Oral evidence: Dairy prices, HC 425Tuesday 8 September 2015

Oral evidence, 8 September 2015.

Witnesses

Dr Judith Bryans, Chief Executive Officer, and Peter Dawson, Policy and Sustainability Director, Dairy UK, gave evidence.

Chair

Thank you very much again for coming before us so quickly. If you would both like to introduce yourselves, with your name, rank and serial number, we will get on with it.

Dr Bryans

I am Judith Bryans. I am Chief Executive of Dairy UK.

Peter Dawson

I am Peter Dawson, the Policy and Sustainability Director of Dairy UK.

Chair

Thank you very much. I will kick off with the first question. The Government consistently tell us that the long-term future remains bright for dairy. What factors make that likely? When will farmers and others begin to see an upturn in prices, rather than a downturn in prices? It is an easy question.

Dr Bryans

I will kick that one off, then. We do certainly see a bright future for the dairy industry in the UK. We see global growth in population. We see increasing demand around the world. As people become more middle class, the demand for dairy and dairy ingredients, particularly dairy protein, seems to be increasing. It will require, based on predictions made by other organisations, milk and dairy products coming from Europe to help supply that dairy, and we certainly see the UK as being an important part of that. We have great conditions for farming here. Long term, and beyond what we have at the moment, which is a real crisis, we do see a bright future for dairy. I wish I had a crystal ball. Unfortunately, I do not. Dairy UK does not make predictions, but we read the predictions made by others. We look at them these days with a certain amount of not scepticism, but adding caveats to them. We had hoped that, by this time of the year, or a little further into the year, we would have seen an upturn in prices. Unfortunately, as you have heard earlier, we still do not have China buying in too much stock. We have seen an extension to the Russian trade ban. Milk production around the world has been very high, particularly in places like the States. They are flying. When we look at the predictions being made by organisations like Rabobank, they now seem to be suggesting that it will be into the spring of next year. That is a prediction made on the basis that, in the meantime, we do not have some major weather event, which would help us out in the UK, but obviously that is all we can base our assumptions on.

Chair

I think you naturally realise the seriousness of the situation as far as the producer is concerned, and there is only so long that they can go on taking these prices. What more do you think you can do, as Dairy UK, to try to move those prices upwards for the producer?

Dr Bryans

We certainly do. We see the issues that the producers are having at the moment. We have great sympathy with them, and coming into the winter, when they are bringing cows indoors, it will be even more of a problem. We would ask that people recognise that this is also a problem for processors, because they are out on a world market and they are trying to sell product that there is too much of. Whenever there is too much of anything, that is really difficult. When you have a supply and demand situation that is distorted as it is at the moment, it is very hard to give the good prices back to the producer that they would like to do. We have recently seen, unfortunately, Cricketer Farm, a small processor, go to the wall, which is a terrible situation to be in for the people that it was employing and its supplying farmers. We are concerned that, if this continues longer term, it will also be an issue in terms of losing processor capacity in the UK. We certainly do not want to see that happen at any point. In terms of what we have been doing, in the short term it is extremely difficult to find a solution to oversupply, but we have spent a very, very long time asking the Government, and we did again in the EFRA meeting last year, to push the Commission to raise the intervention price. We see that as essential, and unfortunately it is not happening. We were very disappointed that we did not see a call for that yesterday, and we still believe that there is an opportunity to push that forward in the meetings at the end of this week and the end of next week. We have also spent quite a bit of time talking to the Commission on futures. We took a delegation with us of Rabobank, FCStone and also EEX to see Tom Tynan and the Commission approximately a month ago. We wanted to talk to them about what could be done in terms of futures, how the MMO needed to change and what the Commission could do there. Unfortunately, our assessment of that meeting was that perhaps it would take such a long time to get the Commission to do anything that we would be into the next crisis before that would be helpful. From the things that we have heard yesterday coming out of the Commission, we would hope that there is now more of a push on to get that done. In terms of our own membership, they have been doing everything they can to give a lag period for a downturn in prices, to hold prices where they can potentially do so. Of course, they have been doing a lot of brand marketing of product to try to sell dairy product. Within Dairy UK, you have to remember that they also fund the Dairy Council, who are our promotional body, and the British Cheese Board. We have been running campaigns for the British Cheese Board over the last number of months. It has been a tough job, and I am not sure there is a magic wand that we have to put the prices up, but we are very concerned about where we are at the minute.

Chair

I want to bring Rebecca in now, please.

Rebecca Pow

You stole my question, actually, Mr Chairman.

Chair

Did I? You carry on. I am sure you will manage.

Rebecca Pow

It is the supply and demand thing again. How are you balancing up this whole issue? You say we are 81% self-sufficient in milk; that is in the UK. On the world market, there is more supply than there is demand, isn’t there?

Dr Bryans

There is at the moment, yes.

Rebecca Pow

How do we, in Britain, get over that problem, on the ground, to help our dairy farmers? We have not got enough milk here, so we are importing it; is that right?

Dr Bryans

We are not importing milk. We certainly import quite a lot of yoghurt and a lot of cheese.

Rebecca Pow

We are importing milk for products, for yoghurt, cheese and butter, then? Is that what we are doing?

Peter Dawson

We import a lot of dairy products, such as cheddar, yoghurt and so forth.

Rebecca Pow

This sounds really basic, but you are the Dairy UK organisation. We have a milk surplus. Why are our liquid milk farmers selling it to people for not enough? Why do they not sell it to somebody for butter? This sounds so simplistic. Why are you not helping them sell it into the other markets, where we are importing milk?

Dr Bryans

It is really not that simple, I am afraid.

Rebecca Pow

I know it is not that simple. I speak after living my entire life on a dairy farm, which sold up four years ago because of all these problems, so I know absolutely what you are talking about. It is a very, very difficult issue, isn’t it? How do we get to the root cause of that? We have got single dairy farmers working individually in isolated cases, which does not help them either, does it? What are you doing about that? That is where these producer groups come in, to try to get them to work together and approach the producers to take the products. What are you doing about that?

Dr Bryans

We do not have an issue in terms of liquid milk in this country. Cheese, butter and yoghurt are imported. Now, we cannot stop people importing product, particularly when the prices coming from abroad are far cheaper than the UK, because we have a strong pound. That is something that neither we nor you have any control over. We are certainly seeing a lot of our members who would like to substitute product. They are doing everything they can with the people that they deal with to do that. Within Dairy UK, we have an Exporters Group, which is looking at trying to promote exports to other countries. Within that, we have repeatedly called for certain things to happen to help us to facilitate exports, so we can use some of the product that we have in the UK. Some of the things that we have called for, for example, are to look at how foreign inspection visits work in this country, how they are funded and how they are run. We have a very recent example ourselves within Dairy UK, where we had to look after a Brazilian delegation who came to the UK. I am afraid I would not say that the UK was a shining example, in terms of organising that visit. The very same week in Ireland, our counterparts were running a fabulous visit with the Chinese. Certainly within Dairy UK, within our Exporters Group, there is a certain amount that we are trying to do to help get some of our great products to go abroad, which will help with some of the issues you are talking about. However, we would also need some more facilitation by Defra in making sure that those things work.

Rebecca Pow

Just very quickly, one of the things Defra and Liz Truss are speaking up about is to promote British products, with this Great British produce label, so it is much more of that, much more detail and much more attention to detail.

Chair

More could be done.

Rebecca Pow

That is very interesting about the foreign trips, isn’t it? That is unforgiveable. We should be able to sort that out, shouldn’t we?

Dr Bryans

Yes, it would be fantastic, because, if we are trying to open up new export markets, then we will need more foreign trade visits, so they will have to be organised slightly better. One of the things that we would also impress upon you today, and we have mentioned to Defra before, is that, for example, when you look at somewhere like China, who is not doing a lot of buying at the moment, even if it were, for our members to put product into China, they would have to be about 15% cheaper than New Zealand because of the tariff.

David Simpson

You are very welcome to the Committee. You have listened to a number of the questions when you were in the gallery there, so I am going to try not to be repetitive. Again, prices have fallen from 2013; we know that. Regarding sustainability for farmers, especially from a Northern Ireland perspective, the price is currently 17 pence. It could drop again to 16 pence for September. It is just not sustainable, and the Scotland is the same. The mainland here is 23 point whatever it is. From your perspective, your organisation markets and helps processing and all the rest of it. The news coming out from Brussels at the meeting on Monday was that they are going to look at Colombia and they are going to look at different things, and all the rest of it. That is long-term stuff. Meeting the Minister, she suggested that somebody should open another cheese factory in the UK. That is not going to happen today. Whilst we understand the sympathies there, let’s forget about some of the claptrap that comes out of Europe and what the bureaucrats tell us we should do. As an organisation that represents the vast majority of the farmers marketing milk, you have a clean sheet of paper. How do we resolve the short to medium term, and the crisis? That is what it is. It is worse than it was in 2009. How do we resolve the crisis we are in now, in the short to medium term? In the long term, yes, we do have developer markets. We understand that for prices and all the rest of it. However, we have to be competitive, and we have to get this level playing field. In my conversation with the Commissioner, when I asked him about the common market, he said, “The only thing common about it is the name.” We have to look after ourselves. As an organisation who represent the body you represent, what is your answer for the short to medium term? That is what I would like to hear.

Peter Dawson

Perhaps I can take that one on. We are very clear that we now operate in a globalised economic environment, and that is where our underlying price trend comes from. It is from the supply/demand balance at the global level. Unfortunately, we are currently in a situation as an industry where there simply are not available to us the private sector mechanisms that allow us to mitigate the impact of price volatility on the industry. Futures instruments, should they mature, would help us, but that is not available for this particular price cycle. That is why we have been consistently arguing that there remains a role for the European Commission to use its residual market management instruments to try to take off the severe impact of extreme downward price volatility, and that is why we have been arguing that there should be a review of the intervention price. That is the policy recommendation that we have been arguing for for some considerable length of time. If that one cannot come to fruition, then can we have at least a decent private storage aid scheme that has the flexibility in storage period and sufficiently attractive rates that allow product to be taken off the market?

David Simpson

A storage aid scheme certainly causes a difficulty, because it ties up capital for the processors. That is the difficulty we have, isn’t it?

Peter Dawson

It also does not have the same characteristic as the intervention system, which puts an explicit price floor in the marketplace. Our preference remains intervention purchasing as a means to stabilise the market.

Dr Bryans

At the moment, PSA, after 210 days, will be coming out at a time of peak production. If that needs to be looked at, it needs to be longer term.

Ms Ritchie

It is coming on to the issue of export markets and strategy. Obviously, we have looked at some of those issues already. What can dairy producers in England and the rest of the UK do to improve dairy export performance? I know you have already referred to the residual markets and the need for the review of intervention price.

Dr Bryans

I think we have relatively credible exports at the moment. Certainly, Northern Ireland pushes our credibility up, because you have been exporting for some time. One of the things you will know is that the promotional fund from the EU is used very well by Northern Ireland, in terms of going and doing third-party promotion on dairy products. You will know Mike Johnston, our regional director, who will say that that gives a very credible return, and they would surpass the KPIs on what they have seen using that EU fund. In England, Scotland and Wales, we have not been very good at using that fund. That is one of the things that we need to do, and one of the things, when I was in the meeting with the Secretary of State, that I asked: should England, Scotland and Wales, or should the UK as a whole, go and make a request to Europe for funding to promote in third-party countries, would it be supported by Defra? That is one way to get that through. We have done a survey, which maybe Peter will talk about, in terms of markets where our processors feel they could go.

Peter Dawson

In order to assist Defra in their prioritisation of their activity, we did a survey of our members of preferred target markets. Not surprisingly, a lot of them came from the Anglo-Saxon food culture, such as North America, Australia and so forth, but also China was a market. What also came from that survey is that there is an enormous range of different targets for individual companies, stretching all over the world. What came from that also is that dairy companies have their own tailored individual export strategies, depending on the nature of their product and their particular market where they think they can get the best return. I think that gives us confidence that, outside the fresh product sector, which is producing liquid milk, which you cannot realistically export any great distance, just about every major player in the manufacturing sector of the British dairy industry has in place a mature export strategy to which they are investing quite heavily. There is an awful lot of activity going in there already. We, as Dairy UK, through our Exporters Group, try to provide a platform where they can interface with UKTI and Defra, and also find opportunities for collaborative action. I think we can be confident that the industry is working as hard as it can on exports, but, with a high sterling and low prices, this is a very difficult situation to actually push exports at this time.

Ms Ritchie

As a continuation, what products should we produce that we are not producing? Are changes necessary in the balance between liquid milk, cheese, milk powder production, skimmed milk powder production, for example? I know, from an NI perspective, that is where the concentration in terms of exports has been. There has also been some suggestion, in terms of export to markets, that, whilst China is now considered to be self-sufficient, the Chinese have a lactose intolerance.

Chair

Can I ask Rishi to ask a supplementary? Then you can answer those, please.

Rishi Sunak

It is a related question about import substitution. I think we are only 30% to 50% self-sufficient in products like butter, yoghurt and cheese. As we look to replace the imports with domestic produce, what do we need to do? Is it better food labelling about British products? Is it more domestic processing capacity that is required? If you could give us some ideas on that, that would be helpful.

Peter Dawson

Perhaps if I answer the question on exports, if you focus on the powder side of the equation, you tend to be into the commodity markets, where it is extremely volatile and very price-sensitive. That is where you get into problems like being subject to import tariffs in China that your competitors in New Zealand are not. There is a difficulty there. It also requires very considerable capital expenditure. As an industry, if we want to go into value-added markets, that is exploiting the assets we have, which is a much greater variety of cheese types. I think that is where the focus of attention is going to be with the industry at this point in time. Going forward, other people may see that there will be opportunities for further investment in milk powders. As I said, in this particular point in the price cycle, it is not a very attractive proposition, but, in the Northern Ireland industry, they are heavily invested in powders. That is an area where there is a lot of export activity already.

Dr Bryans

In terms of import substitution, again, we have this issue around a strong currency. As a result, it is very attractive for people to bring in cheaper product from abroad. Now, one of the things that we have always said is we would like to see better country‑of‑origin labelling. We were one of the few countries in Europe calling for country‑of‑origin labelling. Certainly within the EDA, we were probably the lone voice asking for what we were asking for. I am not sure if you are aware of this, but, in 2010, Dairy UK and the BRC came up with principles on voluntary origin labelling, which were basically shelved and not audited, as we understand it, by Defra because of the desire to see what was going to happen in Europe on mandatory. It is time to look at that again, but also it is very important that we promote, and we promote our own product. Our competitors are promoting their product, and they already have a ready-made market here for them. Through the British Cheese Board, we are doing what we can, and our members will certainly do what they can, from a branded perspective, but more promotion is needed.

Harry Harpham

In your view, what should the EU intervention price rise to?

Peter Dawson

We have not come up with a definitive calculation, but, at this point in time, the difficulty is in the protein market. The butter market is trading at a significant premium to the intervention price, and hopefully it will stay there, because there does seem to be some underlying change in consumption patterns. It is on the SMP side of the equation that there is an issue. If you wanted to safeguard the industry against prices falling to below 17 pence, then you would be looking at an adjustment to the SMP intervention price of over 20%.

Chair

I take it that is not the Scottish National Party. What do you mean by SNP? I do not like too many abbreviations.

Peter Dawson

It is skimmed milk powder, SMP, sorry.

David Simpson

The French have suggested 22 pence as a floor price. Would that be within reason?

Dr Bryans

Yes. CNIEL have done a calculation, which is, I believe, somewhere around 22 or 23 pence.

Harry Harpham

What impact would an increase in the intervention price have on production of milk and dairy products both in the UK and in other European member states? What has the impact been on UK producers to date of the ending of EU milk quota systems this year?

Peter Dawson

There is a question of balance, because you want an intervention price that puts a floor in a market that stops needless damage to the productive capacity of the industry, but at the same time sends a strong enough signal to producers across the European Union to curtail production growth. You are trying to find a right level to achieve those two objectives, because, at the moment, there is still just too much milk. Finding that right level is a calculation probably best left to the Commission, their assessment of budgetary resources and the likely progression of the price cycle. That is why we have not been too definitive in making statements as to what we would like to see. In terms of the abolition of the quota regime, our analysis is not very different to the one coming from the NFU. There has been a surge in milk production from some EU member states, where production constraints have been taken off. This has brought more milk on the market, but, obviously, prices have responded, and you have to expect to see a curtailment in production growth going forward. The problem we have at the moment is that curtailment in growth has not been as rapid as we would like to see, so that is still leaving us with a very demanding market situation. Hopefully, we will eventually find a new equilibrium.

Simon Hart

You heard the earlier questions with the NFU about supermarkets, direct action and all that sort of thing. Do you think that the supermarkets would have made this generous gesture towards the agricultural industry if it had not been for direct action?

Dr Bryans

That is quite a difficult one for us, because we do not represent the supermarkets.

Simon Hart

You must have a view. Do you have a view?

Dr Bryans

I do have a view. Our view, I think, is that dairy products are highly nutritious, complex foods, and we would obviously love to see a little bit more paid for them. Certainly, though, some of our members from NI would say to you that, on the commodity markets, they are getting about half what the retailers are paying for them, so the retailers are also doing their bit. It is good to see some of the extra funding that has been found. Of course, we will see, long term, how that works out. I believe in the distant past there have been initiatives where products were put in place to try to help, and consumers, after a while, were not happy to pay the additional price. It will be interesting to see how that goes.

Simon Hart

I was just whispering to Chris earlier on that the Swiss seem to have got this absolutely right. I was in a Swiss cheese factory last week, and they simply say, “Our cheese is based on the price that we negotiate with our farmers. If the farmer charges more for milk, we have to charge more for cheese.” It works really well for the Swiss. Why can’t it work for us?

Peter Dawson

I think the arrangements operating in Switzerland would not pass scrutiny under EU competition law. That is my understanding of what is going on in Switzerland.

Chair

I have a supplementary on supermarkets, and it is probably quite a difficult question for you to answer. Where you have some supermarkets and big retailers that are more sympathetic than others to getting the price up that they pay to the farmers, what can you do to influence those retailers that do not give the same deal to farmers? Your problem is you have to represent everybody. How can you encourage those that are not being that good? I am being diplomatic here.

Dr Bryans

Actually, from our perspective, we do not go and talk to the retailers at all, because the retailers are the customers of our members. We, as an organisation, could not go and talk to supermarkets about prices.

Chair

There is nothing you can do to influence those others, then, that are not giving as good a deal.

Dr Bryans

I am afraid, as we are set up as an organisation, we could not do that.

Chris Davies

I thought, as a producer organisation, that was one of your roles: to represent your members with supermarkets.

Dr Bryans

We do not represent our members with supermarkets.

Chris Davies

You do not negotiate with supermarkets either.

Dr Bryans

We do not negotiate with supermarkets.

Chris Davies

That has taken my question away, then, really. Can I move on from that slightly? It was very interesting to hear from our witnesses earlier. We have talked a lot about supermarkets. We have talked a lot about exporting. We have not talked about your relationship with Government, with Government Departments, with local authorities, with the police, etc, who would all be big buyers of the dairy sector and dairy products. Where are we with that? Is there more that the Government and these organisations can do to help the dairy industry?

Dr Bryans

Yes, absolutely. We would like to see more procurement of British dairy products. We know that is difficult for you, because you cannot necessarily ask for British dairy products to be procured. We know that there has been some work done by Bonfield, but we do not think it necessarily goes far enough. We would say that there are some principles within the Bonfield work that are not helpful to the dairy industry. For example, in a balanced scorecard, if you want to produce dairy products, it says that 50% of yellow cheese should have a fat content below 25g per 100g. This is not representative of the British cheese market; nor is it representative of the recent research that has been done on saturated fats. We would say that some of that work needs to be reviewed, and there needs to be more procurement of British dairy products into hospitals, Government Departments or anywhere that it can go. That would really help with demand.

Chris Davies

It is an interesting one, this. We have talked about long-term strategy, but, if we investigated this further, will that help the short-term strategy?

Dr Bryans

I think it would be very helpful. At the moment, we have seen some figures, I think, which say that public procurement is around £11 million. That is not an awful lot. I think that has come out of one of the press releases this week. We would not think that was a very high number. We would think, in terms of public procurement, there is more that could be done there to source British product.

Chair

The figures should be much higher than that, I would have thought.

Rebecca Pow

This is the same question that I asked the NFU guys just now, which was about the voluntary code, and that it was recommended that it remains in place, but it is voluntary. The NFU are obviously supportive of it. What do you think about how it is working? Is it beneficial? Does it need changing?

Dr Bryans

The voluntary code is something that we are asked about quite a lot, and we are asked if it is fit for purpose. Our response to that is always that it is fit for the purpose it was put in place for, which was around contractual relationships. It is not fit for a purpose which a lot of people think it is for, which is to affect prices and volatility. This period of time is the first time that the code has been tested. We would say that people supplying the major multiples are covered by the code. If you make it a compulsory code, then it is a compulsory code; it is not a voluntary code any more. That is an extremely difficult position to be in, because, as we have said before, in terms of the dairy package, Defra have always interpreted that, if you have a price change, you have to change contract. Over this crisis period, if there had been regulation rather than a voluntary code, would we really want to have been seeing farmers having to give notice and be given new contracts? A lot more of them would have been in danger of not having anybody to pick their milk up, so we think the voluntary code has worked so far.

Chair

Do you think that most buyers have gone along with the voluntary code, and has it worked as well or better than a statutory code?

Peter Dawson

I think the point has just been made. It is far better than regulation, because it would interfere with the existing contractual model that exists in the industry, basically of evergreen contracts where purchasers have an open-ended commitment to purchase milk from their supplying farmers, but, at the same time, they are given flexibility on milk price. Regulation would interfere with that model, and that would require a new contract every time the price was changed. In a volatile market, you need price flexibility, so that would have been very, very disruptive. On that ground, it has been extremely effective.

Rishi Sunak

On a different topic, do you have a view on how AHDB spends its levy money? Specifically, I am asking with regard to promoting British dairy products. Do you think it does enough, or should do more, or different?

Dr Bryans

We have a number of projects that we do together with AHDB. One is around the Johne’s initiative, which we collectively work with them on. They also put some support into the Dairy Council, in terms of doing essential nutrition work to be able to answer some of the questions around dairy. We always think that there is a greater need for promotion, and recently the Farmers Forum, which sits within Dairy UK, has conducted a large survey of producers in this country, to see whether they believe more promotion needs to be done, and, if so, how that needs to be funded. We are collating the results on that just at this moment in time, so I wish that question was coming next week, when we could actually give you an answer. We certainly have had hundreds of replies to the survey.

Rishi Sunak

I think we would be very grateful if you would share that with us when you publish the results. Thank you.

Chair

You feel that greater promotion of the product would help out, then.

Dr Bryans

Greater promotion is really important. Our members would spend about £150 million on brand promotion, but what you have got to understand is, although that is really important for the brand and therefore for the farmers and the processor, if you want to deal with the underlying integrity of the product, and if you want to deal with raising it to the public eye in its generic form, then it needs more promotion on that level.

Chair

There is also the health and wellbeing of the product, which seems to have been increased now to what the science or philosophy was before. Can we drive that?

Dr Bryans

Absolutely. Hopefully, we will touch on that within the APPG on dairy, which is covering that very topic over the next few months.

Chair

Thank you very much for your evidence. We have now got the Minister coming in, so I thank you both very much for that. It has given us some very good evidence this afternoon. Thank you very much. Examination of Witnesses

Witnesses

George Eustice MP, Minister of State for Farming, Food and the Marine Environment, Tim Mordan, Deputy Director, Sustainable and Competitive Farming Strategy, and Mark Filley, Head of Livestock Policy Team, Department for Environment, Food and Rural Affairs (Defra), gave evidence.

Chair

Good afternoon, Minister, and welcome to the Select Committee. It is a great pleasure to have you here this afternoon. Thank you for coming in good time, because of the fact that we need to inquire very urgently into the price of milk. I do not think you need much introduction. Whether you introduce those with you, or what have you, please do.

George Eustice

Can I say, first of all, congratulations on your new elevation to the Chairman of this Committee that you have served on for so many years? It is great to see the Committee hitting the ground running so early on, with an inquiry on this very important issue. On my left is Tim Mordan, who is our head of farming sectors in Defra, and on my right is Mark Filley, who is our head of livestock.

Chair

Thank you, Minister. I am going to kick off with the first question. The Government consistently tells us that the long-term future remains bright for the dairy industry. Is it?

George Eustice

Yes, I think it is. If you look at the long-term trends, the projection is that demand for dairy products is going to go up by around 2.5% a year. We have a rising world population, set to go to around 9 billion by 2050. British dairy products are seen as a premium product internationally. One of the success stories that we have had, even in the last year, is actually a significant increase in our exports of cheeses in particular.

Chair

Last year, giving evidence to this Committee, you described the price issue faced by dairy farmers as a “short-term blip”. At which stage is this short-term blip going to stop?

George Eustice

It is a very good question.

Chair

It is an answer that you gave, you see.

George Eustice

I am reluctant to predict, because it is not as short-term as we had hoped last time I gave evidence on this before the Committee. There had been something of a false dawn back in the early spring, when some of the projections from analysts like Rabobank were that prices might start to pick up during the summer, certainly by early autumn. There were some flickers of hope on the international spot prices run by Fonterra and others, who had shown a bit of a pick-up in prices. I am not making any predictions. The latest projections that we have seen from Rabobank are now suggesting that it might see a pick-up towards the end of this year or early next year, but having seen once false dawn already I would be reluctant to project that that would be the case. I think in particular what happened is there was an expectation that China might re-enter the market. There have been two big global problems that have driven this sharp downward trend. One has been the substantial increases in production, which is up by around 10% in Europe and similar elsewhere in the world. The other big factor has been China buying far less skimmed milk powder than it was, withdrawing from the market. Of course, this has been aggravated as well by things like the Russian trade ban.

Chair

What progress has been made in replacing imports of products such as ice cream, yoghurt and cheese with home-produced varieties, since Defra outlined those home-based opportunities to the Committee in response six months ago? Are we now consuming more of our own product? Are we importing less? What is happening?

George Eustice

There have been a number of other things we should bear in mind. Obviously, the exchange rates have moved in a way that is not favourable to dairy producers. That has aggravated things. It has not so far been seen to hamper our success in export markets, but it has made, obviously, imported cheeses cheaper. I do not have the figures on me for whether there has been a change in six months, but I would say this. I have always been very clear, as has the Secretary of State, that we believe import substitution, increasing our domestic production of cheeses, yoghurts and other dairy products, is something that goes hand in hand with expanding processing capacity. That is obviously a longer-term objective; it is not something you can switch on overnight. There is a lot further to go. We are still only around 37%, I think, self-sufficient in cheese. We are still importing even cheddar cheese in large quantities from countries like Ireland. There is a lot more we can do on other products such as yoghurt as well.

Chair

Are we using our levy board moneys enough to promote our product, in order to get more people to make that choice, when buying, to buy British rather than buying a foreign product?

George Eustice

Obviously, the different levy bodies have all got a different genesis. They are brought together under the umbrella of AHDB now. DairyCo, which was the dairy element of AHDB, if you like, has tended to focus most of its budget, historically, not on advertising but on research and development and developing productivity, in common with other parts like home‑grown cereals. Like the HTC, they have prioritised research and market data over direct advertising, whereas some of the livestock sectors have got more, maybe, nostalgia, for the days of MLC, and some of those beef and lamb promotions. They have tended to put a greater share of their budget to marketing and advertising directly. It depends whom you talk to. The general consensus is that we can do a lot at point of sale. We are very keen as a Government, and the Secretary of State outlined this yesterday, to develop the GREAT branding, not just as an international brand but as a domestic brand as well, to try to encourage people to purchase British products. When it comes to advertising, though, the supermarkets spend so much advertising in their own right to promote different products that, frankly, the means that the AHDB have to significantly alter the market is limited.

Chair

A lot of the health experts recently have considered dairy fats to be much healthier than they previously did. Is there a role there to promote, for want of a better expression, the “healthiness” of the dairy product? Perhaps that is something that Government can do, through the levy boards.

George Eustice

Yes. We in Defra obviously work closely with the Department of Health on these issues. I know that the industry sometimes raises concerns about some of the healthy living campaigns run, for instance, by the Department of Health. We, for our part, work quite closely to get the Department of Health to, for instance, set up a dairy partnership board, so that the dairy industry can be fully involved in contributing ideas to some of those campaigns. Let’s not forget, as well, that the Department of Health spends around £63 million a year on milk for children at infant school.

Chair

That leads me very simply to the last part of my question. What progress has been made on the Secretary of State’s commitment to create a working group to talk to supermarkets and other providers about better branding and labelling of British product?

George Eustice

This has been progressed by the AHDB. They are convening this. I understand they have had some early discussions already. They are looking very much at the transparency of contractual arrangements between farmers and processors, and even retailers. That is the piece of the work that they are leading. Defra, for its part, is taking the lead directly on talking to some of the supermarkets to see if we can encourage more country‑of‑origin labelling. This is something we have pressed hard for. We wanted to see mandatory country of origin on dairy products, where it was possible to do that, particularly on some of the lightly processed cheeses, for instance. We have not been able to persuade the Commission to do that, but we are nevertheless of the view that there is more that could be done by way of some of the voluntary labelling schemes that we have already got established with supermarkets.

Chair

Do you see an urgency in this?

George Eustice

I do, yes. This is why we are developing these things, and will be over the coming weeks. This is something we would like to take forward. We have to be realistic that this is not going to change things overnight. A lot of these things are longer term. We are also making available grants through the rural development programme to help dairy farmers invest for the future. Of course, yesterday the European Commission announced plans for a £500 million crisis fund to help buffer farmers against the immediate short-term impacts. I am very conscious that, as well as trying to fix some of the structural problems long term, and improve competitiveness long term, we also have to recognise that some farmers are suffering very dire financial distress at the moment.

Harry Harpham

You said you based your quote of a “short-term blip” in the prices that are faced by dairy farmers on advice from people who were saying that it would be a short-term blip. Then you indicated that, presumably from those same advisers, there might be an upturn towards the end of the year or the beginning of next year. What gives you confidence, because they got it so wrong that it was a short-term blip, in their advice that the upturn is going to come towards the end of the year or next year? Have you got confidence in their predictions?

Chair

Rishi, come in with yours. Answer both of them, Minister, if you would not mind. It just speeds it up; that’s all.

Rishi Sunak

Thank you for being here, Minister. This is just a follow-on from the Chairman’s question about encouraging customers to buy British. Could you give us an update on your plans to encourage Government to buy British, both at a national level and at a local level, whether it is schools, hospitals, prisons, local government, etc?

George Eustice

On the first point, I hoped I had made it clear, but if I have not, let me state it explicitly. Having seen one false dawn put forward already by the same analysts, the answer is that I think it is very difficult to say with any confidence that their projection this time would be right. So much of this, as well, depends on what happens in the Chinese market, and whether they do, indeed, re-enter the market and start buying substantial volumes of skimmed milk powder again. A lot also depends on what happens in the New Zealand season. You are about to see a further uplift in New Zealand production as they enter their main season of production and as grass starts to grow in New Zealand. The answer is it is very difficult to project these things. Indeed, one of the other things that we have been promoting, and Dairy UK have actually done some very good work on, is trying to identify ways that we could improve the quality of the data that the Milk Marketing Observatory has, as part of the EU, to try to help facilitate more accurate market projections. That is absolutely the first staging post to getting a viable futures market in this country as well. I am afraid I cannot predict with any degree of confidence. Having hoped that the blip would be short-term, I do not intend to predict that it is going to end soon. On the procurement issue, about a year ago we had the report by Peter Bonfield, which was a plan for Government procurement. We have made good progress there. All of the dairy products that we have in the Defra canteen are 100% British. We have had good uptake from Departments such as the Department for Education and DCLG. Anecdotally, around the country, some local authorities are doing quite well on this, and they are encouraging schools and hospitals in particular to take this up. There is some good practice there, but there is further to go. In particular, when it comes to local authorities and individual schools, where obviously you have huge amounts being sold, there is further to go. That is why we have announced much more transparency. We are going to announce when Government contracts come up for renewal, and advertise that and make that much clearer, so that local firms can contract and bid to do that supply.

Harry Harpham

How many farmers do you estimate have left the dairy industry this year in England and the wider UK because of price volatility?

George Eustice

If you look at the trends, the latest figures that I had were that roughly 300 farmers have left the industry. One of my colleagues might find the precise number. That is around 2.2% of the total number of farmers that we have. It is actually slightly lower than the average has been each year over the last 15 years. Between 2004 and 2014, the average loss per year was around 4%. We have had a long-running trend, actually, of a small number of farms growing, average herd sizes growing, production being broadly static, but fewer producers and a gradual continual exit of dairy farmers. This has been a long‑running trend for at least 15 years.

Chair

Can I just seek clarification? The NFU earlier on said 450 farmers. You do not have to correct it now. You may be right, but just correct by writing if you want.

George Eustice

I am going from memory, so it may be 450. It was in the hundreds, rather than the thousands.

Harry Harpham

Could you comment specifically on price volatility? The NFU had not got the data to break it down today.

Mark Filley

We probably do not have that with us either, I am afraid. I can tell you that the data of the Food Standards Agency, which holds all the registered details of dairy holdings, from August shows that there were 7,945 registered dairy production holdings in England at the beginning of August 2015. That was a reduction of 4.4%, compared to the year before.

Harry Harpham

How many fewer is that than there had been last year?

Mark Filley

I do not have the figures, sorry. We could obviously calculate that for you.

Chair

Doing my arithmetic roughly, it is probably the Minister’s figure that he gave us. However, I think we ought to have a bit of clarification on that one.

George Eustice

We can. I am sure I read somewhere it was around 300, but I can double-check.

Harry Harpham

If you could clarify that would be great.

George Eustice

We will. To your wider point of how much of that is due to price volatility, it is quite difficult to divide that out, unless you were to literally run interviews with farmers who have exited and to explore the reasons for them getting out. Clearly, many of them are losing money at the moment. Prices are below the cost of production for large numbers of dairy farmers. That is undoubtedly going to be a driver.

Harry Harpham

Would there be anecdotal evidence?

George Eustice

Yes. Anecdotally, what I have come across in particular is a vulnerability with tenant farmers in particular. If you are having to go to the bank and ask for extended overdraft facilities to see you through this difficult period, if you own the farm and you have a farm worth several million pounds, it is easier to offer that as collateral to the bank to borrow that money. If your only real asset is your herd of cattle, and there is uncertainty about the industry and your place in it, it is much harder to borrow money to see you through the difficult times against that. I have come across dairy farmers who frankly have said they are at the position where their cash flow means they have to sell cattle, and then they very quickly go to a position where they no longer have a herd size that is viable. I think there is a particular vulnerability with tenant farmers, given the fact that the only asset they have is their herd of cattle.

David Simpson

You are very welcome, Minister. You and I had a brief conversation at the beginning of July in relation to the dairy sector and the dairy prices. There was doom and gloom then, and it certainly has moved on even from that. From a selfish point of view, from a Northern Ireland perspective, you will know that Northern Ireland is sitting currently at 17 pence. It can drop to 16 pence in September, and Scotland is at 18 pence. We are at a very difficult situation with the dairy sector. We depend on 75% or 80% of export, so I believe that Northern Ireland is a special case in relation to that. I know possibly Tory policy is that you do not interfere with the market price; it finds its own level, and all of that. Maybe with that, in a sense, there is going to be casualties, and maybe there is a natural erosion of what is going to happen to try to settle the market itself, but we are in a difficult situation in Northern Ireland. We have had these low prices now for nine months. The prediction is it could be for another nine months. That is the prediction, but there is no crystal ball and we cannot say that is what is going to happen. Northern Ireland is in a very, very difficult situation. We have a land border, and we do not have the same situation as the mainland with retail, where they do not depend on the export as much as we do. What more can the Government do to alleviate the difficulties that Northern Ireland farmers are facing? I know there is a meeting on Friday. We had a meeting yesterday. I was rather disappointed with the package coming out of it, but we have a meeting on Friday, I understand, in Brussels, in relation to all the aspects with a number of member states—the Chairman will probably go for me at this stage—in relation to the intervention. Will the Government support short‑to‑medium‑term intervention for the dairy sector?

George Eustice

I completely recognise we have real mixed fortunes in the dairy industry, in that we still have a significant number of dairy farmers who are on the so-called “aligned contracts”—contracts with supermarkets such as Tesco and Sainsbury’s who are linked to cost of production, some of them still getting between 30 pence and 34 pence per litre here. At the other end, you are right. In Northern Ireland, there is a particular problem, as you said. It is 17 pence or 18 pence. In Scotland, in Wales and in the north‑west around Cumbria, again, because of their dependence on First Milk, which itself is very exposed to the international commodity markets because it is predominantly in processed cheese, they are all on very low prices of around 18 pence. You have a huge spread between those at the top, who are still making a margin and still making a profit, and those at the bottom, who are losing substantial amounts of money. We do recognise that. There are a couple of things that we as the UK Government have called for that I am well aware that Northern Ireland are not enthusiastic about. One is that we have been reluctant to go down the route of intervention, and perhaps if it is the subject of another question I can explain why then. There is another area as well. I know that Northern Ireland is less enthusiastic than the rest of the UK about country‑of‑origin labelling. It is a case we have made. I know that, because of the cross-border trade, there is nervousness about that in Northern Ireland. I would say this: the Commission have made it pretty clear that they do not intend to go down this route of mandatory country‑of‑origin labelling for the foreseeable future. That is why we have resorted to trying to develop further our existing voluntary labelling scheme, and obviously, if that did not work for Ireland, they would not have to adopt it there.

Chris Davies

I have a two‑part question, Minister. Prices have fallen since 2013, virtually every month, but we are seeing milk production increasing rather than decreasing. What is your Department doing to discourage the overproduction? If I may, coupled with that, you mentioned a few minutes ago about the European crisis fund that was announced yesterday. How will that help British farmers? What is the process? How much of that fund will be allocated to Great Britain?

George Eustice

You are right. You put your finger on one of the difficult problems, I think, with this dairy crisis. Because the dairy industry requires long-term commitment, with investment that does not yield increased production for a year or 18 months. It is a long-term commitment. It is therefore quite difficult to switch production on and off quickly and overnight. It is one of the reasons why we have the cycle of almost boom and bust that has been going on now for a number of years. It is one of the reasons why we are very keen to develop a viable futures market that would help mitigate some of the risks that dairy farmers face. In terms of why production has not gone down, I think one of the reasons, and one of the differences between this current crisis and the one that we had last time in 2012, which many of you will remember, is that in 2012 feed costs were much, much higher than they are now. The variable costs that a farmer had, linked to the total number of cows that he was milking, were significantly higher than they are now. The situation we have now is that farmers have very wafer-thin margins, but they have still got their overhead. Because feed costs are lower, I think we are seeing a problem where you have almost got this vicious cycle that farmers, to try to cover their overheads, are actually producing more at a lower margin to try to break even. That is actually then counterproductive in terms of seeing recovery in the price.

Chair

I also think, Minister, that the climate and the weather have been so good this last year or 18 months that it has been ideal for producing milk relatively cheaply. Farmers have chased their own tails, but is that ultimately doing the farming industry any good? That is the question.

George Eustice

It certainly delays a recovery in the price, because, ultimately, if you are in a free-market situation, which is what we are now entering in dairy, and it is a global commodity, you do need farmers to read price signals and try to change their production accordingly. That is why we also, I think, do need a futures market, to help smooth out the peaks and troughs in their income.

Chair

What are you going to do to encourage the industry to have a futures market? You have walked nicely into that one, haven’t you?

George Eustice

I have been pushing this very hard, actually, since the spring. What I am encouraged by is that I think there has been a bit of a sea change, from what I can see, in the mood coming from dairy processors. Six months ago, some of them were saying, “It’s all well and good, but probably a futures market wouldn’t work here.” We are now starting to see the dairy processors—and I said earlier Dairy UK are doing a lot of good work in this area—really thinking constructively about how we can put in place the right kind of data and the quality of data necessary to make a futures market work. This developed in the US. When they removed quotas 20 years ago, we saw quite quickly the emergence of a futures market for skimmed milk powder and for butter. Typically in the US, what a dairy farmer does is they go into the futures market and hedge their risk on around 40% of their production. They effectively have a fixed, predictable price for around 40% of their production. Then they take their chances in the market with the remaining 60%. It does not remove the volatility, but it certainly buffers them against the worst of it.

Chris Davies

What about the European crisis fund?

George Eustice

That is a very good point. There is a precedent for these funds, and the last time we had a crisis, the crisis before the last one, was in 2009. At that stage, the European Commission did something similar. They issued an envelope of funding to each national Government and they gave them some discretion about how to issue that. The UK Government, at that point in 2009, made a straightforward hardship fund to each dairy farmer and kept it as simple as possible. It is too early to tell, really, because we are awaiting further details. At the moment, they have just announced that there will be a €500 million crisis fund, and that it will be allocated as an envelope to national Governments. We are awaiting further details, which we expect probably during the course of the next week to 10 days.

David Simpson

Going back to 2009, can you remember how much the crisis fund was, and what each farm got? Was it €7,000?

George Eustice

I am afraid that was before I was even on this Committee, let alone Farming Minister.

Mark Filley

We will get you the precise figures, but it was in the order of £25 million, I think, the UK’s allocation, and farmers received around £3,000 each.

David Simpson

That is really chicken feed, compared to the problem they have.

Mark Filley

Sure.

Chair

It would be quite good to get those figures in writing, please.

George Eustice

This would be a higher fund, in the sense that it is a €500 million fund, and, if they follow a similar type of allocation to last time—and it is too early to tell exactly how this will come out—we estimate that that crisis fund could be in the region of €40 million.

Rebecca Pow

Is it going to be so complicated they are going to have to employ an agent or a land agent and pay them £2,500 to apply, so they will not bother?

Chair

You ought to declare an interest, but never mind. We will not go there.

Rebecca Pow

I have an agricultural auctioneer husband.

George Eustice

This is a dilemma that we would face, and it is why we have to await further details; obviously this was only announced yesterday. The dilemma that you have got is this. If you wanted it brutally simple, you would do what you did in 2009 and just give a hardship fund to each dairy farmer. However, as I said earlier, we have a wide variance in terms of the fortunes of dairy farmers. I met a dairy farmer earlier this year who had Jersey cows and had a low cost of production of about 22 pence. He was selling his milk as Gold Top at 37 pence a litre. He was doing okay. Now, you would not want to give him necessarily a hardship fund. I am sure he would welcome it. At the other end, you have farmers who are losing money who need that hardship fund. We would have to think carefully, and there is a big trade-off between simplicity and targeting the resources where they are most needed.

Ms Ritchie

Moving on, Minister, to export markets and strategy, you and I had a discussion about this on the telephone back in August. We have supported, as an EFRA Committee, the Government’s view that opening new export markets offers long-term opportunities for dairy farmers. However, China’s import of commodities has stalled. Russia is still banning EU dairy products. What is your view of the potential for exports to lift dairy farmers out of their current difficulties? What other markets are you, the Secretary of State and your officials pursuing? I appreciate, and the Committee appreciate, that is a long-term role. There are short-term, mid-term and long-term roles here.

George Eustice

Short term, I do not think we should pretend that exports are going to give an overnight relief to the industry, for the reason I said earlier that exchange rates at the moment are not in favour of exporters. In fact, they have probably tilted slightly in favour of importers. We are constantly redoubling our efforts when it comes to dairy exports. Later this year, the Secretary of State plans to go to China. She is going to take a delegation of dairy producers with her to China. I still think there is more we can do. We have seen a 10% increase in our dairy exports, to about £1.4 billion now, over the last 12 months, so we are making good progress. There are opportunities as well in markets such as Brazil, which is a big market where there is actually quite a demand for UK cheese. There are opportunities, if we could make the EU-US trade deal work, for British dairy products in the US market as well. They do not have a particularly sophisticated cheese market at the moment, but there is a big demand for British cheeses. In fact, co-operatives like OMSCo, which specialises in organic milk and organic dairy products, have been very successful at targeting the US market.

Ms Ritchie

When is that trade delegation to China anticipated?

George Eustice

I do not have a specific date, but it is going to happen later this year. Do we have it in the autumn?

Mark Filley

November.

Chair

It is this calendar year, is it?

Mark Filley

It is this calendar year.

Ms Ritchie

Will that delegation include dairy farmers from right throughout the UK?

George Eustice

I might ask Tim whether he knows. We will be taking dairy producers, obviously, specifically people who have a product to sell in those markets. It will not necessarily mean taking a delegation of dairy farmers, but it will mean taking people who have cheeses that they are ready to bring to market.

Ms Ritchie

Northern Ireland’s dairy industry exports something like 85% of its milk product but seems, at best, in no better position than the rest of the UK industry as regards current price and income levels. That is why we would like to see, as an EFRA Committee, a review of that intervention price. It was therefore disappointing yesterday that Commissioner Hogan saw fit not to do so. As the UK Minister who negotiates for Northern Ireland at the EU Agriculture Council, what assessment have you made of particular factors affecting export-led prosperity?

George Eustice

Is this a good time to deal with the intervention price, given that it has been raised? Do you want to come back to it?

Chair

It is the next question.

George Eustice

I will delay the big message on intervention. The answer, when it comes to exports, is really about redoubling your efforts in as many key markets as you can. That is why we are taking this trade delegation to China. It is why we have tried to get a Brazilian delegation to come to the UK, to inspect plants here, so that we can open markets there for some of our producers. This is an area that we have really prioritised, and, both under the current Secretary of State and indeed under Owen Paterson previously, we have consistently promoted British exports abroad, and we have made some progress when it comes to dairy.

Ms Ritchie

Further to that, then, how can England and the devolved regions within the UK improve their dairy export performance? I appreciate it is a different way of getting at the same issue.

George Eustice

One of the issues that we do sometimes have is, when we have veterinary authorities visiting from other countries where we are trying to get export certificates, we always do have this slight issue, as you will be aware. With Northern Ireland, it is treated slightly separately. There is an island of Ireland approach on some of those things, whereas many of those veterinary organisations look at a GB approach for the purposes of disease and biosecurity. That does create a complication. We are always very conscious of this, and we try very hard to get particularly the Chinese veterinary authorities to look at meat-cutting plants in Northern Ireland, because we are conscious that there is always that danger that Northern Ireland slightly falls between the stools, because of the way overseas veterinary authorities view things.

Rebecca Pow

I have a tiny, weeny question I was going to squeeze in before the big intervention question. This leads on from Margaret’s question. It was a very interesting point raised by the Dairy UK delegation. Is enough professionalism and focus being put on our foreign visits here to promote our cheese or butter in order to secure these contracts? There was a certain criticism that actually they were not quite high-profile and professional enough. Perhaps that is something relatively straightforward we could be putting more attention into, to secure more of these sales.

George Eustice

We work very closely, as Defra, with, obviously, Dairy UK, and individual dairy companies, when it comes to overseas delegations coming here. We work with AHDB as well. In fact, AHDB are now funding a post in China. We have got a full‑time counsellor there who is focused on trade in agriculture now, Karen Morgan, who is doing some good work. We are doing our bit on that. There are sometimes issues, it has to be said, with some delegations that come here. We have had this in the case of both China and Brazil, where the incoming authority will try to change their plans quite last-minute. This can be counter-productive. We had one instance 18 months ago where there was a Chinese delegation and they suddenly decided they wanted to visit a cheese factory that had no intention of exporting cheese to China at all. There was something there that meant they did not like what they saw, and that set us back slightly. You have to be very careful in ensuring that, when we get these delegations, they are actually visiting the plants and the factories that want to export to these countries. It can be difficult, if you have a big delegation coming from a country that then wants to change its programme at the last minute, and this can create challenges. It is one of the reasons why, earlier this year, a delegation from Brazil decided, in the end, to delay, because it was not possible to put together the programme they wanted at a few days’ notice.

Rebecca Pow

We have some fantastic cheese producers, and I am sure they would put on a great show. I would put in our bid that we do as much as we can. Anyway, on to the intervention question, which was obviously raised yesterday with the European Agricultural Commissioner, Mr Hogan, we called to raise the intervention price, and he resisted it. Does this Government remain sceptical about raising the intervention price? What would your view be?

George Eustice

Yes, and, in fact, we did not call for an increase, in the end, of the intervention price, notwithstanding the fact that I completely understand Northern Ireland’s position on this, which was made clear to us at the time. The reason for that is a number of things. First of all, we have been, over the last 15 years, moving away from old-style intervention into agricultural markets. We established the single farm payment as the right way, without distorting markets, to pay farmers for the public goods and benefits that they bring to the environment. Actually, I think it would be quite a retrograde step to go back to old-style intervention. The second, more practical reason here is that Commissioner Hogan was very clear that to change the regulations to enable an increase in the intervention price would take the best part of a year. You might be at a position where, frankly, you would end up with the regulation to increase the intervention price when it was too late and actually prices had moved beyond even the new intervention level. A further complication here is, whenever we have looked at this, the problem we have had is that, although prices are very, very low here in the UK, they are very much worse in some other European countries. Our average price is still above that in France, in the Netherlands, in Germany and in other Eastern European countries. The danger is that, if you increase the intervention price, you would have to fund that in some way. That would be likely to come out of what is called the crisis reserve, which is effectively top-slicing the single farm payment to fund a central reserve. The danger is that British farmers would pay for the crisis reserve through cuts in their single farm payment, while other European countries would collect most of the benefit through whatever intervention price was put in place, so it is complicated. Despite having a rather principled objection to this, we did look quite closely at the dynamics of this and whether it could work. I think our conclusion in the end is that the kind of crisis package that the Commission came up with yesterday would be quicker, faster, more targeted and more of a short-term fix for what we hope is a short-term problem.

Chair

Can I press you on that? On this package of measures, how long is it going to take, actually getting money to dairy farmers in this country? Do you know?

George Eustice

No, and we will have to wait, obviously, until we get the details coming from the Commission in the next week or so. One of the things I think they did make clear yesterday, and Mark might correct me if I am wrong, is that they intend this to be funded from the super levy fines that those countries that exceeded their quota over the last 12 months have had to pay. The UK over the last 12 months has resisted any softening or so-called “soft landing”, as countries such as Germany and Austria called for, because they were producing well over their quota. That did mean that those countries have had to pay into a super levy. What the Commission seem to have accepted is that the fines paid into that super levy by those farmers who overproduced could now be used to try to soften the blow of the oversupply we have in the market.

Rebecca Pow

Minister, in the UK’s situation, even if they raised the intervention price to 20p, say, or 19p, in my opinion it is not going to help our dairy farmers much. If they are being paid now 23p, but the cost of production is actually 30p, it is still really not going to solve the problem, is it, even if it came about?

George Eustice

It would not solve the problem, no. The other problem with intervention is, if you believe, as I do, that in the long term we need to develop a viable futures market to help farmers manage risk, the quickest way to kill a futures market is to have ad hoc Government political intervention all over the shop, because then the markets actually cannot plan for anything; they cannot predict anything; and they are not going to step in to offer that kind of effectively private insurance against big swings in prices.

Rebecca Pow

Just quickly, on the quota issue that was referred to, do you think that this current crisis has been stimulated by the final ending of the milk quota system?

George Eustice

I do not think it has. This is a global problem. Dairy farmers in New Zealand are going through a terrible time at the moment. Some of them are only getting 12 or 13 pence a litre, equivalent to us. US farmers are going through a difficult time. This is a global situation. It is an oversupply of a commodity and a weakening in demand from key markets such as China. That is the driver. Quotas have now come off. There has been an increase in production that might have contributed a little bit. I do think that removing quotas is right for the long term for countries like the UK, because we actually do, on the fundamentals, have a competitive dairy industry, compared to other European countries. The average herd size in the UK at the moment is around 160 cows. In some of these Eastern European countries, you have average farms with five or 10 cows. We are actually well placed to do well internationally.

Simon Hart

Over the last few months, the debate has mostly been about the impact of the problem on farmers. Very little attention has been addressed to those who supply farmers. In my part of the world, there are a number of businesses that are going out of business, while we all stare in the direction of the actual milk producer. My question really is: what assessment has the Government made about the downstream consequential impact of the crisis? How can it help those people who are quietly going to the wall without anybody really noticing?

George Eustice

I am not aware we have done any specific detailed analysis on that particular element, the effect on the wider supply chain. Perhaps one of my colleagues can correct me if they are aware of some. Anecdotally, certainly, that is an issue. I think it is inevitable that, if you have farmers experiencing cash‑flow difficulties, as many of them are, they are going to be delaying payments for some of their key inputs from agricultural suppliers, and that is obviously going to have a knock-on effect. If you get, in the worst-case scenarios, farmers actually going out of business, or going into receivership or administration, that obviously has a very direct impact on some of those suppliers.

Simon Hart

Is it not slightly the other way around? Suppliers are going to go bust first. They are the ones who are going to go out of business before the farmers, because the farmers are going to be cutting off what might be seen as non-essential, non-critical investment now, maybe on the creation of new buildings or replacing kit. That means kit suppliers are going to go to the wall this year. Farmers might not go to the wall for a bit yet, so the urgency is the other way around, I would suggest.

George Eustice

It is a bit of a debate. Which comes first—the chicken or the egg? I guess, if you are an agricultural supplier, you have a creditor owing you £100,000 for animal feed and they go into administration on you, that is not a great place to be. There is an interrelationship there between the two. What I can say we are doing on this is that I am regularly meeting the agricultural directors of all of the key banks. We are working with them and encouraging them to show forbearance. Many of the banks have already moved dairy farmers who are in distress on to interest‑only loan repayments, for instance. Many of them have given them even interest holidays, to try to help them through this difficult time. We are trying to get the AHDB to help farmers who need assistance in putting together management data, so that they can make the right case to their banks for that support.

Simon Hart

Is there something the Government can do, though? There was a welcome announcement a while back from the Treasury about enhanced capital allowances on agricultural machinery. It seemed to most of us to be sensible that those capital allowance advantages should be also extended to buildings, for the simple reason that, if you buy a German combine, most of the money goes to Germany, whereas, if you build a building, most of the money goes into your local rural economy. There are all sorts of benefits from providing the same tax conditions as far as capital injection for buildings as we currently provide for machinery. I have never heard, apart from the fact that we can’t, a decent argument for why we should not. I wonder if there is something your Department can do with the Treasury to persuade the Treasury to look a little bit wider at the things that we can do—they do not contravene any competition laws—and actually would make a significant difference to the suppliers that we are talking about who are suffering at the moment.

George Eustice

I do frequently get this call from farmers, because there used to be some capital allowance on some farm buildings, historically. This is a Treasury lead, and I do not pretend to be an expert on it. I know that the Treasury would argue that, obviously, on other capital allowances for machinery, they have quite generous allowances there that are helpful for farmers. When it comes to buildings, there is obviously allowance for things like depreciation that can count, I think, still. There is another factor here, which I did see in one of the briefings some time ago. The UK had a special derogation when it had the previous capital allowance for buildings. Since Gordon Brown scrapped that capital allowance for buildings, I think it is very difficult to get it back, because he also lost a special derogation that was there to enable that to happen.

Jim Fitzpatrick

Minister, when we last raised this in the last Session of Parliament, Defra mentioned—and I assume it was probably yourself—that you had asked HMRC and the banks to take a sympathetic stance with dairy farmers. You just mentioned the regular meetings with the banks’ agricultural executives. Mr Oakes from the NFU told us that some banks are offering loans at favourable rates, and you have mentioned about interest holidays and interest-only payments. However, he also said that fast payments of single farm payments are imperative to ease the burden. The Chairman mentioned about tax averaging as a Government initiative. Clearly, some progress has been made. Is there more to be done with banks and HMRC? Is it possible to do more on the faster payments of SFP?

George Eustice

Before the general election, in spring, there was lots of concern about dairy, and dairy farmers would have been having potentially quite significant tax bills, because of course the previous year was a good year, coming up in June and July this year. We did get agreement with the Treasury that they would show forbearance to those dairy farmers. Obviously, it is not automatic. You cannot just say, “I’m a dairy farmer, so let me off my tax this year.” They still need some clarity that there is a genuine inability to pay, not least because there are quite mixed fortunes between farmers and the prices that they are getting. However, we did work closely to come up with a package under the time-to-pay scheme that the HMRC run. When it comes to BPS payments, which I know are also high on farmers’ concerns, we have been working very, very hard over this year. We have had some 200 additional staff put into the Rural Payments Agency to process the manual applications that we have had. The Secretary of State and I have been keeping a close eye on this on a weekly basis over the summer, and they have made good progress getting those on board. We cannot make early payments until we have completed all of the validation and the verification that is necessary, otherwise we expose ourselves to substantial disallowance risk. However, we are doing everything we can to ensure we can pay the majority of farmers in December, and the vast majority at the front of that window. The final thing I would say on this point is the Secretary of State did tell the Commission yesterday that, if there was any scope to show some forbearance on the checks, requirements and administrative checks that are needed, so that we could expedite payments to those dairy farmers and ensure we can pay them at the start of that payment window, we would like to explore that with the Commission. They have said they would look at it.

Chair

I wish you well with that.

Chris Davies

Minister, much of this summer’s action has been focused on the idea that supermarkets were using their market position to pay far too little for milk. Whether that is correct or not, I do not know. What is the Government’s view on this idea?

George Eustice

Views on the supermarkets have probably been a little unfair, because, as I said, if we are serious about addressing this problem, we have to recognise that at its root is a global oversupply and a dip in demand from countries like China. To be fair to the supermarkets, many of them are paying not all but significant numbers—around 20%—of their dairy farmers these aligned contracts, which have still been paying farmers around 32 pence to 34 pence per litre. You have to separate out what the supermarkets are paying the farmers from what they might be charging on the supermarkets. The reality is that, when they are retailing milk at 89 pence for four litres, as some have been, or £1 for four litres, they are losing a lot of money on that quite often. They have absorbed that loss, because they see that as a way of drawing people into their stores. It does not particularly affect demand for milk. Demand for milk is pretty static, whatever price you put on it, but they do believe that it helps draw people into their stores. The only caveat I would say is that it is true, if you have supermarkets discounting at that kind of rate, those smaller retailers, such as the corner shop who do not have the clout to cover such losses, are forced to follow that price down, and they will try to pass that price cut on to farmers. It is a complex picture. Generally, it would be a bit unfair to blame supermarkets for these current prices. In recent weeks, Aldi, Lidl and Asda have now said they will be paying their liquid milk suppliers 28 pence per litre. You have Morrisons saying they will pay 26 pence per litre, and you have Tesco starting to offer an aligned contract on some of their dairy products. To be fair to the supermarkets, they are not the cause of this crisis, and, in fact, in some ways, they have shown some understanding and have tried to help some of their farmer suppliers.

Chris Davies

As a supplementary to that, several supermarkets have now come out and said they will offer a different product for 10 pence extra, and the 10 pence will go directly to the farmer. Is that a gimmick by the supermarket? If ever I stand behind you in the supermarket counter, will you be buying 10‑pence‑extra litres of milk?

George Eustice

Yes, of course. If you stand behind me in the supermarket, you will find me buying the 10 pence extra for farmers. I know that Morrisons got some criticism for that, but obviously they have subsequently come out and said they will pay 26 pence a litre to all of their farmers. This is a very difficult time for everyone. In fact, some processors are finding it difficult trying to sell a product when there is an oversupply in the world market. Dairy farmers are certainly finding it very difficult. There is always, I suppose, a desire to find an easy scapegoat. If we are serious about addressing this problem, we have to keep things in perspective and actually give a bit of credit where credit is due. I am somebody who used to supply supermarkets with strawberries, and had all sorts of problems doing that, so I am not somebody who is naturally sympathetic to supermarket buyers. However, where we do see them making an effort and steps in this direction, we should actually give a bit of credit where it is due.

Chair

Many supermarkets are doing a reasonable job. What are you doing about the big retailers that are not doing a good job? How are you encouraging them to come in line with those that are helping the farmers more?

George Eustice

Obviously, most of the largest ones are either now offering this new guaranteed price, or some are, or, indeed, if you look at those that have not made similar commitments, such as Sainsbury’s or Tesco, they actually have a very substantial proportion already on aligned contract when it comes to liquid milk. The irony is, although we keep saying we need more processed products to add value and to take on new markets, that the short-term position is that those in the liquid milk market, particularly on aligned contracts, are the ones that are doing okay, whereas the ones that are most exposed are the ones supplying the processors. There is a paradox here and an irony. There is a bit of a mismatch between the short-term pressures we have and where the long-term opportunities lie.

Simon Hart

Just quickly, going back to your comment about giving credit where credit is due, which is great, do you honestly think that the supermarkets would have made these magnanimous gestures to the agricultural industry had it not been for direct action over the summer, or was that entirely coincidental?

George Eustice

There was some direct action. There was a lot of consumer interest in this. There is a huge amount of consumer sympathy and support for British farmers. I think they are conscious of that, yes.

Simon Hart

Joking apart, is this the message to UK farmers now: “If you want to extract these enhanced deals with supermarkets, you have got to get on the street.”? That is how it looks.

George Eustice

It may be how it looks, but I am not sure it is entirely fair, because, even before you had some of the more vocal protests that obviously took place, groups like the National Farmers Union had been working closely with the supermarkets to try to get moves in this direction. You are right; there might be a perception that you have had all these protests, and everybody has jumped. Actually, I think that is slightly unfair. I think there is a lot of groundwork that went in earlier by organisations such as the NFU.

Rishi Sunak

Across Europe, producer organisations seem to be a sensible means of increasing market strength for individual farmers versus large processors and retailers. I know you have been supportive of the one producer organisation we have in the UK. Do you have any thoughts on what we need to do to encourage more of these organisations? Is it more action by Government, or is it industry or anything else that needs to happen?

George Eustice

We actually set up a fund to try to encourage producer organisations to set up, and Dairy Crest Direct, which is the first one that we have had set up earlier this summer, is a model that I hope others will follow. It is not a model that lends itself naturally to some of the co-operatives. They would argue that the co-operative system is in many ways an alternative to having a producer organisation. Certainly, though, I think it has been a great success for Dairy Crest farmers. Around 1,000 farmers are now not only collectively negotiating their price with Dairy Crest but also quite often collectively negotiating good deals on their inputs, on things like energy, electricity, feed costs and the like. I think there is raw potential here where you can get something quite refreshing. It is not quite the stifling co-operative model, but a model where farmers have complete freedom and control of their own business, but come together collectively both to buy their inputs and also to negotiate a better price. I think it says something about Dairy Crest as well that they have the confidence to try to help support this. They actually see that, long term, making sure that the farmers have got a fair price and have got a commitment to them is important. Rather than trying to peel off farmers individually and beat the price down, I think it says something about their confidence that they have supported the establishment of this producer organisation.

Rishi Sunak

Is that fund there, Minister, to support further organisations, should they wish to form?

George Eustice

I might ask Mark to come in. We did set up, from memory, a £5 million fund under the last rural development programme, which was run through the RABDF to try to encourage the setting up of producer organisations. I am not sure what the state of that fund is now, whether that has concluded and whether that will be renewed.

Mark Filley

Yes, we have exhausted all the existing funds.

George Eustice

I think the crucial thing is spreading good practice. There is great potential particularly for those groups of farmers supplying the commercial operators, those that are not co-operatives, to follow the producer organisation model that Dairy Crest have pioneered. Other countries do this far better than we do. We have dozens of these producer organisations in countries like Germany. It is a really successful model.

Rebecca Pow

Talking about best practice, Minister, as I am sure you will know, the dairy industry code of best practice was set up three years ago. It is voluntary; 85% of farmers have joined up to it. Our predecessor Committee recommended that this should remain voluntary. I think the Government agreed with that, and that it was a code we should maintain. Do you think, with the difficulties the industry is in, that these contracts are working properly, or could be altered, or could help in any other way?

George Eustice

Alex Fergusson, a Member of the Scottish Parliament, not the football Alex Ferguson but the other one, led a review of this last September.

Chair

He was a very successful manager.

George Eustice

He was very successful. He led a review of the supply chain code and concluded that it was working very well. The one thing that he did say is, to get the remaining 15% of processors to sign up, especially some of the smaller ones, he would like to see the supermarkets perhaps being more proactive, maybe starting to require, or chivvy and encourage, some of their suppliers to join that supply chain code, so that you get a greater sign-up. The ones that are not signed up tend to be the much smaller ones. It is complicated, because sometimes those small dairies who do cream or niche cheeses actually have a very, very good working relationship with a small number of farmers. It is not straightforward. However, I think his recommendation was right. If we could encourage more to sign up to this, it would be good. The problem with the code, of course, is it works better in a tight market where prices are rising than it does in a market when you have oversupply. Giving farmers the ability to walk away from a contract at three months’ notice is a very powerful means of keeping the processors on their toes when supply is tight. When the processors have more milk than they know what to do with, it is a less powerful incentive.

Rebecca Pow

An interesting point raised by one of our previous speakers was that perhaps these contracts are all onuses on farmers, and potentially perhaps a bit more of the risk should be put on the supermarkets and the takers.

George Eustice

Yes. I think the code, in essence, provides for two things. If you want farmers to sign up to a long-term contract, you have to offer them real clarity and transparency about how you calculate your price formula. Whether that is linked to production costs, or whether it is a hybrid that is linked partly to market, partly to production, you have to be absolutely transparent. You cannot expect a farmer to sign up for 12 months or two years, and then say, “The price you get is what we give you.” When I was on this Committee two years ago, we used to have dairy companies saying things like, “Well, it’s not in our interests to kill off our dairy farmers.” It is a paternalistic, “We will be good to them.” I did not think that was good enough. What the code does is it gives a choice. You either have clear clarity and transparency about the way you calculate your formula, or you allow farmers to walk away at three months’ notice. I think it has worked quite well, but it worked better when the market was tight than it does currently.

David Simpson

I am being selfish again, coming back to Northern Ireland. In my constituency, I have farmers losing somewhere from the region of £10,000 a month, with one farmer losing £30,000 milking 650 cows. The crisis fund that we are talking about, if it was £25 million x number of years ago, equated to £3,000. If it is €40 million this time, it will equate to about £5,000 or thereabouts. That would not pay some of their meal bills, when it comes on a monthly basis. I am not saying it is, and I am not trying to be vindictive or smart when I say this, but is it the case, given that we are not getting any answers from Europe because Commissioner Hogan is not supporting any other initiatives, that the only way to resolve the issue in Northern Ireland with milk production is an erosion of milk farmers in order to get the level again? Is that really what it is coming down to? We depend on 75% to 80% of export.

George Eustice

I recognise the difficulties you have in Northern Ireland are particularly acute, because you have exposure to those markets. We hope that we are going to see a recovery in this market. All I would say is, even if we were to do something along the lines that you would hope—namely, intervention—that is not going to stop that farmer losing large sums of the money still. The crisis fund is, as I said earlier, I think a quicker and simpler way to get short-term funds to farmers that are most in need. We need to work out how we would handle such a fund, once we get the further details of it. As I said at the beginning of this session, I think the long-term prospects for the industry remain good. I know that might be galling to farmers at the moment, many of whom I know, who are losing enormous amounts of money, suffering stress and financial difficulty, but the long-term prospects, I believe, for UK dairy remain good. We are competitive, by European standards. We have a premium product in the international market. The population is rising. Demand for dairy, long term, is set to go up on average by about 2.5% a year. I think the long-term prospects remain good, but I do not doubt for a minute that, in this current crisis, it is a desperate time for many, many producers. The other thing I would say is that it is not simply the case that, “Oh, well, the inefficient ones will be the ones that go out of business.” It is far more complex than that. In fact, quite often, some of the ones that are technically better and have invested more are the ones that have more debt, and the ones that have higher input costs and are more intensive. They technically might be better, but they are, in this current downturn, ironically, more exposed than farmers who technically might be less efficient.

Ms Ritchie

Following on from David’s question, in the short term, dairy farmers are facing a difficult winter, notwithstanding you believe that the future for the industry is good and that recovery will come. What can be done in that interim period to assist those farmers? From what I can see, the Government’s solution, and perhaps with the EU Commissioner, is to let the market decide. That is really not good enough for our agricultural industry and foreign industry that is dependent on exports.

George Eustice

In the short term, there is, obviously, the Commission’s announcement yesterday of the €500 million crisis fund. The UK envelope for that, if it is allocated similar to the way it has been done previously, is likely to be in the region of €40 million. You are right. There are then medium-term things, I think, around looking at improving transparency on contracts, going further on that dairy code and improving country‑of‑origin labelling. Then there are longer-term things, which are around opening new export markets, import substitution, investing in processor capacity so that we can step up our production and take on new markets. There is a mixture of things, and the reality is that our ability to deal with what is a global oversupply problem is limited, but the Commission has announced this package yesterday that will give some respite to farmers.

Chair

It is probably too early days, but are you considering that you would look at the price that farmers are being paid for their milk, so, if you are on a contract that is at 17p or 18p, rather than a contract that is at 30p or 32p, you would actually get more support? Some farmers out there are still doing quite well, if they have got good liquid milk contracts with certain supermarkets.

George Eustice

Yes. As I alluded to earlier, it is far too early, really, to say, because this package was only announced yesterday. All we have been told so far is there will be a national envelope that is allocated to us, and we need to await further details of it before we can give further consideration to what we would do with such a fund. As I said, there is a trade-off between simplicity and targeting your resources where they are most needed. Also, as I said at the beginning, there is a wide spread of fortunes here, between those farmers who have lower cost of production, are still getting quite good prices and are still making actually reasonably good profits, and those at the other end of the spectrum who are losing large amounts of money and really, really struggling.

Chair

Minister, thank you. Is there anything you would like to add?

George Eustice

I think we have covered it, unless any of my colleagues think I have missed anything. No.

Chair

Thank you very much for your straightforward evidence this afternoon. I think we have had a very good session with NFU, Dairy UK and yourself. I think we all realise the crisis in dairy farming and the need to help farmers now through this period, so that there will be, hopefully, better times ahead, but it is getting those farmers through to it. I am certain you recognise it, but I think Government needs to recognise it. I am sure we will have you back very soon. We have the Rural Payments Agency coming soon, so we will question them on how quickly they can get the single farm payment to farmers. I think that is something Government can actually do. I do thank you very much for your time this afternoon.

George Eustice

Thank you.

Chair

There being no further business, I declare the meeting closed. Oral evidence: Dairy prices, HC 425 6