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Westminster Hall

Wednesday 17 April 2002

[Sylvia Heal in the Chair]

Dairy Industry

Motion made, and Question proposed, That the sitting be now adjourned.—[Angela Smith.]

9.30 am

Mr. David Heath (Somerton and Frome): This is a welcome but rare opportunity to talk about agriculture. Since the election, farming and agriculture seem to have been almost obliterated from the parliamentary vocabulary. It is a good opportunity for those of us who represent rural Britain to put a few thoughts on to the record about the current state of the dairy industry.

Mrs. Ann Winterton (Congleton): Is the hon. Gentleman aware that there has been no full debate on agriculture in Government time since the Queen's speech and that on one of the days the debate was not about agriculture per se? Should that not be put right?

Mr. Heath : Absolutely. I am grateful to the hon. Lady for that observation. I am doing my bit to put it right by initiating the debate.

Mr. Simon Thomas (Ceredigion): Will the hon. Gentleman give way?

Mr. Heath : It may be over the top to give way before I have finished my opening remarks.

It is still desperately important for many of our constituents that we discuss the farming industry. We could be talking about almost any sector in the agricultural industry, as they are all facing difficulties. The arable sector is suffering especially at the moment, as I know from my constituents who are involved in various aspects of it. I want to concentrate on dairying, simply because in Somerset we have the finest dairy land in the country and therefore in the world. Views may differ from Cheshire and elsewhere, but I believe that Somerset wears the crown of the dairy industry.

We are engaged not only in farming. Processing is a key part of the local economy, and there are retailers throughout the country. It is important that we consider the industry in the round, as those sectors are interrelated. The key to the success of any part of the industry is the vitality of the whole, which I want to explore today.

I understand from the Minister's replies that he believes that dairy farmers' income is increasing—indeed, has doubled—and that the industry has a rosy future. The industry does not share that view. His belief is belied by the experience of almost everyone who is trying to make a living from dairy farming. In recent months, we have seen yet another reduction in the farmgate price of milk. That is having a devastating effect on the profitability of many farms. The price is

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now well below 22p per litre, which is a reasonable assessment of the cost of production. Seven authorities would reduce or increase that sum by a few pence.

The industry is still suffering the after-effects of BSE and last year's outbreak of foot and mouth disease. The outlook is extremely bleak. The key is the producer price of milk. Unless we can achieve a sustainable farmgate price for milk, there will be a lack of investment in the industry and, sadly, many more people will decide that they can no longer continue the unequal struggle to maintain their living through dairying. There will be many losses in the industry.

The average producer price, which the National Farmers Union and others currently estimate at about 16.5p per litre, is simply unsustainable. We were saying that the price was unsustainable when it was higher. During the past year there have been attempts to do something about it, but they have not worked. With the seasonal fluctuations, we are in danger of approaching the all-time low of 14.6p per litre—the price in May 2000. If that happens, it will spell bad news for many producers.

Mr. Simon Thomas : Does not the hon. Gentleman find it supremely ironic that the farmer-producer milk price is dropping so significantly at a time when supermarket profits have risen so much? Tesco posted a £1.2 billion profit only recently. Will he take this opportunity to condemn the use of milk as a loss leader by supermarkets and urge the Government to address the problem, as the Prime Minister promised during one meeting with farmers when he said that the supermarkets had the farmers by the throats?

Mr. Heath : As the hon. Gentleman may have suspected, that is the underlying script of my speech. We must address the problem at the point of retail.

Some would argue that the processors have a case to answer too, but their position is much more complicated. They also operate in a competitive sector and are under price pressure from buyers. Although there has been some criticism of processors who have achieved volume sales at the expense of price, and that has had a knock-on effect on the primary producers, they are nevertheless working in an extremely competitive field. There is a variety of uses for raw milk, and the producers are competing with each other. The net result is an unsustainably low milk price at the farm gate.

Mr. John Burnett (Torridge and West Devon): My hon. Friend has painted a vivid picture of an industry that is facing catastrophe. What is his prognosis for the dairy industry now that we have details about future pricing? Will he also comment on the fact that the spot price of milk was about 11p per litre at Christmas and is about 7p per litre now?

Mr. Heath : My hon. Friend is right. The problem is that there is no light at the end of the proverbial tunnel. Producers cannot see how the situation will improve within a time scale that would allow for sensible financial planning. The difficulties with downward competitive pressures on milk pricing are exacerbated by the bizarre fact that the sector is overproducing,

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particularly in the organic sector. Indeed, the organic sector has possibly suffered most, because the premium has almost completely disappeared as a result of a flow of milk into the sector. Some producers have put in sterling efforts. The hon. Member for Bridgwater (Mr. Liddell-Grainger) mentioned Yeo Valley recently. His remarks were perhaps misinterpreted, because Yeo Valley has done a sterling job in protecting the organic milk producers, as has the Organic Milk Suppliers Cooperative, OMSCO. However, despite those efforts, it is clear that that is not the solution to the problems faced by many milk producers.

We need a clearly negotiated and policed, sustainable and stable price for milk. The Government will have to play their part and, as the hon. Member for Ceredigion (Mr. Thomas) said, the Prime Minister promised as much when it was politically expedient for him to do so. He promised to take an active interest in the matter, but there is less evidence that that has happened.

With regard to the way in which the supermarkets appear as a bloc, I simply do not accept that milk is a sensible loss leader. In fact, I do not believe that the consumer buys milk on a price basis. I have talked to a great many of my constituents about this subject, and I do not believe that people go into supermarkets, look at the price of milk and decide that they will go to Sainsbury's this week rather than Tesco down the road on the basis of a penny more or less. People do not buy milk in that way, so why do we allow the dairy industry to be crucified by the way in which retailers structure their market? I believe that it achieves no tangible results in retailing, processing or primary production. That nonsense needs to be addressed.

Coupled with that, we need to be much more active in our marketing of locally produced milk and milk products, such as cheese and yoghurt, because those products happen to be superior to those available from elsewhere. I have always maintained that we are bad at marketing the brand—in our case, the west country and Somerset—for wholesome produce. There should be a clear duty in this respect on retailers and those who advise them. That brand should be much more visible.

Another problem that the Government need to address is the structure of the market, which is very complicated. Unsustainable assumptions are made about the internal monopoly in this country. In fact, we are competing not only with other European countries, but in the wider world market. It is a mistake to consider Britain in isolation, to put up barriers to the vertical integration in the industry that we wish to see, and not to encourage the co-operative ventures that should play a big part in the industry.

Why is there a lack of recognition of the fact that we work in an international market and that, currently, intervention is not beneficial to the United Kingdom industry? It benefits the shareholders rather than the producers. The Curry report recognises that self-evident fact in the dairy industry. Why are we not building on its recommendations?

My next question is about agrimonetary compensation—this is a well worn track. We saw the end of the traditional agrimonetary compensation system as of the end of 2001. However, the Government

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claimed £79 million for the dairy industry in 2001, and they have until the end of the month to make a subsequent claim, which may be worth about £51 million.

I understand the Government's problems with agrimonetary compensation in its current form and the difficulties occasioned by the Fontainebleau rebate. It has acted to the enormous detriment of the agricultural industry ever since it was signed. Whatever its merits in other respects, it has done a poor job of encouraging Government support for the agricultural industry. However, I ask the Minister to be clear about whether his Department intends to apply for that pull-down of European funds, because it comes at a time when the dairy industry desperately needs it.

Mr. David Laws (Yeovil): I congratulate my hon. Friend on securing this important debate. Does he agree that today offers a good opportunity for the Government to explain their approach to agrimonetary compensation, given that they have made payments and draw-downs of agrimonetary compensation in the past? Does he agree that this is a good opportunity for the Minister to explain the logic behind individual decisions? As we shall meet later today to hear the Chancellor's Budget, in which he is expected to announce a surplus for the current financial year on the Government's accounts, does my hon. Friend agree that it is a particularly good time to make a claim for agrimonetary compensation as it appears that the money is there in the UK's own accounts?

Mr. Heath : I agree with my hon. Friend on all those counts. It is not a huge amount of money in global terms, and I do not pretend that it would make a huge difference even to the industry, but it would provide some support at a time when the industry desperately needs it. For that reason alone it is worth claiming. I see no reason why the Government should not wish to use European funds, to which they have already contributed, to provide support for our industry in a way that other countries would have no compunction in doing.

Mr. Bill Wiggin (Leominster): A constituent told me that agrimonetary compensation made up 50 per cent. of his profit for the whole year. While the hon. Gentleman was modest about what he felt it would achieve for dairy farmers, does he not agree that it is a tremendously important support to the people concerned in that industry?

Mr. Heath : It is important, but the fact that it represents 50 per cent. of the profits is testament to the poor profitability of the dairy industry. The amount of money involved is modest. Perhaps the Minister can tell me—although if he does it will break a pattern set by all the previous Ministers I have questioned on this subject—whether the Government have at any time tried to set up a replacement scheme within the UK for agrimonetary compensation. The reasons why we have an agrimonetary compensation scheme persist. Britain still has a currency that floats free of the euro. Although a green currency is no longer necessary for those countries within the eurozone and it is arguably not necessary for Sweden and Denmark, given that their

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currencies are effectively pinned to the euro, it is necessary for British agriculture which has to contend with more extreme currency fluctuations.

At this point it is perhaps appropriate to talk about the exchange rate because the exchange rate between the pound and the euro is a problem for the whole of British agriculture. That problem besets the entire manufacturing industry. There are things that the Government could and should do. As many hon. Members know, I am not a great advocate of joining the euro, but I believe that there is a need to do something about the valuation between the pound and the euro to make our manufacturing industries, including agriculture, more competitive. The Government have neglected that issue over the last year or so and it needs to be addressed now if we are to have any hope of retaining a competitive aspect to our major industries.

While we are talking about overseas markets, we still have a great way to go to redevelop our overseas markets, including our European markets, which are important traditionally. There is a strong connection between our meat exports and the dairy industry. They are not divorced from one another. While we see the blatant protectionism that goes on in France, against any scientific or legal advice that the French Government could or should have been given, it is legitimate to ask whether the rules of the European Union do anything to ensure the free passage of trade and goods that the entire structure of the European Union was designed to promote. We need to address that as a matter of urgency.

Other hon. Members wish to contribute to the debate and so I will try to make the remainder of my remarks brief. I mention in passing the difficulties that the industry in my part of the country is still experiencing from bovine tuberculosis. It is becoming a problem for many farms in the west country because of the threat of tuberculosis as a disease and because of its knock-on effect on the mobility of stock, its effect on markets and the difficulties of regulation. Those are the inevitable results of a recurrence of the disease in Somerset and the west country.

I am anxious that there is still no experimental evidence to connect bovine tuberculosis and badgers. The Krebs experiments were put on hold; they are no nearer to completion now than they were a year or so ago. As a result, we do not know whether the connection is substantiated. It is desperately important to have that evidence so that appropriate measures can be taken. Many farmers in my constituency urgently need to do something to eliminate tuberculosis, or they will continue to have great difficulties.

I have to strike a pessimistic, if not apocalyptic, note. I have never been more concerned about the future of farming in my county. There is little cause for optimism in most sectors, including the dairy sector, in the immediate future. Small and medium farms throughout the country, especially in my constituency, will continue to be lost. What have traditionally been called small farms are moving up. Figures for disposal sales show that it is not herds of up to 100 cattle that are being disposed of; herds of 200 or 300 are under the auctioneer's hammer. Profitability and investment are lacking, so people say, "Why are we sitting on this

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realisable asset when we are in a difficult job requiring great dedication, which does not provide any reward for us?" More and more people are fleeing the industry.

I am most anxious about the tenant farmers who have no capital, and no way out. The Government are remiss in not tackling the issue with retirement schemes that will allow people to leave the industry with dignity, to find a new role. People will continue to leave the industry simply because they do not have the opportunities that they would wish for. That begs the question about the structure of the rural economy and of land use. There is a limit to how many rich people from London can come down, buy farmhouses and keep a few ponies in the paddock. Something must happen to the land between those farmhouses, which is the most productive in the country, but I do not know how that will come about unless the Government and the industry deal with the matter urgently.

Huge changes are on the way; the common agricultural policy must be reformed and we are only at the beginning of the process. I was hoping for more progress, particularly in the dairy sector. However, what the agriculture Ministers could agree, the Heads of Government were able to shelve at an early opportunity. They need to return to the negotiating table to achieve much faster progress on the issue.

There must be a greater focus on farming, the dairy industry, the needs of farmers as primary producers, the processors and even the retailers—I am prepared to bring them in from the cold. Unless there is a structured approach to the entire industry to make it profitable again, primary producers will be lost, processors will have supply difficulties and retailers will have to rely on overseas imports. That will not be in the interests of our constituents, the national economy, or the retailers themselves.

9.54 am

Mr. Bill Wiggin (Leominster): I start by criticising the Office of Fair Trading report on supermarkets. I recognise that supermarkets compete with one other, but the report does not recognise the power of the purchasing tail and its effect on the price of milk.

Will the Minister look further into the intervention price? I was informed that it stands at 16.3p per litre, but that the UK does not have enough processing power to turn the milk into milk powder, which would allow us to be intervened upon. I also draw the Minister's attention to the cost to the dairy farmer of the nitrate vulnerable zones, which the Ministry has seriously underestimated. I support the plea of the hon. Member for Somerton and Frome (Mr. Heath) for the second tranche of agrimonetary compensation, on which dairy farmers in my constituency depend. As I said in my intervention, although it makes up 50 per cent. of their income, it remains extremely low. I was informed that £8,000 is more accurate than the Government estimate of £32,000 as the average dairy farmer's annual earnings. The Government figure clearly does not apply in Herefordshire.

I shall refer to bovine tuberculosis, as Herefordshire is one of the test areas. Although the number of restricted herds is falling, the number awaiting tests has risen dramatically and the backlog continues to grow. The total is a horrendous figure, with about 27,000 herds

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awaiting testing. This year alone, the Ministry is slaughtering up to 1,000 cattle a month, although last year the figures appeared to dip because of the foot and mouth crisis. Between 1 January and 28 February, 2,077 cattle were reported to have been slaughtered.

The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Mr. Elliot Morley) : It might help the hon. Gentleman if I explained that as part of dealing with the backlog, we targeted the highest risk "hot spot" areas. It is not unusual to see a higher rate of incidence because the targeting is distorting the figures. I am not complacent and would not say that TB is not increasing, but I caution Members about drawing conclusions from the current figures, which do not provide a clear picture.

Mr. Wiggin : I am grateful for the Minister's intervention, but we must also bear in mind the number of cattle slaughtered during the foot and mouth outbreak, some of which may well have been TB reactors. I accept that the Minister would not know about that, but will he talk in his response about research into bovine tuberculosis? With herds being closed across the country because of foot and mouth, the disease may be spreading through wildlife. If wildlife is carrying it, we must face up to it. Badgers are a particular favourite of the Minister and are the most protected animals by law in the whole country, possibly even the world. However, we must face up to what is happening. As soon as a cow reacts, the farms are closed and cannot trade. They can continue to produce milk, but not buy or sell calves. That problem must be confronted because the number of farms being closed is rising dramatically. Some arguments suggest that it would be possible to continue to buy and sell calves that had not reacted.

TB costs about £7 million a year in direct compensation alone. The research bill is more than £21 million. The livelihoods of 27,000 farmers awaiting results are at stake. I hope that the Government's statistics, which prove that TB is threatening to snowball and that at least three herds a day are succumbing to the disease as hitherto free areas become infected, will persuade the Government to address the problem more effectively. There was no testing for bovine tuberculosis in 2001, but as the backlog of farms is growing, an injection of cash should be considered. This may be a great day to call for money to be spent on increasing the speed and number of tests. It adds insult to injury that a farmer, after his morning milking, is expected to test all day without extra support and then do his evening milking. The number of cows that need testing has now grown to such an extent that it is not feasible to expect a farmer to undertake testing by himself. I draw attention to a lovely quote from Eisenhower that was also used in Don Curry's report:

Given the statistics on bovine tuberculosis, that seems to be the case. I hope that the Minister will bear it in mind.

People are also at risk. There are about 40 cases a year of mycobacterium bovis—the bovine TB—in human beings. Obviously, most tuberculosis is caused by the

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other bacterium—mycobacterium tuberculosis. Bovine TB cases are rare and are usually found in people who have caught it abroad or in elderly people who had probably caught it from drinking unpasturised milk. Some cases may have occurred in people who work closely with infected animals. At this stage, however, there is no direct evidence that people have caught the disease in that way, but the risk to farmers and others in frequent close contact with cattle is well recognised.

The Krebs report said that the best prospect for the control of TB in the British herd is to develop a cattle vaccine. The focus for finding a decent, long-term solution must be in a vaccine that will not only prevent it from being caught by cattle, but prevent badgers—the prime suspects—from carrying it. When a virus appears in a closed herd, the badgers in their setts on that farm are not tested. They need to be tested quickly and effectively because the number of badgers that we see in Herefordshire by the side of the road is growing every day. Those badgers are diseased, too. If the Minister has a passion for those animals—I believe that he does—he owes it to them as much as to cattle to find a cure for the disease. Any increase in funding and research that will lead us to a vaccine would be more than welcome. It is essential that a vaccine is found.

The closed herd at Ocle Court in my constituency has recently suffered a bovine TB outbreak. The herd were home-grown fed and had no contact with other cattle. My constituent, Matthew Oliver, was left to watch and weep as his suckler cows were shot as tuberculosis reactors. Recently, Mr. Oliver told Farmers Weekly:

That clear message should not be ignored. Mr. Oliver continued:

The problem has caused so much debate in Herefordshire that a former president of the British Veterinary Association, Francis Anthony, said:

Reactors are now found on 70 per cent. of farms tested in Herefordshire. We cannot continue waiting for the results of the badger tests, yet have measures such as the Minister's Bill on animal health. There is a gross imbalance. If we are to take an aggressive and draconian approach to a future foot and mouth outbreak, as the Minister proposed, we should take the same approach to bovine tuberculosis, and deal especially with badgers.

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I hope that the Minister will answer my questions and perhaps pledge, after today's Budget, to invest more for research on this extremely serious disease.

Mr. Nigel Beard (in the Chair): I call Mr. David Drew.

Mr. Simon Thomas : On a point of order, Mr. Beard. I know that the hon. Member for Stroud (Mr. Drew) has a genuine and sincere interest in these matters and that he will make a valuable contribution. However, he was five or six minutes late for the debate. As I am well known in my constituency for my lateness, I would appreciate a ruling on whether that is in order.

Mr. Nigel Beard (in the Chair): I shall take that into account.

10.4 am

Mr. David Drew (Stroud): I apologise for my lateness. I was stuck on a train because I had an engagement in my constituency yesterday—I am sure that that has happened to us all. I apologise profusely to the hon. Member for Somerton and Frome (Mr. Heath), who introduced the debate. He gave us an invaluable lesson on why we should discuss such issues in this Chamber. As I am the only Government Back Bencher present and it is important that we hear from such quarters, I hope that the hon. Member for Ceredigion (Mr. Thomas), who quite rightly picked me up for my lateness, will give me the chance to speak. I shall keep my remarks brief to allow him the chance to contribute to the debate.

I share many of the worries expressed by the hon. Member for Somerton and Frome, although I missed his initial comments. The picture that he paints is gloomy, and no Labour Member would pretend otherwise. We face the double bind of pressure on prices and over-production. That has other consequences such as lower returns to farmers, and there is a clear indication that processors are not doing well either.

I declare an interest because I am about to achieve the biggest dairy in the country at Severnside, with which I am in regular contact. I have represented its point of view before and when it is seen as the bad guys—it is certainly not always the good guys—it argues that its price pressures are considerable because retailers force prices down. The supermarkets are regularly put in the frame. I shall not be an apologist for them because their recent performance before the Select Committee on Environment, Food and Rural Affairs left more questions unanswered than not about the way in which they saw the future of food and farming, although we gave them a hard time. We must be realistic. Milk and milk products are up against many other products, and the real price of food is at its lowest level for a generation. However, after taking subsidies into account, I argue that the price of food is not as low as some people would have us believe.

The future for organic milk is especially sad. As the Minister knows, I was able to act as a conduit to allow OMSCO—the Organic Milk Suppliers Cooperative—to talk to the Government. It is unacceptable that organic milk is pumped into the mainstream supply. Something is wrong with the structures of both the organic milk market and the overall milk market while that occurs.

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I take a slightly different position on where we should go from here. A debate is needed, although this Chamber is not the only place in which it will be heard. Like the hon. Member for South-East Cornwall (Mr. Breed), I visited New Zealand with the Select Committee as part of our current major investigation on food and farming. One is struck by the contrast between our methods and those of the people of New Zealand in the 1980s. I shall not draw simplistic conclusions or pre-empt our report, but several points are worth making. New Zealand has chosen a different route from ours by using a pasture-led approach. If the proof is in the eating, that has merit. Although there is an argument that our climate and countryside is not as suitable as New Zealand's, it is fair to say that people who regularly visit our shores and give us advice are querulous about the degree to which we have gone along the subsidy-based, high-input and intensive farming route that we have used for dairying. They urge an alternative route, which the Select Committee will examine carefully.

I have alluded to subsidies. There are questions about not just the subsidy approach but the way in which it has become integral to the operation of the CAP. I am not saying that we can cut subsidies overnight. Everyone talks about getting rid of measures such as the milk quota, which is, in a sense, a form of control based on subsidy, but I am worried that the only answer that we come up with is more subsidy. Although the World Trade Organisation is calling for all countries to consider a different approach, we are, in all our negotiations about the CAP, loading ourselves with more of the same. We must break away from that system.

I am not a free marketer but a good old Labourite who will consider intervention when it is necessary and appropriate. However, the industry has been wrecked by the subsidy constraints that have been put upon it. That is true not just of this country but of the rest of Europe.

Mr. Heath : I agree with the hon. Gentleman's basic thesis, but does he agree that some of the countries that act as the great apostles of free trade and non-subsidy, such as the United States, subsidise their dairy industries to the eyeballs? That is particularly so in states such as Vermont, where farmers receive a great deal of money in state aid.

Mr. Drew : Those countries not only cheat covertly and overtly, but their farmers do some horrible things to their animals. Scientific understanding would shed some light on and expose some of the acts at which this country quite rightly takes umbrage, such as including bovine somatrophin in milk and hormones in beef. They are highly questionable practices. We should move towards a more subsidy-free regime, if that is not a contradiction in terms, but one which also demands high standards of hygiene and welfare.

Mr. Simon Thomas : The hon. Gentleman is making some important points on the future of the industry. Does he agree that the role of the supermarkets will be vital in moving towards what he calls a less subsidy-dependent future, and in avoiding a knee-jerk injection of crisis funds into the dairy industry? He mentioned organic milk. Surely it is foolishness to pump organic

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milk into mainstream milk when we are importing organic milk in significant quantities from countries such as Denmark. The Government must tackle the supermarkets and the market itself in order to move towards a less subsidy-dependent future.

Mr. Drew : I largely concur with the hon. Gentleman. I am a great believer in intervening in markets, but we must have consumers on our side. One problem is that, for various reasons, consumers are not buying enough fresh organic milk. We must consider how to market it, and how to bolster consumer demand.

We must restructure our interests. New Zealand did not lose as many farmers as was thought when it claimed to cut away subsidies. There is a question about the degree to which it did so, but from the evidence that we obtained it seems that it is as near to a subsidy-free regime as it can get. We must understand that loss of subsidy will imperil smaller farmers in the short term. We must consider how to restructure the industry fairly and reasonably. We cannot go on the way we are, and I think that that is what the hon. Members for Somerton and Frome and for Ceredigion were saying. We must consider the costs of undertaking a major reform. We must also take other parties—both in the European Union and the rest of the world—with us, and that will not be easy. Some countries make noises about market liberalism but do not necessarily practise it.

Undoubtedly there is market failure, and that causes its own problems when structures are palpably wrong. That is shown most clearly by the debacle of the way in which we restructured intervention arrangements by moving from the milk marketing board to Milk Marque and then to individual successor co-operatives, which now want to combine. We all knew what was wrong, but there was a failure to come up with suitable policies to deal with the problem.

As a member of a co-operative, I believe that we must learn from the successes of other countries and build a genuine co-operative arrangement between producers and processors, even if that means changing the monopoly arrangements. Supermarkets are virtually monopoly suppliers, yet people who contribute to the food chain are subject to pressures within not only this country, but the rest of Europe. We must re-examine those structures and ensure that we get the benefits of economies of scale, research and so forth, which can be achieved only by building new arrangements. That would do a lot of good because it would overcome some of the bitterness—there is no other way to describe it—between producers and processors, which has done immeasurable harm to the way in which the industry operates.

There is no parallel sector in which virtually every six months, processors go out to producers and try to persuade them that a price cut would be beneficial. The industry operates in that way. To pre-empt the eventual pricing, people are encouraged to take a price cut that is based on crazy currency arrangements and the fact that there is over-production at present, which is not always the case.

We must also protect smaller farmers and recognise that that can be achieved only by building new arrangements. As someone who has already had two

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Adjournment debates on the future of county farm estates that have the most vulnerable tenant farmers of all, I take no lessons on why they are the most vulnerable group. We must persuade tenant farmers of the benefits of new co-operative ways of working—sharing machinery, milking and input costs, which will require representatives and colleagues of those people asking them to look at new methods. That is hard, because the independence of the tenant farmer is probably stronger than that of any other group of farmer. They pride themselves on their independence, but that must be mitigated by all the reasons why smaller farmers will not survive, such as capital costs and the cost of land, stock and so forth. We must ensure that we get those people to work together to overcome some of the problems.

The debate can no longer be avoided. It must be taken forward on the back of the Curry commission, although it is separate and more urgent because dairy farmers are in an extremely vulnerable position. There is something special about milk and the way in which the sector operates that means we must do something radical and urgent. We must persuade people that the common agricultural policy is not working.

Bovine tuberculosis affects my constituency, as it does the constituencies of the hon. Members for Leominster (Mr. Wiggin) and for Congleton (Mrs. Winterton). Too many farms are closed. However, we cannot pretend that there are easy solutions. There is no scientific explanation for bovine tuberculosis, although it is subject to huge dollops of research money and a great deal of research is going on. The accusing finger is pointed at the wildlife vector, but let us not be fooled—other contributory factors have yet to be excluded, such as husbandry techniques, the genetic disposition of the herds affected and the locations involved.

The hon. Member for Leominster shakes his head, but if he were to talk to anyone who knows anything about the subject, they would share with him the problems. That is also true of the international scene. The hon. Gentleman calls for a cattle vaccine, as I have done many times, but it would involve the same problems as the foot and mouth vaccine. People question the practicalities and ethics of using vaccine. The best way forward would be to breed out tuberculosis, whether in cattle or in wildlife, which would not be easy. That would be the ultimate, and anything that we can do to achieve that is important.

This vital debate is all about how we rebuild an industry under enormous pressure. I urge everyone not to accept the same old compromises. We must be much more radical and ensure that the industry survives.

Several hon. Members rose—

Mr. Nigel Beard (in the Chair): Order. We have approximately 15 minutes before the winding-up speeches and four hon. Members wish to speak, so if they limit their remarks, they will all have an opportunity to speak.

10.19 am

Mr. Roger Williams (Brecon and Radnorshire): I thank my hon. Friend the Member for Somerton and Frome (Mr. Heath) for securing the debate. It is taking place at a critical time for the dairy industry. On a bright

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and beautiful spring morning such as this one, dairy farmers should be on top form and looking forward to the summer, with their cows about to be turned out to grass. However, the mood in the dairy industry is one of despondency and despair.

I wish to reflect on the state of the dairy industry in Wales—and, in particular, in my constituency. Brecon and Radnorshire is the largest constituency in England and Wales and therefore, as one would expect, it is also the most agricultural. Unfortunately however, the number of dairy farmers in the area has declined to such an extent that the situation is now almost terminal. At the last count, there were fewer than 10 dairy farmers in Brecon, and probably only five or six in Radnorshire. At one time, there were many dairy farms in the Usk and Wye valleys and in the Radnor area, but almost all of them have now given up milk production. That has contributed to another problem: when such farmers give up milk production, they go into beef and sheepmeat production, and that puts even more pressure on those sectors, which are also always struggling.

I wish to mention the last person in my area who came to me to say that he was giving up milk production. Like the hon. Member for Stroud (Mr. Drew), he went into milk production through the county council smallholding scheme, which enables people to enter farming with limited capital. However, with great determination, skill and commitment, people such as him could make a living. He raised a family, and sent his three children to college. He was able to do that because he had great skill in grassland management and the breeding of stock, and, more importantly, because he was prepared to put a huge amount of work and commitment into the business. However, he has now decided that he gets no return for that commitment and skill—and no return on his capital. Therefore, like so many other dairy farmers, especially tenant dairy farmers, who have little capital behind them, he is taking the opportunity to disperse his stock to farmers who have been taken out in the foot and mouth epidemic: he is cashing in his only capital asset to ensure that at least he has some money for his retirement.

Between 1989 and 1999, the number of dairy farms in Powys fell by 30 per cent. That trend has accelerated, due to the problem of pricing. We have already heard that the average price for milk this year is likely to be 16.5p per litre, when the break-even price is about 21p per litre—and 24p per litre, if one wishes to ensure that re-investment takes place. Evidence given to the Welsh Affairs Committee showed that the code of conduct that four out of the five major supermarkets signed up to has been toothless, with regard to ensuring that a fair price is given to producers. That problem must be looked at again.

The problem with the pricing of milk can be traced back to the abolition of the milk marketing board and, subsequently, the dissolution of Milk Marque. Farmers are now trying to put back into place some of the co-operative aspects of the organisation of their industry that Milk Marque established. The Welsh Affairs Committee has also heard evidence that the Office of Fair Trading and the Competition Commission have been much harder on indigenous co-operatives than on foreign ones. Milk First gave us evidence that, when it purchased a cheesemaking plant in Aberaeron, it had to go through a rigorous regulatory process that cost it a

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lot in professional fees, whereas co-operatives based outside the country, such as on the continent, or in New Zealand, are able to operate in the United Kingdom without having to pay for and implement the same regulatory processes. That is, therefore, a real problem.

I turn finally to the agrimonetary compensatory allowance for which the Government can apply before 30 April. The Government have an opportunity to show that they understand the dairy industry's problems and can make a commitment to it. I understand that the average dairy farm, with about 80 cows producing 480,000 litres of milk, would receive about £1,700. In terms of the size and scale of the business, that is not a lot of money, as we have heard, but it is a lot in terms of the profit being made at the moment. It may be the difference between a business surviving and it going to the wall, and we call on the Government to act immediately.

10.25 am

Mr. Ian Liddell-Grainger (Bridgwater): I am grateful that the hon. Member for Somerton and Frome (Mr. Heath) secured the debate. As he rightly points out, it heightens the problems in Somerset, four of whose five Members of Parliament are present. The fifth is on his way back from other duties.

The hon. Member kindly alluded to organic farming in my constituency. In many ways, organic farming was seen as the great white hope. It was going to be the thing that boosted farming so that we could be more eco-friendly and eco-adjustable. However, in the past few months we have witnessed the wholesale collapse of the organic milk price, which has gone from 30p to 24p, and may go even lower. I suspect that the Minister will discuss how to foster an organic industry.

Yeo Valley Organic works throughout Somerset, in all our constituencies—Somerton and Frome, Taunton and Wells. It is this country's prime and biggest producer of organic yoghurt and cream. It is honouring its contracts. It still pays 33p a litre and subsidises organic producers with whom it has contracts. It does so for two reasons. First, it has contracts and wants to honour them. Secondly, it wants to maintain the quality and purity of the organic milk that it buys. It cannot afford not to be able to buy high-quality organics as that is its market.

The company is part of the Organic Milk Suppliers Co-operative, which it helped set up in 1994. It knew about the possibility of over-supply because of the experience with wild boar, ostriches and the many other diversifications that crashed. It wanted to ensure the possibility of holding the market together and that the market did not collapse to that extent. The farmgate price in 1996, when OMSCO started, was 29.5p. It is now down to 24p. The company's contracts run for five years. It has extended them for a further two. Its commitment to its producers is total.

The other problem that we face is that the average dairy income is now £9,500. The agrimoney would work out at £1,700 per farmer. The problem is, therefore, on both sides. Organic producers such as Yeo Valley are trying to increase their coverage and buying power—indeed, they are trying to sell to this place, too; I notice that we do not have many organics here—in order to be able to put forward the case specifically for organics for the longer term.

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Farmers are leaving organic farming because they can no longer afford it. They cannot afford the milk or the income that they receive from organic produce. Where, then, will we get the organic milk and, if I may go slightly further—I realise that we are discussing the dairy industry—the strawberries, for example, to put in the yoghurt?

Unless organisations such as Yeo Valley are specifically helped, the economics involved mean that they will be unable to continue to support farmers in the way that they do. They will do so if they can, but they will need direct help—organic subsidies or money from bodies such as the Environment Agency or the Countryside Agency.

Mr. Adrian Flook (Taunton): My hon. Friend mentioned the Countryside Agency. Is he aware of the report "Rural Proofing in 2001-02", which has just come out? Rural proofing is intended to ensure that the Government think rural. Is my hon. Friend aware that DEFRA has the worst record of all 11 Departments on the implementation of rural proofing? Although it has widely circulated a checklist, established a contact point and liaises regularly with the agency, it has not embedded rural proofing in its policy-making procedures, promotes neither proofing nor the checklist, has established no rural targets for monitoring and has not enhanced rural awareness.

Mr. Liddell-Grainger : I am not surprised in the slightest. I am interested to note that the Cabinet Office has managed to do better than DEFRA. One wonders how many gardens and farms there are in 10 Downing street.

Yeo Valley and other organisations are not cutting their prices; they are trying to stay where they are. I ask the Minister to see what he can do. Yeo Valley is a shining example of excellent practice in the dairy industry, and such organisations are going out on a limb to support the dairy industry. People such as the hon. Member for Somerton and Frome (Mr. Heath), my hon. Friend the Member for Taunton (Mr. Flook) and I depend on such organisations to hold the farming industry together in counties such as Somerset.

10.31 am

Hywel Williams (Caernarfon): I am pleased to be called, given the extensive dairy industry in my constituency and in those of my hon. Friends the Members for Ceredigion (Mr. Thomas) and for East Carmarthen and Dinefwr (Adam Price).

I congratulate the hon. Member for Somerton and Frome (Mr. Heath) on securing this debate. It is very timely, given that the National Farmers Union in Wales calculates that the industry there is in danger of losing up to £45 million due to the current price cuts. That danger was confirmed to me in recent discussions with dairy farmers in my constituency. One told me bluntly and briefly that milk production was high early in the season, price competition was fierce, prices were low and unstable, planning was difficult, investment was threatened and dairy farming incomes were under grave threat. He said that many local dairy farmers were considering their futures.

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The pound and imports are high. I was told yesterday that last year 40 per cent. of our butter came from abroad. Some 385,000 tonnes of cheese were made in the United Kingdom, but 273,000 tonnes were imported. The industry faces competition from all parts of the world, and the liquid milk flows in.

I have discussed with local dairy farmers what options they have. Advised by successive Governments, they have invested and modernised, and herds are now larger and yields have increased beyond all recognition. Can dairy farms in my constituency grow bigger? A constituent recently told me that he had just about been able to bring up his family in the 1960s and 1970s with a herd of fewer than 30 animals, but that he could not do so now.

Can dairy farms in my constituency grow their way out of the present crisis? The industry in my constituency faces the pressure of increased prices when buying and renting land. Indeed, it seems that local prices often reflect not the economic value of the land, but its amenity value to people who are not solely or even mainly engaged in agriculture. That clearly limits the possibility of expansion for smaller holdings and any possible gains from economies of scale.

We have heard about the organic option, but if everyone turns organic, any price advantage will be lost. I recently bought some organic milk. The packaging said that it was organic in very large letters, but that it was produced in Denmark in rather smaller letters.

It is not only producers who are feeling the pressure. A successful farmer-owned co-operative in my constituency, Hufenfa De Arfon—South Caernarfon Creameries—has worked hard to carve out a niche at the quality end of the market, and it has had considerable success. It produces butter and liquid milk, and it supplies a well known, high-quality retail chain. It makes a very popular, high-quality cheese, Hen Sir, which is as good as one will get, but perhaps I am biased. It also makes Monterey Jack, a cheese made to an American recipe, and even succeeds in exporting it to America, along with its other products. This year, it won an export award. Hufenfa De Arfon has always been very good in paying its producers—among the top 25 per cent. and sometimes much better. However, even that highly successful and forward-looking venture feels pressure to reduce the price that it pays to its members, thereby reducing the vital money that it pumps into the local economy. If companies such as Hufenfa De Arfon, the very best, are feeling the pressure, what hope is there for the rest?

Dairy farmers in my constituency are well aware of price instability and the pressure on their industry. They know all about uncertainty and falling incomes, and many are considering their future. They know that they need a higher price for their milk. The National Farmers Union called for 22p per litre just to cover costs and 24p per litre to have a viable industry. Dairy farmers deserve a better, more secure future, and Welsh rural life cannot afford to lose them.

10.35 am

Mr. Colin Breed (South-East Cornwall): I congratulate my hon. Friend the Member for Somerton and Frome (Mr. Heath) on initiating the debate. As many hon. Members have suggested, there has been

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much debate on the issue in our constituencies but not in the House. Our farmers have been constantly contacting us with their tales of woe, which have been amply expressed by several Members this morning. I shall not repeat what they said but add just a few more comments.

On the strength of sterling, whatever the arguments for going into or staying out of the euro, sectors of our industry will be permanently disadvantaged if we stay out. As the principal reason for not going in is likely to be the exchange rate, it will have an effect. If the Government are never going to apply for what is left of our agrimonetary compensation or introduce their own scheme, we need to know. Farmers need to know whether they will ever receive compensatory payment for the clear problem of the exchange risk, so that they can plan their businesses accordingly. Pleading on each individual occasion—I add my voice to the plea that the Government make application—is not the way that an essentially long-term industry wants to plan its business.

One of the things coming up next year, which was made clear by previous Ministers, is the review of quota in 2003. We have not heard much about the Government's position on that. Will they press for the rapid end of quota? Some people thought that it would happen in 2003; if not, when will it happen? If we could press our European Union partners to agree to an end to the milk quota system, which is a clear constraint on the development of an efficient and market-focused industry, there is little doubt that it would do a significant amount of good to the UK dairy industry.

Much has been said about supermarkets. The OFT found cause for an investigation, which was carried out by the Competition Commission. Many of us thought that it was a whitewash and a total waste of £20 million. The voluntary code that has been referred to is totally inadequate to regulate properly the whole of the industry chain. We must also remember that there have been some changes in the way in which consumers purchase milk and milk products. We all know that doorstep deliveries have declined significantly and, as a result, the prices have increased. As consumers shift to supermarkets, the price in the supermarket declines. It is an escalating situation, in which more and more milk is purchased by the supermarkets. Therefore, there is a clear competition issue, which was not grasped properly by the Competition Commission, which looked at excessive profits over the whole range of activities, rather than examining individual products.

There has been growth in new dairy products such as cheese, yoghurt, dairy desserts, fromage frais and so on. Foreign companies and imports have driven many of those developments. We must really try to organise ourselves to be much more competitive in that field, so that we process our milk into those value-added products and start to displace some of those imports. That is an important way in which we can support the dairy industry in the future.

On organic farming, many organic farmers have told me that, although they appreciate the Government's support at conversion, most European competitors continue to receive support post-conversion. That is extremely beneficial to them. Our organic farmers, once converted, are playing on an uneven field of competition because other organic farmers continue to receive support post-conversion.

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I turn to bovine tuberculosis, which is a huge problem in Devon and Cornwall. The figures state that it more than doubled between 1995-2000. A Krebs trial is taking place in my constituency, and I understand all the problems of that. However, the feeling is that even at the end of the Krebs trials, which have been delayed because of foot and mouth, and the spending of £35 million, the findings will be inconclusive—yet we shall probably have seen a significant further rise in TB.

TB is going to be the next BSE or foot and mouth. It is a real and creeping problem. If we sit back and rely on the evidence of the Krebs trials to guide us on what to do, we could be sitting here in two or three years with the same dilemma, while more farmers are subjected to TB problems and more compensation is paid.

On animal movements, farmers are still extremely careful after foot and mouth, and there is the odd scare. However, the current animal movement restrictions are putting an increasing burden on their businesses. They want to know what the long term is to be. Are we going to keep the 21-day animal movement restriction, or is that a temporary measure? Will it be replaced by something else? Farmers need to know the longer-term Government policy in that area.

10.41 am

Mrs. Ann Winterton (Congleton): Thank you, Mr. Beard; it is nice to see you in the Chair.

I, too, congratulate the hon. Member for Somerton and Frome (Mr. Heath) on his good fortune in securing this morning's debate. We have almost all been singing from the same hymn sheet, and I hope that that will send the Government a clear message about the unanimity of view on what is happening in the dairy industry at present, and how vital it is for the problems to be tackled.

The past year has brought dairy farmers varying fortunes, with the fluctuation of milk prices and the onslaught of foot and mouth, one consequence of which was to reduce significantly the UK breeding herd. However, we all remain concerned that the commitment shown by dairy farmers is not reflected in the prices that they receive for their produce. The dairy sector probably has to fund more capital investment, place more emphasis on animal health and assign more commitment to its work than most other sectors in the agricultural industry. It is an outrage that dairy farmers work longer than the average working week and yet take home less than the minimum wage.

At the beginning of 2001, higher prices led to a sense of confidence and an enlargement of scale in the dairy sector. Milk producers had previously seen a decline in incomes for almost three years. However, there has been a notable and ongoing decrease since the end of last year, continuing throughout this year and this month. The National Farmers Union estimates that the average producer price in April will be 16.5p per litre. If those trends continue, together with seasonality, producer prices may be further depressed, perhaps as far as the trough of prices in May 2000. That would be seriously bad news.

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Our milk producers receive the poorest prices in Europe, yet continue to abide by the highest health, safety and hygiene standards of all member states. The Milk Development Council announced on Monday that it intends to commission a survey to investigate why there is such a price difference between the UK and the rest of Europe.

Our dairy farming industry should not experience, and cannot stand, yet another prolonged period of uncertain and depressed prices. Some factors are uncontrollable. For example, world commodity prices have dropped, and the United Kingdom's milk production during the past few months has been greater than expected, which has led to increased competition and has pulled prices down.

As in every sector, UK dairymen remain disadvantaged by the value of sterling in comparison with the euro. This year, £97 million of agrimonetary compensation is available to the agriculture industry, although that is the maximum and the European Commission has yet to rule on the official sum. Approximately £51 million of that figure should be available to the dairy sector. When he replies to the debate, will the Minister indicate the Government's approach to agrimonetary compensation, and whether he recognises the part that that plays in sustaining dairy farmers' profitability?

It is crucial—this has been said several times—that milk prices are maintained at retail level, and that a fair and just proportion of the price is reflected in producer gain. At the time of the April 2001 retail increase, the National Farmers Union was inundated with calls from the public who sought assurance that price rises would mean more money for dairy farmers. Every call made it clear that there was no problem with paying a little extra for milk so long as that extra money was returned to dairy farmers. I say to my hon. Friend the Member for Bridgwater (Mr. Liddell-Grainger) that I shall continue to buy Yeo Valley organic products, which I have done since I visited Yeo Valley when I served on the Select Committee on Agriculture. They are excellent products, and I was delighted to hear that the company is being honourable by continuing to honour contracts to its producers. Long may that continue.

However, all of that could prove of little comfort to producers. It remains clear that the allocation of the final retail price needs further investigation. I agree with my hon. Friend the Member for Leominster (Mr. Wiggin) that many believed that the conclusions of the report by the Office of Fair Trading were totally unsatisfactory. Other members of the food chain must recognise that farmers should receive a better and fairer share of the retail price.

The recent Curry report highlighted the need for farmer collaboration, and endorsed the findings of the milk taskforce report. I quote:

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DEFRA has highlighted the contrast between UK farmer control of production and that in the rest of the world. It states that in 2001, the UK's largest milk group controlled a mere 16 per cent. of production, compared with Sweden's 61 per cent., New Zealand's 90 per cent. and Denmark's 92 per cent. The latter figure impacts strongly on the UK market, because Arla Foods is the company that uses that milk.

Farmers are already doing their utmost to help themselves through the prolonged crisis, but dairy co-operatives are another valid way forward. In some recent mergers, farmers' co-operatives have expressed the hope that they will be able significantly to cut administration and transport costs, and the objective to raise capital and invest in processing, which will allow members to benefit from the added margins between the farm and consumer. What is the Government's view on co-operatives raising money to invest further up the supply chain? Do they have a view on the restrictions and costs that must sometimes be met by those ventures? If those are to be encouraged, that problem should be considered.

Conservative Members are keen for an improvement in honesty in labelling, and would like to see all milk and milk products labelled with the country of origin and the system of production of all major ingredients. If milk is imported, we do not want that information in tiny figures at the bottom of the label. We must enable consumers to choose British milk and British dairy products, which they know that they can trust. Yesterday, I went to the launch of White and Wild, which is a new, high-quality premium product. It is organic milk that comes from farms that have a whole farm biodiversity plan, and it is being sold in about 60 supermarkets from next Wednesday. That is one way forward, and let us hope that the British public will buy that milk, and encourage that movement.

Along with the general decline in milk prices, bovine tuberculosis is a real threat and a constant worry for farmers. In its January 2001 report, the Agriculture Committee called for Government action on farmers' "growing sense of desperation" at the continued spread of the disease. TB testing has been delayed because of foot and mouth disease, but the provisional Department for Environment, Food and Rural Affairs statistics for the period between December 2000 and February 2001 show that 2,231 cattle were compulsorily slaughtered as reactors or contacts. As a result of foot and mouth, we cannot assess the situation from last year's statistics on TB reactors but the release of figures from the most recent batches of testing is imminent, and will prove extremely telling. I have no doubt that they will highlight the sheer extent of the desperation that the Government's strategy against TB is causing among farmers.

I have raised a few issues currently facing the industry. As always in this debate one has to gallop up to the final winning post, as it were, but I leave that for the Minister to do. I am trying to leave him sufficient time to do so. It is in everybody's interest in the United Kingdom that a sector as suited to the UK climate as dairy farming should continue and prosper. However, the Government appear prepared to see that asset squandered, and their lack of action seems almost a refusal to defend it or to instigate a recovery in a very fine sector of our agricultural industry.

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10.51 am

The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Mr. Elliot Morley) : In the time left to me, I shall try and cover the range of points raised by hon. Members. I begin by congratulating the hon. Member for Somerton and Frome (Mr. Heath) on raising the issue. Dairy farming is important in Somerset and the issues that he has raised are important nationally. I certainly agreed with much of what was said by my hon. Friend the Member for Stroud (Mr. Drew) and the hon. Members for Leominster (Mr. Wiggin), for Brecon and Radnorshire (Mr. Williams), for Caernarfon (Hywel Williams), for Bridgwater (Mr. Liddell-Grainger), for South-East Cornwall (Mr. Breed) and for Congleton (Mrs. Winterton).

It may be useful if I stress some of the things that the Government have been doing. Although many points have been very fair, I take exception to the last remark that the Government are not doing very much about the industry. The Prime Minister has been directly involved at all levels concerning agricultural issues. He was at the seminar of the Food and Farming Commission. He has taken a close interest in the action plan on organic farming, which I have been asked to chair. The first meeting was constructive and useful. The food chain centre is in the process of being set up, led by the Institute of Grocery Distribution. A code of practice has been introduced. Of course, if people feel that it is not delivering what it is meant to deliver, we will keep it under review. There is a mid-term review of the common agricultural policy. I can confirm that we are opposed to quotas—we believe that they should go.

One of the problems of the dairy industry is that the impact of the various support mechanisms and subsidies, as my hon. Friend the Member for Stroud said, is a complete mess. It works against the interests of the industry. We must make progress on the mid-term review. We are supporting co-operatives and collaborative marketing in a range of ways. I recently had a meeting with OMSCO. I have been to Yeo Valley, and I confirm that it is doing its best to assist the organic sector and its customers. OMSCO is acting in a principled way, and is a first-class organisation in respect of products and operations.

It might be useful if I set out some of the reasons for the problems faced by the dairy industry, and explain what we can and cannot do. I do not want to mislead hon. Members about the Government's role concerning market intervention. We concede that it is a difficult time for the dairy industry. I accept all the points that people have made. It recovered in 2000 and that continued into 2001, but since then prices have fallen back to what we accept is an unsustainable level. The latest figures show that the farmgate price of milk is around 18.33p per litre, and there is a danger that it may drop further.

It is of course unfortunate that that has happened in the wake of foot and mouth, when many farmers are beginning to restock and recover. The fall in prices has happened for a number of complex reasons. It is, however, certainly a result of strong UK supply combined with weak demand, especially on world markets. During foot and mouth, there were fears that the cull of dairy cattle would lead to shortages of milk, and some foolish claims were made about a likely drop in milk production. We at DEFRA said at the time that

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we were not concerned about milk production because we did not think that it would be a major problem. Although there was a brief dip in production, farmers reacted to higher prices and the threat of a quota superlevy by increasing their levels of production. Furthermore, although 160,000 dairy cows were culled during the outbreak, the June 2001 census shows that the number of dairy cows in the UK fell by only 80,000 because animals that might otherwise have entered the over-30-months scheme were kept on for additional lactation. Despite losses early in the quota year, production for 2001-02 has exceeded that of the previous year, and production levels in the past few months have been at their highest for more than 10 years. That is a classic market supply situation in relation to production and demand.

At the same time, the situation on the world markets could hardly be worse. Markets were already weak because of economic problems in some key importing countries such as Brazil, and they collapsed further in the wake of 11 September. That had a noticeable effect on exports of dairy products from the European Union. The uncompetitive effect of the common agricultural policy on unsubsidised world markets has led to retention on EU markets, which already have a structural surplus of products that would otherwise have been exported. The effect has been to depress the price of butter and skimmed milk powder, which is a point that has already been made, to intervention levels across the EU—an intervention level in the UK is the same as that anywhere else in the EU. As a consequence, some producers have switched from making those products to producing cheese, which in turn has depressed that particular market. The whole thing is a problem.

What can the Government do? I accept that that is a fair question, but we also have to accept—I do not want to mislead hon. Members or the industry—that we do not run a command and control economy, and the Government cannot intervene to set prices. Price setting and price negotiation is rightly a matter between producers and purchasers, and the Government have a limited role. Of course, we accept that the dairy sector is part of a highly structured, interventionist industry. Since we came to power, we have reduced dairy farmers' costs by waiving cattle passport charges, removing dairy hygiene charges and abolishing the weight limit on cattle entering the over-30-months scheme. Furthermore, since 1999 we have paid more than £100 million in agrimonetary compensation to dairy farmers, both in 2000, when prices were low, and last year when the sector faced the particular threat of foot and mouth.

We made it clear, however, that that support should be regarded as short-term, transitional aid, which is the current agrimonetary position. The hon. Member for Somerton and Frome was fair about that because he mentioned the Fontainebleau agreement and understands what the problem is. The idea that there is a pot of EU cash for which we can apply is totally wrong. It is not there for us because it was negotiated away as part of the rebate agreement. All we can do is apply for the right to pay subsidy through agrimoney, which we have to find ourselves. The sector must

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therefore compete not only with other priorities, but with other groups in the agriculture sector that have no such opportunities, such as the pig sector.

Mr. Breed : Will the Minister give way?

Mr. Morley : If the hon. Gentleman will forgive me, I have only two minutes left and I am struggling as it is.

Agrimonetary compensation is a short-term option, not a sustainable, long-term interventionist policy. That is why, incidentally, the previous Government not only opposed it in the Council of Ministers, but did not pay it in 1996, when they could have done so.

In the one minute left, I have to say that I recognise that there is a terrible problem with TB. Please do not think that the Krebs experiment is focusing just on the issue of badgers and cattle. We are also working on vaccines and management, and we will make an announcement about other measures in May, but we have taken many tough decisions to keep that experiment on track. It has not been knocked off course by foot and mouth. We believe that it will produce important information about combating the disease. We take the matter seriously. We are combating the disease and we will continue to work with the industry to try to reduce it and minimise its impact.

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