Dairy Farming

Julian Smith Excerpts

Tuesday 7th June 2011 Westminster Hall

[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.

--- Later in debate ---

[Mr William Bain (Glasgow North East) (Lab)]

I congratulate the hon. Member for Central Suffolk and North Ipswich (Dr Poulter) on securing the debate and on articulating the concerns of many people in the dairy industry about the operation of the UK milk and dairy market sectors. I commend the interventions made by hon. Members and the remarks of the hon. and learned Member for Torridge and West Devon (Mr Cox) who spoke very movingly about the impact of bovine TB on small farming communities in the south-west.

In the past six months, we have had several debates on this subject, both in this Chamber and in European Committee A. What has emerged from those debates and from the speeches this morning is the need for good intentions on the part of the Government to be turned quickly into firm action, and the Opposition believe that such action is needed in three areas. First, the Government need to signify their support for the EU’s adoption of standard contracts for the dairy sector—should member states wish them to apply in their territories—to ensure greater parity in bargaining power between producers, processors and retailers. Secondly, there needs to be a grocery code adjudicator with greater powers of market intervention and greater independence from the Executive than is proposed in the Dairy Farming Bill, with the adjudicator being allowed to impose fines and other sanctions on those operating anti-competitively in dairy supply chains. Thirdly, further incentives in innovation and in research and development are needed to ensure that the British dairy industry has a financially viable future in delivering the highest-quality products both for domestic consumption and export, while cutting its share of greenhouse gas emissions, as indicated in the “Dairy Roadmap” report published this year.

There is evidence that dairy farmers in Britain face problems because of the operation of milk supply contracts in the marketplace. Current milk contracts deny milk producers real stability in pricing and stifle competition and innovation. The National Farmers Union has established that average EU milk prices this March were 14% higher than they were a year ago, at 29.72p per litre, but in the UK the price was 26.59p per litre, which, at 10.2%, is the fourth-lowest increase among the five highest EU milk-producing member states.

The hon. Member for Central Suffolk and North Ipswich has pointed out that the UK has the third-lowest milk price per litre in the EU, beaten only by Slovenia and Romania. The “NFU Cost of Milk Production Report” states that the average cost of milk production was 29.1p per litre between April 2010 and March 2011, which represents a shortfall of 2.76p per litre between the cost of producing milk and the price that the farmer receives. Added to that, dairy farmers in the UK face rising input prices, and the greater demand for dairy products is leading to increased imports.

The European Commission proposals to introduce standardised contracts for milk producers across the EU offer the opportunity for greater stability, alongside an equalising of contractual bargaining power for milk producers. The plans would allow the establishment of collective producer organisations, which have proven successful in other parts of the world in securing fairer farm-gate prices for milk, and member states could create greater transparency in the terms of milk contracts by regulating duration and price, as well as rights of termination should member states see fit. Importantly, the plans would also require milk processors to declare information on milk deliveries. It is vital that the Government indicate—I hope, this morning—whether they will accept the Commission’s proposal to permit national Governments to introduce contracts across all milk supply and delivery chains and whether they will be prepared to enter into further collaborative work with the industry on the wider reform of contractual arrangements, including price variation and exclusivity of supply.

Another important point to address is the competition that the EU dairy industry faces from China and other dairy producers in south-east Asia and from some of the developing economies, as that will become increasingly important in the coming years. The annualised annual growth in the Chinese dairy sector between 1998 and 2008 was 10%, and the increasing demand for dairy, specifically milk, products in south-east Asia will further drive global demand.

On the environmental impacts of dairy farming, the Opposition’s view is that we need to further incentivise farmers who are doing the right thing—for example, recycling water from the milk cooling processes and harvesting rainwater. We know from the Foresight report published earlier this year that an increase in sustainable food production to feed 9 billion people across the world by 2050 will mean producing more food with less water and making better use of soil, so we ought to give fiscal and other incentives to farmers in this country who already do the right thing and simply need additional Government support to continue to do so. Energy efficiency across the dairy sector has increased by more than 27% over the past decade, thus leading to a reduction in emissions equivalent to 270,000 tonnes of CO₂.

We therefore face a number of challenges. First, on contracts, the retail sector might not be willing to make changes to give farmers a fairer price.

[Julian Smith]

May I ask for clarification about the Opposition policy? Is the shadow Minister saying that he now believes that we should have contracts in the UK, or does he agree with me and my hon. Friend the Member for Central Suffolk and North Ipswich (Dr Poulter) that we should begin by exerting significant pressure and by nudging the industry much more strongly in the first instance?

[Mr Bain]

I am not a great fan of nudge theory, but I believe that the Government could do a great deal by indicating that they support the broad thrust of the Commission’s recommendations. That could lead to changes in practice by the supermarket sector and other processors. The Opposition’s position is one of agreement between producers and retailers where possible and regulation where necessary. If it is established that even the most profound of nudges from the Minister has not brought greater fairness in the prices that the retail sector offers our producers, regulation may well have to be the answer. There is a great deal more consensus across the House than might have been immediately apparent.

On the future of the dairy sector, we must sort out the problem of contracts, because they are driving unfair prices. We must also continue to consider the environmental impact of the dairy sector. Some people want far less meat and dairy to be consumed in this country. I believe that one of the best ways to counter that argument is to show and deepen the dairy sector’s environmental sustainability and reduce its greenhouse gas imprint. The Government should work hard with the industry on that front. We must be aware of competition from overseas. We hope that the Doha round of World Trade Organisation talks can be resuscitated to end damaging subsidies and open the issue of animal welfare standards, to the benefit of milk producers in the United Kingdom and across the EU.

If the Government take those three steps and make great progress over the next four years, it will lead to a better, fairer and more financially viable dairy sector than we have at the moment. I hope that, in his remarks, the Minister will outline how he will deliver that.