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As the noble Lord, Lord Sewel, has pointed out, there can be no doubt that we are now entering a very different period in agricultural markets where world price levels are approaching those that we have maintained in the EU. Can the Minister tell us if there are commodities which, in the past three months, have required export refunds other than perhaps a form of export guarantee? If we have reached that point, it would make it much easier to reform EU policy to the point where there are no export subsidies, which, as the noble Lord, Lord Sewel, said, is one of the central aims in his report.

A rather more difficult area must be tariffs. Any reform of tariffs will have an immediate effect on commodity prices within the EU, as it also will on third-world countries for which the EU provides preferential tariffs. I can appreciate that the purpose of this report was to review the internal workings of the CAP. I have looked, perhaps all too briefly, at the report, but I have not found any mention of these external effects of CAP policies. None the less, it is a consideration that will have to be taken up, which should not go unmentioned today, and will require to be reviewed along with all the other policies.

I should declare my interests: I am a livestock farmer, a member of the Scottish National Farmers Union and a member of the Scottish Rural Property and Business Association. Given my interest in things

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north of the Border, it will not be a surprise to those who served on the committee that I come back to a topic that was raised in the evidence given by the Scottish Rural Property and Business Association representative; namely, the requirement with some commodities to retain a certain critical mass in vulnerable areas. That is largely because of the difficulties in maintaining downstream processes and businesses.

As we can see, this rationale has been used as an excuse in a number of other countries for maintaining an element of their commodity support payments and not fully decoupling. It is one of the weaknesses of the health check programme that it requires that no one who has not maintained these payments should be allowed to reintroduce them. But it does not propose to bear down on those who are applying these payments at present and perhaps doing so indiscriminately. It also contains the proposal that it should be possible to direct assistance to fragile areas, which surely should be the threshold that should be used in considering any commodity or other connected payments. This kind of support—I think that the noble Lord, Lord Sewel, pointed it out too—requires to be looked at largely as social and environmental support. Does the Minister consider that this support could be entirely moved into Pillar 2 and not create the distortions which cause the problems with our negotiations with the WTO?

It is very encouraging for us to know that a reduction in the conditions required for cross compliance is in consideration, but there are other aspects of EU regulation that will need careful review. The most recent that I have come across is in haulage regulations. I know that the Minister does not have responsibilities north of the Border, but it might be as well for noble Lords to be slightly aware of some of the problems.

The movement of livestock from the islands and the west coast of Scotland is a highly seasonal affair, largely taking place for two months in the autumn. One of the main livestock hauliers in the area has just sold up his business because the cost of compliance and the sternness of the regulations make it uneconomic and too frustrating for him and his employees. The EU regulations state that for any animal involved in a journey that from start to finish lasts from eight to 12 hours, the lorry must be fitted with a watering system. At least half of the animals being transported are sheep, who have no idea about drinking bowls or nipple drinkers. The ferry from Uist to Oban can take up to seven hours before any onward journey is considered, and once the time has been exceeded, both the lorry and the trailer require climate controlled forced ventilation and satellite tracking. This may not be quite the same challenge for areas in Cumbria or Wales, but all these areas are also affected by the lack of small-scale slaughterhouses nowadays, which has increased the difficulties for the animals and the hauliers.

The noble Lord, Lord Sewel, said that the EU is still looking at bearing down on making large payments to larger farmers. There was a proposal to cap single farm payments which would have had a disproportionate effect on UK farmers, but now that same idea is being targeted at increased modulation. Again, from the

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Scottish point of view, where more than 85 per cent of the land is in less favoured areas that tend to comprise huge acreages or hectarages of land, although not necessarily huge businesses, this would be felt very heavily. It will discourage the development of larger units. We have all seen that if agriculture is to move forward, some small-scale units need to be amalgamated so that larger and more efficient businesses can be put in their place. The aim of the agriculture commissioner, Mariann Fischer Boel, is of course to increase food production in order to stem rising prices, so to introduce a policy that would actively discourage an increase in food production seems absurd.

In their response the Government ask if they can channel aid to these areas in a more focused way to help with unemployment, but that would require innovative thinking. I do not know whether the Minister can give us an indication of how that might be done. They will have to come back to the fact that a certain amount of what might loosely be called agriculture will be needed for the management of the vegetation, and as time goes on, some sort of useful production in order to supply the increasing demands of the world’s population will be needed.

4.47 pm

Lord Livsey of Talgarth: My Lords, I congratulate the committee on producing an excellent report. I can tell by the amount of detail that an awful lot of hard work went into it. The health check has come at the right moment for this debate. This is a time of great turbulence for food production, with price hikes and food riots, while the discrepancies between supply and demand have sent the price of food upwards. This follows a long period of stable low prices in the UK and I believe the report has to be read in that context.

I can well remember saying in lectures 30 years ago that food represented 27 per cent of the disposable income of an average family. Add to that the 33 per cent of income that went on housing and you had already got rid of 60 per cent of disposable income. Until the end of 2007, food purchases represented only 11 per cent of income and there was a steady increase in the purchase of luxuries such as holidays. We have now had a reality check. Over the past 18 months, Tesco alone has made a profit of £2.5 billion, £1 billion more than the entire UK agriculture industry. Those days are behind us as well. We have had a situation where farmers had poor profitability, particularly in the uplands where their incomes have been lower than the national minimum wage. There is a huge dynamic change going on.

Now everyone else, other than just farmers and agriculturists, is starting to talk about food security. In the past 10 years food security in the UK has decreased by 16 per cent, from 86 per cent to 70 per cent. At least a quarter of our food is imported, so what impact will that have on our balance of payments?

In the past lean 20 years many farmers have said, “Thank God for the CAP”—we have certainly said it in Wales—and “Thank God for the French farmers”, who have ensured that all EU farmers have had a positive income. The UK Treasury would never have given us that kind of support. I am afraid that that is a fact of life.

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Why is it that complaints about high food prices do not always focus on the commodity markets, for example, where doubtless at this very moment bets are being placed on the future price of wheat—which has doubled in the past 12 months—and impacting on the current sale price? That is having an effect, too, on the ability of the poor to buy food. A lot of factors are involved in this which cannot be ignored and the report should be set against that background. It is like an academic exercise in some respects: “Reform of the CAP—discuss”. We could still be doing that at midnight, so I shall try to get through only some of it.

I partly blame the Treasury for some of the misdemeanours that have occurred in the agricultural industry. It is interesting to note that only last week the Chancellor said that he felt that direct subsidies should be scrapped. Unfortunately he did not put that remark into context and some journalists interpreted that as if it was going to happen tomorrow. Fortunately the report, and even the Government’s response to it, does not reflect that kind of immediate way of dealing with the problems.

We have the report, the Government’s response and the EU proposals. Unfortunately, I have time to look at only one or two issues. As an ex-member of the committee, I am not going to be a good boy because I do not agree with some of the things that it says. Pillar 1—the single farm payment—has, in the context of agricultural economics, many different interpretations. For those of us who have studied agricultural economics, the three classic principles are land, labour and capital. On the land issue, grade 1 agricultural land has many options; you can grow as many as 25 to 30 different crops, for example, with differing values. Even grade 2 or grade 3 land will do that, but with grade 4 land you have fewer options, and when you get to grade 5, all you are left with is beef and sheep. That has to be recognised in any CAP policy.

That brings me to the issue of area payments versus historic payments. Does one size really fit all? Probably the greatest epoch-making agricultural legislation in the UK, the Agriculture Act 1947, was headed by Tom Williams, a West Yorkshire miner who saw the need for food security and for designating land as less favoured areas—which, in socio-economic terms, were poorly off—and the Treasury in those days was willing to fund that kind of policy. The socioeconomic needs of the less favoured areas are important, in my view. When the chairman, the noble Lord, Lord Sewel, quotes the FAO chairman—or director, I cannot remember which—about the £130 billion shortfall, we must not forget that the Americans are putting $200 billion into agricultural support in the States, which is distorting the whole of world trade, yet they are going on about the WTO and all the rules it breaks. We must be careful about where we put the blame when the EU is reducing its budget on agricultural expenditure.

I agree with what the noble Lord has said. We certainly need to scrap milk quotas, set-aside and export refunds, which are a horrific distortion of trade and impact badly on third-world countries. Historic payments, however, are a totally different situation.

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When we try to apply area payments right across the UK, for example, in the form of the CAP, my concern is that on that basis land may be traded as a commodity because of the area payments that are on that land. I can see that as a possibility. On the other hand, if you look at historic payments as they are in Scotland, Wales and Northern Ireland, you find 80 per cent less favoured areas—80 per cent of areas that can really produce only beef or sheep. There are hills that have had a certain number of hefted stock every year for the past 200 years. That is real history, isn’t it?

We cannot ignore the less favoured areas, and I am pleased to see that in its summary the committee has paid due concern to the poorer areas in the Common Market, in the EU. They need support. What kind of support do they need? I am alarmed by the Scottish evidence here that a 5 per cent reduction in modulation—I am quoting this off the top of my head, so I may not be close enough in accuracy—results in a 19 per cent reduction in farm income. That is a graphic illustration of the importance of historic payments. They may have to be phased out over a long period, but if that is done then something has to replace them. The income streams and disposable incomes in the uplands need to receive support from Pillar 2, as the report rightly says, because we need diversification from those income streams. Very often the farm income is supplying only 50 per cent of the net disposable income of the family, and the rest is coming from elsewhere. That has to be encouraged. Pillar 2 is undoubtedly the way to do it, but I have reservations about whether the British Treasury in matched funding will have the resolve to support rural areas in that way, not just in Britain but throughout the European Community.

4.58 pm

The Earl of Erroll: My Lords, I thank the noble Lord, Lord Sewel, for giving us the opportunity to debate this issue. Although I have nothing to do with the report, as I am married to a farmer I thought I might make a few comments, because I help her with the regulatory paperwork side of the business. It is an interesting report that helped to explain some things. I was interested in the government response and astonished myself by agreeing with quite a bit of it. I liked the objective of continuing to produce the majority of the food we consume, but my worry is whether we will end up doing that.

We live in a complex system and a complex world. Agriculture is even more complex, and we have complex interrelationships with nature. A rules-based system does not work properly. In an ideal world, the market will work, but the trouble is that one cannot predict things well enough. We cannot predict what is going to happen to farming in a few years. We cannot assume that prices will continue to go up, particularly for Europe. Many different things could change. Zimbabwe could sort out its problems and start producing a proper harvest again; Ukraine might do the same; Australia may get some years of rainfall; and suddenly our wheat and grain would be totally uneconomic again. On the other hand, the people who still have some cattle left will like that. Those interrelationships are difficult to predict.

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People forget also that farming had some very tough times while the prices were down. Overdrafts have increased. Now that farmers are trying to make some profits, they probably have to give 40 per cent of them to the Treasury in a really good year. It is therefore quite hard to get the overdraft back down again before the next bad time comes along. If the Government are this year modulating 18 per cent of money that could go to help pay off the overdraft, it does not help because it is yet another tax.

Competing in open international markets sounds like a wonderful idea and is a great aspiration. However, let us suppose that nitrogen costs go too high—that assumes that we can get nitrogen because no predictions have been made on whether any will available in one or two years. There is huge pressure to stop producing it. It is energy-intensive and people want us to stop putting so much nitrogen on the ground. The trouble with that is that one’s yields will drop, at which point we all suffer and enter a more difficult cycle. Since our underlying and infrastructure costs are higher, we will make a loss if we do not have a fairly high yield off the farm. The cost of fuel is going up, as are many other production costs. The report is wrong in stating that regulation of emissions will not have an effect on costs. Merely complying with those regulations is bound to have a cost—one should not kid oneself otherwise.

Defra’s desire to simplify the regulations is sensible. There are many stupid inconsistencies at the moment. A more common-sense approach is needed and decisions need to be taken more rapidly—particularly as the time to submit SP5 forms approaches—so that people really know where they stand. I give an example of a ridiculous regulation this year related to planting wild bird cover. Maize is technically a combinable crop, so one can fertilise, spray and look after it. It thereby flourishes and helps the wild bird population. A mixed crop, which would be better for the wild birds, is not harvestable. It therefore comes under GAEC 12. You are not allowed to fertilise or spray it; your crop will die; and the wild birds will have nothing to feed on. It is just stupid. Why can Defra not get its act together to say something about that early enough? Instead, it says, “Oh, no, we’re bound by the rules from Europe”. It should get its act together.

Adding water costs to the SMRs and GAECs will make life more complex and difficult. At the end of the day, the farmer faces a whole lot of rules which state that one should do something on certain dates as if the world were a perfect place and they could predict everything. But they are coping with the weather, which is unpredictable and changing. Their machinery may break down at the wrong moment. Their contractor may decide to move to a different farm at that date. Their livestock may go ill. One cannot predict what is going to happen. It is not like running a great factory. Most of those businesses are not run with lots of spare capacity, machinery and manpower; they are small, tightly knit organisations which are run close to the bone, so one cannot do it.

It is said that the bigger businesses will benefit from all this regulation because they will be able to deal with it. I agree with those who say that the

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payments should not be capped. Just because the businesses are bigger does not mean that they are making a lot more profit—all kinds of other inefficiencies will exist. One has to find out whether they are profitable before one can start saying that one is going to remove their income. All that would do is bankrupt agriculture generally. It is not the income that matters, but the bottom line.

Interestingly, if we move to bigger units, it will help people who worry about set-aside disappearing. Now that set-aside has been removed in the past year, I have noticed that a lot of fields that my wife popped into set-aside she does not want to remove again. Why? The machinery has become too big. It is not worth turning something of only 2.5 hectares back into wheat. You lose too much around the edges anyway; you have to have 5-metre margins around the watercourses under the pesticide regulations and you will not be able to get the table for your combine. By the time you have got it into the field and put the table on, it is time to take it back off again. So they are not worth farming any more. Some of these things are going to be permanently set aside. If you have a larger unit, the machinery will be bigger so you have de facto set aside. So you should go for bigger units.

The Pillar 2 redistribution is a very good idea. It is what the public want and there is a lot of environmental benefit from it. I enjoy seeing wildlife back, although it has always been around. It has just been shifting around—and, yes, there have been some problems. But with Pillar 2, it is a case of where the money is going to end up. There is a suggestion that some of it should really be going into regeneration schemes, rural development schemes and other things that are not to do with land management. At the end of the day, I thought that this whole area was about land management, and it is the land management that will suffer. If you put big money out there and pop it with some quangos to decide where it is allocated, the farmers will not be the ones sitting on the committees because they will not have the time or the inclination for the bullshit that goes around in those committees, and they will not understand it—

A noble Lord: Really!

The Earl of Erroll: Sorry, it is a technical term. They will not have the time to try to understand how the thought processes go on that regulatory stuff. So the money will probably not end up where people think it is going to end up—in good environmental schemes that will help the land.

Then you come on to the debate about the role of farmers. Do we actually want people who enjoy and love the land, who understand and will work with the vagaries of nature and who do not have a nine to five mentality? You cannot have that mentality when you are dealing with the countryside, the weather, livestock and stuff like that. Those people do not like paperwork and they do not like being treated like idiots either. If you think that someone who has done an environmental studies course in university, who has done one farm walk and then starts producing books telling you how to run a farm, knows what they

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are doing, you have got another think coming. I would love to know how many people who write these regulations actually possess a pair of Wellington boots. I should not think that it is very many of them.

Then there is the necessity of supporting certain markets. If you want to have grassland and parkland still and have it properly done—and under the countryside stewardship scheme, some of it must be managed that way, quite correctly—you must have some cattle left. Of course, there is a big problem about how you keep cattle, the types of cattle, and what happens if cattle become totally uneconomic. In some parts of the country, it is very hard to find lawnmowers to come and eat the grass in countryside stewardship schemes. So we may need to distort things there to ensure that the environmental side is looked after properly.

The last thing I have to say is on the character of the farmer. The reports from Defra and other places glibly say that the farmer should learn about risk management and should join co-operatives and selling groups, and so on. Well, the co-op made a nasty mess of selling its wheat this year, so it does not always work. The large buying and selling groups can make just as many mistakes as the small farmer, so you cannot rely on that.

As for options and futures, they are quite dangerous financial instruments. I have a friend who is a potato farmer who went heavily bust on that a few years back, thinking that he was hedging against losing his potato crop. There would not be so much money to be made out of them in the City if they were not also high risk. At the end of the day, if there is a high reward there is a high risk behind it. The sort of person who is managing land is probably not the sort of person who is interested in that sort of risk or that sort of business or intuitively knows it. If you release half the active sellers—I am trying to think of another word for those with sharp practices—or the financial advising people on to the farms, you will again have some disasters.

It is all very well saying to farmers that they should diversify but, again, you come back to character. A lot of them do not want to run bed and breakfasts or hotels. And then you have the problem of planning. If you want to get a composting unit on to your farm, or something like that, which is nice and green and environmental, everyone will object because they will say that it smells—and then it will take one and a half or two years to get planning, if you get it at all. So it is not easy. You have to get capital for this; you probably have not been making money, so where is the capital going to come from? It is a different kind of business person you want. Is that the sort of person you really want running the countryside and land management in future? Perhaps it is—I do not know—but I am not sure that some of the people who are there are the people that you are making the right recommendations to.

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