Dairy Industry

HC Deb 28 October 2003 vol 412 cc33-57WH

2 pm

Mr. Peter Duncan (Galloway and Upper Nithsdale)

It is a pleasure to see such a good turnout from both sides of the House for this debate, which comes at a very appropriate moment for the industry. I am delighted to have secured it.

I was interested recently to see the controversial moment that boosted the ratings of "Coronation Street", when Sarah asked in the corner shop, "Is it really 37p a pint?" for the milk that she was collecting. That pays tribute, perhaps, to the sentiment felt widely across the UK that this is an industry whose value has been hidden for too long. The UK pinta has a special place in Great Britain.

Obviously, dairy is a 24/7 industry. When I visit my constituents on the farm, or when they visit my surgeries, I recognise that it is not a job or a business that can be done part-time, or that can be undertaken for two or three days a week. It is a full-time commitment and the industry has experienced a rigorous decline in recent years. In Scotland, 50 years ago, there were five herds for every one that remains. Galloway's prosperity was built on the industry and many constituencies represented in this Chamber today have witnessed a similar decline in prosperity, in direct proportion to the number of herds in the industry.

As I was discussing before the debate, the average age of a dairy farmer is now 59 and I hope that my constituents will not mind my pointing out that, when one is speaking to members of the industry, it seems higher. It is an old industry, and there is little prospect of the Government taking action to return it to its historic prosperity.

Mr. Hilton Dawson (Lancaster and Wyre)

I am grateful to the hon. Gentleman and share all his concerns for the future of the industry, but is not this an issue less about Government action and more about the attitudes of the large supermarkets and dairy companies, which seem to be driving my constituents—and hisߞinto oblivion?

Mr. Duncan

The hon. Gentleman is right. It has to do with the balance of market power and I shall discuss that shortly. That is the issue raised most often by my constituents. It is the balance between retailers, processors and producers that seems so out of kilter and that is putting a brake on the industry.

Mr. Paul Tyler (North Cornwall)

The hon. Gentleman does not have the benefit of the Western Morning News, the regional newspaper for our part of the country. Perhaps I could draw his attention to an extremely useful diagram. It shows that the average shop price of a litre of milk is 42p, but the farmer gets only 18.3p—their costs on average are 20p, processing costs are 11p, supermarket handling and cold storage are 2p, and the supermarket profit on that figure is 10.7p. Would the hon. Gentleman agree that that is disastrous?

Mr. Duncan

I certainly acknowledge the clarity of the Western Morning News on this issue. The hon. Gentleman will want to retain his historic good terms with that local media, but I would like to progress by suggesting some direct measures that the Government could take to ease some of the industry's pains.

The president of the National Farmers Union Scotland, John Kinnaird, recently met Dairy Crest's chief executive, Drummond Hall. Mr. Kinnaird said: No-one begrudge: Dairy Crest making a profit, it is key to any successful business. However, our members cannot accept processors and retailers increasing their margins at the same time as producer prices fall through the floor. The major retailers have committed to pay more for cheese on top of earlier commitments on licpid milk. At the very least, Dairy Crest should commit to passing that increase back to producers in full. That is the essence of the price problem: however much is promised at the retailer end, very little gets back to the farm gate.

Mr. David Drew (Stroud)

Price is at the root of the issue, but there is another factor, to which the hon. Gentleman alluded at the start. This is a declining market, and one reason why we need to restructure it is so that all sectors can pull together to try to return it to a state in which the demand for milk is increasing, which would make many other things fall into place. Does he agree?

Mr. Duncan

I do not necessarily agree if the hon. Gentleman is suggesting that milk is a terminally ill industry. I see dynamic things happening in the dairy sector. In recent years, consumption has stabilised and all the evidence is that that situation could continue. I was pleased to be asked to open a new production hall recently by my local processor, Express Dairies. That is exactly the type of innovation that can show the way forward in the industry. It is taking the Nesquik brand into liquid milk. That is a significant investment, securing local jobs in Kirkcudbright, so I am delighted to welcome it. I do not share the hon. Gentleman's pessimism that the. UK dairy industry is in terminal decline. It is rescuable, and if nothing else I hope that this debate provides an opportunity for hon. Members to point the way forward.

Mr. Adrian Flook (Taunton)

As we see if we compare 2003 with 1997, we are still not being helped as a nation, particularly in Somerset, Devon and, no doubt, south-west Scotland, because the Government have in effect undermined the dairy industry by forcing us to import a lot of milk. That was not the case before 1997.

Mr. Duncan

Yes, importing milk causes particular resentment in the industry. There is a paradox, though, to link that to the price debate. The 10 per cent. appreciation of the euro in recent years has not fed through into prices at the farm gate. It is a particularly strange market when that does not happen.

The supermarkets obviously have structural control over the retailing side of the industry. They sell milk cheaply and have done so for many years. The challenge, then, is.. to achieve two things: first, the consumer pays a fair price for milk and, secondly, a fair proportion of that fair price is transferred back to the farm gate.

The UK industry has proved to be very efficient. The yield has risen by almost 1.5 per cent. every year since 1987. That has happened through innovation and the commercial nous of the industry with its breeding, feeding and management systems. Those real commercial gains have been achieved through the hard endeavours of people at the coal face, but the return has been precious little.

The net farm income figures have recently shown a return to the dark days of a couple of years ago. Farm incomes are now at a third of their 1995–96 level. The industry has to tackle those price problems. They are the background to the understandable protests by Farmers For Action and others whereby farmers have sought to take their legitimate complaint to the processing and retailing sectors.

Some strong rural areas of the UK are represented on the Back Benches today. The UK countryside owes a great debt to the dairy industry. l understand that 230,000 farm holdings is the UK total. Unfortunately, the number of registered dairy production holdings in the UK has fallen from 35,000 to 25,000 in recent years. That trend affects all rural communities in the UK and the Government must take it very seriously. In my constituency, there has been a significant decline in the number of farmers, and a trend away from the small family farm.

I am anxious that rural communities should continue. They suffer most when 1he smallest farm units prove unsustainable and they are anxious that the common agricultural policy reforms will put a brake on small farms.

Miss Julie Kirkbride (Bromsgrove)

I congratulate my hon. Friend on securing the debate, which has created much interest in my constituency where there are strong feelings on the issue. He will be pointing out the relative strength of the supermarkets and the prices that they fix for farmers. We should also consider Ministers' inaction following the problems of the foot and mouth crisis, which decimated rural communities, especially the small family farmers that he mentioned.

Mr. Duncan

My hon. Friend is right to draw attention to concerns about an outbreak of these diseases. My constituency was badly affected by the foot and mouth outbreak in 2001 and people are worried that that may be repeated. It is an uncertainty that is holding back the industry. I am worried that there may be a repeat of the foot and mouth outbreak and that the potential problems of tuberculosis, which have blighted the industry in many constituencies, may spread to my constituency.

The farmers in my constituency raise reform of the common agricultural policy with me as often as they mention prices. At a recent National Farmers Union meeting in Kirkcudbright, there was a wide-ranging discussion on the complex issues that affect the dairy industry, which is bearing the brunt of uncertainty about a negotiated settlement of the CAP reform package. There was particular concern about the prospect of decoupling, which was sold to the industry on the basis of a substantial reduction in red tape and form filling. At the early stages of CAP reform, that was, understandably, an enticing prospect for farmers. However, given the practicalities of modulation and ensuring that farms are linked to environmental schemes, the prospect of reducing the burden of red tape appears to be disappearing over the horizon. Farmers are worried that decoupling is no more than a smokescreen that will involve a reduction in their incomes.

Modulation is a prospect that often seems to mitigate worst against the UK, especially in rural areas. In the past, modulation has meant income evaporating from my constituency to elsewhere in Scotland and Europe. There is great concern that modulation and its expansion in the CAP reform package will continue that trend.

Mr. David Kidney (Stafford)

Conservative Members often demand reform of the common agricultural policy. Is the hon. Gentleman advocating that we do not take the opportunity of earlier decoupling than everyone else?

Mr. Duncan

The hon. Gentleman is mistaken. I was not advocating that, but I do want us to take a close look at exactly what we are getting involved in. The industry was sold decoupling on the basis that it would remove the vast swathes of red tape and bureaucracy that have built up over many years and replace it with a simple system. What started to emerge was a removal of many of the schemes, but in terms of the modulation of red tape, they are being replaced by a new form of bureaucracy that has the potential to be even greater than that which it purports to replace.

The industry is concerned about the effect of CAP reform on farm incomes. Early estimates of the probable effect of the package suggest lower profits for dairy farmers, although many uncertainties remain. Estimates by Richard King of Andersons suggest that, as the new dairy premium arrives on farms, a 150-cow herd producing 1 million litres of milk might see an initial income gain of about £6,000 in 2004, which will be very welcome. However, from 2007 the price cuts agreed under the reforms will start to bite and compensation will decline as modulation rates increase and the EU exerts further financial discipline. That uncertainty in the longer term is proving to be a significant worry for all family businesses involved in the dairy sector.

I am particularly conscious of how technologically advanced the industry has become: even the smallest farmers in my constituency are no longer the cottage industry that they once were. They are high-tech, high-capital investment businesses that require certainty. That lack of certainty is proving to be the biggest burden that those businesses must overcome in very short order, before the business evaporates before their very eyes.

Ann Winterton (Congleton)

This morning, I took the wife of a local dairy farmer round the House. She told me that they have to consider an investment of either £18,000 to lease milk quota, or £50,000 to buy it, at a time when they do not know what the value of the quota will be. I am sure that my hon. Friend realises what a tremendous problem that is for dairy farmers, if they are to try to survive at this particularly difficult time. Does he believe that part of the problem is the milk quota system, which was introduced in 1984 and had an adverse effect on the UK compared with other European milk producers?

Mr. Duncan

I agree with much of what my hon. Friend says. She is right to point to the financial commitment that quotas require small businesses to make and to the fact that the capital in a business is often not only the fixed capital but a substantial investment in quotas. Families and local communities are greatly concerned about how the industry will move from that system to a system without quotas.

Given that margins are so incredibly tight in the dairy sector, I am particularly worried when I hear reports that dairy businesses in my constituency are seeking to expand their way into margin and profit. It is a risky strategy for those businesses to double their production because their margins have been halved. Although I am delighted to see any investment in the industry, I am concerned that the environment in the industry is so uncertain that businesses feel that such drastic measures are necessary to secure a fair return on their investment and work load.

I shall conclude by proposing some things that the Government could do to pave the way for a return to prosperity for the dairy industry, although I accept that there is much that is not within the gift of the Government. I know from experience that the Minister for Rural Affairs and Local Environmental Quality is a talented man, but he does not have a golden hand in much of this. However, the Government can make a difference in a number of significant areas—although those do not all fall within the remit of the Department for Environment, Food and Rural Affairs—and I wish to draw the Minister's attention to them.

In particular, the formation of farmers' co-operatives is an important way in which the businesses in my constituency could start to make money again. The potential for the competition rules in the UK to interfere with that natural development must be examined carefully. Can the Minister tell me what position his colleagues in the Department of Trade and Industry adopt on that matter?

Mr. John Burnett (Torridge and West Devon)

As the hon. Gentleman will recall, the Competition Commission exonerated the dairy retailers some years ago. Does he not agree that one successful retailer with 20 per cent. of the retail convenience food market can almost impose conditions that others have to follow?

Mr. Duncan

The hon. Gentleman may be correct. However, my concern is that, if farmers want to get involved in small co-operatives, which I see as a key to breaking out of the cycle of decline, they are potentially prevented from doing so by the rigour of the Competition Commission.

The Minister for Rural Affairs and Local Environmental Quality (Alun Michael)

The hon. Gentleman is making a serious and important point. In the dairy sector there is understandably a fear, particularly following the break-up of Milk Marque, that there is a bias against co-operation. That is based on a fundamental misunderstanding of the reasons why the Monopolies and Mergers Commission found against Milk Marque. The commission's adverse finding in that case was made not because Milk Marque had a monopoly position, but because it abused that monopoly position through its selling system. Events since then have shown that the competition authorities are willing to allow the creation of large dairy co-operatives and processors, as demonstrated by the creation of First Milk and Dairy Farmers of Britain.

I am grateful to the hon. Gentleman for giving me the opportunity to point that out, as he was talking about the industry's confidence in being able to proceed with such an approach.

Mr. Duncan

I am grateful for the Minister's observations. That is another area of great uncertainty in the industry, and uncertainty is proving to be a barrier to progress.

There are two further areas in which the Government could make a difference, the first being labelling. Labelling of all agricultural products is a major disincentive to developing the UK, Scottish and Galloway brands that command respect and a premium price. The UK rules on labelling are an appalling abomination. We are doing our industry no credit and must do more to give it an incentive to build up local brands. For the dairy industry, the branding of non-UK milk as being from the UK sticks in the throat.

Will the Minister ask his colleagues at the Department of Trade and Industry to reconsider market power and in particular the supermarkets' voluntary code of conduct?

Mr. Russell Brown (Dumfries)

I wholly agree that the industry has serious problems, for example the issues of additional yield and good husbandry throughout the country on many farms. However, the hon. Gentleman has not mentioned the economic aspect and supply and demand. Does he agree that, despite the fact that we have not delivered a full quota in recent years, there is still over-supply in the marketplace? As long as that is the case, supermarkets can clearly beat prices down at the farm gate.

Mr. Duncan

There is also a failure to develop potential milk products and a serial failure to develop specialist products in the dairy industry, which could drive returns into the industry and the farm gate.

The Minister has the opportunity to re-evaluate the supermarkets' code of conduct. It was a voluntary scheme and I understand that the offer of that scheme was gratefully accepted by the industry at the time. There is great scepticism that it is not working as it should and I ask the Minister to implore his colleagues at the Department of Trade and Industry to seek the Office of Fair Trading's involvement in monitoring that agreement. There is considerable concern in the dairy industry that it is being forgotten about again, and that the prosperity of past years will not be repeated unless urgent action is taken and a fair price given for a fair product.

2.23 pm

David Taylor (North-West Leicestershire)

I congratulate the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan) on initiating the debate. This is a crucial stage in the life of the dairy industry, and I am pleased to contribute briefly. I am particularly pleased to see so many Conservative Members at a time when they have their own deep trauma.

In its briefing for the debate, the National Farmers Union points out that the key issues on which we should focus are milk prices and bovine TB. Unless and until dairy farmers get a fair return, they will continue to contract in number. Until bovine TB is controlled, more and more farmers will be forced to leave an industry that has become enfeebled in less than a decade.

I shall focus initially on milk prices. As the hon. Gentleman said in his admirably measured introduction to the debate, the dairy industry is in a dire state. Processors and supermarkets take an ever higher proportion of the retail price, leaving farmers with continuing and growing losses. Clearly, that cannot continue. With prices at 18p a litre at the farm gate and a production cost of about 20p a litre, a typical 1 million litre per annum dairy farm is losing £20,000. With milk production nationally standing at about 14 billion litres, that is equivalent to 14,000 farms with hundreds of millions of pounds in losses, which is not sustainable.

Is it not the case that a higher proportion of the delivered milk price—to the doorstep or the chiller cabinet—has to be paid to the farmer? That has been true for 50 years. In 1945, the then Ministry of Information—I do not believe that it was located in Millbank—talked about the least pleasant aspects of farming: In winter, you are up long before sunrise. In calving time you are often up all night. You milk twice a day, dawn and afternoon. You have to wash down each animal, feed it, milk it, clean down the shed, clean yourself and ensure the purity of the milk, over and over again, day after day. Apart from the major efficiencies of mechanisation, 58 years on, one is tempted to say that little has changed. Farmers milk the cows and everyone else milks the farmers.

Mr. Dawson

On that point, does my hon. Friend agree that UK farmers could assist themselves by embracing fully the concept of fair trade and recognising that they are in exactly the same powerless position as producers in developing countries in relation to the power exerted over them by large companies? Is it not time that we had a fair trade campa gn for quality UK produce?

David Taylor

There is an awful lot in what my hon. Friend says. A proportion of World Trade Organisation discussions and negotiations revolved around that very issue, so there is some potential in what he says. The situation is not fair. The proportion of the delivered price retained by the farmer is not sustainable, and it is unfair. The work involved in producing milk is immense compared with that involved in selling the product. Farmers have to have high standards of welfare for livestock and full traceability, and adhere strictly to the dairy farm assurance scheme. They have to care for the land, with all the environmental aspects that that entails.

Almost the first thing that the hon. Member for Galloway and Upper Nithsdale said was that the job is 24/7, and it is. Dairy farmers are dealing with living creatures and when they are not working with cows, they are usually thinking about them and are concerned about their welfare. Although new Labour is said to be reluctant to intervene in markets, like its predecessor, it has to when markets are failing as seriously as this one is.

Early-day motion 1803 is garnering a substantial number of signatures from throughout the House. It was tabled by my my hon. Friend the Member for Ynys Mon (Albert Owen) and amended by the hon. Member for Ceredigion (Mr. Thomas). I encourage hon. Members in the Chamber and those who may read the debate to consider that motion carefully. It points out that the Government must be an honest broker in bringing together powerful dairies and multiple retailers to enter into a full and proper dialogue with dairy farmers and their representatives. Unless they get larger returns and a surplus, dairy farmers will never be able to reinvest in the industry and it will continue to decline in the way the hon. Member for Galloway and Upper Nithsdale described.

Like many other rural areas, North-West Leicestershire is seeing dairy herds decline. One of the most shocking closures in the past few weeks was referred to by another farmer in a letter to me just two days ago who wrote: As you may be aware John and Pat Stanley sold their entire dairy herd this week. It was a shock to all of us in the industry because they were considered one of the most efficient high production herds in the country, and they enjoyed what they did. It is a sad reflection on the industry when families like that have to give up milking. The animals which were all outstanding went for very little money, as buyers have little confidence in the future of dairy farming. The farmer is absolutely right. A family with a high reputation has left the dairy industry, so things must be seriously wrong.

I speak to the local National Farmers Union regularly and, prior to this debate, I contacted and received comments from people such as John Adkin of Belton, Clive Spalton of Isley Walton and Chris Timmis of Swannington. The mood is profoundly pessimistic. I shall cite one further quote: It is of grave concern to us that we have suffered a very depressed milk price over the last three years. This we cannot absorb any longer. We are a long established mixed family run farm and our main source of income…is from milk sales. We have slashed out costs to the bare minimum, the effects of this are that there is still no surplus cash to reinvest or even maintain the farm and buildings that are required. Effectively we are producing milk at below the cost of production". That is a depressing state to get into.

We have been in this situation before. Those who are running family farms and who are the second or third generation will be able to reflect on the farm records, which show that there was a similar period in the 1930s, when low and volatile milk prices effectively brought about the creation of the milk marketing boards, which saved the milk industry when it was on its knees. The boards created some stability in farm-gate prices. The days of the milk marketing boards ended in 1994, after legislation from the Conservative Government. One of the successes of that scheme, which died with it, was ensuring that farmers, processors and retailers took a fair slice of income from the production of milk.

How on earth have we arrived at the present commercial chaos in less than a decade since the end of the old milk marketing boards? I ought to declare that my wife worked for the milk marketing board for some time. We need a proper regulatory board to handle the present three-way negotiation between farmers, processors and retailers, because the negotiation is unequal. The farmers are not collected together in groups that can exercise the leverage that they ought to be able to exercise as an industry.

Mr. Tyler

The hon. Gentleman is making a valid point. However, I was on the Committee that dealt with the Bill relating to the milk marketing boards and I wonder whether he recalls that his colleagues on that Committee joined with the Conservative Government to destroy that system.

David Taylor

I was not aware of that and I am sorry to hear it. I shall look at the names of those people and see whether they have recanted. It is a serious point.

Mr. Eric Martlew (Carlisle)

My recollection is slightly different. I do not think that that was the case at all.

David Taylor

Some interesting research in the Library this evening will show whose memory is more accurate.

I believe that there is a way back. Many people want to speak so I will confine my remarks to a further two minutes. My way back is through a co-operative of some kind, or groups of co-operatives. The Minister said that the Government have not looked unfavourably on the development of a number of co-operatives that have emerged in the post-Milk Marque era. Well, that is fine, but co-operatives in the dairy industry in the European Union achieve much more than co-operatives have been able to in this country. Co-operatives are biased towards making commodity products. They make value-added products, set a floor on the milk price and require public and private retailers to pay a reasonable price to obtain milk at the farm gate.

I hope that the farming industry, dairy farms in particular, will not base its action too much on a few disappointing co-operative failures. [Interruption.] The failure of the Amelca co-operative in west Derbyshire, to which the hon. Member for West Derbyshire (Mr. McLoughlin) was about to refer, was a failure not of co-operative principles, but of the business plan, and it was created at a time of difficulty in the industry.

I hope that there will be a way back for the dairy industry through the formation of co-operatives, and that the Government will play their part. The industry needs more stable milk prices, a higher floor price and greater security for dairy farmers. All producers need better prices. There is no single villain in the piece, but I hope and expect that in the last two years of this second-term Labour Government we can help to turn around the dairy industry, which is looking over the edge of a precipice. Many hon. Members who represent rural seats are fearful of what the future may hold.

Several hon Members

rose—

Mr. Deputy Speaker (Mr. Edward O'Hara)

Order. Hon. Members may wish to note that we have just 24 minutes until the Front-Bench responses must start at 3 o'clock.

2.36 pm

Mr. Patrick McLoughlin (West Derbyshire)

I am grateful to be called to speak in this debate because, as the hon. Member for North-West Leicestershire (David Taylor) pointed out, the fact that early-day motion 1803 is already gaining signatures from hon. Members of all parties shows the very real concern that is felt about this issue throughout the House. I congratulate my hon. Friend the Member for Galloway and Upper Nithsdale (Mr. Duncan) on initiating the debate. The dairy industry will be listening to it and to what the Minister has to say at the end.

The dairy industry is vital to the physical and economic health of the nation. The simple fact is that prices must improve or it will disappear. As the largest single agricultural sector, the dairy industry provides jobs for tens of thousands of people. It contributes 22 per cent. of the value of agricultural production. The UK dairy industry provides 95 per cent. of the dairy products that form an essential part of our diet. The 30,000-plus dairy farmers in the UK help to maintain and protect our countryside and there is no doubt that the countryside feels under threat from this Government.

By taking for granted the availability of milk and the vital role that it plays in our diets, we could be contributing to the demise of the industry. More than 10 billion pints of milk are sold in this country every year, providing a mixture of vitamins and calcium—which are essential for good health—that few other foods can rival. The industry is vital for the health of not only our nation but our children. The Government are complacent and I hope that the campaign that is being launched forces them to take action.

Six years of poor prices have forced the milk-producing industry to contract alarmingly. Since 1997, farm-gate prices have steadily dropped. They are now more than 5p per litre less than in 1997, despite the fact that retail prices have remained relatively steady. Low prices are forcing farmers out of business. In England alone, there are 5,000 fewer dairy farmers than in 1995. In south and west Derbyshire, there are only 574 dairy holdings, compared with more than 700 in 1995. Year after year, the number of dairy farmers is being reduced. How long will we let that continue?

There is no good explanation for why farm-gate prices for liquid milk are so low. Prices should have moved in the dairy farmer's favour in the past nine months. The pound has weakened against the euro, world commodity prices for butter and cheese have strengthened and Britain maintains a strong market for fresh milk. Indeed. the large supermarkets agreed to raise by 2p per litre the price paid to the dairy processor with the undertaking that that would be passed back to the producer. Yet prices remain among the lowest in the EU because most processors are passing back less than 1p. Farmers are now receiving only 39 per cent. of the price that consumers pay for milk. In 1996–97—I do not know quite why I have those figures—they were receiving 58 per cent. People should reflect on that.

David Taylor

rose—

Mr. McLoughlin

If the hon. Gentleman does not mind, he spoke for 13 minutes and a lot of people want to contribute.

There continues to be unwillingness by some to ensure that profits are shared throughout the industry. The futures of remaining farms are undermined by the lack of investment and the general exodus from the industry. Many dairy producers simply cannot see a way to continue, and the Department for Environment, Food and Rural Affairs continues to predict a decline in net income. I wish that the Department would take its responsibility to agriculture a little more seriously. Agriculture seems to be what it cares about least; it is amazing that it does not even appear in the Department's title.

Mr. Stephen O'Brien (Eddisbury)

My hon. Friend is developing powerful arguments, not least with the staggering price difference that he quoted. Is he aware that another major factor now rest restraining investment and confidence in the industry is the great threat of the ever-expanding bovine TB problem and the appalling delay that it causes?

Mr. McLoughlin

Indeed. That is a big issue in Cheshire, as it is in Derbyshire. I had an answer from the Under-Secretary of State for Environment, Food and Rural Affairs, the hon. Member for Exeter z(Mr. Bradshaw), on the rise in TB cases in my area of Derbyshire, and the figure was staggering. The fear that that causes for farmers is yet another burden for the industry.

With prices so low, farms are being starved of cash for future investment, as my hon. Friend the Member for Galloway and Upper Nithsdale said.

Mr. Flook

Does my hon. Friend agree that an extra cost will be that of implementing nitrate-vulnerable zones?

Mr. McLoughlin

Yes. That is another regulation, another demand, another thing for farmers to spend time on among so much else.

Few young people are interested in entering the industry when the average income of a dairy farmer is only £2.90 per hour for a 70-hour week. There is no minimum wage for the dairy farmer because he simply has to work longer and harder to achieve his return. Many farmers with experience are considering leaving. If the industry collapsed, that would have major ramifications for the whole United Kingdom. Dairy farming is the single largest agricultural sector in the UK and the industry accounts for 22 per cent. in value of agricultural production. Its destruction would see considerable increases in imports and the loss of significant exports. Tens of thousands of jobs in the supply and support industries that rely on the cow would be at risk. If dairy farming is to continue, larger returns must be passed back to enable reinvestment. The average price to a milk producer is 17p per litre, but the average cost of production is estimated to be more than 20p per litre. Those are the crucial figures.

I have the privilege of representing one of the most beautiful constituencies in England, and the Minister was there just a few weeks ago. There is no doubt that many people visit my constituency, which contains some of the Peak District national park, partly because it is farmed, maintained and looked after. If we do not look after the dairy farmers, the countryside that many people enjoy week in, week out will, sadly, disappear.

2.44 pm

Mr. David Heath (Somerton and Frome)

It is a pleasure to follow the previous speakers. I particularly congratulate the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan) on securing the debate, not least because it was precisely the debate that I called for in business questions a week or so ago. It is long overdue if we are properly to represent the people who are attempting to make a living from dairy farming in our constituencies. If I needed persuading of the difficulties that the Somerset dairy farming industry faces at the moment, and I do not because it has been that way for some time, I could have done no better than listen to those who attended the south-west industry dinner at the Royal Bath and West show. However they were involved in the industry, whether as farmers, processors or whatever, everybody said the same thing: the industry faces a dire future.

I shall be brief so that other hon. Members have the opportunity to speak. I represent a constituency that may contain more dairy cattle than any other and is certainly one of the finest dairy lands in the country. On behalf of dairy farmers, I want to express the cries of pain and anger that, if they were here today, they would express. I do not want to repeat arguments that have already been made, but if we do not get the farm-gate price of milk or milk produce right, we will not have a viable dairy farming industry in years to come.

We have skated around the central issue, which is the power of the supermarkets. They have an oligopoly that destroys any attempt at a free market in milk. Until somebody faces down supermarkets and says, "We want an indigenous dairy industry and we want our farmers to continue to lead the life that they have done over the years, producing milk and milk products in this country," we will not make a difference. The issue is the difference between the price of production and the price that is available through the retail system.

Mr. Ian Liddell-Grainger (Bridgwater)

Will the hon. Gentleman give way?

Mr. Heath

If the hon. Gentleman will forgive me, I will not, as many other Members want to speak.

We cannot sustain a position in which a loss is made on every pint of milk sold. The hon. Member for West Derbyshire (Mr. McLoughlin) is right to say that there should have been an improvement in the past three years. There has not been because of the power of the supermarkets. They could not care less about this country's industry because they can always import products.

Milk is not a price-sensitive issue for the consumer in the supermarket. People do not base their purchase of milk on price; they go in, pick up the container of milk and pay the price at the checkout. The supermarkets cannot see that unless they produce a sustainable ladder through the industry that makes a proper return on investment and capital at farm, processing and supermarket level, they will destroy the industry.

I see so many smaller farmers who face a very uncertain future and are coming to the conclusion that to sustain the losses that they are sustaining while retaining their farm as an asset of huge capital value is a nonsense that no accountant would advise them to continue. They also face the fact that they cannot make the essential investment needed to improve and modernise their farms because they cannot demonstrate to the banks that their businesses have a viable future.

When farmers wrestle with the continuing knock-on effects of foot and mouth and the difficulties of bovine tuberculosis, which we have still not properly addressed; when they consider that some agricultural sectors are beginning to come out of depression; they are told that other farmers are doing better but they know that they are not; and when they cannot feed their families on the return from dairying, they will of course consider whether it makes sense to continue.

As the hon. Member for West Derbyshire said, if we do not have dairy farms in the best dairy farming areas, whether in Somerset, Derbyshire, Cheshire or wherever, we will not have the areas of outstanding beauty that people come to visit—there will be a wilderness. Nobody wants that to happen.

I beg the Minister to take a strategic view of what is best for Britain, its farmers and the British countryside. The hon. Member for North-West Leicestershire (David Taylor) may well be right: until we have some form of intervention or bargaining process that levels the playing field on behalf of our farmers, we will not give them a fair deal.

Our farmers are desperate. They are getting to the point where they are prepared to take desperate measures. I want to avoid that, but we can avoid it only if the House is seen to be speaking up clearly for the industry and the Government are seen to be doing something for it.

2.50 pm

Mr. Simon Thomas (Ceredigion)

I am pleased to have the opportunity to speak briefly on the dairy industry in west Wales. I shall not exchange facts and figures about which part of the country has the most dairy farmers. There is, however, certainly a strong dairy tradition in west Wales and my constituency and a strong tradition of innovation in the dairy industry there. Some award-winning cheeses were introduced in west Wales, the first organic dairy was started there and there is an increasing amount of co-operative working in the industry in that area.

I am certain that the dairy industry in west Wales and throughout the UK has been at the forefront of innovation, reacting to customer demand, trying to introduce new products and developing new ways of adding value to the milk supply chain. That activity must be supported as much as possible by the Government as part of the solution to the current crisis in prices.

I listened carefully to what the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan) said. He made a measured and important contribution to the debate, and I congratulate him on that. I agreed with much of what he said and I shall not bother repeating it, because many hon. Members want to contribute.

It is important to recognise the scale of the decline in Wales. We have lost nearly 500 dairy farms in just two years. That is a significant blow to the dairy sector. We need some sort of critical mass in that sector, especially in terms of forming co-operatives, working together and adding value to products. If we do not intervene now and take some action, when the industry comes together and starts working it will not be of a sufficient size and strength to challenge the supermarkets and the processors, as the hon. Member for Somerton and Frome (Mr. Heath) said.

On talking to dairy farmers in my area, I find that they do not always come down hard on the supermarkets. They ask some hard questions of the processors, such as the creameries, which are the intermediaries in the chains and are aho taking a lot of money out of the process. We are aware that in the last couple of years at least three price increases by the supermarkets were made in the name of the farmer. If we were to work out what the price should be per litre, we should be talking about 26p being passed on to the farmer at the moment—if we take into account what the supermarkets tell us they have been doing with the price increases. If the supermarkets have passed the price increases on to the processors, who has been holding on to them? The farmers have certainly not been receiving them. An average farmer producing milk in Wales receives around 8p per pint. We know that milk sells on the doorstep at about 43p, and for a little less than that in the supermarket.

Many hon. Members have talked about what action could be taken. The hon. Member for North-West Leicestershire (David Taylor) and the hon. Member for Somerton and Frome talked about what could be done, including some sort of intervention, or arbitration. I hope the Minister takes my suggestion seriously, because it is a new Labour suggestionߞI know it is, because the Government did something similar about two weeks ago.

When Carlton and Granada came together, the Government said, "There's a problem here." They said that there was too much weight in the marketplace in the hands of one big company and that they were not sure about it. They allowed the merger to go ahead, but established an independent watchdog to limit the company's ability to raise the price of advertising slots to ensure that there were no adverse effects on those who bought advertising time from that huge company. The milk industry is crying out for just such an independent watchdog. There could be one person—perhaps a regulator empowered by the Government—to undertake those tasks, looking at the price paid by supermarkets, processors and producers and trying to come up with equality in that regard. I commend that idea to the Minister.

We need to know from the Minister today what further action he intends to take on bovine tuberculosis. As we know, the Krebs trials will drag on until 2006. There will be an effect not only directly on dairy producers but on consumer confidence. If bovine TB increases as it has done—it has been increasing by 20 percent. a year in Wales so far—the effect on consumer confidence will be something to be concerned about. In particular, there will be an effect on the cheese producers. Think of all the cheese producers using raw, unpasteurised milk. It makes the best cheese, but how will they maintain consumer confidence if there is rampaging TB in the cattle population? The Government must take an interest in that and must take action.

My final point—I understand that time is short—is on compensation payments to milk producers under common agricultural policy reform. I understand that the Department for Environment, Food and Rural Affairs is considering a compensation payment with a decoupling based on the quantity and not quality—that is to say, the butterfat or protein content—of litres held under the quota. I would like the Minister to reconsider that.

If we accept that there is over-supply in the market, why are we rewarding it in the payment of decoupling following CAP reform? Why are we not considering supporting producers such as those on Guernsey and the Channel islands, and organic producers, who are aiming at specialised markets and aiming to protect and deal directly with consumer demand? We could be in danger of rewarding the acknowledged over-supply in the market.

I hope that those are useful suggestions for the Minister to consider. There is more that can and, in a sense, should be said, but other hon Members want to speak in this important debate and I understand why.

2.56 pm

Mr. Stephen O'Brien (Eddisbury)

First, I congratulate my hon. Friend the Member for Galloway and Upper Nithsdale (Mr. Duncan) on securing a timely and critical debate. The subject is of vital interest to farmers and milk producers in my constituency, which, coupled with that of North Shropshire, is claimed to be the largest milk field in Europe. However one defines such matters, a lot of milk producers are represented in this Chamber. That is why there is such interest in the debate, and such urgency to impress on the Minister the action that needs to be taken and is within the gift of DEFRA. For the sake of the national interest, it is not something that the Government can afford to ignore or dismiss lightly.

Economically, there is a background of ever-commoditising a raw material for so many value-added products against an over-supplied European market. Because of that over-supply, we have some distortions in the market.

Ann Winterton

Is my hon. Friend aware that the whole annual EU surplus of milk is supplied by Germany and France? Germany consumes less milk than the United Kingdom, has twice as many cows and is allowed to produce 28 million tonnes. France produces three times what it consumes—24 million tonnes. We are allowed to produce just 13.9 million tonnes and we consume practically all of it.

Mr. O'Brien

I am grateful to my hon. Friend. That is why I emphatically say that the industry is not declining—not only does the UK need it, but it has market demand to sustain it. What the industry really needs is a level playing field. That is why, in the four years that I have been privileged to be a Member of the House, I have twice, under the private Member's Bill ballot, introduced a Food Labelling Bill. That Bill demands the display of the country of origin and standards of production. I know that high standards are shared by so many, including the organic and specialist producers. The hon. Member for Ceredigion (Mr. Thomas) made an absolutely vital point about Channel islands producers, and the fairness of compensation under the intended schemes.

I plead with the Minister to impress the importance of the issue on his colleagues in the Government and, particularly, on the Under-Secretary of State for Environment, Food and Rural Affairs, the hon. Member for Exeter (Mr. Bradshaw). I had a constructive meeting with Cheshire farmers and the Minister for the Environment about bovine TB, but because there has since been a transfer of responsibilities it is critical that those farmers get to meet the Under-Secretary. The Cheshire farmers did not criticise DEFRA, but said, "Here is a positive opportunity for the Government to take the appropriate action." We recommend, and it was well supported—the NFU endorsed it in a briefing that I know all hon. Members received—a MOT test certificate for cattle, so that when transfer movements take place, those cattle that have been able to take TB tests have a higher qualification and can go with their passports.

Secondly, we need to ensure that an isolation ward is provided at the farm of receipt so that the rest of the herd is not put at risk. That would be a practical solution. On the front line of the spread of bovine TB—whether or not it appears in clusters—the vectors appear to be badgers and perhaps other wild animals. The Krebs inquiry is hopelessly delayed and under threat as a genuine process to address an admittedly difficult political issue. In Exeter in Devon, there are genuine pressures caused by bovine TB as well. That proposal is not special pleading; it is something for the dairy industry, in the national interest, that is within the Government's gift, and it could speed the process up and do so accurately and scientifically.

I urge the Minister to help us to secure a delegation to meet the Under-Secretary so that we can make those points yet again, because nothing is happening yet. We have to see progress in the interest of our dairy farmers, who are crying out for help. They are doing their best in the national interest and they are not getting the support that they need.

3 pm

Andrew George (St. Ives)

I congratulate the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan) on his measured opening remarks, which hit the nail on the head. He explained that dairy farming is a way of life, rather than a job in the countryside. I have to declare an interest: many of my family are engaged in the dairy industry and I have worked in it myself.

The hon. Gentleman pointed out that the Government need to take on board the effect of competition rules on mergers between farmers' co-operatives in the future. In his earlier intervention, the Minister showed that he is aware of the likelihood that the only way forward for dairy farmers is for farmers' co-operatives to have greater muscle in the market to negotiate and secure a far better farm-gate price than they can at the moment.

The hon. Member for North-West Leicestershire (David Taylor) explained and reflected what I have found to be the case among dairy farmers not only in my constituency but, I am sure, throughout the country: they are all fundamentally and profoundly pessimistic. He said that he more or less regretted the loss of the milk marketing boards, and knowing what we know now, many of us look back to the stability that they were able to provide the dairy industry. There was a climate in which farmers could plan for the future, which they clearly cannot do now.

The hon. Member for West Derbyshire (Mr. McLoughlin) argued well that prices have increased due to the strength of the pound against the euro, the stronger world price for cheese and the agreement—among some supermarkets at least—to pass on a 2p-per-litre price increase on liquid milk. During the past year, all those factors should have been working towards improving dairy farmers' circumstances. However, it is clear that the one fundamental factor that has worked against even that is the strength of the supermarkets and the fact that they can dictate market conditions as they have done. In my view, the bulk of any farming subsidies seems to be siphoned off to middlemen, processors and supermarkets. The hon. Gentleman hit that nail on the head.

Mr. Drew

To be fair to the processors—I have the biggest dairy in my constituency—there has been a huge reduction in capacity. That has come at a cost. One thing that I said earlier, which was slightly misconstrued, was that we need to rebuild the relationship between the processors and the producers. That can be done only if the processing industry is reasonably efficient.

Andrew George

That is true. The Dairy Trade Federation called in the Monopolies and Mergers Commission, as it was in those days, to consider the impact of Milk Marque because farmers wanted to integrate vertically into the market. It is appropriate that farmers are able to do so, and to add value to their products and engage in processing themselves. I am pleased that they are doing that, and I hope that we learn from those areas where they are doing it successfully.

My hon. Friend the Member for Somerton and Frome (Mr. Heath) expressed the passion and human emotion behind the current situation, and, along with the hon. Member for Ceredigion (Mr. Thomas), repeated the theme of the impact of supermarkets on farmers. The hon. Gentleman also asked, who is making the profit? Someone clearly is, and it sure as hell is not the farmer.

The hon. Member for Eddisbury (Mr. O'Brien) mentioned the impact of bovine TB. Certainly, those areas that were restocked following foot and mouth have seen further outbreaks, and I agree with the hon. Gentleman that that points in the direction of having health clearances attached to cattle passports as cattle are being moved around the country. The Government must take on board such positive initiatives because, as the dairy industry tries to recover from its current doldrums, it does not want to be hit by the further effects of bovine TB outbreaks.

Matthew Green (Ludlow)

Does my hon. Friend agree that the effects of TB on the dairy industry are set to be even more significant? The average cost is £36,000 per affected farm per incidence. Although the Government provide compensation for the value of the slaughtered cattle, they fail to cover the cost of loss of milk sales, halt to the trade of live animals, disruption to breeding plans and the loss of pedigree lines, all of which add up to that loss of £36,000, which is devastating for farmers.

Andrew George

I entirely agree with my hon. Friend. It is clear that although there is 100 per cent. compensation for: he animals themselves, the overall impact on the holding is significant—he articulated that far better than I could.

I come from a farming background. Earlier, I was speaking to one of my cousins, who is a dairy farmer in the parish of Mullion. When I was being brought up in that parish, there were nine dairy farms; now there are two. People have talked about the significant reduction in the number of dairy farms in the country. It is a question not just of economic sustainability, but of social sustainability. We are losing rural traditions and the lifeblood from the countryside, as, frankly, the countryside is being turned into prairie and ranch. We cannot afford to allow that to continue. The contribution that farming makes is not only to the economy itself, but to the whole way of life of the countryside. People need fully to understand that.

British dairy farmers are among the most mechanised and efficient, and they operate in some of the most favourable climates, especially for pasture and growing. Yet, to my knowledge, they are more firmly on their knees than those in any other European dairy industry. On the impact of the MMC report in 1999 and the Government's response to it, which we debated in this House, it was a critical error by the Government to accept the MMC's interpretation of the place that Milk Marque had in the market. Since that critical point, we have seen a significant decrease over a long period, ending where we ar;, today. We do not know what will happen as a result c f the break-up of Milk Marque.

Mr. O'Brien

As I forecast in 1999, the problem was not only that the MMC made a misinterpretation. The Minister at that time, the right hon. Member for Tyneside, North (Mr. Byers), made an overruling that prevented localised vertical integration, which could, on a value-added basis, have been the rescue. Instead, all the power was given to the distributors and yet more pressure was put on the farm-gate price.

Andrew George

The hon. Gentleman makes a good point. The vertical integration point certainly needs to be looked at.

Dairy farmers are going out of business in this country at breakneck speed. Prices are at rock bottom. Families I have spoken to today, and other farmers mentioned during the debate, are clearly producing milk at a rate that can hardly achieve break even; some are making a loss. That is, of course, a loss to the Treasury because it is collecting no tax from dairy farmers at the moment. At the same time, processors and supermarkets are clearly making profits. It is evident that we cannot simply sit back and allow that to happen, and limp on from crisis to crisis. The milk price should be the basis not simply for establishing that fact; it should be the basis for special pleading. We should recognise that this is a dysfunctional market. There are still quotas. The Government have a role to play: they should intervene in the market.

The Government must answer some questions. What assessment has been made of the impact of the conclusion of the Competition Commission report of 1999 that Milk Marque had been exploiting its monopoly and should be split up? What do they believe is the break-even price for dairy farmers? Do they believe that the code of conduct operated by the Office of Fair Trading should be toughened to give farmers more muscle in the marketplace? Have they assessed what will be the impact on our dairy farmers of the European Union's eastward expansion, and if so, what will it be? Will the dairy premium that will be introduced simply be siphoned into the coffers of the processors and supermarkets, although it should be used to support our dairy farmers? Crucially, what will the Government do to protect our dairy farmers in the marketplace in future?

3.10 pm

Mr. John Hayes (South Holland and The Deepings)

I congratulate my hon. Friend the Member for Galloway and Upper Nithsdale (Mr. Duncan) on securing the debate, which is indicative of his passionate commitment to the dairy industry. That passion has been replicated across the Chamber, not least by my hon. Friends the Members for Eddisbury (Mr. O'Brien), for West Derbyshire (Mr. McLoughlin) and for Congleton (Ann Winterton). I note that the Chairman of the Select Committee on Environment, Food and Rural Affairs, my right hon. Friend the Member for Skipton and Ripon (Mr. Curry), is present, which illustrates his personal commitment to this subject and to the plight of our dairy farmers.

Measured in any terms—farm incomes, the number of people leaving the industry, borrowing—there is no doubt that the industry is in decline. That has been repeatedly stated in the debate. According to a wide range of indicators, dairying is in deep crisis. The National Farmers Union claim that unless the price paid to milk producers improves there will be no dairy industry left to worry about". There cannot be a more stark warning than that.

As my hon. Friend the Member for West Derbyshire pointed out, milk products account for 22 per cent. of agricultural production. The decline and collapse of the dairy industry is more than just a narrow sector issue: it is about the welfare, benefit and maintenance of our countryside, as he described. As hon. Members have said, dairying is now barely viable. The Minister knows that milk producers need about 19p to 20p per litre to be viable, and they are not getting that. Raw milk production is almost beyond viability.

The problem is even more complex. Whereas our European competitors have much greater capacity to add valueߞthey have much better processing at farm level—in our country, processing is concentrated in the hands of a few organisations. As the hon. Member for North-West Leicestershire (David Taylor) pointed out, the ability of dairy farmers to trade their way out of problems is limited by their inability to add value to their products. The hon. Gentleman is right that we need to look at collaboration and co-operation—at ways in which we can encourage dairy farmers to add value to their products.

Mr. Liddell-Grainger

Is my hon. Friend aware that Yeo Valley is now the predominant organic yoghurt supplier and that although it set itself up as a co-operative, it is finding it hard to compete?

Mr. Hayes

My hon. Friend is a champion of the industry in his own part of the world, and he is right about that. That point was also made by a charming Member for a Welsh constituency, the name of which I will not attempt to pronounce because I will get it wrong, who said that it is vital that we help people to develop vertical markets that allow them to add value in the way that has been described. That is not happening at present, and I hope that the Minister tells us how he will help to make it happen.

The situation is not helped by the common agricultural policy. My hon. Friend the Member for Congleton made the position clear. A newspaper article of last weekend contained the following statement about milk production: The UK is only permitted to produce 14 million tonnes a year, slightly more than we consume. Germany, which consumes less milk than Britain—only 11.2 million tonnes—has twice as many cows and is permitted to produce 28 million tonnes. France, which consumes even less (8 million tonnes) is allowed by Brussels to produce 24 million tonnes". That is neither fair nor right and it cannot be allowed to continue.

Mr. David Curry (Skipton and Ripon)

rose—

Mr. William Cash (Stone)

rose—

Mr. Hayes

As my right hon. and hon. Friends may have different views, I shall give way to them in turn.

Mr. Curry

My hon. Friend makes an important point. Would he acknowledge that at the time of our entry to the European Union the UK was concerned to safeguard New Zealand exports to this country? Low British production is the price we paid to do that and we are still paying that price.

Mr. Hayes

With your permission, Mr. Deputy Speaker, I shall now give way to my hon. Friend the Member for Stone (Mr. Cash), who may have a different perspective.

Mr. Cash

Does my hon. Friend agree that we have to reform the common agricultural policy and ensure that it comes back to the UK on satisfactory terms?

Mr. Hayes

The views expressed by my right hon. and hon. Friends are widely held among dairy farmers. Far be it from me to add more in the short time available than to say that I agree about the need to reform the CAP. Other issues need to be amplified here.

As the hon. Member for Somerton and Frome (Mr. Heath) pointed out, it is unacceptable for supermarkets to take the lion's share of the profit that is to be had in the production of dairy products. The relationship between the farm-gate price and the retail price is simply unfair. It is unreasonable to have such distortion and imbalance in the food chain. We need a Government who are prepared to face up to that and do something about it.

Labelling is vital too. My hon. Friend the Member for Eddisbury has been notable in this respect. He introduced two private Member's Bills to bring fair food labelling to this country, both of which were blocked by the Government. That is scarcely believable given the palpable reasonableness of his proposals.

There is also the dreadful business of bovine TB. Coming on top of all the problems that have been highlighted in the debate it is the icing on the cake. It is the last straw for many dairy farmers. Hon. Members will know that the disease is spreading rapidly. It is making its way across the country. My hon. Friend the Member for North Wiltshire (Mr. Gray), who is recognised as a champion of dairy farmers, has highlighted the matter in his area and in the House. Yet, as was pointed out, rather like the Liberal Democrats' capacity for being politically capricious, the Krebs report and tests are seemingly endless. The Krebs tests go on and on and yet dairy farmers face the problem of bovine TB unabated. The Minister needs to tell us what specific and urgent steps the Government will take to deal with the spread and severity of bovine TB.

I will end with a series of questions that farmers would put to the Minister if they were here today. Do the Government agree with the president of the Scottish NFU, who is well known to my hon. Friend the Member for Galloway and Upper Nithsdale, that the decision of suppliers not to pass on to farmers the extra 2p per litre that they receive is "abhorrent"? What specific measures will the Government put in place to allow farmers to add value to their products? Do the Government accept that because of the current price per litre of liquid milk paid to producers the average net profit of dairy farms is falling to the point where those farms are no longer viable? Do the Government accept that under CAP reform the plight of dairy farmers is likely to worsen?

Have the Government sought to amend EC regulation 2597/97 in the manner that the milk taskforce report recommended? Do the Government accept that the uncertainty is greatly damaging to the industry and will they state clearly today whether the UK will go for earlier decoupling of the dairy sector in 2005 rather than in 2008? What is the Government's strategy to help the dairy industry? What are the notional targets in terms of production and the number of producers or is there no strategy? Will we be entirely reactive, reacting to the imperative set by cur competitors in Europe? What is the Government's policy on aiding dairy farmers affected by breakdowns to their herds caused by bovine TB? We want new information, new ideas and new proposals from this Minister today.

The Government must know of the profound difficulties faced by the dairy industry in the United Kingdom. The Minister will have heard the concerns expressed by hon. Members in all parts of the Chamber—from the Government Benches, the minor parties and Her Majesty's Opposition. He will understand that many of the points go well beyond political knockabout and reflect genuine concern and a real passion to support our dairy industry. There has been enough wringing of hands; let us hear from the Minister specific, persuasive proposals to deal with the matters. They must be persuasive because, if he does not introduce such proposals, there will be no British dairy industry.

3.20 pm

The Minister for Rural Affairs and Local Environmental Quality (Alun Michael)

I congratulate the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan) on choosing such an important subject, which has not been debated in the House for some time. I want to respond tc the specific issues that he raised and his particular request for Government action.

The hon. Gentleman's website shows his long-standing interest in the topic, including legislative burdens on industry, to which he referred. However, I must confess to having been led astray and to reading his doomsday diary, in which the saga of the leadership of the Conservative party accelerates towards chaos on 5 November, with bonfires blazing across Britain. I commend to my hon. Friends and Opposition Members a reading of his contribution. We have seen an excellent turnout by all three main parties today, and only a cynic would suggest that some might be here to gain an alibi if the last of the 25 letters trickles in this afternoon.

The dairy industry has national importance, and the debate is timely. I can confirm, as I was asked to do, that I have read the early-day motion standing in the name of my hon. Friend the Member for Ynys Môn (Albert Owen), which recognises the nature of the milk market but, as hon. Members have done today, calls on the Government to intervene in the interests of the future. We at the Department for Environment, Food and Rural Affairs, together with our colleagues in the Department of Trade and Industry, need to examine the market carefully and objectively, and I shall refer to the study commissioned by the Milk Development Council and undertaken by KPMG.

The hon. Member for Ceredigion (Mr. Thomas) referred to regulation, and the Government's view is that the voluntary code should be made more effective. It is reviewed from time to time within the context set by what was the Monopolies and Mergers Commission.

Mr. Burnett

Will the Minister give way?

Alun Michael

No, it is important that I respond to points made by Members who have been here throughout the debate and made contributions. If there is time at the end, I shall give way to others.

I agree with the hon. Member for Galloway and Upper Nithsdale about the full-time nature of dairy farming, and he was right to say that the past few years have been particularly difficult for the industry. I am not sure that his statistic about the average age is right, because I have been told that the average age of 59 has been quoted year after year for several decades. However, he is right to say that farm-gate prices have been depressed and that many dairy farmers have not received sufficient returns to sustain their businesses in the long term.

Dairy farmers have also had to adapt to new burdens, and they are now faced with having to adjust to the new conditions that will be created by the reformed common agricultural policy. Although the Government recognise those difficulties, and we will help when we can, we also believe that the UK dairy sector has a sustainable future. The hon. Gentleman gave examples from his constituency of how farmers are being imaginative and finding new ways of doing business, and I have seen many such examples throughout the country in the past two years.

Let us consider the market situation. The reasons why low farm-gate prices have been such a burden to the industry are complex and cannot be reduced to a single factor. At different times and in different combinations, exchange rates, the prices on world commodity markets, and domestic supply and demand have all played a role. For example, in spring 2002, when the average farm-gate price fell below 15p per litre, an unusually large seasonal peak of milk production meant that there was insufficient capacity in the UK to process it. Unfortunately, that occurred when demand for dairy commodities on world markets was low due to economic difficulties in some key importing countries, such as Brazil. That led to the retention of dairy products that would normally be exported on to EU markets, which were already in a position of structural surplus. That forced down prices throughout the Community to intervention levels when the strength of sterling meant that the intervention price was insufficient to provide a floor to the market at a level at which UK dairy farmers could cover their costs.

We need to ask why farm-gate prices are still low today, when world markets are reasonably buoyant and when the euro has strengthened against the pound, leading to increased prices for many commodities.

Imports of liquid milk represent less than 0.5 per cent. of the UK market. The UK's exports are considerably more, and we export more, mainly to Ireland, than we import. I should also point out that there has been an improvement in farm-gate prices.

3.25 pm

Sitting suspended for a Division in the House.

3.40 pm

On resuming—

Alun Michael

I was pointing out facts relating to recent improvements in farm-gate prices. The latest official data, for milk delivered in August, show an average farm-gate price of 18.70p per litre, nearly 2p per litre higher than the average farm-gate price for August 2002. That does not include any recently announced increases. Nevertheless, several hon. Members have quoted figures that appear to show that the increase has reflected fully neither the market situation nor the effects of the major multiple retailers' price initiative in June.

Considering the retail initiative first, it must be noted that liquid milk sales by the major multiple retailers use only about 25 per cent. of raw milk in the UK. The 2p per litre increase announced by the supermarkets would therefore, if distributed to all dairy farmers, result in an increase in the farm-gate price of 0.5p per litre. Without an improvement in the underlying market situation, the effects of such an initiative would be short-lived. Although the liquid milk market normally commands a premium over other outlets, if the premium grows too large, companies will naturally compete for it. As most liquid milk is sold through supermarkets as an own-brand commodity, any competition is likely to be on price, which will quickly erode the premium. While supermarket price increases are not unwelcome, we should not underestimate their effect.

Considering the market for other milk products, there have been price increases for butter and skimmed milk powder that might support those for liquid milk. However, for cheese—particularly mature cheddar—the situation is not so good and as the manufacture of cheese accounts for a quarter of the UK's milk production, that is significant. Furthermore, commodity cheese—unlike liquid milk—is open to competition from other member states. There are signs that cheese prices may soon rise, which may lead to further increases in farm-gate prices.

Nevertheless, as the hon. Member for Galloway and Upper Nithsdale mentioned, that does not explain why farm-gate prices in the UK compare so unfavourably with the EU average, taking currency into account. As hon. Members will be aware, the Milk Development Council commissioned KPMG to consider the issue and its report, published earlier this year, makes interesting reading. Some hon. Members have acknowledged that there is no single factor that would produce a solution. The report found that there are several reasons for the unfavourable comparison, including the low value of the dairy product mix compared with that in many other member states; the relatively low level of innovation and new product and brand development in the UK dairy industry; and the structure of the industry and dairy co-operatives.

KPMG's report suggested that there was room in the supply chain to improve efficiency through better co-operation. Its conclusions are very much in line with those of Sir Donald Curry's report, which found a need across all agricultural sectors to improve returns through adding value and improving supply chain efficiency. We have addressed that assiduously since the publication of the Curry report. The industry itself must address most of those issues, such as the structure of the sector and new product development. However, the Government can and have—

Several hon Members

rose—

Alun Michael

I said that I would try to answer the questions raised in the debate; if there is time, I shall take interventions.

For example, my noble Friend Lord Whitty has been chairing meetings of a dairy supply chain forum, consisting of senior figures from all parts of the supply chain, which has been considering co-operative solutions to improve supply chain efficiency, among other issues. As a result of discussions in that group, the industry has already begun to act to address the problems of seasonal milk production, which reduces prices for all dairy farmers in the spring. Furthermore, under the auspices of the forum, the Milk Development Council has initiated an innovations workshop to examine barriers to innovation in the sector and how to overcome them, which is the point made in the KPMG report.

For their part, the Government have granted nearly £500,000 to the Food Chain Centre to examine how to improve dairy supply chain efficiency. We have also established English Food and Farming Partnerships to encourage co-operation and collaboration across all agricultural sectors—

Mr. Deputy Speaker

Order. We must turn our attention to the closure of post offices in south Portsmouth.