Dairy Industry

Huw Irranca-Davies Excerpts

Wednesday 4th February 2015 Westminster Hall

[Daniel Kawczynski (Shrewsbury and Atcham) (Con)]

During the previous Parliament, in 2006, I set up the all-party group for dairy farmers. In Shropshire at that time, nearly a decade ago, we already recognised the crisis that our dairy farmers faced. Some 160 Members of Parliament joined the all-party group and we had an excellent secretariat, the Royal Association of British Dairy Farmers. The Prime Minister joined the all-party group when he was Leader of the Opposition; it was the only one that he joined during that Parliament. After a year of deliberations, taking evidence, going to Brussels and meeting various organisations, we came up with two recommendations: a limited cull of badgers to deal with the crisis of bovine TB, and a Bill introducing a groceries adjudicator to regulate the supermarkets and their conduct towards processors and dairy farmers. We took those recommendations to David Miliband, who basically laughed us out of his office—

[Huw Irranca-Davies (Ogmore) (Lab)]

Rubbish!

[Sir Roger Gale (in the Chair)]

Order.

--- Later in debate ---

[Huw Irranca-Davies (Ogmore) (Lab)]

This has already been an excellent debate. I thank the hon. Member for Ribble Valley (Mr Evans), a good Swansea boy, and all Members who have spoken for their contributions. My hon. Friend the Member for Ynys Môn (Albert Owen) and others reminded us of the importance of the dairy industry not simply to the economy, growth and exports but to the social fabric of our rural communities, their interplay with our towns, and our health and well-being.

About 14 billion litres of milk are produced in the UK each year, and about half of that is used for liquid milk. The UK is the third largest milk producer in the European Union, after Germany and France, and the 10th largest in the world. Given the industry’s value of £4.27 billion at 2013 market prices, its importance is clear.

However, despite the long-term optimism expressed by some Members, Ministers and EU Agricultural Commissioner Phil Hogan, the dairy sector has suffered from low prices and volatility for years. The November 2014 farm-gate price of 28.91p per litre was down 16% from the previous year. The 2012 milk crisis led to blockades of depots and processors, and thousands of angry farmers descended on Westminster to confront Ministers. In fact, the former Minister who was confronted by those angry dairy farmers, the right hon. Member for South East Cambridgeshire (Sir James Paice), is now the chairman of First Milk, which is owned and run by dairy farmers who have been forced to delay payments. He told the press recently that

“hundreds of UK dairy farmers are unlikely to find a home for their milk this spring.”

In addition to that delay, First Milk’s producers have seen the price they are paid plummet from 32.5p per litre last spring to 21.2p per litre for those supplying the Co-op on liquid contracts and 21.57p per litre for those in the manufacturing pool.

The average farm-gate price of about 28p per litre disguises huge variations. A third of liquid milk is sold to retailers, which base the price they pay on what it costs the farmers to produce it, plus an agreed margin. Sainsbury’s and Marks and Spencer currently pay 34p per litre, Waitrose pays 33p per litre, Tesco pays 32p per litre and the Co-op pays almost 31p per litre.

Some major retailers, though not all, argue that their massive discounting of liquid milk at four pints for less than 90p in their endless price wars is not done at the cost of farmers. They argue that the only casualty in the price wars is their own profit margins, but frankly, even supermarkets that pay decent farm-gate prices to the producers and have the most direct relationships cannot absolve themselves of responsibility. The fact that they engage in price wars in which liquid milk is a prime weapon embeds the idea that milk is a commodity to be undervalued and sold for less than the price of water or carbonated and unhealthy fizzy drinks. Ultimately, the only casualty in the price war is the dairy farmer. We need to see not only British milk but British dairy products on supermarket shelves.

Some retailers and their production chains do not contract directly with producers, so they may not have regard to the voluntary dairy code, which I will return to in a moment. They do not absorb the costs of the price wars themselves, and instead put pressure on their supply chain, which causes farmers to reduce costs further below the cost of production.

Two thirds of liquid milk produced is sold to processors, which is where the cuts are being made. Arla, which supplies Asda, pays farmers 25p per litre. Müller-Wiseman pays the same. Dairy Crest is set to cut its price to less than 25p per litre, and we await a decision on the sale of Dairy Crest’s liquid milk division to Müller in the latest act of business consolidation to drive out costs. First Milk, as I said, pays less than 22p per litre. Iceland supermarket is supplied by Arla and Müller-Wiseman, but it has asked them to base their future prices on the cost of production—that is at least a step forward. Morrisons has announced that it intends to establish its own producer group, but in the meantime it gets its milk from Arla and Dairy Crest.

There is also huge variation in production costs. The figure most commonly cited is the National Farmers Union average of 28p per litre. However, the most recent figures from the industry body, DairyCo, show that there is a 14p per litre difference in the cost of production between the top quarter and the bottom quarter of farms.

We need a prompt review of how the whole dairy industry is overseen through the dairy code and the Groceries Code Adjudicator. The genesis of the dairy code, which was established on a voluntary basis in November 2012, was a dairy crisis that culminated in blockades, protests and a Minister leaving his post benighted but not delighted at his treatment. However, the independent review by Alex Fergusson MSP in 2014 proposed an extension to retailers and measures to increase the uptake into the 15% that are not currently signed up to the code.

When the public and the political awareness of the pressure on dairy farmers is so great and when the public relations disaster for processors and retailers is so potent, why is the take-up not higher? Why is it not universal? Will the Minister commit to name and shame everybody who has not signed up to the dairy code in public, on the Department for Environment, Food and Rural Affairs website and in Parliament? Will he also commit to name and shame and publish a regularly updated list on the DEFRA website and in Parliament of all the processors and retailers that participate in supply chains that pay farmers less than the average cost of production?

The Government, in evidence to the Select Committee on Welsh Affairs in 2013, repeated their previously stated position. They said that they would seriously consider legislating for compulsory contracts if the code fails to deliver the desired outcomes. Does the Minister now feel that that is needed, or has he considered it and ruled it out?

I and some Members here today know that the Government had to be dragged into agreeing to financial penalty powers for the Groceries Code Adjudicator.

[Daniel Kawczynski]

indicated dissent.

[Huw Irranca-Davies]

I sat on the Groceries Code Adjudicator Bill Committee, so I can tell the hon. Gentleman that they did. They conceded only under pressure from Members on both sides of the Committee. They argued against giving it those powers, which perhaps explains why it has taken so long to introduce the regulations. I and others have repeatedly raised that delay in Parliament.

I ask the Minister to clarify what the Prime Minister meant when he was pressed on extending the role and remit of the GCA to the dairy industry at Prime Minister’s questions on 21 January. He said:

“I also think it is time to look at whether there are ways in which its remit can be extended to make sure it looks at more of this vital industry.”—[Official Report, 21 January 2015; Vol. 591, c. 217.]

We all welcome the sinner who repents, but that issue was discussed ad nauseam in the Groceries Code Adjudicator Bill Committee two years ago, and the Government rejected it. We had the opportunity to extend the powers along the whole supply chain, including processors and intermediaries, but that was dismissed as disproportionate. We also had the opportunity to enable the GCA to investigate abuses, but that was dismissed as allowing “fishing expeditions”.

I seek clarity, so let me ask the Minister directly. When the Prime Minister referred to extending the remit of the GCA to look at more of the industry, did he mean that it should include intermediaries? Did he mean that the GCA should have the power to instigate proactive investigations into abuses, which the Environment, Food and Rural Affairs Committee asked for?

The current pressures on the dairy industry go beyond the UK. They reflect reduced demand in China due to the economic slow-down and the closure of the Russian market. The recent increase in production in the EU due to confidence in higher milk prices in 2013, good grazing and good weather, and increased yields in the UK conspired to lead to an over-supply. Arla suggests that global production is increasing by 5% per year, while demand is growing by only 2%. There is no single answer, but there are several areas in which we need to take action in the face of continuing long-term global price volatility and predicted continuing falls in farm-gate prices in the near future.

Will the Minister update us on the progress on country-of-origin labelling, on the establishment of producer organisations in the dairy sector, on the futures market for dairy and on what the uptake and interest in it has been? How much of the countryside productivity scheme money—the £141 million—has gone directly to dairy farmers, and what measures has it funded? What progress has been made with banks and lenders to deal with the immediate cash-flow problems? What discussions has the Minister had about the resilience of the dairy sector in the face of increased volatility that could follow the ending of milk quotas on 1 April this year? Most of all, we would like to know what the Prime Minister meant on 21 January. Was he serious, was he committed or was he deluded? Was he misinformed? Did he misspeak? Was he off piste and off message? Was it a soundbite in the run-up to the election to make the farming community think he is listening? The Minister has the chance to clarify whether the Prime Minister knew what he was talking about, or whether he was just spinning out of control.

It is over to the Minister to sort out the confusion from No. 10. Here we are again, three months to the day after the previous dairy debate, and three years after the previous dairy crisis. Our dairy farmers need and deserve some straight answers.