Dairy Farming

Stephen Phillips Excerpts

Tuesday 7th June 2011 Westminster Hall

[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.

--- Later in debate ---

[The Minister of State, Department for Environment, Food and Rural Affairs (Mr James Paice)]

I congratulate my hon. Friend the Member for Central Suffolk and North Ipswich (Dr Poulter) on securing this debate. It was widely discussed when I was at the Suffolk show last week, so I was given plenty of notice that I would be grilled on these issues. I also thank my hon. and learned Friend the Member for Torridge and West Devon (Mr Cox). I am not sure whether he was appearing for the prosecution or the defence, but his speech not only contained the gravitas that we expect but correctly conveyed the huge importance that the dairy and beef sectors attach to the issue of bovine TB, to which I will refer in a few moments. Finally, I thank the hon. Member for Glasgow North East (Mr Bain). As he has said, there is probably agreement among the parties about where we need to go.

I will address some of the points made by my hon. Friend the Member for Central Suffolk and North Ipswich. He said that our food production is 40% of our total food supplies; it is actually well over 50%, and we could produce more than 70% of our food indigenously. I do not want him to think that things are worse than they are, although I want to improve both positions.

It is worth making the point that we are the EU’s third largest milk producer, well ahead of the only country that we might reasonably say could do better than us, Ireland, which has the temperate climate and conditions to grow grass for more of the year and more effectively. With the exception of Ireland, we should be competing effectively with every other country in the EU.

My hon. Friend and others are entirely right that the industry is under huge pressure. Members who watched “Countryfile” on Sunday evening will have seen yet another auction of a large dairy herd by a farmer going out of business. However, we have a slight conundrum. Although the number of dairy farmers is decreasing significantly, by an average of 5% a year over the past decade, there has been no such dramatic reduction in the number of cows or in the amount of milk that we produce. In fact, milk production in the UK increased by 500 million litres last year, and it is now almost back to the level of three years ago. That is due to the expansion of herds by many farmers, as well as to genetics, better feed and so on, which cause individual cows to produce more milk. From the Government’s perspective, we are faced with a dilemma. Are we interested in supporting individual dairy farmers or the industry and this country’s ability—to return to the issue of self-sufficiency—to produce the milk that we need at home? It is a conundrum, and I do not pretend to have the answer.

The state of the UK market is easily clarified in some round figures. Roughly 50% of UK consumption of milk and dairy products is liquid milk, almost all of which is domestically produced—as my hon. Friend has said, carting liquid milk overseas is not common. Another 25% of the market is milk products such as cheese, yoghurt and so on processed from British milk. The other 25% is processed products imported from abroad. It is fairly easy to divide the market into those three.

To return to my point about the European market and competition from elsewhere, there is no doubt in my mind that we should be able to compete much more effectively with other countries, with the possible exception of Ireland, in the 25% of the market that consists of imported processed products. My hon. Friend made a great deal of the prices being paid by our supermarkets. I am not saying that supermarkets are without fault, but the real issue is the price being paid lower down the chain at the processed end.

The latest milk prices—they are published weekly, so this is open information—say that the highest price being paid for milk is 29.01p in the dedicated supply chain for Marks and Spencer through Dairycrest. The second highest is in another dedicated pool, for Sainsbury’s, through Arla. The lowest, at 23.8p, or more than 6p a litre less, is paid by North Milk Co-op. A little above that, the supplier First Milk pays 24.2p. The table that appears in the farming press each week simplifies things slightly, but the top half of prices mainly go to the liquid trade, while the bottom half go to the processed trade. There are exceptions, but that is a general point. Increasing the price paid for processed milk would improve the overall situation for everyone.

As my hon. Friend has said, the retail market is important. The average farm-gate price in March was 26.57p a litre, which is 10% higher than the year before, although, as several people have said, costs have rocketed proportionately or by even more. However, the retail price of a 4-litre carton of milk is about 55p a litre, which means that the processor and retailer take 28.5p a litre—that is more than the dairy producer, the guy who keeps the cow for 365 days a year, takes—just to bottle, distribute and retail the milk. There is no doubt, as the Dairy Council and others have shown, that the share of the overall retail price taken by the farmer has stayed the same or even fallen, the share taken by the processor has stayed roughly the same and the share taken by the retailer has rocketed. There are questions to be asked about that, and I will come back to them in a moment.

I will discuss the shape of the industry to demonstrate to my hon. Friends that the issue is not only about liquid milk or about supermarkets. Much has been said about the European package, particularly about contracts. The first thing to say in response to the hon. Member for Glasgow North East is that we are a long way from any decision, because we do not have the European Parliament’s decision yet. That is a post-Lisbon treaty event that involves the European Parliament. I will come back to the other points, but we support the issue of contracts as presented by the Commission. We support the proposal that individual member states should be able to make contracts compulsory in their own country, if they so wish. As far as England is concerned, I have already said publicly that, if that is what the end version looks like, we will consult the industry about whether to have compulsory contracts, but I have not hidden my view that I do not think that they will achieve what people believe they will.

That is the point that I want to address, because my hon. Friend the Member for Central Suffolk and North Ipswich paid great attention to the issue of contracts. Let me make it clear that, in the UK, virtually all farmers have contracts, which takes us back to what is in them. The main reason why this matter features so highly in the European dairy package is that most dairy producers in other countries do not have contracts, so for them it would be a great innovation. Although this is a devolved issue, it is relevant to the UK and, as far as England is concerned, it is clear that the proposal as it stands—we do not know how it will end up—does not allow individual member states to lay down minimum standards or terms in the contract. It says that the contract must address the issue of price, either by setting a price or a formula, but it does not allow the member state to set it. It will be open to negotiation between the producer and processor to decide the price or formula by which the price is arrived at.

Similarly, the contract must address the issue of duration, but it does not allow the member state to lay down a minimum duration. Some, including the National Farmers Union, seem to think that the contract should include a lot more. We can argue about whether it should, but it does not. The proposition from the European Union does not allow member states to lay down detail on standards, which some seem to believe that it should. That is why I do not think that it is the panacea that some have made it out to be.

[Stephen Phillips]

Given that, as the Minister has said, the package is not the solution to the problem, and given that he has identified the discrepancy between what is paid for liquid milk to, on the one hand, those who supply it as liquid milk and, on the other, those who process it, is the solution not for the Government to bite the bullet and set a minimum price for dairy products, at least in England? Will the Government therefore support my private Member’s Bill, which will receive its Second Reading on Friday?

[Mr Paice]

My hon. and learned Friend must be aware that it would be contrary to EU law for us to set a minimum price. The whole common agricultural policy has—with, I think, cross-party support—moved away from the idea of Government setting prices, whether at a member-state or EU level. That has been the big reform of the CAP over the past 15 to 20 years, and it is right that we move in that way. I do not think that the answer is to set a minimum price. The Government’s role—I will return to this in a moment—is to try to make sure that the market is working properly. There is parity of power, wherever possible.

Let me turn to an issue raised by the hon. Member for Glasgow North East. We fully support the proposition in the European dairy package that producer organisations should be allowed, although we are concerned about a point of detail regarding how big they will be allowed to get. However, the only two significant co-operatives in this country—Milk Link has about 13% of the market and First Milk has about 10%—are light years away from what we believe should be the maximum, namely 25%, or the EU proposal of 33%. To be honest, that upper limit is relatively hypothetical at the moment, because we are nowhere near it. Even if the two merged—it was once proposed that they should merge; the merger was approved by the Office of Fair Trading; but they decided not to—they would still not be up to the maximum. I need to make it clear, therefore, that nothing today prevents groups of dairy producers from getting together to become a producer organisation. Indeed, the Secretary of State, in her speech in Oxford, and I have frequently said that we strongly encourage them to do so. However, Government cannot force farmers to work together, and it is for them to do so.

The final point on the package concerns transparency, to which the hon. Gentleman referred. We strongly support a transparent marketplace. Obviously, there is a limit in terms of regulation and bureaucracy on how much information it is sensible to demand, but we support the principles of transparency in the package.

I am in the unusual position of having a bit of time to respond to the debate, so let me now address some other issues. The supermarket adjudicator takes us back to my point about parity of power. The Government have published their Bill, and I was interested to hear the Opposition’s concerns. I am not too clear on all of them, but one related to the adjudicator’s powers to impose fines and other sanctions, although I am not sure what they are. Let us be clear that the Bill provides the option for the Secretary of State to give the power to provide fines. In other words, if we find the adjudicator’s initial power, which might be described as the name-and-shame approach, to be inadequate, the Secretary of State can provide it with the power to impose fines. I do not think that we in this Chamber necessarily understand the relative import of that. The big retailers assure us that that is totally unnecessary, that they do not break the code, that there is no need for an adjudicator and that they are all doing the job properly. I am sure that they have assured everyone present of that. They all pay a huge amount of attention to their reputations. They want their good name to be known and seen. If we say, “We’re going to fine you instead,” what level of fine would make any difference to one of our big retailers? That is the question. The level would not be £10,000. I do not even want to guess what would actually influence their behaviour, but it would be many times that. We therefore have to consider whether that is really a sensible way forward, commensurate with all the other issues of fines, levels of fines and penalties throughout the country. I think that we underestimate the power of damaging somebody’s reputation in that way.

The hon. Gentleman also referred to incentives for innovation and development, particularly in relation to energy saving. He referred to the industry road map. I am not sure whether he or any other colleagues were present when I launched the industry road map a few weeks ago, but one of the most telling charts in the document—I do not take any credit for this, but it is worth making the point—shows that the dairy producers who had the highest margins also had the lowest carbon footprint. Fiscal incentive, to which the hon. Gentleman referred, is therefore built into the system. Of course, we can provide fiscal incentives from the rural development plan for England, but the real incentive is that it is profitable to conserve energy, which the report clearly shows

We are putting in place other things and taking action on them. My hon. and learned Friend the Member for Torridge and West Devon is looking at me with beady eyes—I have not forgotten his remarks. We hope that the Government buying standards will be published shortly. They will lay down particular criteria, so that the Government will lead by example. The Macdonald taskforce on regulation made a number of proposals about nitrate vulnerable zones, which are hugely important to the dairy sector. We are taking those forward as fast as we can. Indeed, at the outset, I was able to announce that we could accept one or two areas relating to NVZs immediately. I am looking across the whole of that issue and am considering how we can reduce its impact and cost.

I am trying to reinvigorate and revitalise the dairy supply chain forum, which was set up by the previous Government. I want to ensure that the only people who come to that forum are chief executives or board member equivalents and that it has an important role because, at the end of the day, the real future of our dairy industry lies not in the hands of the Government, but in the hands of the industry. I am trying to ensure that the retailers, the processors—whether they are bottlers or processors into commodities—and the producers are all around the table and that they are working together to iron out the problems and take things forward. Price is important and I wholly understand the dairy farmer who says, “I need more for my milk.” However, the Government’s job is to ensure that the whole chain is working. If we can do things to take costs out of the system, it would be equivalent to a price rise, although it may not be so readily seen as that.

On income other than that derived from price, let me refer to the two big groups that I have mentioned, First Milk and Milk Link. They are nothing in European terms but, in UK terms, they are pretty substantial producer-owned organisations. They got off to a rocky start, and there were big problems with paying low prices and members having to put up large sums of money. Of course, the third group—Dairy Farmers of Britain—fell by the wayside a couple of years ago. However, those two organisations are now making progress and have chief executives who understand the new world in which we are operating. For example, the chief executive of First Milk has opened up a global pool, whereby when the price of skimmed milk powder on the world market is equivalent to 33p a litre, farmers can say, “Why aren’t we getting it?” They can get that price, although perhaps it will not be quite as much as that. There will be a pool of milk targeted at global price commodities. Of course, there is a downside, because if global commodities collapse—they have done so in the past—so will the pool price. However, such an initiative allows that issue to be addressed and is an ingenious and innovative approach.

Milk Link—I hope First Milk will follow—is paying dividends to its farmer members, which is important. People who have invested in shares and through their commitment to a farmer-owned business are entitled to receive a dividend—a share of the profit. That is just as important to them as the price of their milk, and it is part of the return to their business. From what I have been saying, colleagues will not be surprised to learn that I am an enthusiast for farmer-owned businesses and think that they are the way forward. However, there is a limit to what the Government can do. We will exhort all we can, and if there are any barriers in the way we will do our very best to lift them, but we cannot force farmers to work together.

Finally, I come to the issue of tuberculosis. I am grateful for the words of my hon. and learned Friend the Member for Torridge and West Devon about my personal commitment to the matter, which is completely and utterly undiminished. However, as he has said, we must get things right. A number of his presumptions about why we have not yet been able to make any final decision were accurate. We launched our consultation in September, and it concluded before Christmas. As I have said repeatedly in public, that consultation threw up some serious issues that must be dealt with because, as he rightly presumes, we would almost inevitably be faced with judicial review if we were to decide to go ahead with the badger cull. Several of those issues have taken some tackling. We are working with our own lawyers, and we have retained QCs to advise us. As he will know from his own eminent career, they have raised all sorts of issues to which we must have answers in the courtroom if the situation arises.

I can tell hon. Members that we are getting to the position whereby a decision can be announced and, as my hon. and learned Friend has rightly said, there will be an overall package of measures. This has been a good debate and I do not want to raise the politics of the matter too much but, apart from the issue of badgers, my other big criticism of the previous Government is the piecemeal approach that they adopted to tackling TB. They should have grasped the issue by introducing a comprehensive package and used every available tool in the toolbox, as many people in the industry have said.

I can tell hon. Members—this is not what my hon. and learned Friend wants to hear at this stage—that we hope to make a full announcement before the House rises in July. That will comprise a decision on the issue of badger culling as well as a wider package of measures. He picked up the point that I have been reported as implying that we might not be going ahead with a cull. As a lawyer, I am sure that he fully understands that if one has not made a decision, there has to be a question mark in both directions over what that decision might be. I say to him and hon. Members that, as I expect is blatantly obvious, that decision is not just for me, but for my right hon. Friend the Secretary of State and, indeed, the Cabinet to make. Such a major decision is hugely important, and we must get it right. We need to ensure that the whole Government support the final decision, whatever it may be. As I have said, I assure hon. Members that the decision will be announced before the House rises in July.

As you have rightly said, Mr Hollobone, this has been a tremendously good and very important debate. I am grateful for the opportunity to take a little longer than usual to elaborate on some of the issues. I hope that I have impressed on hon. Members the Government’s determination to tackle a number of these issues and to move forward. As I have said, it is not all in the Government’s hands, but what we can do, we will do. I pay respect to my hon. Friends’ commitment—those who are here now and those who have been in and out of this Chamber during the debate—and to that of my hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski), who is sitting behind me. He was the founding member of the all-party group on dairy farmers, but now he cannot discuss the matter, because he is acting in another guise. Many hon. Members rightly feel very strongly about the importance of our dairy sector. It is the biggest sector of British agriculture and long may it remain so.