Oral evidence: Dairy farming in Wales, HC 968
Oral evidence, 3 March 2015.
Witness
George Eustice MP, Parliamentary Under-Secretary of State for Farming, Food and the Marine Environment, gave evidence.
Chair
Minister, thank you very much for coming in this morning. I understand that your associate is stuck in Brussels, which is fine. We have you as a Minister so that is good enough for us, I think. Can I start by asking you this? You have said that what is happening at the moment in the dairy industry is a “short‑term blip”. How confident are you that things are going to start to recover, and how quickly do you think it might happen?
George Eustice
I am confident that things will recover, because if you look at the long‑term trend we are seeing a growth in demand for dairy products of between 2% and 2.5% per year. There are many export opportunities for UK processors, particularly on things like cheese, and we have been doing quite lot to try and open new markets in places like China and Brazil, which could be good markets for those products. In terms of how quickly it will happen, you have to recognise as well how we got to where we were. We have seen a big increase globally in milk production. Milk production last year was up by about 18% in New Zealand and up by around 8% to 10% across Europe. So we have had a big increase in supply. That has had a major knock‑on effect on the global commodity prices. That is why we have seen such sharp falls. However, farming being what it is—being exposed to the elements and the weather—we are already seeing drought conditions and production falling off sharply in New Zealand. If you look at the international auction prices—that is a spot price run by people like Fonterra for skim milk powder—since the new year we have seen a firming in those prices. They are now up by about 10% on the start of the year, and for the first time recently in the Netherlands we saw farm‑gate prices just start to go up slightly. We are not out of the woods yet but the signs on the international auctions are starting to look more positive. It will take time for that to feed through into farm‑gate prices. I am not an expert in these things, but most analysts are now predicting that farm‑gate prices will start to recover from the summer onwards, or, at the very least, later this year—perhaps in the autumn.
Chair
I have read one report from Northern Ireland, I think, where there was a suggestion that HMRC ought to look at farmers’ incomes over—instead of one year—two, three or five years when calculating tax so that, if a farmer has a good year one year and a bad year the next, one year can be offset against another. I do not know if you have seen that report, but it seemed to make a lot of sense to me. Is it something you would be willing to take up with HMRC?
George Eustice
It is an interesting idea and something we are looking at. This is what happens in Ireland, apparently, that they can average their profits over five years. We have had representations—
Chair
Obviously that is within the EU rules, then.
George Eustice
No; there is nothing in the EU rules that would stop it. This would be an HMRC decision. Obviously it would be a decision for the Treasury and it is not for me to pre‑judge or tell them what to do on a tax matter, but we have had representations from the NFU and other farming representatives on this and it is an area that we said we would look at.
Chair
Lastly from me, I have heard a lot of great things about what we are doing to help cheese manufacturers, for example, to export around the world, and I believe there is a general view that things will be done. I have a luxury cheese manufacturer, Abergavenny Fine Foods, in my constituency, who have just opened up a processor. What can I tell them this afternoon that they could do to access that help? What practical steps are there out there for them and other organisations like them?
George Eustice
I would say get in touch with UKTI. Several times a year, each quarter, I regularly hold a meeting of the food export forum, where we have a range of people in the food sector, including dairy producers, and we are constantly looking at what we can do to help exporters. In the most recent export forum, which was just last week, we discussed that we want to try and help some of the small and medium‑sized enterprises begin exporting, some of those who are not maybe exporting at all, and perhaps look at doing more work on near markets, such as Europe, because we have a big export market on our doorstep. The challenges in Europe are less than getting into new markets where we are trying to open up and where it is slightly more complicated. I would encourage them to get in touch with UKTI. They have a network of regional managers and support in place.
Chair
I know them well and will be interested to see what their experience is, so thank you for that.
Geraint Davies
You mentioned UKTI being a helping hand, but also the Chair mentioned that HMRC is not always a helping hand. In fact, one of our previous witnesses suggested when they appealed to have tax payments spread over a longer period that they were basically pursued and asked, “Can we check whether you have any assets yourselves? Can we confirm that your bank manager won’t give you an overdraft and that your accountant says you don’t have any more money?” That sort of attitude does not sit alongside the UKTI one as a coherent approach from Government supporting businesses which have volatile revenues and profitability. Is there anything you can do about that?
George Eustice
We have encouraged HMRC to show forbearance to dairy farmers, in particular, because there is a particular problem with them. Most of them had a very good year last year; prices were good during 2013 and the first part of 2014. We could have a situation where dairy farmers—and the Farm Business Survey bears this out in many cases—had almost a record year last year. That means they will have quite a large tax instalment to pay in June this year, at a time when some of them will be least able to afford it because they will have just weathered a difficult winter and seen a lot of pressure on their cash flow. So we have asked HMRC to show forbearance. Clearly, under their “time to pay” procedures, they cannot just give it automatically. They do have certain checks that they need to make. But I would say that, if any farmer feels that those checks and questions are too intrusive or make the process too difficult, do let us know because we are in dialogue with HMRC on this and I would be happy to take up individual cases.
Geraint Davies
So the signal to farmers is to go to you, George Eustice, and let you know—
Chair
Or go to their local MP.
Geraint Davies
—what is happening in HMRC so that we can have feedback on what is happening on the ground.
George Eustice
Go to your local MP, I would say, as Mr Davies says, and then I can take it up. But I completely understand that HMRC cannot automatically do this; otherwise people will take it up and maybe abuse it. They do need to have those checks, but we have encouraged them to show forbearance because we recognise this is a difficult time for some dairy farmers.
Glyn Davies
I want you to tell us where we are on the Groceries Code Adjudicator. We have had an expectation that there will be an extension of their influence in different ways. Where are we on extending their remit on the ability to launch investigations and the ability to levy fines? What can you tell us about developing and strengthening the Groceries Code Adjudicator?
George Eustice
On the first point about the ability to carry out investigations, they already have that ability. They have done one recently in Tesco. They can rely on third party evidence. For instance, if the National Farmers Union feed back to the Groceries Code Adjudicator and say farmers are consistently telling them that a particular supermarket is doing something which they believe is in breach of the code, that in itself is sufficient for them to launch an investigation. So I think they have the investigatory powers they need. In terms of the fines, the order several weeks ago was laid to enable them to fine a maximum of 1% of turnover. That has been laid and we can expect that to take effect. So we have put that one in place as well. In terms of the scope, the Prime Minister said he wanted to look at this, and so officials are looking at the possibility of extending the scope of the Groceries Code Adjudicator further down the supply chain. However, it is important that I flag up some of the challenges. The reason we opted two years ago to go for a voluntary dairy supply chain code was that there are advantages to the voluntary code over a statutory code. Once you set up a statutory code—and I looked at this in detail last autumn when we had some concerns that the voluntary code might not survive because a number of processors were indicating they had concerns with it—the shortcoming is that you are then covered by what is called the “Milk Package”, which is an occupied field by the European Union, and that would not allow you to have the most valuable elements of the voluntary code, of which the most important one is that a farmer can walk away with three months’ notice. You would have a statutory code that was weaker than the voluntary code that we have. So there are difficulties, I think, with establishing a statutory code further up the supply chain. Alex Fergusson, who did a review of the voluntary code and concluded it last September, said that he thought it was working well and that there were things we could do to try and improve it, such as getting the remaining 10% of production with some of those smaller processors also using, abiding by and signed up to the code. That is probably where we should start and look in the first instance to get some early improvements on that side. But we are looking at this issue of the supermarket adjudicator, while recognising the drawbacks in that approach.
Glyn Davies
Do you think there needs to be an example of one or two fines for the industry—on both sides of the industry—to show that it is for real? Only when there are one or two actual fines will people realise that this is not just words—it means something.
George Eustice
It was important to have that power there. I was on the Bill Committee as a Back Bencher at the time and was one of those who argued that they should have the power to levy these fines where there were breaches. I am very pleased that we now have that order down and we can put those in place. In terms of what will make a difference, I met Christine Tacon recently and talked about the code—this was before they did the investigation of Tesco—and why they had not felt the need to carry out investigations so far. She was quite interesting in that she said that the most powerful thing about this code would be to get the suppliers, whether they are processors or farmers supplying direct to supermarkets, using the code properly. What happens sometimes is that a supermarket will make a request of a supplier who is in breach of the code. Sometimes that supplier is a middle man, not the end producer, and rather than face down that demand, which is in breach of the code, it is a bit too easy for them to accept it and just pass the cost down the line. Her point was that if the negotiators representing the suppliers just calmly said to a supermarket, “You will appreciate I can’t accept that because it is in breach of the code,” that is the way you get this working. The ones who are doing this well are training their negotiators to use the code and not just caving in and accepting it, and then complaining that they are too scared to tell the adjudicator in case there are reprisals. We need them to show some guts and ensure that their buyers—the supermarkets—are abiding by the code.
Chair
Can I go round the table on this very point?
Simon Hart
Where can we find in the public domain a list of the actions that the Groceries Code Adjudicator has already taken, for what reasons, what sanctions they may have handed down and what the response of the particular offenders might have been? Is that a matter of public record, and, if so, where is it?
George Eustice
I saw myself the announcement on the “Six O’Clock News” that they were going to investigate Tesco. I remember seeing it, so that was very much in the public domain. In terms of other actions, I am afraid I would have to write to the Committee and confirm that. This obviously is a BIS lead. The supermarket adjudicator has a website. I am aware that they publish some information, but I am not sure—
Chair
Okay. To be fair, Nia was waiting, but that was a good point. Thank you.
Nia Griffith
On the issue of the investigations, we have heard this morning that our farming union friends are still concerned that there is not a proactive enough element there. Although you may dismiss fears by suppliers that they could be victimised, they are real fears, and it is quite clearly mentioned in the EFRA report on dairy prices that there is a need to try to strengthen or instigate that investigative, proactive approach. Would you look at that again?
George Eustice
I would come back to what I said at the start. They have the ability now to carry out an investigation even if they have just got anonymous feedback. It does not have to be a named individual who goes up in lights to say, “I am the one who has lodged this complaint.” They have the ability to investigate. The Tesco one is the first formal investigation that they have done. Christine Tacon has been clear that, for the first year or so of operation of the code, she wanted initially to focus on making sure everybody understood their responsibilities under it and to apply pressure in general terms rather than looking at individual cases, to make sure that there was compliance with the code. But the fact that they have recently started this investigation of Tesco is proof that they are willing to do those investigations. I would say this as well. Some companies are running training for negotiators who work for suppliers to train them in how to use the code to their advantage in a way that has not got to be difficult or threatening. The truth is that the supermarket buyers do understand the code. It is just that sometimes, like anyone, they will push their luck, and if the negotiators on the other side of the table just politely say, “You will understand that I am not able to accept those terms because it would be in breach of the code,” they know where they stand. The evidence is that those supermarket buyers don’t push their luck and don’t say, “Right, that’s it: we are going to tear this up and not have you as a supplier any more.” In fact, they recognise that they have been rumbled and will back off. So a lot of it is just about training the negotiators working for the supplier to do their job effectively. I think we can do more in this area.
Geraint Davies
On this relationship—and I had a background in Unilever in this sort of thing at some point in my distant past—the power of these retailers, even to massive established multinational manufacturers, is enormous and they can turn to certainly a commodity supplier of milk and say, “We are sorry, we just don’t want you. We will take someone else or go to the world market.” It is not a balanced picture. If the supplier turns round and says, “We will report you,” it is not a sensible move because they can lose everything and the retailer really does not have much to lose at all.
George Eustice
The situation you have described is precisely why we set up the supermarket adjudicator. We had the groceries code in place and it was precisely because of the imbalance of power that you described that we said, “Right; we need to have an adjudicator in place.” They are now in place. They have started their first investigation into Tesco. We are giving them the power to levy fines of up to 1% and we just need to see how this beds down. There will be a review anyway of the supermarket adjudicator in 2016. Now, having given them the powers both to do the investigations and levy the fines, it is right that we give it a year and see how it beds down.
Mr Williams
The last report this Committee undertook asked of DEFRA how they would manage the success of the code and the issue of setting a fixed Government review date for the operation of the code. There was resistance to that at DEFRA at the time. Does the resistance still exist? You mentioned a year in the assessment of the work of the adjudicator. Is there not a need for the code to have the same analysis?
George Eustice
I do not see any reason why they could not do both at the same time. If there was reticence on the part of DEFRA, it is because we are constantly recognising that this is a BIS lead. It is the Department for Business that hosts the adjudicator within the CMA, and it is right that they should lead on this and they will lead on that review. But given that the Prime Minister has said he wants to at least explore the possibility of having the supermarket adjudicator look at issues further up the supply chain, that in itself would require changing the code, since the relationship between a farmer and a processor has a different set of issues and challenges from that between a processor and a retailer.
Mr Williams
It is a changing picture and some of us would welcome that change in the future. How would you assess the success of the code to date as a Minister with responsibilities for these matters?
George Eustice
It has been successful. It is too early to tell, but I have met a number of large farming businesses who have been quite supportive of the work they have seen the supermarket adjudicator do to date. For instance, I met a large‑scale vegetable producer that is in my own constituency. They said there had been issues with supermarkets, for instance, requiring them to purchase plastic packaging from a designated supplier and that designated supplier was not necessarily the supplier that would offer them the most competitive price and the best quality product; it was the supplier that had been approved by the supermarkets and quite often they had paid a concessionary fee to the supermarkets to be the approved supplier. The supermarket adjudicator got on to practices like that quite early and has been working quite hard to take some of that anti-competitive practice out of the supermarkets. So there has been progress on some of those fronts. We have had the first investigation under way. We need to see how it beds down in the next year once they have the ability to impose the fines as well.
Jonathan Edwards
There is a clear feeling in the farming community, Minister, that UK Governments of whatever colour are reluctant to take on the supermarkets when compared with the reactions perhaps of some other EU member states. Recognising the fact about the adjudicator, how would you respond to those criticisms that are alive in our communities today?
George Eustice
If we were reluctant to take on the vested interests such as the supermarkets, we would not have brought in the adjudicator at all and would not have given the ability to fine. Those lobbying on behalf of the supermarkets said, “We do not need an adjudicator. We’ve got this code. We don’t need it.” We, that is to say the Conservatives, and the Liberal Democrats and both parties in opposition said, “No, we are going to introduce an adjudicator to enforce the code.” When it came to the Bill being discussed, many of us, including those on the Bill Committee, said, “If we are going to do this job, let’s do it properly. Let’s give them the ability to levy fines where that is appropriate,” and we did that as well. I do not accept that analysis. The fact that we have introduced the adjudicator and given it the power to fine proves that we are willing to take proportionate action while not interfering in a market.
Jonathan Edwards
On that quickly, Minister, a Select Committee of this House says that the remit of the adjudicator should be expanded so that they should be more robust. That is the criticism.
George Eustice
If you are referring to the EFRA Select Committee, they did say we should look at the issue of whether the adjudicator should have a role further up the supply chain. Coming back to the point that I made to Mr Davies at the beginning of this session, while we are looking at that—and we are looking closely at that—there are drawbacks to putting the dairy supply chain code on to a statutory footing, because you are then covered by the “Milk Package” and you could then potentially end up with a code that is weaker than what we have now. It is not a panacea or a perfect answer, but it was a recommendation from the EFRA Select Committee. The Prime Minister took that up and said, “Okay, we will look at this,” and so officials, both in BIS and DEFRA, are looking at this issue closely.
Mr Williams
I want to go back to the issue of investment in the dairy sector. The Secretary of State has made various references to appropriate capital grants being available and accessible for farmers. You have talked about making the application process for rural development funds as simple as possible. What progress is being made on the investment that most farmers I talk to would like to make, notwithstanding the economic challenges that they face at the moment? What support are they getting from Government?
George Eustice
We will be giving imminently some more specific details of the rural development programme, which obviously covers England; Wales has its own. In the English scheme—and bear in mind the Welsh Government will do their own—we are looking at grant aid to support various things from remote sensors to monitor the cattle and grazing habits, through to new ways and new approaches to deal with things like mastitis in cattle. We are using the rural development programme to fund a bespoke suite of grant aid to dairy farmers and we will be announcing details of that shortly. In the case of Wales, I know that there is a Dairy Task Force for Wales that Andy Richardson is currently carrying out. I understand that is also due to report imminently. They had expected it to come by the end of February but it is now delayed a little. I understand that is also going to look at how the rural development programme can be used in Wales to support dairy farmers.
Mr Williams
How often do you talk to your Welsh equivalent, Rebecca Evans?
George Eustice
I discussed this issue with Rebecca Evans most recently at the last European Council that we had when dairy issues were on the agenda, but we also have regular meetings with the devolved Ministers at a departmental level to talk about these concerns. There is a regular session between all the devolved Ministers and UK Ministers, but, informally, I also have plenty of opportunity to discuss with her at things like the European Council.
Geraint Davies
I previously asked about the power of retailers. I want to ask you about buying British and buying Welsh, countries of origin, and how that is going in terms of increasing the consumer leverage, if you like, on buying products. Indeed, alongside that, if Tesco buy milk, they just brand it Tesco. What opportunities are being encouraged to basically label milk and added value products as specific brands so that it gives them a bit more consumer leverage?
George Eustice
Yes. There are opportunities here. Obviously there are a lot of voluntary accreditation schemes, such as the Red Tractor logo and others out there, but as a Government we are aiming to get the Commission to have a proper look at compulsory “country of origin” labelling on dairy products. Anecdotally, quite a lot of farmers tell us they believe that Irish milk is sometimes crossing the border, being processed maybe in Northern Ireland and then marketed as a product of the UK, when it has been processed in the UK but the dairy—the milk that is used in the supply chain—is not from the UK. In many other areas—we have had it in beef for over a decade—we are about to introduce new regulations at a European level on sheep, poultry and pigs which have mandatory “country of origin” labelling and which distinguish between where animals were born, reared and slaughtered. We are very keen to investigate whether we do something similar with dairy so that in order to say “country of origin UK” the milk must have been produced in the UK as well as the cheese or other dairy product processed here. The Secretary of State wrote to Phil Hogan after he was appointed late last autumn and the Commission are looking at this. They are doing a feasibility study on whether we could extend mandatory “country of origin” labelling to dairy products.
Geraint Davies
This will say UK as opposed to Britain or indeed Wales, will it? Is there an opportunity for Wales milk or cheese?
George Eustice
This would be UK, but the other point I make is that there are many good examples out there of using protected food names legislation. Again, it is an EU designation. You have it with Welsh lamb and you have Welsh beef. I know that in the case of milk you can get Jersey milk produced on the island of Jersey from Jersey cattle. So there are examples in the dairy sector of protected food names being used. Given that Wales has a protected food name on beef and lamb, I see no reason why it could not deliver and develop something similar in the dairy industry.
Jonathan Edwards
Under EU rules, member states must intervene to buy milk when it falls to 17p per litre, and in evidence to this inquiry this morning we have received strong representations that the intervention price should be increased. Is this something that the UK Government support, and will you push for it?
George Eustice
We generally have been very sceptical about increasing the intervention price beyond the current levels. It has been a long‑standing stance in the UK Government that we should move towards an industry where there is less intervention and where the industry responds to market signals. So while we do have this floor price—or reference price, as it is sometimes called—which is there when there is a real crisis and when you really do need some sort of intervention and Governments can take that out of production, we do not want to set that level so high that it starts to distort the market. It can be quite costly. Last time when we intervened on cereals, for instance—I think in 2011—it cost the RPA a couple of million pounds in storage costs. So these intervention and storage schemes can be quite costly. The other thing I have always argued is that we should try to foster the development of a futures market to help dairy farmers in particular manage risk and manage the peaks and troughs in the cycle of prices. All the evidence from people who understand futures markets shows that the quickest way to kill the development of such a market is to have political interference in an unpredictable way, willy‑nilly, in the market. Basically, to get a futures market, you do not want to have too much political interference. So we are sceptical about it. The final thing on this is that, although our milk prices are low, particularly for some farmers—I get that—our overall dairy prices are slightly higher than most other European countries, and quite often what tends to happen with these schemes is that we pick up the bill and the cost, and other countries get the benefit of intervention. That is why we are generally sceptical about it, both on a point of principle that we run a market‑based system but also the history of these schemes is that we tend to pay while others benefit.
Jonathan Edwards
When we were out in Brussels at the beginning of this Parliament, representatives of the Irish Government told us they were encouraging their producers to vastly increase production in anticipation of the end of quotas, which is happening next month, I believe. How prepared do you think the industry is in Wales and the UK to deal with the end of milk quotas?
George Eustice
We are well placed. We have seen expanding production and that is partly because dairy farmers did what we would expect them to do. They had high prices last year. They responded to that by increasing production and we have a competitive industry here in the UK. We have a good climate for growing grass. We are well placed to do well internationally in a competitive way in the dairy industry. In the case of Ireland, you could argue that they have increased their production too quickly. They will now have super‑levies because they have extended their quota ceiling. We do not have that problem in the UK. While production has been increasing, we are still within the quota limits for this final year. But Ireland and a number of other countries, such as Austria, Germany, Estonia and others, are going to face super‑levies because they have increased production too quickly and gone over their quotas for this final year.
Geraint Davies
On that, you said you did not want to interfere with futures markets, but there are unpredictable shocks, like the coincidence of taking away quotas and the issue with Russia where they have stopped taking dairy products and other food products from Europe. How do you anticipate the Russian situation affecting the market, and do you not think there is a role for Government, at our level or EU level, to intervene to smooth the curve, if you like, of impact?
George Eustice
Yes, on your latter point. I would not describe the removal of quotas as an unpredictable shock; it has been talked about for many years.
Geraint Davies
No, not that, but the Russian issue on top of that and the Irish stuff, yes.
George Eustice
On top of that, we do. To finish the point, there has been lots of argument at the European Council over the last year about whether we should loosen the super‑levy charge on those countries that are going to exceed their quota in this final year. The UK position has been very clear. We have had a plan that has been in place for many years, so let’s stick to it, and those that have gone over will have to pay the super‑levy penalty. On the Russian ban, yes, there has been an impact particularly in the Baltics. That is why, while we are often sceptical about these interventions, we have not stood in the way of the Commission’s plan to have storage aid, particularly for the Baltic countries. Latvia, Lithuania, Estonia and Finland have all been particularly impacted by the Russian ban because they do a lot of milk and dairy exports there. The Commission has put in place support there. The EU Commission—and again we have supported this as part of the compromise—also has an EU Milk Market Observatory, which monitors market conditions and enables there to be interventions in extreme cases. The point you cite with Russia is a good one and there has been intervention in that instance.
Guto Bebb
To finish things off, you have responded to Mr Williams’s question about the relationship with the Welsh Government with a very positive view of how that relationship is working. Can you give any examples of the way in which that positive relationship you described has been utilised in order to respond to this current crisis?
George Eustice
All I would say is that we have a dairy supply chain forum that meets twice a year, which met most recently in November, and we do have Welsh industry representatives on there.
Guto Bebb
I mean particularly now with the Welsh Government in mind.
George Eustice
There are certain things that we do collectively. The dairy supply chain code is something that covers the whole of the UK and that has been helpful, so we have engaged them on that. The best I can really say on this is that we agree with the Welsh Government the collective position that we take as a UK Government at the European Council. Before the European Council, Rebecca Evans and I have a meeting and we talk about the UK stance. When she is unable to make it—and she does not attend every Council—then official-level meetings take place between Welsh Government officials and DEFRA officials to ensure that they are content with the stance that we are taking.
Guto Bebb
Have you had any representations from the Welsh Government on the Groceries Code Adjudicator?
George Eustice
I cannot recall. I would have to check because I do get a lot of correspondence. It is not impossible, but I cannot recall that being raised with me at this point.
Guto Bebb
Could you possibly write to us just to confirm?
George Eustice
I can confirm, but I have no recollection of receiving a letter specifically on the point of the supermarket adjudicator from the Welsh Government.
Chair
If that is everything, I call this meeting to an end. Thank you very much indeed. Oral evidence: Dairy farming in Wales, HC 968 23