Ms Shelby Matthews and Mr Simon Michel-Berger

3 MARCH 2005

  Q420Chairman: We have been given the impression that at the moment different countries use Rural Development Funds for very different things: Spain for improving the water supply; Eastern Germany perhaps for the improvement of villages. Is this your point also, that a farmer is perhaps less good at arguing his case than an active urban civic group?

  Ms Matthews: Yes. It is normal that the funds are used for different purposes in different countries to reflect regional differences, I think one can expect that, but there are limits to that as well.

  Q421Lord Plumb: I think you have made your position absolutely clear and understandable that the direct payment fund has to be sacrosanct and if you start moving from there you are really taking away from agriculture. In the UK, the Government has   already set the scene on development in environmentally interesting areas and that, of course, relates more to the Structural Fund. Farmers have said, and continue to say, "We want to produce food. We are farmers, we are not park keepers", and I share that view. On the other hand, if the funds are there in Pillar 2 then they are going to show a lot of interest in how they can get hold of those funds and what they are used for. I think the interesting area we would like your view on is in that second pillar to what extent those funds can be used for agricultural purposes, agricultural development. There is a lot of diversification going on and at the moment my information is that at all of these meetings that are taking place in the UK on the use of Structural Funds, on the use of the funds for diversification, not for farming matters, not for making golf courses but for using buildings for other purposes, using land for other purposes, and so on, there is a growing interest from some of the larger farmers. In the past it has been that this is help for the smaller farmers but now there is a lot more interest in asking how can we get hold of that and better use it. This is why I think the question comes as to whether it would be better to try to incorporate that into the Structural and Cohesion Funds allowing for development in those other areas. I could name farm after farm, and so could you, Ms Matthews, where those buildings are much more profitable in what they are being used for. One farmer, who is not very far removed from my family, said "I cannot produce animals at £3 a foot". In other words, storing equipment and so on is far more profitable than trying to farm it. In my opinion, it is a very sad reflection of what is happening, speaking as a farmer, but nevertheless that is the way things are going. Is this happening in other countries to the same extent? Is there the same sort of interest in the Structural Funds as there seems to be a growing interest in the United Kingdom?

  Ms Matthews: Farmers are seeing their direct payments being cut through modulation and they know that this modulation is paying for if there is any additional money in the rural development policy and that increases their interest because they are losing out and looking for ways to compensate for that. I think what you are asking is, are they interested in getting that money for wider elements and, therefore, it might be better to put it in the Structural Funds. This is a dilemma for us. The advantage of putting it in the Structural Funds is farmers could get open access to other sorts of investment possibilities or whatever, whereas the position I have put to you is the opposite side, we feel that if it does go there will be demands on it that we have lost. We have taken the view that it is better to keep it.

  Q422Chairman: On that point, what is the attitude of the new members? Is there a greater feeling in Poland or Slovakia, as an example, that there is sufficient of the infrastructure that is still very poor and arguably they would be quite interested in using money that otherwise might be called rural development money effectively to improve villages, for example?

  Ms Matthews: There is this big dichotomy in the types of farming in these new Member States of very small and quite big. The very small are not going to be in a position to benefit from Structural Funds as such. The main problem for agriculture in these countries as far as investment is concerned is between the farm gate and the retailer.

  Q423Chairman: Is that so?

  Ms Matthews: In certain sectors where investment is required, like milk and so on, obviously that is a concern, but if they fail to be competitive it is not because of their costs but because they have not got—

  Q424Chairman: The distribution.

  Ms Matthews: Exactly, and the processing.

  Q425Countess of Mar: And doing the value added before the farm gate rather than after it.

  Ms Matthews: Yes. You have done a study on that, Simon, I do not know whether you have anything to add on that from the new Member States' point of view?

  Mr Michel-Berger: I did a study when I was with the NFU on EU enlargement and the impact on British farmers. There is a great need in the new Member States for some aid to help them with their restructuring because the lag, so to speak, is much bigger in terms of the infrastructure. As to how this money is being used, developments are only beginning to show and it is quite early to say what is going to happen in any precise way because, as Shelby said, there is this big issue of farming in the new Member States often being very small scale, subsistence even, and not even family farming which we are used to with a viable farm of a couple of hundred hectares, just a very, very small size. I think it is very difficult to say what is going to happen there.

  Q426Earl Peel: I remember hearing you present that paper and one of the things you put, which I thought was quite interesting, was you said as the general standard of living begins to increase in the East European countries there are going to be great opportunities for the UK and other countries to export their agricultural produce there because by that time those countries will not have reached our level. Obviously that was a major plank of your argument and I assume you still hold that view, which I thought was a very interesting one.

  Mr Michel-Berger: Yes.

  Q427Lord Lewis of Newnham: Could we have that point again?

  Mr Michel-Berger: I will give you a very practical example. In the new Member States many farmers for their livestock, let us say for their pigs, have had only a limited gene pool and limited variety of animals to choose from. Because of the restrictions of the Cold War era they did not have the opportunity to draw on the wide gene resource that is available to them now. Many farmers in the new Member States now have a very strong interest in getting some of the genetic material to improve their livestock. For example, there is some trade developing now on the import of pigs into the new Member States, exports from the existing Member States, to update the genetic pool. If I may make a specific national point: Britain is very well placed because the British gene pool for many animals is very well developed and there is a very strong opportunity for British farmers to export animals to the new Member States for this particular reason. That is one very specific example.

  Chairman: That is very interesting. Lord Sewel, do you want to add something on the question of rural development?

  Q428Lord Sewel: Can I feed back to you what I have taken from what you have said. It seems to me that what you are arguing is there are enormous cost pressures on agricultural production as a result of the externalities of environmental considerations and animal welfare, so the CAP money available ought to be focused almost entirely on farm support. The difficulty there is how to get the balance in terms of the rest of the rural economy because one of the things that we do know is that in rural areas the greater the level of dependence upon agriculture, the higher the level of rural depopulation. It could well be that an argument which says maintain rural incomes, rural activity, has as its perverse consequence the decline of the rural economy and depopulation.

  Ms Matthews: If you are talking about rural development, which the rural development policy is, then you should take into account all of these factors and you have got to spend your money on other things, perhaps, but this does not take away from the fact that production has to be produced in a sustainable way.

  Q429Chairman: How do you put over that point? It is very difficult to sell that point of sustainability, is it not?

  Ms Matthews: These are the cross-compliance measures that farmers have to meet. What I am saying is they are part of production costs.

  Q430Chairman: I appreciate that.

  Ms Matthews: Normally they would be reflected in the prices but we are not able to do that because of WTO.

  Lord Lewis of Newnham: I am not a farmer but I found your argument very persuasive. I do think that the position in farming, as far as I am concerned, has been badly expressed from this point of view. If I may make an analogy here, that would be with the manufacturing industry which is virtually disappearing from many aspects of the European scene and going over to countries in which production costs have become the prime factor and they are very, very much smaller and, as a result of this, we are losing out. I think we are significantly losing out. I have a lot of sympathy with what you are saying. It seems to me that somebody has got to sit down and rewrite the script in such a way that these particular points are made from the point of view of environmental and sociological points rather than the point of view of—no disrespect to my colleagues—money is being given to farmers and why should it be given to them and not to other sections of the community. I think you have given me a very persuasive case in terms of the WTO argument.

  Chairman: Before we get on to WTO, Earl Peel.

  Q431Earl Peel: I think Lord Lewis' point is extremely well made. There is another factor which is beginning to come into play and that is the hidden environmental costs of long distance transport. There was a very interesting report on the radio, I think it was yesterday—

  Ms Matthews: This morning.

  Earl Peel: Was it this morning? It shows how out of sync with time I am. I thought it was very interesting indeed. These are the sorts of issues that are going to have to be taken into account. The opportunity for buying your produce locally and, therefore, reducing the impact, going back to climate change, are the sorts of issues that have got to start coming up in a much more dominant way than they have.

  Lord Sewel: So we move to a European pineapple regime, do we?

  Earl Peel: Bananas in Iceland!

  Q432Lord Haskins: I want to come back to the question of Doha. You have made the very strong point that all of these reforms have been driven by WTO, and I agree with that absolutely. There is a lot of codology that Pillar 2 or Pillar 1 are aimed at some other objectives. The main objective is to comply with WTO arrangements. Once you get into Pillar 2, once you get into the environmental agenda and the rural development agenda, it all gets very muddled because it has not been thought out properly. We have now got another WTO coming up and we have been told that if it goes through the impact on farm prices, not immediately but in four or five years' time, could be as much as 10 per cent on top of that. How do you think that European agriculture is going to cope with that further change?

  Ms Matthews: The official position in WTO is we have done two reforms and whatever comes out we must meet those reforms, but I have to say there is a big fear that is not going to be the case and the first thing is if we eliminate export refunds completely and at the same time lower tariffs we are going to have this pressure on prices.

  Q433Lord Haskins: It is the tariffs rather than the refunds that is going to affect the prices, there is not very much left in the refunds. We are left with tariffs, which is a big thing.

  Ms Matthews: We have almost emptied our amber box, we have almost emptied our blue box and we have offered to eliminate export refunds, and all we have got left now is market access to tariff protection that we have. If that goes you only have to look at the OECD figures, which I think exaggerate the situation, which have calculations of the price gap between the price that is left, and that is significant, and the reason it is there is largely tariffs. It is something between

30 billion and

50 billion.

  Q434Lord Haskins: Most of that is Mediterranean products, that is where the real pain is going to be.

  Ms Matthews: Why do you say that?

  Q435Lord Haskins: If you take grain, Europe is largely getting towards being able to compete. Dairy is a problem. There is not a big global market in dairy products. We do not quite know what the market is in dairy products. Talking to the Australians last week, they are not interested in the European market, they are interested in the South East Asian market. It is the fruit, the Southern European products, which are the ones that are really protected against South African imports, sub-tropical imports, and that is where the problem is going to be.

  Ms Matthews: I agree with you on the fruit and vegetables, particularly if the minimum price increase system is attacked as well. We have other concerns on a range of products, including butter and sugar. We have got the reform coming up so we do not know the situation on sugar. Also the meats, including poultry and pig meat and, of course, beef. We have real concerns about the tariffs particularly because of what is happening in Brazil.

  Q436Lord Haskins: Do you think the WTO will address any of these issues if you are concerned about welfare issues and environmental issues in part of the negotiations? I know they did not last time around but there is talk of them paying some more attention to particularly the environmental issues in the next round of negotiations.

  Ms Matthews: I come back to a point I did not answer from Lord Plumb. There is some chance of applying those rules from the EU on the food safety aspect because they have to. They have to try at least.

  Q437Lord Haskins: The Asian flu thing, for example.

  Ms Matthews: Obviously it is their responsibility. When it comes to animal welfare, you almost cannot talk about it in Geneva. On environmental issues we have not made any progress so far and I must say I feel very doubtful that we are going to make any progress on that in this round because we have got such a long way to go on the main issues. There is a lot of work to be done on three pillars. If they are going to get an agreement they are not going to be able to get very far on the environment.

  Q438Lord Haskins: The third uncompetitive element which we have not mentioned at all is labour, which is a huge problem in Western Europe.

  Ms Matthews: If you look at what is going to happen if we have additional price pressure, where we are competitive is we have the knowledge, the good climate and quite a lot of good factors.

  Q439Lord Haskins: And a nearby market.

  Ms Matthews: Exactly, a wealthy stable market on your doorstep. Where we are not competitive is on the labour and on land prices. Normally we would see a shift away from land-based production, away from labour intensive production in Europe, if we had further price pressures. When you look at sectors like that already, like the poultry or the pig meat sector which are often not land-based and quite low labour, they are facing pressures as well. Even the big poultry companies in the UK are facing enormous pressures from imports from Brazil. At the moment it is going into processed products usually but if we move on tariffs any more we fear that we will be importing for the supermarkets.

  Earl Peel: Those processed packages have a little red tractor on them even though most of the initial produce has actually come from Brazil.

  Lord Haskins: You cannot import fresh chicken from Brazil, it has to be frozen. Once you freeze a chicken you are in a totally different market.