Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Examination of Witnesses (Questions 980-999)



Mr Jack

  980. If you go back over the period 1995-2000 in money terms an amount of money has come out of British farming because the fall in incomes has been greater than the annual amount of subsidy that has gone in, so you could argue that we have already seen the effect. We started our inquiry in 1995. We have already witnessed what ending the subsidy was like and we have survived. Does that give us any clues as to what would happen if we carry on reducing subsidy in the way that we have been talking about so far?
  (Mr Gill) Can I make two points here? Yes, you are correct to point out that this divergence of prices, and I regularly use some work that our economists have done for us which is an inflation graph which shows RPI using food inflation and using farm gate inflation. A fourth line I have added recently is catering inflation because catering is assuming more and more of the market place. I use a 13-year period because we started the series in 1987. Consistently food inflation has underscored general inflation by an order of one per cent or slightly more per annum over that 13-year period. Interestingly, catering inflation exceeds RPI by two to three per cent per annum. What I did was take the base in 1987 of what the total UK food bill was and asked them to inflate the UK food bill by inflation for the 13-year period as opposed to food inflation, RPI. The outturn was that the British consumer had saved on their food bill just under two billion pounds per annum other than they would have paid for by inflation. That is not far short of the CAP transfer. The second point you make is have we not actually got, to use Mr Mitchell's word, cold turkey already? We have in terms of prices but we have not in terms of the subsidy so, if you took that away, would the effect be just the same? No, it would not because we have already seen significant exodus from the farming community in the last two years. The census years end in June. We will have another set of census figures in a few months' time. It is running at around 20,000 people per year. That is a massive exodus from the industry. People have survived by shedding labour and working untenable hours. I hear talk in the press today that teachers, understandably, want to have a defined working week. Many farmers, and particularly livestock farmers, are working twice those hours for 52 weeks of the year and more because they have shed labour. What they have done to survive is cash in their pension funds and all their savings and drawn down any family assets and surplus assets just to survive. Continuing that survival with prices as they are is a real question mark of how they are going to survive and I hear in some parts of the country that rents being tendered are non-existent this year for the first time. If you drop it even further then you will see a massive exodus.

  981. Have you done any work on who the winners and losers would be in a regime without quotas and subsidies? Have you done any kind of modelling to try and predict what the effects would be? You have described already some of the effects and it sounds to me as if you would have more of the same if the current regime was changed. Can you give us a little picture sector by sector as to what the effect would be of removing quota and subsidy and, if I can just put in parentheses, why is it that so many dairy farmers still seem to be wedded to milk quotas when we are actually rather good at producing milk? We have a natural advantage of pasture on the western side of the country and yet people are not saying, "Give us the tools and we will show you the job we will do." They say, "No. We would rather have the quotas."
  (Mr Haworth) You have asked a hugely complicated question. You are right. In the last six or seven years farming has lost about four billion pounds from the market and its total subsidies are just over three billion, so you are right. What it points to is firstly the fact that, as Ben has said, the current level of income is unsustainable. We cannot expect to continue at that level and survive. The second problem is that the real problem is not in the level of subsidies. The real problem is in the market place and there are a lot of reasons for that. The value of the pound is clearly one very important reason but the second and equally important reason is the malfunctioning of the food chain in the United Kingdom which means that although we may be very efficient, and I think your question was probably referring to this, at the production level we are efficient, the fact is that we fail to get as much from the market place as many of our competitors in the rest of Europe and that is why we are struggling at the moment. What would be the effect of taking away subsidies and quotas? I think the problem is, and the reason, as you have said, why many farmers who have got dairy quotas feel it is very difficult for them to get rid of quotas is that they feel the current situation is so difficult that they find it hard to contemplate a different future. When the milk chain in this case is operated so badly they find it hard to imagine that they can do away with quotas which they see at the moment as a form of support rather than as a form of constraint, as you do. I think if the market was performing much better they would be much more ready and more willing to look at getting rid of the quota system.

  982. Can I just interrupt you a moment. Can I just draw you back to the question I asked. Have you done any modelling?
  (Mr Haworth) I was coming on to that.

  983. Good.
  (Mr Haworth) The who would win and who would lose. It is not what you would expect, in fact. What we have seen in the last few years is not necessarily the most efficient farmers being the ones who survive, and there are various reasons for that. The most effective and efficient ones may well be those who have the highest level of borrowing because they have done a lot of investment and those are the people who are very often in trouble, not the ones who maybe are not particularly efficient farmers but historically have got a very low level of borrowing because they have not actually been investing in the past in modernising. Also the ones who are more likely to continue in production are probably those who are towards the end of their careers and have not got a lot of alternatives whereas many of the more entrepreneurial younger farmers who have got other skills, transferrable skills, are the ones who are going out. Actually what has happened in this very difficult transition period is the farmers that one would have wanted to keep in the industry are the ones who are most likely to have gone out.
  (Professor Buckwell) Can I just add to that. I agree with that analysis. The consequence of what you describe between 1995 and the present time is also a huge lack of investment, and that is simply unsustainable. If you are not replacing the fixed equipment then you can get by for a few years with that but then it starts to tell, it starts impacting on productivity. One of the other consequences has been a tremendous restructuring of the industry, which is not well documented, we know about it but the huge increase in contracting and share farming, and the implications of that for environmental land management are not very clear. Then to turn around and say "If we have survived this far surely we can lose another £2-3 billion and still survive" is not good logic. You make the economies and the changes initially, the easiest ones available to you, if you keep turning the screw then you will see simply an accelerated restructuring, an accelerated exit of labour, even less re-investment in the industry and then you start finding that the rather small total contraction in the sector that we have seen so far in absolute terms will then accelerate, and you ask "Is this in the national interest?"

  984. Am I right in assuming that all of you agree that if there is a universal—that is throughout European—parallel reduction and removal in subsidy over a period of time that you cannot see any benefits from doing that? The NFU in paragraph 16 of its evidence says: "... there are undoubtedly examples of agricultural support payments which distort the market and where changes would probably have a generally beneficial extent". It is a bit tentative, either you are agree that getting rid of them will be good and that the efficient British farmer will shine through in certain sectors or you do not. That is a fuzzy statement about the possible impact of change.
  (Mr Gill) The situation is not black and white, I am afraid it is not, we wish that it were, because there are the complexities that we have discussed already with those who are not-full-time farmers, either full-time in terms of money/income, or in terms of the time they spend on the farm. It is a complex factor of age of farmer that Martin has just been through. The drivers, therefore, do not actually give logical answers. One of the more long term factors which needs to change, which I alluded to earlier on, is if you get to the stage in 2020 whereby a quarter of your land mass is in non food crops, whereby you have another block of land—say five to ten per cent—specifically targeted at environmental projects on top of the environmental standards within food production, then you will have rebalanced the food supply chain to such an extent that you have a supply/demand equation giving you a figure, a price, above the cost of production. Once you get into that situation then you do not get these perverse results from twiddling the knobs because you have actually got into a tenable economic situation. Then you could see, because there is a balance, that Britain within Europe could seek quite easily to maximise what it is good at, which is grassland production, not just milk, beef and sheep, whereas others in Europe would maximise on other positive attributes that they have, which is the founding principle of the Common Agriculture Policy, the development of the comparative advantage.
  (Mr Haworth) Another answer to your question is also that the reduction in market prices or in market payments that you alluded to has occurred only in the UK, this is a purely UK phenomenon. In the rest of Europe farm incomes have remained stable or marginally increased whereas ours have been cut dramatically. This is a reform of the CAP, if you like, which has taken place uniquely in the UK. As Allan has just said, in the present circumstances it is very difficult to imagine taking away another slab of money going to farmers in the form of support at the present time whereas in the rest of Europe that might well be something which could be contemplatable actually. We are facing this circumstance in a uniquely bad situation with having had no investment for the last five years.

  985. Can I just say, would some of the problems you have described—low investment, difficult finances—be solved if we joined the euro? Would we be having a different conversation now about farming without subsidy if you were doing it from a higher income base? Is it not perhaps the case that some of your members are sitting there putting their bets on getting in but how much is that influencing your view of the situation?
  (Professor Buckwell) To answer that, it depends rather strongly on what rate we join. At the present rate then no benefit. If we could magically engineer a rate of over 70 pence then that is a different story and then, certainly, we would be having a very different conversation. It would be all smiles and positive talk from our members.
  (Mr Thomasin-Foster) Just to put a figure on what Martin said a minute ago. Five years ago, taking 100 as the base level of income, a total labour unit in the 14 Member States, excluding the UK, today the level is 107 against five years ago the level in this country is 60 something per labour unit, to show you the difference which has occurred because of all the issues we have talked about.
  (Mr Gill) There are two major discrepancies in the economy: the euro or the absence from the euro and the relative weakness or strength of the pound, depending which perspective you want to come from, have been major factors. It is interesting to observe though that when the euro rate was struck at about 71 pence there was a general feeling in this country that was a level we could not survive at. Today I would suggest that the majority of farmers would be very happy to have that rate at 71 pence, it is a matter of adaptation. We have gone through an enormous amount of pain to get there, unnecessary pain, which has cost many lives in terms of farming businesses and a lot of suffering as a result. The second one is the point that Allan Buckwell has made, the food industry in Britain has suffered from a chronic lack of investment in the processing sector in the last four decades, not dissimilar to other industries in this country with the trains, for example, which have been centrally funded, for reasons which are very different and reasons, because of our structure in farming, that we have not adopted a structure which has given us the ability to force the need for investment. Some of it for example was down to at times the Milk Marketing Board where there was a pricing system which allowed all the costs of processing to be passed back to the producer. That is a reality and that is changing slowly now. We need to accelerate that change to invest. It has been made worse by the fact that in Britain we are under allocated in funds from Europe in terms of the Rural Development Regulation. In terms of our economy we should be 8 to 9 per cent, we are at 3\5 per cent. Compared with France and the Republic of Ireland, two countries either side of us, if we had their rate we would have 15 per cent. That is an instrument that is used widely in those countries which gives them far greater structural support, encouragement to change, to build on a variety of schemes which are outside production related subsidies and survive in the very difficult scenario in which we live. We suffer severely in Britain because of that on top of the exchange rate fluidity.

Mr Mitchell

  986. It seems obvious that you cannot have a Common Agricultural Policy without a common currency. It is fairly obvious also that the euro was not going to be that, may never be, we do not know, not everybody is in it. Now before you had a common currency because it was a basket. Why did farmers and Government allow them to get away with this when it was clear that if it was not a common currency one was going to go up and the other was going to go down and problems were going to be caused for those nations caught in the process? Why was the common currency abandoned?
  (Mr Gill) I am deeply interested to hear that you put me on a common par with Government.

  987. Did you protest at the time?
  (Mr Gill) It was not my decision, as you are well aware. The point is you are quite correct that to have a single market without a common currency puts enormous strains on it, that was why we had all the other systems in there. To my mind that is set to get worse because I think it is quite likely now that it will not be a common currency of 12, it will be a common currency of 14 and if we stay out of that we will be more and more exposed. Furthermore there are arguments for and against joining the euro but they have not been properly debated. There are risks whatever we do. It seems those on the pro euro side suggest there are no risks in going in and those who are anti euro say there are no risks in staying out; that is demonstrably rubbish. There are risks both ways which need to be fully debated which have not been fully debated, not least of which is the ability of the central authority within Europe to redistribute capital which in the only other currency unit in the world that I am aware of, which is the United States of America, the Federal does redistribute capital and there is no significant base within Europe to do that. Nobody has tackled those key questions. Having said all that, I think also the key question which needs to be put to the British public is actually first "Do you want to stay in Europe?" and once you have answered that, which we would argue "yes", then you have to ask the question "Are we better off in or out of the euro even if the euro fails?". I could envisage a scenario that if the euro did fail all the hot money goes into sterling, the pound rate goes phenomenally the wrong way and we are out of business.

  988. I am not arguing about the euro. Why did you not point this out to Government at the time or raise objections to the fact that they were being split in this way?
  (Mr Gill) I think we have raised the points about currency at a variety of occasions.

  Chairman: Having had a variety of occasions we are not going to have another occasion now. We are going to call a halt to that.

Mr Breed

  989. We could not get through the morning without talking about modulation, which has been introduced by the Government and has been suggested in the Curry Report as a substantial means of delivering the objectives of farming. Although I probably know most of the answer I will ask it for the record: why is the NFU implacably opposed to modulation?
  (Mr Gill) Can I be clear about the word modulation, Chairman, because as you are well aware modulation's definition has changed meaning a lot of times throughout its existence in the European context. Modulation was originally conceived as a Robin Hood principle, to take from the big, to give to the small, it has since changed effect although in France modulation has a cut off of 30,000 euros per farmer. Interesting concept: When we talked to the Greek farmers they told us that if they had that cut off in Greece that would not be a problem because they would only have five farmers who receive more than 30,000 euros which puts the perspective of divergent agricultural economies across. Why do we remain opposed to modulation? We remain opposed to the tool because it is taking money from one to pay to another, not necessarily the same because it is not ring fenced, and with the current mechanisms of modulation even with the additional match funding of Government, because of the inefficiencies and the additional capital works which are required for the farmer to get it back, even if it is his money he is getting back he will be a net loser because of the costs involved. The estimates that we have put on it, if there was 10 per cent modulation, if the figure was 10 per cent, the net effect on farm income would be a reduction of 138 million to the farming industry as a whole.

  990. It is not his money, it is the taxpayer's money first and his will be going back, although I understand what you mean. What about the CLA and the TFA, do they support the concept?
  (Professor Buckwell) Can I say that we have been arguing for a number of years now that we have to change away from production supports to payments for rural development. Therefore then the question is what is the mechanism for doing that and modulation, in a sense, is the one that is currently on the table and under discussion, and quite rightly. In principle, we are in favour in the sense that this helps move policy in the direction we have been arguing and makes the policy more legitimate and defensible, and improves environmental delivery which is what we need to do.

  991. You will be able to expand a little bit more when I ask some other questions but can I just ask Mr Haydon.
  (Professor Buckwell) Can I say that it has to be EU wide—

  992. Can I stop you there, I will ask you some questions about that but can I ask the TFA, are you supportive of it?
  (Mr Haydon) Chairman, we are not, we would support what Ben has been saying. Unfortunately, as you will know, 40 per cent of the land mass of the country is farmed on a tenanted basis and therefore we are very unlikely to support a scheme from which the majority of our members are potentially disenfranchised. The idea of modulation is quite simple. You take money away from subsidies and then you move it over into environmental and rural development schemes. Unfortunately if you are a tenant, to take part in any of those schemes, you are at the whim of your landlord. If the permission is there it is fine, if it is not, it is very often withdrawn or at a cost to the tenant. We are very unlikely to support a scheme which basically very little of our members at present have got the chance of getting into.

  993. If we could move on a little bit because you will be aware that the NFU in the South West have decided that it might be better going with the grain and perhaps putting energies into getting the benefit rather than fighting the principle. There may be some divergence. Have you got any idea of what sort of proportions of your respective memberships support and do not support? Have we got a real divergence of opinion? The fact the Curry Report is now in, the Government has introduced modulation already, it looks to be the way that it is going. Have you done any straw polls of your memberships as to what members may be supportive of modulation and those who are firmly against it?
  (Mr Thomasin-Foster) To answer that question, if I can, from the CLA. We have been discussing modulation, obviously, and as such I am talking about fund switching, I am not talking about social engineering which I talked about earlier on.

  994. Yes.
  (Mr Thomasin-Foster) We have been discussing that for some time. We have, as far as we know, a full understanding and acceptance of that principle. From a European landowners organisation, again within that organisation, which represents the 14 and 15 Member States, we have an understanding amongst those that this fund switching is something which is acceptable, should be looked at and should be promoted.
  (Mr Dunn) In terms of the principle of modulation, I think our membership would be broadly in favour so long as they have access to the schemes that the modulated money was being paid to support. It is fair to say in the current context the majority of our membership would be anti-modulation because of the difficulties that they have accessing the schemes but were those problems resolved and the administration costs reduced then we would see many more of our members being more pro.

  995. The principle may be right but you may not agree necessarily with the current scheme?
  (Mr Dunn) Correct.

  996. Ben?
  (Mr Gill) You raised the issue of the South West. Those in the South West, indeed there are those throughout the whole country, take a differing view. We adopt the majority view as a democratic organisation. The feelings of the particular group in the South West were considered in London but they were not the majority view. This is one of the points about modulation. It is divisive, it sets one against the other because those who are eligible and likely to be able to receive the money are obviously going to be in favour of it, particularly if it happens that they are not going to be contributing in any degree or form to the extent to which they are going to be receiving it. That to me is the divisiveness bit of it.

  997. 80:20? 90:10?
  (Mr Gill) No, I do not go into percentages. I think it is very important I make it very clear because certain people have sought to misconstrue this. I am not saying we are opposed to agri-environment regulations, I am saying they need to be adequately and properly funded but not by using the current mechanism of modulation which is inefficient, highly bureaucratic and costly, costly in every sense of the word.

  998. Without modulation you would say that money could only come from Government which would be against state aid?
  (Mr Haworth) If I could just add, one of the big problems, it is divisive, as Ben just said, because at the moment people who pay most in modulation are obviously the arable sector and that is in the east, people who are most likely to gain at the moment are people in livestock production and that is why the west is more likely to be favourable. That does point to Ben's other conclusion, if we are to continue with modulation you have to have a mechanism which does not do that, which gives access to everybody to gain the benefits from agri-environmental schemes.
  (Professor Buckwell) Can I say, the purpose of the fund switching is to switch the policy to a more desirable set of arrangements. I think in principle we are all in favour of a broad application stewardship scheme which can engage most if not all land managers in order to partly get round that problem that Martin has just explained. Can I say the reason that we are in favour is that we would feel pretty stupid if we are not. Given the conditions, switching money from Pillar 1 100 per cent FEOGA financed to Pillar 2 50 per cent Member State financed, in order to spend the money in Pillar 2 it has to be match funded, under existing—and I stress existing—co-financing arrangements that means more money for the rural economy. Given the plight that our members are in we feel it would be pretty daft not to be looking very seriously at that possibility to both bring about the change in policy and bring about a further injection of assistance to the rural economy and to deliver the things that our members want. Also, we want this to be EU wide in order to have level terms of competition amongst the Member States and there is a question about the pace at which it is done, when does it start, at what rate, all of that to be debated.

  999. If it was compulsory across the whole of the EU would the NFU change its mind?
  (Mr Gill) Compulsion is a clear factor which needs to be in there, a level playing field. Why create a massive bureaucracy, just say "Right, we are going to take this amount of money and put it into the agri environment". At the moment—and I should have added this to complement a point that Mark made about the European landowners—we discussed this in the ComiteĞ des Organisations Professionnelles Agricoles, COPA, with all 15 Member States there last month in Brussels and with the sole exception of a small Spanish farmers' organisation, COAG, which has particular nationalistic tendencies in Spain, the whole farming industry throughout Europe is opposed to the concept of modulation as it is proposed at the moment, although they recognise the need to address the issue of agri-environment schemes and funding. Remember also it is exacerbated by the lack of funds because of the point I make about Rural Development Regulations. If I was an arable farmer in Spain or Portugal at the moment I could claim under an agri-environment scheme, depending upon which country, between 150 and 180 euros per hectare for not ploughing, not burning my straw (we are not allowed to burn our straw) minimal cultivation and direct drilling. That is a lot of brass, to use Mr Mitchell's terms, if that is an acceptable word, Chairman, a lot of money going into the industry which dramatically tilts the balance one way or the other.


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