Milk

HL Deb 09 November 1999 vol 606 cc1305-22

5.30 p.m.

Lord Grantchester rose to ask Her Majesty's Government how their proposals for the milk industry and in particular for the supply of raw milk will affect the rural economy.

The noble Lord said: My Lords, I rise to introduce this short debate tonight on the milk industry rescheduled after the tragic event of last Friday. I am grateful to all noble Lords who are to contribute. I declare an interest as a dairy farmer in Cheshire and chairman of a small, direct supply producer group, the South West Cheshire Dairy Association. I welcome my noble friend the Chief Whip who will be replying to the debate on behalf of the Government.

Agriculture continues in deep crisis. Dairy farming, some 16 per cent of agriculture, yet crucial to the livestock areas of the western side of Britain, has seen its profits fall 36 per cent in the year to April 1999, following a fall of 41 per cent the previous year. Deregulation of the milk industry occurred in 1994. Dairy farmers enjoyed barely two years of increased returns. There followed four years of accelerating decline. The average dairy farmer has seen his profit fall from a high of around £36,000 in 1995 to this year's figure of £12,000, with further falls in prospect. The smaller farmer is already making losses.

Commercial dairy farming has three income sources—milk, mature livestock sales, most notably the end cull cow sale, and calf sales. The withdrawal of support to those two livestock markets post-BSE has revealed that markets have yet to recover. The calf processing scheme, which paid £90 per calf in 1996, ended on 31st July this year with the result that the dairy bull calf is now a drain on a farm's resources as the dairy farmer has to dispose of the animal as best he can. The welfare implications have been highlighted by the national media.

In the cow market, with the loss of export trade, farmers are receiving around £300 for the cow carcass through the over thirty months scheme—less than half the price of four years ago. In Germany and France, cull animals are worth up to 30 per cent more than four years ago. The Government have already withdrawn support to the calf market, revealing an absence of internal UK demand. Can my noble friend give a clear assurance today that the over thirty months scheme will continue until export markets re-open for trading and that it will not be curtailed overnight? Can he confirm that the Government will seek a smooth transition, for example by increasing the age specification from 30 months, or by ending the rolling nature of the scheme?

The dairy farmer has increasingly to rely on his main source of income; namely, milk. This is why perversely production keeps increasing, maintaining pressure on quota prices. In the four years since 1996, farmgate price has fallen 28 per cent, equivalent to 7p per litre, and is still falling. There are three basic reasons why milk prices have fallen so alarmingly: first, poor markets in the European Union and the world; secondly, the strength of sterling; and, thirdly, the poor negotiating strength of dairy farmers.

Dealing with the international market, the economic problems in Asia, Russia and South America have meant export volumes have shrunk and world market prices are down by over 30 per cent for butter and skim milk powder and by over 20 per cent for cheese and whole milk powder. With some 20 per cent of European milk exported, those price and volume falls have undermined European domestic market prices, with butter prices down 30 per cent, cheese down 17 per cent and other products down by between 5 and 10 per cent.

In the United Kingdom, even with about 50 per cent of milk going to the liquid market, average prices will have dropped by about 1p per litre before currency movements. Sadly for UK agriculture, sterling has been extremely strong. The effect in the milk market can be measured by the movement in the intervention milk price equivalent (IMPE), which has also dropped by 30 per cent. However, the sterling effect has little impact on the United Kingdom liquid market which suggests that the average milk price drop attributable to sterling is about 4p per litre. Against the overall drop in prices of 7p per litre, 5p per litre can be attributed to the first two reasons; namely, market conditions and the strong pound. This leaves a balance of 2p per litre—28 per cent of the price fall—which appears to be due to the superior bargaining position of milk buyers since deregulation.

That brings us to the Monopolies and Mergers Commission (MMC) report on the milk industry. In the days of the Milk Marketing Board, UK farmgate prices were next to bottom in the European milk price league. In 1998, according to ZMP, the United Kingdom had become bottom of the league with a farmgate price of 18.6p per litre, standardised at 3.7 per cent butter fat, against a top price of 24.5p per litre received in Italy. In 1994, the old MMB milk-selling price was 6.5 per cent above IMPE. In its first selling round in 1994–95, Milk Marque achieved an average selling price of 14.8 per cent above IMPE. This year, Milk Marque's average selling price was back at 7 per cent above IMPE.

Looking at it another way, Stock Exchange listed dairy company margins have fully recovered from the post deregulation milk price hike. For example, Express Dairies' margin fell from 9 per cent in 1993–94 to 6 per cent in 1996–97 but has recovered to 8.5 per cent in the past two years. From Robert Wiseman's annual report, earnings per share, at 7.3p in 1995, have risen to 16.5p, and operating profit has increased from £7 million to £19 million over the same period. Following through to the supermarket shelf, dairy farmers' share of the retail price of milk has fallen from 38 per cent to 33 per cent over the past two years. Consumer butter and cheese prices are 6 per cent and 8 per cent higher, while whole milk prices are down 5 per cent. If the idea of getting rid of the milk board was to get milk prices up, then it has manifestly failed. With Dairy Crest, MMB's value-added arm, also floated off, the experience of Milk Marque has been a bitter one for members.

Against that background, the MMC report on the supply of raw milk was a bitter blow for dairy farmers, alleging that consumers pay more for fresh milk than they should. I shall not discuss the report at great length. To summarise, the MMC found that Milk Marque is a scale monopolist by virtue of its share in the supply of milk and able to exploit its position by using its selling system and engaging in various practices to artificially raise prices. From the definitions and assumptions of the report, that may well be correct. But that has inherently been the case since vesting day and suggests that MM was fundamentally flawed from the outset.

The reality is that, in practice, the Office of Fair Trading (OFT) has been dictating what MM can and cannot do since at least February 1996. The strategy of a single national co-op that could and would abuse its dominant position has been a historic mistake, bought at huge cost to the farming industry. The OFT has been operating as the industry's regulator. If milk prices in the shops have not fallen as much as they should, that has been due to the actions of dairy companies and retailers. In the summary section, paragraph 1.2 of the report states: Milk Marque effectively sets the floor price of milk for producers in Great Britain, because of its membership policy and its high market share. Since purchasers of milk must offer producers a higher price than that offered by Milk Marque if they are to attract and retain those producers, milk prices throughout Great Britain are higher than they would otherwise have been". That is a strange description of an abusing monopoly. At present it can be concluded that Milk Marque is failing to deliver to its members a fair milk price, even bringing down everyone's milk price. It is losing membership as fast as members can find alternative buyers. The long-term future of the co-operative must be in doubt. With only a single national co-operative, milk buyers have been able to place Milk Marque in the position of being a marginal milk supplier behind their directly sourced supplies. As buyers cherry pick their milk supplies, Milk Marque is progressively weakened by its own cost structure. With operating costs at 2.2p per litre against other dairies sourcing direct supplies at 1p to 1.5p per litre, Milk Marque's costs as a percentage of the milk price are disastrously about 12 per cent of today's price at 18.5p per litre and can only worsen as prices continue down.

UK dairy farmers have been drawn inexorably into milk processing to add value to their commodity. Dairy farmers throughout the world, except in the UK, have invested in milk processing with mixed results. MD foods in Denmark and the big Dutch coops appear to have paid farmers very good prices. In contrast, Irish co-ops have paid comparatively poor milk prices. Co-ops dominate the New Zealand market, yet farmers are paid disastrously low prices. The trend everywhere is for co-ops to dilute their farmer shareholding to raise funds to invest in value-added businesses. But in the UK, the MMC report would not allow an intact, national Milk Marque to enter processing.

The MMC recommended the restructuring of Milk Marque by dividing it into independent and competing quota-holding bodies able to sell milk on a commercial basis and therefore able to engage in milk processing. The Secretary of State did not accept this recommendation. To remain intact, Milk Marque would lose control of its selling system and its ability to expand into processing. The reaction of Milk Marque is that it would rather be broken up, to allow it the freedom to operate. This was endorsed by its membership last Thursday.

Alarmingly, dairy companies immediately pressed home their advantage on publication of the MMC report, as prices to farmers since July have fallen a further 4 per cent. Can my noble friend anticipate today that the break-up will relieve Milk Marque of the requirements laid down in the MMC report? Will the selling arrangements of the successor bodies be circumscribed in any way? New arrangements are certainly needed to deliver a sustainable milk price to dairymen.

The headline figure is that £1 billion will have disappeared from the rural economy due to falling milk prices from 1996 to the year 2000. This figure has been quantified by Deloitte & Touche from the 1998 National Dairy Council's publication Dairy Facts & Figures. The loss of calf income has been calculated at £170 million, and this figure will increase now that dairy calves are at nil value. In my north-west region, this equates to a loss to the rural economy of £160 million due to milk price falls, and £30 million due to calf price drops. The upstream and downstream effect magnifies the falls: 18,000 jobs were lost in farming last year.

While it can be argued that the effect in the north west may be dampened because agriculture is but a small part of the local GDP, in prominently agricultural counties like Cumbria, Pembrokeshire, Devon and Cornwall, the impact is considerable. To Devon and Cornwall, the withdrawal of £110 million through loss of dairy income out of the rural economy will impact significantly, especially this year when I understand tourism has also been hit.

Income tax repayments are now a major factor in keeping farming afloat. In a Written Answer last month, the Treasury estimated that repayments through profit averaging and losses increased nearly threefold to about £80 million in 1997–98 from £30 million in 1996–97. This money coming back into the countryside does not reveal the extent of falls in profitability and losses already suffered. Tax definitions are notoriously difficult. My local agricultural accountancy firm responded that this year it had reclaimed £½ million for its clients. Significantly, these are one-off payments. What happens next year?

The pressure on farming families to diversify and to find alternative sources of income is immense. The second income for farmers' wives is often all that families have to live on. Parcels of land and barns are being sold to supply capital for alternative enterprises. Planners need to look sympathetically at the many innovative schemes put before them. The environmental impact must be carefully considered.

All this underlines that farming and the countryside desperately need a clear strategy from government. Perhaps I may press my noble friend to ensure that the utmost urgency is given to these issues as the performance and innovation report (PIU) is considered.

5.43 p.m.

Lord Monk-Bretton

My Lords, I should like to start by thanking the noble Lord, Lord Grantchester, for providing us with this opportunity to talk about milk; indeed, I feel that we are doing so not before time in a very fast-moving situation. I should also declare a remaining interest in dairy farming since retiring. It is smaller than it was but, at any rate, I still have some knowledge of what goes on.

I should like, first, to emphasis the word "opportunity" because not all of the world's milk can be produced in New Zealand, which has the ideal climate. We in this country have a tolerably useful climate. We have good on-farm equipment and larger herds than Europe. From that point of view, we ought to be highly competitive in dairy products in Europe, if not beyond. However, to do this our dairy processing infrastructure and our milk marketing must be right. The great worry is that they are not right and that this opportunity is being lost.

Milk has always been, the sheet anchor of British farming". It is pretty widespread, except perhaps in the major arable farming areas. It is axiomatic that dairy farmers will not be able to look after the environment if they cannot make a living. With milk at 17 pence a litre, it is currently considered that only the 10 per cent most efficient can make a profit. I believe that the usual exodus from dairying per annum of 3 per cent to 4 per cent will, in all likelihood, now triple because dairy farming is undoubtedly in serious trouble; and that matters for the countryside.

The report of the Monopolies and Mergers Commission, which was mentioned by the noble Lord, Lord Grantchester, is my next item. The report found against Milk Marque and the Secretary of State for the Department of Trade and Industry accepted it. Producers were indeed disappointed. They had already seen that Milk Marque had virtually been driven on to the rocks—and pretty much driven there by the determination of the dairy industry's federation, with the help of certain government action in altering the method of the selling round of Milk Marque. I believe that that loosened the headstone of the arch by which Milk Marque was supporting prices.

I hope that the noble Lord, Lord Carter, who is to reply to the debate, will be able to comment on some of the questions asked by producers. For example: does not all this contrast strangely with the analysis of the problems of milk marketing made in 1933, when it was decided that monopoly should be met by monopoly? Perhaps that analysis was not far out because the Milk Marketing Board lasted for 60 years with no little success.

As regard the MMC's report, I ask: are we over-interpreting our competition law? Alternatively, does our competition law discriminate too much against the primary producer? I feel that there is something in one or other of those questions. It seems that we are back to the old UK problem of a significantly wider difference between farm-gate and retail prices than is the case in Europe.

I should like to draw attention here to my particular dislike of paragraphs 2.190 and 2.191 of the MMC report. To me, these paragraphs effectively say that the European Community's support price mechanism for milk should protect the dairies, not the producer. This may be satisfactory in Europe with the vertically integrated co-op industry, but, to my mind, it is not satisfactory in England. I believe that that support was intended for farmers.

At the United Kingdom Milk Group Conference in September, which the noble Lord, Lord Carter, and I attended, we heard a good address from Mr Randall Torgenson of the United States Department of Agriculture. That is a paper well worth studying by all those involved in dairy processing. I trust that Her Majesty's Government will also study it closely. Some 82 per cent. of milk in America is handled by cooperatives. We asked Mr Torgenson a question at the end of the address which does not appear in the paper. That is why I draw attention to it. We asked whether, supposing the United States anti-trust laws applied in England, Milk Marque would have passed muster? Mr Torgenson replied emphatically, "yes". He stressed particularly that US rules took into account the weak position of a large number of producers as against a small number of processors. He does not think that what has happened here would ever have happened there.

The Minister has now given Milk Marque what I regard as a "Hobson's choice" of dividing into three co-operatives, each handling 1.6 billion litres of milk per annum. I have serious concerns about this—and I am not alone—because it goes against the trend in dairy processing. Everyone else is merging to get bigger while we fragment. I mention MD Foods handling 90 per cent. of all Danish milk and Arla of Sweden handling 60 per cent. of all Swedish milk. Both co-operatives are merging. The new co-operative will handle 7 billion litres of milk per annum. I wonder how they get away with that when our laws state that we cannot. I think one might well ask that. The German co-operatives are merging into strong groups. There are many such moves afoot among co-operatives everywhere and among private enterprise dairies in the UK. The message regarding our industry in the UK from the Milk Group Conference is that much consolidation and modernisation must be undertaken if UK processing is to be an efficient competitor in Europe. One can only hope that our new co-operatives can help to achieve this.

I return to the MMC report. I draw attention to paragraph 2.382 on page 94. I do not like that paragraph because it prevents the new co-operatives from combining to operate processing facilities. I wonder how rigidly this measure would be interpreted. I think that some shared plants as between the new cooperatives must and should be allowed. I believe that we are light years away from producer-processors really creating major competition for the big five dairies. It must be emphasised how difficult it will be to establish co-operative processing anyway. We are 60 years behind Europe; we have to find the capital—and where from?—Milk Marque has little money; and the producers do not have much either, particularly under present circumstances. One has to remember that co-operative processing can prove to be risky. It may or may not be a successful venture, as has been shown elsewhere.

Bearing in mind the hold that the big five dairies have on producers and the hold that the supermarkets will increasingly have on the five dairies, will either group deal with a producer co-op? They may decide that they want to oppose producer co-ops in the same way as they opposed Milk Marque. There are great worries as regards all this. It is pretty certain that things can only get worse before they get better, but some assertive thinking is needed to achieve rapid results. Certainly the Government must be flexible and helpful to co-operative effort. Producers feel, not unnaturally, that the Government have got them into this mess. Some catalyst may be needed to get all this moving if disaster is to be avoided. When I mention a catalyst I am asking for something, be it tax remission or a tax holiday, but something to get co-operative producer processing going.

Finally, our UK dairy herd is not large. It is far smaller per head of the population than is the case in most other countries in Europe. I would like to see us exploit our opportunity for British dairying and not see it sink and suffer because our marketing is not right. That is the end of my remarks, but I wish also to say goodbye. It is likely that the noble Lord, Lord Grantchester, who initiated this debate, and I will no longer attend this House. I am delighted that a maiden speaker is to speak after me. I hope that he will carry the torch for British dairying.

5.56 p.m.

Lord Carlile of Berriew

My Lords, in the legal profession to which I belong there is a technique called confession and avoidance. I notice that my first confession, that of being a member of the legal profession, causes a frisson in your Lordships' House because there a re so many members of that profession here.

My second confession is probably even worse; namely, that of having spent 14 years in another place. However, in those 14 years I learnt at least one good habit: to walk down the corridors and across the Central Lobby to visit this House from time to time to listen to the debates. Without gratuitously criticising the House of Commons, after my experience there it is with real diffidence that I make my maiden speech in your Lordships' House. I hope that as the years pass I may reach that standard of informed debate which has been the norm here—a standard less often reached in the hurly-burly there. The demand-led aspects of direct electoral accountability do not always have reason as their handmaiden.

I hope that my two-and-a-half years of largely rural home leave, or, as it is sometimes called domestically, parole, since I retired from the other place, may have chipped away some of the more combative, rougher edges of what I learnt there. I hope, too, that those two-and-a-half years enjoying my home in rural Wales will have added to my knowledge of the problems that face rural areas, and particularly the milk industry. It is with a sense of irony that I come, after that interval of two-and-a-half years, from a House which is self-evidently too large, too undemocratic in its content, composition and operation and manifestly in need of reform, to a House which has faced historic reform, despite its record—some would say in the teeth of its record—for rationality and the exchange of sound argument.

I am delighted to see in his place my noble friend Lord Hooson who was my senior supporter when I took my place in this House. For 31 of the 35 years from 1962 to 1997, he, and then I, represented Montgomeryshire in the House of Commons. During those 31 years he and I have shared a passion to bring forward before Parliament the condition and the needs of rural areas. They have become a subject of highest importance to me and, I know, to the noble Lord also.

As I say, I live, and when I can, work in rural Montgomeryshire. In addition, outside my legal practice I declare a interest as a director of a company—originally a farmers' co-operative, but now converted to plc status very successfully—that serves and therefore mirrors the core industry of the area.

Perhaps that brings us to a key question. What is the core industry of an area like rural mid-Wales? Over the years we have all read about and seen the great efforts of organisations like the Welsh Development Agency and the now lamented Development Board for Rural Wales in which my noble friend took such a great part in encouraging its formation. But even after decades of economic development, when one asks what is the core industry of an area like rural mid-Wales, the answer is one word: farming. It always has been farming. It remains farming today and whatever economic developments, which of course we welcome, are brought to rural areas like ours, farming will remain the core industry for the future.

The farmers whose land I see from my home and who are my friends are not merely the curators of rural Wales and of the hills and hedges, though I believe that some, particularly those living and spending most of their lives in the cities, believe wrongly that that is the farmer's role. In round figures 70 per cent of the local economy of rural mid-Wales still depends on the activity of farmers and those who work for them. The cohesion of villages and market towns and therefore the visual and perhaps above all the social integrity of the countryside, depends on their continued reasonably successful economic activity. The milk industry is a key part of that.

Of course, in all walks of life there is greed and there is a good deal of mythology—some of it justified—about the greedy farmer. However, in the present state of the farming industry one is as likely to find a hungry farmer as a greedy farmer. One is much more likely to find an angry farmer than a greedy farmer. What has happened to them? Their incomes have dropped by 62 per cent over the past three years. What other industry, what other profession, has had to put up with that kind of reduction in income without any measures—structured measures at least—being taken to alleviate that. Investment in farming is at its lowest level (again in round figures) for 20 years. If that were happening in any of the other core industries of this country we would be wringing our hands. But when it comes to farming we seem to shrug our shoulders.

The common agricultural policy is part of the problem. In my view it served the farmers well for years. Now it has become their bogey. It is bedevilled by the inflexibility and the reluctance of European Union member states to redesign it from first principles. That means new principles applicable to a widening, deepening union. In terms of food production, Welsh farmers cannot compete with the vast breadbaskets of central Europe. Common agricultural policy reform must recognise the consequent economic and social strains that our rural areas face.

The milk industry is a key factor for the survivor of our rural life. If farmers continue to suffer price falls and if the Monopolies and Mergers Commission report and the Government's reaction to it, is allowed to place producers in other countries at an unfair competitive advantage compared with our own farmers, then the repercussions for the British countryside will be dire.

Farmers realise of course that nobody owes them a living, but what they ask is simple and, I would suggest, reasonable. Where necessary—they will always say this first in my experience—"Give us the means and we will diversify if you can present to us a justifiable case based on recent evidence that that is what we must do". But what farmers also say is this: "Please do not regulate us, nanny us or force us, through economic correctness, out of the opportunity to meet the reasonable public demand for choice in milk, including raw milk, and other potential on-farm products". We do seek a Government reaction which bears some hope for a reasonably prosperous future for the farmers and for the most important and good reason that our communities should survive.

I congratulate the noble Lord, Lord Grantchester, on his success in bringing these important matters to the House. He and the noble Lord, Lord Monk Bretton, will be missed. I hope that their departure and that of other enlightened and substantial farmers in this House, will not result in these issues becoming neglected. I hope to join and perhaps initiate similar debates in the future.

6.6 p.m.

Baroness Byford

My Lords, it gives me immense pleasure to congratulate the noble Lord, Lord Carlile of Berriew, on his eloquent and passionate maiden speech. It will be a joy to have him with us in this House. He brings to this Chamber many years of parliamentary experience, having represented Montgomeryshire for 14 years. From his speech today we know that his experience in the legal profession will make him a great adversary across the Chamber, too. We thank him for his very thoughtful contribution on rural matters and look forward to hearing from him on many occasions in the future, particularly in our farming debates. I offer a warm welcome to the noble Lord.

The noble Lord, Lord Grantchester, raises this question at an important time and I congratulate him on so doing. As of this morning, it appears that Milk Marque is intending to establish three competing businesses. This is roughly in line with the Mergers and Monopolies Commission recommendation and against the original ruling of the right honourable Stephen Byers. However, positions can change and have changed dramatically, in a short space of time. This debate is crucially timed.

As the Minister and other noble Lords present will be only too aware, farm incomes are at an all-time low. In the past two years incomes have halved and halved again. As the noble Lord, Lord Grantchester, said, 18,000 jobs have been lost in farming in the past year.

The MMC report, as other noble Lords have mentioned, began in 1997, and at the time of its release the statistics were already out of date. It even suggested that milk prices have risen when, as we all know, the opposite has happened. The average producer price was 25p per litre in 1996, 19p per litre in 1998–99 and is currently about 17.58p per litre for the majority of dairy farmers. That is below the cost of production and has triggered an unprecedented increase in the number of farmers quitting the industry.

According to the data supplied by ZMP, UK farmers were at the bottom of the price league in Europe in 1998. Italy was on top with an average price of 23p per litre. That situation is likely to worsen.

The report concludes that Milk Marque's planned increase in its milk processing capacity may be expected to operate against the public interest. Now that Milk Marque no longer has a monopoly, that conclusion is surprising. It is perfectly legitimate that dairy farmers should own the means of processing and manufacturing. Perhaps the Minister will expand the Government's thinking in this direction when he comes to reply. I understand that in Denmark, MD foods holds a 95 per cent stake in its dairy industry, as another noble Lord said.

We on these Benches believe that Milk Marque should be allowed to develop added value to raw milk. Its market share is down now to some 37 per cent and it seems fair that dairy farmers should have some processing capacity, as is common with other northern European states.

The more efficient farmers—who are often the bigger ones—have left Milk Marque and formed their own milk groups These are independent co-operatives which are able to operate more successfully than Milk Marque. The greater the number of groups formed, the greater the strain on Milk Marque, through which the smaller, more rural farmers often have to sell. I suspect that that is true in Wales. I understand that even now Milk Margue has to charge some farmers for milk collection from their farms.

The Government's response to the MMC report is that. Milk Marque should not be broken into smaller units, nor should it be allowed to go in for further processing. The NFU is challenging both the report and the decisions. It believes that the report is ill-conceived, out of date and does not reflect the realities of what is happening in the dairy industry.

I understand that the NFU's action will centre on two aspects of European law. Firstly, that the report neglects the special exemption that agricultural cooperatives are given under EU competition law; and, secondly, that it places insufficient weight on the provisions of the EU milk regulation to establish the target price as the aggregate of producer prices.

It could be argued that the splitting of Milk Marque into smaller units will put each at a competitive disadvantage because each will carry fixed-term management fees. Some would argue that it would be better for them to remain together in order to lessen the impact of those fixed costs. However, greater organisational freedom is required if Milk Marque is to move into a variety of value added products.

I turn now to the second part of the noble Lord's Question. He asks how the Government's proposals for the supply of raw milk will affect the rural community. He is right to be concerned. The noble Lord, Lord Carlile, reflected on that matter very accurately. I believe that we would see more small dairy farmers quitting the industry. That would have great implications for each community which is threatened. As we all know, they are not merely suppliers of milk; they are businesses. They are at the very heart of our rural areas. It is crucial that they should be maintained.

In addition to this particular problem which threatens our rural communities, I should like to speak on another matter which, so far, other noble Lords have not addressed. If I am a little wide of the mark, I apologise, but I feel I should mention the issue of bovine TB. As noble Lords who have spoken in these debates in the House will know, bovine TB is spreading rapidly throughout the United Kingdom. It started in the south west, moved up the west side of the country, is very prevalent in Cheshire, and we also have this problem in my own area of Leicestershire.

Agricultural employment may be a fraction of what it once was but for our farming population it still provides the economic, social and environmental basis of country life. Farm incomes support those who work as equipment manufacturers, suppliers, mechanics, shopkeepers and vets, to name but a few. Over the years farmers have been the guardians of our countryside. If they go, who will take up this role?

In his very good opening speech, the noble Lord, Lord Grantchester, touched on the question of dairy bull calves. He explained the issue so well that I will not go into detail. He asked whether the Government would consider continuing the 30 months scheme until exports have been re-established. I, too, will listen with interest to the Government Chief Whip's reply.

Perhaps I may now pose one or two questions to the Government Chief Whip. First, does he accept that small dairy farmers would continue to be squeezed out of existence if Stephen Byers' original ruling had prevailed? Secondly, does he accept that the groupings of the more efficient farmers—which have already taken place and which will continue to take place—will place a greater strain on those who have no such choice, especially those who live and work in rural areas?

Thirdly, what hope has the Minister to offer small producers of dairy products? We have spoken about raw milk but not specifically about those who might wish to go into producing more dairy products in their own right.

Fourthly, will the Minister confirm that the Government will push ahead with trial badger culls regardless of the animal welfare lobby and the other difficulties which I know they are currently encountering? That is a very important issue which has huge implications for our dairy industry.

Fifthly—other noble Lords have already mentioned this matter—does the Minister accept that the outcome of this year's CAP reforms were a disaster for our dairy farmers, while other countries, particularly Eire, enjoy rising quotas? There will be no improvement for British farmers until, at the earliest, 2008. For many farmers that is not an option.

We have spoken very clearly about the issue of raw milk and the implications that the MMC report has for all farmers. We have talked also about the implications for the rural community. As I come to the end of my speech, I, too, would like to thank the noble Lord, Lord Grantchester. I have been an Opposition spokesman on agriculture in this House for a year. It has been a pleasure during that time to look across the Chamber and to know that on the Government Benches there was someone who spoke with great knowledge. It has been a joy to have him participate in many agriculture debates during the past year.

I also wish to thank my noble friend Lord Monk Bretton. Like the noble Lord, Lord Grantchester, he said that this will be his last opportunity to speak in the House. Their contributions and their expertise in the topic will be a great loss to this House. They will both be missed. On behalf of these Benches, I wish them every success in the challenges they will face.

This has been an important debate. As I said, it could not have come at a better time. We were all very sad that the debate had to be postponed from last Friday. We on these Benches extend our support and sympathy to the family concerned. We thank the Government for giving us the chance to have the debate at this important time. I look forward to hearing from the Minister.

6.18 p.m.

Lord Carter

My Lords, the House will be grateful to my noble friend Lord Grantchester for giving us the timely opportunity to debate this important subject. I should declare a former interest. I was a shareholder and director of a farming company with a number of dairy units before I became a member of the Government. I no longer have an interest as a director and shareholder—which I am coming to believe is extremely fortunate timing with the way matters have gone.

All noble Lords who have spoken have shown by their contributions the importance of the Question tabled by my noble friend. It is particularly pleasant to congratulate the noble Lord, Lord Carlile of Berriew—I hope that I have pronounced it correctly—on his outstanding maiden speech. He comes to the House with a distinguished parliamentary and legal background and we look forward to his contributions in the future. I was much taken with his reference to the process of "confessional avoidance", as I believe I heard him say. As a Chief Whip, I am familiar with that technique. I shall try to deal with all the points that have been raised in the debate. If I do not cover all of them in the time available, I shall write to noble Lords.

The Act which abolished the Milk Marketing Board and set up Milk Marque started in this House. As the agricultural spokesman at the time, I dealt with it for the Opposition. I must say that, sadly, when one examines what has happened in the milk industry, some of the fears expressed at the time by myself and others have been borne out.

The United Kingdom dairy industry is arguably the most economically important agricultural sector. Over 30,000 holdings produce around 14 billion litres of milk each year, approximately half of which is sold as liquid milk and the rest in the form of a wide variety of dairy products. Milk production is worth, at farmgate prices, some £2.5 billion. Those holdings are predominantly in the west of the country and in Wales, as we heard from the noble Lord, Lord Carlile. The holdings are often found in areas where alternative farming opportunities are perhaps not as attractive at the moment as they once were and where alternative sources of employment outside agriculture may be scarce. The concern at the effect of current developments on the economy in these areas is therefore understandable. I am sure that all UK dairy farmers are acutely aware of the old saying that they buy retail, they sell wholesale, and they pay the transport both ways.

As we have heard today, this large and vital industry is currently facing extremely difficult economic prospects. There is no one single reason for that, but essentially the difficulties result from the operation of the free market in so far as the common agricultural policy allows this. We know that markets in Russia and in south-east Asia have declined sharply, leading to a surplus of milk or milk products chasing a market which, even in the UK in the case of drinking milk, is certainly declining. That in itself is a classic recipe for falling prices. At the same time, noble Lords know that sterling has been particularly strong against the euro. This has meant that support prices such as the intervention prices for butter and skimmed milk powder, which are set in euros, have fallen in the UK. This has led to further downward pressure on the raw milk price as the floor in the market provided by intervention has been progressively lowered and prices throughout the system have followed.

The Government understand the current difficulties of dairy farmers. That is why my right honourable friend the Minister of Agriculture, Fisheries and Food announced recently that cattle passport charges will be deferred until 2002–2003 at the earliest. That is a considerable benefit to the dairy sector. I have heard the argument that this is not real aid because the charge is one that had not yet been imposed and was in any case a piece of unnecessary bureaucracy. I am afraid that that is nonsense. The cattle passports form an integral part of our battle to ensure that UK beef is not only the safest in the world but is recognised as such. That carries a benefit to dairy farmers and they would have been expected to bear their part of the costs. However, that is now alleviated.

At the industry's request, we also recently conducted a poll of dairy farmers to see whether they supported the proposal that the Milk Development Council should have its remit extended to include the generic promotion of liquid milk. Despite the cost to them of such activities—which might have been seen as a barrier at times like these—I am pleased to say that those farmers who voted were overwhelmingly in favour. On 28th October my right honourable friend the Minister of Agriculture announced that we would be preparing legislation to bring the proposals into effect. On the general subject of development councils, I have long been a supporter of them as the best way of effecting agricultural improvement. They are funded in an industry containing many small producers by means of a statutory levy on all the producers who will benefit from that improvement.

It is proposed under the MDC that producers should enter into a promotional campaign along with processors with equal funding from the two parties. Given the tensions that have existed in the industry in the past, that co-operation between, as it were, the two sides must be a positive sign for the future. No one is naive enough to believe that such a campaign will turn the tide of profitability overnight but research carried out by producers' representatives leads them to believe that it will have a real and positive impact on demand. That is why they are prepared to commit funds to the exercise.

Over the past year there has been very rapid growth in the demand for, and the supply of, organic produce. The growing interest of the major retailers reflects a substantial and apparently continuing growth in consumer demand. The retail value of organic dairy products in the UK has increased from an estimated £15 million in 1997 to £54 million in 1998–99. That is a substantial and rapid increase. Approximately 60 per cent of the UK market is supplied by home production and there is clearly an opportunity for further expansion by the dairy industry to meet that demand.

The Government have given substantial financial support—around £16 million in England—to aid the conversion to organic production methods. Some 40 per cent of applications for conversion aid in England relate to the south west where, as we know, there is a strong dairying tradition. We have recently announced the provision of £10 million of new money for conversion aid, and regulations allowing the scheme in England to be reopened were laid before Parliament on Wednesday of last week.

This work on promotional issues and the interest in organic production are positive signs for an industry which is looking forward and trying to find ways to adapt to the harsher economic pressures which now face it. Each in itself will not solve the problem but they are indicative of an industry which is not prepared to give up.

I turn to some of the questions raised in the debate. My noble friend Lord Grantchester asked whether, on the break-up of Milk Marque, to which I shall refer later in my remarks, it would be relieved of the constraints that have been placed on it. The Secretary of State for Trade and Industry announced last Friday that he had withdrawn his previous request for interim measures and changes to the Milk Marque selling system.

My noble friend Lord Grantchester, the noble Baroness, Lady Byford, and the noble Lord, Lord Monk Bretton, referred to the position of Milk Marque in regard to the comments of the Monopolies and Mergers Commission report. Both Milk Marque and the NFU have instituted a judicial review process on the detail of the evidence in the report. I am advised therefore that the detailed consideration is sub judice and it would be inappropriate for me in my role as a Minister to comment on that.

The noble Baroness, Lady Byford, said that Milk Marque would like better to utilise its processing capacity. I agree that that may be the case, but not if it uses that overcapacity to exploit its monopoly position, which had been the fear with Milk Marque before it was split. The big co-ops in Europe generally do not supply the market with milk in the same way as Milk Marque but process the milk themselves, which is a very different prospect.

Turning to the question of the possible involvement of the three new regional co-operatives which are to succeed Milk Marque and their possible investment in processing, for over 30 years I was a director of a farmers' co-operative. If a true co-operative is established, is engaged in processing and is run as a mutual fund, that co-operative can invest with gross funds; namely, it need not use taxed income. Funds retained in a mutual are not taxed in the hands of the mutual. Tax is paid only when money is distributed to the members. However, that could be a useful source of funds if these new co-operatives decided to go into processing.

The noble Lord, Lord Carlile, stated that we should not over-regulate. I think that we would all agree with his words. The whole question of regulation is currently being examined by MAFF with the help of the industry itself. Three groups are looking at the intervention system, the meat industry and IACS. The three groups are chaired by well known figures in the industry: Norman Coward, Robin Pooley and Don Curry, the outgoing chairman of the Meat and Livestock Commission. They have been asked to report to MAFF as quickly as possible.

I turn to the report from the Monopolies and Mergers Commission on the supply of raw milk in Great Britain. I do not propose to go into the report in detail but to recall a few of the basic points. First, the MMC found that Milk Marque was exploiting its monopoly position. My right honourable friend the Secretary of State for Trade and Industry accepted the findings of the report but not the recommendation that he should compel Milk Marque to split, believing that a wider debate leading to a consensus provided a better way forward. Faced with the prospect of tighter controls on the selling system and a ban on new operations—that is, processing—Milk Marque has, as noble Lords know, itself decided to split into three successor bodies. As I said, the Secretary of State has rescinded his previous request for a change in the selling system.

I commend the decision to split, which I emphasise again is one which the industry itself has taken. It does not represent a government proposal for the milk industry. So far as concerns the future, I would quote the Milk Marque chairman, an old friend of mine, Mr Poul Christensen. In a message to his membership he said: The restructuring proposals offer us the opportunity to create three new dynamic businesses, large enough to protect your interests"— that is, the members' interests— in the market place and free to grow and develop commercially". That was a historic decision for the dairy industry in this country. Milk Marque members have shown their commitment to build a new future for themselves. The radical steps they have taken give the commercial freedom they need to meet the challenges of today's market place and to find new ways of doing business. The Government certainly wish the new businesses every success.

Lord Monk Bretton

My Lords, what would happen if a major opportunity occurred? This is a fictional example, but it might occur. If M.D Foods decided to withdraw to Denmark and its enterprise here suddenly came up for sale, and the three successors to Milk Marque had the money to get hold of it—I do not know how they would find the money but let us assume that they did—how would that tie in with the difficulty we have about interpreting the MMC report? I know that the noble Lord cannot say too much about that report. Nevertheless, I hope that these big possibilities will be borne in mind, because a big possibility like that would really get co-operative producer processing on the move in this country.

Lord Carter

My Lords, any one of the three groups will now be free to invest in processing if it wishes to do so. In the hypothetical situation which the noble Lord poses of all three getting together again to invest in milk processing, I would imagine that they would have to clear that with the Office of Fair Trading and the MMC before they could indulge in that, because it would reproduce the situation which was frowned on in the MMC report and which led to the break up of milk marketing into the three businesses.

Lord Monk Bretton

My Lords, would two be allowed to do that?

Lord Carter

My Lords, I really cannot answer that question off the top of my head. It would depend on the size of the investment and the share of the market that was involved. But the three new businesses are now clear of any of the constraints that were on Milk Marque under the previous system.

I was about to quote from Poul Christensen. At the special general meeting last week, when the decision was taken by the Milk Marque members, he said: Now is the time to put the past behind us. We must look beyond the traditional division between producer and processor to create a new industry based on partnership, ready to face the global challenges ahead. It is only by working together in large and in market-focused groups that farmers can provide the quality, the service and the value which is needed to flourish". The future lies very much in the hands of these three new co-operatives and with individual dairy farmers. Perhaps they will invest in processing facilities themselves; perhaps they will seek more strategic alliances with existing processors, which will now be possible for any one of the three but was not previously possible with Milk Marque; or perhaps both those things or some quite different strategy. Whichever avenue they choose, I see no reason why they should not succeed on behalf of their members. I am not suggesting that the milk market will turn around overnight. Of course it will not.

The Government's priority is a thriving dairy industry which can compete on world markets. But we must recognise that, regardless of the position on CAP reform, it seems both desirable and inevitable that the next WTO round will lead to further liberalisation in world trade, which will include the dairy sector. In the coming years we face the prospect of increasing pressure on EU and dairy prices as a result of several factors. We therefore attach considerable importance to the mid-term review of the dairy regime which is due to take place in 2003. But to reform the CAP dairy regime and to phase out milk quotas, which has long been the policy of this Government—and indeed the previous government—we will need to achieve substantial support from the Commission and from our European partners.

The Duke of Montrose

My Lords, I understand that in the view of the NFU of Scotland the way these new Milk Marque businesses will avoid regulation is by commanding only 25 per cent of the production of milk in the country. When one hears the evidence produced by my noble friend Lord Monk Bretton about the size and the control of milk industries in other countries, one wonders whether they will be able to compete on an international scale.

Lord Carter

My Lords, that is a fair point. I am not quite sure from where the figure of 25 per cent comes. They cannot each have 25 per cent because at the moment Milk Marque in total is 37 per cent. They will be smaller businesses. They will be able to invest in processing. I suspect that they will be faster on their feet. Only time will tell. I know there is a view that one needs to be extremely large to succeed in this field, but there are some smaller organisations throughout Europe which are extremely successful in this field. We shall have to see how the market works out.

We have the basis for a dairy industry where at least some of the uncertainty which has existed for the past couple of years has disappeared and whose producer co-operatives can operate free from detailed monitoring by the Office of Fair Trading. Now that they are no longer in a monopoly position—at least from next April—they are subject essentially to the same general competition rules as the dairy processing companies. I see no reason why these changes should prove to have any long-term adverse effect on milk producers, on the rural economy or on the supply of raw milk.

In conclusion, perhaps I may add my own thanks to the noble Lord, Lord Monk Bretton, and to my noble friend Lord Grantchester. Those of us who over the years have been engaged in the House in agricultural and food subjects form a small and intimate group. We all know each other and we always used to speak in the same debates. I am extremely sad to see them go. I wish them both well in the future.