Dairy Industry

Tessa Munt Excerpts

Wednesday 4th February 2015 Westminster Hall

[The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (George Eustice)]

I begin by congratulating my hon. Friend the Member for Ribble Valley (Mr Evans) on securing this important debate. Given the sheer number of Members who have wanted to speak today, it is clear that he has touched a nerve and alighted on a serious problem, which is the current state of affairs in the dairy industry. I am well aware that many dairy farmers are suffering at the moment. Yesterday, I was in Cumbria and I met a group of dairy farmers there. Earlier this year, the issue dominated discussions at our regular farm resilience group, as it did at our meeting of the dairy supply chain forum last November, and we have another meeting next week with the Secretary of State to look further at the issues facing dairy farmers and to consider how we can help them.

It is fair to say that the dairy industry has had a rollercoaster ride in the last couple of years. In 2012, we were exactly where we are now, with prices on the floor; in fact, in many ways the situation then was worse, because feed prices were very high and dairy farmers were losing a lot of money. Then, last year—2013-14—we saw a very good year for dairy farmers. Prices were much higher, at around 30p to 35p per litre. feed costs came down, and the farm business survey showed that they had a good year last year. Since then, there has been a big increase in production in New Zealand, with production there up around 18% over the last year. Demand in China dropped off quite suddenly, as the Chinese had built up stockpiles of skimmed milk powder and came back out of the market. Production in Europe is up by 8% to 10%, and the Russian trade ban has aggravated things. As a result of all that, on the international auctions we have seen a very sharp decline in prices, which brings us to our current low level.

As a number of hon. Members have already alluded to, it is worth noting that there are differences between different farm businesses; different farmers face a wide range of costs. Yesterday, I visited a farmer who has Jersey cattle on an extensive grass-based system, and his costs of production were only around 22p per litre. It is not always about “inefficient” and “efficient” producers. Sometimes, efficient producers choose to run quite intensive systems, which means they have higher labour, feed and capital costs, and have to make more investment. Quite often, those producers find that they have higher production costs—for some of them, it costs 28p to 30p per litre—and if they are receiving low prices they are losing money.

The other element to bear in mind is that there is a big spread in the prices that farmers receive. At the top end, there are those farmers who are responsible for around 30% of UK liquid milk production and they are on cost-of-production contracts to the major supermarkets. Many of them are still receiving around 30p per litre for their milk. At the other end, there are those farmers who supply processors and consequently they are much more exposed to the international commodity markets, such as those supplying First Milk, which takes most of the milk production in Scotland, the north, the borders and Wales. At the moment, First Milk is able to pay farmers only around 20p per litre, so there is a big spread, both in terms of production costs and the prices farmers are paid.

I will point out, first of all, the things that we are doing in the short term. Immediately, we have to address farmers’ cash-flow challenges. Regarding those farmers who have not yet received their single farm payment—most farmers have received it, but some have not—we have told the Rural Payments Agency to absolutely prioritise dairy farmers, and particularly those supplying First Milk.

I had a meeting with the banks two weeks ago to encourage them to show forbearance to their business customers who are dairy farmers suffering difficulty at the moment, and I will continue to monitor the process as far as the banks are concerned.

We have urged Her Majesty’s Revenue and Customs to be sympathetic in its dealings with dairy farmers. Those dairy farmers who had a good year last year potentially face quite a large tax bill, which is due to be paid in June this year, and we need to show some forbearance to those farmers who will have just weathered a very difficult winter.

Finally DairyCo, which is part of the Agriculture and Horticulture Development Board, has set up a special unit to give financial advice to farmers to help them through these difficult times. Also, we will shortly open a new round of rural development programme schemes, which will have dedicated measures to try to help farmers to improve their productivity and reduce their costs.

In the medium term, there are other issues that we are looking to explore. First, there is exports, which was mentioned by a number of hon. Members. I completely agree that if we want to have a resilient industry for the long term, we have got to open new export markets. We have seen good progress in this area. In the past year, there has been 47% growth in exports to non-EU markets of our dairy products. In fact, our total dairy exports are now at their highest level ever, at £1.3 billion. A few weeks ago, the Secretary of State was in China where she had discussions with the Chinese about how we can open up these opportunities, and we will shortly receive a delegation from Brazil to consider the opportunities for dairy exports to that country.

Another key area that I have been working on with the National Farmers Union in particular is around market measures to deal with volatility. In the US, when quotas were removed, quite a sophisticated futures market was developed to help to manage volatility. Typically, US dairy farmers fix around 40% of their production at a fixed price, hedged in the futures market, and leave only 60% of their production to the vagaries of the market. That takes some of the extreme peaks and troughs in the market out of their income profile. We can learn lessons from that system and we are working on this issue with the NFU. There are embryonic markets in skimmed milk powder and butter, for instance, which are run by the London international financial futures and options exchange, and Eurex, and we would like to see whether we can develop that futures model further.

We are keen to promote country-of-origin labelling. The UK was at the forefront of arguing for improved country-of-origin labelling on beef, lamb, pigs and poultry, and we should do the same on dairy products, so that we do not have Irish milk being imported to the UK and processed into cheese, before it is fobbed off as a product of the UK.

Procurement was mentioned by a number of hon. Members. Last year, we launched the Bonfield report, which was a new approach to procurement. It sets out a balanced scorecard. The uptake from schools and hospitals has been good in that respect, and we are keen to encourage further uptake.

[Tessa Munt (Wells) (LD)]

Will the Minister give way?

[George Eustice]

I cannot give way, as I want to cover as many points as possible. I agree with the point made about procurement, and we are making progress in that area.

A number of hon. Members mentioned the Groceries Code Adjudicator. I can confirm that a week ago the order that establishes the ability to levy fines was laid. It is subject to an affirmative resolution process, so it will now go through Committees in both Houses, but that will happen during this Parliament.

A number of hon. Members talked about the extension of the groceries code. We are considering that. Last year, I considered whether we should place the dairy supply chain code on a statutory basis, but because there is existing EU legislation in this area—a Common Market organisation regulation that establishes the grounds of such codes—we would end up with a weaker code if we put it on a statutory footing, because we would not be able to stipulate that farmers could walk away at three months’ notice. Therefore, while we had a contingency plan to put the dairy supply chain code on a statutory footing if it collapsed, we would have ended up, as I say, with a code that was weaker, so there are limitations to doing that.

When it comes to the powers of the GCA, we have to realise that they are not reliant on complaints. They already have full powers to investigate

“if there are reasonable grounds to suspect”

that the code has been broken. So, those measures are already in place. In fact, when I met Christine Tacon recently to discuss this matter, she said that one of the biggest things she is trying to encourage is better training of processors and those dealing with supermarkets to ensure that they use the code effectively and say to supermarkets, “You’ll understand that I can’t accept what you are asking me to accept, because it would be in breach of the code,” and to do so in a way that ensures everybody abides by the code. That is how we can help those further down the supply chain, because one of the issues is that it might sometimes be easier for processors to take the hit from the supermarket and pass it on to farmers. We need to ensure that they hold their retail customers to the code.

A number of hon. Members mentioned intervention prices. I have to say that Commissioner Hogan thought that that would be the wrong way to go when it was discussed at the Agriculture and Fisheries Council last week. One of the difficulties we would have is that other farmers in the UK would have to pick up the cost of such action through crisis measures, and we would tend to find that other European countries would benefit most, because although we have low prices here, other European countries have even lower prices. Also, the history of such schemes tends to be that the UK pays while others benefit, so we have to be concerned about that. However, we have the milk market observatory at EU level, and other crisis measures, particularly to mitigate the effects of the Russian ban, have been considered.

Hon. Members mentioned the EU school milk scheme. I will say, briefly, that we access that scheme, although it is not a very generous scheme; we have to top it up a lot, but we do use it. When it comes to the number of dairy farmers, there has been consolidation over many years, but production in the UK is now at a 10-year high. So, although we have fewer dairy farmers, total dairy production in the UK is still higher than it has been for a decade.

I will finish on a brighter note, by saying that the long-term prospects for this industry are good. We are seeing a 2.5% rise in demand per year, and the UK is well placed to take new opportunities in markets. We should also note that most analysts are now predicting a recovery of milk prices—farm-gate milk prices—later this year. The last three Fonterra global dairy trade auctions have shown a recovery in skimmed milk powder prices on the global market; in fact, they are up 15% since the beginning of the year. As I said, it will take time for that to feed through to farm-gate prices, but most analysts now expect that we will see a recovery in farm-gate milk prices from the summer onwards and that could be quite a strong recovery, if the early indications on the international auction in recent days are anything to go by.