Livestock Premium Quotas

HL Deb 18 October 1993 vol 549 cc445-96

4.50 p.m.

Lord Hamilton of Dalzell rose to move to resolve, That this House considers that the Sheep Annual Premium and Suckler Cow Premium Quota Regulations 1993 (S.I. 1993, No. 1626) do not contain adequate measures, either to tackle the adverse economic effects which arise from the transferability of quotas away from particular holdings, or to protect vulnerable livestock rearing areas and the communities that depend on them; and therefore calls upon Her Majesty's Government to introduce further measures, sufficient to provide full redress for these adverse consequences of livestock premium quotas.

The noble Lord said: My Lords, I have an interest in this debate both as a landowner and a member of the Country Landowners' Association, which supports this Motion.

At the time at which I originally tabled the Motion for debate I was obliged to pray for an annulment of the statutory instrument implementing the regulations on sheep and suckler cow premium quotas. Due to a number of days' legal proceedings during the Recess, the time has run out for a Prayer and I am grateful to the Government for allowing time for this important debate to take place as an ordinary Motion.

I have also changed the substance of the Motion. It now calls for the Government to take further measures to correct deficiencies in the operation of those regulations. As a result, the Motion before your Lordships will observe what I am told is the tradition of the House by not seeking to throw out a statutory instrument. It will ensure also that it cannot give rise to a retrospective effect on those who may have already carried out transactions in quota.

It follows from that that, in spite of motives which some of your Lordships may have attributed to me for initiating the debate derived from the part that I played in another debate in this House which took place before the Recess, this Motion does not challenge the principle of applying quotas to agricultural production. The British Government have fought against them in Brussels but their opinions have not been taken by the other countries in the Community, and that it is a fact of life which we must sadly accept.

This debate is focused on the particular problems created by the arrangements made by our Government for applying premium quotas to sheep and stickler cows. But it is of far greater importance than that. It will set the precedent for measures to implement further quota regulations which could very well follow.

Why is it that I ask your Lordships to conclude that the Government's regulations are inadequate? The starting point is that a producer is eligible for a maximum premium payment according to the number of sheep or suckler cows which he happened to have and registered—at the end of 1991 for sheep. The arrangements for suckler cows arrived on my desk this morning and appear to be similar in principle but with a registration date at the end of 1992.

The number of animals which can be produced is dependent upon the amount and quality of land, in hand or tenanted, available to the producer. Therefore, I argue that the value of the quota for premium now payable can only have come from a combination of capital assets, incorporating both livestock and land.

The producer under those regulations may sell that quota. Where there were two assets needed for profitable livestock rearing, now there are, in effect, three; namely, land, livestock and quota. Anyone wishing to farm land from which quota has been removed will have to acquire quota or bring it with them. The value of the contribution of land to the equation has been diminished. The only way in which the land value will not be reduced is if there is an economic alternative to livestock rearing on it. In both uplands and lowlands the flexibility of farmers is becoming ever more restricted by set-aside, milk quotas and planning designations, so these alternatives may be few and in many cases non-existent.

This problem becomes an issue between landlord and tenant only because an owner-occupier has less incentive to sell his quota than his tenant because, as I have just explained to your Lordships, the sale of the quota has the effect of creating a reduction in the value of the land. An owner-occupier will make little or no net gain by selling, whereas this measure is a direct inducement to encourage tenants, particularly elderly ones with no succession, to take their money and retire, partly at the landlord's expense.

We claim, therefore, that there are five detrimental effects in the measure as it now stands. First, it devalues land and, therefore, the landlord's assets, as I have explained. Secondly, the ability to capitalise quota rights means that substantial sums will be realised and, by their nature, are likely to leave the industry. A thousand sheep on a less favoured area have premium rights with a capital value of between £40 and £45 per animal or £40,000 to £45,000—less the 15 per cent. syphon if the quota is sold to anyone other than the landlord or incoming tenant. The potential for a drain of money out of agriculture seems to run against government policy over many years when both Conservative and Labour Governments have used substantial sums of taxpayers' money to maintain rural employment and to prevent the emigration of the rural population to the towns.

Thirdly, there is the possibility—I might say likelihood—that quota rights will move away from some marginal areas where conservation goes hand in hand with grazing. There are wild plants which will survive the grazing of animals, particularly sheep, but not the mower; and some that actually require the grazing of sheep to survive. This measure will not help ecology.

Furthermore, the loss of income arising from reduced rents on new tenancies will strike a further blow at places where there are obligations placed on their owners to maintain the heritage. It will bring closer the point, already reached by some when those liabilities will exceed the assets available. This measure will, in my opinion and doubtless in the opinion of many of your Lordships who are faced with this problem and are aware of the perilous state of the national heritage entrusted to their care, give rise to a further deterioration in what they hold, deemed to be in the national interest.

Fourthly—and this is an important point in this debate—the Government's regulations on these quotas will, whether or not they wish it, guide landowners in decisions on whether to let land in the future. Because this legislation will be seen as the precursor to further measures, it will influence decisions across the range of farming activities.

It is, therefore, not only landowners who should be concerned. It is also those enterprising young men and women who need tenancies to become the nation's future farmers. If owners will not let, new entrants cannot rent.

The Government, on their announcement of the shape of landlord-tenant legislation, only about a fortnight ago reiterated their desire to see more land let. There is little point in reforming the framework of the legislation if at the same time the Government pursue policies which will discourage owners from letting at all before they even look at the new legislation.

Fifthly, following the May 1992 CAP reform settlement, in November last year the Community agreed to insert a provision—Article 13—into EC law requiring member states to adopt measures to tackle problems arising when the producer is not the owner of the land. That covered the transfer of quotas or other equivalent actions. It was a victory for the British Government in Brussels.

However, the Government now say that they did not win after all but lost. They recognise the adverse effects of transferability of quota rights on land but claim that under their interpretation of Article 13 they can do nothing about it. The issue is the subject of a judicial review initiated by the CLA.

Clearly this House cannot resolve the legal arguments of the judicial review in this debate. But it is relevant to note that the Commissioner for Agriculture, Rene Steichen, has said that Article 13 was agreed expressly to allow the United Kingdom to solve the problems created by having the most highly regulated landlord tenant system in Europe.

I have a letter from M. Steichen to my noble friend Lord Inglewood in which he concludes: Thus, it is clearly a matter for Member States to act in the area of problems arising between producers who own quota rights and the owners of the land they farm". That is from the horse's mouth.

I would ask your Lordships to note too that the Council of Ministers has also stated that the resolution of landlord-tenant issues is a matter for member states. In my opinion this is a correct and proper view of the purpose of subsidiarity which I heard many noble Lords claim to be the jewel in the Maastricht Treaty. Why are the Government denying it?

In looking at the possible solutions to this problem, I am of the opinion that a compensation mechanism would be the most practical cure for it. It would mean that, where a landlord could prove that his land had been devalued by a loss of quota rights, he would be compensated by being entitled to claim a proportion of the proceeds of their sale.

I do not, however, claim a monopoly of wisdom, and doubtless noble Lords will have other suggestions to make. I can accept that a guarantee of replenishment of the national reserve for let land left denuded of quota would serve to neutralise the negative effects of the present regulations. I shall listen with interest to any ideas your Lordships may put forward.

In any event, I hope that the House will agree that the regulations as they stand pose real problems. They are problems which the Government themselves recognise and which will have far-reaching knock-on effects. This Motion is designed to make the Government address these problems and I commend it to your Lordships' House. I beg to move.

Moved, That this House considers that the Sheep Annual Premium and Suckler Cow Premium Quota Regulations 1993 (S.I. 1993, No. 1626) do not contain adequate measures, either to tackle the adverse economic effects which arise from the transferability of quotas away from particular holdings, or to protect vulnerable livestock rearing areas and the communities that depend on them; and therefore calls upon Her Majesty's Government to introduce further measures, sufficient to provide full redress for these adverse consequences of livestock premium quotas.—(Lord Hamilton of Dalzell.)

5.2 p.m.

Lord Chorley

My Lords, I start with a confession: I am no farmer. Accordingly, I am somewhat surprised to find myself speaking immediately after the noble Lord, Lord Hamilton of Dalzell, who so comprehensively and ably moved this Motion. Indeed, many distinguished farmers are due to speak after me. I would not have put my name down to speak on this undoubtedly important but, I am sure we all agree, rather technical issue if it were not for the difficult problems which it raises for the organisation of which I have the privilege of being chairman. I refer to the National Trust.

Your Lordships may be aware that the trust owns nearly 600,000 acres of land in England, Wales and Northern Ireland. Much of that land, which we have acquired over the years for its landscape and amenity value. is upland country. It is hill farming and sheep country. We have, for example, 1,200 tenant farmers and nearly 100 farms in the Lake District. So, the good economic health of the upland sheep farmer is of the utmost importance to the trust.

I do not say that particularly because of the rents that they bring in—important though they are—nor because of their importance to the rural economy—although that is extremely important—but because of a further factor, the sheep themselves. Our upland landscape, the landscape of Wordsworth and the lakeland poets, has been shaped over the centuries by the sheep. Without sheep, the landscape would revert to scrub because sheep are natural lawnmowers. Therefore, any measures which wittingly or unwittingly endanger the future of sheep farming are of direct concern to the trust. It is in that context that we are concerned about the effects of the quota regulations on tenanted farms and on conservation grazing.

Established tenants will generally have received sufficient quota, but the tenants who have taken farms since mid-1991 and those who have been allocated extra land on the splitting of a vacant holding are in difficulty. The main problem concerns the letting of vacant holdings. The capital required by an incoming tenant is considerable and has to cover ingoing valuations, purchase of livestock and machinery and working capital. The hill farmer will be required to purchase or rent the hefted flock. The additional cost of leasing ewe premium quota at £10 to £12 per ewe or purchasing it at £40 to £50 is prohibitive and there is a real fear that hill farms will be increasingly difficult or impossible to let. The noble Lord, Lord Hamilton, referred to that.

The trust devotes considerable resources to upland management for our statutory purpose of conservation. In the Lake District alone, we spend about £3.5 million a year on conservation work. The trust, as landlord, owns the hefted flocks of Herdwick sheep which are leased to tenants. These flocks are an important part of the Lake District scene and, as I have explained, they are important for conservation. But their existence is threatened by the quota system because, although the flocks are owned by the trust, the quota necessary to claim the premium has been given to the tenant. I find that extraordinary.

An outgoing tenant will sell or lease his quota. It would seem logical to transfer the quota to the incoming tenant, but any quota that the incomer purchases will be counted against any allocation that he may get from the national reserve, thus providing a disincentive to keeping the quota on the farm.

It might be argued that an alternative would be for the trust to buy the outgoing tenant's quota and lease it to the incomer. But the regulations prohibit holding of quota by non-producers for more than two years. The trust has also been designated a single producer for the whole country. That bears hardly on us 'because any premium claims in excess of 500 ewes attract only 50 per cent. of the premium. Since the trust already manages some 2,000 ewes in-hand, any additional ewe premium claims will reduce even further the amount of subsidy received. This seems most unreasonable.

What are the options for rectifying these weaknesses? Let me say right away that I agree with the noble Lord, Lord Hamilton, and that we recognise that there is little prospect of altering the EEC regulation to vest quota in the owner rather than the producer. However, the definition of a producer could perhaps be interpreted more liberally so that non-producers could hold and lease quota for the purpose of ensuring that sufficient quota was available to enable a farm to be let. We believe that this would be justified on general grounds, but there is a further justification in that it would help ensure that areas of conservation value would continue to be grazed.

The Country Landowners' Association arid the Royal Institution of Chartered Surveyors are pressing for a system of compensation to landlords for the devaluation of the holding where quota is transferred away. I have great sympathy with this claim but, as far as the trust is concerned, the more important point is to ensure that sufficient quota is available to tenants. Our conservation objectives are more important to us than diminished land values.

A better suggestion, I would suggest, would be for a larger national reserve so that all legitimate claimants receive a full allocation. Incoming tenants would thereby get sufficient quota for the proper farming of the holding. To get a larger reserve, the percentage put into the reserve when quota is transferred away from a farm, which I understand is currently 15 per cent., needs in our view to be increased to at least 25 per cent. Similar rules should apply to leased quota.

As quota only goes into the reserve when it is transferred away from the farm, the higher the percentage into the reserve, the greater will be the incentive to retain the quota on the farm. An adequate national reserve will bring down the price of quota so benefiting new entrants and reducing the windfall gain to existing producers.

Finally, I understand that this whole problem has been, and continues to be, exacerbated by administrative delays. We have experienced this ourselves over a hill farm which we have been trying to let for some months in the Lake District.

This is an unsatisfactory state of affairs. It is inequitable as regards the landowner; it is inequitable as regards our hefted flocks; and, perhaps most importantly, it bears heavily on new entrant farmers or those seeking to enlarge their farm. Moreover, much of this takes place on land which is today economically right at the margin. It probably has no other use except for forestry, yet much of this land is of the highest conservation value and it depends on grazing for that conservation and for its appearance. It bears heavily on the trust financially, but perhaps much more importantly, because of the work we do. I hope the Minister will take on board not just the fact that we have problems with equity here and of an economic nature, but also the great importance of the uplands to landscape conservation and the fact that there are a number of what appear to me to be relatively easy ways of dealing with this matter.

5.10 p.m.

The Earl of Swinton

My Lords, personally I do not much like sheep. When I farmed them myself I always found that if they had anything wrong with them the first thing they did was to lie on their backs, flap their feet in the air and die. They seemed to put up little natural resistance. They also had some nasty personal habits. I have never known anything which spent more time on doing what you or I do a few times a day than they did. They also seemed to do it in the dirtiest possible way, with the maximum amount of mess. I also do not like seeing sheep much when I visit moorland. I do not like to see such land covered with sheep. However, I like the end product of sheep and I like the people who produce them; namely, the hill farmers. There is a place for them on the hills as one cannot do anything else with some hill farms other than farm sheep. Provided that farmers do not put too many sheep on the open moors, I am all for them farming up there.

The matter of quotas is proving a dangerous threat to the livelihoods of the people I have just mentioned. The term "quota" in the context of this debate is probably a misnomer. After all milk and potato quotas give one the right to produce and there are penalties if one overproduces, but beef and sheep quotas give one the right to receive a subsidy for specific production. There are no penalties for overproduction. However, if one does not achieve the quota, the subsidy is simply not paid. It is acknowledged that sheep farming on the uplands would be totally uneconomic without subsidies. Without a sheep quota, therefore, an upland farm ceases to be an economic concern. When therefore a farmer, particularly a tenant farmer is tempted—the temptations are great—to up sticks, cashing in on the quota, the damage done to the farm which that tenant leaves can be overwhelming.

I shall elaborate on two cases from my own estate which may provide examples of what I fear. My first example concerns a hill farm on the edge of the moor of about 334 acres which became available to let because of the retirement of the tenant in April 1993, immediately after the regulations we are discussing now had come into effect. The farm in question was rather a good hill farm but I only received three offers from future tenants, of which two were totally unsuitable. I am sure this occurred because of the threat of the sheep quotas which hung over farmers at the time. Luckily the only suitable offer came from an existing tenant who happened to be the neighbour and son-in-law of the retiring tenant. This led to a happy outcome which only resulted because the retiring tenant wanted to help his son-in-law by leaving the sheep on the farm. I am sure that if these extremely fortunate circumstances had not occurred, I should not have been able to find a tenant for that farm.

The second example concerns a similar hill farm of 296 acres which becomes vacant in April 1994. The tenant on that farm took over the tenancy from his father in 1991 and has decided to buy his own small-holding and remove the stock and the quota. By this time the beef quota will be in place as well as the sheep quota and it is estimated that it will cost an incoming tenant some £33,000 to purchase the relevant quota. This item is on top of the tenant's normal capital which is required for the purchase of live and dead stock. The figure of £33,000 is equivalent to £111 an acre, or, if the amount is borrowed from a bank, it is equivalent to a rent charge of about £11.14 an acre. One can compare these figures to the current rental value of the farm of £21 per acre. The charge on the quota of about £11.14 is over 50 per cent. more than the current rental value.

In the meantime the young farmer who has been a tenant for a mere three years leaves the holding with a golden handshake of approximately £33,000. I do not criticise the young man for doing that. I say good luck to him as he is taking advantage of a windfall, and why should he not do so? But surely these regulations were designed to control supply and not, as in this case, to transfer a windfall profit for the benefit of tenant farmers who can then simply remove it and leave the holding. I am sure that when my noble friend Earl Howe replies to the debate, he will make much of the disincentive posed by the 15 per cent. that producers have to surrender to the national reserve if they transfer quota away from the holding. A 15 per cent. tax on a windfall profit really is an enormous disincentive, is it not? When I think of some of the deals I have done in my life, I would have been jolly happy to pay a 15 per cent. tax. I am certain that many noble Lords would agree with me. A disincentive of a 15 per cent. tax does not even equal the current rate of value added tax. I do not believe that that is much of a disincentive.

I believe my noble friend will also mention ring-fencing of less favoured areas. I am afraid that those points also do not constitute great disincentives as the areas we are talking about are so large. I am, of course, worried about the drop in rental value of hill farms and I gladly declare this interest to your Lordships. My next sentence may make me sound rather a prig but that is not the case. I am far more worried about the general effect of the quota on the uplands than about how the loss of rental value will hit my pocket, because I believe the quota system will produce alarming effects on hillside farms. I believe some of those farms will be badly farmed simply because the tenant does not have the money to farm properly when he has paid for his quota. What is worse than that, I fear some farms will not be farmed at all. I am extremely worried about the environmental damage that such a course may result in. Some of that damage will occur in the loveliest areas of our land, in the national parks and areas of outstanding natural beauty.

I believe social damage will also occur when farms are not farmed in struggling hill-farming communities as local shops and post offices will suffer. The whole position will be simply appalling. I am alarmed at this position and I beg the Government even at this late hour to reconsider this matter to see whether they cannot do something about it. I could not support more strongly the Motion of my noble friend Lord Hamilton of Dalzell.

5.18 p.m.

The Duke of Somerset

My Lords, all those concerned with the well being of agriculture will thank the noble Lord, Lord Hamilton of Dalzell, for initiating this debate, for among other points it touches deeply upon the future of the landlord and tenant system in this country. It concerns the legitimate interests of both parties in implementing CAP reforms. Quotas are increasing their control over different enterprises and cereals may become the next target and these regulations a precedent. Many noble Lords have argued in this Chamber in the past about the dangers of supply management but when it has a direct effect on the value of land we must start to ask various questions.

I acknowledge my interest as a landowner of let farms in the lowlands, but I feel that the future of land tenure rises above that personal interest. For some years it has been difficult to find future farm tenants with sufficient capital. Any proposals which add to initial capital costs, such as the purchase of livestock quotas, will make it that much harder, if not impossible, for young men to apply successfully for a tenancy. Under these plans new entrants will buy their CAP support in advance.

The CAP reforms of last year were not intended to discriminate between landlord and tenant. Even though the Commission is generally regarded as being slightly anti-landlord, the new regulations include a provision allowing individual member states to solve such problems. Indeed, I believe that MAFF negotiated hard for that right. As we have heard, the right was confirmed in the European Parliament in April and by the agricultural commissioner in May.

I should make it clear that I am referring to loss of land value where the tenant has sold the livestock quota and the farm is unsuitable to some degree for other enterprises. That severely limits the options of an incoming tenant and must therefore affect the farm's rentable value. Therefore, I am speaking only of assessable and provable loss.

MAFF takes the view that it is not legally entitled to compensate for such loss, despite my previous point concerning its negotiations and despite a judicial review obtained by the CLA and legal opinions contrary to that of MAFF. Indeed, I am told that the Government have said that they would not wish to introduce further measures even if it was resolved that they had such a power. Perhaps when he winds up the debate the Minister can tell the House whether that is true. If we find that legislation for the general reform of the landlord and tenant system so long expected is not included in the forthcoming Queen's Speech we shall perhaps have to presume that this Conservative Government are no longer a supporter of the system.

I hope that MAFF will try to keep the hearing of the judicial review in the High Court in London, in the interests of a speedy resolution and of lower costs, and will not encourage procrastination in the European Court of Justice.

MAFF has instigated a national reserve and a siphon system, which is good. However, even MAFF admits that there is no guarantee that a particular holding can he allocated a new quota when the original quota has been sold. Therefore, the system will still fail. If MAFF could provide such a guarantee many problems would disappear.

There are other important reasons that further measures are necessary. The 1990 report of the Select Committee on the European Communities on the Future of Rural Society alluded at length to the importance, economically and thus socially, of keeping livestock on the hills of LFAs. Environmentally, it is vital to have some sheep on the hills. Therefore, it is a pity that the broadly placed ring fence around the LFAs, as outlined in these regulations, will not have sufficient effect in protecting marginal hill areas. That is because quotas will still be transferable, for example, between Dartmoor and Exmoor, or from poorer to better land within the LFAs. That report is still valid. It points out the human cost involved where viable agriculture is forced to cease as a result of changes in the rules.

Perhaps I may end by asking two questions of the Government. First, am I right in thinking that there should be no change in rents as a result of the introduction of quotas? If that is the case, what is the position where a tenant sells the quota but remains in occupation? Secondly, why did not the Government take up the option of operating a national pool for transfer of premium quotas, thus leaving quotas with zero value and obviating all the stress? That option was available in the 1992 CAP reforms.

It is clear to me that the Government have made a mistake with the statutory instrument and that the UK has ended up with the worst of all worlds. Therefore, I hope that they will take notice of this Motion and that all noble Lords will support it.

5.25 p.m.

Lord Middleton

My Lords, although I do not own any agricultural land, I am paid by a company which owns land, some of which is farmed and some of which is let to farming tenants. To that extent I have an interest in Statutory Instrument No. 1626.

By now it will be clear from what other noble Lords have said that the root of the difficulties arising from the sheep and beef cow premium quota regime lies in the decision by the European Council of Ministers to allocate quotas not to land but to individual producers. As we have heard, quotas are valuable and can be bought and sold. My noble friend Lord Hamilton told us that the current price for a sheep quota in LFAs is £40 to £45 a head. I agree with my noble friend Lord Swinton that it must be very tempting for a farmer in financial difficulty or at the point of retiring to cash in on that windfall gain. The harm that will result was described by my noble friend Lord Hamilton: the drain of capital from agriculture; social and environmental damage in the uplands, to which the noble Lord, Lord Chorley, referred; the devaluation of land bereft of the right to receive payments for livestock; and the undermining of the landlord and tenant system.

The Government cannot be held responsible for the decision of the Council of Ministers to allocate individual quotas. I know that they opposed it. They were well aware of the problems that would arise and, greatly to their credit, expended considerable effort in achieving the inclusion of Article 13 in the EC legislation. That article was referred to by the noble Duke who has just spoken.

Article 13 provides that member states shall take appropriate measures to deal with problems arising from the transfer of a quota or other equivalent actions when the producer is not the owner of the land. The Government rightly foresaw the problems that would arise; they succeeded in having Article 13 included; and they admit the existence of the problems which they foresaw. Therefore, it is difficult to understand why they now say that they have no power to intervene and to take appropriate measures by invoking Article 13.

The legal argument on which the Government base that refusal seems to me to be a poor one. As we have heard, it is to be tested by means of judicial review, which I understand is to be in January. Therefore, this is not the time to examine the Government's legal case. However, as I understand it, and as no doubt we shall hear when my noble friend the Minister replies, in essence they say that diminution of land values takes place at the time of allocation of a quota and not at the time of transfer of a quota. Therefore, they say, they are powerless to invoke Article 13, which they say allows them to act only to alleviate problems arising out of transferability of quotas.

I cannot for the life of me see how in itself the introduction of quota (which merely gives a right to an occupier to receive premium on his sheep which are already there) can alter the manner of his farming, the value of the land he farms or the rent which it should command. What may alter its value is when he gets rid of his quota so that he or a future occupier cannot obtain sheep premium. Depending upon the location of the holding and the availability of alternative enterprises, such impact could range from 0 per cent. to 50 per cent. of the capital value.

What form could the appropriate measures required under Article 13 take? My noble friend Lord Hamilton referred to compensation but only where the loss in the value of land can be proved. Compensation would go no further than making good any loss sustained. It could not exceed the value of the quota. Yet the Government are making extraordinarily heavy weather of that aspect. I dare say that we shall hear something about that later.

So long as I have had experience of agricultural holdings legislation, and well before that, provision has always been made at the end of a farm tenancy to weigh up, on the one hand, what improvements have been made by the tenant to a landlord's assets; and, on the other hand, what damage may have been done. The end of term valuation is performed by professional valuers acting for each party who finally agree figures so that a tenant is compensated for any improvements to the holding and dilapidated for any damage. For instance, he might diminish the value of the holding by destroying gates or fences or by various kinds of neglect. Valuers have long been accustomed to assessing damage to a holding so as to arrive at a dilapidations figure. I should have thought that it would not be too difficult for them to assess diminution of value following a removal of quota. Yet the Government appear to be obsessed by difficulties which they envisage in working a compensation mechanism. I believe that their worries are groundless.

It may be that judicial review will confirm the Government's view about their power to act under Article 13. I do not think that it is likely, but it may happen. However, the Government might then say that that rules out compensation. What else could be done to mitigate the admitted difficulties? Those difficulties are admitted by government. Already they have established a national reserve of quota, as we have heard; and there is the siphon whereby on disposal of quota 15 per cent. of it goes into that reserve. The Government intend to use that reserve to provide quota for incoming tenants to replace that which has been sold off as let land.

But there are other competing uses for which the reserve is required. The Government admit that there will not be enough in the reserve to go round. A guarantee of priority for the let sector would be helpful. However, only a guaranteed undertaking that quotas transferred from let land will be replenished from the national reserve would remove the adverse effect of those regulations on that sector.

The Government have sought to limit the migration of quota away from the uplands by means of what they call less favoured area ring fences. That would stop quota going outside a less favoured area. However, there could still be marginal upland areas denuded of quota, and therefore almost certainly of sheep as well, to the detriment of the environment, possibly leading to overstocking lower down the hill and further environmental damage. The ring fencing could probably be more tightly drawn.

I support my noble friend in asking the Government to introduce further measures such as those that I have suggested in order to redress the adverse consequences of marketable livestock quotas.

I do not know whether my noble friend Lord Hamilton will press this Motion to a Division. Clearly that will depend upon what kind of reply he has elicited from the Minister. First, I have heard it said that a vote against the Government on this Conservative Back-Bench Motion would be disloyal. But it is hardly a party matter. It is a matter of administration. There are precedents where a Conservative Government have, through an order, created an undesirable administrative situation which has been pointed out to them by their own supporters. In this specific case I understand that the matter has been under discussion with government for well over a year, with no satisfactory result. The Government are keenly aware of the problems but appear to be paralysed and unable to solve them.

Secondly, I have also heard it said that a vote against the Government would be damaging to agriculture in general and to the landlord and tenant system in particular. It is the strong belief of my noble friend and those who support him that what will cause damage is the way in which the Government, through the order, are implementing the EC legislation. Any measures which will mitigate that damage will only benefit agriculture and the landlord and tenant system and prevent tension between landlord and tenant.

Thirdly, I have heard it said too that such a vote would be bad for the House of Lords. It is said that it would be harmful to this House to press the Government on what will be perceived to be a landlords' interest. But the order affects the whole spectrum of those in agriculture, including landlords and tenants. It affects others living in the countryside too. As we have heard, environmental and social issues are involved.

If one were to pursue that argument further, Members of this House who own land should therefore be disqualified from debating or legislating upon any agricultural matters where agricultural holdings law is involved. I should have thought that that would go far further than the ordinary rules and conventions about Peers' financial interests. It would in effect be a gag on a particular category of Members because it might be thought that these were still the days when landed interests exerted influence upon government. That perception is 100 years out of date and I am very surprised to hear it put forward.

Therefore after hearing the debate and after listening to the Government's case, if my noble friend is still dissatisfied, then I would follow him into the Lobby with a clear conscience on all those three points.

5.38 p.m.

Lord Lyell

My Lords, we are all grateful to my noble friend Lord Hamilton of Dalzell for giving us the opportunity to discuss this problem today. Like many other Members of your Lordships' House, I have to declare my interest, first, as a producer, secondly, as a landlord and, thirdly, as a member of one of the organisations which has showered noble Lords with advice.

My noble friends Lord Middleton and Lord Swinton referred to the fact that the quotas that we discuss today are the right to receive a premium as opposed to quotas that we have already had on milk. The quotas that we discuss are not problems of the Government's making. The Government merely pick up the difficulties.

The concept of tradable quotas has been referred to in one of your Lordships' sub-committees. Professor Tangemann referred to bonds. That might be a solution. Perhaps my noble friend on the Front Bench will take that into consideration in the future, although not this afternoon.

The consistent line running through the remarks made by all noble Lords this afternoon is the extra cost on existing producers in areas which are already somewhat handicapped. In Scotland, we call them "disadvantaged" and "specially disadvantaged" areas. The complications, not just financial but administrative, on any producer or landlord with problems, let alone a producer or landlord who wants to expand his operation or enter an operation, have an enormous effect on finances. That point was well put by the noble Lord, Lord Chorley, who, I believe, was and still is a distinguished chartered accountant, and I took on board his thoughts which had particular relevance.

The sums which have been mentioned are more marked in the hills than they would be on a comparable holding outside the less favoured areas, perhaps in arable areas. That is well known to many of us, particularly my noble friend the Captain of the Yeomen of the Guard, sitting on the Front Bench (the Earl of Strathmore and Kinghorne). He and I both know the problems in Angus and several Members of your Lordships' House here this evening come from Angus.

So far as I am aware, on the figures produced in paragraph 6(1) of the regulations, if a producer has 500 ewes outside a less favoured area, on a transfer he will lose the right to obtain a premium on 7.5 ewes. If there is a second transfer, as my noble friend Lord Swinton mentioned, he loses 27 per cent. of the quota. In the less favoured areas that is serious enough, but in the specially disadvantaged areas, mentioned on page 7 of the regulations, that is a particularly harsh handicap.

Another side to the point put by the noble Lord, Lord Chorley, was that under paragraph 6(1) the "siphon"—which I believe is the technical name—might be raised to 25 per cent. That would accentuate the problem.

I have two questions for the Minister. First, I do not wish to go deeply into the definition of "holding" which is in the regulations, but would I be right in thinking that a tenant in a less favoured area who gives up, sells or moves from his holding of land will lose 15 per cent. of the value of the quota which he might receive through the siphon mentioned in paragraph 6(1)? However, if the tenant moves to another holding in the same area—quoting the example given by my noble friend Lord Swinton—he would not lose any quota through the siphon. Am I right in thinking that that is the case? If so, then the former holding of land is effectively sterilised. The producer on the former holding or the landlord will have to buy or somehow acquire a quota.

That has been the consistent line through the debate and if I am right, it is a harsh penalty in areas which are already somewhat handicapped. Perhaps a plain swap could be negotiated. However, in any case, the new producer will have to bring the quota with him or he may be required to buy it. In any case, it is a new overhead in agriculture, which is already handicapped. For that reason, I should be interested to hear what the Minister has to say.

Thirdly, in paragraph 9 on page 4 of the regulations there is what is classified as "Transfers and leases between sensitive zones". Will my noble friend confirm that paragraphs 9(1) and 9(2) will provide the protection that my noble friend Lord Middleton sought over leakage from upland to the more marginal areas right down to within 100 yards of what is delineated as less favoured areas? One might be able to turn them into arable areas with a little effort.

If the ring fences that have been mentioned, and which one hopes will work through the regulations, are not adequate, there will be an additional factor in the transfer of quota from the upland areas. That is not the intention of the Government. I believe that the intention of the Government and the Commission is that the quota should remain in the hills and not be transferred right down to the margins of the less favoured areas.

My noble friend Lord Hamilton hoped that the ring fences would work. I hope that they will be able to, without undue dispute and argument. This afternoon we have heard pretty strong arguments and I think that I am the first Scot to speak in the debate, although there are three or four more. When noble Lords come to hear my noble friends, they will realise that I have been extremely moderate and I look forward to hearing what my Scottish friends have to say. I am grateful to my noble friend Lord Hamilton of Dalzell, a Scot in exile, and look forward to what the Minister has to say.

5.45 p.m.

Baroness Masham of Ilton

My Lords, I thank the noble Lord, Lord Hamilton of Dalzell, for moving this Motion. I must declare an interest as I am a producer and a sort of tenant, with my noble kinsman Lord Swinton being the landlord. Unlike my noble kinsman, I like sheep, for the good reason that their wool keeps us warm.

I think that I am the piggy in the middle and it is because of that that I am grateful to the noble Lord for giving us the opportunity of airing some of the problems surrounding the sheep quota. As problems are here for solving, I hope that the Government will succeed in finding a solution to make the new quota system more fair to everybody. As this Chamber is for improving legislation, I hope the debate will have that effect on the matter before your Lordships this evening.

I have a flock of sheep at the moment without a quota. I know I speak for many people who have had to contain their frustrations over the lack of information coming forth about the appeal system of the sheep quota and then the rush to fill in forms, with only a few days' or weeks' notice.

As the base year was 1992, I shall try to explain, as an example, how complicated the situation has been and still is for some of us tenants who took over land which comprised the three farms which had been farmed by my noble kinsman. When he gave up farming on 1st November 1991, the quota was allocated automatically only to those who claimed premium in 1991 and 1992. The tenants concerned, with me, could not claim in 1991 as they did not take over their holdings until November. The rules regarding taking over the previous producers' quota apply only if one takes over or inherits the entire holding. So a problem arose.

It is totally uneconomic to have a commercial flock of sheep without the support of the annual sheep premium, which is paid only if one has a sheep quota. Most sheep farmers who have not yet received any quota have supported their flocks from their own resources throughout 1993, living in hope, as information dates were repeatedly postponed. This dilatory action on the part of the authorities will cost unsuccessful applicants £20, £30 or £40, or whatever the ewe quota is, through no fault of the farmer's.

Do the Government really want farmers who do not receive a quota to plough out their grassland, where possible, for arable crops which are already in surplus in the European Community, where lamb meat is still imported from the rest of the world? In my case, there are eight other tenants involved. There must be many throughout the country with complications. An article in the Yorkshire Post was headed: Ministry warns of ewe quota disappointment". I hope that the Minister will try to understand the problems of unlucky producers and be able to give more hopeful news tonight.

In the long term there is anxiety that people wanting to start farming will not be able to afford to do so if they have to buy or rent a farm, stock it, equip it and buy quota. There are many farms on the high ground which are suitable only for sheep. Sheep farming is an isolated life in winter with many hazards, such as snow and the loss of sheep. Many young people do not wish to dedicate their lives to that sort of routine. The subsidies are now so big that a farmer could not afford to farm without them.

I can see that the quota system controls the amount of stock in the country. But Europe still imports lamb. When we traded at world market prices the subsidies were more simple. The EC seems to be creating more bureaucracy and complicating the lives of farmers who want to get on with the planning of their breeding programmes. We have been told that the computer at Northallerton has broken down—just one more delay and complication of modern life.

I have sympathy with landlords who will be left with hill farms with no quota if the farmer leaves taking his quota with him. If there is no reserve for incoming quota-less farmers to apply for and they cannot afford to buy quota, will the farms remain empty, causing desolation to the countryside? It is important that there should be good relationships between all people living on, looking after and working the land. The countryside needs looking after. Why cannot Britain interpret the European regulations to suit our way of life instead of complicating the issues?

The Minister is a helpful and well motivated Member of the Government. I hope that, having heard the debate, he will understand better some of the many difficulties. It is always a problem to please everybody, but working together in harmony is better than causing divisions among landowners and farming tenants.

5.52 p.m.

Lord Burton

My Lords, I am delighted to add my gratitude to my noble friend Lord Hamilton of Dalzell. I fear that much of the thinking behind the Government's proposals comes from the better arable areas of the country and that more thought should be given to the LFAs in the hills. In many cases the stock, whether sheep or cattle, has to be hefted to these areas. Many of the areas are unfenced. One cannot just go into the marketplace to replace such stock. The ewes on the ground must know their way around. It is vital that they know where to go in a storm and where to find the best grazing, and that they are acclimatised to the area and stay upon the area.

So far as cattle are concerned, I have personal experience. I made the mistake of trying to boost my stock by buying in some Irish cattle. It was a mistake because they were infected with red water fever. It was not until my own stock started to die that I realised what had happened. By that time the ticks on that hill had been infected and now it is not possible to put any other cattle on to the hill unless they are immunised by having come off an area which has red water fever. So it is quite vital to have a hefted stock of cattle on this area. The hefted stocks are of key importance to the future welfare of some of our rural areas.

Some five million hectares of Scotland are classified as either less favoured or disadvantaged. That amounts to 90 per cent. of the total agricultural area of Scotland. In much of this area—I believe it is about 4 million hectares—there is little or no alternative method of farming. The loss of quotas from such areas would render them uneconomic. There is no surplus cash in these fragile areas. The drainage of cash will hit them very severely. I already know of one old boy who has put off his retirement so that he can go with a golden handshake, given to him by the Government at the expense of his holding. Either an incoming tenant or his landlord will have to pay for his golden handshake, and the future of the hefted stock is in jeopardy. My noble friend Lord Swinton has put this point most strongly, and I heartily applaud him on behalf of those concerned with the welfare of the hill areas of this country.

I gather that the NFU's point is that the landlord can write into his lease that quotas may not be removed from the holdings. But that will apply only to new leases—or possibly to a tenant who may agree to it being written in to his existing lease.

In certain circumstances quota can be removed from the LFA ring fence. I know that the number of circumstances is not large, but there are circumstances in which it can be done. However, I cannot find anything which permits fresh quota to come within the ring fence. Consequently, it seems to me (I may be wrong) that the amount of quota in the area will steadily run down. I am very doubtful whether the 15 per cent. syphon will be adequate to keep these LFA areas stocked.

I cannot understand the Government's attitude to this matter. I wonder whether it could be that other commodities are shortly to come onto quota and that the Government are worried about setting some sort of precedent in relation to quota. I wonder whether there is anyone here today, particularly on the Front Bench, who would disagree that the landlord-tenant system is a good one, one which has stood the test of time. Yet this legislation will now undoubtedly make landlords less willing to let their property on agricultural leases. The quota proposals seem to advocate short-term gain while jeopardising the long-term profitability of our farming.

5.57 p.m.

Earl Peel

My Lords, I too should like to thank my noble friend for having raised this topic for debate. I am bound to say that I think the timing is in some way unfortunate. I am sure that it would have been preferable if we could have discussed this matter after the judicial review. We should have had a clearer idea of the Government's commitments. I accept of course that this is no fault of my noble friend. He had to find a slot, and this is where we find ourselves this evening.

I too must declare an interest in this as an owner of an upland estate and as a member of the CLA, which is of course involved in the judicial review. I am also a member of the NFU. I like to keep a balanced view of these matters. I hope that the discussion will not turn into a slanging match between those two organisations. That would be a great tragedy. At the heart of this matter is the welfare particularly of upland farms. We must concentrate our minds on that and, if possible, try to strike a balance between the landlord on one side and the tenant on the other (the CLA and the NFU).

I suppose that I like quota. We have it, and we must try to make it work. But I have to say that I find it rather distasteful that we now find ourselves in a position where farmers are to be trading in subsidies. They are to be trading in taxpayers' money. I do not find that a particularly attractive aspect of this quota business.

Noble Lords have already expressed the importance of the viability of hill farms and the fact that they rely very much on the subsidies that they receive. Again, the socio-economic effects on hill farms without subsidies would be drastic. Certainly, under the existing proposals for attaching quota to the producer, without a satisfactory solution there will undoubtedly be extreme difficulties.

It is very easy to exaggerate in these matters but I believe, as noble Lords have already said, that we have a very real problem. As my noble friend Lord Swinton pointed out, quota is a very valuable asset. Certainly tenant farmers will be attracted to the idea of disposing of that quota at the end of their tenancy. I beg the question whether some of them might even consider it before the end of their tenancy. We have all done our figures. Taking a rough view on 700 ewes., the quota would be worth £23,800. It is a lot of money and very tempting to many hill farmers when that is the sort of level of support that they can now trade, particularly if they see the future of hill farming as doubtful. With the considerable changes which have taken place over the past few years, one cannot blame them for thinking like that.

My noble friend Lord Burton mentioned the problem of the hefted flock. Very often such hefted flocks belong to the landlord. They are the landlord's capital. So the landlord could find himself in a situation in which he has a flock without any quota as well as land without any quota. That is a double problem—a double whammy, as a government Minister once said.

In my own case I have eight tenant farmers. If they go with their quota, I shall not know what to do. I hope that my noble friend the Minister will advise me on this matter. I do not say that they will all walk off with the quota here and now, but over the next few years, as some of them retire, that problem will arise. It will arise in my case and in many other cases also. We must have some clear guidance as to the way we are going. I can only see it resulting in either increased rent for the farmer, if the landlord has to buy the quota, or indeed a situation where, if a tenant has bought quota, he may not be able to afford the rents which exist at the moment. Those questions must be answered.

The Government have consistently supported the LFA's over the years. Millions of pounds have been invested in retaining the socio-economic aspects of the uplands in providing a system whereby farmers can continue to farm. But I believe that, by failing to provide a solution to this very thorny problem, the Government could be undermining those millions of pounds worth of support that we have seen over the years. We must have a solution to this problem. As I said, it must not be seen as a landlord/tenant argument; we are talking about the welfare of the upland communities and farming in that area.

I have known the noble Baroness, Lady Masham, for years and know that she is an eminent rearer of ponies. I was not aware that she also bred sheep. She never ceases to amaze me. The noble Baroness quoted from the Yorkshire Post. I should like to quote from another great northern newspaper: the Darlington and Stockton Times. The paper quotes a particular individual as saying what I believe is very relevant: MAFF must take firm and effective action if it is to avoid the undoubtable hardship and inequity that will certainly be suffered by genuine cases and if it is to avoid becoming the object of total ridicule by the Country Landowners' Association when new tenants do not receive the quotas they have been so faithfully promised". I believe that that is the nub of the matter.

Perhaps I may change tack for a moment. As a member of the council of English Nature, I should like to raise a problem concerning nature conservation. Sections 15 and 16 of the Wildlife and Countryside Act refer to management agreements on sites of special scientific interest and national nature reserves. For some reason they have not been recognised in the regulations as qualifying environmental schemes. That makes no sense to me at all because they are the hard core of the environmental process in the countryside. There could be a case in which a farmer entering into a management agreement on an SSSI to reduce his sheep will be obliged to sell his unused quota rather than lease it for the duration of the agreement. That poses enormous problems. If and when those agreements terminate, it may well result in farmers being reluctant to enter into such agreements. One cannot blame them.

Similarly, problems may exist when the reintroduction of grazing on sites of special scientific interest is desirable. An example of that might be the chalk grasslands, which have deteriorated over the years through a lack of grazing. How will the quota be made available in such cases?

What is perhaps of even more concern is that the lack of an equitable solution may result in the UK Government not meeting its international obligations under the EC habitats and species directive. I hope that my noble friend the Minister will give considerable thought to that problem which, along with many other problems that have been raised, must be addressed.

A number of solutions have been put forward by your Lordships this afternoon. Compensation in some way or another may be the answer. Amending the Agricultural Holdings Act to allow for the same quota to be intact at the end of the tenancy—in other words a covenant against assignment—is one solution that has been put to me. I am also informed that that would not infringe European legislation as it would not restrict the use of the quota by the producer during the tenancy. It would simply ensure that it was handed over intact at the end. I believe that it was the noble Duke, the Duke of Somerset, who suggested—I hope that I interpret him correctly—that the Government should act as a broker so far as the quota is concerned. So there would not be any trading. It would be distributed by the Government—nil value. Again, that is a perfectly reasonable solution which would overcome the whole business of trading.

But whatever the final solution, it has to be better than that we have at the moment. I know that my noble friend realises and appreciates the problem. His department has a duty to try to resolve it. Quite frankly, if it is not resolved, it will be expensive and, perhaps more importantly, divisive—divisive between landlords and divisive for tenants. That is the last thing we need. We must look to tenants and landlords to resolve this matter with the help of the Government. Most important of all, we must look after the upland farms.

6.9 p.m.

The Earl of Lytton

My Lords, after so many excellent speeches, it is very difficult to put forward a cohesive, technical rationale to these regulations. I should like to start by thanking the noble Lord, Lord Hamilton, for giving us the opportunity to discuss them today. I have various interests to declare. First, I am a member of the Country Landowners' Association and of the National Farmers Union. I farm jointly with my wife in a less favoured area and I even possess a share of the quota. But it is in my role as a chartered surveyor and therefore someone who supposedly has some knowledge of the economic background to this issue that I should like to make my comments. It is legitimate to make some general comments about the way in which the quota regulations have come about, notwithstanding the fact that many of them are imposed by the EC.

I agree that there has been a failure to address the question of overgrazing or prudent stocking levels which has been raised already. If anything, the regulations reward bad husbandry for enshrining past poor practices. That carries a high risk of damage to sensitive landscapes.

There is an element of intellectual improbability in the quotas because they are trying to make a freely tradeable asset divorced from the activity that nurtures it; namely, the use and occupation of land. I accept that that has been imposed by the EC. Nonetheless, it is the duty of the UK Government to attempt to mitigate its effect. Moreover, the exclusively tradeable item is for the benefit of one party only. That does not matter where there is an owner-occupier. But it does matter where there is a tenancy and when both have an interest in what amounts to a legal co-partnership. It is not legitimate to disadvantage one al the expense of the other.

In less favoured areas such as Exmoor, where I have my farming interests, I cannot see that livestock husbandry with the benefit of a quota can be anything other than completely unprofitable. I say that in the knowledge of how the economics work in that part of the world. Without quota there is no economic use of that land for agriculture. There may be other uses but it will not be agriculture.

The quotas produce a high risk of dislocation. We heard of the dislocation of landlord-tenant relationships. I should like to point to the dislocation of investment and forward planning in agriculture in the areas that stand to be most severely affected because of uncertainty and the procedural difficulties about which we have heard. I cannot think of one landlord who would be willing to let land or construct new livestock buildings in those circumstances. It is not only a question of the National Trust and its tenants but also county councils and other similar bodies. The quotas uncouple the geographical distribution of livestock, holding by holding, and in so doing allow an element of freedom of migration, which was simply not possible before. That will produce a major difficulty in policing.

By creating the uncertainty there is an increase in risk. which in turn raises yield. An increase in yield damages the resource of the land, the buildings and the whole economic infrastructure. There are no minimum or maximum stocking density provisions to give any safety net.

I do not perceive any gains through quota allocation as between 1991 and 1993, unless for some remarkable reason the producer is given some greater quota allocation than he had reason to expect. But I worry about the barriers to tenants and new entrants to the industry who will have to buy quota in addition to bringing in their livestock. In the latest reports regarding the number of transfers of quota we are talking about it is £46 a head for sheep down in the Dartmoor area. Bearing in mind that the breeding ewe may cost a similar amount, it doubles the cost of the livestock.

I believe that the regulations will have an effect on rents unless somebody can reassure me that tenants will not take advantage of the situation presented to them. I do not blame them for that. Were I advising a tenant professionally I would tell him exactly that. It is therefore unlikely that there will be anything but an effect on rents. The market place will operate patchily. I do not anticipate for many years a good match between quota allocation and land available. In the meantime there will be uncertainty and muddle.

I fear for the likely effect on the consensus only recently hammered out on the matter of agricultural tenancy reform. I agree with the point made earlier that it is an important element in the sharing of the capital asset with a producer who pays a rent. It is something which is enshrined heavily in our land use and planning system. But the tenant can now affect the future viability of the holding as never before. I should like to know how the Minister would expect a local planning authority to view an application for new livestock buildings in circumstances where there was a clear uncertainty over the long-term continuation of quota on that land.

Valuers will advise extreme caution. Therefore, whether or not actual falls in capital value occur in theory, the market will now reflect the uncertainty and risk, with significant capital and liquidity consequences. It is the creation of a large and expensive bureaucracy that worries me more than anything else. All those involved in agriculture know how much bureaucracy already exists. There is no attempt to go towards a proper free market. There will be rigidity for existing producers and new entrants. Difficulties of expansion and contraction in the flock or herd size will occur because of the way the regulations operate. The public perception of all that will be that overgrazing will continue; and that there will be an unseemly squabble, referred to by the noble Earl, Lord Peel, over handouts of public money. With no sheep extensification scheme, I fear that the perception among the general public will be a continuation of support for the unsupportable, with little support for the beneficial owners.

As did many other noble Lords, I received comments from all sources. I cannot agree with the position of the National Farmers Union that alternative agricultural enterprises are available. In my part of Exmoor that simply is not the case. In large parts of less favoured areas I suspect that a similar situation exists. I cannot agree also that no falls in value will occur. On the best impartial evidence of the Royal Institution of Chartered Surveyors, the strong likelihood is that there 'will be falls in value.

The value of the quota is created out of another economic asset. It is either land value or ease of use in practice. It is not a free good. It is something which is created out of existing activity. The market for that transferable element is unlikely to produce early stability. I suggest that it may not even produce long-term equilibrium. The siphon and the national reserve provisions are insufficient for all of that.

The measures must be seen in the light of what amounts to the effect of nationalisation of arable cropping rights under the integrated administration and control system. Seen in that light I believe that the quotas will, as does the IACS scheme, reduce choice and competition. It makes a balance of payments deficit in temperate foodstuffs more likely to continue rather than the converse.

Both the Country Landowners' Association and the Royal Institution of Chartered Surveyors are of one mind; that is, that there need to be measures to produce stability. Landlords and tenants do not operate in isolation from one another. I would point out that the Country Landowners' Association, for one, represents owner-occupiers like myself as well as tenants and landlords. We need to reach the situation where we view the matter as impartially as possible among all the various interests. There must be some form of quota guarantee. I do not use the word "compensation"; that is tendentious. But somewhere along the line something will move from one person to another and there must be some form of guarantee that quota is available to make good the deficiency, if not free, then at relatively modest cost. That needs to be coupled with a direction to arbitrators in rent reviews to prevent advantage being taken of the new situation in the context of rent reviews on agricultural tenancies. I am very much for freedom of action—good luck to these producers who have quotas allocated to them and can transfer them away. But this should not be done at the expense of the industry or other operators in it.

The Royal Institution of Chartered Surveyors warned from inception of the problems that were going to arise. I believe that to a degree it has been misrepresented in the sense that it has been asked to comment about issues such as when loss occurs rather than about the question which is really at the heart of this: if loss occurs, how do we mitigate the problems that arise from it? By "loss", I do not just mean financial loss; I mean the disruption to the industry.

I am very disappointed that having gone to negotiate the Article 13 provisions we are now told that they cannot be implemented. What about subsidiarity? Where is this question of protecting United Kingdom interests in the context of EC regulation? I find it very difficult to come to terms with that and very difficult that this Government are not protecting the interests of the industry as a whole. If the National Farmers Union is correct that there is no loss in value, a quota guarantee system would not cost anything at all. If the market was shaky, it would reinforce confidence. If there is a drop in value, why is it left to the industry to deal with it rather than the Government taking account of this?

I see that time is getting on and I have spoken long enough. I certainly support the Motion in the name of the noble Lord, Lord Hamilton, and look forward with interest to what other noble Lords have to say.

6.22 p.m.

Lord Hastings

My Lords, I declare my interest at once both as a landowner and a "farmer"—I prefer that word to "producer"—and I shall be entitled to receive payment on quotas both for ewes and suckler cows.

The more I have read this vast sheet of briefing papers not only from the Country Landowners' Association but from many other sources, the more I am astonished that the Government seem intent on resisting this quite modest and sensible amendment. I turn at once to the closing words of the noble Earl, Lord Lytton, about Article 13 of the European Community. The Commission has already confirmed that the Government have powers legally to do what they are expected to do to not disturb—those are the words of the Commission—the landlord-tenant relationship and yet they are refusing to do so. Why? I think that any objective layman reading all these papers and hearing all these speeches would come to the conclusion that the Government are quibbling and are hiding behind a legal technicality. I think it very surprising that they are willing even to be taken, if necessary, so far as the European Court where they are much more likely to lose their case. So why this obstinacy?

They have declared that they have no wish to upset the landlord-tenant relationship and yet they admit at the same time that there will be distortions which will affect that relationship. Their only solution is to set up some monitoring device; and if things go wrong then they say—they have given an undertaking to the Country Landowners' Association—that they will do something to put it right. But that will be too little too late. Many people will suffer in the meanwhile and perhaps many holdings will have gone out of production altogether. It is not a solution at all.

It seems to me that they have put forward this solution with the main purpose of saving costs. They have calculated that it will cost at least £50 million to accept any kind of compensation or guarantee scheme in arbitration. Yet the CLA and the Royal Institution of Chartered Surveyors, which after all must have more practical experience, with respect, than the civil servants in the Ministry of Agriculture in these matters, have calculated that in only about 5 per cent. of cases would it be necessary to go to arbitration. Once the pattern is set by a few cases in the early days then voluntary agreements will be the order of the day. That is precisely what has happened in respect of milk quotas. I have been able to settle a milk quota capital value with a tenant perfectly amicably and without any difficulty at all. That will be the usual custom. So I think that their fears are completely baseless.

I understand that they want to save money in view of the appalling cost and the waste of time and money imposed on them by the European Commission in respect of the set-aside regulations and other environmental issues where, as the noble Baroness has said, people have been flooded out with horrible paperwork, which I remember by noble friend Lord Carrington, in an aside during a Maastricht debate, describing as absolutely intolerable. The noble Baroness is absolutely right. No assessment has ever been made either by the Commission or by our own Government of the economic viability or even the possible achievement of the objectives of those regulations, which will cost the taxpayer as well as the farmer a great deal of money in administration and time-wasting. I mention that as an aside—the kind of bureaucracy that one wants to avoid in this instance. I think that the Government's intentions will create more bureaucracy that the amendment itself.

I do not think that there will be any cost to the Government at all in any guarantee scheme or compensation scheme because money will pass between the tenant and the landowner, and vice versa. But what about the new tenant? I am not at all confident that anyone has asked or answered that question yet. How will the new tenant come in when the landlord cannot afford to allow him a lower rent if he has to buy a quota? It does not seem practical to me, and the Government do not seem to have thought this matter out.

I come finally to the words uttered by the noble Lord, Lord Middleton, about the intentions of noble Lords in their voting. I am astounded that the question of loyalty comes into it at all. As the noble Earls, Lord Peel and Lord Swinton, and other noble Lords have mentioned, this is not really a battle between the landowner and the tenant. It is a question of the future health of the agricultural industry—most particularly, as has been pointed out, in the uplands, but everywhere. To suggest that there is any question of disloyalty in voting for the amendment is absurd.

It was also suggested that such a course might do damage to your Lordships' House. That is another suggestion that I cannot quite stomach. I have been a Member here for quite a long time—37 years—and I do not think I need any instruction as to what will do damage to your Lordships' House. I suggest that noble Lords have a very pleasant habit—or perhaps unpleasant from the point of view sometimes of the government in power—of exercising their own judgment. We rather like doing that here more than is allowed in another place.

I believe that my noble friend the Minister who is to reply, having heard all the arguments, may be—and ought to be—considerably shaken in voicing the brief that he has, having heard all the speeches. I do not know how he is going to address us with conviction. I ask noble Lords to exercise their own judgment in this case. If noble Lords do that I am pretty confident that they will be voting for this Motion and I hope I shall be right.

6.30 p.m.

Viscount Mountgarret

My Lords, I too will follow the example of previous speakers in declaring an interest. I am a landlord and also a member of the Country Landowners' Association. Although I may not be a member of the National Farmers Union like others of my colleagues, I have a very great regard for that organisation, as indeed I have for the Tenant Farmers Association. I find their views and comments most helpful to me in discussing various matters with one's tenants. As a result I like to feel that I have a very happy relationship with them, but whether they have such a relationship with me or not is quite another question, although I obviously hope so.

This has been a most interesting debate because so far—unless I have not heard, and I am sometimes rather deaf—we have not heard one single word spoken against the Motion raised by my noble friend Lord Hamilton. I can tell noble Lords this: I am not going to be the one to start. I support it absolutely. The reason I support it is this: the Motion we have in front of us is another example of a further nail in the coffin for this country's landlord and tenant system, which has served the industry so well over hundreds of years. We have taken on the chin successive tenancy legislation which has weakened the enthusiasm of landlords and potential landlords for the letting of land.

Now we have these regulations, which again will act precisely as a disincentive to landlords as regards future tenants, and I regret that. If our party—of which I am proud to be a member—is going to stick by its professed intention of encouraging the landlord and tenant system, then for the life of me I cannot see why it has failed so consistently in this matter and has permitted this order to proceed unchanged.

I support quotas arid see the need for them. I am not against them in principle. But quotas cannot lie with the occupiers of land because, as my noble friend Lord Peel so rightly said, that opens the floodgates to potential trading with the nation's finances and the taxpayer's money. It is undoubtedly a very dangerous step to take. Quotas are probably necessary and we must do the best we can with them.

If these regulations were allowed to remain in force unchanged, I believe that that could be—and almost certainly would be—the thin edge of the wedge for further quotas which may, and I suspect will, come. We have already the system of set-aside to reduce the amount of production of cereal growing. I am riot sure that set-aside itself will be sustainable for very long because of the enormous cost involved in paying compensation to people to do nothing. Therefore, the logical progression from that is to introduce quotas for cereal growers.

Are we to have a system where quotas shall apply to the tenants and not to the land? I hope not. Once one has a precedent then it is easy to hide behind it in the same way as it is relatively easy to hide behind the fact that it is the desire of our lords and masters in Brussels to impose these sorts of regulations on us because they perceive it to be good for them. Their system of farming is so totally different. As far as I am concerned—I believe that I also speak for a number of other noble Lords—they can do what they like, but for the life of me I cannot see why we should in any way subscribe to a system which pleases those eminent people to our detriment. Again, for that reason I hope that these regulations will be substantially changed.

My noble friend Lord Middleton referred to what can be done. He brought to light one of the possible routes—that is to say, compensation. I believe compensation is a most difficult thing to calculate. It would open the floodgates to endless argument. I believe my noble friend Lord Peel used the word "divisive". There should be no value attached to quotas. Once one begins to attach value to them one is creating something concrete which can be traded. Compensation is not very attractive although I see the logic of it. I see no reason why it should not be possible—only if the will is there—for the quota to be attached to land and, land being an immovable object, no value being attached to the quota.

I hope that it will be possible, even at this stage, to stand back, look at the problem which has been generated and be prepared to hold up one's hand and say, "We have got this wrong. From now on the quota will be attached to the land. There will be no compensation. The quota cannot be transferred away from the land and the owner is stuck with it". When the land is sold or acquired by another owner, then he acquires the quota at nil value because there will he no value attached to it. There will be the same value to the land as the grass which grows on it, the trees or whatever.

That is the point I want to make. I believe it was my noble friend Lord Hastings who suggested that compensation might cost about £50 million.

Lord Hastings

My Lords, no. The point is that the Government have suggested that. The CLA disagrees entirely.

Viscount Mountgarret

My Lords, I am very grateful to my noble friend. Whoever suggested it, the fact of the matter is that compensation may cost £50 million so that is a very good reason for not having it. I hope that we shall be able to find a different route and that the suggestion I have made is a possibility.

When my noble friend comes to reply in the most charming and persuasive way that he has, I hope that he will realise that he has an army of dissenters behind him. It is interesting to note that there are not so many dissenters in front of him. I would rather not be in his shoes, as I should find it extremely difficult to discover many arguments to persuade the noble Lords who have spoken so eloquently—myself certainly excepted—to change their views at a moment's notice.

6.39 p.m.

Lord Palmer

My Lords, I think it has nearly all been said so I shall be extremely brief. I have in fact no financial interest to declare, albeit I do belong to the Scottish National Farmers Union and indeed the Scottish Landowners' Federation. I do however strongly support this Motion as I believe it is vital for the survival of the uplands and the less favoured areas throughout Great Britain. I also think, as other noble Lords have pointed out, that there is a very serious danger of the situation causing bad blood and ill-feeling between tenant and landlord, and I would ask the Minister just to reaffirm that this is the last thing that the Government wish to foster.

I would like to take a moment to cite one example which I think clearly demonstrates the unfairness of the present situation. A neighbour of mine had saved all his life to buy himself a small upland farm, which he succeeded in doing in November 1991. He leased the farm back to the seller on a five-year limited partnership agreement. Within six months of the lease taking effect, quotas had been introduced, as a result of which the tenant was able to claim the livestock quotas for himself, even though he had only been the tenant for six months when they were introduced.

My neighbour did manage to obtain a condition in the lease whereby the tenant cannot sell the quotas during the term of the lease, and at the end of it he is bound to offer them to the landlord. However, this is little consolation as there is no way in which he will be able to afford to buy them at current values, which are somewhere in the region of £50,000. If he does not buy them, he is left with a farm which has no quota and is therefore rendered virtually unlettable and not worth farming for himself because he would be unable to obtain the livestock premiums without the quotas. I agree with the noble Viscount, Lord Mountgarret, that there surely is a very strong case for having nil value on the quotas, which must remain attached to the land.

This problem will also arise in the lowlands as flexibility and alternative enterprises to sheep rearing disappear with the arrival of set aside and its dearly beloved IACS forms.

As many other noble Lords have said tonight, it is surely only right and proper that the Government must now make provision to see that landlords' interests are protected, and tenants are required to compensate landlords for any proven loss, as the noble Lord, Lord Middleton, pointed out, in the value of their land not exceeding the value of the quota if the tenant removes or sells it. As things currently stand, the tenant has obtained a gift at the landlord's expense, as the noble Earl, Lord Swinton, pointed out, which I believe could have disastrous repercussions, not only for the future of landlord/tenant relationships but for the whole pattern of livestock farming today, particularly the way the less favoured areas are managed and maintained. I fear that without such compensation our natural heritage and those responsible for it will be devastated.

6.43 p.m.

The Duke of Roxburghe

My Lords, I, too, should like to add my thanks to my noble friend Lord Hamilton for giving your Lordships the opportunity to debate the serious problems related to the sheep annual premium quotas. I must first declare an interest in that the Roxburghe Estates encompass 22 farms within less favoured areas. So it will be of little surprise to your Lordships that, as a landowner, I, like many others, am deeply concerned about the implications of the transferability of quotas. On the other hand, as an eternal optimist I live in hope that my noble friend the Minister will heed what I and other far more eminent noble Lords have had to say tonight.

It is vital for landowners to foster a healthy and vibrant relationship with their farm tenants, the let farms forming, as they do, the backbone of the predominantly agricultural estate. Many farms are occupied by second or third generation successors, others by newer tenants, most of whom have expanded from smaller holdings with the attraction of a larger and more economic unit.

A large part of the Roxburghe Estates comprises land in the LFA. In the past 10 years, eight hill farms have been relet, including four which were previously farmed in hand. In the case of one new tenant, he started farming on his own at the age of 23, renting 33 acres and having 60 sheep. Twenty years later, he is now responsible for 2,800 hill ewes. That is proof indeed that there are opportunities for new entrants to the industry and for progression up the farming ladder. However, as many other noble Lords have said, it is vital that such opportunities are not stifled and that the livestock sector, particularly in the more marginal upland areas, is supported to ensure that the rural communities and economies, which are so heavily dependent upon agriculture, are sustained in the future.

Much has been made by noble Lords of the value of subsidies in upland areas. Indeed, one half of the gross farm income is represented by the sheep annual premium. Without subsidies therefore, farms in those most vulnerable areas would cease to be viable. If a tenant is permitted to transfer the quota off his holding without any restitution, the rights to a major part of the farm income are therefore removed with it. It is no idle threat to say that such a severe effect on the earning capacity of the breeding flock, herd, or even the land, would, in the poorest areas, render the holding unlettable and unfarmable, with damaging consequences for the local communities, the environmental management of the land and its value.

Where no alternative to agriculture exists—this is very much the case in many of the upland areas, where now "no-go" designations for forestry are increasing—the land would fall into disuse and dereliction. That is a doom-laden scenario, but the damaging consequences are entirely avoidable, as we have heard from almost every speaker. The introduction of fair and equitable measures to address. the problems can and should be accepted by the Government. Landowners are merely seeking a fair deal to preserve confidence in the landlord and tenant system, and to maintain the viability of stock-rearing land in the event of a transfer of quota.

If the national reserve fails to meet the demand for quota from new tenants, an incoming tenant will be forced to purchase quota in the market in order to maintain livestock numbers at the previous stocking level, increasing the tenant's capital requirements and reducing the profitability of the holding. It would have serious repercussions, as the noble Earl, Lord Lytton, said, not just on the value of the land, the rental values and the economic viability of land owning, but—and perhaps most importantly—on the willingness and ability of potential tenants to offer for land to rent. The capital cost of stocking a hill farm would be out of reach of many of those seeking to start up or expand.

I should like to ask one question about the Scottish system, about which a note has been written by the Scottish Landowners Federation. It relates to bounded and hefted sheep stocks. On many tenanted hill farms, that hefted stock is also a "bound-sheep stock". The tenancy agreement will require the tenant to take over, at a bound-stock valuation, the sheep on that farm. At the end of the tenancy, he will be obliged to sell back to the landlord a fixed number of sheep. The valuation at which those stock are acquired and sold by the tenant is defined under the Hill Farming Acts and reflects, in addition to prevailing market prices, a premium for the hefting and acclimatisation.

The quota legislation does not address the issue of those bound stocks, allowing quota to be removed from the unit by a tenant without recompense to the landlord who is then obliged to purchase back the stock from the tenant at an above average price. I shall be interested to hear what proposals, if any, my noble friend has to deal with the hefted sheep stock system. Without the introduction of measures, either in the form of compensation or the guarantee mentioned by a number of noble Lords, I believe that it will lead to a further decline in the landlord and tenant system and to a continuing reduction in the supply of farms available to let, to the detriment of the agriculture industry as a whole. Indeed, landowners are now being advised by the organisation representing their interests in Scotland not to let land in view of the adverse effects that would be caused by the tenant transferring quota from his holding.

We must consider carefully the serious implications of failure to address the problems of quota transfer. Surely it cannot have been the Government's intention to create a situation in which landlords cannot let their land because of the impact of quotas. Therefore, I urge the Minister to implement the additional measures to remedy the adverse consequences, and I strongly support my noble friend's Motion.

6.50 p.m.

Lord Stanley of Alderley

My Lords, as opposed to most noble Lords who have spoken I do not have to declare an interest. I and my wife are owner-occupiers and therefore whether the quota is attached to the land or to the shepherd makes no difference to us. However, between us we possess 1,008 sheep quotas. I have a suspicion that my comments will not exactly endear me to my noble friends and therefore I cannot thank my noble friend Lord Hamilton for tabling the Motion.

I sympathise with landlords over the thought of the possibility of losing capital value or rental income but I am doubtful whether such a loss will occur as a direct result of quota being sold off the holding by the flock owner. The rental and capital value of a sheep farm, in particular in the Highlands, will be determined by the profitability of sheep farming and any quota sold is and will be ring-fenced.

I was somewhat surprised to hear some noble Lords take the view that quotas should remain in upland areas. Many is the time I have heard noble Lords who live in such areas state that they are overgrazed. However, if stocking rates are reduced by the European Community, which is most certainly on the cards, more land will be needed for the existing sheep and rents could well increase. Certainly agistment rents in Wales have regularly increased and often average more than £100 per acre. Therefore, I believe that it will be extremely difficult to prove that a reduction in rental and capital value will take place because quota has been sold by the flock owner. In any event, I shudder at the thought of the possible litigation and work for valuers, and so, I believe, does my noble friend Lord Mountgarret.

As I understand the Motion, it does not necessarily suggest that further measures mean that the flock owner and the shepherd should compensate the landlord if he sells his quota. I must make it clear that as a shepherd I should object violently if that happened. I should do so for two reasons. The first is that the sheep are the flock owner's or shepherd's—usually the same person. That is the case as regards my wife and myself. The fact that there are any sheep on the holding at all is due to his or her care and attention. Indeed, many shepherds—myself included—foresaw the coming of quotas and deliberately overstocked. I hope that this foresight and hard work is not now being coveted by the landlord. The second reason—and I feel most strongly about it—is that if we must have quotas of any kind (and I do not like them) they must be freely traded in order to allow the younger producer and the more efficient producer to expand. That view was expressed many times during my membership of sub-committee D and since and also by many of your Lordships.

I wish to deal with a matter raised by no fewer than six noble Lords; that is the question of money leaving agriculture. One cannot stop quota having a value. It makes no difference whatever if the incomer pays his landlord or the outgoing tenant. All quotas, in particular milk it can be argued, mean a loss of money to the industry. In milk, as your Lordships and I know only too well, the main beneficiary is the landlord. In this case it happens to be the shepherd. That is what quotas do and for better or worse—in my opinion worse—they are with us. We cannot get away from that.

Yes, as was said by my noble friends Lord Swinton and Lord Middleton, the flock owner has had a windfall. I fully accept that. However, landlords have also had a few—development rights and so forth—and often at the expense of the tenant. We are all avaricious in the end. It therefore follows that the only party against whom the landlord can make a claim is the Government. Well, good luck to him—I gather that the Government are a little short of money. As I have explained, I am extremely doubtful about whether any loss will be able to be proved.

I suggest that the constructive way forward to help a newcomer coming into a holding is to allocate him quota from the national reserve. That was mentioned by the noble Baroness, Lady Masham. That reserve, which is set at the highest permissive rate of 15 per cent. of sales, might be increased by taking, say, 1 or 2 per cent. off existing quota holders such as myself. I am feeling particularly charitable today because I have been to church—but it is only temporary. Will my noble friend Lord Howe say whether that is a possibility.

I fully appreciate the anxieties of the CLA expressed by all noble Lords. But I believe they are unfounded and for the reasons that I have mentioned unworkable. Furthermore, since 1984 most tenancy agreements have—perhaps I should say more honestly "could have"—included a clause reserving quota for the landlord. That point was made by my noble friend Lord Burton. I am in total agreement with the CLA, my noble friend Lord Hamilton and other noble Lords that the whole question of quotas and set-aside possesses horrific problems. Therefore, I welcome my noble friend's Motion to discuss a particular quota this evening. I hope that it will lead to continuing dialogue between all the farming organisations and government.

However, likewise, I hope that my noble friend will not press his Motion because, as I see it, that will only put the four contestants—I use that word incorrectly—the CLA, the Government, the NFU and the Tenant Farmers Association, in opposite corners fighting each other and I fear that I shall be in the middle, which is worse. It will make further constructive discussions more difficult, including tenancy reform. I fully accept that that needs addressing, not least to resolve the inevitable problems that have been raised tonight caused by necessary agricultural cutbacks to satisfy the GATT negotiations. That matter was alluded to by the noble Duke.

It would be dishonest of me to say that I do not sometimes disagree with the Government and ask your Lordships for an opinion against them. I recently disagreed with my noble friend on the Front Bench about potatoes. But—and it is a very big but—I do so only if such an action will achieve something. A Division this evening cannot reverse the order and, as I have said, will only make matters worse. I beg my noble friend not to divide the House. Certainly I could not support him were he to do so.

Earl Peel

My Lords, before my noble friend sits down, perhaps I may pose a question. My noble friend welcomed the concept of a windfall for the tenant through the quota system and he described that tenant, in most cases quite rightly, as the flock owner. I ask my noble friend how he feels that that would be overcome where the landlord owns the flock and it is part of the landlord's capital.

Lord Stanley of Alderley

My Lords, I am not sure that I said that I welcomed the tenant having a windfall. I merely said that that has happened. I am not sure that I quite understand the question. Your Lordships may remember that I was not too happy when the landlord received the larger share as regards milk quotas. If my noble friend is asking me whether the landlord can own the quota, he can, provided that he has 10 ewes. I do not know whether that answers the question.

Earl Peel

My Lords, my noble friend has not understood the point that I was making. I was referring to a case in which certain hefted flock were part of the landlord's capital and owned by the landlord. My noble friend referred to the windfall profit, whether or not that is welcome. I wonder what his position is as regards the case in which the landlord owns the sheep as part of his capital.

Lord Stanley of Alderley

My Lords, I live in a sensible country and I do not believe that we have hefted flock. Therefore, I cannot answer that question. However, as the law stands at present, it would come back to who owns the sheep.

7.2 p.m.

Viscount Devonport

My Lords, there are few things that remain to be said at this late stage of the debate. I merely wish to make and underscore one or two points. I support my noble friend Lord Lytton in his views about the problems of evaluation and the decoupling of the product stock from the land on which it is reared.

I wish to underline also the remark made by my noble friend Lord Palmer which is extremely relevant; namely, that under the proposed and existing regulations tenant producers can and will obtain a windfall gain on transferring quota away from poor land which they farm. That must diminish the value of let land at the owner's expense. I fear that that inequity will cause great problems, as my noble friend said.

On the hills there is no economically viable alternative to sheep and suckler cow rearing. Once the quota is transferred, farming ceases to be viable, as other noble Lords have said. No new tenancies can be given. The land becomes derelict and reverts to scrub. Communities diminish and producers who are attracted towards leaving farming will sell up their quota premium.

Perhaps I may mention a concrete example of that in relation to my interest as a hill farmer in England and Scotland. It summarises the issues. I hope that the noble Lord, Lord Stanley, is right in what he says about future values of hill land, but I am not optimistic.

On the hills in Northumberland, about 1,000 to 2,000 acres are needed decently to support one family. I own and farm one farm of 836 acres and I own and let another nearby farm. That is a better farm but of the same size and one on which I wanted to expand production when it became vacant. The tenant there, who farms two other better farms on lower ground, offered this year to give up my farm. In 1991 I could have purchased his stock at market value and received a working return of about 5 per cent. Because of what I believe is the careless design by our Government of the regulations as applied in this country, I shall have to pay the outgoer an extra £85,000, which brings my return on that farm to about 1 per cent. Is that worth my while? I do not believe that it is worth my while or that of anyone else.

That underscores one of the basic problems. In cases where forestry is not an alternative for land use—perhaps there is no heather—which has some sporting value—that land will sink in value from about £300 to £15 per acre. There are already thousands of people in that situation. I wonder whether that treatment is just, especially when the Government had the opportunity under the 1992 CAP reform to avoid that not only, as the noble Lord said, by operating a national pool, but earlier this year the opportunity arose to support Germany to regionalise quota along the lines of the existing beef special provisions.

For my part, I await with interest the outcome of the judicial review. I conclude by asking the Minister, in support of the Motion, to assure not just the House but the country that effective measures will be introduced to correct that inequity in the regulations. I ask them to safeguard the future of marginal livestock rearing areas. To that end I press the Minister to explain why a national quota pool is not the most effective and fairest method for all concerned. I ask the Minister to do that, even though it is very late in the day. Failure to ensure that effective measures are taken to return quota in some way to the unit, whether by quota guarantee from the national reserve or by funding quota acquisitions, will most certainly lead to significant hill land clearances. I find it difficult to believe that that is the intention of either the Government or the Minister.

I conclude on a poetic but perhaps pertinent note with a quote by Peter Levy, made, I admit, in a different context: The sense of a crisis is universal: the landscape everywhere in Britain feels like a survival but no one is sure of the future". My Lords, I feel the same.

7.9 p.m.

Lord Dormer

My Lords, at this late hour I do not wish to detain your Lordships for very long but as a result of strong opinions expressed to me by members of the farming community, I should like to say a few words.

At the outset I must declare an interest as a landowner of some farms which may be affected by the issue. The present situation is causing widespread anxiety among tenant farmers, landowners, upland farmers and especially among younger farmers who may wish to enter the profession. Unless the quota remains on the farms, there will be insufficient capital. That has been extremely well put by my noble friend Lord Swinton and other noble Lords.

The question arises where farmers have been tempted to sell off a quota. That cannot be in the interests of the farm, the incoming tenant or in the interests of hill farmers in general or the agricultural industry. As a trader in an agricultural area said to me recently, "When farming does well, everything does well; when it suffers, we all suffer".

The question of the environment also arises when upland farms may cease to be let due to the removal of the quota, with the resulting removal of the subsidy—a factor well expounded by the noble Baroness, Lady Masham.

From every point of view, the matter is deserving of the most urgent consideration by the Government and I implore the Minister to do all that he can to assist the farming community and all connected with agriculture in this country, as a result of the speeches made in the Chamber this evening.

7.9 p.m.

Baroness Elliot of Harwood

My Lords, I do not intend to make a long speech, but want to say only a few words about the quota and to emphasise the importance of hill farming, sheep and cattle to a great deal of the hill land farms of Scotland and Wales. I hope that the Government will realise their importance. Although that has not been obvious from what they have said so far, we await with interest the speech of my noble friend Lord Howe. When considering this debate and discussions on this matter, I hope he will realise that hill farming and sheep and cattle in hill areas are of vital importance to agriculture in this country and must be supported.

7.10 p.m.

Lord Hooson

My Lords, the noble Lord, Lord Hamilton of Dalzell, has initiated a fascinating debate in which we have heard, particularly from the landlord's point of view, the great problems which could arise—I say "could" advisedly—with regard to farms which are suitable only for sheep rearing and which are deprived of quota. We have heard about what might happen if there is a systematic denuding of the quota in those areas of the country where only sheep rearing can take place.

Unfortunately, we have heard from only one tenant farmer, the noble Baroness, Lady Masham, who I understand has a particularly sympathetic and benevolent landlord with whom she has a cosy relationship. That was the only expression of the tenant's viewpoint.

Much of the criticism that has been expressed in this debate has been aimed at Common Market regulations rather than at the regulations which the Government have introduced. No doubt the noble Earl, Lord Howe, will tell us whether the Government have taken advice with regard to the suggestion of compensation and on the question of whether it is possible for the Government to order a tenant to pay compensation to a landlord if he sells the quota. I should have thought that that was not possible legally for this reason: a Common Market regulation introduced the quota and, like any other form of subsidy, quotas inevitably distort relationships. We anticipate certain distortions which do not happen, but other distortions occur which we never anticipated. Am I not right in thinking that the Common Market allocated the quota entirely to the producer? If there is to be compensation, I should have thought that it should be paid by the Government and certainly not by the tenant. I do not think that the Government have a legal right to order a tenant to mitigate what might be described as the landlord's loss.

I am told that the Country Landowners' Association has obtained the right to a judicial review of whether the Government have interpreted the Common Market regulations correctly in a certain matter. If there was an order to the effect that tenants had to provide the compensation, I would advise them immediately to seek a judicial review because I do not think that it is open to the Government legally to order that to be done.

We must look at the purpose of the quota. Surely it was introduced as a result of a change in EC agricultural policy. It was introduced to facilitate a freer market in agricultural goods. It sought to discourage additional livestock from being kept in this country. Surely the purpose of the premium, of granting it to the producer in the first place and then of allocating the quota to the producer was to compensate for the loss of income which came formerly from support prices for the stock that he was selling in the market. The quota was compensation for the producer.

I doubt the proposition which has been made both in the House this evening and in the papers that I read this weekend which were produced by all the farming organisations in this country that the value of the quota has been created out of the land. I do not believe that that stands up to examination, because the quota, with its concomitant sheep subsidy and payment for ewes, is surely a means whereby the paternalistic Common Market is trying to safeguard the agricultural community's inevitable loss of income as a result of moving to a freer market.

All sides of the House have supported the GATT negotiations and the move to a freer market. I am possibly alone on these Benches in having grave doubts about the success of those negotiations. I foresee that by the turn of the century not only will agriculture in Europe be suffering greatly, but industry in Europe will also suffer. We are now seeing enormous developments, such as the cosy relationship that is now developing between the United States and Japan and the Pacific Rim. But let that be by the way.

Like the ewe headage payments and subsidies, the quota is surely a temporary expedient while Europe's agriculture is wound down. It is compensation for producers. If that is so, it seems to me that, as the noble Earl, Lord Peel, wisely suggested, we should try to find a way out of the present dilemma without setting all the agricultural organisations at each other's throats. This is a dilemma which the Government must tackle.

I have an interest to declare because I have farmed for almost all my adult life and am an owner-occupier in a land largely of owner-occupiers. I have the same impression as the noble Lord, Lord Stanley, that there is far more quota available in my area than there is land to meet it, because farmers have maximised their claims for headage. My view on that is reflected in the fact that enormous sums have been paid for agistment and grazing tenancies—well over £100 in some areas—because farmers have more quota than they have land to accommodate the sheep which are part of the quota.

The September newsletter of Smiths Gore, chartered surveyors, raises the question of consensus, stating: A consensus quickly seemed to emerge"— in relation to sheep and suckler cow quotas— that any units bereft of quota would be depreciated in the eyes of the market-place". The newsletter then states that in Smiths Gore's experience that has not happened. It continues: Two factors seem to be at work. First, in Scotland at least, there still appears to be considerable interest in farming properties from commuters and non-agricultural buyers … Secondly, there are signs that some livestock farmers are keen to get their hands on additional grazing land to overcome headage limits in the wake of the CAP reforms". The newsletter goes on to point out that farmers in Scotland have paid up to £150 per acre for grass lets. Therefore the consequence that we foresee may not happen but other consequences which we have not foreseen may well happen.

I believe the Government ought to direct their mind to the following matter. There are certain farms surely that can only be used, agriculturally, for rearing sheep or suckler cows. If these farms were to be permanently denuded of quota I envisage that there could be a real problem. It may well be, as the noble Lord, Lord Stanley, suggested, that the market might sort all this out. But what if it does not? That is the real problem which I believe the Government should consider.

My own suggestion is that the landlord should have the first option to buy. A provision could be introduced whereby the landlord was given the option to buy and to hold over in trust for an incoming tenant. That should not be subject to the 15 per cent. siphon. Perhaps the noble Earl, Lord Howe, will correct me if I am wrong. I believe the 15 per cent. siphoning off is the maximum that was allowed under the Common Market regulations. Personally I would have increased it to 20 or 25 per cent. and that would have added to the reserve in the Government's hands. Then the Government could have dealt with the problem. Is there not a means of providing that the landlord has the first refusal so he can guarantee that the holding will have a quota? The means of valuing that quota at that stage without the siphon would be a matter the Government would have to consider and make provision for. However, that is certainly a matter that is worthy of investigation.

I do not believe I can add anything more to the matter except to advance the following reflection. It seems to me that the quota is intended to mitigate the loss to the farming community generally. I can well believe that it could be argued in farm arbitrations that the farming income in the future which partly derives from the quota must be considered in fixing rentals. I would be surprised if that were not the case, although I can see immediately as a barrister what the argument would be the other way. The whole system of quotas, like set-aside and other such matters, is a temporary matter. Within a decade the picture will be very different. It may be markedly more difficult for landlords, tenants and farmers alike if the developments that I can foresee occur. In the meantime the Government should give their attention to the issue of how one guarantees that the farms which are not viable unless they can be used as rearing farms have the headage available for stocking by the incoming tenant.

7.23 p.m.

Lord Carter

My Lords, like other noble Lords, I wish to thank Lord Hamilton of Dalzell for tabling this Motion which has obviously roused a remarkable degree of interest, particularly on the other side of the House. The Motion draws attention to a very real problem which has been created partly by the Government, partly by the European Commission, but mainly by the absurdity of quotas.

Unlike other noble Lords, I do not have to declare a direct financial interest in either sheep quotas or suckler cow quotas, although I have for nearly 40 years been involved in the detailed accounting of a large number of sheep flocks. From the figures I have seen over that period, I can assure your Lordships that the sale or the lease of quota will make much more money for sheep farmers than anything they may do in terms of actually farming sheep.

The debate has underlined the many disadvantages of quotas: for example, their inflexibility, their attendant bureaucracy and the perceived advantage or disadvantage by one party or another. However, as a number of speakers have said, we are not talking about a quota in the sense of production control as on milk, potatoes and sugar beet. We are talking about a licence to receive a given amount of premium, and such licence as attaching to the ownership of livestock and not to the ownership of land. If the quotas we are discussing had been attached to land, that would have created an interest in the quotas on the part of landlords. A landlord's consent would have been required for the transfer of quota, and obviously there would have been an implied value to the landowner. Will the Minister explain why these quotas were not attached to land? What was the argument that was developed in the Council of Ministers and in the Commission? If it was decided not to attach the quotas to land, why did the Government not choose to operate the national pool for transfer of quotas that has been mentioned by a number of speakers? However, I suspect that it would be too late to do that now. Such a national pool would certainly be no more bureaucratic or cumbersome than the system we are now to have.

It is clear that the Motion contains two separate but related aspects. There is the argument regarding the loss of value to the landowner. I understand it is argued that the loss of value should be compensated by the taxpayer by the Government having to buy up quota and/or the tenant. There is also and to my mind the more compelling argument regarding what has been described as the vulnerable areas. It is a pity in some ways that the Motion had to combine those two separate but related aspects because, as I have said, the argument regarding the vulnerable areas is much more compelling than the argument regarding the loss of value in the lowlands.

So far as I am aware, there is no evidence so far of an effect on the value of land or on rental values. But perhaps, to be fair, it is too early to decide that. The Government have said they will monitor the effect of these quotas. I wish to quote from a letter written by Mrs. Gillian Shephard to Dr. Gavin Strang. She wrote: You will, I am sure, appreciate that it is difficult to predict the impact which quotas will have on landlords and tenants. However, I believe that the steps which we are taking will significantly diminish the effects which you and others fear may occur. I have also undertaken to monitor the operation of quotas carefully, and if it appears that distortions are occurring—such as a shortage of quota in one ring-fenced area when there is an excess in another—I shall, of course, consider any appropriate action to correct them". It is significant that the only example the Minister gives is of the possible distortions resulting from transfers inside the ring-fenced areas. She has not mentioned the potential loss in value to landowners. Is this an oversight on her part or is the only area that is to be monitored the effect on the vulnerable areas and not the effect on land values and rental values?

I wish to make a general point which has been touched upon by a number of speakers, and that concerns the nature of tenancy agreements between landowners and tenants. These differ widely, but almost all of them contain a quota clause. I accept that most of the quota clauses refer to quotas which are attached to holdings. The NFU sent me an example of a tenancy agreement which stated that, the tenant shall before quitting the Holding nominate as his Successor the Landlord or incoming Tenant in respect of any basic quota of which he has the right of nomination and that he shall not allow any quotas allocated to the Holding or any agricultural marketing scheme or otherwise to lapse by his default and that he shall use his best endeavours to obtain for the Holding suitable quotas under any new scheme and maintain those already attached to the Holding". It would be interesting to know whether in the case of that tenancy agreement the tenant would be able to transfer the quota without the consent of the landlord. I discussed this matter only this morning with a leading land lawyer. As I understand the position, there is nothing to stop the drafting of new agreements to deal with the problem that has been mentioned. This is not an area where European law prevails. We have already heard a quotation from a letter from the European Commissioner. I am sure your Lordships are aware of the CLA brief and the reply that was given in the European Parliament on 21st April which stated: Community regulations do not affect relations between landowners and farmers, national legislation being applicable in this area". As I understand it, this means that our own landlord and tenant law is superior in this case and it would be possible for all new agreements—I understand that this does not apply to existing agreements—both tenancy agreements and share-farming agreements, to be drafted in future to deal with the problem which has been mentioned by a number of speakers.

It seems to me that there are two points where the situation will bite. Unless a new form of 'valuation mechanism is introduced, the situation will bite not when the transfer of quota takes place but either at the next rent review or on the termination of the tenancy. Can the Minister say whether an arbitrator will be able to take into account, under normal arbitration rules, any change in value affecting the rental value or the value of the land? Is it in fact correct that further measures are required? Also, is there an argument in equity for such further measures if a loss of value results, and is proved, from the transfer of quota?

We have been here before. I am indebted to my noble friend Lord Gallacher, who reminded me of the excellent report which was produced by the Select Committee on the European Communities on the milk production outgoers scheme. The report was produced by a joint committee of Sub-committee E (which deals with law) and Sub-committee D (which deals with agriculture). It makes extremely interesting reading, because all these matters affecting the rights of the landlord were examined and dealt with in that report. Many of the arguments are similar to those adduced today. There is reference to the possibility of the disposal of an interest in the property of the landlord without the landlord's consent being invalid because it conflicts with an article in the Treaty of Rome and also Article 1 of the first protocol to the European Convention on Human Rights.

I mention that report because in that case the committee tended to argue that in the case of that scheme insufficient regard was paid to the interests of the landlord. This is again perhaps a suitable case for examination by a joint committee of the law and agriculture sub-committees of the Select Committee. That would obviously have to await the outcome of the judicial review, but that might be a way of throwing some light on this very difficult point.

As I have said, there are two separate but related aspects. The second is the effect on the vulnerable areas. Here there is a very real anxiety, which was expressed so well by many speakers. In my view it is a much more pressing problem than the problem of the possible loss of value in land or rental values in the lowlands. It could have severe effects on the upland communities. The point has been mentioned, and is worth repeating, that some tenancies on hill farms require the farmer to keep a specified number of sheep. Reference has been made to hefted flocks on the hills. It is important that when he replies the Minister deals with this point because there is a real area of anxiety here which I share.

Do the Government agree that there is a real problem in the LFAs? Will they give those areas any priority in the allocation of the national reserve? Can the Government give us an estimate of the likely size of the national reserve and say whether they believe that it will be sufficient to deal with all the problems that have been raised?

Another point was raised with me by my noble friend Lady Nicol, who would have taken part in the debate today but had another engagement. It concerns the rights of commoners. A commoner who does not presently exercise his grazing rights could be allocated a quota, which might then be sold. Would that not have serious implications for total grazing numbers and the rights of future commoners? I shall be interested to hear the Minister's reply.

We have had an interesting debate, and obviously I cannot deal with all the points that have been raised. However, I should like to comment on just a few. When he opened the debate the noble Lord, Lord Hamilton, said that the value of the quota arises from a combination of assets. That point was mentioned by other noble Lords. In fact, it does not. The value of quota arises from the political decision to introduce quotas and bureaucratic decisions regarding the method of implementation. That is not merely semantics. The source of value goes to the heart of the problem.

The noble Lord, Lord Hamilton, also said that the transfer of quota represents the capitalisation of quota rights. That is the CLA argument. The NFU and Tenant Farmers Association say, on the other hand, that it is the capitalisation of the future income stream from keeping sheep. I ask the Minister which side of the argument he comes down on—the CLA point of view or the NFU point of view?

A number of references were also made to the uncertainty that will be created over the letting of land in future. In my view the present uncertainty is due to the Government's proposals for tenancy reform in relation to the freedom of contract. Are we really to believe that landowners are queuing up at present to create new secure, lifetime lettings before they know the details of the new legislation which is promised, one hopes, for the 1995–96 Session? That uncertainty will stop the creation of new tenancies much more than the problems relating to sheep quotas.

The noble Lord, Lord Stanley, mentioned the fact that windfall gains arise in land ownership and land occupation. An example is the windfall gain in land values resulting from the granting of planning permission for development. That again is a value created by bureaucratic decision. Under landlord and tenant law, the tenancy can then be terminated and the compensation which has to be paid to the tenant is a few years' rent, which bears little relationship to the increase in value accruing to the landowner. I am not aware of many cases where the landowner has offered to share the windfall surplus value equitably with the tenant.

Some speakers said that there should be a nil value for the quota. I cannot help wondering whether that argument would have been adduced so strongly if the sheep quota had been attached to the land, thereby creating an interest in the quota for the landlord. Again, the noble Lord, Lord Stanley of Alderley—as always—expressed extremely well the difference of opinion which now exists between tenants and the Conservative Government on one side of the argument and substantial landowners on the other. To coin a phrase, it's a funny old world.

As I said, very real anxieties have been expressed, especially with regard to the way in which the regulations affect the vulnerable upland areas. We shall all listen to the Minister's reply with interest. I hope that he can assuage the considerable doubts that have been expressed. I understand from a number of observations that if he cannot do so, noble Lords opposite are wondering what they might do if the Motion is pushed to a vote. I would entirely understand those noble Lords opposite who wish to show their displeasure by voting for the Motion and against the Government. I can assure them that it is not in the least difficult. On this side of the House we do it all the time.

I should like to conclude by thanking the noble Lord, Lord Hamilton of Dalzell, for putting down the Motion. Like the rest of the House, I await the Minister's reply with great interest.

7.37 p.m.

The Parliamentary Secretary, Ministry of Agriculture, Fisheries and Food (Earl Howe)

My Lords, every so often in your Lordships' House we debate an issue which arouses strong, if not passionate, feelings. One such is the subject of my noble friend's Motion this afternoon. I am grateful to all noble Lords who have spoken, because this debate has served to present me with a very clear idea of the anxieties which your Lordships feel most keenly. I shall therefore now seek to respond to those anxieties, to explain the Government's stance in these matters; and to set out the measures which we have taken to alleviate—I hope substantially—some of the problems which have been identified. At the end, I hope very much that my noble friend will find it possible to withdraw his Motion without a Division, both in the light of what I am about to say and in the knowledge that points raised in the debate will be studied closely by Ministers.

I recognise the anxiety which has been expressed about the impact which quotas may have on the land and on those who have an interest in the land. Let me therefore make clear from the outset the Government's approach to quotas. During the discussions leading up to the reform of the CAP in the livestock sector last year, the UK repeatedly stated its opposition to the introduction of quotas. We resisted their introduction for some time during the Community negotiations precisely because we believed that they would introduce distortions within the sector and so inhibit necessary adjustments, and create new and unwelcome bureaucracy for all. The Community as a whole did not share our view—in fact the UK was in a minority of one—and quotas were adopted last year as a means of constraining the future cost of the livestock regimes.

The Council of Ministers, however, sought to avoid some of the difficulties to which quotas can give rise. In particular, it decided that the quotas should be allocated to producers, and should not be attached to the land. In that decision lies the origins of this debate. A number of noble Lords have said today that their concerns would be resolved if quota were tied to land. But the Council recognised that, because quotas inevitably introduce rigidities into the farming industry by making it more difficult for producers to develop their enterprises in line with the needs of the market, those rigidities are reduced if producers are able freely to buy or lease-in quota as their businesses expand, and to sell or lease-out quota if they choose to diversify into other sectors. That freedom can only be achieved in its fullest sense if quota is not tied to the land. The Council was also mindful of the administrative, legal and other difficulties which have emerged in the dairy sector from the attachment of milk quota to land. Again, this decision on the ownership of quotas rested with the Council as a whole; had we chosen to argue the opposite case, there is no doubt that we would have failed. That explains why quotas are not attached to land and I must make it clear that it is an issue over which member states have no discretion.

My noble friend Lord Hamilton asked why there should be no discretion, and why subsidiarity should not apply. If there is to be a common organisation of the market for livestock production, the EC regulations on livestock quotas must be adopted in every member state in a way which does not distort competition between producers in the Community as a whole. That common organisation of the market is fundamental to the CAP; and I am sure that noble Lords who insist on a level playing field in other areas of the single market will recognise that it is just as important in this area.

The Government recognise, however, that although a system of freely tradable quotas mitigates some of the problems which arise with any quota system, it also creates other potential problems. My noble friend's Motion identifies that when it refers to the problems which arise from the transferability of quotas away from particular holdings and the need to "protect vulnerable livestock rearing areas and the communities that depend on them". Those are concerns which the Government share. We have accepted from the outset that the transfer of quota by producers away from the land on which it was initially exercised could lead to certain areas becoming unattractive for sheep and suckler cow production. On land where no alternative profitable enterprises are possible, this could, in some cases, lead to some environmental and economic problems. The Motion suggests that the Government have not taken sufficient measures to address those potential problems, and calls upon the Government to introduce further measures. Let us first, however, examine the steps which the Government have taken.

First, I refer to the protection of vulnerable livestock rearing areas. The Community rules require member states to take the necessary measures to avoid quota being moved away from sensitive zones or regions where sheep or suckler cow production is especially important for the local economy. The Government have defined seven such sensitive areas, out of which ewe premium and suckler cow premium quota may not be transferred except under very limited exceptional circumstances. These areas are: the lowlands of Great Britain, the English less-favoured areas, the Welsh less-favoured areas, the less-favoured areas of the Scottish Highlands and islands, the remainder of the Scottish less-favoured areas, the Northern Ireland less-favoured areas and the Northern Ireland lowlands. This approach reflects both the Government's policy of retaining extensive livestock product ion in the less-favoured areas, and the need to retain a balance between the livestock sectors in the hills and in the lowlands.

The aim of ring-fencing quota in this way is to ensure that large differences in the demand for quota between areas do not result in quota draining from one area, to the detriment of its environment and its local economy. The ring-fences are real protective barriers. However, in creating ring-fences we had to be mindful of the need not to introduce so many of them that they have the effect of freezing the structure of the industry. Some noble Lords have suggested today that more ring-fences should be created. The risk, however, is that that would simply introduce new and artificial rigidities into the sector, without providing any real additional protection for the environment or the industry. That would be in nobody's interest. The Government consulted widely on their proposals for ring-fencing earlier this year. Those proposals were widely welcomed as likely to meet the objective of protecting vulnerable areas without introducing unnecessary strains into the industry. I say to my noble friends on the Benches behind me in particular that there is no evidence that this approach is failing in its objectives, nor that it is likely to fail in the future. It is premature to say that ring-fencing of quota needs to be tighter. Moreover, my right honourable friend the Minister of Agriculture, Fisheries and Food has given a clear and firm undertaking to monitor the operation of our ring-fencing policy carefully. She has also given an undertaking that, if any distortions do emerge, the Government will look, where possible, to introduce amendments so as to mitigate those effects. I hope that that undertaking helps to meet a part of the concern which has been expressed in the House today.

Turning to the concerns of those who have an interest in the land, the Government recognise the desirability of discouraging speculative transfers of quota from a holding, as well as the predicament of landowners whose land may be affected thereby. We have therefore taken measures by means of the national quota reserve. The Community regulations require member states to operate national quota reserves for both sheep and suckler cow premium and to allocate quota as may be necessary to help alleviate distortions. In the first year of operation of those reserves—in other words for the 1993 schemes—priority for receiving allocations must go to a number of clearly defined hardship and exceptional cases: in essence producers who, for one reason or another, have not received an automatic allocation of quota matching their production in the reference periods, but who nonetheless remain genuine producers.

For subsequent years, however, different priorities can, and will, apply. Under the Community rules, the reserve itself is to be re-stocked with quota by means of a "siphon" on quota transfers, as many noble Lords have mentioned. The siphon applies only in cases where quota is transferred by a producer without a simultaneous transfer of the holding. Again the Government accept that where quota is transferred away from its initial holding, this may, in some cases have some adverse environmental or social consequences. That might, for example, be the case where a landlord finds it difficult on marginal land to attract a new tenant who either already holds his own quota, or is prepared to acquire new quota.

To address that risk, the Government have set the siphon, on quota transfers which take place without transfer of the holding, at the maximum level—and I emphasise "maximum"—permitted under the Community rules; that is to say at 15 per cent. of any quota transferred. We have two objectives in setting the siphon at this level. First, we intend that it should discourage speculative transfers of quota by producers. And a siphon, or "tax", of 15 per cent. on such transfers should go a considerable way towards achieving that. Secondly, we want to ensure that, where such transfers take place, we maximise the quota that is made available as a consequence to the national reserve. Building on that, we intend from the 1994 schemes onwards to give a very high priority, when allocating quota from the reserves, to producers who take over land from which quota has been removed by the previous, outgoing tenant. Landowners themselves would be eligible to apply. Again, that undertaking should, I hope, bring a measure of comfort to those who have expressed concerns on that matter.

Perhaps I may say this to my noble friend Lord Swinton. The siphon is avoidable. If tenants wish to leave farming they have a direct incentive to sell the quota to a successor tenant and so avoid the siphon. In answer to my noble friend Lord Lyell, the siphon does not operate where the tenant transfers his sheep farming operation to another holding.

The noble Baroness, Lady Masham, expressed worries arising out of her own difficulties in obtaining quota. My honourable friend the Minister of State wrote to the noble Baroness in the summer. The advice given in that letter still stands. Allocations of sheep quota were made automatically to producers who received payments under the 1991 sheep annual premium scheme and who also submitted a claim for premium in 1992. There are, however, special provisions for those who, like the noble Baroness, claimed premium for the first time in 1992. We hope to be able to invite applications to a pool of quota for 1992 first-time claimants and to the national reserve later in the year.

Baroness Masham of Ilton

My Lords, perhaps I may say to the Minister that that answer to the farmers who did not receive the quota, "later in the year", has been the answer all along. May I ask the noble Earl how late is "later"?

Earl Howe

My Lords, it should not be long now.

My noble friend Lord Peel asked about the quota rules for management agreements supervised by English Nature. We have negotiated with the Commission an arrangement under which producers taking part in an environmental scheme notified as a state aid to the Commission may lease quota for the life of the environmental scheme, rather than for a maximum of three years, which is the normal rule. I am, therefore, glad to say that the relaxation of the leasing rules would apply to any English Nature management agreement which has been notified as a state aid. It is for English Nature itself to arrange for notification of those arrangements.

The priority categories in the national reserve will be set out in a statutory instrument which we hope will be laid within the next few weeks. The quota available in the national reserve will be limited and it is therefore necessary to draw the categories fairly tightly. However, we propose to have a category covering producers who need extra quota as a result of reversion from arable to grazing. English Nature schemes will be eligible under that category.

The noble Lord, Lord Carter, asked whether the less favoured areas would be given priority when quota is allocated from the national reserve. The siphon on quota transfers and allocations from the national reserve will observe the ring-fencing rules which apply more generally to the movement of quota. In simple terms, there are separate compartments of the national reserve corresponding to each ring fence. Therefore, except in very limited exceptional circumstances, quota siphoned from a producer within a ring fence will be reallocated to another producer within that ring fence.

The noble Lord, Lord Carter, also asked this question: if a commoner is currently not exercising his rights, what is his position in relation to acquiring quota? A producer will only receive quota automatically at the outset if he was a producer in the relevant reference years. A commoner not exercising his rights in the quota reference period will not, therefore, have received an initial allocation of quota unless he was a producer on other land. If he chooses to exercise his common land rights in the future, he may purchase or lease quota from other producers. He may also qualify for one of the categories eligible to receive quota from the national reserve, although I should emphasise that that will depend on his individual circumstances. There is no specific priority category for commoners seeking to use their rights. For completeness, I should mention that he would also be free to graze the land without quota, although I accept that that is unlikely to be an economically viable option for many producers.

I understand the desire of some noble Lords, in particular my noble friend Lord Middleton and the noble Duke, the Duke of Somerset, to secure an assurance from the Government that the amount of quota available in the reserves will be sufficient to cover all holdings where quota has been removed by an outgoing tenant. Let me explain why I cannot give such an assurance, much as I should like to. We do not yet know the extent to which transfers of quota will take place without transfers of the holding. We do not know whether these transfers will predominantly involve producers farming tenanted land. And we do not know how many of these transfers will affect "vulnerable" land where it would otherwise be difficult to retain livestock production. We cannot therefore know precisely the likely future supply of quota to the reserve, nor the likely demand for quota from it.

While it is therefore impossible to give the type of assurance which some noble Lords are seeking, I can assure the House that these three measures—the ring-fences, the siphon and priority from the national reserve—are all the steps the Government are permitted to take under the Community legal framework. There are no other measures which we are legally able to adopt. I should, however, like to make one additional point. The environmental, social or economic problems to which a number of noble Lords have referred are, as yet, theoretical problems. I do not wish in any way to belittle the concerns that have been voiced but there is no evidence yet that these problems are, in practice, emerging in marginal or sensitive areas.

My noble friends Lord Swinton and Lady Elliot and others have expressed particular concern about the uplands. These are important concerns, but I do not think that we should ignore the possibility that quotas may exert pressures on rents and land values in the opposite direction from that which landlords fear. As the noble Lord, Lord Hooson, pointed out, already we are seeing a greater confidence and buoyancy in the livestock sector, reflected in market prices, in exactly the same way as the fortunes of the dairy sector improved after the introduction of milk quotas. Other factors, such as the structure of HLCAs, may very well influence the extent to which severely disadvantaged areas remain tenanted.

My point is that there are factors which work in the landlord's interests and we simply do not know at this stage whether some of the problems identified with quotas are more apparent than real.

My noble friend Lord Hamilton raised an argument that I believe is a red herring. It is that the regulations will result in a drain of capital from the industry I believe that that concern is misplaced. It is traditionally the case that when producers retire they pass on their assets, whether those be land, livestock or other equipment, to their successors. Or they sell them to other producers. Where they choose to sell those assets, other producers wishing to enter the sector or to expand their businesses buy them. Thus, although an outgoing producer may choose to retire on the proceeds of selling his assets, he can only do so to the extent that others are prepared to bring new proceeds into the industry to acquire those assets.

My noble friend also raised his doubts about vulnerable areas ceasing to be viable if quota is transferred away from holdings. While I am sure that we should be alive to those concerns, the environmental consequences of quota transfers should not be exaggerated. The total sheep and suckler cow quota in the UK is based on recent stocking numbers. 'Therefore, the introduction of quotas will not by itself lead to a reduction in livestock production. Despite any effect which quotas may have on land values, a similar amount of land is likely to be required for livestock production now to that required before quotas were introduced. Moreover, it will surely be the case that, where tenants leave their holdings, others who already have quota or who are willing to acquire quota will be prepared to bid for that land.

I wish now to turn to the second aim of the Motion: that of seeking measures, sufficient to provide full redress", for the adverse effects which derive from, the transferability of quotas away from particular holdings". The introduction of quotas in the agricultural sector can have some significant and complicated economic effects within and across the sector. It can, for example, affect the value of various assets, including breeding livestock, farm machinery and land. The economists will tell us that, in general, as quotas acquire a value the value of other assets will fall to a greater or lesser degree. There can even be knock-on effects outside the livestock sector. In the light of that, it is abundantly clear that it would be impossible, so long as the quota system is in place, to devise a mechanism which would be, sufficient to provide full redress", for all those individuals who are adversely affected, one way or another, by the introduction of quotas. It is a practical impossibility.

Having emphasised that point, I accept that my noble friends Lord Hamilton and Lord Middleton are concerned in particular about the effect which the introduction of quotas may have on the value of land. Let me say at once that I understand that concern. The Government have acknowledged from the outset that, all other things being equal, one consequence of introducing a system of freely tradable quotas will be to increase the value of assets held by producers, who gain a new asset in the quota itself, while reducing the value of assets held by landowners, because land values may fall. The economic explanation of this effect is rather complicated and I do not propose to give a detailed exposition of it today. However, the theoretical effect itself can be expressed quite simply as a windfall gain to producers generally at the expense of owners of land.

During the Community negotiations on quotas, the Government explored fully the possibility of securing provisions in the Community legislation which would have allowed this transfer of asset value to be addressed. Most other member states, and the European Commission, were, however, extremely reluctant to include provisions to this effect because they considered that the quota should be allocated unequivocally to the producer and that landowners should not have any claim on it whatsoever. What we therefore got from the Commission were only limited powers whose wording is clear. They are powers requiring member states, where necessary, to take the appropriate transitional measures, to find just solutions to problems which may arise in existing contractual arrangements", in the event of a transfer of quota by a tenant or other actions having the same effect. The crucial point here is that the provision identifies the problem to be addressed as occurring at the point of a quota transfer.

The wording of the Motion before the House today explains precisely why the provision we were granted cannot be used to introduce the type of compensation measures which are being sought for landlords. As the Motion clearly states, any "adverse economic effects" for landlords arise from the "transferability" of quotas. In other words, any loss in the value of land is a consequence not of actual transfers of quota away from the holding but of the introduction of transferable quotas and their attachment to producers. If there is a loss in the value of land, it affects all land capable of sheep or suckler cow production, regardless of whether, in the case of tenanted land, any quota is subsequently transferred or removed by the tenant. The Government have taken detailed professional advice on this matter. The advice is clear that any loss to landlords in terms of a fall in actual rents is likely to take place at the first rent review following allocation of the quota; not when the quota is subsequently transferred or removed by the tenant. My noble friend quoted Commissioner Steichen's remarks in this context. But member states are required to act on their legal interpretation of EC legislation and not on the view of any Commission official.

In the light of that, I hope that it is easy to explain the Government's firm legal view that we simply do not have the powers to implement a scheme whereby all tenants with quota would compensate their landlords. The Community legislation provides only for member states to address problems arising from actual and particular quota transfers. Given that any losses which landlords may see in the value of their land derive instead from the introduction of the quota system, the Government believe very firmly indeed that they have neither the power nor the obligation to introduce a compensation scheme for landlords.

I think that there is something else I should say. I would not wish the House to be left with any mistaken impression that if the legal powers were available a compensation scheme could be devised which would be straightforward to operate and which would satisfy all parties. That would simply not be possible. Indeed, there is a real risk that any scheme would not only be costly to operate but would give rise to new inequities, arbitrary treatment and discrimination between producers. Let me illustrate that very briefly.

I have already explained that if there is to be a fall in actual rents this is most likely to occur at the first rent review following allocation of the quota. Even if legal powers were available to address this loss, it would give rise to very serious practical difficulties and problems of equity. For example, if compensation were to be made payable at this time (at the time quota is allocated), tenants would be required to pay compensation to their landlords even though they remained producers and may not have sold or leased out their quota. This could be both highly disruptive and unfair. If on the other hand compensation were delayed until some later date, there would similarly be formidable problems in assessing the precise extent of losses which could have taken place years, or perhaps even decades, earlier. There is a particular further difficulty over short-term letting arrangements. It would be very difficult, if not impossible, to devise practicable compensation mechanisms in respect of producers who hold their land under short-term lets. The prospect of some producers paying compensation while others avoided the burden entirely would create further, damaging inequities. For these and other reasons the Government believe, and have stated firmly, that a compensation scheme would not any way be in the best interests of the sector as a whole.

With your Lordships' permission, I should like to summarise what I have said. We have taken all the appropriate steps which are available to us under the Community legislation to address the concerns which have given rise to this debate. To those who have said that these steps are inadequate and have pressed us to go further, I must emphasise that there are no other steps which it is desirable for us to take or which we can legally take. If there was anything else we could do, we would have already done it. I would, however, also emphasise that the problems which we are addressing are at this stage still theoretical: there is as yet no real evidence that economic or environmental problems are emerging from the introduction of quotas in the hills or elsewhere. Let us not therefore decide that the Government's actions are inadequate before we have any evidence that that is the case.

On the issue of compensation, I have explained why it is not realistic to suggest that a mechanism could be devised to provide full redress for all those—whether they be producers or others—who may be adversely affected by the introduction of quotas.

There is, however, a further consideration which I would ask my noble friend Lord Hamilton to reflect upon most particularly. Noble Lords will be aware that the Country Landowners' Association has challenged the Government's position over a compensation scheme for landlords by seeking a judicial review. That is the CLA's privilege and it goes without saying that the Government will abide by the decision of the courts, whatever that may be. However, it is now a matter for the courts to resolve; and no resolution of your Lordships' House can inform or be of benefit to that process of law. Furthermore, the challenge to the Government in the courts in no way affects the legal position as we must now take it to be and as I have outlined it to your Lordships; and I would ask my noble friend to consider whether it is desirable for your Lordships' House to instruct the Government to take action which it would not be legal for the Government to take. I believe it is not; and I very much hope that my noble friend, whatever his feelings about the substantive points at issue, will see the importance of these wider considerations when he comes to decide what to do with his Motion.

8.8 p.m.

Lord Hamilton of Dalzell

My Lords, I thank all my noble friends and all those noble Lords who have given us the experience of their enormously wide knowledge of the countryside; of farming in the hills, the lowlands and everywhere, and the terrible damage that will be done. Only the Government—and also, I have to say, my noble friend Lord Stanley and the noble Lord, Lord Hooson—take the complacent view that in spite of the additional costs put on tenant farmers, they will continue to farm happily and pay hundreds of pounds an acre in order to continue in their business. All I can say is that if that were the case, the compensation mechanism which I propose would then offer no compensation because there would be no compensation to offer. But to have no such mechanism in place would simply mean that one would have to have a major disaster before the Government finally decided that something ought to be done. I believe that that is very unsafe.

My noble friend Lord Mountgarret said that he thought that the cost of having a compensation scheme would be very high, and vast figures were bandied about. That is a nonsense. We do not claim that compensation arrangements should come into force until the quota rights are sold away. Therefore the matter would have to be settled then. If the Government were right and it becomes an issue as to when the quota is issued, there will still be rent reviews and all the mechanics will be gone through for deciding the value and effect on the tenancy year by year. Therefore at some stage or another those costs will be incurred willy-nilly. Therefore I discount the argument that costs destroy these things.

Without keeping your Lordships for much longer, I must turn to the Government's case on their legal position. The Government's case depends on saying that they are legally incapable of doing anything about the matter. It would be extraordinary were we in this country to have a different system from that reigning in the rest of Europe, where tenant farmers are not a problem. This, my noble friend says. despite the assurances that I read out earlier from M. Steichen, what the commissioners have said and what appears to be the general interpretation of Article 13, put in specifically by the Government, with the Community's agreement, to solve problems which are particular to this country because of its tenant farmer relations.

I am not prepared to watch this Government destroy the tenant farmer relationship. Many noble Lords have expressed their great concern about what will happen to their tenants. This is not an issue between landlords and tenants. We are friends with our tenants, we work in co-operation with them and their affairs are our affairs. It is our business to make sure that our tenants survive happily.

I cannot sit down without asking your Lordships to give me their opinion on this matter.

8.12 p.m.

On Question, Whether the Motion shall be agreed to?

Their Lordships divided: Contents, 69; Not-Contents, 52.

Division No. 1
CONTENTS
Airedale, L.	Kinloss, Ly.
Aldenham, L.	Kinnoull, E.
Barber of Tewkesbury, L.	Kintore, E.
Barnard, L.	Kitchener, E.
Beaumont of Whitley, L.	Knutsford, V.
Boardman, L.	Lawrence, L.
Bridges, L.	Lindsey and Abingdon, E.
Buccleuch and Queensberry, D.	Lytton, E.
Burton, L.	Malmesbury, E.
Carnarvon, E.	Manton, L.
Chorley, L.	Masham of Ilton, B.
Clinton, L.	Middleton, L.
Cornwallis, L.	Monson, L.
Craigavon, V.	Moran, L.
Crawshaw, L.	Mountgarret, V.
Cross, V.	Mulley, L.
Daventry, V.	Napier and Ettrick, L.
De L'lsle, V.	Norrie, L.
De Ramsey, L.	Onslow, E.
Denham, L.	Palmer, L.
Devonport, V.	Peel, E.
Donegall, M.	Ridley, V.
Dormer, L.	Roxburghe, D.
Downshire, M.	Saint Oswald, L.
Gray, L.	Salisbury, M.
Halifax, E.	Saltoun of Abernethy, Ly.
Halsbury, E.	Somerset, D.
Hamilton of Dalzell, L. [Teller.]	Swinton, E.
Harrowby, E.	Walpole, L.
Hastings, L.	Westbury, L.
Hertford, M.	Wharton, B.
Holderness, L.	Willoughby de Broke, L.
Hothfield, L.	Winchilsea and Nottingham, E.
Hylton-Foster, B.	Yarborough, E.
Iddesleigh, E.

NOT-CONTENTS
Archer of Weston-Super-Mare, L.	Gray of Contin, L.
Arran, E.	Hacking, L.
Astor, V.	Hayhoe, L.
Blatch, B.	Hemphill, L.
Blyth, L.	Henley, L.
Braine of Wheatley, L.	Hives, L.
Caithness, E.	HolmPatrick, L.
Carnock, L.	Howe, E.
Chalker of Wallasey, B.	Jenkin of Roding, L.
Cranborne, V.	Long, V.
Cumberlege, B.	Lonsdale, E.
Dean of Harptree, L.	Lyell, L.
Elton, L.	Mackay of Ardbrecknish, L.
Faithfull, B.	Marlesford, L.
Ferrers, E.	Melville, V.
Fraser of Carmyllie, L.	Reay, L.
Gardner of Parkes, B.	Rodger of Earlsferry, L.
Goschen, V.	St. Davids, V.

Seccombe, B.	Suffield, L.
Sharples, B.	Thomas of Gwydir, L.
Skelmersdale, L.	Trumpington, B.
Stanley of Alderley, L.	Ullswater, V. [Teller.]
Stewartby, L.	Vinson, L.
Strathcarron, L.	Wakeham, L.
Strathclyde, L.	[Lord Privy Seal.]
Strathmore and Kinghorne, E.	Wise, L.
[Teller.]	Young, B.

Resolved in the affirmative, and Motion agreed to accordingly.