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House of Commons

Thursday 13 January 2005

The House met at half-past Eleven o'clock


[Mr. Speaker in the Chair]

Oral Answers to Questions


The Secretary of State was asked—

Dairy Industry

1. Mr. David Heath (Somerton and Frome) (LD): What recent assessment she has made of the profitability of the dairy sector. [207843]

The Minister for Rural Affairs and Local Environmental Quality (Alun Michael): Profitability varies between farmers within the industry. The difference between the most efficient quartile of producers and the least efficient is of the order of 12p a litre, which is an enormous range when one considers the cost of production against the farm-gate price of about 19.6p. The 2003 KPMG report found that dairy processor profits and margins were not out of line with those of other food sector companies.

Mr. Heath: The right hon. Gentleman takes an extraordinarily sanguine view of the fact that we are losing dairy farms at the rate of 40 a week; that we have lost a third of dairy farms since 2000; and that dairy farmers on average earn less than £3 an hour for a 70-hour week. The fact is that farm-gate prices go down while supermarket margins go up. It is clear that the supermarket code of conduct is not adequate to the task of regulating the industry. Does he intend to take action or is he simply going to wait for the extinction of the British dairy farming industry?

Alun Michael: I was not sanguine; I simply gave the hon. Gentleman the facts. He seems extraordinarily pessimistic. The production of milk is at roughly the same level as it has been in recent years. There has not been a large drop in production, although he is right to say that some producers have gone out of dairy production—because they have taken business decisions to move elsewhere or because they have found it difficult to make a profit from milk. That is illustrated by the big difference in profitability between farmers. We want a sustainable and competitive industry. That must involve bringing up the efficiency and profitability of those at the lower end of the scale whom I have mentioned. That is being addressed both by the industry and by the Government. That is why my noble Friend
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Lord Whitty has put so much effort into working with the dairy supply chain forum, which has a clear focus on efficiency and profitability.

Mr. David Drew (Stroud) (Lab/Co-op): My right hon. Friend will be aware that the Select Committee investigation into the dairy industry found a level of distrust between the different sectors that is hard to see in any other industry. One of the major ways in which it was felt that the producers could fight back was by much larger-scale co-operation and, dare I say it, as a Co-operative Member like my right hon. Friend, co-operatives. What are the Government doing to encourage the formation of such co-operatives to ensure that the producers have an effective voice and a means of organisation?

Alun Michael: Primarily, we are working with the forum to which I referred. I am aware of the way in which various co-operatives are pressing for change. Two of the leading co-operatives in the industry have campaigned, along with the National Farmers Union, on the price received by farmers at the farm gate. It is clear that that engagement in the industry, and our engagement in supporting the industry and seeking to create a sustainable future, is the right way to go.

Sir Nicholas Winterton (Macclesfield) (Con): Does the Minister accept that many of us on the Opposition Benches are not seeking to score political points—[Laughter.] No, seriously. The situation facing the dairy producer in the United Kingdom is dire. We could lose the industry, as the hon. Member for Somerton and Frome (Mr. Heath) said. Many of us regret the passing of the Milk Marketing Board, which was the most effective co-operative that has ever existed. Will the Minister look at the profit that the superstores are making as against the profit—very little—made by the producers?

Alun Michael: The hon. Gentleman always lets us know when he is making a partisan point, and he is clearly not doing so on this issue. There is a danger of being over-optimistic or over-pessimistic on this issue. I said that there was an extraordinary variation between some farmers, who are doing quite well and producing at a profit, and others. I ask the hon. Gentleman to pay particular attention to the fact that I gave, that there was a difference of 12p a litre between the top and bottom quartiles of farmers' costs of production. That obviously makes a big difference to profitability.

The supermarket code of conduct is being reviewed as a result of the work of the Curry commission and its report. The Office of Fair Trading initially concluded that there was some evidence of problems within the code, but that little hard evidence had come forward. It has therefore worked on a compliance audit. We all look forward with great interest to the findings of that proactive look at the way in which the supermarkets operate and their relationship with the farming industry.

Mr. Brian Wilson (Cunninghame, North) (Lab): Does my right hon. Friend agree that value-added products are one way of increasing the sector's profitability? Does he share my puzzlement that one can walk into a supermarket and see the shelves lined with value-added
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dairy products produced by vertically integrated co-operatives on the continent, while such co-operatives in this country are deemed anti-competitive?

Alun Michael: Certainly, value-added products are an important opportunity for the industry. There are two considerations—the farm-gate price for milk and producers gaining more profit from suppliers. Historically, in most European countries, more processing arrangements have been owned by farmers. The co-operative movement was invented in this country, but was exploited more by farmers in many other countries than by our own farmers. Obviously, the important thing is to help the industry become as competitive as possible in the interests of both the consumer and a long-term sustainable industry.

Charles Hendry (Wealden) (Con): Is the Minister aware that even the most efficient dairy farms are closing down? The largest one in my constituency, which had 500 dairy cows and a £2 million investment in the most modern milking facilities in the south-east of England, recently closed because it could not become profitable. We are reaching a stage where the only profitable dairy farms are those relying on cheap family labour, where family members are not paid a proper wage for their work. Will the Minister take on the supermarkets, whose pricing policies have led directly to a situation in which efficient dairy farms are closing down and there is an increasing reliance on imported foreign milk?

Alun Michael: First, on the supermarkets, it is important to wait for the report by the Office of Fair Trading which, as I said, has been looking proactively at their relationship with farmers. Members on both sides of the House may well wish to look at that report when it is published. As for profitability, major investment by some producers has made it difficult for them to remain profitable in the market, but as I suggested, there is an extremely large variation in profitability between the top 25 per cent., which is composed mostly, but not exclusively, of large producers, and the producers at the bottom end who may find it difficult to maintain production. Significantly, the production of milk in this country has not gone down, even though some farmers have moved out of milk production.

David Taylor (North-West Leicestershire) (Lab/Co-op): Further to those figures, if Mr. Micawber was a million-litre midlands milk producer with median costs of 22p a litre, he might say that a 20p farm-gate price equals ruin but a 24p farm-gate price equals prosperity. Is it not the case that the retailers are taking an excessive slice of the retail price? The investigation chaired by my hon. Friend the Member for Stroud (Mr. Drew) found it impossible to determine the actual distribution of 18p per litre of the price paid by the consumer. What is happening?

Mr. Speaker: I hope that there is some chance that the hon. Gentleman will make his supplementary questions brief. That certainly was not brief.

Alun Michael: The current farm-gate price is, I believe, 19.6p, so clearly producing milk in excess of that would not be profitable. In 2003, the KPMG report
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found that 60 per cent. of milk was produced profitably for farmers, which, as suggested by the large variations between the top and bottom quartiles, implies that for some people production is not profitable. I recommend that my hon. Friend chooses as his weekend reading the report by the Milk Development Council published in August 2004, as it demonstrates that, although the proportion of the price taken by the supermarkets has increased in the past 10 years, another 10 years before that the proportion that they took was roughly what it is now. One must therefore take a careful look at the matter, and that is precisely what my noble Friend Lord Whitty is doing with the forum that represents the farmers and the dairy industry, which we want to be sustainable in the long term.

Mr. Owen Paterson (North Shropshire) (Con): The profitability of the sector is being significantly reduced by bovine tuberculosis, which the Government have described as an epidemic and which they predict will cost £2 billion over the next 10 years. What is their assessment of the likely improvement in profitability in the UK if they implemented the wildlife management measures introduced in Ireland, which delivered a 96 per cent. reduction in infection risk in Donegal?

Alun Michael: I find it interesting that the hon. Gentleman did not follow the questioning of hon. Members on both sides of the House about enabling the dairy industry to be competitive and successful. There are recently published results from the Irish four areas badger culling trial, which we are studying with great interest. We are asking the independent scientific group on cattle TB to look at those findings and assess their relevance to the situation in the UK. That will lead us to conclusions which, I am sure, will be debated with great interest by hon. Members of all parties.

Andrew George (St. Ives) (LD): I am not sure that the Minister properly reflects the deep seriousness of the situation. There have always been variations in the input and profitability of dairy farms, and no doubt there will be in future. He has to accept that public subsidies that go to dairy farms have been siphoned off into the profit margins of supermarkets. Report after report from the Select Committee and the Milk Development Council all confirm that dairy farms have been losing, out while supermarkets have been creaming it. Rather than circumnavigating further mulberry bushes with inquiries and committees, the Government should act. Why do they not act, as they did to break up Milk Marque four years ago and—

Mr. Speaker: Order. The Minister can answer.

Alun Michael: Thank you, Mr. Speaker. It is a complicated matter. We are trying to move to a situation where demand dictates production. That must be good for the health of the industry in the long term. The current level of production means that some goes into low-level and therefore low-return uses—generic rather than branded butter and other products, such as powdered milk and so on. As I said earlier, the level of production is comparable to that before some producers moved out of dairy. That is why it is so important to relate the activities and how the industry develops to how the market moves.
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