Dairy Industry

Earl of Shrewsbury Excerpts

Thursday 17th September 2015 Lords Chamber

Asked by

[The Earl of Shrewsbury]

To ask Her Majesty’s Government what steps they are taking to support the dairy industry in the United Kingdom, in the light of the European Union aid package announced on 7 September.

[The Earl of Shrewsbury (Con)]

My Lords, I am grateful to your Lordships for affording me this opportunity to ask the Question for Short Debate today. In doing so, I declare my interest as a member of the National Farmers’ Union. I am delighted that my noble friend Lord Gardiner of Kimble is to reply. He possesses a deep knowledge of the countryside in general and rural issues in particular. I know that he is well aware of the significant problems which face the UK dairy industry, especially as his family has long been associated with that industry. From small beginnings last week, I am delighted to see so many noble Lords taking part today, which shows the importance of this subject. I am most grateful for their participation and look forward to listening to their comments. I am genuinely sorry that the noble Lord, Lord Grantchester, is unable to join us on the Benches opposite on this occasion. I know that he has another appointment but he is an acknowledged expert on the dairy industry and we shall miss his expertise today.

Farmers are having a pretty rough time, with the dairy sector experiencing probably the worst of it. The situation is degenerating and dire. Farm-gate milk price returns to UK farmers have fallen by 25% to 30% since the summer of 2014. This equates to falls from around 35p per litre to an average price in May this year of 24p per litre. The variance in UK farm-gate milk prices is the widest ever seen, with farmers on retailer-aligned liquid milk contracts receiving prices above 30p per litre but others supplying into powder and milk brokering receiving prices down to 15p per litre. In fact my next-door neighbour at home, who only milks 60-odd cows, is on 14p per litre with First Milk.

This price structure has occurred as a direct result of falling global commodity prices, which were down by nearly 50% in the same period, and other external factors including the ban on imports by Russia. That ban has recently been extended by a further 12 months. Further factors are reducing purchasing by China and the Middle East. Currently, there are 9,777 dairy farmers in England and Wales; that is 488 fewer than in July 2014, and the figure is falling weekly. Many are leaving the industry because they simply cannot continue to fail to make ends meet and young, aspiring dairy farmers cannot get a foot on the ladder. It is really sad.

Just over half of the milk produced in the UK annually is sold as fresh liquid milk through retailers, and is subject to a competitive tendering process where processors bid for long-term contracts. Most retail milk is sold as skimmed or semi-skimmed, so liquid processors end up with a surplus of cream to be sold as retail or wholesale, or to be made into another product such as butter. The huge fall in global commodity prices has reduced the value of these milk constituents dramatically. Around a quarter of UK milk is processed into cheese, in the main into Cheddar. Cheddar is traded internationally and subject to high levels of competition from other countries, notably Ireland. The remaining volume of milk is processed into a variety of products, including yoghurt and milk powder as well as constituent products such as whey—and then we have the supermarkets.

Milk has been at the forefront of a UK retail price war as the major supermarkets compete for custom from hard discounters. Fresh liquid milk has been heavily reduced in price to the extent that the average price for four pints is just 98p. The full effect of these discounts cannot be easily understood, due to the commercial sensitivity of processor- retailer negotiations. But in the long term, this discounting devalues the product and could cause serious damage to the industry if there is not enough value to be passed down the supply chain. I believe that if retailers choose to operate in this way, they must absorb the cost themselves and not seek to recoup it further down that chain. Furthermore, I believe that the end customer would not object to a small rise in the cost of this highly nutritious and top-quality product, which currently is cheaper than bottled water. However, any such rise in price must be passed in its entirety to the farmer.

It is true that a few supermarkets have developed direct relationships with their liquid milk suppliers, paying a so-called cost of production-plus price to farmers, but only around 10% of UK milk is currently under such an arrangement. Cheese wholesale prices have also been falling dramatically, especially with the demise of exports to Russia, as I mentioned earlier, but there is little evidence of any of these cost savings being passed on to consumers—a move which would surely have the effect of bolstering consumption. Can my noble friend the Minister comment on the recent emergency agricultural council meeting, which I know he attended? Following that meeting, what strategic decisions for the long term have Her Majesty’s Government planned to further support the UK dairy industry?

What can Her Majesty’s Government do? The UK dairy industry is adjusting, albeit painfully, to an increasingly volatile global market. While the long-term prospects for dairying are positive and UK dairy farmers remain the most efficient in the EU, there are urgent short-term issues to be overcome. For instance, Her Majesty’s Government need to ensure a timely payment of the BPS in December to ease cash flow in the short term. There also needs to be a review of UK dairy processing capacity. In addition, fairness must be ensured in the supply chain by supporting and strengthening the work of the Groceries Code Adjudicator, while encouraging milk processors to comply with the voluntary code on milk contracts. Finally, in this shopping list of numerous items, there must be a reduction in the regulatory burden borne by dairy farmers.

In conclusion, in many ways the dairy industry in the UK is a victim of its own phenomenal success. We must build on that success, further improving our skills in efficiency, productivity and first-class animal husbandry. We in this country are proud to be world leaders in dairy farming and we must do everything possible to encourage and support our farmers to remain at the top of their game and to be viable, so that they can have the confidence to invest in the future.