Dairy Farming (South Derbyshire)

It is a great pleasure to debate this issue—perhaps I should say discuss, given the number of hon. Members present—with my old and dear hon. Friend the Member for South Derbyshire (Mr. Todd). The debate has reminded me that he tries to be constructive in all his remarks and in his often trenchant critiques of policy. He started by saying that this was not a tale of woe, although he rightly acknowledged that genuine grief exists, and that he wanted to focus on the positive. He talked about the makings of a healthy and successful industry. That is right, because, as he pointed out, the UK has many natural advantages and we must make better capital on the back of those. My hon. Friend has highlighted the key areas for debate, and I want to respond on those. He talked about economies of scale and the price of food. He identified liquid milk as a commodity and spoke of the need to add value by processing or by niche marketing. He also mentioned the ways in which the Government can and perhaps should be contributing to that. Crucially, he highlighted the need for innovation in the industry to help to add that value and he rightly identified the need to minimise bureaucratic overlap. In touching on all those issues, he has hit on the essential components of the highly successful industry that we both want. I shall try to respond in more detail on each of those areas that my hon. Friend highlighted and to discuss some issues that I did not pick up during my introductory remarks. In terms of value, dairy farming accounts for around 17 per cent. of UK agricultural production and is the single largest agricultural sector at £2.5 billion. Household expenditure on dairy products in the past 12 months totalled £7.3 billion. I understand that that makes dairy the second largest grocery category in the UK. The dairy sector is therefore of great importance. It is important to have a considered debate on the many challenges that the dairy sector undoubtedly faces. It must face up to some harsh realities. My hon. Friend correctly pointed that out, but he was also right in wanting not to talk the sector down but to look to the signs of success and growth. He acknowledged that pressure on farm-gate prices will remain. It is important for the sector to be realistic about the prospects for farm-gate prices; they are unlikely to return to the levels seen in the mid-1990s. I accept that farm-gate prices are not high enough for some to be able to sustain their businesses and that costs have increased across the supply chain. The acknowledgement of that by Sainsbury’s and Tesco, and their resulting action to increase prices, is therefore welcome. The Government believe it to be in the long-term interest of buyers to establish fair and sustainable arrangements for dealing with their suppliers. It is good that there has been some acknowledgment of that, even though some might say that it is overdue. A number of retailers have initiatives to encourage closer working relationships with identified suppliers, some of which attract a price premium. We must also be aware that a considerable proportion of milk is sold through middle-ground retailers and catering establishments, or as food ingredients, as well as being internationally traded as a commodity product. The Competition Commission has found that the four largest grocery retailers account for less than 25 per cent. of volume sales of raw milk processed in the UK. It is important that we are careful not to place too much emphasis on the major supermarkets, as others have their part to play. There have also been some positive developments in the contractual arrangements between processors and producers. Those relationships, which should help to develop greater transparency and trust, are to be encouraged. We hear a lot about paying a fair price for milk. If it is not the price agreed between a willing buyer and a willing seller, then what is a fair price? How would a fair price be determined without reference to the market price? Is it the average cost of production, in which case there would be handsome winners but many losers? What about those farmers who cannot match those costs of production? Should we subsidise inefficient producers at the expense of consumers? How would such an approach encourage efficiency gains? How would it help international competitiveness? All those questions go along with that line of argument. The industry needs to move away from the fixation on price and fix its attention on profitability. There remains a worrying disparity in the costs of production between the most and least efficient dairy farmers. In 2003, it was found that there was, on average, a 12p per litre differential between the most and least efficient dairy farmers. That is not sustainable. Given such a wide variation in costs, we return to the question of what constitutes a fair price. It is worrying and somewhat incredible that many dairy farmers are still unaware of their own production costs. We welcome moves to encourage awareness of costs of production as they may help to provide the information for producers to make timely business decisions. Even with current farm-gate prices, there are dairy farmers who are able to make a profit. We may rarely hear of them, but they do exist. Such farmers deserve our encouragement and praise. One such example is James Hague from Daisy’s Dairy, who some may have heard on ““Farming Today”” last Tuesday. He and his wife are new entrants into dairy farming and are producing, processing and marketing their own milk. They are making a very healthy profit by adding value and are providing a quality product and service, for which their customers are willing to pay a premium. Clearly, not all farmers can follow the same path, but individual producers have to continue to play their part as well by reducing costs and becoming more efficient and, above all, by innovating and adding value through processing and the use of niche markets, as my hon. Friend suggested. The rest of the supply chain also has its part to play in cutting costs and maximising efficiency. There has been considerable investment in processing capacity and, as a result, we have some world-class processing plants. There are also some less efficient plants, just as there are efficient and less efficient producers. This is why, through the dairy supply chain forum, the Department for Environment, Food and Rural Affairs is part-funding a study benchmarking processor efficiency on an international level. The Milk Development Council is also conducting a similar study benchmarking producer efficiency. We have also invested more than £1.3 million through the agricultural development scheme to help the dairy sector address issues of efficiency. As my hon. Friend notes, increasing the value of dairy products is key. A 1989 report by Coopers and Lybrand for a milk marketing board concluded that"““the present pricing system and allocation arrangements for raw milk in England and Wales will hinder the development of an industry which is internationally competitive””." The UK processing industry is finally beginning to throw off that legacy and is now producing more value-added, innovative and branded products. To see that we need only consider the recent successes with added-value liquid milk such as Cravendale or Night Time Milk, or the plethora of branded cheeses, such as Seriously Strong or Cathedral City. While on the topic of cheese, I want briefly to discuss the debate about cheese and children’s diet started by the Food Standards Agency. Cheese has a high saturated fat and salt content, but it is also an excellent source of protein, calcium and other beneficial nutrients and minerals. I hope that parents will use common sense when feeding their children and will include cheese as a key part of a balanced diet. They should not be put off by the tick-box approach of a few people in white coats. Another recurrent theme is concern about the numbers of dairy farmers leaving the sector. My hon. Friend alluded to that. It is not a new phenomenon. In 1943, there were more than 100,000 dairy farmers, but by 1994, there were 28,000—there are now about 20,000. According to the Milk Development Council’s ““Dairy Supply Chain Margins 2005-06””, the rate of farmers leaving the industry has hardly changed in the past five years and is about 6 to 6.5 per cent. The trend of declining producer numbers is not restricted to the UK. In some parts in the EU, such as Spain, the number of dairy farmers leaving the industry has been much higher than in the UK. There is a similar trend in the USA and Canada, reflecting a global trend towards fewer, larger herds in developed economies. Those economies of scale are exactly what my hon. Friend was talking about; they are the clear driver. My hon. Friend asks about an early retirement scheme. As the Curry report stated, a retirement incentive scheme is unlikely to offer value for money compared with the large costs likely to be involved. One of the report’s further recommendations was that DEFRA should produce a supporting pack of advice for farmers considering retirement. At the launch of ““Fresh Start”” in December 2004, we issued two publications that responded to that recommendation. Concern has been expressed recently about the apparent decline in milk production. As my hon. Friend acknowledged, it has remained relatively stable—around the 14 billion litre mark—since quotas were introduced. Production is below quota this year, as it has been more often than not since 2000, but it must be remembered that milk quotas are a ceiling on production, not a target. Producers should produce for the market, rather than for the target. Recent statements that the UK will soon have to import liquid milk are overly pessimistic. We currently export more liquid milk than we import. DEFRA has commissioned a study which will be published later this year. It will assess the potential for GB-European trade in liquid milk—