Common Agricultural Policy

HL Deb 05 April 2004 vol 659 cc1664-78

7.34 p.m.

Lord Carter rose to ask Her Majesty's Government what would be the effects on dairy farmers of the proposals in the mid-term review of the common agricultural policy.

The noble Lord said: My Lords, I declare an interest as the president of the Royal Association of British Dairy Farmers. I tabled the Unstarred Question because dairy farming today is a very worried and hard-pressed sector of the agriculture industry. The profitability of dairy farming has been poor for the past five years, and most dairy farmers now have costs per litre that exceed the milk price. For 40 years before I joined the Government in 1997, I was involved in advising farmers and in preparing detailed management accounts on many farms all over the UK, including dairy farms. In all that time, efficient dairy farming was always relied on to be profitable, to produce a return on capital and to promote a reinvestment.

The MTR outcome is unsatisfactory for dairy farmers. I think we can all agree with that. Single farm payments based on historic output had been expected and could have been justified due to the large investment that dairy farming demands. A recent report by Professors Colman and Harvey, which I am sure that the Minister has seen, supported historic payment and, even with that, they calculate that as a result of MTR the milk price is likely to fall to 15p per litre, a figure that is well below production costs. There is no dairy farmer in the UK who can dairy at 15p per litre and still produce a reasonable profit.

For the first time in major UK legislation, MTR has been implemented differently in England from the devolved regions. As a result, dairy farmers receive different support levels, and those in England are considerably disadvantaged compared to those in the other regions. Additionally, the area payment approach adopted in England will further disadvantage larger and more efficient dairy farmers who have invested heavily in recent times. The result will be a drift of milk production to the devolved regions. Quotas will move across borders, although in time that will perhaps be irrelevant. Will the Minister say whether Defra has done any calculations on the likely reduction in the number of diary farmers and in milk production in England as a result of the proposals in the MTR?

To compound the difficulties that face English dairy farmers, the Government decided on two payment bands: severely disadvantaged areas and non-severely disadvantaged areas—SDAs and non-SDAs for short. SDA farmers, regardless of the system or the enterprise, will receive a single farm payment of perhaps only £75 per hectare compared to, say, £220 per hectare in the nonSDA areas. There are 1,500 dairy farmers in the SDAs. Under the current proposals, they will be severely disadvantaged and financially damaged, although almost all of them farm on the fringes of the SDA, not up to the moorland line, and with management systems and investments that are very similar to their non-SDA neighbours. Such farms will be unsustainable with consequential knock-on effects for rural employment and communities. The current proposal will also severely affect the beef sector, and cattle numbers with the SDA will dwindle and will disappear in many areas. Single-species grazing by sheep will be detrimental to the landscape and to wildlife habitats.

I do not wish to go into all the correspondence that has been exchanged between the various organisations in the industry and the Secretary of State. As the Minister knows, the organisations have urged the adoption of the well accepted moorland line as a division between the payment zones in the SDA. The moorland line is used in the Countryside and Rights of Way Act 2000. On the assumption that the total sum of support available would not change, there would be some redistribution of payments. but on a fairer and more equitable basis. The Secretary of State demanded a unified industry position, a consensual position. That has been forthcoming, and I hope that the Minister will be able to bring us up to date with the likely response of the department to the proposal that has been made to split the SDA area into two: the moorland area and the rest of the SDA.

If there is an improved payment, it will cover almost all the SDA diary farmers. It is clearly an improvement, but nevertheless the future of diary farming cannot be guaranteed within the SDA line. The Government really should consider whether there is potential for additional support measures in those areas. I believe that opportunities are offered by the hill farming allowance scheme.

As we know, some farms straddle the payment lines and correct calculation of the single farm payment must be ensured. As we also know, in order to obtain the single farm payment there must be what is described as cross-compliance. I refer to the specific requirements proposed for cross-compliance for dairy farmers: soil protection and maintenance; protection and maintenance of habitats and landscape; protection of landscape features; protection of stonewalls and other landscape features; management of hedgerows; provision of two-metre uncultivated field margins; protection of permanent pasture; et cetera. All of those fall within the costs of an already hard-pressed sector. That is the position with the MTR and the SDAs. I hope that the Minister will comment on that.

I now turn to other issues. Many dairy farmers are baffled by the proposition that they should move upstream into processing to capture some of the upstream margin between the farmgate price and the retail price. The merged Arla/Express Company will control about 38 per cent of the liquid milk supply in this country. I understand that Arla and Fronterra work together in the UK, where they have established a major presence in the spreads market.

A potential barrier to vertical integration is the attitude of the UK's competition authorities. Given the relatively small size of the dairy industry, it has been the subject of a remarkable number of investigations by the competition authorities, and in the industry there is great uncertainty about how those authorities would view prospective transactions. The greatest uncertainty arises in respect of the markets for raw milk and processed fresh milk. In contrast, the position in respect of processed products such as cheese, butter and skimmed milk powder is much clearer, as these markets are world-wide in their nature and it is generally accepted that it is unlikely that any transaction in Great Britain could materially harm competition.

In the raw milk and processed fresh milk markets, on the other hand, the OFT has never definitively stated whether it considers there to be a single GB-wide market for those products. This is a key issue. If there are regional markets, it is much easier to envisage competition law problems arising. Conversely, if markets are viewed nationally, no single processor or co-operative is likely to be found to have any material market power.

While there has been a number of inquiries in which these issues have been discussed, none has reached a definitive conclusion. This is surprising, as for some years now raw milk has been traded nationally, and no regional pricing variations have been observed. Equally, as regards processed fresh milk, the influence of the supermarkets and the concentration of business into the hands of a small number of nationwide suppliers, something to which I have already referred, mean that there is no real scope for regional price variations to emerge.

The current position is, therefore, highly unsatisfactory especially as, on this issue, the UK seems to be out of step with other major dairying countries that are our competitors. In a number of countries, vertically integrated co-ops hold large market shares without that being considered to be in any way against the public interest. Arla of Denmark, for example, which has recently purchased the Express business in the UK, has a domestic market share of over 85 per cent in Sweden and 65 per cent in Denmark. Fronterra of New Zealand has a share of well over 90 per cent of its domestic market.

Many dairy farmers are concerned that unless these uncertainties are resolved, vertical integration will never be achieved to the desired degree. In the light of other developments in the industry, that raises difficult issues about the long-term future of British dairying.

The question is whether the uncertainty could be reduced by means of a clear statement from the authorities on the limits of what they consider acceptable in this industry. While that would not require changes in industry structure, it could provide a helpful framework within which the industry could then evolve. The Curry commission report stated: We encourage the competition authorities to consider the wider market context, particularly the consolidation of international suppliers, when looking at new or expanding collaborative ventures".

To conclude, I ask the Minister when the Commission will produce the detailed regulation to implement the MTR. When will the Government lay the regulations before Parliament? When will the amount of the single payment be known? When can farmers expect to receive the first payment under the new scheme? As I said, dairy farming faces a more uncertain future than at any time since the end of the war. I hope that when my noble friend the Minister replies, he will be able to offer some comfort to a hard-pressed and worried industry.

7.45 p.m.

Lord Plumb

My Lords, it is always a pleasure to follow my old friend the noble Lord, Lord Carter. I thank him for initiating this debate. I thank him also for the very full statement that he has made. Like him I hope that the Minister will be able to respond to many of the points that he put forward.

The noble Lord declared an interest as the president of the Royal Association of British Dairy Farmers. I declare an interest as a past president of the Royal Association of British Dairy Farmers. This debate constitutes something of a reunion of past presidents as the noble Lord, Lord Grantchester, who will speak after me, is the immediate past president. We have been involved in dairy farming over many years.

I also declare an interest as a dairy farmer until the end of the month. On the 30th of this month my herd will be sold. I follow five generations of dairymen. Therefore, it is a very sad moment for me that we find ourselves in this situation. My son has taken the obvious decision in the circumstances in which he finds himself.

We have lived through a time in which dairying has been a most progressive industry. The application of technology, science and cattle breeding mean that we are, and have been, a world leader for some considerable time. We have the capability now through our stock of producing a high quality product and production has increased by more than tenfold during my lifetime.

As the noble Lord, Lord Carter, said, returns are totally inadequate on the average commercial herd to allow for a living and for reinvestment in that herd. We have gone through various tragedies such as the tragedy of BSE that led to the over-30 months scheme. I hope that the Minister will end the uncertainty regarding when that scheme will finish. That was followed by foot and mouth disease and now TB which is still spreading across the country. It has caused many herds to be closed in the past year or two and has had a demoralising effect on many producers who were hanging on and waiting for the outcome of the mid-term review or the CAP reform.

The Government have made it absolutely clear, and the industry has generally accepted, that the marketplace is, or should be, at the centre of decision-making. When the announcement was made they hoped for an immediate sign that there would be some market price increase. As we know, the reverse is the case. Yet as dairy farmers and beef farmers analyse the single farm payment, they fear that they will lose out and the higher their production per hectare, the more they lose over time, especially if followers are not being reared on the farm. As the noble Lord, Lord Carter, made absolutely clear, those in the SDA areas are very much alive to the implications. I look forward to hearing the noble Lord, Lord Whitty, talk of the required boundary changes to which the noble Lord, Lord Carter, referred.

On the face of it, if we look at the overall spread, sheep producers gain but in the good British tradition of a mixed farm system, we pride ourselves on keeping a fair balance between livestock and arable. This move, as it stands at present, could lead to massive destabilisation of the whole of the industry.

Over the weekend, I checked with two senior auctioneers. In my own area, nine dairy herds are being sold this month. Some are large and some not so large, but in the region of 1,500 cattle are being sold from those nine herds. I asked one auctioneer about the following months and he said that the order books are full. On Saturday morning, the milk-tanker driver told my son that he was concerned for his future. He would soon be out of business because there would no pick-up on the farms where he was in the tradition of collecting the milk.

Therefore, can the Minister confirm, or does he accept, that much of the quota and some of the stock that has been, and at present is, moving from farms in England is going to Scotland and to Wales, where the system looks more attractive at the start of the present system? There have been promises of improvement over an eight-year period, but that is a very long period over which to adjust when there is already a prediction of a decrease in milk prices this year.

Of course, I accept that the reasons for the low price for producers are complex. They are related to the level of supplies, the world market and exchange rates and so on. Your Lordships will be aware that, under the chairmanship of the noble Lord, Lord Whitty, the Dairy Supply Chain Forum is already looking for collaborative solutions and possible barriers to innovation. It is not innovation that farmers are looking for—they have been innovating for many years; it is the market. Marketing and value-added production is a key factor, but many farmers are not in a position to adapt to a changed system of adding value to their product.

Looking back over the years—one must do that as one tries to look forward—the saddest day was when we lost our Milk Marketing Board. Perhaps the Minister can tell us how, without statutory powers, we can copy many other European countries with powerful co-operatives without upsetting the Competition Commission too much.

No one is afraid of competition if it is fair. But I believe your Lordships should know that imports of dairy products have risen in value in the one year since 2002–03 by 25 per cent. The overall result shows a record deficit in dairy products of £690 million in one year. During the period from 2000 to now, imports from European Union countries increased by 35 per cent—from 653,000 tonnes in 2000 to 921,000 tonnes in 2003. I am sure that there will be a considerable increase on top of that during 2004. One of the main features is that the UK has exported a much lower-value product at £950 a tonne and the cost of imports has been £1,410 a tonne. If we had a level exchange rate, the UK exports could be 48 per cent higher and the deficit could be halved.

From the butter mountains that are now history, my understanding is that, over and above the daily consumption, we have six days' worth of butter in stock. That is in the whole of Europe. In today's volatile world, should we not be thinking more about security, apart from the balance of payments? As we well know, milk cannot be produced simply by turning on a tap. A calf born today will, it is hoped, be producing in three years' time.

Therefore, does the Minister agree that we need far more transparency? We need to be able to explain to both the producer and the consumer why the producer is receiving perhaps, as the noble Lord, Lord Carter, said, as low a figure as 15p a litre but let us say 18p or 19p a litre at present. At the weekend, I went to a supermarket to check prices and saw pasteurised whole milk at 79p a litre and organic milk at 99p a litre. There is a very big gap between what the producer receives and what the consumer pays. If one asks the consumer, he will immediately say, "Well, so be it. We would be prepared to pay 3p, 4p or 5p a litre more if we could maintain the supply". I also noted in the supermarket that a bottle of water, straight from the spring, was £1.40, and it had not gone through an animal in the way that milk does.

I hope that, in his reply, the Minister can answer the critics who are angry because they believe that the Government do not care about milk production in this country. Those critics say to themselves, "It is obvious that they think that if we can import it apparently cheaper, why produce it?".

7.56 p.m.

Lord Grantchester

My Lords, I am grateful to my noble friend Lord Carter for securing this debate. He has always worked to help farmers to undertake business analysis in their operations and he has been a constant exponent of co-operation to secure benefits within agriculture.

I declare an interest as a dairy farmer in Cheshire, a director of Dairy Farmers of Britain, a past president of the Royal Association of British Dairy Farmers, the chairman of the Cheshire branch of the Country Land & Business Association, and a member of the NFU.

Within the broad context of the reform of the common agricultural policy, the announcement made on 12 February of the basis of decoupling support is a very positive step forward. The key point is that subsidy will be removed from production. Farmers must take their signals on what they produce from the market and not from the subsidy attached to that production. Payments are planned to continue until 2012 to allow a transitional period. As those payments are made irrespective of the amount of continuing production, the first point is that analysers and commentators should not recouple the payment into returns when assessing the future profitability of enterprises. The future of farming will depend on what is achieved in the market place, and focus should be put on those aspects. The supply chain must also recognise that agricultural production must secure a profitable return if it is to continue and that suppliers will not always be forthcoming, regardless of prices paid.

My noble friend Lord Carter is correct to point out that conditions are particularly harsh in dairy farming because, by general attribute, dairy farming is land-intensive. The solution to adversity has always been to drive down unit costs through increased production and efficiency. Under the progressive hybrid system, the most efficient will tend to lose out—that is, those most needed to take the industry forward.

Dairy farming is having to shoulder two reforms simultaneously: the change from historical production combined with intervention price cuts, the compensation for which will be shared across all sectors. In addition, contrary to the 1992 agreement establishing payments for arable crops to compensate fully for reductions in support prices, dairy premium will not fully compensate the dairy farmer. Furthermore, dairy farmers' payments will now be modulated. Over the course of intervention price cuts, a 20 per cent price cut on last year's 18.1p per litre average milk price will bring returns to 14.5p a litre. However, unlike on the continent, UK milk producers have already faced a milk price cut of nearly 30 per cent since deregulation in 1995. I understand that modulation in the compensation and single farm payments will be as high as 25 per cent after only three years.

English dairy farmers clearly sense that, among the changes, reduction in support could further weaken milk prices. They perceive that dairy farmers in other regions will have an advantage over them as the generally higher historical payment method will erode on the transition to area payments. In monetary terms that equates to around £216 per hectare on an historical basis coming down to a payment of perhaps £105 per hectare in 2012.

The further peculiarly English effect is that there will be two regions in England for the purpose of calculation of the regional area payment: the severely disadvantaged area (SDA) and the non-SDA area. That split is for entirely sensible reasons. However, there are many historically valid dairy farmers in the SDA areas that will lose out substantially. An industry-wide consensus, including the CLA, NFU, TFA, National Beef Association and the National Sheep Association have proposed a three region solution: first, land above the moorland line; secondly, land between the moorland line and the SDA line and thirdly, the remaining non-SDA land.

Analysis suggests that that would increase the payments in area two; that is, land between moorland and the SDA line, from about £70 per hectare to £120 per hectare, albeit that land above the moorland line will decrease to £30 per hectare. In view of the industry-wide consensus can my noble friend assure the House that this is being actively considered?

Returning to the question of milk prices, can my noble friend indicate whether the Government have changed their assessment of the price cuts agreed in Luxembourg last June? I understand that the milk price cuts are now assessed as far more draconian than were necessary to deal with even the worst predictable consequences of the next WTO agreement or EU enlargement. It should not be forgotten that the GATT Uruguay round, which involved big cuts in export subsidies, required no milk price cut at all.

I now understand that the EU Commission, in its first forecast since the MTR, forecast that EU surpluses will disappear over the next six years and as a result market and milk prices will not fall by the combined phased 22 per cent cut in support prices. Indeed, by 2010 the Commission says that intervention stocks should sell out as consumption is expected to exceed production.

Cheese consumption is also forecast to grow rapidly, especially in the new member states. If those forecasts are correct, there will be big savings in the EU budget costs as well as higher milk prices paid to farmers.

Within the parameters of the changes envisaged, there are still areas in which the industry seeks clarity. Dairy farmers will now need to submit the equivalent of an IACS form and be subject to set-aside on temporary grassland. It is not unusual to have rotations of eight to 10 years. In view of the impact of such designations, can my noble friend help tonight with a definition of "temporary grass"?

I also understand that hill farm allowances presently paid to beef farmers and sheep farmers are to be de-coupled and will change to an area-based system. However, as they are part of the rural development regulation under Pillar 2, they are not part of the SFP. Can my noble friend tell the House whether dairy farmers could reciprocally benefit from those payments being spread over all LFA land?

Post-MTR, when dairy farmers are learning to respond to market signals, they will still be faced with the milk quota regime. Does my noble friend agree that further reforms are necessary to end milk quotas which add cost and constrain development? The single farm payment will be subject to cross-compliance. The stewardship schemes are also under re-assessment. In helping to ameliorate the situation for dairy producers, can my noble friend confirm that agri-environment schemes, both at entry level and the higher level, will be available and relevant to dairy farmers?

The dairy industry has seen a continuing reduction in dairy farmers over many years. There are many actions and opportunities which dairy farmers must identify and seize for their future prosperity. In identifying supply chain issues as part of the problem regarding low milk prices, dairy farmers are now engaging with processors. That is only likely to be effective through co-operative action. Dairy Farmers of Britain, the milk co-operative, along with the other milk co-operatives, are setting new strategies on behalf of their members. Following the continental model, Dairy Farmers of Britain are retaining part of member returns from the market to purchase processing and to add value to their supply.

I ask the Minister whether those retentions, which are presently deemed to be part of a farmer's income and as such assessed for income tax, could be treated more favourably as a further spur to co-operative ventures. In looking to the market, the co-operatives have already ventured into processing thus recreating its presence in the value-added food chain. In addition, they are looking to take out costs and duplication in transport. Is that not where the future of dairy will be secured? The constraints of regulation must be raised to allow prosperity to return.

8.5 p.m.

Lord Hooson

My Lords, it is some years since I ventured to take part in a debate on any agricultural matter. In those days I farmed but I was not a dairy farmer, so I have no interests to declare. However, the absence of the two Front-Bench spokesmen on agriculture make me a reluctant participant on a subject on which I have no expertise; that is, the dairy industry.

This is in the mid-term review of the common agricultural policy which, whatever its defects, was intended to consider the economic, social, cultural, environmental and even political aspects of policy. The noble Lord, Lord Plumb, spoke from his great knowledge of dairy about the possible consequences in his area, and we have to consider all these matters.

When I look back at my experience of the common agricultural policy, I was persuaded of its importance by no less a figure than Helmut Schmidt, when he was Mayor of Hamburg. We happened to be two fellow delegates to a NATO meeting of parliamentarians considering defence. I pulled his leg about having seen two combine harvesters in front of what looked to me like semi-detached houses in a German town. He then took me aside and thought he had to persuade me of the great political and social importance of this policy throughout Europe. The social and political importance of the policy is still great. What is necessary now is an adaptation of that policy to suit the conditions of our day.

I hope that I can put on my Welsh hat now, and point out that the arrangements for Wales are on a different basis to those for England. The arrangements for Wales are on a historical production basis. It is much simpler than the system for England. The Welsh Assembly has made the decisions, and it is without any doubt much fairer to family dairy farmers in Wales. The NFU handout on the arrangements for Wales mentions the introduction of the single farm payment from January 2005; the full decoupling of all existing direct payments; and the Welsh Assembly's decision that dairy premiums will be incorporated from 2005, as well as an additional payment as a top up.

It may be because of the smaller size of Wales, and the greater predominance of smaller family farms, that the Assembly Members are much closer to the needs of the Welsh farming community than, perhaps, the Government here is to the farming community in England. From the information I have about the arrangements in England, it seems that although there are provisions for changes in certain areas, there will be very considerable difficulties in implementing some of them.

The general opinion in Wales is that the system suggested for England will favour large producers and large landowners, rather than the smaller family farmers. It will be difficult to have a scheme for severely disadvantaged area policy in England. It is perhaps too complex. I know it is claimed that it might well have an unfair impact on diary farmers in south west England, the Pennines and Cumbria, and they are nearly all smaller family dairy farmers.

A debate took place in your Lordships' House only last week on a Bill providing for certain powers of the Auditor General for Wales, and the powers he has for co-operating with the Comptroller and Auditor General in England on border matters. It seems that one of the problems to arise will be that it might be better for some farmers to have two farms, one in England and one in Wales—or even on the border—and see which system they can use, or whether they can use both systems to their full advantage. I made some soundings earlier, regarding the provisions in that Bill for the Auditor General to intervene on some of these cross-border matters, and whether he would have the power to intervene if we had a different policy in Wales from that which obtains in England when there are farmers on either side of the border. It raises a very interesting point.

I am very pleased that the noble Lord, Lord Carter—who has such a great interest in agriculture and has been one of its great defenders over the years in your Lordships' House—has raised this problem today. Although I am inadequate to deal with the details of dairy farming—a couple of my colleagues would have been in a much better position to do so—it is necessary to look at the general review of the common agricultural policy in the light of the economic, social, cultural and environmental aspects of the whole of Europe as they are today. We have inherited a policy that was intended, largely, to keep communism at hay. It was done in a marvellous way, and when the history of this period is looked at in perspective, one will see what the enormous benefit of the common agricultural policy was in keeping so much of the population of Italy, France and West Germany in the countryside and not flowing straight into the cities. But there needs now to be fresh scrutiny of the entire policy, with a view to ensuring that it is right for the conditions of our day. It may be that, on the dairy aspects, the Welsh Assembly has pointed the way that England might follow.

8.14 p.m.

Lord Dixon-Smith

My Lords, I am grateful to the noble Lord, Lord Carter, for introducing the debate.

I am not a dairyman. I parted company with cows because they needed midwives at two o'clock in the morning. But my brother has always been a dairyman. If we are in the presidential stakes, he was president of the Friesian Cattle Society, later the Holstein Friesian Society. He knows the business very well. His opinion is that the industry is now in crisis.

The Minister of course is on familiar territory. He is entirely used to dealing with people who are dependent on public funding because of his background in local government. He knows the problems of redistributing government moneys around an industry—in this case of course I refer to local government—and he knows that every time you redistribute the funding, which happens on an annual basis and occasionally the formula is adjusted, it causes huge problems. So, it is unsurprising that the mid-term review, which decouples agricultural support from production, causes problems.

A sentiment that has not been brought into this debate, which I think needs to come into it, is what I would call the indirect but very likely possible effect of this decoupling. If the payment relates to the farm and to the land and not to production, then, for sure, if market conditions, which are the driver of production, are not encouraging, it is likely to cease. The payments of course will continue and may well keep the farmer. He may keep his farm looking pristine and beautiful, but it could produce nothing. A thought that needs to be taken very seriously in this country is what will happen as agricultural production begins to drop. The market may be increasing in volume, but conditions are such that farmers may well find it more attractive to go out of production. The CAP will support them to do that because the payments are decoupled. That is the first awkward thought.

I spoke to my brother this afternoon and asked him what was happening in the dairy industry. He said that in England at the present time you could not sell cows quickly enough. My noble friend Lord Plumb has borne that out by his remarks. He is absolutely right. So I then said to my brother, "What is happening to the quota of dairy farmers who are stopping production?" He said, "Oh, it has been bought by farmers in Wales and Scotland". That may be a perverse effect but it is an observation by a practical dairyman of what is happening in the dairy industry. That does not bode very well for the future.

There is no easy answer to the situation. Milk has not been profitable in market terms for some time. Farmers can read what I might call "the market signals". The fact is that if you produce milk this week, now that we are past 5 April, you can go out of production at any time. You can get the interim payments and you will then be eligible for the single farm payments in three years' time or whenever they come in in England. Because of other factors those farmers do not feel encouraged. They do not think they are getting the necessary backing in biosecurity, particularly in relation to problems such as tuberculosis. They are stopping production in England. I do not know the answer to this; the Minister might. At the present time agriculture is heading into a considerable depression. I am not optimistic for its future.

The same could happen to the arable sector if market prices for main commodities go down. Of course those who can produce specialist crops, market garden crops and fruit will continue. But general farming will also be vulnerable if we see prices receding to the levels of two years ago. That of course has nothing to do with the question raised by the noble Lord, but it is a picture of the industry. The Minister will I hope be able to prove that I am wrong, but the empirical evidence suggests that hard times will get worse from a production point of view if not necessarily in terms of the appearance of the countryside.

8.20 p.m.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Whitty)

My Lords, I thank my noble friend Lord Carter for initiating this debate. Clearly, when the agreement on reform of the agricultural policy was made in Luxembourg in June, it was a radical change. It moved European farming away from a system of production subsidies, which tended to maximise production irrespective of quality, to one based on support for land management and farming, if land is kept in good agricultural condition.

Different member states and different parts of the United Kingdom have taken different decisions on how to interpret that single farm payment. The central strategic change is that we are no longer subsidising production. We are, however, continuing to support agriculture as a whole, and we are encouraging farmers, over a lengthy transitional period, to face up to the real market conditions rather than to chase the subsidy. That is an important change in agricultural policy, and one which, by and large, this House has supported. The economists, by and large, support it when looking at UK agriculture compared with EU agriculture as a whole. Their estimate is that UK agriculture will benefit; there will be more income to agriculture at the end of this process, in that, across all sectors, farm incomes are likely to increase by 3 to 5 per cent.

However, we are talking about the dairy sector, which in some parts is quite intensive compared with the land on which it operates. Initially, it would not benefit from this change as much as other parts of agriculture, but it would benefit from the general change of condition whereby we are not chasing subsidies and are not dependent on EU fixed prices, but we are moving to a freer market in agricultural produce. One of the problems—my noble friend Lord Carter made this point—is that there is a double whammy in relation to dairy, because dairy's reform is at a later stage than the reform of most other mainstream products covered by the mid-term review and the outcome in Luxembourg.

That means that the switch into direct payments for dairy, which will then be subsumed and taken over by the single farm payment, is happening at the same time to dairy, whereas it happened in sequence to, for example, arable farming and most other parts of the livestock sector. That presents a particular problem for dairy, because in England we have chosen to move to an area-based payment, which must be beneficial in terms of environmental outcome, agricultural land management and a level playing field between different land uses. Farmers can genuinely make up their minds on the basis of the market, rather than on the basis of past support systems, but it means that dairy as a whole will lose its proportion of the total subsidy by about 9 per cent.

It is not true, however, that that will necessarily accelerate the number of people going out of dairy farming. There has been a long-run, fairly rapid retreat from dairy farming. The reduction in the number of farmers over the past two or three decades has been fairly rapid. The effect on milk production and on numbers in the milking herd has been much less marked. Indeed, production has largely kept up, through the merger of herds and the creation of larger farms. The noble Lord, Lord Dixon-Smith, shakes his head, but, by and large, production has kept up. Whether it should have done so, given profitability levels, is another matter.

We have a perverse intervention from the EU relating to quotas. The quotas that are supposed to control the level of market production have probably acted to increase it to beyond the level at which it is profitable for dairy farmers. That appears to be the case in the UK. We do not believe that the effect of the changes will be to greatly accelerate the rate at which dairy farmers are leaving the industry, nor that they will significantly reduce the total volume. But there will be a further rationalisation of the industry.

If we were to look solely at the support that applies to the dairy sector, we could argue that the net effect is to support smaller producers. Over this period, larger producers take the biggest hits, while smaller, family-based dairies receive increased support as a result of the reforms. That puts a brake on what would otherwise be a more rapid intensification and consolidation within the dairy sector.

The noble Lord, Lord Plumb—along with other noble Lords—said that people are selling their herds and closing down their businesses. If the subsidy is de-coupled, people will look to the market. The market is big enough to maintain a level of production that is not very different, but there will be fewer producers. That has been the lesson of the past few decades. That situation will intensify to a limited degree. There will be a redistribution within the dairy industry, but there is a brake on the degree to which that consolidation will take place.

My noble friend Lord Carter referred to the Colman and Harvey study, which estimates that the number of dairy farmers will fall to 15,000, but that the level of milk production will be largely maintained. That is not a much more rapid reduction than has taken place over the past few decades.

In response to the question asked by my noble friend Lord Carter and other noble Lords, we have a further decision to make on the issues of the SDA. If the whole of England had been shifted from an historic payment— which we did not believe was the best way for English agriculture to proceed—to an area payment, there would have been a marked redistribution "up the hill".

We therefore divided England into two areas, the SDA and the rest of the country. Inevitably, there were winners and losers in that process. While the main losers are probably in the beef sector, some dairy farmers will also lose from the line that was drawn around the SDA.

There is one proposal that we should move to the moorland area, and another—which now has wide consensus in the industry—that we should move to a three-tier system, with loan basis, non-moorland SDA and moorland SDA levels.

While the three-tier system has widespread support in the industry, there are difficulties with it. It will not solve all the problems. Some dairy and beef farmers who are further up the hill will receive less than their neighbours, and in some cases, where the moorland and SDA boundaries are roughly the same it will not resolve the situation. Indeed, some people could be worse off. Wherever the line is drawn, there are bound to be winners and losers.

The Government intend to make a decision on this matter shortly, but it will not necessarily please everybody. However, we will take fully into account the current pan- industry consensus and the issues presented to us by the dairy sector and others.

My noble friends Lord Carter and Lord Grantchester also raised the issue of the hill fann allowance. This is paid in relation to a somewhat different area; it comes to an end in its present form at the end of 2006, when it will need to be reviewed. It is a pillar 2 payment rather than a pillar 1 payment, for those of your Lordships who understand these matters, and therefore cannot be wrapped up into the single farm payment. This is something that the Government will have to address. At present, the hill farm payment is not available to dairy farmers but we will have to consider where it should apply with regard to dairy farmers within whatever area is designated.

Cross-compliance is the new condition for receiving a subsidy, requiring farmers to operate the land on a good agricultural and environmental basis. That applies to dairy farmers, as it will to all other farmers. It creates a level playing field. It is a relatively limited requirement—we are out to consultation on the exact requirements—and will be enforced with a relatively light touch. However, it sets a standard for all farmers, including dairy farmers. I do not think that dairy farmers should particularly resent that proposal.

Much has been made of the movement between England, Scotland and Wales. Scotland and Wales have decided largely to maintain the payments to existing farmers, sector by sector, on a historic basis. Some cattle and dairy farmers in Scotland will receive what they have had previously, whereas in England they will be moving gradually away from that to an area payment. In the first few years, the difference will not be significant, but it will become significant as we go over the eight-year period.

If people are taking decisions on a switch of quotas to Scotland and Wales—the market is a UK market, and no doubt some moves arc being made—our information is that the movement is not yet very significant. Even if it were, that is a rather short-term view taken by those who require those quotas. After all, any sale of quotas requires both a buyer and a seller. The value of those quotas will diminish over time. In my view, not long into the period of transition in England, Scotland and Wales will recognise that the historic payments system may not be appropriate in continuing to pay farmers for what they were doing in 2002 when we approach 2010 and 2012. We are taking the longer view that it should benefit not only agriculture as a whole but also the dairy sector.

My noble friend Lord Carter addressed other structural problems within the dairy sector, as did my noble friend Lord Grantchester. This is the nub of the problem. Whereas much of industry and some of agriculture have grasped the problem of the chain, it seems that the combination of the effect of the quota system being maintained in the dairy sector for longer than other periods and a hostility between the various factions within the dairy chain has led to a lack of progress on the rationalisation and restructuring of the dairy sector. Some of this is often put down to the fear of the attitude of the competition authorities, to which my noble friends Lord Carter and Lord Grantchester both referred.

The reality is that the OFT and the competition authorities define a market; in relation to other jurisdictions within Europe they also define a market. In the development of a market, there is cross-border trade in liquid milk in other parts of the EU. There is virtually no cross-border trade in relation to liquid milk in our market. Therefore, the trigger for an investigation tends to be in the UK market. But the issue is not whether you cross the threshold where the OFT and the competition authorities are interested—it is what any restructuring or merger would mean in terms of abuse of a market position. If the OFT is satisfied that, irrespective of the market share, it is beneficial to move to that restructuring, it will accept it. A number of different changes in the market structure, both horizontal and vertical, have been approved by the OFT in recent years and it will continue to do so.

There are, however, deep structural problems in the dairy sector. As the Minister involved, I am attempting to address some of them through the Dairy Chain Supply Forum. It is important, however, that those within the industry itself talk to each other and address those problems in a way that will deliver a better price for the original producer and more stable relationships within the dairy chain. That problem is not a matter of the common agricultural policy and it is not a problem essentially for the Government, although they stand by to facilitate solutions. It is a problem for the industry itself to address.

Lord Carter

My Lords, perhaps the Minister will write to me and all those who took part in the debate to answer my questions about the timing of regulations and payment.