It would be easy to make a debate on this subject a tale of woe, because there is certainly woe to tell. Nearly half the people with dairy holdings in Derbyshire have left the industry in the past 10 years, and they have left for good reasons: it simply has not been possible to sustain a business with the prices that they are able to obtain for their product. However, I do not want to make the debate a tale of woe. I want to set out why I believe that after, sadly, a further period of pain—a period of pain that the Government can assist with—we have the makings of a highly successful industry, which will both provide solid employment for farmers and their staff and be an important contributor to environmental quality in our countryside.
The UK has many natural advantages in this respect. We have high-quality grassland in abundance. It is far easier to produce milk in this country than it is in, for example, southern Europe, and we have relatively large farm units—that was the case even before the consolidation process of the past few years—where it is possible to obtain economies of scale.
We have some disadvantages as well. We have what is essentially a large bulk commodity marketplace. Half the milk produced in our country is consumed at its most minimally processed level—as liquid milk. Not surprisingly, therefore, that is priced by supermarkets at a bulk commodity rate as a shopping bag filler and nothing more. It is always a shock to me when I visit a supermarket and pick up the mineral water that it is more expensive than an equivalent volume of milk produced by local farmers.
The story goes on, because a significant additional proportion of milk production is processed further but is still of very low quality. I am referring to waste cream, which we do not consume in liquid milk and which is largely exported to the continent, and to powder products, which are of relatively low value. Only a very small proportion—about a quarter—of our production goes into higher added value product of one kind or another. That is one of the core reasons why there is a problem with the dairy industry in our country.
Why is the debate about dairy farming in south Derbyshire and not dairy farming anywhere? Well, south Derbyshire is a bit different. It is a lowland area of the country and, by and large, dairy farms are larger in south Derbyshire than they are elsewhere. For example, the farmer with whom I have been talking about this subject over the years has a 350-head herd, which is, by UK standards, large. The average herd size is a bit over 100 now, so that farmer has a very large farm unit. He is not particularly unusual. His herd is large in south Derbyshire terms, but herds comfortably over 100 are not particularly unusual in the area, so we already have relatively efficient large-scale units. We also have a reasonably good road infrastructure, whereby it is possible to collect the milk economically for processing. In some parts of the country, just the logistics of getting the milk to the processor are tough.
What we have to do is challenge one or two assumptions. There is an assumption in this country that food must be cheap. When we go to a supermarket, we tend to look at the price first. Those of us who go on holiday on the continent know that the world is looked at in a rather more complicated way there—and milk is also looked at in a rather more complicated way there. If people look at the liquid milk display in a typical French or Italian supermarket, they will find a very small space set aside for the basic product, but a large area set aside for processed product that has high added value content. We have work to do, which I shall return to, on changing the customer’s expectation of what milk is actually about.
Another difficulty is that over time demand for milk is falling in this country. It is not falling dramatically, but eating habits at breakfast, which are one of the big drivers for demand, are changing.
In a normal market, the pressures of low prices and constant low profitability would produce a market solution relatively rapidly. The businesses involved would either change their business model dramatically or go out of business and cease production, bringing production levels down to a level that is sustainable in the marketplace. That does not happen in dairying; in fact, it does not happen in most farming. There are several reasons for that. One is that we are talking about long-term investments in animals and areas of our countryside, but we are also talking about fixed habits.
Neil Kinston, whose farm I mentioned, has been farming that area for 50 years. It would be a huge wrench to disturb that family’s hold on that particular bit of south Derbyshire countryside and to move them into a completely different activity. One of Neil Kinston’s sons has chosen to emigrate to New Zealand, because he sees the opportunity of a freer marketplace there. I remember talking to him about it. I have visited New Zealand and it is a different world; it is a huge challenge. I want to draw one comparison on that later.
After a relentless period of low prices, we are starting to see some effects. I was constantly staggered that, up until and even beyond foot and mouth, milk production remained at or even slightly above quota levels. Since then, there has been a gentle decline, which seems likely to continue. Herd numbers have been falling sharply in Derbyshire. That has been true, to a greater or lesser extent, across the country. Herd sizes have gone up, because other people have taken on the spare capacity that is produced, by buying quota or leasing it from those who are giving it up.
The calculations that I and others who are informed in the industry make are that if current trends continue, demand and supply will roughly balance somewhere around 2011-12. At the moment, there are still substantial surpluses and a buyers’ market in milk, and a buyers’ market when someone is trying to sell a commodity is death. They have no purchase at all and it is a constant struggle to achieve a fair price.
There is the prospect that at some point the market will change, and we are starting to see some changes occurring. Supermarkets are beginning to identify farmers they particularly favour who can produce to a particularly high level. We see greater use of local branding by supermarkets, even for milk. If people go to Waitrose, for example, they can find a picture of a smiling farmer and a smiling cow, if you can get it to smile, saying something about what the milk is. It is a local milk. It is known to the person coming to buy it in the supermarket because it comes from somewhere near where they may live. That type of clear identification is partly a response to supermarkets looking a little further into the future and saying, “We’re not going to be able to buy what is in effect spot milk wherever we like. At some point, we’re going to have to select carefully who we trade with, and they’ll be picking who they’re going to trade with, too.”
More specialist markets are emerging. Organic milk went through a terrible period after a flood of people got into organics. As a result, we had an organic milk lake, but no appropriate buyers. Some suppliers then found themselves with the ultimate farmers’ problem of investing in going organic, but not getting the expected price premium. That situation has reversed as organic milk demand has increased, and there are certainly opportunities for more growth.
There are also opportunities for growth further down the supply chain. I reiterate that we have to find a way of shifting the balance regarding liquid milk and higher-value processed milk. We must also consider who should get that higher value. It is critical that we look into the production of flavoured milks, cheeses and yoghurts, although yoghurt uses only small amounts of milk. There should be active, ongoing research into such products, as well as the various desserts that use milk as a key component.
The processing sector has been complacent. Companies are used to processing large quantities of white liquid and shunting it out in containers. That is their business, but they have not been innovative. There have been many innovations in the milk products that come here from places such as Denmark, Sweden and the Netherlands. Innovation has been a core activity of those businesses because they could not flog liquid milk there in the quantities in which it is consumed here. Leading-edge thinking has tended to come from those businesses; we have to turn that around. There is a role for the Government in that. There needs to be greater emphasis on research support for developing new products for downstream, higher-value milk products.
There are signs that we can succeed if we make those changes and get the balance between supply and demand much closer to one that places sellers in a more advantageous position. If we do those things, the natural advantages of our industry will come into play and dairy farmers should have an effective income and a strong place in the marketplace. What can we do to help that come about?
First, we need to consider how we regulate the sector. I return to the relationship with supermarkets, most of which have assurance schemes that basically say, “We are going to buy stuff from you; we’d like to come and check your farm and look at how your dairy operates to ensure that we are getting the highest standard.” There is then a hygiene service that does many of the same things. We should examine the overlaps between the assurance scheme checks and the hygiene checks and minimise the hassle and bureaucracy that farmers have to deal with.
Secondly, I go back to what happened with Milk Marque, the co-operative that was co-owned by farmers. It used to purchase virtually all the milk that was produced in this country and sell it on, but it was not efficient or effective. It was rightly broken up in 1999, but on the wrong grounds—that it was an anti-competitive model. The milk market is becoming more complicated. Milk is a European product that has by-products and downstream activities, and we have to consider relationships with continental Europe.
Other companies regularly buy into our sector because they have none of the constraints that our farmers have. Arla, which controls MD Foods, dominates the marketplaces in Sweden and Denmark in a way that we would never permit under the rules here, yet it can come here and trade freely and buy our businesses. I have to say, though, that it also innovates in helpful ways. We need to free our farmers to do the same. They got a tremendous chill when Milk Marque was broken up. We have to make it clear that the opportunity remains to build successful, integrated co-operative activities. Some 90 per cent. of the milk that is produced in New Zealand goes through Fonterra, which is a farm-owned co-operative. Is there a monopoly issue there? No, there is not.
We have to take a more international and adult view of how competition works in the sector, including by helping some farmers to leave it. We could use the kind of early retirement schemes that are used in other EU countries. Such schemes can facilitate older farmers who are grinding out their lives and who will not be able to cope to the end to leave in dignity and pass on their activities to those who can take advantage of the opportunities of the future. As I have said, we also need support for research and new product development. Some of the resources that the Department for Environment, Food and Rural Affairs has available, such as additional marketing activity, should be targeted at those sorts of ideas.
There are concerns in my constituency about controls on slurry and nitrates. If farmers are called on to invest heavily in concrete bunkers to hold slurry and prevent its dispersal, they will need assistance, in current economical terms, to do so. If that obligation is imposed on them, it will be the final straw for many farmers and they will not be able to deal with it. For many, it will take significant capital investment to achieve that goal. Given that it is a public health goal and there is a reasonable scientific basis for it, there ought to be some means of assisting farmers to deal with that requirement.
It would also be helpful to clarify policy on bovine tuberculosis, which affects my area. Farmers want to reach an agreement on how best to control its spread. No one likes killing badgers—I do not—but we would like some certainty about how matters are to proceed. We have had a long study of the options, but no clear answers or direction from the Government.
We have powerful brands, including some in Derbyshire. Some regional development agencies have developed food strategies that look at local brands and their identification with foods. We could put more resources into that area and into strengthening the ability to exploit local brands in downstream activity.
There is hope and there are prospects. This industry can be a successful, innovative and quality industry of the future, but we need a period in which some farms are lost, some are made bigger and there is a turnover of personnel to produce the outcomes that I suggest. The Government could help during that period of, perhaps, four or five years. The recent increases in milk prices are appreciated, but marginal, in restoring profitability to most milk units, and we are still some way from having sustainable prices of more than 20p a litre. Until we have greater equilibrium in the marketplace and farmers have more control over their future, we require hardy folk to make tough decisions, and we need the Government to help them with some of those decisions and to enable change.
It is a great pleasure to debate this issue—perhaps I should say discuss, given the number of hon. Members present—with my old and dear hon. Friend the Member for South Derbyshire (Mr. Todd). The debate has reminded me that he tries to be constructive in all his remarks and in his often trenchant critiques of policy. He started by saying that this was not a tale of woe, although he rightly acknowledged that genuine grief exists, and that he wanted to focus on the positive. He talked about the makings of a healthy and successful industry. That is right, because, as he pointed out, the UK has many natural advantages and we must make better capital on the back of those.
My hon. Friend has highlighted the key areas for debate, and I want to respond on those. He talked about economies of scale and the price of food. He identified liquid milk as a commodity and spoke of the need to add value by processing or by niche marketing. He also mentioned the ways in which the Government can and perhaps should be contributing to that. Crucially, he highlighted the need for innovation in the industry to help to add that value and he rightly identified the need to minimise bureaucratic overlap. In touching on all those issues, he has hit on the essential components of the highly successful industry that we both want.
I shall try to respond in more detail on each of those areas that my hon. Friend highlighted and to discuss some issues that I did not pick up during my introductory remarks. In terms of value, dairy farming accounts for around 17 per cent. of UK agricultural production and is the single largest agricultural sector at £2.5 billion. Household expenditure on dairy products in the past 12 months totalled £7.3 billion. I understand that that makes dairy the second largest grocery category in the UK. The dairy sector is therefore of great importance.
It is important to have a considered debate on the many challenges that the dairy sector undoubtedly faces. It must face up to some harsh realities. My hon. Friend correctly pointed that out, but he was also right in wanting not to talk the sector down but to look to the signs of success and growth. He acknowledged that pressure on farm-gate prices will remain. It is important for the sector to be realistic about the prospects for farm-gate prices; they are unlikely to return to the levels seen in the mid-1990s. I accept that farm-gate prices are not high enough for some to be able to sustain their businesses and that costs have increased across the supply chain.
The acknowledgement of that by Sainsbury’s and Tesco, and their resulting action to increase prices, is therefore welcome. The Government believe it to be in the long-term interest of buyers to establish fair and sustainable arrangements for dealing with their suppliers. It is good that there has been some acknowledgment of that, even though some might say that it is overdue. A number of retailers have initiatives to encourage closer working relationships with identified suppliers, some of which attract a price premium. We must also be aware that a considerable proportion of milk is sold through middle-ground retailers and catering establishments, or as food ingredients, as well as being internationally traded as a commodity product.
The Competition Commission has found that the four largest grocery retailers account for less than 25 per cent. of volume sales of raw milk processed in the UK. It is important that we are careful not to place too much emphasis on the major supermarkets, as others have their part to play. There have also been some positive developments in the contractual arrangements between processors and producers. Those relationships, which should help to develop greater transparency and trust, are to be encouraged.
We hear a lot about paying a fair price for milk. If it is not the price agreed between a willing buyer and a willing seller, then what is a fair price? How would a fair price be determined without reference to the market price? Is it the average cost of production, in which case there would be handsome winners but many losers? What about those farmers who cannot match those costs of production? Should we subsidise inefficient producers at the expense of consumers? How would such an approach encourage efficiency gains? How would it help international competitiveness? All those questions go along with that line of argument.
The industry needs to move away from the fixation on price and fix its attention on profitability. There remains a worrying disparity in the costs of production between the most and least efficient dairy farmers. In 2003, it was found that there was, on average, a 12p per litre differential between the most and least efficient dairy farmers. That is not sustainable. Given such a wide variation in costs, we return to the question of what constitutes a fair price. It is worrying and somewhat incredible that many dairy farmers are still unaware of their own production costs. We welcome moves to encourage awareness of costs of production as they may help to provide the information for producers to make timely business decisions.
Even with current farm-gate prices, there are dairy farmers who are able to make a profit. We may rarely hear of them, but they do exist. Such farmers deserve our encouragement and praise. One such example is James Hague from Daisy’s Dairy, who some may have heard on “Farming Today” last Tuesday. He and his wife are new entrants into dairy farming and are producing, processing and marketing their own milk. They are making a very healthy profit by adding value and are providing a quality product and service, for which their customers are willing to pay a premium. Clearly, not all farmers can follow the same path, but individual producers have to continue to play their part as well by reducing costs and becoming more efficient and, above all, by innovating and adding value through processing and the use of niche markets, as my hon. Friend suggested.
The rest of the supply chain also has its part to play in cutting costs and maximising efficiency. There has been considerable investment in processing capacity and, as a result, we have some world-class processing plants. There are also some less efficient plants, just as there are efficient and less efficient producers. This is why, through the dairy supply chain forum, the Department for Environment, Food and Rural Affairs is part-funding a study benchmarking processor efficiency on an international level. The Milk Development Council is also conducting a similar study benchmarking producer efficiency. We have also invested more than £1.3 million through the agricultural development scheme to help the dairy sector address issues of efficiency.
As my hon. Friend notes, increasing the value of dairy products is key. A 1989 report by Coopers and Lybrand for a milk marketing board concluded that
“the present pricing system and allocation arrangements for raw milk in England and Wales will hinder the development of an industry which is internationally competitive”.
The UK processing industry is finally beginning to throw off that legacy and is now producing more value-added, innovative and branded products. To see that we need only consider the recent successes with added-value liquid milk such as Cravendale or Night Time Milk, or the plethora of branded cheeses, such as Seriously Strong or Cathedral City.
While on the topic of cheese, I want briefly to discuss the debate about cheese and children’s diet started by the Food Standards Agency. Cheese has a high saturated fat and salt content, but it is also an excellent source of protein, calcium and other beneficial nutrients and minerals. I hope that parents will use common sense when feeding their children and will include cheese as a key part of a balanced diet. They should not be put off by the tick-box approach of a few people in white coats.
Another recurrent theme is concern about the numbers of dairy farmers leaving the sector. My hon. Friend alluded to that. It is not a new phenomenon. In 1943, there were more than 100,000 dairy farmers, but by 1994, there were 28,000—there are now about 20,000. According to the Milk Development Council’s “Dairy Supply Chain Margins 2005-06”, the rate of farmers leaving the industry has hardly changed in the past five years and is about 6 to 6.5 per cent. The trend of declining producer numbers is not restricted to the UK. In some parts in the EU, such as Spain, the number of dairy farmers leaving the industry has been much higher than in the UK. There is a similar trend in the USA and Canada, reflecting a global trend towards fewer, larger herds in developed economies. Those economies of scale are exactly what my hon. Friend was talking about; they are the clear driver.
My hon. Friend asks about an early retirement scheme. As the Curry report stated, a retirement incentive scheme is unlikely to offer value for money compared with the large costs likely to be involved. One of the report’s further recommendations was that DEFRA should produce a supporting pack of advice for farmers considering retirement. At the launch of “Fresh Start” in December 2004, we issued two publications that responded to that recommendation.
Concern has been expressed recently about the apparent decline in milk production. As my hon. Friend acknowledged, it has remained relatively stable—around the 14 billion litre mark—since quotas were introduced. Production is below quota this year, as it has been more often than not since 2000, but it must be remembered that milk quotas are a ceiling on production, not a target. Producers should produce for the market, rather than for the target.
Recent statements that the UK will soon have to import liquid milk are overly pessimistic. We currently export more liquid milk than we import. DEFRA has commissioned a study which will be published later this year. It will assess the potential for GB-European trade in liquid milk—