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Milk Prices

2.30 pm

Mr. Stephen Crabb (Preseli Pembrokeshire) (Con): I   am grateful for the opportunity to open this debate on milk prices and the dairy industry. I am extremely encouraged by the turnout for the debate, considering that so many other important things are happening in the House today.

The fact that this is the first debate for which I have applied and secured since being elected six months ago reflects the seriousness with which I view the challenges facing dairy farmers and the importance of maintaining a healthy domestic dairy industry. I appreciate that this is a complex subject that has generated a huge amount of comment and analysis in recent years, not least the excellent report from the Environment, Food and Rural Affairs Committee published last year.

There are many different angles to the issue, and I   shall not attempt to cover all bases. I shall not, for example, mention the impact of common agricultural policy reform on the dairy sector, or bovine tuberculosis, which is having such a harmful effect on dairy farmers in my constituency I will not mention rising energy input costs or even the huge amount of regulation that is hampering so many farmers in the sector. I hope that contributions from other hon. Members will plug the gaps in my speech.

My starting point is a simple one; it is the belief that Britain—Wales—needs a vibrant, healthy dairy farming sector, but that many dairy farmers are currently demoralised and pessimistic about the future and have little faith that the market for their product is working fairly and transparently. Many dairy farmers are producing milk at a loss, with production costs of around 20p a litre set against the farm gate price of   around 18p a litre. It sounds rather like a GCSE maths question: "Work out how big the loss is, given any level of milk production." It is not complex.

Here we are in the middle of autumn and with the escalation in costs of producing winter milk, many of the   dairy farmers to whom I have spoken in recent days are very gloomy. That farmers were even able to countenance the action that some of them took last week in withholding product from processors is indicative of the frustration and anger in the community. Speaking to local dairy farmers, I do not get much sense of optimism or enthusiasm for the sector in which they do business.

I spent part of my recess attending agricultural shows in my constituency and talking informally to numerous farmers. I could find reasons to be optimistic about beef and arable, and indeed we have had good news in recent weeks about the beef market and the ending of the over-30-month scheme. I pay tribute to the Minister and his colleagues for their efforts in that regard. However, in discussions with my dairy farming friends and representatives of the Pembrokeshire branches of the Farmers Union of Wales and the National Farmers Union, I heard nothing to suggest that the dairy sector is in anything other than a depressed state. The message and feedback that I have received is one of unalloyed pessimism, which is very worrying.

Pembrokeshire lies in the heart of the famous west Wales dairy belt where, thanks to our wonderful rainfall and topography, we have been a major producer of
 
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Britain's milk for centuries. If dairy is to have any future in the UK, it should be in a place such as Pembrokeshire. Seen from the air, Pembrokeshire is a beautiful patchwork of family-run farms, holding together around 90 small, rural village and town communities.

The changes that we are seeing in the dairy sector lead me to believe that the nature of some of those communities is under threat. There is no question that farmers are exiting the dairy sector, and farming altogether, at an alarming rate. Farms are being vacated, which is having a serious knock-on effect on the viability and sustainability of our local services and the   communities that use them. We know that there has been a drop of more than 30 per cent. in the number of dairy farmers in Wales in the last decade; we have also seen the closure of numerous village schools, post offices and shops during the same period. It is no flight of the imagination to suggest that the two phenomena are closely linked.

Some dairy farmers are leaving the country altogether. I know of two young farming families in my constituency who have left in the last year to pursue their businesses overseas, one in France and one in Canada. I understand that they are not the only examples from my county. They have not given up on the industry that they love; they have given up any prospect of carrying out their business profitably in the UK, which is very sad.

I do not regard this situation with anything like the cool neutrality of the former permanent secretary to the   Department, who told a conference in 2003:

"Government has no particular view on how much milk the UK should produce or on how many producers or companies there should be. . . . it does not have views on the shape of the industry."

I take the view that a diverse supply base is a good thing. I believe that, while the trend towards larger farms cannot be reversed, family-run farm enterprises are a good thing and that the wider rural economy in a place such as west Wales relies on a large and successful network of producers.

No one is arguing that change must not happen, least of all the farmers to whom I have spoken. Indeed, the   "Vision for the Dairy Industry" document published recently by the NFU illustrates that; it is forward looking and realistic about the changes facing the sector. However, it is my contention that some of the trends in dairy are being accelerated by imbalances in the supply chain caused by unequal power relationships and a lack of trust and transparency. The problem is one of a fundamental imbalance in the supply chain where farmers, who are the primary producers, are right at the end of the supply chain and the return that they get for their toil is widely regarded as unfair.

Let me state from the outset that I do not accept the simple narrative that supermarkets are the cause of all the woes that face dairy farmers, and they should not be seen as pantomime villains. My understanding is that the picture is a lot more complex than that. Supermarket chains are rational decision makers, whose duty is first   and foremost to create value successfully for shareholders, which they do by creating and recreating value propositions for their customers day in and day out. Farmers understand that supermarkets are here to stay. Supermarket chains are the largest customer for British agriculture and some of the younger farmers
 
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I   have spoken to, in particular, are remarkably upbeat about the need to work closely with the major retail chains. Only yesterday, I was speaking to one young dairy farmer in my constituency who is closely involved with the group Future Farmers of Wales. She stated clearly that if she has any sort of future in the industry, it would only come about by working successfully with the major retail chains.

That brings me to the efficiency and transparency of the supply chain linking the farmer to the supermarket checkout. I do not believe that the market is working well; a high degree of mistrust, suspicion and confusion characterises the sector. There is no question but that the rise of supermarkets has altered the playing field on which farmers compete. We know from the Milk Development Council report in September that evidence suggests that farmers' returns on milk have fallen at a much greater rate than those of their EU counterparts, but that retailers' margins have been increasing. Dr. Nick Fenwick of the Farmers Union of Wales describes it like this:

"There is now overwhelming evidence to suggest that the dominance of supermarkets over supply chains represents a wholly new type of market place that is not compatible with traditional notions of free competition, and the economics of 'supply and demand'."

As a Member with a passionate belief in the benefits of free competition, I have to take such a charge very seriously indeed.

The first specific point to which I would like the Minister to respond concerns the extent to which he feels that the current supermarket code of practice is working well. In what ways could it be reformed or changed to ensure that the market functions well and for the benefit of the primary producer? Does the Minister agree that the code should apply to the entire supply chain, thus addressing the relationship between farmers, suppliers and supermarkets, as opposed to those between supplier and supermarket? Last year's Environment, Food and Rural Affairs Committee report concluded that

"there remains a fundamental imbalance of negotiating strength between supermarkets and most of their suppliers. The code appears to have been ineffective in redressing this imbalance, at least in respect of the dairy supply chain."

I welcome the Minister's thoughts on that statement, one year on from the publication of the report.

Mr. Stephen O'Brien (Eddisbury) (Con): My hon. Friend articulates very well indeed the severe problems that a lot of us share in our constituencies. These matters are crucial to the rural economy, not only in relation to its diversity but to the vital strategic business of producing dairy raw materials. Has he noted, as I have from talking to farmers in my constituency, that the receipt for farmers for their commoditised product at   the farm gate is probably about 18p, while the supermarkets have increasing returns? If we analysed the whole value chain from the farmer through to the shopper, about 18p in that value chain is unaccounted for.

I do not know whether my hon. Friend has carried out any further investigations. If not, does he hope that the Minister is able to account for that 18p because it cannot be accounted for in distribution costs, or in any attempt to suggest that there is a regulated distribution market? If that 18p were available, it would be better shared
 
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among farmers at the farm gate rather than used solely to increase returns for the supermarkets under their code of practice.

Mr. Crabb : My hon. Friend makes an excellent point. The evidence submitted to the Select Committee last year highlighted the confusion that I mentioned when examining the sector, and the confusion and lack of transparency in the supply chain. I echo the comments of my hon. Friend and I invite the Minister to comment on the missing 18p per litre.

What are the Government doing to ensure that fair play is maintained in respect of consumers and suppliers? If the Office of Fair Trading sees its role as firmly in dealing with consumers, who is protecting the interests of suppliers? I invite the Minister to comment on the concept of a buyer's charter proposed by the NFU, which seeks to ensure that trading terms between suppliers and retailers are not abused.

Mr. Lindsay Hoyle (Chorley) (Lab): Rightly, the hon. Gentleman has mentioned the buyer's charter. I wonder whether he has signed my early-day motion, which I   urge other MPs to sign, which supports the NFU's stance on the buyer's charter.

Mr. Crabb : Absolutely.

I would welcome a response from the Minister on the question of what role he feels that he and his Department can play in restoring confidence to the sector and, specifically, in bringing farmers much closer to processors and retailers. It is a widely held view that farmers need to get closer to the end customer and to be much more directly involved in value-added processing, which means a greater degree of partnership working and vertical integration down the supply chain.

On partnership working, I was encouraged to learn of two examples of retailers seeking to work constructively with primary producers to ensure that a fairer return reaches the farmer's pocket. In so doing, they are guaranteeing their own supply base. I am told that Marks and Spencer has established long-term price agreements with a network of organic dairy farmers to supply milk to its in-store cafés. That agreement provides added security for the farmers, who have a more stable environment in which to make their investment decisions.

More significant in terms of volume is the partnership involving Asda, Arla and its base of dairy farmers. I   understand that the purpose of the partnership was to ensure a much greater level of transparency in the supply chain and to build trust and consensus with the   processor and the producers. That involved Asda's agricultural manager sitting down in the homes of many of the individual farmers involved in the partnership. That kind of close involvement obviously builds trust and lays a good foundation, but it still does not fundamentally alter the price scenario for liquid milk.

Mr. James Gray (North Wiltshire) (Con): Although I   entirely agree with my hon. Friend that vertical integration is a good thing overall and probably the way forward for the industry, does he not agree that there is a significant risk that companies such as Asda and some of the other very large retailers and processors may
 
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bring unreasonable conditions to bear on smaller dairy   farmers in particular, so that only the large, professional, industrial-type dairy farmers will survive because the small farmers—the kind that we represent in many of our constituencies—will be unable to compete?

Mr. Crabb : My hon. Friend makes an extremely good point. I have not been able to find out the extent to which the farmers who are involved in that kind of partnership represent the kind of farmers that we both have in our constituencies; those who run small, family farms.

Albert Owen (Ynys Môn) (Lab): Does the hon. Gentleman think that it is important that when supermarkets such as Asda apply for planning permission, the planning authority considers the local conditions and the effects that he says supermarkets have on pushing the price down in local areas? Should there not be greater input from local farming unions in the planning process so that local sourcing can be considered as a way of helping farmers, particularly those who run family farms?

Mr. Crabb : The hon. Gentleman makes a good point. I have to confess that I am unsure of the extent to which the detailed planning guidance that affects decisions that local authorities make can incorporate that kind of thinking about local sourcing, but I have been talking to   local supermarkets in my constituency and asking specifically how many local lines of produce they stock, whether they have targets for Welsh produce and whether they are on course to meet them.

Mr. Andrew Turner (Isle of Wight) (Con): May I assist my hon. Friend on that matter by describing the   reaction of the Isle of Wight council's planners to the suggestion that local sourcing should be a condition of an extension to Tesco at Westridge in my constituency? The planners believe that that cannot be done, but the members are determined that it should be done and are determined to push it through and try it. I   hope that other planners up and down the country will be persuaded by their members to try it.

Mr. Crabb : My hon. Friend makes a good point.

Without doubt, there is a need for greater rationalisation and consolidation in the processing section of the supply chain. Many farmers feel that that would be one route towards equalising some of the power relationships in the chain, especially if there were much greater farmer-owned processing. However, in that context, we could run into problems with the Office of Fair Trading. It is a view in the farming community that the OFT would seek to call in any further mergers between large UK dairy companies for fear that that would give them a monopolistic position in the domestic market.

Many farmers regarded the OFT's decision to investigate the proposed acquisition of 15 per cent. of shares in Robert Wiseman by First Milk as absurd. I   want to ask the Minister why the OFT felt that it was necessary to refer to the Competition Commission the proposed sale of Scottish Milk Dairies, which held only
 
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2 per cent. of the Scottish liquid milk market, to Robert   Wiseman. To quote one renowned dairy producer, who I spoke to this morning:

"it sends out completely the wrong signal to the industry when the OFT is crawling all over initiatives like this".

I invite the Minister to respond to that.

Mr. O'Brien : I am grateful to my hon. Friend for generously giving way a second time. I am holding a raft of e-mails from dairy farmer constituents who are incensed about the Scottish Milk Dairies and Robert Wiseman Dairies decision and recommendation. The Minister has an opportunity today to demonstrate that it is within the Government's power to have a beneficial effect on dairy producers in our constituencies. I had something to do with the 1999 Eddisbury by-election, as did my hon. Friend the Member for North Shropshire (Mr. Paterson). That was the time when the former Secretary of State—I   cannot remember his constituency, but it was somewhere in the north-east—reversed the Competition Commission's recommendation and did not allow vertical integration from producers. That has had a continuing and dire effect on the value-added chain to benefit farmers at the farm gate. The Minister has it within his gift to reverse that and we are urging him to do so.

Mr. Crabb : I thank my hon. Friend for that intervention. We look forward to the Minister's comments on it.

What steps is the Minister taking actively to encourage the growth and development of farmer-controlled co-operatives such as Milk Link? Farmers are not looking to politicians to determine the milk price. Those I speak to consider themselves to be business people and simply want the market to work in a way that guarantees fair outcomes.

I am grateful for the opportunity this afternoon to raise some important issues concerning the dairy sector and look forward to contributions from other hon. Members and to the Minister's comments.

Several hon. Members rose—

Mr. Joe Benton (in the Chair): Order. Before I call the next speaker, I want to draw attention to the fact that I   propose to commence the wind-ups at around 3.30. A number of hon. Members have indicated that they wish to speak and I want to call all of them if possible. That is in the hands of hon. Members so I appeal to them to be as brief as possible.

2.47 pm

Mr. Lindsay Hoyle (Chorley) (Lab): I congratulate the hon. Member for Preseli Pembrokeshire (Mr. Crabb) on raising this matter because we would not otherwise be having this debate today. It is an important debate because the subject seems to be a forgotten one. Farmers seem to be bottom of the pile when recognition of them should be at the top of the pile. Without doubt, farmers—dairy farmers and beef producers through to sugar producers—are under the cosh from day one.

I congratulate the hon. Gentleman on raising the subject and the way in which he articulated every problem and issue along the way. My only slight disagreement—this is my view and opinions change—is
 
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that ending the 30-month scheme will not do anything for beef production at this stage. We must try to keep it until we can get the beef price at a sustainable level for beef farming.

The main subject is milk prices and the price that is paid at the farm gate to farmers who work endless hours. MPs may complain about the hours that we work, but they are nothing compared to those worked by farmers. They work seven days a week with their families and they toil to try to ensure that we can be proud of our countryside and, more importantly, that milk is delivered to homes and supermarkets. I shall return to that villain.

An unacceptable price is being paid to dairy farmers. The 2003 study said that milk production costs were about 18.36p per litre and we now know from the NFU's latest paper that they are just over 20p per litre. As was said earlier, one does not need to be a great mathematician to know that farmers cannot stand such losses. Governments come and go, and seem to have their own ideas about farming. One minute we persuade farmers to undertake more intensive farming because that is where the future lies. Then we say that perhaps we should not have large, intensive production but should slow it down. Farmers must keep trying to change the way in which dairy production takes place. Then we come to the big problem. Yes, they can produce quality milk in this country that is second to none, but they need a fair, firm price delivered to the gate. The price is not fair at the moment. The problem is monopolies. No matter how many times we try to break them, it does not help the person who we are representing today, the farmer. Whatever action we take, the price will not be fair.

Mr. Gray : Does the hon. Gentleman agree that it is not just a matter of the differential between the 20p that it costs the farmers to produce the milk and the 17p that   they are receiving, but capital investment? A constituent, Mr. John Tuck, wrote to me to say that his milk parlour is 31 years old. His youngest tractor is 16   years old. How on earth is he supposed to replace that equipment, when he is losing 3p per litre on his milk?

Mr. Hoyle : I was trying to make that point. Farmers are expected to invest in a certain way. They are then told, "Sorry, we have not got it right. We want you to change to this way." How can we expect people to invest? How can we expect to change the way in which farmers are viewed, without their receiving the real price? The hon. Gentleman is correct.

My constituent, Rick Massey, is a big dairy farmer. He has worked hard to make a living for him and his family. He is a tenant farmer. He and the rest of the Brindle farmers have always been up against it. One minute Arla wants to be fair to the farmers; the next minute, it is cutting prices. Both sides sign up to an agreement to say that the price   is fair, only to find out that the dairies want to renegotiate the deal within 12 months. That is unacceptable.

We have had the same experience with supermarkets. They continually work in such a way. The great passport of a penny is not acceptable. The matter has been touched on already. Supermarkets must be fair. They
 
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can make a difference to farming in this country. The answer to the future of farming is for the supermarkets to pay a fair farm gate price to ensure that farming stays in this country for ever and a day. That can happen because of their monopoly. They dictate and they can make or break a farmer. The time has now come for less talk and more action from the supermarkets.

Let them sign up to a voluntary buyer's charter. They are shying away from matters. A buyer's charter would be a step in the right direction. We and the supermarkets must be serious. People do not realise what is going on when they pay the price in the supermarket. They think that someone is making a lot of money; they might think   that it is the farmer. Well, we all know that it is not the farmer who is making the profit, but the supermarkets and the processors. Excuse the pun, but they are creaming off all the capital. When it comes to price, let us have not a fair playing field, but a fair dairy field.

Albert Owen : Does my hon. Friend agree with farmers in my constituency who welcome the OFT holding a review into the dominance of the major supermarkets? He referred to a buyer's charter. Does he also agree that the Minister should be thinking about his Department working with the Department of Trade and Industry to construct a proper regulatory framework? Farmers are asking for that. They have no confidence in the OFT, or in the Monopolies and Mergers Commission.

Mr. Hoyle : I cannot disagree with my hon. Friend. He   is correct. Let us have commitment from the supermarkets under a voluntary charter. The Office of Fair Trading must be seen to be doing its job. We have received report after report from the supermarkets, but they always shy away from the real problem, which is their monopoly position. We should be taking on the directors of the supermarkets because, without doubt, the moment that their collar was felt, we might see a fair price.

Daniel Kawczynski (Shrewsbury and Atcham) (Con): It is encouraging to hear a Labour MP speaking with such passion about agriculture. Does he agree that it is important to have a Secretary of State in the Cabinet who is involved solely in agriculture, so that she or he could act as a champion to lobby the supermarkets? I   questioned the Secretary of State for Environment, Food and Rural Affairs at the DEFRA Select Committee the other day. I referred to her as the Secretary of State for Agriculture, for which she admonished me, to the cheers of Labour MPs. She said, "I am not the Secretary of State for Agriculture. My Department is DEFRA."

Mr. Joe Benton (in the Chair): Order. That was quite a lengthy intervention.

Mr. Hoyle : We recognise that the Department is now called DEFRA and has slightly different rules. However, I agree with the hon. Gentleman that the farming industry needs champions. There are a lot of champions in the Chamber today who will ensure that its voice is heard.

I am sure that the Minister is taking that on board. I   know that he is a champion of the industry. He has not been in the job for long, but at least he is going around
 
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the shows, seeing the farmers, and beginning to talk to people. I am pleased that that is happening, but we must of course firm up the position on the future of farming.

Legislation has been mentioned, and that is necessary. There is also a need for the input of a Government, and of the Departments that have been mentioned. The Department of Trade and Industry and the Department for Environment, Food and Rural Affairs, along with the National Farmers Union—and even Farmers For Action—have all got voices that must be heard. We must all stand together and say to the supermarkets, "We need you to be fair." That is the commitment that is needed. Perhaps we ought not to be using legislation; perhaps we ought to be allowing common sense to prevail, by telling the supermarkets that if they really do want a future in this country, they must recognise this point. That is important.

It is also important to touch on the subject of young farmers and the future of farming. There is no future for young farmers, because of the high cost of buying or renting a farm. The prices are unfair, and that puts people off; they ask, "Why do it?"

If anybody picks up and reads the Farmers Guardian these days, they will know that farms from the south of England to Scotland are up for sale for one reason; people have had enough. They might not be walking away from farming altogether—they might be going to Nigeria or other parts of Africa, or to France, or to Canada—but our farmers are saying, "Enough is   enough," and they are going elsewhere in the world to try to enjoy what they enjoy most, which is farming.

Annette Brooke (Mid-Dorset and North Poole) (LD): Does the hon. Gentleman agree that although the consumer might benefit to some extent from lower supermarket prices, the loss of our dairy farming would create great disbenefits for the consumer, because there would be lack of controls on quality, in addition to us losing our farmland? Tough action and tough speaking are needed now; there is no alternative. We have had a real wake-up call, and I hope that we have got it in time.

Mr. Hoyle : I cannot disagree. In fact, I totally agree, except on one point. I do not think that people who shop at supermarkets are getting the best deal. I do not believe that any of the gains that are being made by screwing the farmer into the ground is being passed on to them; the   evidence shows that that is not what happens. The profits are creamed off for shareholders. Companies such as Tesco and Asda hold up their balance sheet; that comes first, and it does so at the expense of farming. That is unacceptable, because it is not sustainable.

We must also talk about the Government in this respect. They have a major role to play. We must get people around the table, and get them to recognise that there is a future in farming only if a fair price is paid for what farmers produce.

Another big issue for farmers is that they want to be farmers. They did not want to be form-fillers, but, unfortunately, that is what they have become. More and more of their time is spent form-filling. I understand that there is a need for forms. I understand the problems caused by foot and mouth and so forth, and
 
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I   acknowledge the difficulties that arise from such events, so I recognise that forms can be important, but there is an issue to do with the number of forms. They are repetitive. Often, a single form could cover a lot of the relevant issues, and if that form were shared between different Departments, that could further reduce the burden on farming.

That is what farmers would like to happen. Let them do what they do best; let them get out into the fields and get on with farming. They did not take up farming to do so much form-filling. However, I recognise that this problem is not entirely to do with DEFRA; forms come from all Departments.

The amount of paperwork is crucial for the future of farming. We ought to be saying that one form will fit all, if the information is shared. That can be done. We need to take a serious look at this matter, because it is important. I am sure that, like me, all Members regularly meet the farmers in their constituencies; when we do, the one thing we can be sure that they will say is, "Have you seen these forms that I now have to fill in?"

It is a tragic shame that dairy farmers with new-born calves have no market for those calves. There is no future for calves. They are having to shoot the calves; they are having to be put down. That is a tragedy.

There are a number of major problems that we must deal with. All Members present are united on one thing; farmers must get a fair deal. Let us talk to the people who matter. That is not just the Government, but the supermarkets, which can do more for the future of farming than any of us here by giving that fair price.

3 pm

Mark Williams (Ceredigion) (LD): Like others, I pay tribute to the hon. Member for Preseli Pembrokeshire (Mr. Crabb) for securing the debate. If there is one message that must come from it, it is that there is a united front, as has been said by the hon. Member for   Chorley (Mr. Hoyle). I join him and other hon. Members in drawing the Minister's attention to the huge gulf between retail milk prices and farmers' production costs. Many of us receive that message in the farmyard and at the marts when we talk to farmers in our constituencies. We have also heard about the disastrous effect that that has had, and is having, on dairy farming.

The hon. Member for Preseli Pembrokeshire was right to draw attention to the much more far-reaching implications of the collapse of the dairy sector for local schools and services, and for the wider rural community. I share a constituency border with him. All the concerns in Preseli Pembrokeshire that he expressed are replicated in my constituency.

Historically, a third of the total farm output of Wales was generated by the dairy sector. Yet, by the end of 2004, 60 per cent. of Welsh dairy farmers were failing to cover their production costs, and dairy farmers in Wales have been exiting the industry at a rate of three a week, a frightening statistic. In Ceredigion, some 1,300 jobs have been lost in the agriculture, forestry and farming sector since 1998. The number of holdings and the average herd sizes have fallen dramatically. We cannot overstate the feeling of the farming community. In the same week as Tesco's profits topped £1 billion, nearly two thirds of farmers could not cover their production costs. There is real despondency and anxiety about the future of their farms.
 
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Mr. Philip Dunne (Ludlow) (Con): I want to reinforce the point that the hon. Gentleman is making so well about the strategic nature of the industry. For the public health reasons that have been mentioned, there is concern that if farmers leave the dairy industry in the way he has described—it is also happening in my constituency—this country will, at a certain point, lose the capacity to produce milk. That is not too far off. I   urge the Minister to take that message away from this debate.

Mark Williams : I thank the hon. Gentleman; I can only concur with those comments. This is a UK-wide problem, although constituency interests are obviously dear to our hearts.

A combination of factors has brought us to this situation. The legacy of the break-up of the milk marketing boards has left the large retailers and their suppliers in an increasingly powerful position in the supply chain. That has been compounded by significant rises in farm prices since the 1990s, motor fuel prices increasing by 22 per cent. last year, feed prices increasing by between 9 and 20 per cent. and the price of fertilisers rising by 30 per cent. in two years.

Again like the hon. Member for Preseli Pembrokeshire, I will not be tempted to discuss CAP reform, but that issue has had a profound effect on dairy farmers. When questioned on the issue, Ministers have stated that market forces should be allowed to operate. It would seem that farmers are still losing out in what is an increasingly favourable market for some dairy products.

Mr. Michael Moore (Berwickshire, Roxburgh and Selkirk) (LD): My hon. Friend talks about the picture in Wales. In Scotland, we have lost 500 diary farms in the   past five or six years, and thousands over the past 20 years.

Market forces have been mentioned. Surely for as long as the big supermarkets are allowed to unleash their forces on the market there will be only one set of winners. Is it not about time that the Office of Fair Trading was given a proper remit to regulate this market for everybody?

Mark Williams : My hon. Friend pre-empts me slightly. Of course that is the case. Free markets with protection for the vulnerable must surely be the course.

The Rural Payments Agency figures have shown that milk production is about 233 million litres behind quota. The economics of supply and demand would suggest that farm gate prices should therefore be rising, yet they remain low—that is the problem. I will now discuss possible solutions, and I look forward to the Minister's comments on them.

As was articulated well by the hon. Members for Eddisbury (Mr. O'Brien) and for Preseli Pembrokeshire, the National Farmers Union is concerned at the decision made by the Office of Fair Trading to refer the proposed merger of two Scottish milk processing companies to the Competition Commission. The NFU thinks that further rationalisation in the processing industry is essential if the UK is to compete effectively at EU and international level. I would be interested to hear the Minister's views on the principles of rationalisation. Does he agree with the NFU that it should be encouraged? If so, what can he do to aid that process?
 
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Farmers have told me that suppliers often cite increasing fuel prices and transport distances as a reason for reducing the price that they will pay for milk. Does the Minister agree that we should have a renewed push   to process milk as locally as possible? The closure   of local creameries is a key factor in driving down farm gate milk costs. The Government, the Scottish Parliament and the National Assembly for Wales should address that.

Action on those points would be welcome, but that would only begin to address the main issue. I return to the point made by my hon. Friend the Member for   Berwickshire, Roxburgh and Selkirk (Mr. Moore): the Government must do something to tackle the   overwhelming power of the supermarkets. The voluntary supermarket code of practice applies only to the relationship between farmers and their suppliers, and people have no confidence whatever in that system. The code should apply to the whole supply chain. That would acknowledge that the behaviour of supermarkets impacts directly on farm gate prices; the figures that we are hearing today prove the facts.

Mr. Alan Reid (Argyll and Bute) (LD): My hon. Friend makes important points about the unfairness in the marketplace. Does he agree that one of the problems with the supermarket code of practice is that, if suppliers complain, it has to become a matter of public record? Naturally, some suppliers are anxious about that, in case they are then victimised by the supermarkets. Does he agree that we need an independent watchdog to help reintroduce transparency and trust into the industry? Such a watchdog could be proactive and need not rely on suppliers to make a public complaint, with all the risks that that involves.

Mark Williams : My hon. Friend is right. In a survey in the February 2004 OFT report on the supermarkets code of practice, 73 per cent. of respondents reported a fear of complaining about the conduct of suppliers. Three years after it was introduced in 2001, not a single farmer had used the code, fearing lack of anonymity and loss of business.

Mr. Jeremy Browne (Taunton) (LD): Does my hon. Friend accept that farmers and agricultural producers are not looking for special favours? They do not want to be permanently reliant on subsidies, and that is not the route we should seek to take. What they want is a fair market—I am in favour of free market economics—but one can only have such a market if there are no abusive or restrictive practices and if there are enough players in the supply chain to mean that there is genuine competition. That way, the price of milk will find a natural level, which means that farming can be sustainable without being reliant on subsidy. The problem is not that the Government necessarily need to give more largesse—

Mr. Joe Benton (in the Chair): Order. That intervention is far too lengthy.
 
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Mark Williams : I thank my hon. Friend for that intervention. His essential point was about the level playing field. That relates directly to what my hon. Friend the Member for Berwickshire, Roxburgh and Selkirk said about the need for a food trade inspector based in the OFT to monitor the whole supply chain and prevent unscrupulous action.

I also wonder—this point has not yet been touched on––about the feasibility of the introduction of a brand of fairly traded milk, a specially labelled product that would guarantee consumers that the farmer was receiving a fair price for his milk. Would the Minister be willing to assist such a scheme?

I hope that the Minister will take on board the comments of hon. Members today. There is a great deal of consensus among all parties present that action must   be taken to halt the erosion of our dairy industry. I go back to what the hon. Member for Preseli Pembrokeshire and I have said: this issue is about livelihoods and about sustainable rural communities, because once the farms and farming families have gone, there will be a critical threat to the vibrancy of a rural economy. We have seen that in Wales and, from the contributions in the Chamber, throughout the United Kingdom.

3.10 pm

Patrick Mercer (Newark) (Con): It is a pleasure to follow the hon. Member for Ceredigion (Mark Williams), who spoke clearly and with great interest in the subject. May I congratulate my hon. Friend the Member for Preseli Pembrokeshire (Mr. Crabb) on securing this debate? Any time the Minister wishes to look at the limited but large farms and the burgeoning, affluent supermarkets that I have, he is welcome to return to his old stamping grounds. I shall show him around with the greatest of pleasure; I am sure that my constituents will be very pleased to see him.

North-east Nottinghamshire is not noted for its dairy or beef farmers. During the past 50 years, we have moved quickly from a mixed agricultural society to a limited one of almost completely arable farmers. Unlike the rich pastures of Preseli, where I spend many of my holidays, the whole area in between the power stations that proliferate up in Nottinghamshire is taking on much more the mien of the county of Cambridgeshire.

Our farming is getting much less interesting, demanding and diverse, and the farming communities, and their mixture, are suffering. Several Members present have already made the point that the vibrancy of the agricultural community depends not only on profit margins, but on variety and on there being a fair deal for those to whom they sell their produce.

Time is limited, so I shall not bang on more than I   normally do, but I should like briefly to consider one case study in my constituency. A little under a year ago when this problem started to generate heat in the east midlands and in north-east Nottinghamshire, I was asked to visit several of the diminishing number of dairy farms in my area. Most of them were absolutely model farms. They understood the necessity to make milk production as efficient as possible, and the diversity was impressive. Every single one of them had thought about the environment; many had tried to diversify so that
 
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they could sustain all sorts of farm products other than merely dairy products, and I was impressed by the way they were making a go of difficult circumstances.

In one particular case, the farmer of a larger than normal herd of 110 beasts told me that he was producing in profit less than £1,000 a month. He and his wife worked more than a 60-hour week, and they had had to pay off the man who worked part-time essentially, as far as they were concerned, to fill in the forms about which   we heard from the hon. Member for Chorley (Mr. Hoyle). Their workload was increasing and their profit margin decreasing by the day. I do not need to tell the Minister that on 1 October the price of milk fell by another 0.3p, making life even more difficult for the characters whom I have just described. That is a relatively large milk producer on my patch; there are others in more difficult circumstances.

Although electricity, diesel, contracting, oil-based fertiliser and all other costs that the farmer must absorb continue to rise, there is nowhere for the farmer to go. I know that the Minister understands. With my limited grasp of mathematics, I should have thought that the rules of supply and demand suggest that as supply diminishes, so prices should rise. That is not the case. Although prices may be rising, they certainly are not doing so at the farm gate. The losers in this deal are the farmers who are trying to put in those 60-hour weeks not only to produce the goods that we want, but to maintain the farms, the diversity and the rural aspect.

Those points have been made already. However, the dairy farmers pointed out to me that it is not easy to change from dairy farming, unlike other forms of farming. It takes about four years to go from conception to producing a milkable animal, if that is the right technical term, and such a business cannot just be turned round or changed overnight. Already, we have heard that if we are not careful, given where competition is going, we will end up with large farms, and the sort of small herds that I have been discussing will completely disappear. I do not want that, and it is clear that nobody in this Chamber—no matter what their political stripe—wants that either.

I iterate the points already made. Will the Minister please allow us, and therefore our farmers, to know what the Office of Fair Trading is going to do about this? How will a supermarket code of practice be made to work, both in theory and—to use the same word again—in practice? What can the buyers charter be made to do for the farmer, rather than the processor? Lastly, how can farmer-controlled co-operatives be encouraged by the Government, not just in theory, but in fact?

The time for talking about this subject is long past. The Minister understands that, unless the supermarkets and other market factors are gripped and controlled, we shall lose our dairy production capacity completely, and I, for one, will be extremely sorry and many of my constituents will be extremely poor.

3.17 pm

Mr. Roger Williams (Brecon and Radnorshire) (LD): I, too, congratulate the hon. Member for Preseli Pembrokeshire (Mr. Crabb) on securing this debate. This is not the first time that we have debated this issue, and we seem to be making a distinct lack of progress.
 
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From the dairy farming point of view, the issues are about not just the price of milk, but BSE and the lack of export opportunities. The fact that dairy farmers cannot send their calves to the best market also impinges on the profitability of dairy farms.

However, the price of milk is obviously a key issue. I   am surprised to see the Under-Secretary of State for Environment, Food and Rural Affairs, the hon. Member for South Dorset (Jim Knight) in his place; I   should have thought that the Minister for Competitiveness would have responded to this debate. In a sense, this issue is not about farming, but competition. Farming is all right: people produce milk—there is no problem with that. The key issues are selling it and the state of the market.

I shall be very quick. We have to make up our minds about a point of principle and of policy. The question is about whether we want a fair market or a free market for milk. I do not think that we can have a free and a fair market; we will find that the free market is not fair—it does not reflect the effort and investment that goes in from farming families—and that the fair market is not free.

This country, and in some ways the Government, have benefited very much from food prices having been kept down. Inflation in this country has been kept very low, and we congratulate the Government on that, but across the economy the prices charged by some service industries seem to have gone up fairly substantially—I   certainly think that when I pay my accountant or solicitor. To some extent, manufacturing has also seen price hikes. Food prices, however, have been kept very low indeed. Supermarkets do not compete on quality or variety—all of them have those—but on price. It is hard to explain to a farmer that supermarkets make more money by charging less than anybody else, but that is what they do because they want market share.

Mr. Gray : The hon. Gentleman seems to be making a different point from that of his colleagues. A moment ago, we were saying that, given that milk was sold at 54p   a litre at supermarkets, somebody somewhere was making a fat profit. The hon. Gentleman seems to be saying that the supermarkets are competing with each other and keeping the price unreasonably low, and that that is why farmers are so badly paid. In that case, presumably he is proposing that supermarket milk prices should go up.

Mr. Williams : If the hon. Gentleman hangs on a minute, I shall come on to what I am and what I am not proposing.

That is my analysis of the market. In classical economic terms, a market—a free market, which is acting properly and in the interest of all who participate—must have many buyers and many sellers. Everybody must have a shared knowledge of that market—the amount, the demand, the amount provided and the manner provided. That is obviously not the case in this country. Tesco and other supermarkets have a huge proportion of buying clout. That point has been well made.

One of the questions that I would like to ask the Minister is about the OFT—I am not quite sure whether it is the Office of Fair Trading or the office of free
 
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trading. The OFT is meant to be at arm's length from the Government, but there must be some indication as to when it should or should not intervene. The time is well past for intervening in the food chain market. Examples have been given, and we could put out a lot. What are the instructions, the guidance, for the Office of Fair Trading?

I know that my hon. Friend the Member for Lewes (Norman Baker), who leads for us on these matters, will put forward the case for a fair trade inspector. That is important. In Wales, few farmers sell directly to the supermarkets. They sell through intermediaries, whether the dairies, the slaughterhouses or the meat-processing plants. Often the happy supermarket—I   cannot remember which hon. Member mentioned this—will go and sit in the farmer's kitchen and chat, moaning and groaning about the margins and that sort of thing, when the dairy is driving down the price.

Mr. David Jones (Clwyd, West) (Con): The hon. Gentleman mentioned that farmers in Wales sell primarily to dairies. Does he not share my concern at the increasing number of dairy closures, including Longslow dairy in my constituency only last month? Farmers are left with additional transport costs, reducing their profitability.

Mr. Williams : I agree. The problem of consolidating the industry stands as a problem.

I will close. The Minister needs to address the competition issues. No Government should leave the   country lacking in food. British dairy farmers cannot produce at the price at the moment and, in the end, they will not produce.

3.22 pm

Mr. Philip Hollobone (Kettering) (Con): I have the pleasure and privilege of representing the Kettering constituency, which is situated in the heart of England and represents the best that England has to offer in every respect, including agriculture.

The Minister has connections with Kettering. He will know the area well, but he may not be aware that in north and east Northamptonshire the number of dairy herds has fallen from 42 to just 13 since 1986. Several more are on the brink of closure, taking the number of dairy farms down to single figures. At the current rate, I   would not be surprised if dairy farming ceased to exist in the Kettering constituency during my parliamentary career, should that last for more than one term.

Local dairy farmers tell me that the process of closure has accelerated in the last five years. Dairy farming requires substantial investment, not only in financial terms but also in time. Dairy farming consumes far more of a farmer's time than crop production, because of milking and animal-welfare issues. The request that local dairy farmers asked me to make is that the Government look seriously at the transparency of the   supermarket price of milk.

With another hat on, I have the privilege of sitting on the all-party parliamentary small shops group. We are considering the state of the retail sector. Evidence given shows that a supermarket having an 8 per cent. share of the retail market starts to distort competitive pressures. Tesco has a 30 per cent. share of the grocery market and
 
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a dominant share of the milk market. As my hon. Friends said, the farmer gets only 16p to 20p per litre, but the supermarket sells milk at 54p per litre. The Government urgently need to examine the difference between the two prices.

Of course, there is an Office of Fair Trading. The hon. Member for Brecon and Radnorshire (Mr. Williams) made an extremely good point that the Government need to send a signal to the OFT and the Competition Commission that all is not well, not only in the retail industry but in the supply chain, particularly in respect of dairy farming. On behalf of all the dairy farmers and related rural communities in the Kettering constituency, I urge the Government to take the issue extremely seriously. I do not want to be the Member of Parliament for a constituency that no longer has any dairy farms.

3.26 pm

Hywel Williams (Caernarfon) (PC): I congratulate the hon. Member for Preseli Pembrokeshire (Mr. Crabb) on securing this important debate. It is timely, as the industry is in crisis—I do not use the word lightly. Milk prices are a particular issue in Wales and in my constituency and the constituency of my hon. Friend the   Member for Carmarthen, East and Dinefwr (Adam   Price), who would contribute to this debate if he had the time.

Many producers have gone out of business, not because they are unwilling to put in the long hours or do the work, and certainly not because they are not enterprising. In rural areas in Wales and elsewhere, people are very enterprising. They run small businesses successfully—much of the time, against the elements—but they are under extreme pressure.

I would like to use my time to draw Members' attention to the effect on some processors. I refer specifically to a farmer-run co-op in my constituency—the South Caernarfon Creameries, or Hufenfa De Arfon. It is a unique enterprise, with members as far south as Aberystwyth and as far east as Denbigh. It produces an excellent range of products, including organic products and milk from cows that are fed on non-GM feed—it is labelled as such, which is the good practice that we hope for from other producers. The creamery produces a cheese called Monterey Jack, which is based on an American recipe, and exports it to America. The people who run the co-op are enterprising. The prices that it pays its owners—it is farmer owned—are always in the higher echelons, and it does everything that it should, yet it is under pressure because of the current situation, which, unfortunately, is a case of the bad driving out the good.

At the recent annual general meeting of the Farmers Union of Wales, Carwyn Jones, the Minister for Environment, Planning and Countryside in the Assembly, said that the supermarkets were in danger of killing the goose that lays the golden egg. A Minister from Cardiff has told us who is holding the smoking gun. I do not need to go into that argument, as the Milk Development Council's report is clear enough.
 
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I shall make one further point that is specific to my part of the world. It is to do with the knock-on effect on rural life and, particularly in my constituency, on the   Welsh language. The agricultural community is the backbone of the Welsh language.

Adam Price (Carmarthen, East and Dinefwr) (PC): The hon. Member for Brecon and Radnorshire (Mr.   Williams) made an excellent point about goods inflation in the UK, which is currently running at 0 per cent. for milk. All the cost increases are being passed to the suppliers—they are not being borne by the consumers—and that is one of the problems.

Hywel Williams : I thank my hon. Friend for that intervention, which brings me to my final points. Will the Minister ensure greater transparency in the supply chain? We need to be able to see where the money is going. It certainly is not going into the pockets of farmers in my constituency or in my hon. Friend's constituency. Finally, I refer, as other Members have, to the virtue of a buyer's charter as requested by the National Farmers Union and the FUW.

3.30 pm

Norman Baker (Lewes) (LD): This has been a useful debate. I congratulate the hon. Member for Preseli Pembrokeshire (Mr. Crabb) on introducing it. The debate has been attended by a large number of Members from all parties—more from the Liberal Democrat and Conservative parties, it has to be said. Nevertheless, Members from all parties are here today, despite the fact that a significant debate is taking place in the main Chamber.

The debate is also significant for the fact that hon. Members who have spoken have shown unanimity about the seriousness of the problem, the role of the supermarkets and the urgent desire to do something to ensure that the British dairy industry continues in existence. I am sure that the Minister will have taken those points on board and I look forward to hearing his contribution shortly.

This is a serious issue. It is extraordinary that this country has an almost unique combination of skills, structure, climate and geography to provide a secure and financially sound dairy industry, yet farmers are leaving the industry week after week, as we have heard, from all parts of the country, be it Wales, Scotland, the   south-west or indeed my constituency of Lewes. Undoubtedly one of the reasons is the operation of the market. My hon. Friend the Member for Brecon and Radnorshire (Mr. Williams) is right to draw attention to the importance of the competition process, which is at the root of our debate this afternoon.

Mr. Andrew Turner : The hon. Gentleman acknowledged that geography is a significant factor. Would he be surprised to know that school milk, which is subsidised and sold in my constituency, is sold at 18p   for a one-third-of-a-pint carton? It is brought from Chadwell Heath in Essex to the Isle of Wight; yet it is possible to buy milk at 30p a pint from suppliers on the Isle of Wight. For some reason, even the Government's subsidised scheme for milk creates far more food miles and far more expensive milk.
 
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Norman Baker : It does indeed. If I were to be distracted down a different road, the same could be said of the fruit scheme in schools. Huge numbers of pears and apples are imported into the country, when it would be better if they were supplied by our own suppliers, for environmental reasons as well as to support the British farming industry.

I want to draw the Minister's attention to the answer to a parliamentary question that I put, which spells out the relationship between the price that farmers have received for milk in recent years and the price at which the supermarkets are selling it to consumers. In 1995 the average price paid at the farm gate across England and Wales was 24.94p a litre. By 2004 that had dropped to 18.46p a litre. We also heard of all the extra costs—genuine and significant costs—that are falling on the   farming industry, whether it is for fertilisers or the infrastructure. When suppliers have lost about 25 per cent. of their price over that period of time, it is impossible for them to continue indefinitely, if over the same time the supermarket price has stayed roughly the same and the supermarket profit has increased from 1.3p a litre to 13p.

David T.C. Davies (Monmouth) (Con): Does the hon. Gentleman agree that one of the significant costs that have been borne by many dairy farmers is that resulting from TB and its spread in certain areas? Does he agree that the Government need to take action over that and to see how it is being caused, which in many cases is by badgers?

Norman Baker : I agree that TB is a serious issue, particularly in the south-west, but also in Sussex in my constituency. The hon. Gentleman will be interested to know that the Lib Dems recently published a proposal to deal with the problem, which included dealing with the badger issue.

The relationship of farm gate prices to retail prices is   absurd, and shows what the NFU correctly calls a dysfunctional supply chain. The supermarkets are making increased profits, while the process to compete for supermarket tenders is driving down prices to farmers. As a result, the dairy industry is threatened and we will end up sucking in more and more imports. That is in the interests of no one, except those who are abroad. It is a clear market failure. The market is not delivering the level playing field that we have a right to expect. That is why so many of us are so angry at the OFT's failure to take action on this matter.

My hon. Friend suggested that it was the office of free trading rather than the Office of Fair Trading. I might suggest that it is the office of fixed trading, fixed in the sense that it does not move and also that it seems to be beneficial to supermarkets and not to those supplying milk. I understand why we have got there, but it is not satisfactory simply to leave the matter with the OFT, which is not only not helping with a clearly malfunctioning market in which it ought to intervene, but is making matters worse, as we have heard, in respect of the referral of the proposed acquisition of Scottish Milk Dairies Ltd. by Robert Wiseman Dairies plc to the Competition Commission, despite the fact that the business represents a mere 2 per cent. of
 
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the   Scottish liquid milk market. It is extraordinary that   when the OFT intervenes, it does so in the wrong direction. We cannot allow that to carry on.

Mr. Stephen O'Brien : Having had some involvement in this for many years, does the hon. Gentleman agree that the real problem that the OFT has, and that the Government can influence, is that it should not keep on looking at the producer definition as the short circuit and the easy way out for defining a market, which is the much harder process of defining where the sales took place? That is how we could help get to the supermarkets rather than always to the farm producers.

Norman Baker : I have some sympathy with that point. The OFT also seems to fail to recognise that we are now in the European market. When it considers the ownership of different aspects of the market it needs to do so on a European basis rather than on a UK one.

The Minister who is present is from DEFRA. He doubtless has some sympathy with the plight of farmers; I have heard him on previous occasions express such a view. What influence does he have with his colleagues at the Department of Trade and Industry, who should be the ones taking action on this matter? How can he take that message back? What will he ask them to do? What is DEFRA's position on those issues, which the DTI, the OFT and the Competition Commission ought to investigate more fully? They do not seem to be investigating them fully at the moment.

As has been said by my hon. Friend the Member for Ceredigion (Mark Williams), there is an urgent need for   a fair trade inspector or a food trade inspector in the OFT. It is clearly not satisfactory to rely on the code of practice, which has simply delivered nothing. Nobody will complain if they feel that they will be victimised or will lose business as a consequence, and we cannot expect them to do so. There has to be a genuine mechanism to allow farmers to make what they believe to be genuine complaints, to have such complaints properly investigated and to feel secure that they will not lose out as a consequence. Clearly, they do not have that confidence at the moment, but they want to make complaints.

The absence of complaints made does not mean that people do not want to complain. There are plenty of complaints to make. I am sure that other hon. Members present will have met local farmers, as I have; I joined a   great many from the south-east outside the Arla processing plant in my constituency, which is at Sheffield park, near Chailey. Farmers have plenty of complaints, many of which are entirely justified, and they are very angry. Some farmers are now being driven to pouring their milk down the drain to try to draw attention to this serious issue. Plenty of complaints could be made. The fact that they are not being made through the code of practice suggest that it is flawed. That has to be changed.

We need an intermediary, such as a food trade inspector, who could analyse the complaints and drive some sense into the OFT. Will the Minister support that sort of mechanism to allow the regulation of the market to be properly addressed in a way that has not taken place so far? His colleague in the Lords and the DEFRA team have expressed some sympathy with this issue. Will
 
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the Minister tell me what he is going to do by way of an inquiry into the power of the supermarkets, which is generally of concern not only to us in this House and to the farming industry, but to consumers, who are writing to me in increasing numbers? What will he do to ensure that the whole issue of supermarket power is addressed? A complex monopoly of four big chains now controls a huge amount of the food market and distorts it as a   consequence. That must be addressed as a general issue and I do not see it being addressed.

Farmers are going out of business every week. In Wales alone, 32 per cent. of the farmers have left the diary industry in the past 10 years. There are now only 15,000 dairy farmers in England and Wales, according to the National Farmers Union. This is a serious matter and I hope that, given today's high attendance and the   strong views expressed by Members of all parties, the Minister will accept that we now need action from his Department and, most of all, from the DTI and the OFT.

3.39 pm

Mr. Owen Paterson (North Shropshire) (Con): May I   begin by drawing attention to my declaration in the Register of Members' Interests that relates to income from agricultural rents, which, happily in this case, mainly comes from dairy farming? This has been a splendid debate, and I congratulate my hon. Friend the Member for Preseli Pembrokeshire (Mr. Crabb). I have never seen this Chamber so full; there are Tory MPs sitting right around the corner, so that they almost touch the lonely and lone Labour Member.

Mr. Hoyle : I think it ought to be put on the record that more than one Labour Member is present. This subject is too important for us to score political points.

Mr. Paterson : The hon. Member for Ynys Môn (Albert Owen) left the Chamber, although I see that he has now returned.

My point is that although a big debate on terrorism is taking place in the main Chamber, this issue has attracted great attention. It is right that it has done so; we have the climate, the livestock and the husbandry and yet, although this industry should be prospering, it is in dire trouble, with prices well below the break-even price of approximately 20p.

The reason for that is partly a historical problem, caused by the old Milk Marketing Board, and the incentives given to farmers to produce a commodity—liquid milk—which they were told would then be taken away. I can remember that in respect of my own family in the 1960s; there was never a worry about where the milk might go. However, the problem is that during that   period our competitors in Ireland and on the continent—in particular France—were forging ahead with farmers' co-operatives, and were focusing on added value.

We must differentiate between milk, which is a commodity, and products that the consumer wants to buy. We have become efficient producers of a commodity, but our farmers are detached from the end market. That problem is compounded by a strong and
 
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well organised retail sector, which has driven prices down, so that farmers are being driven out of business. The solution is to add value. We must get our farmers near to the end consumer; they must get into brands and finished products that consumers want to buy.

Let me offer a couple of examples from my constituency, which, along with that of my constituency neighbour, my hon. Friend the Member for Eddisbury (Mr. O'Brien), is part of the largest milk field in western Europe. Processing is about four times more efficient in France than it is here. We produce 11 per cent. of the EU's milk, but only 4 per cent. of its cheese. France produces 18 per cent. of the EU's milk, and 22.5 per cent. of the cheese. We are suffering from a ghastly hangover going back to the years of the MMB, when we did not invest in efficient processing plant.

However, there are exceptions. Müller, a private German company, has, from zero to 12 years, gone from producing nothing to producing nearly 2 billion pots of   yoghurt in a state-of-the-art, world-class plant near   Market Drayton in my constituency. I talked to Mr. Robert Cope of Adderley yesterday; he is going to   increase the size of his herd of cows from 300 to 600   to supply Müller. Another nearby family business is going in the opposite direction. Justin Beckett has stopped milking cows, and has gone into specialised cheese production. He is supplying the multiples and all the supermarkets, and he is buying from a large number of small processors. He wants fat in his milk, 4   per cent. fat, so he is encouraging the use of Jersey and Shorthorn cows. That is just the sort of thing that my   hon. Friend the Member for North Wiltshire (Mr.   Gray) was touching on.

There are solutions to this problem; they are to add value, to get near the customer, and to use the supermarkets. When I went to see Herr Müller in Germany, he said he could never have grown his business at the speed that he has done without the extraordinary efficiency of the UK distribution sector. We need to get products into that sector.

Albert Owen : I apologise for leaving the debate. I had to take an important telephone call. The hon. Gentleman should not make party political points about attendance, and the high attendance by Members of all parties who represent Welsh constituencies is to be applauded. He talked about added value. As the hon. Member for North Wiltshire mentioned, the problem in that regard is that the margins are so small that nobody can invest and diversify in the way that is being outlined. The options for farmers to do that are limited. It helps when they get opportunities from larger companies, but it is impossible for small family farms to reinvest in the new machinery that is needed to make the added-value products.

Mr. Paterson : The hon. Gentleman is right. The Government make it difficult to get into that. However, I cited the example of a small, family business which has prospered by adding value and getting near the consumer. The hon. Member for Chorley (Mr. Hoyle) talked about the supermarkets. The problem in that respect is that the Chancellor will do nothing about them, because, as the hon. Member for Brecon and
 
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Radnorshire (Mr. Williams) said, taking action will create inflation, and the Chancellor will not want supermarket prices to go up.

Mr. Hoyle : Will the hon. Gentleman give way?

Mr. Paterson : I am sorry, but I have given way once, and I must now press on.

In respect of liquid milk, we can add value by way of a variety of additions, such as omega 3 fish oil. We could also have vending machines in schools, as my hon. Friend the Member for Isle of Wight (Mr. Turner) said. There are new probiotic products, too. Treating milk as a commodity is a complete loser; we have to get into adding value, because the situation will get worse. Polish production has increased by 11 per cent. this year, pushing EU production up by 1 per cent. Poland is coming along with western efficiency, and Hungary will follow. We must add value and get near the consumer, and the Government have to get out of the industry's hair in terms of farm regulation, putting up new units   and factory regulation. Leon Downey fought a wonderful battle down in Pembrokeshire, in the constituency of my hon. Friend the Member for Preseli Pembrokeshire, to stop being put out of business by Government regulations.

Mr. Hoyle : Will the hon. Gentleman give way?

Mr. Paterson : I do apologise, but I have only a short time left.

There are further problems with regulations on, for instance, farm shops—they are another way of getting near the consumer—and getting planning for retail outlets. There was an interesting case this week in which the European Commission ruled on feta. I would like the Government's line on that. The Government must stand up for the ability to make named cheeses in other geographical areas. Take our area; the majority of Cheshire cheese used to be made in Shropshire. It would be a real problem if there were pressure from the Commission on named cheese.

The Government could do a lot more on cross-compliance. EU directives such as the nitrate vulnerable zones directive and the water framework directive all mean costs on top of the other rising costs that hon. Members present have mentioned, one of which was fuel. There is a lot that the Government could do to make life easier for those who need to branch out and expand. I agree that it is extremely difficult to get into those added-value activities.

Above all is the issue of the OFT. It was an absolute disgrace that the right hon. Member for North Tyneside (Mr. Byers)—the then Secretary of State for Trade and Industry—overruled and went against the Monopolies and Mergers Commission report. At the time, Milk Marque had 38 per cent. of the domestic market, and Arla was allowed in with 98 per cent. of its market. It is ludicrous to treat the markets that we are talking about as little, isolated national markets; they are not. The case last week, in which Robert Wiseman Dairies was not allowed to buy a business that had only 2 per cent. of the Scottish liquid milk market, was ludicrous.

I was talking to a very successful executive of a big milk co-op this morning. He said, "You can't breathe without the risk of OFT intervention." All Members in
 
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this Chamber have talked about that. We have to allow   larger groupings, and we need larger farmers' co-operatives, processors and distributors. With them, we will get research into the products that I mentioned, efficiencies of production to get us up to continental levels and, above all, the clout to stand up to the supermarkets.

I simply do not understand the extraordinary, narrow definition that the OFT seems to put on the market in the country. My hon. Friend the Member for Eddisbury is right; the OFT looks only at supply. It does not look at sales—I do not think that it has a way of getting at them. We have a massive problem here. We are talking about a product that is not just European—I have mentioned Poland, and huge imports come from Ireland, too—but global. Milk powder can come from New Zealand or the west coast of America. It is absolutely incorrect that the OFT and Government direction should be allowed to interfere in such a prejudiced manner with the suppliers of milk.

Also, as numerous hon. Members have said, the OFT is not attacking the problem of the buyers. Those buyers are in an extraordinarily privileged position, because there is an oversupply of a commodity and a small number of buyers, who have massive power. If there is time, I   would like the Minister to give the Government's position on that, and to say what the Government are going to do about it, because there is unanimity on the issue across this Chamber.

Quotas have collapsed in value. We are under quota   in this country, but there are massive payments of super-levies in Italy. What is the Government's line on sale of quota across borders? On by-products, it is frankly disgusting that black-and-white calves are being shot the moment that they are born. At a rough calculation, if we achieved the same price for black-and-white bull calves that one can get in France this afternoon, that would add £100 million to dairy farmers' incomes. What will the Government do about that?

Finally, I come to TB. I do not have time to go through the 600-plus parliamentary questions that I   have tabled on TB. This disease is out of control; it is an epidemic, according to one of the replies that I received. Its not being cured will cost this country £2   billion over the next 10 years. When will the Government take action?

3.50 pm

The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Jim Knight) : I   welcome the debate. It has been useful and I pay tribute to the hon. Member for Preseli Pembrokeshire (Mr. Crabb) for raising the issue, which is important to my constituency of South Dorset. We probably would not have a railway line if it were not for the need back in the days of Thomas Hardy to have a way in which to get the milk from Dorset to London to serve the market. When I was on holiday earlier in the year, I visited the hon. Gentleman's constituency and enjoyed the perilous pursuit of coasteering with my family. I might not repeat that activity, but it might have been a less perilous occupation than answering today's debate.

I agree with the hon. Gentleman about the serious challenges that are faced by the dairy industry. When visiting agricultural shows over the summer, I, too,
 
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heard the frustration and sometimes anger that has been expressed on behalf of dairy farmers in my constituency. I must qualify my statement by saying that I firmly believe that there is a bright future for a modern, profitable and efficient United Kingdom dairy sector in the long term. We have a climatic advantage, a flexible milk quota regime, some first-rate producers and processors, and affluent customers.

Our farm size, efficiency and costs of production relative to our European partners are good. We are further ahead in preparing for the lower prices and trade liberalisation than most other European Union countries. We heard about value-added production from the hon. Member for North Shropshire (Mr.   Paterson). That and branded products are increasing, and specific or niche markets are being developed all the time. We can have a successful dairy sector in the UK and we are in a good position to ensure that we do.

That said, I am not complacent. I appreciate that the short to mid-term is challenging for the sector. It is clear that the problems facing the dairy industry are complex and that there is no simple solution to them. The Government's response has been to obtain more transparency and clarity in respect of such issues by   establishing the dairy supply chain forum, chaired by my noble Friend Lord Bach, so that we can play our part in helping industry to help itself. I wholeheartedly agree with what the hon. Member for North Shropshire said about value-added production. We are aware of   the   problems in the UK dairy industry. We export low-value commodity products and we import high-value products. The industry needs to move away from that. The forum is funding a major study into barriers to innovation.

Mr. Hoyle : Will my hon. Friend give way?

Jim Knight : I say to all hon. Members that I have a series of points to make, but limited time in which to do so. If a Member wants to make a genuinely new point, I   am willing to hear it. However, that will mean that I shall have less time in which to deal with the issues that have already been made.

Mr. Hoyle : I thank the Minister for giving way. He is a little more generous than members of the Opposition. An important part of the issue concerns import. Imports can come into this country under easier rules. We expect high welfare standards from our farmers, but the same welfare standards are not placed on farm imports into this country. Can there be a level playing field in respect of welfare standards?

Jim Knight : We need a level playing field. Compliance is the responsibility of the Commission and it must ensure that we achieve it.

The hon. Member for North Shropshire referred to named cheeses. It is a difficult matter. We are making an effort to encourage the creation of brands that are protected by the EU, such as the Cumberland sausage or the Melton Mowbray pork pie, to add value to our industry. However, by saying that we want to be able to
 
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protect our brands and products, but we shall not allow others in Europe to protect theirs, we will be in a difficult position. A balance must be struck.

Mr. Geoffrey Cox (Torridge and West Devon) (Con): Will the Minister give way?

Jim Knight : Is it a new point?

Mr. Cox : Yes. I am extremely impressed by the Minister's bright vision of a long-term future. However, it is the little things that depress the farmers at present. Devon has the largest permanent milk quota in the country. In my constituency, we are 30 vets short in the   state veterinary service. TB testing is now grinding to a halt because private vets are withdrawing and there are no private vets available to carry out the testing. It is that sort of thing that tells dairy farmers that the Government are not interested, and long-term bright visions of jam tomorrow are not going to sustain an industry that is dying now.

Jim Knight : I want to dwell on the points that are crucial to the matter, such as those relating to supermarkets and so on, but the Department is very focused on the issue of bovine TB. We are exploring various options in order to address that. We shall be making announcements before too long in order to address this particular problem.

The forum has brought together all sectors of the dairy industry to find collaborative solutions to common problems. The forum has played a pivotal role by providing a framework for constructive debate and giving leadership for the dairy sector through this challenging time; I have referred to some of the things that it has commissioned. In response to the hon. Member for Kettering (Mr. Hollobone), it is certainly building more transparency. There is still further to go to properly identify the 18p per litre that the hon. Member for Eddisbury (Mr. O'Brien) talked about, but the forum is doing some very important work in that area.

We recognise that farm gate prices, although broadly similar this year to last and higher than they have been recently, are too low for many to be able to sustain their businesses. In response to the hon. Member for Preseli Pembrokeshire, I am concerned about the number of farmers leaving the industry. There was a report by Professor Coleman on the changes in dairy farming in England and Wales since 2002–03, which suggests that there might have been a more significant downturn in production than previously projected as a result. Although milk production is low this year, it is too early to tell whether there is a definite trend, but we are watching that carefully and we are concerned about it. UK production at the moment is roughly at the same level as it was in 1998–99.

We also recognise that costs have increased for all in the supply chain, putting a squeeze on profitability for some. However, in terms of profitability, farm gate prices are only one part of the story. Producers have to play their part too by reducing costs and becoming more efficient. As the NFU has noted in its impressive document, "A Vision for the Dairy Industry", profit comes from a combination of cutting costs and
 
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achieving a fair return from the market. The 25 per cent. of farmers with the lowest production costs were producing milk for, on average, 12p per litre less than the 25 per cent. with the highest costs. That difference is not sustainable. In response to my hon. Friend the Member for Ynys Môn (Albert Owen), that is one of the   reasons why it is very difficult for us to introduce a regulator. How can a fair price be set when there is such a difference in cost?

Mr. Gray : Will the Minister give way?

Jim Knight : I really must use these last two minutes to   deal with the points made. There are many points I   would like to make, but I should move on to the central issue of supermarkets and their code of practice, which was spoken about with such passion by my hon. Friend the Member for Chorley (Mr. Hoyle) and many other Members during the debate.

Recently the Competition Appeal Tribunal has instructed the Office of Fair Trading to review its decision not to refer the grocery market to the Competition Commission for a market investigation. Competition issues are regularly cited as having a detrimental impact on the dairy sector. I have discussed my concerns and those of my constituents, and those concerns to which I referred at the beginning of my comments, about the operation of the supermarket code of practice with the Under-Secretary of State for Trade and Industry, my hon. Friend the Member for Bradford, South (Mr. Sutcliffe), and my noble friend Lord Bach and I will continue those discussions. We have meetings scheduled and I will certainly pass on to my hon. Friend the views that have been expressed with such passion in this debate.

I am pleased that the Office of Fair Trading announced that it will be more proactive in monitoring supermarkets' code compliance procedures. It also
 
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confirmed that trade associations could take—[Interruption.] I note from the sedentary comment of the hon. Member for North Wiltshire (Mr. Gray) that he is unwilling to listen to a word I am saying.

Mr. Gray : Will the Minister give way?

Jim Knight : I will not give way because I have only one minute.

Mr. Gray : On a point of order, Mr. Benton. The Minister is making the worst ministerial reply I have ever heard. He named me as making a sedentary comment and now he will not take my intervention. The point is that he is not replying adequately to an impassioned, one-and-a-half hour debate—

Mr. Joe Benton (in the Chair): Order. That is not a point of order. The Minister has a few seconds left.

Jim Knight : We have had a good debate. The OFT confirmed that trade associations could take group action—

Mr. Joe Benton (in the Chair): Order. Time is up.

Mr. Hoyle : On a point of order, Mr. Benton. I do not believe that it was deliberate, but the hon. Member for North Shropshire suggested that Conservatives were sitting all round the Chamber, but there were also Members from other political parties here. He went on to suggest that I believed that the Chancellor of the Exchequer should increase the price to people who shop in supermarkets. Far from it; I   suggested that the profit should come from the supermarkets and go to farmers.

Mr. Joe Benton (in the Chair): With respect to the hon. Gentleman, that is not a point of order.
 
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