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Crabb: Tackling the crisis in the dairy industry

Speech at Westminster Hall in the House of Commons.

"I am grateful for the opportunity to open this debate on milk prices and the dairy industry. I am extremely encouraged by the turnout for the debate, considering that so many other important things are happening in the House today.

The fact that this is the first debate for which I have applied and secured since being elected six months ago reflects the seriousness with which I view the challenges facing dairy farmers and the importance of maintaining a healthy domestic dairy industry.

I appreciate that this is a complex subject that has generated a huge amount of comment and analysis in recent years, not least the excellent report from the Environment, Food and Rural Affairs Committee published last year.

There are many different angles to the issue, and I shall not attempt to cover all bases. I shall not, for example, mention the impact of common agricultural policy reform on the dairy sector, or bovine tuberculosis, which is having such a harmful effect on dairy farmers in my constituency I will not mention rising energy input costs or even the huge amount of regulation that is hampering so many farmers in the sector. I hope that contributions from other hon. Members will plug the gaps in my own speech.

My starting point is a simple one; it is the belief that Britain - Wales - needs a vibrant, healthy dairy farming sector, but that many dairy farmers are currently demoralised and pessimistic about the future and have little faith that the market for their product is working fairly and transparently.

Many dairy farmers are producing milk at a loss, with production costs of around 20p a litre set against the farm gate price of around 18p a litre.

It sounds rather like a GCSE maths question: 'Work out how big the loss is, given any level of milk production.' It is not complex.

Here we are in the middle of autumn and with the escalation in costs of producing winter milk, many of the dairy farmers to whom I have spoken in recent days are very gloomy.

That farmers were even able to countenance the action that some of them took last week in withholding product from processors is indicative of the frustration and anger in the community. Speaking to local dairy farmers, I do not get much sense of optimism or enthusiasm for the sector in which they do business.

I spent part of my recess attending agricultural shows in my constituency and talking informally to numerous farmers. I could find reasons to be optimistic about beef and arable, and indeed we have had good news in recent weeks about the beef market and the ending of the over-30-month scheme.

I pay tribute to the Minister and his colleagues for their efforts in that regard. However, in discussions with my dairy farming friends and representatives of the Pembrokeshire branches of the Farmers Union of Wales and the National Farmers Union I heard nothing to suggest that the dairy sector is in anything other than a depressed state.

The message and feedback that I have received is one of unalloyed pessimism, which is very worrying.

Pembrokeshire lies in the heart of the famous west Wales dairy belt where, thanks to our wonderful rainfall and topography, we have been a major producer of Britain's milk for centuries. If dairy is to have any future in the UK, it should be in a place such as Pembrokeshire.

Seen from the air, Pembrokeshire is a beautiful patchwork of family-run farms, holding together around 90 small, rural village and town communities.

The changes that we are seeing in the dairy sector lead me to believe that the nature of some of those communities is under threat.

There is no question that farmers are exiting the dairy sector, and farming altogether, at an alarming rate. Farms are being vacated, which is having a serious knock-on effect on the viability and sustainability of our local services and the communities that use them.

We know that there has been a drop of more than 30 per cent. in the number of dairy farmers in Wales in the last decade; we have also seen the closure of numerous village schools, post offices and shops during the same period. It is no flight of the imagination to suggest that the two phenomena are closely linked.

Some dairy farmers are leaving the country altogether. I know of two young farming families in my constituency who have left in the last year to pursue their businesses overseas, one in France and one in Canada.

I understand that they are not the only examples from my county. They have not given up on the industry that they love; they have given up any prospect of carrying out their business profitably in the UK, which is very sad.

I do not regard this situation with anything like the cool neutrality of the former Permanent Secretary to the Department, who told a conference in 2003:

'Government has no particular view on how much milk the UK should produce or on how many producers or companies there should be ... it does not have views on the shape of the industry'.

I take the view that a diverse supply base is a good thing. I believe that, while the trend towards larger farms cannot be reversed, family-run farm enterprises are a good thing and that the wider rural economy in a place such as west Wales relies on a large and successful network of producers.

No one is arguing that change must not happen, least of all the farmers to whom I have spoken. Indeed, the 'Vision for the Dairy Industry' document published recently by the NFU illustrates that; it is forward-looking and realistic about the changes facing the sector.

However, it is my contention that some of the trends in dairy are being accelerated by imbalances in the supply chain caused by unequal power relationships and a lack of trust and transparency.

The problem is one of a fundamental imbalance in the supply chain where farmers, who are the primary producers, are right at the end of the supply chain and the return that they get for their toil is widely regarded as unfair.

Let me state from the outset that I do not accept the simple narrative that supermarkets are the cause of all the woes that face dairy farmers, and they should not be seen as pantomime villains.

My understanding is that the picture is a lot more complex than that. Supermarket chains are rational decision makers, whose duty is first and foremost to create value successfully for shareholders, which they do by creating and recreating value propositions for their customers day in and day out.

Farmers understand that supermarkets are here to stay. Supermarket chains are the largest customer for British agriculture and some of the younger farmers I have spoken to, in particular, are remarkably upbeat about the need to work closely with the major retail chains.

Only yesterday, I was speaking to one young dairy farmer in my constituency who is closely involved with the group Future Farmers of Wales. She stated clearly that if she has any sort of future in the industry, it would only come about by working successfully with the major retail chains.

That brings me to the efficiency and transparency of the supply chain linking the farmer to the supermarket checkout. I do not believe that the market is working well; a high degree of mistrust, suspicion and confusion characterises the sector.

There is no question but that the rise of supermarkets has altered the playing field on which farmers compete.

We know from the Milk Development Council report in September that evidence suggests that farmers' returns on milk have fallen at a much greater rate than those of their EU counterparts, but that retailers' margins have been increasing. Dr. Nick Fenwick of the Farmers Union of Wales describes it like this:

'There is now overwhelming evidence to suggest that the dominance of supermarkets over supply chains represents a wholly new type of market place that is not compatible with traditional notions of free competition, and the economics of 'supply and demand'.

As a Member with a passionate belief in the benefits of free competition, I have to take such a charge very seriously indeed.

The first specific point to which I would like the Minister to respond concerns the extent to which he feels that the current supermarket code of practice is working well.

In what ways could it be reformed or changed to ensure that market functions well and for the benefit of the primary producer? Does the Minister agree that the code should apply to the entire supply chain, thus addressing the relationship between farmers, suppliers and supermarkets, as opposed to those between supplier and supermarket?

Last year's Environment, Food and Rural Affairs Committee report concluded:

'there remains a fundamental imbalance of negotiating strength between supermarkets and most of their suppliers. The code appears to have been ineffective in redressing this imbalance, at least in respect of the dairy supply chain'.

I welcome the Minister's thoughts on that statement, one year on from the publication of the report."

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