HL Deb 09 November 1988 vol 501 cc680-706

6.46 p.m.

Lord Gallacher rose to move, That this House takes note of the report of the European Communities Committee on Farm Price Review 1988–89 (15th Report, 1987–88, HL Paper 85).

The noble Lord said: My Lords, in the normal course of events to be discussing the common agricultural policy farm price review midway through the year to which the review itself relates would be considered in most polite circles a doubtful use of time. However, I believe that the special nature of this year's farm price review and the background against which it took place justify us in giving some consideration to the matter and in particular in taking note of the report on the proposals made for 1988–89 which your Lordships' Select Committee prepared at the material time.

The year 1988–89 was in a sense unique for farm prices in the Community. First, it was the year in which financial disciplines agreed at the European Council of Heads of State in February 1988 were applied to farm prices. That was reflected in the nature of the proposals made by the Commission. In effect we had a standstill arrangement so far as prices were concerned. The standstill was necessary to conform to the new financial disciplines to which the farm budget is now subject.

Because of that special factor, the Select Committee decided to take evidence from the Treasury on the matter. At page 17 of the report noble Lords will see elaborated the five safeguards which the Treasury now consider should be sufficient to prevent any repetition of settlements far exceeding the capacity of the Community to pay for them within its existing financial ability.

At the same time, I believe that it is necessary where farming is concerned to make it clear that there are no absolute safeguards even for expenditure under the common agricultural policy. There will always be factors such as the weather worldwide, the special relationship between the dollar and the ecu so far as pricing is concerned and harvest variations in the 12 member states of the Community, covering as they do such a wide geographical area and representing very significant differences in climate.

As I said, the price proposals themselves were for a standstill arrangement. We have summarised those briefly—and I hope adequately—in Appendix 3 of the report. In that beloved phrase "real terms" the standstill arrangement represented a 2.8 per cent. decrease in prices. Because of the standstill nature of the proposals, your Lordships' Select Committee decided to concentrate on what the report describes as "related measures" as well as the agri-monetary proposals contained in the Commission's original proposition. These related measures included the incorporation of a premium for cereals, the extension of milk quotas until 1992 and a decision not to extend the variable premium for beef beyond 1988. We did not consider the sugar proposals at all because the view of the sub-committee was that it will be necessary at some time for us to have a comprehensive look at the sugar position within the Community. The only agri-monetary proposal originally put forward was one for a 10 per cent. cut in the monetary compensation amounts for Greece.

We took evidence as usual from farmers, from food manufacturers, from the Home Grown Cereals Authority, from environmental groups and from consumers. There was inevitably, in such a wide spectrum of evidence-giving, some conflict of views notwithstanding the limited nature of the changes proposed. We are grateful, as always, to the bodies which submitted evidence to us and in particular to those witnesses who came along to give us oral evidence as well as their written submisssions.

The committee very quickly found itself forming a view against the incorporation premium for cereals. We reluctantly accepted the need for milk quotas to be extended until 1992. On beef, we decided to defer detailed consideration because it was obvious even at that time that the Commission was due to produce new proposals for a beef regime, as the existing regime will expire on the 31st December this year.

So far as agri-monetary measures are concerned, strong representations were made to us for and against a devaluation of the green pound, as well as of the Greek drachma. The farmers favoured a very large devaluation, the Ministry of Agriculture was in favour of a small one and consumers were against any devaluation, because they said it would lead to some increase in prices and prices were already high enough.

With the then current appreciation of sterling—that is to say, at May 1988—details of which are given at page 49 of our report, the value of the United Kingdom monetary compensation amounts had fallen by almost 40 per cent. This reduced significantly the distortions caused by monetary compensation amounts, and that was especially so in the case of pig meat.

Monetary compensation amounts themselves are due to be eliminated by stages by 1992, and the committee supports this proposal but doubts whether it is achievable within such a tight time scale. Meanwhile, having to choose between the evidence given to us and the submissions made, the committee supported the concept of a modest green pound devaluation, provided that savings could be achieved elsewhere in the budget and provided that it did not give rise to any necessity for fudging the proposals. In fact the outcome of the negotiations, as I am sure the Minister will tell us, was that a 3.2 per cent. devaluation was agreed for Britain, resulting in a small increase in shop prices. Other member states also got devaluations, but I notice that France and Ireland received smaller devaluations than the United Kingdom. The settlement of the proposals for the year was stymied for a while by the Greeks, who wanted a devaluation in excess of 10 per cent. In the end they got it and, as I say, others managed to get devaluations as well.

So far as co-responsibility levies, which are currently applicable to milk and cereals, are concerned, the Select Committee has never been enamoured of such levies in principle. In particular, we have never been especially fond of the rules for levying these amounts, because the exemptions granted under the co-responsibility arrangements tend to favour small producers and, to that extent, are discriminatory so far as the United Kingdom is concerned.

We are also concerned, as a committee, about the way in which the milk and cereal levies so raised are used by the Commission. The Commission is naturally reluctant to give up a lucrative revenue source. We believe that the future of co-responsiblity levies needs discussion in the light of the decision to continue the dairy quota until 1992 and of the introduction of stabilisers for cereals. We favour a reduction in co-responsibility levy rates as a prelude to their abolition. If the Minister has time when replying, we should welcome a view on this proposition.

So far as the incorporation premium for cereals in animal feedstuffs is concerned, we give detailed reasons for our criticism of this idea at page 7 of the report. It is basically a device to increase the use of cereals and feedingstuffs by means of subsidy of the cereals so used. As there is little scope for this in the United Kingdom because our feedingstuffs already contain, so we are told, a very high proportion of cereals, we think that the scheme is of little value to the United Kingdom and, as drafted, it would be difficult to administer and likely to be cost-ineffective. However, it gives member states who use cereal substitutes an option of switching from things like manioc to animal feedstuffs incorporating cereals at a cheaper rate. That did not console us particularly and seemed another reason for being critical of the proposition as such.

We understand that a decision on this question has been deferred, and it may be that the Minister will be able to tell us tonight whether there is any movement so far as the idea is concerned, or whether it is likely to be consigned to the category of something that was started but has not been acted upon because of the criticisms made of it.

So far as dairy quotas are concerned, we agreed reluctantly to a continuation of quotas until 1992, in accordance with the recommendation. At the same time we have added a rider to our acceptance, to the effect that we do not see quotas as being an answer to the long-term problems of the dairy industry. The phrase we use is that it may, "fossilise patterns of production". I am aware, of course, that there are those who disagree sharply with this view. They are of the opinion that because quotas are transferable fossilisation is not likely to be a problem.

I think it is very difficult to argue coherently one way or the other, without looking at a much broader picture than was possible during our review of the Commission's proposals. For example, Members will be aware that the 1988 importation of milk regulations take effect from 16th November this year. It seems to me that by any reckoning these will have a long-term effect on the dairy industry in the United Kingdom, and may possibly have a very serious effect on doorstep deliveries in the United Kingdom, because at first glance they seem to permit member states to send a very wide variety of milk and milk products to this country without let or hindrance, provided that they satisfy the necessary standards. That is a position we have always known would arise. It now seems to be very much a fact of life and I think it indicates that no fixed position can be taken up on the question of whether or not dairy quotas, which have worked so well so far, can be regarded as a permanent solution to the problems of the dairy industry throughout the Community.

In this regard, I might mention that the stock position of butter in the European Community has, as a result of the imposition of quotas, fallen by two-thirds and now stands at 400,000 tonnes, of which the United Kingdom's stock is a mere 70,000 tonnes. I use the word "mere" in the context of the days that were. The stock of skimmed milk powder in the Community, which amounted to 1 million tonnes, is now virtually nil.

This clearance of stock is something that always brings a great sigh of relief to those who have been associated with the problems of overstocking, but it is necessary to mention in passing that the stock clearance has been achieved at considerable cost to the Community and has indeed been of little benefit to consumers within the Community. One fervently hopes that the measures now taken, particularly by the Heads of Government Meeting in Brussels last February, will prevent any recurrence of major buildups of stock, because they greatly discredit the concept of the common agriculture policy as such.

So far as the beef buying-in price is concerned, the Commission proposed removing provisions in calculating the beef buying-in price to save money on sales to intervention. We supported this proposition because it seemed to us that the modifications to the beef regime made in 1986 have not had any significant impact in reducing the volume of beef sold to intervention. We understand that an adjustment of the buying-in price has been made. I wonder whether this has had any effect on the intervention position so far. Perhaps the Minister would mention this in replying to the debate.

We made no comment on the proposals for wine, fruit and vegetables, protein crops, tobacco and olive oil. The proposals for these commodities were in line with those for other commodities which I have mentioned. However, the continuing need for evenhanded treatment of crops produced in the southern half of the European Community remains quite serious. This is particularly true in view of the enhanced opportunities that southern member states now have to increase their sales in northern states of the Community. Those noble Lords who study the labels on canned fruit will be hard put these days to find very much in the shops from South Africa. On the other hand, great quantities come from Greece, Italy and Spain. It is important that the southern states should be reminded of the fact that the northern half of the Community gives them an opportunity for selling their products and taking advantage of the situation.

At the beginning of my remarks I mentioned that the settlement was overshadowed by the financial disciplines imposed by the Brussels summit. I think that we can say that the future of the common agricultural policy looks considerably brighter than it did a few years ago. There is a reasonable balance between money available and the amount of food being produced. The limits on budget increases, the use of stabilisers with maximum guaranteed quantities in place, the use of quotas for milk and the use of market management, which are all important factors, have combined if not to transform the CAP then at least to make it appear a more favourable policy than it was three or four years ago.

I am too old a hand to imagine that no other problems exist, but I think that I can say truthfully that major steps have been taken towards a solution of existing problems. The regimes that apply in the Community are still far too complex as such and are certainly not understood by all those directly affected by them. Some attempt should be made to make the structure of the CAP more intelligible to farmers and shoppers. It is a considerable intellectual exercise at present to achieve the foggiest idea of how the system works.

I remain convinced that the common agricultural policy is at the heart of the European Community. Without a common agricultural policy I believe that there would have been no free movement of manufactured goods in the European Community in the first place, and so in a sense there might not have been a Community at all. The prospect of achieving total free movement of goods by 1992 would be considerably more remote than it now is. I look forward to the achievement of the full Community by 1992, not only for the reason that it may take the heat off the CAP, but because there will be in Europe a new focal point for the opinion of the people who are citizens of the European Community. Having said that, I advise those concerned with agricultural matters to maintain the strictest vigilance, which I think will always be necessary where assistance to farming is concerned. I commend the Motion to your Lordships.

Moved, That this House takes note of the report of the European Communities Committee on Farm Price Review 1988–89 (15th Report, 1987–88, HL paper 85).—(Lord Gallacher.)

7.4 p.m.

Lord Middleton

My Lords, when we reported on the 1987–88 farm price proposals in April last year we summarised the difficulties involved in reducing the expense of the common agricultural policy arising out of surplus production by saying: The Community's problems are aggravated by the conflict between the objectives of the Treaty of Rome in terms of maintaining farm income and the insupportable burden that would be placed on the budget were the agricultural support to have remained open ended". The Community has taken belated but strong measures to curb spending. As the noble Lord, Lord Gallacher, reminded us, the milk quota imposed in 1984 was reduced in 1986 and again for 1988–89.

Following an effective 7 per cent. cut in cereal prices in the previous year, last year's price fixing and related measures amounted to a further drop in support of the order of 9 per cent. for bread wheat, 12 per cent. for feed grains and a slashing 25 per cent. for oil seed rape. This year's price fixing has to be seen as part of a package consisting of three elements: first, the freeze on prices which, as the noble Lord reminded us, in real terms means a further cut of 3 per cent., secondly, stabilisers; and thirdly, the imposition of a ceiling on total agricultural spending. As we saw when we debated stabilisers last February, support prices for cereals are to be reduced whenever production exceeds a guaranteed threshold of 160 million tonnes.

I am always mystified about how the Commission thinks that it is going to get accurate cereal production figures from all the member states. Estimates for the 1988 harvest vary. The one that we used in the report was for a 1988 harvest of 162.5 million tonnes of cereals. On that basis, next year's corn prices would be cut by another 3 per cent.

The noble Lord, Lord Gallacher, referred to the co-responsibility levy. That is the part of the stabiliser mechanism which affects farmers most obviously and is additional to any price cuts. I see that I am just now paying £7 per tonne on barley so that amounts approximately to another 7 per cent. reduction.

The Minister of Agriculture said in a debate in another place in May this year: I hope that no one will be in any doubt about the potentially severe impact of stabilisers and hence pressure on farmers if production continues to rise … But in cereals, if Community production exceeds the maximum guaranteed quantity of 160 million tonnes by whatever amount regularly over the next four years, intervention and buying—in prices will automatically be cut by as much as 12 per cent., coming on top of reductions in recent years. Cumulatively, that could mean that by 1983 the common level of support for cereal producers could be as much as one third lower than it was in its peak in 1983–84".—[Official Report, Commons, 5/5/88; col. 1038.] All this adds up to a substantial reduction in support.

Furthermore, as the report points out and as the noble Lord reminded us, UK farmers are still disadvantaged in comparison with our European competitors through the operation of MCAs, although this burden has been lightened to some extent by the appreciation of sterling and by our Minister's achievement in obtaining for the United Kingdom a further reduction in the monetary gap of 3.2 points starting next year.

It is probably too soon to make an assessment of the effect of this year's February agreement on re-launching the Community budget, but I agree with the noble Lord, Lord Gallacher, that the general picture in November 1988 is different from that which we contemplated when debating last year's price proposals 15 months ago.

The noble Lord, Lord Gallacher, has referred to the weather. The vagaries of the world's climate remind us once again that annual world production of grain does not always exceed consumption. This year's drought in large areas of North America and in Asia is likely to cause an excess of consumption of 150 million tonnes. For the first time since 1973 strategic grain reserves are in danger of falling below the FAO target level of 250 million tonnes.

In Europe there has been a significant rundown in intervention stocks. The noble Lord, Lord Gallacher, referred to milk powder, the stocks of which have disappeared. Butter stocks are down by nearly 70 per cent. The wheat mountain is smaller by 34 per cent. and the beef mountain is beginning to shrink. Oil seed rape production, probably due to the cut in 1987, has this year fallen by an estimated 600.000 tonnes. Because of the reduction in spending on export refunds due to higher world cereal and oil seed prices and to the reduction in intervention stocks, Community spending on agricultural market support is running well below forecast levels. In budgetary terms, 1989 spending is now thought to be 1.7 billion ecus below the agricultural framework level. A great deal has therefore been done to reduce the burden on the budget. Surplus stocks have been reduced, partly for this reason and partly because of the weather, and the Community's finances are in a healthier state.

Perhaps I may now turn to the other objective of the Treaty of Rome to which I referred earlier: maintaining farm income. We noted last year that over 10 years there had been an average fall in the purchasing power of net farm income in the Community of just over 25 per cent. In the UK it had been just under 40 per cent. When we debated stabilisers earlier this year I drew attention to the very depressing figures relating to average net farm income in the UK contained in MAFF's 1988 review. To the dismal figures for the previous five years was added a gloomy forecast, and I quoted MAFF's 90 per cent. drop in projected 1987–88 net income for English cereal growers compared with 1982–83. I refer again to MAFF's 1988 review. Although farm output has risen by 20 per cent. in the last 10 years, bank indebtedness mounted fivefold over the same period.

All over the country there is a strong feeling among farmers that they are under pressure. These figures would seem to give some substance to their worries. The hard fact is that the process of getting the CAP under control is bound to be a painful one for farmers. All noble Lords who spoke in debates on last year's prices and on stabilisers acknowledged this.

I believe that somewhere in the report we refer to the necessity in the long term for a more market-oriented agriculture. To achieve this will make great demands on farmers as they strive to produce at lower cost. As I have said before, the brakes are being applied very sharply. If the metaphor used is that of the curb, I would say that the effect on a horse is similar to that of brakes on a motor vehicle: sharp application throws it off balance. I make this point because the Commission, having taken strong corrective action to curb farm production for budgetary reasons, is now proposing new measures that would place restrictions on agricultural production for environmental reasons. Some of these proposals are to come forward this year.

If farmers are in danger of being thrown off balance by the budgetary controls—and I have indicated that this may be happening now—then any additional proposed controls should be scrutinised with the utmost care.

It is fashionable at present to worry about the environment; and it is right to do so. I care very deeply about such matters. However, we must make sure that the very best scientific advice is taken on environmental matters. Here I believe that your Lordships' Select Committee could have a significant part to play in eliciting such opinion. There is nothing that will damage the British countryside more than an agricultural depression. Noble Lords who are as old as I am will remember how horrible some parts of the country looked in the 1930s. A balance has to be struck between the maintenance of food production by an efficient home industry on the one hand and, on the other hand, the best and most sensitive use and management of the environment. We must not allow the balance to be tipped the wrong way in either direction.

7.16 p.m.

Lord Mackie of Benshie

My Lords, we are discussing a report, published some time ago, which has been overtaken by events. However, it is a very good time to discuss it because we are seeing the effects of the measures proposed and taken. There has been a certain amount of success as regards the Commission's main objective in the last few years at the hand of the council and of those who have taken part in the common agricultural policy: that objective being to bring the surpluses under control. Without doubt we have had some success. Ten years ago subcommittee D said that we had to have a restrictive price policy, that we had to give warnings to farmers, and that forward planning was needed. Unfortunately, nothing happened. The Council kept putting up prices for political reasons. Nothing was done, and now we have to take very sharp action, as the noble Lord, Lord Middleton, has stated.

There is little doubt that there has been much success with the milk quota. It has reduced the surpluses enormously. No doubt my noble friend Lord Walston will be citing this. He has long said that the quota, or some such device, is the way to bring the surplus under control. That has been proven with milk.

I do not agree with the general opinion of the committee, and the noble Lord, Lord Gallagher, that it is desirable to do away with quotas. I simply say that the system is working. Although the dairy farmers' income has dropped, along with others, they are among the better off sections of the agricultural community, and the surpluses are coming under control. That must be success.

I believe that beef will probably cure its surplus because of the policy for dairy farming. There are already signs that we need more suckler cows in this country and in Europe if we are to keep up the supply of beef which the people are eating in increasing quantities.

As regards cereals, we are experiencing some savage and unfair-to-farmers practices after the encouragement that they have been given to grow cereals. I believe that they are working. The one that works best is the simple fact that the Commission can now control intervention. It can cut intervention at certain times and it can bring it in at other times. By doing so, it can keep the price down and thereby drive the farmers on the poorer land out of cereal production and back into the stock farming that perhaps they should be undertaking.

I agree entirely with my excellent chairman the noble Lord, Lord Gallacherwho has been a very good chairman of Sub-Committee D—that the co-responsibility payment is a mess, grossly unfair, does not do anything for consumption, is awkward to apply and everything else. The incorporation scheme I believe is even worse. I cannot see it working with any degree of success whatsoever, and I hope that the Government will do all in their power to see that it does not come into being in this country.

Price discipline will bring cereals both in this country and in the Community into line. The use of intervention powers and the use of stabilisers will bring our cereal production on to the kind of land that should be producing it and will bring cereals under control.

The fact is that the £27½ billion—a lovely phrase, "billion pounds"—which goes to supporting agricultural prices, does not go to the farmer. The people I know in our part of the world who have made a lot of money have been the people who have built stores. They have become extremely prosperous, and some of them have now sold the stores and moved back into farming. That is very sensible and very good, but it is not a long-term policy for agriculture in Europe. That ties up with what we have been talking about regarding milk. If production can be restricted and at the same time a fair price is paid then we shall start to get somewhere. We are not really in a position where the world is rolling with food. We quote the surpluses in the States and in Europe, but quite small and quite usual natural disasters suddenly reduce the stocks. For example, in the States stocks of wheat in 1989 will be half the 1988 stocks. Feed grains are down by 36 per cent. These are enormous figures. It means that we have to look after agriculture in this country. It is still a great industry, an enormous contributor to our extraordinarily bad balance of payments.

As the noble Lord, Lord Middleton, said, agriculture is the mainstay of a beautiful, interesting and alive countryside. We do not require any more savage attacks on the living of the farmers and their men on the land. I am sure that much thinking still has to be done about extensification. If the food is produced off more land then that land is waiting if one gets into trouble and one can return to more extensive cultivation.

I am glad to see that the Council for the Protection of Rural England is coming round to this point of view. I hope that, whichever Minister replies, he or she will give us the benefit of the Government's thinking along these lines. There is little doubt in my mind that if we preserve the land and the fabric of the industry that will be a wise move because all over the world man is destroying the natural environment. We have examples of what has been done in Africa which, from one end to another, is an example of land going out of production—"desertification" is a ridiculous word, but it is not a funny word in terms of the millions of acres going out of production. We have—we hear about it, and rightly so—the destruction of rain forests all over the world, not only in the Amazon and Africa, but in the Far East as well. The human race is so clever, so sharp, that we shall cut ourselves. The least we can do in Europe is to see that we preserve a balanced agriculture which may be needed very greatly in the future.

7.25 p.m.

Lord Walston

My Lords, as always the Select Committee has produced an admirable report. We have now been accustomed for many years to the noble Lord, Lord Gallacher, presiding over a wise and objective committee. He has expounded what the committee has produced in his usual clear and concise manner.

What is less usual about this debate is that while we normally can agree on what I have just said year after year, it is usual for us and certainly for me to criticise in very many respects what Brussels has produced and what it is proposing. However, on this occasion I am happy— indeed, somewhat surprised—to be able to say that it has at last produced the outline of a policy which has some chance of success. Brussels appears to have succeeded in limiting the amount of its expenditure on the common agricultural policy. If it really has succeeded by the end of the year I think one can say that it will be the first time, ever since the common agricultural policy first came into being.

What is more, and possibly more significant, it has now at last followed the advice which your Lordships have frequently given, and other people too, of attempting to produce a moderately long-term policy for agriculture to explain to farmers throughout the whole of the Community what they are being asked to produce, not simply for the current year—when obviously it is far too late to have any effect on what they are doing—but for two or three years ahead.

Let us hope that all will be encouraged by that and will produce an even longer-term policy for at least five years ahead. In the meantime, by all means let us be grateful for mercies which are not all that small in the context of the Community.

I pick two specific points out of the report. My noble friend Lord Mackie of Benshie has already mentioned one of them, and so has the noble Lord, Lord Gallacher; that is, the milk quotas. As my noble friend has reminded the House, this is something that I have for long advocated. However, I have always been aware of its dangers and the fact that it can, if left unfettered, produce in certain areas a relatively small privileged class of farmers who, having acquired the quota, are able to continue producing milk regardless of their efficiency, rather than letting a controlled degree of market forces eventually squeeze out the less efficient and those in the less suitable areas and encourage newcomers to come in who are more suitable or existing farmers to expand. We do not want to have a frozen pattern of milk production or any other kind of production.

One of the tasks confronting those concerned with the long term of the common agricultural policy is to work out methods by which the quotas for milk, sugar beet and other products can be modified so that production will go to those who are most efficient and favourably placed.

My second point has already been mentioned by the noble Lord, Lord Gallacher, and I should like to re-emphasise it; it is MCAs. They are a complete nonsense and a grave disadvantage to British farmers. Paragraph 34 of the report states: Prices in France and Ireland were about 9 per cent. higher and those of the Netherlands up to 17 per cent. higher than in the United Kingdom". To a large extent that is due to MCAs.

Table 4 in paragraph 50 shows the difference between the national currency value of CAP support prices applied in Germany and the United Kingdom up to 13th March and from 2nd May. For cereal intervention prices the difference was 21 per cent. and 14 per cent.; for dairy product intervention prices it was 21 per cent. and 13 per cent.; for beef guide prices it was 12 per cent. and 5 per cent.

They are significant differences in price. To put it mildly, it is misleading to say that we have a common agricultural policy when the prices which are paid to farmers in the Netherlands, France, Ireland and Germany differ to such a marked extent from those paid to British farmers. It is because of the exchange mechanism.

I ask noble Lords to take seriously paragraph 57 of the report . It states: The difficulty of mca abolition is much greater for those Members States whose currencies are not participating in the EMS exchange rate mechanism—i.e. Greece, Portugal, Spain, and the United Kingdom". Although it is far from this debate, if any additional argument were needed that is a reason why we should move into the exchange rate mechanism with the least possible delay. Without that, such disparities and divergencies cannot be overcome.

Two further points have been touched upon by other noble Lords. I shall not detain the House for long by mentioning them but they are of importance. For a long time we have been used to discussing agriculture in the Community and in this country in terms of surpluses, mountains, lakes, and so forth. We have forgotten that there were times, and that there could be times, when food was short. We have also forgotten the need that was so great in the 1950s for conserving foreign exchange by growing more food at home. Therefore we must not be misled by the surpluses.

I agree with those who say that they must be reduced, that they have been a great drain and that the common agricultural policy has many faults which are slowly being overcome. However, we must not think that life will be easy in the future, that come what may we shall never be short of food and that it will always be cheaper on the world market than within the EC. We must remember that a drought in the United States, a cold winter in the Soviet Union, floods in China, or whatever, can have a profound effect on world food supplies and world prices. It is not inconceivable that the years are not far distant when, if we pursue a policy of reducing domestic production too severely, we may find ourselves importing food not at the cheap world prices which we know today but at the inflated prices which occur when demand exceeds supply.

We must bear in mind an additional factor. It is that, apart from rising standards of nutrition throughout the world for which one hopes, the population of the world is rising at an alarming rate. By the end of the century there may be 1 billion more mouths to feed and the food must come from somewhere. It will be no good suddenly waking up to that fact when surpluses have disappeared and shortages have reappeared and saying, "Let us produce more". Everyone, even non-farmers, knows that farming is a long-term process. I am not arguing for a level which entails vast surpluses, but whatever the level may be we must keep going an efficient agriculture in this country; we must keep good people on the land, both farmers and farmworkers; we must keep good scientists working to promote efficiency; and the infrastructure must be maintained.

Finally, I should like to reinforce what was said by the noble Lords, Lord Mackie of Benshie and Lord Middleton, about the effect on the environment and the countryside of the declining prosperity in agriculture. The noble Lord, Lord Middleton, claims to know what it was like in the 1930s. I claim to be considerably older than he and my experience of those days is still vivid. It is of overgrown hedges, silted-up ditches, rusting corrugated iron, thistles, nettles and brambles. It was an environment which today would create outcries of protest from the urban dweller. We have not yet reached that stage and I hope that we never shall; we are a long way from it. However, it is a picture which we must keep in the back of our minds. We can avoid it only by having a prosperous agriculture with profits for good farmers on good land producing what the community requires. In order to promote that kind of policy we must exert all our forces.

7.38 p.m.

Lord Dunleath

My Lords, I spent a considerable amount of time composing a speech which I now find to be almost entirely inappropriate to the debate. However, my confidence is marginally restored by the observation that the noble Lord, Lord Lyell, has taken his place. Perhaps I may be permitted to confine myself to a few remarks on a local level. I am sure that the noble Lord will listen to them with his usual sympathy, even if the noble Baroness, Lady Trumpington, finds that they are not entirely relevant to her reply.

It seems to me that the whole situation is overshadowed by the varying value of the green pound and the variation in price support. Pitching the matter at a local level, the differential between UK support prices in the dairy industry and those in the Republic of Ireland is approximately 6 per cent. That means that an exporter of butter in the Republic of Ireland receives a net MCA subsidy of £105 sterling per tonne if he is exporting to the UK and, indeed, an export refund of over £115 per tonne higher than that which would be received by a similar UK exporter if the butter was going to a third country.

That clearly discriminates against the UK and particularly so against Northern Ireland which is in a peculiar position; namely, it is the only part of the UK which has a land boundary with a different part of the EC with this differential applying. Therefore, smuggling between Northern Ireland and the Republic of Ireland continues to take place and I envisage that it will go on taking place until those differentials have been eliminated. While the discrepancies exist, there will be this continuing situation of smuggling backwards and forwards and fortunes will be made by certain people out of that illicit activity.

I wonder whether or not that is an area on which the Anglo-Irish Agreement could take constructive and concerted action. As we have said before—and I know this is not pertinent to the debate—the Anglo-Irish Agreement has come in for much criticism because it always seems to discuss political matters. If it were to address itself to matters of common interest which would make it acceptable to all sections of the community with the exception of the smugglers, would that not raise the profile, acceptability and desirability of the Anglo-Irish Agreement in the eyes of people of all shades of opinion in the community? I throw that out as a suggestion.

Perhaps I may return to the status of the green pound in the EC. Representations have been made by the Ulster Farmers' Union, the Milk Marketing Board and others for a devaluation of significant proportions. In the event, the 3.2 per cent. reduction in MCAs and devaluation of the green pound is welcome and will help but it will only go part of the way towards reducing the sort of discrepancies of which we are speaking. Therefore, one hopes that Her Majesty's Government will press for further devaluation sufficient to move towards elimination of MCAs. As the noble Lord, Lord Walston, said, MCAs are undesirable and something which ideally we should do much better without.

That leads on to the question of what will happen as regards the green pound and MCAs with effect from 1st January 1993. Perhaps it would be a slight understatement to say that Her Majesty's Government have shown a certain disinclination to join the EMS. I wonder how much difference that would make. I have asked various people who are well informed but who have not received a clear reply about that and who could not read any clear reply in this report. If the noble Baroness, in replying, can throw any further light on that, I should be very interested indeed to hear it.

On the subject of the co-responsibility levy which has already been mentioned, I cannot help wondering in the case of milk why it is still necessary to have the co-responsibility levy at the level at which it is at the moment. After all, its original purpose was to discourage milk production but we now have a quota situation whereby farmers are heavily penalised if they overproduce. In fact the cost of a medium to large herd of 300 cows could be £5,000 to £7,000 in co-responsibility levy each year. That seems to be excessive and can make the difference between profitability and non-profitability. I wonder why that is still necessary in a quota situation. Indeed, we know that part of the purpose of the co-responsibility levy was for publicity and promotion of milk products but surely that was only a small fraction of it. I wonder why the levy has to be continued at as high a level as is proposed at present.

On the subject of milk quotas, there still seem to be some unfair elements in the administration of the system. Arising from the Mulder case, other producers are suffering from the fact that those producers who voluntarily opted to go out of milk production in the 1970s and early 1980s and received monetary compensation for so doing, have been granted quotas after all. That has resulted in not a large but a significant penalty being laid on other producers who remained in milk production during that period.

Again, many UK producers have not received their tribunal awards in full. Perhaps I may quote Northern Ireland figures. Those who were due development awards—in other words farmers who happened in 1983 to be building up a herd and therefore their milk production was not up to the level which they were anticipating—have only received 95 per cent. of their award. Hardship cases, farmers whose herds were suffering from brucellosis or something of that sort in 1983, have only received 85 per cent. I feel that I must almost apologise for again referring to the 65,000 tonnes of extra quota which were originally awarded to Northern Ireland but which were not received and were distributed throughout the rest of the United Kingdom. A certain recovery of that has been made but the full 65,000 tonnes have not yet been appropriated for Northern Ireland as was originally intended. I am sorry to say that that is something about which there is still resentment.

In conclusion, I am most grateful to the noble Lord, Lord Gallacher, for his exposition of the report to which I listened with great interest.

7.48 p.m.

Lord Carter

My Lords, discussion of this report enables those of us who served on the committee to thank my noble friend Lord Gallacher for his chairmanship of that committee which l believe ends at the end of this Session. The combination of wit, firmness and courtesy which he showed from the Chair made service on the committee a positive pleasure.

The farming world has moved on, as is its wont, since the committee reported. On reading again the paragraphs which deal with the budgetary costs of the CAP, one is reminded of the effect of what I would describe as the constant farming variable; namely, the weather. I understand that the Commission is now heading for an underspend approaching £1 billion. That reminds us that one season's shortage of rain does more to save money on the CAP than years of the Prime Minister harangueing her European colleagues.

The report concentrated on three areas—the green pound, MCAs and incorporation premium. I deal with the premium first. We are all agreed that this is an absurd proposal and I hope that the Minister can confirm that the Government will resist it as hard as they can. As regards the green pound and MCAs (which have been discussed already), are the Government still committed to the abolition of the whole paraphernalia of the green pound and MCAs by 1992?

The discussion on the report provides the opportunity for a more general agricultural debate. We should remind ourselves that however much the Government congratulate themselves on the control of the CAP budget, we should not forget that farm incomes have declined by more than 40 per cent. in real terms in the past 10 years. Farm incomes are at their second lowest level in real terms since the war. There is also the knock-on effect on the rural economy. Farmers spend about £9 billion in the rural community through wages and the purchase of goods and services. We hear a great deal about the Government's economic success and are told that there is a budgetary surplus of some £10 billion. We are therefore entitled to ask: what are the Government's plans to deal with the real and depressing problem of depressed farm incomes?

This major industry, with an output of about £16 billion, is in serious recession. Jobs are being lost and there is now more uncertainty in the industry than I have known in my 31 years as an agricultural adviser. As I said, we are entitled to ask the Government to tell us their plans to restore the confidence of farmers and produce an increase in farm incomes in real terms.

We know that there are a number of issues concerning farming and the countryside. It is obvious from the Prime Minister's speech to the Royal Society that the environment, however defined, is clearly going to be the flavour of the decade. We also now have the Commission document on the future of the countryside. I understand that government proposals are due shortly on the extensification plan which is required by the Community. When will those proposals be produced? What is the timetable?

In the context of extensification, is the Minister aware of the interesting work which is being done at Aberystwyth? This shows that Government encouragement of organic farming through grant-aid may, on certain assumptions, be a cheaper policy in terms of its budgetary costs then either a set-aside programme or export refunds. Are the Government considering these options in the extensification proposals?

We should remind ourselves that as regards extensification and set-aside we have a surplus of food and not a surplus of land. By that I mean that we could use all the land we have by producing our food less intensively. We would thereby maintain employment in the countryside. It is a surplus of food which is our problem—and that is fast disappearing —and not, as it is often said, a surplus of land.

In the context of set-aside there is of course the effect on jobs which has been mentioned by several noble Lords in debates in the past. Even with the very limited take-up which we have seen for the first season (which we all expected) this almost certainly means a loss of about 750 full-time jobs without any form of compensation for the workers apart from statutory redundancy payments. There is also the effect among farm tenancies. I understand from a number of land agents that landlords are wondering whether they should re-let farms or take set-aside money.

I raise two points relating to farmers' costs and returns. The first is the problem of bovine spongiform encephalopathy. We know that the Government have agreed a level of compensation of 50 per cent. of market value. Are the Government aware of the dangers of unscrupulous producers who put suspect animals into the food chain in order to get their full cull value rather than take the 50 per cent. compensation offered by the Government? That is an example of shortsighted Treasury accounting for candle ends and I appeal to the Minister to reconsider policy in that respect.

There is another problem which I have already mentioned to the Minister outside the Chamber. This affects the input costs of farmers. There is a delay in granting licences of right for approval of chemicals, some of which have reached the end of the period under which they are protected by patent. Some of these chemicals have been on the market for a number of years. If they could be sold under licence of right that would reduce farmers' costs. Have the Government any plans to speed up the process of granting licences and to give some priority to products which have been on the market for a long time?

I conclude on a point that has been made by a number of speakers in this debate. We should reflect how quickly the farming picture can change and remind ourselves of the fragility of world food supplies. World wheat stocks have halved in two years. We are told that for sugar the supply and demand balance will be tight. The forecast is that beef production in the EC will be down by 5 per cent. World pigmeat production has declined for the first time in 10 years. As a pig producer I regard that as good news. There is nothing I enjoy so much as selling into a short market.

The increase in commodity prices generally indicates a very close supply and demand balance. We are now told that the greenhouse effect could be affecting us by the mid-1990s. That is only seven years away—the length of one farming rotation. I made my maiden speech in this House on the 1987 review. I conclude now with the same remark that I concluded with then. I quoted the wise remark by the late Arthur Street. He pointed out—and we learnt the wisdom of it this year—that all the efforts of the politicians and the bureaucrats are as nothing in their effect on farmers as the simple question of whether or not it rains tomorrow.

7.56 p.m.

Lord Northbourne

My Lords, I take this opportunity, as the noble Lord, Lord Gallacher, this morning chaired Sub-Committee D for the last time, of thanking him and again paying tribute to the wonderful way and to the good humour with which he led us through the complexities of the CAP.

I should like to take your Lordships a little on to the world stage in the context of this price settlement. Earlier this year I was lucky enough to attend a conference on world agriculture in Munich organised by Chatham House and three other organisations. From that it seemed to me that we are being a little parochial in thinking that the importance of reducing surpluses must be seen only in the context of the enormous cost to the EC budget. In fact, it is a major world problem. If we do not solve that problem it could seriously jeopardise the GATT round of discussions now being conducted and which will come to a head at the mid-term review next month in Canada.

The problem is that of subsidised over-production specifically in the United States, the Community and Japan. Hunger in the third world is not caused by lack of food but by poverty. The dumping of surplus food on the world market, which is a product of the surpluses produced in the three countries mentioned, causes poverty in the rural communities of the third world—and a high proportion of the people in the third world depend on a rural economy. It also causes anger and economic crises in countries such as New Zealand.

My view is that the present situation is immoral. Whether or not is is immoral, unless the problem is solved it will cause real risk of breakdown in the GATT negotiations. A solution must therefore be found. The USA has proposed what it calls a zero option. In effect, this is a move towards free trade by the year 2000, though the USA has now retracted that precise date. At the meeting I attended, the US representatives were extremely aggressive, even offensive, towards the EC because the representatives of the Community were not prepared to follow that plan.

Whether the American Administration would be able to deliver free trade, I very much doubt, however. The alternative solution being suggested by the Community is a much more staged move towards a degree of free trade over a period of years. In this context I believe that it is worth mentioning the very interesting suggestion that the first move must be to arrive at a measurement of subsidy. This is needed because there are so many different forms of concealed subsidy which countries apply in order to benefit their farming communities. The Community has developed a concept called the PSE or producer subsidy equivalent. The idea is that if the subsidies of every kind provided by different countries could be reduced to some units of simple equivalence then it might be possible to move effectively and fairly towards a staged reduction in subsidy.

Whatever the plan, the surpluses must be reduced. It is against this background that we have to look at the settlement under discussion. Of course the price settlement is only a part of the package. There are the stabilisers and quotas that have been discussed this evening and there is also set-aside. The Council for the Preservation of Rural England made an interesting point in the paper which was sent to some of us that the most damaging aspect of set-aside is the philosophy that it has created. That is the idea that there is a surplus of land. The noble Lord, Lord Carter, referred to this. There is not a surplus of land if we can think of something else to do with it. I am not entirely convinced that in every case we can.

Undoubtedly there is a surplus of food. The alternative to set-aside, which is the rather useless way of coping with apparently surplus land, is the possibility of extensification. The danger of this is that we end up with a countryside that is a museum. Extensification must be justified in the less favoured areas. It may be that it can be justified elsewhere—certainly, for example, where farmers wish to undertake organic farming. It would seem reasonable that they should receive the subsidy for doing so because they are in effect saving money by producing at a much lower rate of output per acre.

I believe that extensification can probably be achieved in terms of rotation, but whether it can be achieved effectively in terms of agricultural practices such as using smaller quantities of fertilisers, I am less convinced. We have to see the present surplus situation and the present price review in the context of the inexorable technological advance in yields. I believe that the noble Lord, Lord Carter, was not giving full weight to the 3 per cent. increase in yield capacity of our crops which we are told we are likely to see over the next decade.

Against this we have to set the political reality. Most people, and not only those who live in the countryside, are keen to avoid destroying the rural environment. This means also not destroying the rural community. I believe that some figures quoted by the noble Lord, Lord Middleton, suggest that if we do not want to destroy the rural community the reductions in price support that have taken place over the past few years will have to be offset by income aids which do not stimulate production. That is known as decoupling in EC jargon.

In this context, European farmers have said that they do not want to be paid for doing nothing and they do not want to be paid for being park keepers. British landowners and farmers have a very proud tradition of beautifying and looking after the countryside that they love. I believe that, as pressures increase for access to the countryside by a largely urban population, we may perhaps have to learn to enjoy doing as a job what in the past we did for love.

8.7 p.m.

Lord John-Mackie

My Lords, the problem with being the last speaker before the Minister replies is that practically everything has been said. My noble kinsman who often follows me always makes that complaint and says that I have said exactly what he was going to say. That is slightly unfair. But that is just the way of things.

The problem with the report is the interval between the decisions of the EC, the committee si udying them and the writing of the report, and now our debating it. A period of over eight months have passed. Quite frankly, a good deal of it is almost academic. This is not in any way a criticism of the report because it was very necessary to look into the whole subject.

I believe that the noble Lord, Lord Gallacher, and his committee have done a good job in putting into the report all the details, outside the price, that affect the farming community in the EC and other places as well. On page 20 there is a list broken by two items, such as tobacco and something else, that do not grow in this country. One then turns to page 51 and looks at the wheat prices. I had to do many calculations to convert ecus into pounds and I hope that I have got it right.

I was in company with a few big cereal farmers at the weekend. They are selling wheat forward at prices that are much higher than the £112 which is the intervention price for feed wheat in the EC. Bread wheat is making much more than that. I believe that some very high quality bread wheat is almost approaching the target price. From that point of view it is a pity that this matter was not discussed a little earlier or that we did not have a debate on agriculture, because, basically, that is what this Unstarred Question is.

Another small point is that the table shows our inflation at 3.9 per cent. That is very much out of date and inflation will be almost double that figure by the end of the year if all that we are told is true. That rather spoils the arguments put foward in the table. All these matters emphasise the volatile nature of food production. Quite a few noble Lords have emphasised this, particularly the noble Lord, Lord Walston, who also referred to other matters that create this situation.

I believe it is dangerous to make too many presumptions about food surpluses or food stocks. The FAO maintains—I believe this figure was quoted—that anything below a 17 per cent. reduction in stocks is too low. I believe it is now down to 16 per cent. and still falling. The argument that this situation can be rectified very quickly is not too strong. I believe that the noble Lord, Lord Northbourne, who has just sat down, said that we have many people setting aside for at least three years if not five. I spoke with some Canadian and American farmers and it appears that some of the larger producers of cereals in other countries are not too keen to go back to higher production after the so-called lessons of the past.

The main issue is this. The world population is steadily rising and if industrial production increases and the standard of living in developing countries continues to rise, the demand for food will rise very fast indeed. Today I had quite a long talk with the new Indian High Commissioner on this subject. He maintained, as have various other people in this debate, that the issue is not the lack of food but the lack of money: it is poverty that creates hunger.

The noble Lord, Lord Northbourne, raised this point but I think he is wrong in one respect. At present, putting cheap food into some of these countries depresses prices for local peasants who are by no manner or means feeding the population. This happened 20 years ago when barley prices fell in this country. The deficiency payment was created to raise prices in this country to local farmers. At that time we were buying a great deal of food from abroad but we managed to bring it in without destroying the incomes of home farmers. We have to teach those governments to do just that. They should not starve their people for the sake of keeping going a low standard of production. This point should be emphasised.

I discussed my next point with the Indian High Commissioner. At present consumption per capita of all grains in India is only about 202 kilos. In the United States consumption per capita is 845 kilos. He emphasised that most of the American consumption is left on plates because that 845 kilos is converted into meats and so on. A decent standard of nutrition requires about 450 kilos, which is about the consumption figure in this country. Half the world's population consumes below that figure. There is still a tremendous demand for food, a point emphasised by nearly every speaker today. We must watch carefully what we do in terms of cutting back production, setting aside land and so on. I agree that there is a local EC problem of surpluses and stocks and the cost of getting rid of them. Nevertheless we can solve that problem and still watch our step carefully. The rise in the world's population is quite fantastic. A very well documented report in The Lancet said that, because population control is not working, the world's population by 2030 will be 7,500 million. One can imagine how much food such a population will require. There will be an unlimited demand for food in the very near future.

I mentioned a price freeze and I referred to a table in the report. As to incorporating more cereals into feed, I do not know who thought of that one but I hope to goodness that it will be dropped with a clang. I cannot see how that would work and it would be a bureaucratic mess.

My next point concerns the green pound and MCAs. The noble Lord, Lord Gallacher, pointed out that the whole thing is inexplicable to most people. Paragraph 26 on page 10 of the report should be read carefully. Most people do not understand the subject; and while I am not an authority the people I talk to believe that the problem will not be solved until we join the European monetary system. We all know the difficulty of trying to understand the MCAs and the green pound.

Consumers gave evidence to the committee. I cannot understand why we cannot make the point more clearly to them that food today is much cheaper than it was in the 1930s. In the case of milk, one hour's work today by the average working man, who earns about £150 to £156 a week, will buy 17 pints of milk at 22p a pint. One hour's work in 1950—the average working man then earned about £2.50 a week—would buy only five pints of milk. That is the difference in milk prices. The same would apply to the price of meat and ordinary brisket. It should be pointed out to people how cheap food is today compared with 30 or 40 years ago.

Lord Mackie of Benshie

My Lords, was my noble kinsman referring to 1930 or 1950?

Lord John-Mackie

My Lords, I think I said the 1930s. I hope that someone will back me up against my noble kinsman, I am sure I referred to the 1930s.

I agree with the noble Lord, Lord Middleton, about deductions. He sells barley and when he gets his cheque he finds that £7 per tonne has been deducted. That is a high figure on barley at £155 per tonne. What are they doing with that money? It was originally planned to use the money to reduce stocks. I should like to think that the stocks have been reduced and that something can be done to get rid of these levies. It is a very heavy burden indeed.

I thoroughly agree that the farmers should look to the environment. However, they cannot farm with the environment always in their mind, as a great many people in this country seem to think. Farming is a job. The environment is important but there is a great deal of over-emphasis from some organisations on what we do and what we do not do.

I should like once again to congratulate the noble Lord, Lord Gallacher, and his committee on the report. It is a pity that we could not have had it a little earlier.

8.18 p.m.

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

My Lords, I should like to start by thanking the noble Lord, Lord Gallacher, for the sub-committee's report on this year's farm price review. It is interesting to note that this debate has included a good number of speakers who are not members of the committee. Such is the importance of the subject.

As your Lordships know, a settlement was reached some months ago, but this debate has shown how convenient it is to have an opportunity to consider the committee's report in the light of the outcome. I have to tell the noble Lord, Lord Carter, at once that I cannot trip down the BSE path tonight. I think that he should be ashamed of himself for raising it.

I should like to start by mentioning five of the features of the February European Council decisions which have important implications for the price fixing. First, CAP guarantee expenditure must now be held within a guideline which cannot grow faster than 74 per cent. of the rate of growth in the Community's gross national product. This should limit the real annual growth in guarantee spending to 2 per cent. over the next four years on average compared with 10 per cent. over the past four years. Both the Commission's initial price proposals and the settlement that is reached must respect the guideline.

Secondly, unlike previous agreements, there is no provision for exceptional circumstances, an ill-defined term enabling in practice the guidelines to be breached. Instead, there is only a monetary reserve to provide up to 1 billion ecu in any year if there is a significant fall in the value of the dollar against the ecu, since this has a direct impact on agricultural expenditure. I should add that money will be put into the reserve if there is a significant rise in the dollar.

Thirdly, the stabilisers which are now generally in operation throughout the CAP link full levels of support to specified quantities of production, with cuts in support if those quantities are exceeded. In this way they contribute both to keeping expenditure under control and production in check. Fourthly, the Commission is committed to managing markets for each major commodity so as to avoid an overrun of expenditure. If further Council action is required, for example to strengthen stabilisers, the Council is committed to taking urgent action on a Commission proposal.

Finally, in the past the Community has been able to disguise the true cost of the CAP by allowing intervention stocks to build up, without proper charge to the budget. Now purchased stocks must be fully depreciated in the budget.

I have reminded your Lordships briefly of these major improvements in the management of the CAP, because their recent introduction was the background to the price fixing negotiations. So, let us now examine how the farm prices package that was agreed on 18th July compares with the proposals made by the Commission. The prices part of the package was agreed very much as proposed by the Commission, with support prices being frozen in ecu terms for most commodities. In addition, adjustments were made to the support mechanisms for cereals, oilseeds and beef which will reduce support. This continues the downward pressure on support levels which has been applied for the past five years.

I should like now to say something about agrimonetary issues because they formed a very important part of the committee's report, and indeed of the price fixing. The committee dwelt on the practicality or otherwise of the long-term aim of eliminating all MCAs by 1992, and I can understand its doubts. But I believe that the problems can and must be solved. MCAs have to be abolished if a proper single market is to operate in agriculture. The Commission's objective is therefore one which the Government fully support and will fight for.

The Commission is committed to making a report to the Council on how it is to be done, and the steps by which the monetary gaps between green rates and market rates on which MCAs are based will be abolished. I am glad to say that, thanks to the efforts of my right honourable friend the Minister in another place, both Council and Commission accept that these arrangements must cover all monetary gaps: those of the four non-members of the exchange rate mechanism, including ourselves, as well as those of other member states who are in the ERM.

The noble Lords, Lord Dunleath, Lord John-Mackie and Lord Walston, advocated membership of the ERM. I reply to them merely by repeating the Government's statement that we shall join the ERM when we think that the time is right.

The Commission's specific proposal was limited to a devaluation for Greece, the country with the largest MCAs. We found that unacceptable for two reasons. First, we believed that eliminating monetary gaps and therefore MCAs by 1992 would best be achieved by a gradual and phased demolition of all MCAs, including our own. Secondly, with UK MCAs at the time ranging up to 17.5 per cent. our farmers were disadvantaged in comparison with those in other member states, as your Lordships' report notes, and we could not accept that nothing should be done to redress the balance. We therefore believed that a measured green pound devaluation was necessary, and we pressed for one.

The noble Lord, Lord Walston, will appreciate that we were successful. We secured devaluations effective from 1st January 1989 which will reduce UK monetary gaps, and therefore MCAs, by 3.2 points in all sectors except beef where green currency devaluations are to be considered in the review of the regime which has recently begun.

The measure of our success, as recognised by the noble Lord, Lord Gallacher, is that the green pound devaluations agreed are greater than those secured by our main EC competitors, such as France and Ireland, and will improve the competitive position of our farmers. They increase support prices by 2.9 per cent. in most sectors and, were they taken in isolation, would raise farm incomes by £120 million in a full year. They will have only a minimal effect on the food price index.

Lord Mackie of Benshie

My Lords, perhaps I may ask the Minister what she means by "taken in isolation". Does she mean that the price will be smaller when the other factors are taken into account?

Baroness Trumpington

My Lords, perhaps I may speak with the noble Lord after the debate, because I shall have to look back to see what I said in order to adjust my mind to his question.

I turn now to some of the commodity points raised in the report and by noble Lords today. First, on cereals, I fully endorse the committee's comments on the cereals incorporation premium. As the House will know, the Government have consistently opposed the idea of such a premium, and the Commission's proposal was not adopted. Moreover, the Council has agreed that any incorporation premium would have to meet certain criteria. In particular, it would have to result in increased use of cereals in animal feed; be based on the most recent possible reference period; be in conformity with GATT; and, last but by no means least, be subject to a monitoring system capable of ensuring its cost-effectiveness.

The views put to the committee on the proposal to halve monthly increments in the intervention prices for cereals and oilseeds were divided, as were the attitudes of member states in the Council. In the event, it was agreed that monthly increments for cereals should be reduced by a quarter and those for oilseeds by a fifth. For cereals, at least, we would have preferred a larger cut, but this was a step in the right direction.

The committee made special mention of the milk quota system which the European Council agreed should be extended for a further three years. As a result of this decision all the main elements of the milk regime remain unchanged by the 1988 price fixing. The effect of the decisions taken under the British presidency in December 1986 have now become fully apparent. Community intervention stocks of skimmed milk powder—as noble Lords have already mentioned—which were over 900,000 tonnes two years ago have now been virtually eliminated, the stocks of butter are dwindling fast—down from 1.3 million tonnes to 210,000 tonnes in two years. But there is still a large surplus of milk products and a very stringent approach will continue to be needed in this sector for the foreseeable future.

The noble Lords, Lord Gallacher and Lord Mackie of Benshie, spoke about co-responsibility levies. The milk quota system was not our preferred option, nor were co-responsibility levies which are applied in the milk and cereal sectors. We believe that reducing prices is the right way to bring supply and demand into balance, and that benefits consumers too, which quotas and levies do not. But those were the stabilising measures which the Council as a whole voted for. We shall continue to work for the removal of co-responsibility levies, offset by price cuts.

The noble Lord, Lord Gallacher, mentioned the importation of milk in the future and the possibility that doorstep deliveries might be affected, and other such matters. I must agree with him that a lot of thought and work must be done by our people on the subject. However, I hope that it is also possible to look at the future of milk and milk products in a robust way. I further hope that we shall be exporting our fair share.

I turn now to the beef sector. Your Lordships will be aware that we have consistently pressed for making intervention less available and less attractive. We are therefore pleased that the price fixing weakened it further by reducing the price at which beef is bought in. Further action is justified but this needs to be considered as part of the wide-ranging reform of the regime on which negotiations, as I have said, are just beginning.

We welcome the Commission's proposals on intervention which would build on progress already made by further limiting its scope and cost. As to premium payments for farmers, we are studying the proposals carefully. If the system is to change, we shall aim to ensure that such changes are for the better.

The noble Lord, Lord Gallacher, asked about the effect of the recent changes to the beef intervention arrangements. It is too soon to determine how effective those changes will be, but I am pleased to be able to say that beef intervention stock levels have decreased since July from nearly 700,000 tonnes to 620,000 tonnes.

Your Lordships have made it clear that you want to know how this year's final price settlement measures up to the new rules on budget discipline and to be satisfied—I was pleased with this word in the report—that there was no fudge. To begin with, the package was estimated to produce a small saving against the 1988 budget of 24 mecu, but, mainly due to green rate devaluations, there will be an additional cost of 289 mecu in 1989. The additional cost in 1989 had to be covered to stay within the financial framework and the Commission faced up to its responsibilities, as my right honourable friend the Minister urged it to do. As a result, offsetting management savings, mainly on skimmed milk subsidies, enabled the Commission to cover the extra costs and indeed to reduce its budget estimate by 20 mecu for 1989.

Since the price fixing, due to improved world market prices and management action to restrain spending on a number of commodities, reduced levels of expenditure have resulted in the outturn for 1988 being estimated to be 1 billion ecu below the guideline. For 1989 the Commission has brought forward a rectifying letter to the 1989 budget which, if adopted, would give a provision for CAP guarantee spending about 1.8 billion ecu below the guideline in 1989.

The budgetary picture, at least in the short term, therefore appears satisfactory. However, the Commission knows as well as anyone that it should not use temporary improvements in the world market prices, for example those caused by the US drought, as a justification for reducing the pressure on the CAP. To do so now would mean that harder decisions would have to be taken in future if, or when, world prices decline, since budget discipline would then bite all the harder. Such a switchback approach makes no sense. We need to hold firmly to the course we have set.

I should like to mention how stabilisers are working. Since the price fixing, the Commission has made known its harvest estimates for a number of the commodities subject to stabilisers. For rapeseed, a cut of 7.65 per cent. in the target price has been applied. This is less than the 10 per cent. cut applied last year but reflects the fact that, as a result of reduced acreage and lower yields, estimated EC10 production of rapeseed has fallen this year compared to last year by about 10 per cent. This is a welcome sign that stabilisers are having an effect in this sector. For sunflower seed a cut of 19.8 per cent. in the target price has been applied, nearly double last year's reduction, and for soya a cut of over 10 per cent. has been applied.

In the case of peas and beans, the stabiliser is operating this year for the first time and is already making its presence felt. Production estimates were about 20 per cent. above the level of the maximum guaranteed quantity, giving rise to support price cuts of about 10 per cent.

Although, as my noble friend Lord Middleton is aware, the Commission has not yet decided its harvest estimates for cereals, the 1988 Community harvest will probably be somewhat below 165 million tonnes, though it is expected to be sufficient to trigger the stabiliser which gives a 3 per cent. price cut next year; but there may be a small repayment of the additional 3 per cent. co-responsibility levy.

Time is going by. I shall write to the noble Lords, Lord Mackie of Benshie and Lord Carter, about extensification and the reduction in farm incomes, if that is agreeable to your Lordships.

I was moved by the words of the noble Lords, Lord Middleton, Lord Mackie of Benshie and Lord Northhourne, about the beauty of the countryside and the welfare of farmers. The Government are well seized of the importance of both. Further, the Government are heartened by the progress which has been made in the Community's approach to the management of agricultrual policy.

My right honourable friend the Minister in another place will continue to pursue our policies which, as I have shown, are bearing fruit and which we firmly believe are in the best interests of the EC, of our country, of thriving rural economies and therefore of the farmers themselves.

Lord Gallacher

My Lords, I should like to thank all Members of your Lordships' House who have taken part in the debate and for the quality of their contributions. I should especially like to thank the Minister for replying to the debate, particularly in the circumstances which she was kind enough to mention to me.

If the report has merit—and some say it has—it is in no small measure due to the quality of Sub-Committee D. On this occasion I should also mentioned the fine service we had from our specialist adviser, Mr. Simon Harris.

On Question, Motion agreed to.