kiddington. She referred to the BBC programme "Panorama" last Monday which dealt with fraud in the common agricultural policy whereby 10 per cent. of the agricultural budget is redirected—it seems towards the Mafia. I shall put this as delicately as I can. There is another form of redirection—insider dealings. Preknowledge of levies and harvest estimates could be very useful commercial information. Given the complications of stabilisers, I wonder whether this is yet another avenue being opened for the redirection of Community funds.

I declare an interest here in oilseed. I was for some years a member of the oilseeds advisory committee of the EC in Brussels. It occurred to me then that people enjoyed great commercial advantage if they had preknowledge of subsidy rates immediately before they changed.

The report is an excellent analysis of a complicated subject. I conclude as I began by congratulating the chairman of the committee, my noble friend Lord Gallacher, on producing the report and so enabling the House to debate this important topic.

8.50 p.m.

Lord Peston

My Lords, I take part in the debate with some trepidation. I am not a farmer. It is a great many years since I looked at the common agricultural policy. In view of what I am about to say, perhaps I should add that I was in favour of the United Kingdom joining the EC on balance. The negative part of the balance was the common agricultural policy. If asked about the prospects at the time we joined, I should have said that by 1988 we would have it reformed and sorted out. I would have thought it unbelievable for the common agricultural policy to be in a greater mess in 1988 than when we joined. I say that to put the matter into context.

We are asked to look at the subject of stabilisers because of the need for curbs on the ever-increasing spending on agricultural support. In other words, our concern is with the budget. It is clear, whatever else one says about the control of public expenditure, that this part is completely out of control. As several speakers including the noble Baroness, Lady Robson, have pointed out, there is a paradox. If stabilizers—or, in my view, any of the other interventions that we are asked to consider—were used effectively to control the budget, they would be so disruptive of the agricultural sector that it would become politically impossible. In other words, the notion is, "Either you use the stabilisers to stabilise the budget, in which case the thing blows up politically" or, "We cannot allow the political ill-effects to occur so we invent stabilisers, but then use them almost as a fig leaf-. That is a matter of serious concern.

To pursue the economics of stabilisers, I am much in agreement with the noble Baroness, Lady Elliot of Harwood. I, too, was at a total loss to know what this or any of the rest of the terminology meant. Unlike the noble Baroness, I think I still do not understand what it means. In so far as stabilisers might conceivably have some effect on the budget, the concern is that they would then destabilise almost everything else: they would destabilise farmers' incomes, production and prices—or, at least, there is a danger of that.

This leads to the other aspects that concern me. Here is a set of proposals which the committee has examined but which it is fairly clear the people in Brussels have not thought through. The economics seem to me extremely complex, but we are offered no serious analysis.

I have referred to the remarks of the noble Baroness, Lady Robson, on stabilisers, with which I agree. I note that both she and my noble friend Lord Carter mentioned the subject of fraud. Here again I must take a negative view. Within a system as arcane and bureaucratic as the common agricultural policy, fraud is in my opinion inevitable. The idea that one can somehow get rid of some of it by adding to the number of bureaucrats seems to me even more preposterous. Given a system that appears to have been set up in the first place so that smart operators can manipulate it, I am amazed that anyone should be surprised when that happens. It is what any economist would predict must inevitably follow.

I am worried by a point that my noble friend Lord Carter mentioned and to which reference is made in the report. If one views stabilisers or any of the other interventions from the point of view of the farmer, they are really mysterious. If I were a farmer, I would regard them as much more likely to produce difficulties than to assist me. I should be particularly worried about the uncertainties that seem inevitably to follow from them. If one intends to do something of this nature, I am a great believer in having a set of rules. I have a strong suspicion that, if we move in this direction, stabilisers, too, will be manipulated, and not necessarily to the advantage of farmers.

Stabilisers are about the budget. I do not doubt for one moment that the excess spending is an important matter. I hope that, in considering stabilisers and the budget, we will not be led away from what many of us in the economics profession regard as the much more serious faults of the common agricultural policy, namely, that it is monstrously inefficient and unfair. Stabilisers appear to do little to address those problems. Although I do not disagree with the concern of the Prime Minister with the budget, one hopes that it does not overwhelm all other considerations in the assessment of what is going on.

In following my noble friend Lord Carter, one cannot but reflect on the anomaly that we have a Community built around free market principles in which the outstanding topic of the day is unification of markets and the reduction of artificial barriers. Bedded within it, however, is the common agricultural policy, which is an affront to free markets, to efficiency and to equity; and, indeed, we are considering further interventions to effect even more manipulation.

In conclusion, I am bound to say that I believe that your Lordships are right to scrutinise in detail stabilisers, set-aside and any other proposals put forward. None of that is a substitute for fundamental reform of the common agricultural policy or—better still—its abandonment in favour of a more sensible system of agricultural support.

8.58 p.m.

Lord Middleton

My Lords, it must be said that it is not very easy to form a judgment on the latest proposals of the European Commission to curb Community expenditure while negotiations are still proceeding.

The noble Lord, Lord Gallacher, has explained why the Committee concentrated on the measures proposed for just two commodities, cereals and sheep. The proposals for sheep have been dealt with so comprehensively and clearly by the noble Lord, Lord Gallacher, and by my noble friend Lady Elliot of Harwood that I shall say no more on the subject save this: I believe that the criticisms of the sheep stabiliser proposals contained in the report—that they would discriminate against the United Kingdom and are therefore not acceptable in their present form—are justified.

As to cereals, we are in a difficulty. As the noble Lord, Lord Carter, said, it is impossible adequately to assess the likely effect of the stabiliser proposals when both the level of production at which they are to be triggered and the price cuts to follow are not yet fixed.

The report weighs up the likely effect of the stabilisers, given the numbers that the Commission believes should be written in to be effective. The report, as we have heard, concludes that the measures proposed are not likely to be very effective in stabilising budget spending. It suggests that they would be unlikely to have significant effects on the levels of production and, finally, it takes the view that as they stand they would bring significant disadvantages in their train.

These are not very enthusiastic conclusions. They have already been greeted by adverse comment, though not, it appears, here tonight. The sense, if not the words, indicate a rather sharp criticism that the report underestimates the need to resolve the financial crisis in the EC and that it is high time for a large measure of support by the taxpayer to be removed from the feather-bedded agriculture industry and a bed of nails provided consisting of really steep and effective price cuts coupled with an immediate curb on the use of fertilisers.

How easy it would be if the CAP could be reformed in such a cheap and simple manner. If that were so Ministers and heads of government would not be locked as they are now in such complicated discussions and negotiations.

I comment first on the fertiliser suggestion. I believe that constraints on production such as a nitrogen quota are economic nonsense. Whatever is done to limit output, one cannot tell an industry which is highly geared to technological advance, as is British farming, that in future it has to produce inefficiently. It would be just as foolish to tell supermarkets that they must go back to selling through the corner shop or coal miners to go back to using picks and shovels or the textile industry to forgo the use of man-made fibres.

I now turn to the question of price cuts. All noble Lords who have spoken tonight agree that the member states, through their Council and ministers, have been negligent in allowing levels of prices that have stimulated production of cereals beyond what was required for home consumption and what can be sold abroad without upsetting the pattern of trade.

The Sub-committee, of which I have the privilege of being a member, has been saying that for years. It would be quite unfair to accuse it of being unaware of the budgetary implications and the urgent need for reform. Because the process of gradual and measured control of prices over the years, which we have long recommended, has not been adopted the savage cuts that are being advocated are actually under way now. As we feared, the brakes are being applied too late and many would say too hard.

I remember quoting the figures when we debated the Commission's 1987–88 farm price proposals last May. Last year cereal prices were cut by up to 12 per cent. and this year by a further 7 per cent. The effective price cuts are greater by reason of the other related measures which were imposed at the same time. Oilseed rape has taken a 25 per cent. price cut this year. One really cannot brush off a 20 per cent. cut in grain prices over two years and say that nothing is happening. Of course the EC expenditure runaway bus must be brought under control, but the methods used must be sophisticated.

The present health of the farming industry and this country's capacity to produce reasonably priced food are not in a state to survive the kind of bludgeoning which I have heard advocated. As our report on prices said last May, there has been an average fall in the purchasing power of net farm income in the Community of 25 per cent. in the past 10 years. In the United Kingdom the fall has been 40 per cent. due to the effect of large negative MCAs, whose malign effects continue to discriminate against our own farmers. The noble Duke, the Duke of Somerset, referred to that and so did the noble Lord, Lord Carter.

I have heard a figure mentioned which indicates that at present, because of the green pound, UK cereal producers are suffering from a return that is depressed by about 18 per cent. Last May I quoted some of the Government's figures for farmers' returns. These can now be brought up to date following the publication of the 1988 Annual Review of Agriculture. I think it justifies the rather gloomy picture I am painting and reflects what all of us in farming know very well: that the weather plays a far larger part than is ever allowed for by those who predict future levels of production. For example, Table 30 of the MAFF 1988 review shows that for English farms growing mainly cereals, taking an index figure of 100 for average net farm income in 1982–83, the index figure rose to 134 in the good harvest year 1984–85. The following year it was 23. The forecast index figure for 1987–88 is 10. For English lowland livestock farms it is down to just 5 from a figure of 100.

As the noble Lord, Lord Carter, has reminded us, for those of us who farm in eastern England, all the way from Kent to Northumberland, the 1987 harvest was a disaster and these figures bear out what we already knew. It appears from Table 31 that farmers in Scotland have done better—according to the MAFF review, that is. But we should not forget that in 1985–86 the average result for Scottish cropping farms of all sizes was a loss of no less than £11,000 per farm.

If it is necessary to knock some of the stuffing out of the featherbed (if there is one) then, in recommending how to do it, never let it be forgotten under what hazardous conditions our food is produced. Nevertheless, when that is said, the long-term trend of cereal production must be upwards, though yields will rise probably less steeply and certainly less steadily than was envisaged in the forecast that we had before us when we debated our report on cereals in 1986.

Consideration as to the form of the control that should be imposed on both costs and output is in the forefront of the current debate on the CAP. Stabilisers as now proposed are only one mechanism. I can understand why the Government have accepted the principle. It is perfectly logical that overproduction should lead to price cuts and in our report we state that if such a brake is adopted it should be capable of being applied automatically. It is difficult to agree when to apply the brake and how sharply it should be applied. We draw attention to the unpredictable effect on farm incomes of allowing agricultural stabilisers to operate in an unfettered fashion. We state in the report that stabiliser controls as now proposed for cereals carry with them many disadvantages and by themselves may not be effective.

I believe that the most important conclusion in the report is that contained in paragraph 46. It states that: Agricultural Stabilisers should be seen only as part of an overall Budget strategy toward the CAP.". In the next paragraph we state that: Agricultural Stabilisers, on their own, cannot be regarded as the sole mechanism for controlling agricultural spending.". There are other potential measures in addition to price restraints. There is the transfer of land to nonagricultural use; alternative crops, including forestry; import substitution; the development of industrial uses for farm products; and set-aside, as we have heard tonight. All those and other mechanisms are under discussion and it is our view that budgetary problems must be tackled by a combination of some or all of those.

The proposals for stabilisers can only be effective as part of a package, but that package must be devised with the greatest care. A draconian assault on the farming industry's capacity to produce, such as I have heard advocated, would be very damaging and its effects would reach right out into the nation's economy.

9.10 p.m.

Lord John-Mackie

My Lords, the noble Baroness, Lady Robson, and I are the only two speakers who are not members of the committee. Nevertheless, we can sincerely compliment the noble Lord, Lord Gallacher, on the way in which he introduced the report today. He covered a great deal of ground but there is still a great deal of ground to be covered. I note that one of the first matters he mentioned—almost in the second sentence—was set-aside and I shall return to that subject later.

I was intrigued to note that my noble friend Lord Peston is the only person I have heard claiming that the CAP was in a mess in 1973 when we joined and that the whole system was wide open to fraud in any event. Not for one moment do I suggest that he is being wise after the event, but it would be interesting to find his reference for those statements. However, we shall leave the matter there.

We are all agreed—nobody could disagree—that something must be done about the surpluses and their cost. One of the major costs (approximately £2,000 million) is the handling of the present surpluses sitting in store, and that problem must also be tackled. As my noble friend Lord Carter and other noble Lords pointed out, if the job is to have any effect before the budget is bankrupt, it must be done quickly.

This morning I read a report in a newspaper to the effect that it appears that the German Minister of Agriculture and our Minister are a little closer than has been the case in the past, and if something might be achieved this week that is a good sign. However, if the next harvest is planned and planted it is too late for another year and things will be in a sorry state. As was pointed out in the report, there is a lack of political will.

I looked at the report carefully and then turned back to the first paragraph which straightaway sets out almost everything that is required. It is a good paragraph which reads: Stabilisers have in the past year become a key feature of CAP reform. The name is new: it refers to any mechanism to keep market support for an agricultural commodity within budgetary limits. The concept is not new: quotas and levies on sugar production are existing stabilisers; so too are co-responsibility levies and quotas for milk. Now the Commission is proposing stabilising mechanisms for a wider range of agricultural commodities.". That is a far-reaching paragraph.

If one then turns to paragraph 62, which contains one of the most succinct conclusions I have ever seen in a report, one finds that one could have carried out the whole job in two minutes and not bothered to go into the detail of the report at all. However, I should like to make one or two points that I have picked out from the report for discussion. The report picked out sheep and cereals, and that has been emphasised by various noble Lords in the debate. Of course it is also anxious about the Commission asking for more power to deal with the situation.

To put it fairly simply, the Commission wants stabilisers to reduce the price to the farmer by various means, and they have all been mentioned—namely, maximum guarantee qualities and in some cases reducing the intervention periods. The noble Duke, the Duke of Somerset, mentioned one technical point, that if you have grain in a cattle yard, you will have to sell it when you bring the cattle in. There is also the point that you often have to sell it for reasons of cash-flow, which is also rather important, and if there is no market and no intervention, you are in a bad way. There is also the question of increasing the co-responsibility levies, and so on.

I presume that the theory behind this is that if the returns are low enough, farmers will stop producing. The committee very ably points out the fallacy behind this. If you do that quickly enough—and we are all agreed that it is necessary to do it very soon—the effect on farm incomes would be disastrous. The noble Lord, Lord Middleton, has given us figures on what is happening anyway in reductions, and there is no sign of anybody going out of production because of that. If it is spread over a long period, farmers will make every effort to increase production—the noble Duke, the Duke of Somerset, mentioned this—and they are doing that to stabilise their incomes.

I read an article in one of the agricultural papers last week by a young economist from Cambridge. He pointed out the figures for the increase in production that has taken place over the past 10 to 15 years and how there is no sign of that stopping. He gave some figures of how much land could be taken out of production simply by increasing the size of our crop yields, etc. As the noble Lord, Lord Middleton, pointed out, paragraph 48 is headed: Stabilisers do not control production". How right that is! The report is to be commended on that point.

With regard to sheep meat, I suppose I should declare an interest. Although I have no sheep, I have a lot of grain production, oilseed, and so on. Most noble Lords who are interested in sheep meat have pointed out that their main objection is that it would be detrimental against the UK and there seems to be a considerable unfairness in having a separate stabiliser for sheep numbers in this country.

As I said earlier, in its conclusion the committee mention the question of set aside. I have looked at this situation for quite a few years and at one time I was very keen on quotas because on the whole that seemed to be the fairest method. However, when one starts to look at the administration of quotas, particularly for grain, with all the different ways in which grain is disposed of, the amount that is used on the farm and the amount that goes from farm to farm, I came to the conclusion that administratively quotas were almost impossible. They work for milk and sugar mainly because these two commodities go through one source of manufacture, and in that case it can be done.

That brings me to set-aside, particularly for arable crops. My noble friend Lord Carter was right in saying that the only way to control the stock is to control the number of female animals—cows and sheep. Of course, there is no pig regime but they will also need to be controlled if necessary. Therefore, the amount of animals that come on for beef will be controlled. That raises the question—and of course I pointed this out to him—that you can buy Irish store cattle and at one time we brought in a lot of Canadian store cattle. However that could no doubt be controlled. The great thing about that is that both set aside and the control of female animals can be easily administered.

I spent a whole afternoon with the county agent for Minnesota in the United States looking at how they control set-aside. He has a very small staff and although I do not want to give all the details, I will say that they used a helicopter and an infra-red camera. If a field was a colour that it should not be, it was checked. The agent maintained that administration of set-aside was not as difficult as is sometimes made out.

The other point I want to make is that whatever we do with set-aside, it must be mandatory. All sorts of suggestions have been made regarding tendering, and so on, but I believe that we must make it mandatory. One does not need to go to 20 per cent. as 10 per cent. would take out about 3 million acres in this country and that would certainly do the job.

The noble Duke, the Duke of Somerset, gave figures which I hope can be obtained. He spoke about £300 per hectare. That is £120 per acre. I do not think the noble Baroness will accept that because I tackled her earlier and she suggested a figure of half that amount. I shall be interested to hear what she has to say to the noble Duke.

I look forward to the committee's next report on set-aside because that will be the most important issue in the near future. Like many noble Lords, I hope it will also include the green pound. That certainly will keep it busy.

9.21 p.m.

The Parliamentary Under-Secretary of State, Ministry of Agriculture, Fisheries and Food (Baroness Trumpington)

My Lords, I am glad that the noble Lord, Lord Gallacher, and my noble friend Baroness Elliot began in the way that they did because I should like to start by saying how poignant it is, today of all days, to see the name of Lord De La Warr as a valued member of the sub-committee. He will be sadly missed.

I congratulate the noble Lord, Lord Gallacher, on the production of this valuable report on agricultural stabilisers. As your Lordships are well aware, negotiations on the Commission's stabiliser proposals have now been under way for some months. Indeed, the special meeting of the European Council in Brussels over the next two days will be seeking to reach agreement on these proposals as the key part of an overall agreement on the future financing of the Community. It is certainly the Government's firm intention to get this matter settled now, so long as our esential concerns are properly met.

The committee has expressed some doubts about the effectiveness of the stabilisers proposed. With respect to my noble friend Lord Middleton and other noble Lords, I must take issue with that assumption. The stabilisers are surely a major step in the road to CAP reform—the biggest step so far. I believe they could make a major contribution to tackling excess production and expenditure. CAP expenditure must be brought under control, and if action is needed in future to ensure that budgetary limits are respected, we shall take it.

The European Council in Brussels last June gave a clear mandate to the Council to adopt all the measures necessary to complete an overall agreement, including measures to ensure that budgetary discipline is fully observed. The UK has consistently made it clear that we were not prepared to accept any fudging and would not address the question of additional resources until agreement was reached on binding control over Community spending. The stabiliser proposals were one part of the Commission's response to the European Council.

To quote from the report: The Committee wholeheartedly support efforts to control the cost of market support under the CAP as a crucial part of the refinancing of the Community budget". The open-ended guarantees of prices under the CAP, with very little relationship to market realities, contribute to the development of the surpluses which concern us all. The reduction of the present over-high prices is of course what this is all about. It is the Government's firm belief that prices under the CAP must be adjusted to allow supply and demand to play a greater role in agricultural markets and to restore intervention to its original role as a safety net rather than an alternative market outlet. Here we are absolutely at one with the committee: stabilisers work by reducing prices.

Although the term "stabilisers" is yet another piece of Euro-jargon, the concept is not a new one. The committee's report recognises this, and further recognises that there are a number of areas where stabilisers, or some form of stabilisation mechanism, already exist. The difference in the present proposals is their scope. They tackle almost all the major areas of CAP expenditure and introduce more widely the concept of making stabilisers operate more automatically—that is to say, without further intervention by the council. That final point is an important one to which I shall return in a moment.

The Government's firm objective on stabilisers is I believe the same as the committee's and that is to secure agreement on mechanisms that will be effective. By that I mean that they must be quite specific as to the way they operate. They must be workable, legally binding and fair; and they must deal with the problems of surpluses. They must also bring about greater budgetary discipline. I referred earlier to the importance of automaticity. The Commission's proposals for new stabilisers include provision for predetermined adjustments to the support regimes which would take effect if specific production or intervention thresholds are reached. This would obviate the often lengthy council debates on such matters and allow corrective action to be taken quickly, in many cases within the same marketing year. The committee have, rightly, recognised the importance of this aspect and the Government want to see as much automaticity in the provisions as possible.

I understand the reasons why the committee's report focuses particularly on the stabilisers proposed for cereals and sheepmeat. First, the arrangements for cereals. The noble Baroness, Lady Robson, stressed the importance of cereals, and the committee has rightly concentrated on this sector which is now probably the most in need of corrective action. My noble friend, Lady Elliot, spoke of fluctuations. Were it not for the poor harvests in the past two years, the position today would be even worse. Your committee has questioned whether stabilisers will be effective in curbing production. This will depend on the mechanism adopted. Certainly sustained reductions in support levels for cereals would eventually lead to lower levels of production. And we have made it clear that we are looking for stabilisers that, over a period of years will provide—and very importantly, will be known by the farmer to provide—a substantial reduction in support levels. Provided, then, that the maximum guaranteed quantity is not set at too high a level, and provided there are realistic cuts in support levels if the MGQ is exceeded, stabilisers should make a major contribution towards controlling production.

As we have already heard, there has been considerable opposition in the council to the Commission's proposals for cereals, and for other arable crops, oilseeds and proteins. The proposals now under discussion for oilseeds and proteins are largely similar to those orginally proposed, but for cereals there are some significant changes. The latest ideas would postpone any price cut until the year following the one in which the MGQ was exceeded; but there would be an increase in the co-responsibility levy at the start of each year. Under this system price cuts would be cumulative.

We continue however to have reservations about the use of the co-responsibility levy as a stabiliser mechanism. Unfortunately, other member states do not share our views on this point and we are likely to have to accept an increase in the levy if we are to secure an effective package on stabilisers. However, we are continuing to press two points. First, the principal weight of any stabiliser mechanism should fall on price cuts, not levy increases; secondly, the Commission's discriminatory proposals that the first 20 tonnes of cereals produced on a holding be exempt from levy should be rejected.

The noble Baroness, Lady Robson, and other noble Lords, mentioned set-aside. Before leaving cereals I should like to touch on that subject. The noble Lord, Lord Carter, said that we should get on with set-aside even if stabilisers are not agreed quickly. Set-aside must be complementary to stabilisers, not a substitute. The Commission agrees. It will not propose its stabiliser ideas formally until it is sure that there will be satisfactory agreement on stabilisers.

The Commission has now come forward with new proposals on set-aside. These would build on the existing provisions on extensification and if adopted would replace them. The proposals would set up a separate set-aside scheme, covering other arable crops as well as cereals. They would also provide for a separate extensification scheme, which would require a 20 per cent. reduction in output rather than in area. This new approach has been generally welcomed, although disagreements remain on some points of detail.

The Commission has made it clear that its proposals on set-aside complement its proposals on stabilisers; they do not replace them. We have generally welcomed the Commission's new proposals, as we have consistently argued that a tough price policy should be accompanied by a voluntary set-aside scheme designed to encourage producers to reduce levels of production and to cushion the impact of lower prices on those least able to cope. I would not, however, wish to go into the details of these proposals now. I would back up the noble Lord, Lord Gallacher, and remind your Lordships that the Select Committee on the European Communities is currently taking evidence on these proposals, but that is for another day.

If one is looking for someone who has great personal experience regarding sheepmeat, one has only to look as far as my noble friend Lady Elliot. I should now like to turn to the stabiliser for sheepmeat. I can only agree with the committee that the separate guarantee threshold for Britain is a most unwelcome proposal. We have argued very strongly that, while we want a fully effective stabiliser for this, as for other sectors, it is quite unfair to single out, as the noble Lord, Lord John-Mackie, said, one region within the Community to be penalised in this way. But I must warn your Lordships that our views on this point have met with no sympathy from other member states or the Commission.

The noble Lord, Lord Gallacher, and the noble Baroness, Lady Robson, suggested that stabilisers on sheepmeat are unnecessary given that the EC is only 80 per cent. self-sufficient and that the regime is to be reviewed anyway in the course of the year. It would be tempting to excuse the sheepmeat regime from the budgetary discipline implicit in stabilisers but the cost of the regime has rocketed from 500 million ecus in 1985 to a full cost of well over 1 billion ecus this year. We firmly believe that this regime cannot be exempt from proper restraint. Even with a stabiliser the Commission foresees production continuing to rise in the years ahead, as evidence to the committee shows. Community self-sufficiency will therefore also rise.

As for the proposed headage limit on the number of ewes per flock which would be eligible for annual premium, I agree that this proposal too is not in UK's interest, given our structure and flock sizes. We have opposed it, just as we have successfully done in several previous price-fixing negotiations. I am glad to say that it now appears probable that it will not form part of the settlement on stabilisers: I have no doubt, though, that we shall have to oppose it again during the forthcoming review of the sheepmeat regime.

The committee also referred to the additional powers required by the Commission to operate the stabilisers. We have argued that it is necessary for the Commission to have the requisite powers but that these powers should be clearly defined and that the Commission's actions should be transparent. I am, however, hesitant about the committee's suggestion that a new mechanism is needed to review the operation of the stabilisers. There are a number of existing financial committees that can, and should, oversee the stabilisers as part of their budgetary monitoring.

The committee's report touches on the question of direct payments to support farmers' incomes. The Government see income support as essentially a social measure which should be left to member states. It seems perverse to construct a preferential social security system for one section of the population. We are particularly sceptical about the Commission's proposals for income aids funded from the Community budget. Though nominally production-neutral, they could so easily become a very expensive route to increased production. However, the Government welcome the parallel proposal to constrain the national aids which member states can pay their farmers. All member states are unhappy with the Commission's income aid proposals, though for differing reasons, and debate is stalled. It remains to be seen whether the Commission will reformulate the proposals so that discussions can start again.

The committee is quite right to consider the effectiveness of the mechanisms proposed and their ability to constrain expenditure effectively. We have of course pursued very much the same line of approach to the negotiations. For cereals, there are inherent difficulties for effective budget stabilisation when only about 15 to 20 per cent. of production is supported and the major item of expenditure is on export refunds. This means that a 1 per cent. increase in production has a disproportionate effect on costs which could be offset only by a much larger cut in support prices. However, any price cuts will result in a reduction in the level of export refunds and thus expenditure will be lower than it would otherwise have been. For other products, however, effective stabilisation is much more readily attainable within the framework of the Commission's original proposals. Overall, the Commission estimates that its proposals now on the table will save over 600 mecu in 1988 and over 1,400 mecu in 1989.

It is true that levels of CAP expenditure also depend on world market prices which, in part, are influenced by currency fluctuations. The Commission has proposed a monetary reserve of 1 billion ecu which can be drawn on to enhance agricultural spending if the requirement increases due to a fall in the value of the dollar. A certain amount of fall would be allowed to take place before this mechanism would be triggered. We are insisting that the mechanism must work both ways: a rise in the value of the dollar must also be taken into account. The Commission has also suggested that a regular examination of expenditure against average profiles of expenditure over previous years would provide early warning of sectors where spending was not being adequately controlled, and has suggested that it would need scope for remedial action in such circumstances. The Commission has not followed up these ideas with detailed proposals.

There is one further point in the report which was referred to by the noble Duke, the Duke of Somerset, and which I should like to address—the reference to the serious effect on farm incomes and possible destabilisation of markets. The Committee expressed concern that: Were Agricultural Stabilisers to be operated in an open-ended fashion for a major crop such as cereals … the result on farm incomes would be unquantifiable and potentially serious". That is not the situation, my Lords. The proposals for cereals are not open-ended; they are subject to a ceiling on the extent to which support can be reduced. In addition the proposals on set-aside, as well as the wide range of measures which the UK have brought forward in the last year would provide an alternative for those producers who might be most affected.

I do not want to go down the fraud path referred to by the noble Baroness, Lady Robson, and the noble Lord, Lord Carter, except to say that we strongly support any efforts to improve Community financial control—for example, by means of the new anti-fraud unit which has recently been set up in the Commission. I should like to say that my right honourable friend the Minister takes this matter very seriously and has already drawn attention in the Agriculture Council this week to the need to take firm and effective action against fraud. We shall continue to press for recognition of the importance of the fight against fraud.

The noble Lord, Lord Carter, gave me a certain amount of warning on the question of the green pound and- my noble friend, Lord Middleton, also mentioned it. We have yet to see what the Commission will propose for further adjustment of green currencies in this year's price fixing. I am aware of the strong feelings on this subject and my right honourable friend the Minister will take these strong feelings into account when considering the extent of any green pound devaluation to be negotiated in the price fixing.

With regard to MCAs, which again I think were raised by the noble Lord, Lord Carter, the abolition of MCAs is the Commission's declared aim, which the UK supports. A good start has been made, but a lot of hard negotiation remains to be done if the timetable of 1992 is to be met. Certainly a common internal market implies common price levels throughout the Community. Membership of the exchange rate mechanism has no automatic effect on green rates. We would not move to the same level of prices as members of the exchange rate mechanism just by joining the mechanism ourselves.

One last point. The noble Duke, the Duke of Somerset, spoke of extra land used for cereal growing in case of the quotas coming in. I am told that this is not borne out by the acreage figures available. The area of land devoted to cereals has fallen by some 100,000 hectares from its peak in 1984.

Finally, I note that the Committee touched on the lack of political will which has so often impeded radical across-frontiers reform in the past. In that context, I have already endorsed the Committee's views on automaticity. We in the United Kingdom have been and are vigorously pursuing a fair and effective solution to the vast burden of CAP expenditure which bears so heavily on us all. It is essential that all member states share this burden fairly, and that reforms take proper account of the diversity of farm size and structure throughout the Community. We shall continue to take that line. It would indeed have been interesting to hear what your Lordships would have said had this excellent debate taken place after, instead of just before, the decision-taking talks which will be going on in the next few days and weeks.

Lord Gallacher

My Lords, I should like to thank both the noble Baronesses and all the noble Lords who have taken part in this debate. A particularly pleasing feature of it so far as I am concerned is that there was practically no repetition in any of the speeches made, so that, taken as a piece, this should make useful reading in Hansard.

May I also express my thanks to the noble Baroness the Minister for the detailed reply and the update which she has given us. We shall be watching with considerable interest the outcome of the talks on the 12th and 13th. As I understood it, it appears to be felt that stabilisers plus set-aside equals happiness, and happiness equals agreement. I am a perennial optimist, as is the noble Baroness, but in a good Scots phrase, "I hae ma doots".

In respect of the congratulations which were extended to me personally, perhaps I may say that much of the credit belongs to our clerk, Mrs. Martin, and the specialist adviser, Simon Harris. With those words, I commend the report to the House.

On Question, Motion agreed to.

House adjourned at fourteen minutes before ten o'clock.