Dairy Farming

Dan Poulter Excerpts

Tuesday 7th June 2011 Westminster Hall

[Dr Daniel Poulter (Central Suffolk and North Ipswich) (Con)]

I am pleased to see that, despite the recess, a number of colleagues are arriving, and more will join us later.

It is important that we debate the future of British dairy farming. It is an important matter throughout the country, but especially so for East Anglia, and particularly for Suffolk and south Norfolk and for Waveney valley in my constituency. All Members here today would like to see the re-establishment of a thriving, profitable and sustainable agriculture sector in the United Kingdom. About 15 or 17 years ago, the country produced 70% of its own food, but we now produce only 40%. There is a strong case for supporting the development of much greater food security and food sustainability, and the dairy sector has an important part to play in that.

Milk prices affect dairy farmers from time to time, but the dairy industry has faced a particular crisis over the past few months and, as a result, at least eight farms in East Anglia close to my constituency are no longer in business. The key factor is the price that dairy farmers receive for their milk. There is a tension between the price paid by the consumer, particularly given the current economic climate, and the price that retailers pay milk producers. Nevertheless, if we want to maintain a profitable and thriving agricultural sector, we need to ensure that milk producers receive a fair price. At the moment, Britain is third from bottom in the European league table for the price that our milk producers receive, which is unacceptable.

I know that the Minister is familiar with a number of these factors as they affect Suffolk, having originally been with AtlasFram farmers, but the point of this debate is to focus on what the Government can do to support the British dairy industry over the next few years, particularly in the current crisis.

[Sarah Newton (Truro and Falmouth) (Con)]

I congratulate my hon. Friend on securing such an important debate. The future of dairy farming is important to people throughout the country, as we need greater food security and must produce more of our own food. Does he agree that it is about not only the supply of milk, but the products that are made from it? Those products are important to the economy of Cornwall. They include not only our famous clotted cream but our ice cream, cheese and yoghurt, which all depend on healthy supplies of milk. Many dairy farmers in my constituency, like those in my hon. Friend’s, face the prospect of having to give up that important part of their livelihood, along with their farming traditions.

--- Later in debate ---

[Dr Poulter]

My hon. Friend makes a good point. I want to focus on milk, but others may wish to discuss other milk commodities and derivatives. Many retailers do not pay our dairy farmers a proper price for the commodities that they produce, as she has said so eloquently, but I shall focus on milk because, for producers throughout the UK, milk is the main produce of the dairy farm. None the less, I accept that the price that those farmers receive for yoghurts, cheeses and other milk-based products is a problem.

There has been increasing coverage of dairy farming issues over recent months, and I am sure that the Minister is aware that a key problem is the contracts that dairy farmers are tied into with the retailers. Before going into that aspect, however, it is worth setting out the background to the problem.

There is increasing concern that the milk industry is in crisis. Milk is a perishable product, as we all know, and farmers have little choice but to enter into contracts that often feature exploitative terms and conditions. These contracts contain no certainty about the price that will be paid from month to month, and producers are locked into contracts with notice periods of 12 or 18 months and with penalty clauses from the moment that they announce that they wish to move to another retailer. Such penalty clauses often include a section on price, which adversely affects the farmer.

[Stephen Phillips (Sleaford and North Hykeham) (Con)]

I congratulate my hon. Friend on securing this debate. Both he and the Minister know that this matter is close to my heart, and I hope that my private Member’s Bill will receive his support on Friday—I am sure that it will.

My hon. Friend has mentioned contracts. Does he agree that the major problem faced by the dairy industry is that retailers regard milk as a loss-leading product, and that they use their superior position in the market to drive down the price in a way that has made dairy farming unsustainable for many producers? The Government need to tackle that issue.

[Dr Poulter]

I thank my hon. and learned Friend for his intervention. The point is that the framework around those contracts has helped to keep the market subdued. As I have indicated, Britain is third from bottom in the league table of what farmers are paid for their milk in Europe.

The average European Union milk price in March 2011 was 29.72p per litre, but it was only 26.59p in the UK. For most farmers, over an average year that 1p a litre amounts to between £80,000 and £100,000. On average, British farmers are being paid £300,000 less than the European average, which is unacceptable if we wish to support a thriving dairy industry. We need to drill down into why British farmers are not paid a fair price for milk, whereas a much higher price is paid by European retailers to their milk producers.

Various narratives are put forward by retailers and suppliers on what they pay our dairy farmers. They say that they pay a fair price, but according to the European average they do not. They say that consumers are under financial pressure and that they need to keep the cost of milk down, and there is some truth in that. Yes, we are in difficult economic times, consumers are under financial pressure, and we want the cost for consumers to be as low as possible. However, although the price of milk in the shops over the past few years has risen considerably—by 70% or 80%—the increase paid to the farmer has been disproportionately lower. There has not been the necessary knock-on for farmers, so although retailers and suppliers are benefiting from a rise in the price of milk in the shops, our milk farmers are not. That is not fair, and it is not beneficial to the dairy industry. If we do not support our dairy producers, more farms will go out of business, which will be bad because it will impact adversely on consumers given the perishable nature of milk.

The other argument often put forward by retailers and suppliers is that milk must be resourced exclusively from the UK. We all want to see retailers supporting British farmers, backing honest food labelling and buying from them whenever they can. However, given the perishable nature of the product, and given that unlike many European countries we have a particular market for fresh milk, British retailers and suppliers have no option but to buy from British producers. That is another spurious argument put forward by many retailers and suppliers, and it is not a good reason for them not to pay our British farmers a fair price for their milk.

I am pleased that the European Commission has identified the significant imbalance in bargaining power between farmers and dairies and the lack of certainty and control over the price that farmers receive for their milk. It has recognised that the problem lies with the contracts and has proposed a number of ways in which national Governments can address it.

As the Minister will be aware, the Commission’s proposals to improve the position of dairy farming include allowing member states to introduce minimum legal standards for milk contracts, which would include the price to be paid for the duration of the agreement and a proper arrangement for the termination of those contracts. At the moment, when a farmer seeks to end a contract, they have to wait 12 or even 18 months before it can be terminated, but the penalty clause kicks in immediately, which means a lower price for the milk that they produce. That does not seem to be a fair contract, and it should be investigated.

The EU has talked about permitting producer organisations to be established, which would allow dairy farmers to come together to improve their negotiating power with dairy companies, and that would be a good thing. It has also discussed introducing greater market transparency into the dairy supply chain.

The EU has identified a number of issues with the contracts, which, as my hon. and learned Friend the Member for Sleaford and North Hykeham (Stephen Phillips) has said, are at the crux of this matter. The majority of milk contracts offer dairy farmers no certainty or clarity about the price they will be paid from month to month. They allow the milk buyer to make unilateral changes to milk prices, which often take place at very short notice. Dairy farmers have great difficulty exiting such contracts. All those issues imbalance the contractual relationship between the dairy farmer and the milk buyer.

I hope that the Minister will tell us that the Government support a fair code of practice and that they will give us a little more clarity over the role of the ombudsman. Unless we improve the current situation between milk producers, milk suppliers and retailers, more and more of our dairy farms will go out of business.

It has been a pleasure to flag up these key issues, and I look forward to hearing from the Minister and my colleagues.

[Julian Smith (Skipton and Ripon) (Con)]

I thank my hon. Friend for giving way just as he is ending his speech. Is he convinced that Government-led contracts are the way ahead, or does he see the potential for a halfway house, where there is a greater focus on transparency and a greater use of nudging for all parts of the industry? In other words, does he think that we need to legislate to address the contract issue?

[Dr Poulter]

Instinctively, I do not like unnecessary red tape. However, given that the National Farmers Union has already been involved in some considerable nudging and given that there is a considerable imbalance between the power of the dairy producers and of the retailers, perhaps the Government have a role to play. I agree that it would be good to see a mutually agreed solution that supports the code of conduct and the role of the ombudsman. However, if that does not work, I hope that the Government will intervene. To start with, I would like to see things being resolved without using unnecessary red tape. Hopefully, we will see many organisations taking corporate responsibility and backing British suppliers. We have seen that in the pork and meat sectors of the industry, with many British retailers beginning to show greater corporate responsibility in buying British meat and putting it on their shelves. In the dairy industry, we need to see our retailers taking a similarly robust attitude and showing such corporate responsibility as well. I want to see that first and then, if necessary, further action and intervention from the Government.

[Caroline Nokes (Romsey and Southampton North) (Con)]

I thank my hon. Friend for giving way and for having secured this important debate. Does he not acknowledge that there are a number of retailers who are showing greater corporate responsibility? Waitrose, for example, operates a partnership of dairy farmers, one of which is based in Leckford in my constituency. Can we not encourage a greater use of that model in the rest of the country?

[Dr Poulter]

That is a good point. Marks and Spencer provides us with another good example. Like Waitrose, it has already shown a high level of corporate responsibility. Indeed, Waitrose has a good attitude to supporting British farming in general. My hon. Friend is right to say that there is a need for a number of companies to support a profitable and sustainable agricultural sector. The crisis in the dairy industry at the moment highlights such a need.

A number of dairy farms are being forced out of business. The prices of commodities and fuel are making it difficult for farms to be as successful as they once were. My hon. Friend is right to say that retailers should show some support, and we hope to see the model that she has mentioned rolled out across the country. However, it is important for us to trust the retailers to show that greater corporate responsibility before the Government intervene.

In conclusion, the number of dairy producers in the UK is plummeting, and the price paid for milk is consistently low. At the moment, we are 25th out of 27 in the EU league table. Input costs have soared for producers in recent years, especially over the past few months. In 2009-10, milk production was at an all-time low in the United Kingdom.

The crux of the matter lies in the fact that contracts between suppliers and producers are skewed against the producer, so that prices can be changed arbitrarily while notice periods are often 18 months or more. Most contracts are exclusive, which means that a producer can be tied to one supplier for a long period. The penalty clauses in many contracts are detrimental to the producer and favour the retailer.

The Food Labelling Regulations (Amendment) Bill will help to address some of the imbalances, and I am sure that the Minister will discuss it. None the less, retailers need to show greater corporate responsibility. The Government must be prepared to intervene if retailers do not support the industry in such a way and if the current nudges in our regulations do not work.

I thank the Minister for attending the debate and look forward to hearing his remarks. Some colleagues may wish to add some remarks on bovine TB.