Milk

The Committee consisted of the following Members:

Chair: Mr Gary Streeter 

† Bain, Mr William (Glasgow North East) (Lab) 

Burden, Richard (Birmingham, Northfield) (Lab) 

† Edwards, Jonathan (Carmarthen East and Dinefwr) (PC) 

† Esterson, Bill (Sefton Central) (Lab) 

† Fullbrook, Lorraine (South Ribble) (Con) 

† Hopkins, Kelvin (Luton North) (Lab) 

† Jones, Graham (Hyndburn) (Lab) 

† Paice, Mr James (Minister of State, Department for Environment, Food and Rural Affairs)  

† Parish, Neil (Tiverton and Honiton) (Con) 

† Rees-Mogg, Jacob (North East Somerset) (Con) 

† Simmonds, Mark (Boston and Skegness) (Con) 

† Watkinson, Angela (Lord Commissioner of Her Majesty's Treasury)  

† Williams, Roger (Brecon and Radnorshire) (LD) 

Alison Groves, Committee Clerk

† attended the Committee

The following also attended ( Standing Order No. 119(6) ) :

Kawczynski, Daniel (Shrewsbury and Atcham) (Con) 

Cash, Mr William (Stone) (Con) 

European Committee A 

Tuesday 15 March 2011  

[Mr Gary Streeter in the Chair] 

Milk 

[Relevant Document: European Scrutiny Committee, 17th report of S ession 2010-11, HC 428-xv, chapter 1.]  

4.30 pm 

The Chair:  I call Mr Jacob Rees-Mogg to make a brief explanatory statement. 

Jacob Rees-Mogg (North East Somerset) (Con):  Thank you, Mr Streeter, for allowing me to make this opening statement. It might be helpful to the Committee if I take a few minutes to explain the background to document 17582/10, and the reason why the European Scrutiny Committee recommended it for debate. 

The economic crisis that affected the milk sector in 2008 led to the creation in Brussels of a high-level expert group to consider the medium and long-term measures needed to stabilise the market and producers’ incomes. The group produced its report in June 2010, and document 17582/10 comprises a draft regulation, which seeks to address specific issues identified by the group. Those issues are the imbalance in bargaining power between farmers and processors; poor transmission of market signals; the limited use of formalised, written contracts; the rebalancing of bargaining power if producer organisations were, within limits, able to negotiate contract terms; the role of so-called inter-branch organisations; and the need for timely and regular information on volumes of raw milk delivered to processors. 

In particular, the regulation would increase the bargaining power of producers by exempting from competition law the setting up of producer organisations, which would be able to negotiate prices with the processors for up to 33% of national production, as long as the negotiation did not exceed 3.5% of EU production. In addition, member states would be able officially to recognise inter-branch organisations within the dairy supply chain, and would also be able, but not required, to make written contracts for the delivery of raw milk between producers and processors compulsory. Lastly, they would be able to require processors to declare the quantity of raw milk delivered to them each month. The measures would apply until at least 2020, but would be subject to review before then. 

Although certain aspects of the proposal would be optional so far as individual member states were concerned, it would nevertheless introduce some potentially significant changes. Moreover, the setting up of the high-level group was in response to the severe problems facing the milk industry at that time and, although the immediate market outlook seems reasonably reassuring, it depends heavily on a number of underlying assumptions. The European Scrutiny Committee therefore took the view that there were sufficiently important issues arising from the proposal to warrant a debate in a European Committee. 

The other document before us—17243/10—is a Commission report that analyses the evolution of the EU market for milk and the consequent conditions for phasing out the dairy quota system in 2015. It suggests that production is likely to show only a modest reaction to the end of the quota regime, and that the EU is on course for a soft landing at that point. The European Scrutiny Committee saw the report as a useful backdrop to the wider issues raised by document 17582/10. 

4.33 pm 

The Minister of State, Department for Environment, Food and Rural Affairs (Mr James Paice):  I welcome you to the Chair, Mr Streeter, in this debate on an issue of great importance to the agricultural community. I am grateful to the European Scrutiny Committee for calling the debate, as I do not think that any of us who takes an interest in such matters can be unaware of the serious situation facing the dairy sector. I entirely agree with the European Scrutiny Committee’s assessment that the proposal could introduce significant changes to the application of competition law. 

Members will be aware that the UK has a strong dairying tradition. It is widely recognised that, within the European Union, the grass-growing conditions in the UK are probably second only to those in the Republic of Ireland. As recently as 2009-10, we had nearly 16,500 farmers producing 12.83 billion litres of milk from 1.9 million cows. However, we are also very aware that there has been a dramatic reduction of close to 50% in the number of dairy farmers over the past decade or so. That is a reduction in dairy farmers, not in cows or milk; production has fallen by only 9%, as a result of a combination of larger dairy farms with more cows, and increasing yields per cow due to nutritional and other advances. That trend is not unique to the UK; it is being replicated across industrialised countries. 

One of the issues the industry is most concerned about is farm-gate prices—the price farmers get for their milk—which vary. Anyone who reads the farming press, which publishes various tables weekly, will see the variation. At the top end there are prices in the order of 28p a litre, although I do not want to be too specific for obvious reasons. Those higher prices tend to be for milk in a dedicated supply chain to a supermarket for retail sale as liquid milk. The bottom end is milk that goes into processing in one way or another, where the price tends to be about 23p or 24p, although it can be lower than that. 

As a matter of interest, I will compare those figures with the retail price at three different supermarkets, which sell milk at 79p a litre. That price is based on a pint bottle. Four pints are sold at £1.25, which works out at 55p a litre. The dairy producers are concerned about the share of that retail price. With some justification, they feel that it is inadequate. Obviously, costs have recently gone up dramatically. As I am sure everyone is aware, the cost of grain has doubled in the past year. That is driving up feed costs, energy costs, fuel costs and fertiliser costs. It is true to say that the average income from dairy farms in 2009-10 was more than £24,000 before any income from agri-environment or the single farm payment was included, but that hides a massive variation. Many, as I sure you are aware in your constituency, Mr Streeter, will have made a loss. As

always, the costs vary between producers and gradually, as in any other sector, the least efficient will struggle when margins get tight. 

My hon. Friend the Member for North East Somerset referred to what happened in the dairy global market a couple of years ago. We have to remember that dairy prices are no longer fixed by Ministers. The intervention level is extremely low, which is why we see this massive global fluctuation. That led to the high-level group, which has been mentioned. 

The Commission’s proposals cover four aspects, the first of which is the bargaining power of producers. The concept of producer organisations is not merely positive; we want strongly to encourage it. A number of aligned groups—they are not classified as producer groups—are working directly with supermarkets for the retail trade. I have to stress that there is nothing at present to stop producers organising themselves into a producer group. Indeed, they can cover 15% of the relevant market volume if they so wish. We do not have that, but there is nothing to stop them doing so. 

We have called upon the Commission, in the high-level group and since, to clarify the position for producers to encourage them to form producer organisations within existing competition law. The one issue that we have with these proposals is that they would make special arrangements under a different set of laws for the dairy sector, compared with the competition law for the rest of the agricultural industry. 

This proposal changes the limits for producer organisations to 33% of a member state’s national production, or 3.5% of European production, whichever is the lowest. The proposal allows national competition authorities to stop negotiations in their territory, even below the 33% threshold, where they believe competition is being excluded. The Commission would take that role for interstate negotiations. We believe that national authorities should be able to act where competition is significantly distorted, and to play a role in decisions on interstate negotiations too. The proposal moves away from a key competition law concept, which is the phrase “the relevant market.” We contest that member state boundaries do not define the actual markets for milk. They may be sub-national or multinational, as with Ireland or smaller member states, and in the rest of Europe they may be based close to a national border and may quite easily cover two member states. 

We argue that 33% is in excess of the level necessary to generate efficiencies. We would prefer a lower level that would still allow farmers to gain and enjoy their benefits, and we think that 25%, which is in line with the EC merger regulation, would be more appropriate. We do not have any producer organisations in the UK as far as we are aware; no organisation is registered as such. Our two big milk co-operatives, Milk Link and First Milk, have roughly 10% to 11% of the market apiece. Having 25% in a producer organisation would be a dramatic change from the current position in the UK. The proposal takes a positive concept, which we support, but it legislates for it in a manner that carries great risk and is unnecessary. Under the proposal, a single producer organisation might cover more than 40% of mainland British production. Having said that, the Committee will realise from what I have just said that that is a long way from where we are today. Clearly,

it would be very damaging to competition overall, and allowing price fixing on that scale would be anti-competitive and would damage the industry. 

Contracts between farmers and processors are widely used in the UK but not in some parts of the EU, which is why the high-level group has proposed them. The proposal that we are discussing does not itself allow member states to make contracts compulsory, but the Commission has stated that 

“Member States may, within their own contract law systems, make the use of such contracts compulsory” 

if they so wish. The proposal on contracts would guarantee the free negotiation of the detail of the contracts, an approach to which we are committed. If a member state chose to make contracts compulsory for all contracts between producers and processors, they would have to be written; they would have to be made in advance; and they would have to include price, volume, timing and duration. That is an important point, because as far as we understand it, that would be an exclusive list. The National Farmers Union wants compulsory contracts, but many of the aspects that it wants to see are not covered by the proposal. We do not have a problem with the Commission’s current proposal, but if it became too wide we might do. 

The proposal also refers to inter-branch organisations. We do not have any in the UK, although it is conceivable that First Milk and Milk Link might count as such. It is still slightly unclear what comprises an inter-branch organisation, because they are a foreign entity to the UK. They would aim at improving transparency and collaboration, but they could not fix prices or control production and markets. We would be quite happy to accept that proposal. 

Finally, processors will be required to declare the quantity of raw milk delivered to them each month. That would not add to the current requirements and would make for transparency overall, which we think is right. I hope that that is helpful as an introduction to the Committee. 

The Chair:  I am grateful to the Minister. We now have until 5.30 pm to ask him questions. I remind Members that questions should be brief and that it is open to them, subject to my discretion, to ask related supplementary questions. 

Mr William Bain (Glasgow North East) (Lab):  It is a pleasure to serve under your chairmanship once again, Mr Streeter. In welcoming the Minister of State to his position, may I ask him what discussions he has had at the EU Agriculture and Fisheries Council with his EU counterparts on the unfairnesses and inefficiencies that they have seen in the operation of the EU milk market? What degree of consensus has he managed to reach on how those inequalities should be eased out of the market? 

Mr Paice:  I am grateful to the hon. Gentleman, and I am sure that I speak for him when I say that we both want to do the best for our dairy industry, which is in dire straits. The honest answer, as he used the word “discussions”, is “limited”. Speeches were made, but the reality is that, with 27 different member states, it is

difficult to have discussions. By the time every member state has spoken for three minutes, that is two hours up. It is a sadness. 

Nevertheless, we try to have bilateral discussions with Ministers in the margins of meetings. We have had some of those, but I will not pretend that we have had them with every member state. Around the table, there are mixed views. Some countries strongly support the toughest, most robust interpretation of the high-level group’s original proposals because they believe that they are the right way forward. Others countries think that even the Commission’s proposals, which are not always in line with the high-level group’s original ideas, go too far. 

The honest answer is that a great range of positions is being adopted by different countries, but we certainly agree with the principal issues espoused by the high-level group. The first is that collaboration is to be encouraged within certain constraints, to which I have referred. That is a matter of the strength of the producer compared with the marketplace. Work must be done on contracts, but we do not think that member states should make them compulsory, and there are other issues with which we are in sympathy. I have tried to make it clear that we have a lot of sympathy for most of the points in the Commission’s proposals. 

Roger Williams (Brecon and Radnorshire) (LD):  I would appreciate a bit more certainty about what level would trigger an interest from the national competition authorities. Does the Minister agree that in the past, a number of mergers or acquisitions, which could have proved beneficial for producer groups, have not proceeded because the mere threat of an inquiry has proved a disincentive? 

Mr Paice:  I am grateful to my hon. Friend for his comments. I understand fully his absolute commitment, although I am not entirely sure that I agree with everything behind his question. The Office of Fair Trading was asked to investigate the proposed merger of First Milk and Milk Link about three years ago, and gave it the go-ahead. As it happened, the two organisations decided not to proceed with the merger, for reasons best known to themselves—I will not comment on that—but the OFT gave permission to go ahead, and as I said, the result would have comprised more than 20% of the market. 

Jonathan Edwards (Carmarthen East and Dinefwr) (PC):  May I take the Minister back to harmonisation? We believe that harmonisation of the proposals across the EU is a key objective. In the light of his previous comments, how hopeful is he that that is achievable? 

Mr Paice:  I am quite optimistic that we will reach a conclusion, although I must tell the Committee that we are a long way from it now. Negotiations in European quarters take a long while, and the European Parliament is now involved in agricultural issues as a result of the Lisbon arrangement. It is perhaps worth picking up the point about comitology, as this is part of the wider alignment of the single market operation with the Lisbon treaty. We would like the proposals to match the common understanding—that is the technical term—including

having delegated Acts clearly time limited, the correct recitals concerning the consultation of member state experts and the correct objection procedure; I can take longer if the Committee asks me to do so. 

There are issues about precise implementation and comitology, but yes, I think that we will get an agreement. I believe that we in the UK are taking a responsible position in those discussions. As I have intimated to the Committee, with the question mark over changing competition law, we are basically content with the principles of the current proposals. 

Neil Parish (Tiverton and Honiton) (Con):  I welcome the Minister’s comment that First Milk and Milk Link can join together if they want to, because that would perhaps create greater muscle in the marketplace. May I ask him about short-term contracts? Is there a need to have longer-term contracts so that the big buyers do not push down the price at which they buy the milk because of the short-termism of the contract?

My final point is on milk powder. The last time that the price of milk powder was very high, back in 2006, the prices to the farmer were much higher. I believe that the price of milk powder on the world market has increased dramatically. So why are we not seeing that reflected in milk prices to the farmer? 

Mr Paice:  I would not want my hon. Friend to misunderstand what I said earlier. I said that the OFT gave the go-ahead for the merger of those two organisations when it did the investigation. I am not saying it would not be the same today. All I am saying is that I am not in a position to comment on what the position would be today. That is the historic picture. 

On powder, my hon. Friend is right that of all the global trade in dairy products, by far the biggest is in dried milk powder. Most milk powder comes from New Zealand and other such countries, which can literally stop production for a couple of months at the right time of year because it is a commodity that is easily stored and stockpiled. 

The price of milk powder has risen dramatically over the past year or so. So if we had a milk drying plant in this country today—we have one at Westbury, but only a relatively small proportion of our milk can go there—it could effectively pay something in the order of 32p or 33p a litre against today’s global price for powder. The reality, however, is that a couple of years ago it would probably have been paying 14p a litre. Farmers needs to recognise that, although the global price of milk powder can go very high, it can also go very low indeed. That has to be taken into account when we look at the price and are green with envy. 

My hon. Friend’s other question was about the duration of contracts. The Government’s view is that the length of such contracts is a matter for negotiation between the processor and the producer. The Commission is not proposing a particular length of contract, and I would not want anybody to think it is. The Commission is simply saying that the contract should include a duration, not what that duration should be. 

We could argue it both ways. Last Thursday I spoke to a meeting of dairy farmers, many of whom said that 12 months was too long. They want to get out of their contract because somebody else is offering them a little

more. I suggested to them that when prices are on a downward slide they might want a contract longer than 12 months to hold them at a higher price. So the question of the right duration is a case of swings and roundabouts. That is why I do not think the Government should be setting the duration; it should be a matter for the producer to set with the processor. 

Kelvin Hopkins (Luton North) (Lab):  I do not have an agricultural constituency, nor do I have a particular interest apart from the consumers. Is it not the case that supermarkets are exploiting consumers at the same time as they are squeezing the price paid to producers? It is the supermarkets that we have to take in hand. 

Mr Paice:  There is no doubt that many dairy farmers are very upset at the stance of the supermarkets. During my opening remarks I touched on the fact that they see a massive price differential between what they get at the farm gate and what the consumer pays at the supermarket. There is no doubt that various studies have demonstrated that the share of the retail price taken by the retailer has risen considerably over the past decade or more, whereas the share taken by the processor has remained roughly static and the share taken by the producer has declined. Those are indisputable facts. 

As to what one should do about it, the issue, as the hon. Gentleman knows, was rightly referred to the Competition Commission by the previous Labour Government. The Competition Commission came forward with a proposal for the grocery supply code of practice, which became statutory and was implemented in February 2010. The commission also proposed the introduction of an ombudsman to monitor and enforce that code of practice. I think all political parties went into the general election committed to doing that, and we will bring forward that legislation. It is of course a matter for the Department for Business, Innovation and Skills, because it falls under consumer affairs, but I am led to believe that the draft legislation is only a few weeks away. I cannot be more precise, but we can study the proposals in more detail and I hope the proper legislation will follow as soon as possible. 

Mr William Cash (Stone) (Con):  Following on from that point, and also that made by my hon. Friend—he is a friend—the hon. Member for Luton North, having many dairy farmers in my constituency I am naturally very conscious of the fact that supermarkets have many of them over a barrel. I welcome the idea that there should be this code of practice, and follow-through by the ombudsman, in the legislation that would follow. However, is it also not the case that dairy farmers are locked into contracts that compel them to send their market to one buyer, which is the monopoly problem, and that because milk is a perishable product that must be collected every day they do not have the freedom to contract that many others have? Therefore it is important, irrespective of the problems of the competition policy, to ensure that there are compulsory written contracts that mean that the British dairy farmer benefits from these proposals. 

Mr Paice:  I am grateful for my hon. Friend’s question and I appreciate his huge constituency interest in this. However, while we are broadly in support of the

Commission’s proposals, he is suggesting that we make the contracts compulsory. We have not made a final decision on that. If the regulation goes through as we anticipate, we will consult the industry and other interested bodies, but our inclination is not to make them compulsory because I am not sure what that would achieve. My hon. Friend rightly referred to duration—being locked into a contract—but as I said in answer to my hon. Friend the Member for Tiverton and Honiton, the length of the contract can work both ways. You can be locked in when prices are falling and be delighted, because you are held at a higher price than you would otherwise get. Equally, as in the current circumstances where there is an upward pressure on prices because the skimmed milk price is gradually forcing the whole market up, I understand farmers wishing they could get out of today’s contract because a better one is on offer. 

The other point my hon. Friend the Member for Stone makes is that of location, which brings me back to the point I made earlier about the relevant market. We believe that competition should be seen not just in national boundary terms, but in what the relevant market might be. There is no doubt that there are parts of the country in which there is only one outlet for milk to be sold. The problem is more that there is no alternative buyer, and farmers must take what they are offered, rather than the contract. Whether there is a role for the Government in this I am not sure. I am speculating, but I have heard that many farmers argue that you will not get another processor to come into the area because of some unwritten agreement that they will not poach each other’s suppliers. Clearly I have no practical evidence for that, so it would not stand up in any court or competition investigation, but I would like to see more competition in that sense so that dairy producers have a real choice of where they sell their milk, which sadly they do not have in many areas. 

Mr Cash:  I would simply thank the Minister for concentrating on fairness or unfairness, which lies at the heart of the question of competition. May I refer to a portrait just in front of him that shows Palmerston taking a line on the commercial treaty with France, which dealt with fair competition and trade? Behind him is John Bright arguing against the iron hoof of monopoly. This is the essence of the problem in a nutshell: we must find a way of ensuring that supermarkets do not continue to have a commercial monopoly over dairy farmers, in a way that has done a great deal of damage to them over the past generation. 

Mr Paice:  I am grateful to my hon. Friend and I agree with much of what he said, but supermarkets are not the only part of the equation. Only 53% of the milk that we produce in this country is sold as liquid milk. The other 47% goes into cheese, butter, yoghurts and a variety of other dairy products, so we must not get too carried away with the view that this is all the supermarkets’ fault. There is room for criticism and I have probably implied where my sympathies lie. We must not forget, however, that most of the lower prices being obtained by our producers—I referred to this earlier—are for milk that goes to the processing sector. My challenge, as a Minister, is to find ways to enable that processing sector to pay more for its milk, and raise the whole base. 

Mr Bain:  Does the Minister agree with the Commission’s assessment, which is that the terms of the draft regulation and the action of national competition authorities combined would provide sufficient protection and safeguards for co-operatives and dairy co-operatives in member states, if the regulation were adopted? He will be aware of Dairy UK’s concerns, for example, about contracts unduly affecting it. Can he allay those concerns, and state that Dairy UK would not be harmfully affected? 

Mr Paice:  I think that the two things are slightly different. We agree with the proposals of the Commission. It does not say that contracts should be compulsory. Dairy UK’s concern is what would happen if contracts were made compulsory, and I have some sympathy with that view. As I said in response to an earlier question, the Government’s view is that, provisionally, we do not wish to see that happen and it is not in the regulation. The Commission has said that, under present law, we can make them compulsory if we wish to do so and, if this all goes through, we will consult the industry about that possibility. However, if contracts were made compulsory, it might have the effect that the hon. Gentleman described, which is Dairy UK’s concern. 

Roger Williams:  Most hon. Members welcome the coalition Government’s commitment to the grocery ombudsman, and that proposal has received cross-party support. When that measure comes into place, I am sure that the first thing that the ombudsman will look at is the milk market, because it has been a dark and gloomy sector of the agricultural industry for some time. What I am worried about, however, is that if an inquiry is undertaken and the ombudsman makes a recommendation, could that recommendation be in conflict with some of the European regulations? It is a hypothetical question, but would the Minister make the Department for Business, Innovation and Skills aware of the regulation and of how that might affect possible recommendations from the ombudsman? 

Mr Paice:  I find it difficult to imagine a situation where an ombudsman’s recommendation would conflict with the proposals, but my hon. Friend may be right. It might be possible. I will endeavour to ensure that the Department for Business, Innovation and Skills is aware of the proposals, but I think that they are too broad to affect the ombudsman or adjudicator, as we will call him or her. That role is very much about the code, which is already statutory—the role is very much about enforcing and monitoring that code itself, which we already know about. 

Kelvin Hopkins:  It must surely be the case that the 53% of milk products that are consumed as fresh milk are part of a domestic industry, both for supply and consumption, and many of the other products would also be from domestic supply of milk going to processes, and then to supermarkets. Overwhelmingly, the industry is domestic. Is there not a case for the EU having no real say in what we do with our milk industry, and for us to leave the milk industry of other countries for their national regulation, too? 

Mr Paice:  I thought that we would get there sooner or later. The hon. Gentleman and I have sparred many times in these Committees, and I will not get into

debates about the rights and wrongs of the EU. We are there, in a single market, which is the operation against which we must judge the regulation. However, I wish to slightly correct him, because he implied that it is all a domestic issue. The figures I gave are of UK production—53% of UK production goes as a liquid and 47% goes into processing—but in the consumer market only a little over 50%, I think, of total dairy products, both liquid and processed, are UK produced. We have a massive import of dairy products, which we need to bear in mind, so the statistics are not quite as he describes. My visionary approach is that I would like to see our industry claw back some of the market that we have lost to imports, and which we could perfectly well produce competitively here. 

Jacob Rees-Mogg:  Will my right hon. Friend follow on from what my hon. Friend the Member for Tiverton and Honiton said about powdered milk? My constituency of North East Somerset is near Westbury, and yet my local dairy farmers tell me that they find it difficult to change to supplying the powdered milk factory from providing to the ordinary processor because of the monopsony power of the local processors. Can anything be done about that? Is it right to have a generalised suspicion about the European Union thinking that introducing a regulation that amends another regulation is the answer to a problem of regulation? 

Mr Paice:  We could get into a long debate on the philosophical point about deregulation being replacing one regulation with another. My answer to my hon. Friend’s second question is that I agree with him that it is not a particularly good way forward. The principle we share is the point that he made about Westbury and skimmed milk. We are back to the issue of “How long do you want your contract for?” Westbury is, I believe, supplied by a number of individual producers, but mainly by the two big co-operatives that I referred to earlier that, I understand, put milk in there when they can. Westbury was always designed as a way of taking the surplus milk off the market in the spring, when cows produce a lot more milk with the fresh grass. I fully understand any dairy farmer seeing the price that they could get at Westbury today and saying, “Why can’t I have some of that?” They are prevented from doing so because of their current contract. Retuning to my earlier point, they might think differently if they were forced out of another contract to supply Westbury when the price was going down. 

I wish to slightly correct the figures that I gave a few moments ago, because I inadvertently misled the Committee. My memory failed me when I talked about the total share of the consumer market. The figure is 75% for the total UK production of milk and dairy products, with about 25% imported, which equates to about half of all processed products because we hardly import any fresh milk. We import roughly half the processed dairy products sold in this country. 

Jonathan Edwards:  As the Minister knows, agriculture is a devolved matter. What discussions has he had with the devolved Governments on the issue? Are there any major diverging opinions that prohibit a joint UK negotiating position with the EU? My understanding is that the Welsh Government support compulsory contracts, for instance. 

Mr Paice:  We have regular discussions with Elin Jones, in the Welsh context, and with the Ministers responsible for agriculture in other devolved authorities. I am not aware of any significant difference in the approach to the European regulation. The Welsh Government do support compulsory contracts, but that is not what the regulation proposes. The regulation is silent on compulsion but, separately, the Commission says that current legislation would allow us to make contracts compulsory if we wished to do so. As I understand it, the Welsh Government could make them compulsory if that were their choice. It is not in the overall approach of the regulation. 

Neil Parish:  I should like to press the Minister on competition law, because I am fascinated by the idea that 33% of production in the hands of co-operatives would be too much. Tesco has 32% of the retail trade in this country, but I do not think that the Government will refer it to the Office of Fair Trading. I have never been convinced that we cannot allow co-operatives to have more say in the market and a bigger market share. Perhaps then we could actually get a better price for the dairy farmer. I am never quite sure why the OFT seems so down on milk producers yet never tackles Tesco. 

Mr Paice:  “Never say never” is the argument. I cannot prophesy what the OFT might be asked to investigate in the future. As my hon. Friend knows, it has been asked to investigate supermarkets on, I believe, three occasions in the past 10 or 12 years, so it is conceivable, on the basis of averages, that it might happen again. However, we are so far away from even the 25% that we recommend that the argument is irrelevant. I have had this debate with farmers’ groups and have said, “When you get to 22%, come and argue the case for 33%.” When the best that we have is 10% or 11%, and that is not officially in a producer organisation, we are far from the limit. Also, I refer to general legislation on mergers in which 25% is the trigger; it is right that we should largely stick to that. 

Mr Bain:  The Minister will be aware of the context of the proposal for draft regulation at EU level. It is, of course, because of the abolition of milk quotas in 2015. Has he had any liaison with his counterpart in the Swiss Government? In Switzerland, contracts have been used since 2006 as a means to secure, as the hon. Member for Stone said earlier, a soft landing for the Swiss dairy industry in moving from a quota system to a system in which quotas do not apply. 

Mr Paice:  I could be very brief and say no, I have not had those discussions. I would have astonished the hon. Gentleman if I had said yes. The soft landing is an important point, but, as I said earlier, we are well below the figure. We are 8% below quota, so, for the UK, the abolition of quotas is relatively irrelevant, unless other countries that are producing at or close to quota were suddenly massively to increase production, which would obviously affect the European market. There is no evidence that that would happen. The state of our dairy industry is replicated in every country across Europe. Dairy industries everywhere are facing huge pressures, and I do not see massive expansion in any of them. 

Mr Cash:  On the basis that price is written into the milk contract, does the Minister agree that an agreed method of price variation ought to be written into it? Many people have suggested that that would be a good idea. 

Mr Paice:  As I said earlier to my hon. Friend and to the Committee, the Government take the view that they should not stipulate the detail of contracts. The Commission is proposing that contracts should be written and made in advance, and should include price, volume, timing and duration. It does not stipulate the detail of those items but that they are to be covered in the contract, and we feel that that amount of detail is acceptable. 

I do not think that the Government should be driving into the detail of how the price is set. There is a raft of different ways in which it could be arranged. One of the big supermarkets currently sets its price on the basis of quarterly studies of the costs of production by one of the main dairy consultants, and the price is related to that. A set figure does not have to be put in for the price—a formula might be used. There is a range of options. I do not think that central Government should make that decision. Let the farmers and processors sort it out for themselves. 

Kelvin Hopkins:  Who would object to the return of the milk marketing boards and the arrangements that we used to have in the past, apart from those who are market ideologues? 

Mr Paice:  Count me in, Mr Streeter. Part of the problem we are facing today in the dairy industry—not every dairy farmer likes to hear this—is a consequence of the Milk Marketing Board and the 100% compulsory monopoly. There was no need for innovation. It is one of the reasons for the massive import penetration to which I referred. We sat back happily, our farmers got a pool price for their milk and it was all cosy and nice. I do not knock it. I worked for a farmer who was involved when I was much younger. The milk industry was very profitable. It was all very cosy. But in the meantime we saw massive import penetration. While we were in that situation, Europe was forming big co-operative operations which were developing all the dairy products that are now in our marketplaces. That is the harsh reality that we now have to face. 

The Chair:  If no more Members wish to ask questions we will proceed to the debate on the motion. 

Motion made, and Question proposed,  

That the Committee takes note of European Union Document No.17582/10, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No. 1234/2007 as regards contractual relations in the milk and milk products sector; notes the potential for the establishment of producer organisations in the dairy sector to enhance the bargaining power of producers; and supports the Government's view that greater clarity of existing competition law and what producers may do collectively would better enable rebalancing of negotiating power in the sector rather than the Commission's proposed exemption from competition law and limits based upon national milk production.—(Mr Paice . )  

5.16 pm 

Mr Bain:  It is a pleasure to serve under your chairmanship this afternoon, Mr Streeter. 

I welcome the European Scrutiny Committee’s decision to hold a full debate on the draft EU regulation on support and regulation within the milk and dairy sector. I congratulate the hon. Member for North East Somerset on his opening remarks. As the Committee will be aware, producers, retailers and consumers experienced a period of severe price volatility in the dairy sector from 2007 onwards, which led to direct financial support of the milk industry by the EU in 2009. As the Minister pointed out, the industry has since recovered, but there must be no complacency in planning to cushion the impact of the elimination of quotas on the industry in 2015. 

The joint OECD-FAO Agricultural Outlook report leads to projections that milk production will return to an increasing path from this year, with total EU production 3% higher in 2020 than in 2009, with production of fresh dairy products forecast to rise by 8% during the same period and cheese production by 10%. One of the responses of the European Commission to the volatility in dairy prices was the establishment of a high-level experts group to make recommendations on the medium and long-term regulatory framework for the industry, with a final communication being published by the group in 2009. 

The following key challenges were identified. The first was what the group described as sub-optimal relationships between suppliers and purchasers in the milk products food supply chain, with the chain being lengthened by the number of participants, and asymmetry in bargaining strength between suppliers and purchasers. The second was the lack of transparency on price formation along the chain and the increased volatility of commodity products. The third was a fragmentation of the EU internal market on milk products and a competitiveness deficit in all sectors of the chain. 

On bargaining power, the Commission in its document on the interface between EU competition policy and the common agriculture policy states: 

“Unequal bargaining power often leads to commercial dealings, which are unlikely to restrict competition to any significant extent, but which appear to be unjust, unfair or undesirable from a social or political point of view.” 

That is the position that many of dairy farmers in this country and in many other EU member states find themselves in. The National Farmers Union published research in February of this year, claiming that dairy farmers were being paid some £330 million annually less for their milk than the actual costs of production, with a gap of 3p per litre between production costs and the price received by the producer. 

According to survey responses to the high-level group from member states, about 58% of milk in the EU is delivered by members to their co-operatives. Roughly 20% is delivered based on individual contracts, which the draft regulation discusses, between producers and private processors. Another 8% is delivered through producer delivery groups, to which the Minister referred. 

The high-level group established that current EU dairy market structures had worsened elements of the 2009 price slump by creating rigidities in the market, reducing incentives for innovation or productivity gains and weakening potential to maximise market opportunities in the EU and beyond. To deal with the first of those

challenges, the high-level group proposed several initiatives lasting until at least 2020 and covering the immediate aftermath of the abolition of milk quotas in 2015. The initiatives would rebalance some relationships in the supply chain through exchange of information on contractual practices, the launch of an awareness campaign, exchange of best practice on notification of contractual practices, the preparation of sets of standard contracts and an assessment of unfair contractual practices on the internal market, with proposals for any measures necessary to address them. 

To deal with concerns about the formation of dominant market positions, the proposals could prohibit individual producer organisations from engaging in negotiations where anti-competitive practices were to be adopted or small or medium-sized processors would be inconvenienced as a result. It has also been recommended that inter-branch organisations, comprising processors and those involved in distribution, be created to improve market transparency. 

The Commission also considers that the supply of a wider range of information is desirable in order to consider fluctuations within the market. It therefore proposes to require raw milk processors to declare to national authorities the quantities of raw milk delivered each month. We welcome the Minister’s support in principle for that idea. The Commission also intends to conduct reviews in 2014 and 2018, and to publish more regular reports on progress in the milk market. 

In principle, the Opposition welcome the concept of standard contracts underpinned by changes in the legal basis in EU agricultural law and subject to a full analysis of costs and benefits produced by the Commission and a full consideration of the relative merits of a voluntary rather than compulsory approach. We believe that such contracts have the potential to provide greater certainty to milk suppliers and the dairy sector and to rebalance the bargaining power of the principal participants within the supply chain. 

As I said earlier, contracts have existed in the Swiss milk market since 2006 and will remain in force until 2015. In Australia, contracts covered about 13% of Australian farm-gate milk in 2009. We believe there are benefits in each member state taking the final decision on their introduction, and we note the special arrangements made to protect producer co-operatives by exempting them from the need for contracts, provided that their statutes contain rules with the same objective. We also note that dairy co-operatives composed of farmers and processors are unaffected by the proposals and have been supported as a mode of agricultural production by several judgments of the European Court of Justice assessing their compliance with EU competition law. 

We also recognise the implications for competition law, but as the arrangements are likely to be applicable in the short and medium term, perhaps expiring by 2020, we believe that long-term concerns about derogations from competition policy can be allayed. We support the idea of inter-branch organisations, which exist in a similar form in the fruit and vegetables sector, given that there is evidence to show that they are likely to promote greater transparency and more research, and encourage improvements in quality in production and processing in other parts of the milk supply chain. 

The Opposition support the Commission’s efforts to tackle the inefficiencies and inequalities in the dairy supply chains. We call on the Government to engage

positively with the proposals and secure a fairer deal for hard-pressed dairy producers, who contribute so much to the prosperity of this country. 

5.24 pm 

Jacob Rees-Mogg:  I thank the hon. Member for Glasgow North East for his generous opening remarks to both the European Scrutiny Committee and to me personally. I welcome what the Minister has said and the Government’s approach to the matter, which I think is right. I was particularly struck by his comment that England has some of the best land for dairy production, which could not be truer for Somerset. The land in Somerset is ideal, the rainfall is perfect and the grass is particularly luscious. 

I wanted the European Scrutiny Committee to push for a debate on the matter because the dairy industry in North East Somerset has been badly affected in recent years. Any number of dairy farmers have gone out of business, and those that remain find the situation difficult. They are not making enough money to invest in their business in the way that they would like, even though they have the ideal conditions for milk. That concerns me because, as I said in a question to the Minister, the European Union’s approach—thinking that it can do everything by regulation—has failed. The reason why we have problems is not that a Martian has come down and suddenly made the rain stop falling in North East Somerset, but that the structure of the dairy industry, which has been run by the European Union since 1972, has let down our farmers. 

I should like to quote the explanatory memorandum produced by the Council of the European Union, which is in our pack, because it recognises that fact. It is something worth noting—the European Union has, for once, noticed its own failings. It states: 

“The existence for a long period of fixed quotas and high institutional prices, with, in effect, guaranteed outlets for dairy commodities created rigidities in the market. Structural adaptation was often inhibited, actors in the production chain were not stimulated to respond to market signals, including price movements, and there were reduced incentives for innovation or productivity gains.” 

That is the worst type of regulation to have. We want farmers, along with every other person involved in industry, to be as productive as possible, to innovate and to avoid such rigidities. To think that we could improve it by further regulation or amendments to regulations that relate to competition is almost certainly the wrong way to go about it. The aim ought to be moving towards a free market. 

My friend in European matters, the hon. Member for Luton North, will not agree with this part of what I am saying, but the problem for British and particularly Somerset dairy farmers has been caused by regulation and state control. I imagine that Welsh dairy farmers have found it to be similar problem. However, it would be wrong to go from a regulated and constrained market to a free market overnight. Our farmers have been given certain undertakings and reasonable expectations of how the market is. They therefore have a reasonable expectation that it will not suddenly be broken and moved to a free system. None the less, I encourage the Minister, when negotiating with our European friends, even when he is discussing matters with the Swiss, who may not be immediately in the regulations, to say that

what we want is to get away from regulation and interference and to allow farmers to have their own contracts, as he is going to allow, to supply where the price is highest and to ensure that they are able to innovate in the way that people in other industries can. 

Milk is a commodity product. I have been involved in financial services for the past 20 years; I was an investment manager. Most commodities have a straightforward traded price. The fact that one is selling to a powerful processor does not make any difference. If one had a South African gold mine, one would sell at the gold price to one jeweller as much as to another. What we have, because of the interference and the distortion of the milk market, is false pricing for our farmers, so that they cannot access the international price or change freely between the powder price and the liquid milk price. We need to move towards freer trade and freer markets and away from the bureaucrat-knows-best model. 

5.29 pm 

Kelvin Hopkins:  I have listened with interest to the debate. I suggest that more, rather than less, regulation is needed. The last thing that we want is farmers going out of business and the country having to import even more milk products. 

I refer to the explanatory memorandum provided by the Minister on 28 January. On agriculture, it states that 

“there are significant differences between each Member State”. 

That is true. One reason why the CAP is so badly designed is that it covers countries with great differences in the nature of their agriculture, which suggests that each country would be better managing its own agriculture, choosing how much to import and how much to produce and regulating its industry to the benefit of producers and consumers. Squeezing down the price of milk hurts producers; it does not help consumers, but merely inflates supermarkets’ profits. 

The memorandum also states: 

“There is a problem with poor transmission through the chain of market signals and price”. 

If the price mechanism does not work well, it suggests that we need some regulation to ensure that farmers get a fair price for their milk and that consumers are not exploited by supermarkets at both ends. Again, I speak not as an agriculture expert or someone who has traded in commodities in the City but, I hope, as someone who looks at things reasonably logically. 

I have argued against the CAP for a long time, but it strikes me that, nationally, the supply of milk can be regulated. The memorandum states that competition in the dairy market should be the subject of “appropriate quantitative limits”. We can regulate things, but cows cannot be magicked out of the air. They take some time to develop and so on, unlike cereals, where one can plant more and within a year production can be raised substantially; one can cut production if necessary, although instability can cause problems in growing markets as well as in animal markets, but much more so. 

It strikes me that we need more regulation to squeeze the supermarkets and to stop them exploiting producers and consumers. We need a more stable world, particularly for farmers. It is seriously worrying; we may be the most extreme case in the European Union and even in the world in our obsessive belief that the market knows best in all circumstances and that the freer the market the

better. I do not believe that. Other countries may say those things, but they do not practise them; instead, they control things. France is a classic case. It talks about supporting the national champions—in other words, protectionism. If France does it, why do we not do so? There is a case to be made for more regulation of the dairy market, not less, and regulation at a national level, so that each nation can choose on behalf of its producers and its consumers how its market should operate. 

I say these things as an individual; I do not represent my party. I shall support whatever our Front Bench spokesperson says, depending on the advice given by our Whips. A free market in agricultural products is not sensible, nor is a regulated market that covers many countries, given the immense differences in their agricultural sectors. A regulated market at a national level would be the sensible way forward. There was nothing terribly wrong with the milk marketing board arrangements that we used to have. 

5.33 pm 

Roger Williams:  I shall take a middle course, as expected. Reforming the common agricultural policy towards a more market-oriented system has been of benefit to the farmer and the consumer, but a great deal of volatility in food prices does not benefit either. I believe that there is a role for the Government. 

I am told that in a perfect market we would have a large number of sellers and a large number of buyers and that everyone would know the prices and volumes being traded. We certainly do not have that in the milk market, where the number of buyers is far greater than the number of sellers. However, there will be more price transparency as a result of the regulations, which is a good thing, and more transparency in the quantities being traded. I therefore welcome some of the recommendations made in the regulations. 

Finally, in the previous Parliament, I served on the Select Committee on the Environment, Food and Rural Affairs, and we held an inquiry into the unfortunate collapse of a co-operative. Britain has not been very good at marketing co-operatives—we have not succeeded at it. The inquiry resulted in certain recommendations that Governments could take to make the operation of co-operatives more effective and beneficial, not only for producers but for consumers. One of the recommendations was to change the law in relation to raising capital for co-operatives. The Minister was well aware of the recommendations at the time. Every Department is very busy doing important things, but will he reflect upon those recommendations at some stage? In terms of the return for milk producers, the co-operative system, as the report said, is not flawed, but certain changes to regulations are needed to make it more effective for those producers. 

5.36 pm 

Jonathan Edwards:  As members of the Committee will be aware, the milk sector in Wales is of great importance, especially to my constituency of Carmarthen East and Dinefwr. If the eastern half of my constituency is known as the anthracite coalfield, the western valleys of the Teifi and the Tywi are the milk field of Wales. 

The regulations are the result of several years of work and discussion. As we have heard, after the milk crisis, during which demand for dairy products significantly decreased following unusually high prices in 2007, an expert group was set up to find out what went wrong and what needed to change. The panel concluded that the current market is unfair for farmers and recommended several measures. The Commission acted on that information and presented its so-called milk package in December. 

The package seeks to address bargaining power and create a harmonised approach across the European Union in four different areas. First, it provides a legal instrument for member states to put in place supply contracts with specific terms between farmers and milk processors. Secondly, it allows farmers to negotiate contractual terms collectively through producer organisations. Thirdly, it extends to the dairy sector the exemptions that apply for inter-branch organisations in the fruit and vegetable sector. Lastly, it requires milk processors to declare information on milk deliveries. 

The Commission’s proposals on contracts provide a basis for addressing the significant flaws that exist in current contractual arrangements, which force dairy farmers to supply all the milk that they produce to dairies exclusively, for a duration of not less than 12 months, with very little, if any, predictability about the price that they will be paid for the milk. I am therefore happy with the proposals under discussion, because I think that they will rectify some of the injustices mentioned earlier. They address fairly the current weak position of dairy farmers, who do not have sufficient control over the price that they receive for the milk that they produce. Simply raising the price for the consumer does not necessarily mean a better price for farmers. We have enough experience of supermarkets providing loss leaders and increasing their own margins without benefiting their suppliers. 

The most promising aspect of the proposals is the requirement for milk contracts between the farmer and the processors. The contract would set out the price and volume of milk to be sold. The Commission proposes that member states can choose to make those formal, written milk contracts a compulsory requirement, and as the Minister has mentioned, that is the preferred position of my Government in Wales. We are concerned that the desire to see a harmonised approach across the EU could be undermined if member states are allowed to opt out of measures that could address the serious problems in milk contracts, so we support compulsory contracts. I hope that the UK Government will revisit their view and argue for compulsory contracts throughout the UK to ensure harmonisation across the EU. 

When a member state makes contracts compulsory, the draft regulation states that they must contain a number of elements, such as volume, price payable, duration and so forth. These so-called essential contract ingredients are considered necessary for any milk contract. However, we would also like to see requirements to prevent exclusive contracts, so that producers are not tied to one milk buyer. We believe that that might inhibit fair competition in the sector. 

The Commission’s proposals also include the possibility of farmers bargaining collectively for the terms of their contract, so that they would be in a stronger position. We think that that is a good thing. Additionally, it

proposes to set up organisations that represent the whole supply chain, from the farmer to the retailer. That is important for farmers and consumers to get a fair deal and for no one to lose out, and it would challenge the domination of the supermarkets over the whole sector. We therefore broadly welcome these proposals and hope that progress can be made on the issues that I have touched on, including mandatory contracts without a requirement for exclusivity and an agreed price for the product. 

5.40 pm 

Mr Paice:  I thank hon. Members on both sides of the Committee for their helpful contributions, which have been largely supportive of both the Government’s position and these proposals. Let me reinforce the message that the Government believe strongly in collaborative working, co-operation, joint bargaining, or whatever phrase one wants to use. Indeed, when the Secretary of State for Environment, Food and Rural Affairs addressed the annual general meeting of the National Farmers Union, she specifically said that she hoped that farmers would work together to get a better deal and to exercise greater bargaining power. That is clearly the Government’s position. 

As was said earlier, the history of co-operation in the UK is pretty chequered. Having worked on a farm for a number of years before I first entered the House, even though it was in the arable sector rather than the dairy sector, I am well aware of farmers’ unwillingness to give up their independence for their own benefit and to pool their powers to generate success. That view, however, is changing and we are seeing some pretty massive co-operatives developing in the grain sector, but, sadly, nothing in the dairy sector. 

As I intimated earlier, however, both First Milk and Milk Link—the two big co-operatives—are now beginning to fulfil their potential. One of them is paying dividends already, which farmers should see as part of their overall return from the co-operative as much as the price they get for their milk. In both cases, the management of those co-operatives is beginning to think more broadly compared with some of our other processors who still seem to be obsessed with defeating each other and fighting for supermarket contracts, rather than thinking more broadly of the market that I described earlier. 

There should be no doubt that the Government strongly support co-operation. We can argue, as my hon. Friend the Member for Tiverton and Honiton did earlier, about the maximum size of a co-operative, but as we are so many light years away from that, I feel that it is a relatively hypothetical debate. If we got to that size, I would be very happy to debate the matter further with him, but I fear that it is some way away. 

The hon. Member for Glasgow North East and my hon. Friends the Members for North East Somerset and for Brecon and Radnorshire referred to the volatility that comes from the freer market that we are all witnessing. Such a market is probably an inevitable consequence of the quite proper move, which my hon. Friend the Member for North East Somerset and I agree is right, towards free trade. We will get greater volatility of food markets because a relatively small proportion of any food product is actually traded on the world market, so the impact of a relatively small rise or fall in supply can have a

pretty massive effect on a product’s price. In the dairy sector, there is properly more trade than in some other sectors. 

The hon. Member for Glasgow North East quite rightly referred to various papers that recognise expanding opportunities for the dairy sector. Primarily in the far east, demand for dairy products is a result of increasing population and increasing prosperity, and that creates great opportunities. This country should be ready and willing to take up such challenges. Some internationally traded products that have been coming here may find different homes in future. Overall, though, global demand will rise and the opportunity for the British dairy industry should be promising. Many dairy farmers today, however, would be hard pushed to be persuaded of that, given the plight in which they find themselves, to which the hon. Gentleman quite rightly referred. 

We would challenge some of the figures that the National Farmers Union used in its calculation, but overall we accept that a lot of dairy farmers are not covering their costs, or are only barely doing so. They are certainly not covering them enough to make the investments for the future that we would like to see. That brings me back to the Government’s role, which is the subject of the debate. 

I entirely agree with my hon. Friend the Member for North East Somerset that the whole industry has been in a straitjacket in some areas and innovation has been squeezed out. I made that point in answer to the question from the hon. Member for Luton North about the milk marketing board, and there is no doubt that that is a significant factor. We must find a way to persuade our processors, and potential new ones, to invest to try to drive back some of the imports that I have described and to take greater advantage of the increasing opportunities for exports. That comes in a week when our British food exports have achieved an all-time record of almost £11 billion in the past year. That is a massive achievement, of which we should all be proud. 

The hon. Member for Glasgow North East has welcomed my comments on transparency, as did other hon. Members, for which I am grateful. He also rightly referred to impacts and cost-effectiveness. We, too, are concerned that proper impact assessment has not been carried out. 

Overall, I am grateful to hon. Members for their comments. My hon. Friend the Member for Brecon and Radnorshire referred to Dairy Farmers of Britain, which was a disaster. I think that everyone recognises, however, that the disaster was not a feature of its being a co-operative, but of its downright bad management and some awful decisions that it took. I will, if I may, write to him on the specifics of raising capital, about which I am aware on principle, but not sufficiently so to answer him now. 

To conclude, the Government hope that the proposal will go through on the basis that we have discussed. We are certainly being constructive, as the hon. Member for Glasgow North East has urged us to be—we want it to go through. We do not believe that it is the be-all and end-all in solving the dairy sector’s problems—I do not think that many people would believe that to be so—but it will help. There is much potential for increased bargaining power. There is no doubt that the massive imbalance in

market bargaining power between farmers and processors, as well supermarkets, needs to be addressed. More co-operatives, the development of inter-branch organisations in the UK—bring it on. We would be very pleased to see that happen. It is not the Government’s role to force them to come together, but we would strongly urge them to consider doing so. 

Question put and agreed to.  

5.48 pm 

Committee rose.