WEDNESDAY 21 NOVEMBER 2007

Mr Dai Davies, Mrs Mary James, Dr Nicholas Fenwick, Mr Derek Morgan and Mr Andy Robertson

  Q323  Chairman: Good morning, everybody. Thank you very much for coming. I am Lord Cameron. Our normal Chairman, Lord Sewel, is away with NATO in Budapest so I am afraid you will have to put up with a lesser model! Thank you very much for coming and for your written evidence. I am told that I have to tell you that we are being web cast and that there is a possibility that someone out there is listening and looking, but unlikely we think! Would you like to make any opening statements or do you think your evidence might come out in the questioning?

  Mr Davies: Perhaps I could, my Lord Chairman. I am Dai Davies and I am President of the NFU Cymru, and on my right I have Mary James, the Deputy Director and our Head of Policy for the Union. I would like to thank the Committee for the opportunity to give evidence on this very important issue. I congratulate the Committee on the timeliness of this oral session, with the communication from the Commission to the Council and the European Parliament having taken place yesterday. NFU Cymru's written evidence was submitted in October. I would like to take this opportunity, if possible, to bring our views up-to-date, especially on the news that we had from Brussels yesterday, the communication and Mariann Fischer Boel's presentation to the Agricultural Committee of the European Parliament. The Agriculture and Rural Development Commissioner asked yesterday whether the fact that she was conducting a health check implies that the patient is sick. She went on to say certainly not, but that it is quite normal for a perfectly healthy person to visit his doctor to see if he can do anything to keep himself in good shape. I have a personal motto, "If it's not broken, why do you need to fix it?" I use this phrase in the context of the EC's suggestion that we should move away from payments based on historical receipts towards a `flatter rate' system. Given the experience of our English colleagues and the RPA fiasco, together with our experience in Wales in terms of the redistribution of support when our Tir Mynydd (LFA) support moved from a headage payment to an area payment, there is no question that our preferred approach would be to adhere to our present payment system which seems to have served us quite well. Perhaps we should not forget the fact that the Rural Development Budget is allocated on an historical basis. Another issue which the EU's recent communication raised is that in principle we should perhaps be considering applying an upper and lower limit on decoupled payments. Whilst NFU Cymru would share Commissioner Fischer Boel's view that we should take out of the system payments to ensure that pseudo farmers do not benefit from it, I cannot see, given the devolved approach to the Single Payment Scheme, that scaling back payments without looking at the number of labour units employed would benefit the economy in general. It may also encourage the subdivision of some of these holdings. The Commissioner's communication yesterday reaffirmed that the milk quota system was to expire in 2015. Whilst NFU Cymru accepts that this will enable those who want to expand to do so, we agree with the Commissioner that this must not be done without making sure that we do not cut the legs from under the market. We were also interested in her reference to assistance, "especially but not exclusively for mountainous areas" which have a very heavy dependency upon dairy production. In this context we would see the dairy industry in Wales as being a client for assistance and would wish to explore this further. The other issue I would like to refer to is modulation. This is an issue of some contention in Wales due to the fact that we feel we are being unfairly treated with regard to the imposition of voluntary modulation. The Commissioner is suggesting that we make an annual increase of 2% in compulsory modulation to take effect in the budget years of 2010 to 2013, an overall increase of 8%, but "it goes without saying that the increase in compulsory modulation will be matched by the reduction in voluntary modulation in those Member States which apply the voluntary modulation." This is a view I have strongly conveyed to the Commissioner and I am very pleased that this position is being tabled, though I realise we have a long wait before the Commissioner's legislative proposals and ministerial decisions are taken. My Lord Chairman, I will stop at that point for the moment.

  Q324  Chairman: Thank you very much. Does anyone else want to make any comments?

  Mr Robertson: I am Andy Robertson, the Chief Executive of NFU Scotland. I think the Committee has seen our submission so I am not going to repeat any of that or go into any great detail. I would like to make a few general points. Firstly, CAP support has been central to maintaining a viable agricultural industry for many years. I say that knowing that many farmers, if not all, would much rather be making their living from the marketplace and not relying on that support, but the sad fact at the moment is that, for a variety of reasons which may come out during further evidence, the market does not pay a price that reflects the full value of what is delivered by farming. That is why agriculture has been supported for many, many years, long before we ever had a CAP and long before we were ever in Europe. I think the challenge for the future and I suspect what this Committee is interested in is to try and construct a CAP that delivers food security and wider non-market benefits and at the same time, while also maintaining a viable agriculture industry in the United Kingdom, delivering value for money to the taxpayer and indeed something that is credible in the eyes of the taxpayer as well. I will follow on from Dai and just quote one piece from Mariann Fischer Boel's speech yesterday, "We expect the CAP to work very hard for the good of the European Union in many ways, a safe food supply, beautiful countryside, a competitive farming sector and lively rural communities," and she said you will find all of those things in the job description of the CAP. I think I will leave it at that.

  Q325  Chairman: Thank you very much.

  Dr Fenwick: My Lord Chairman, thank you very much for the opportunity to give evidence to you. I do not intend to reiterate what has already been said except to emphasise what Dai has already said, which is the huge impact the changes from headage (ie per head) payment to area payments had on Welsh agriculture in the late Nineties and the fact that the historical model that we have in Wales is critical in terms of stopping the total redistribution of funds amongst farm businesses.

  Q326  Chairman: Thank you very much. I should warn you that we took evidence last week from the Director-General of MAFF in New Zealand which was very refreshing. Perhaps I can act as Devil's advocate to start with and ask you the very simple question of why should farmers get paid when there is, after all, a welfare social safety net in existence in this country? Why should farmers get paid at all through this particular channel?

  Mr Robertson: If we were just talking about supporting individual farmers and their individual incomes I can understand why that might be a very valid comment and very valid criticism, in fact, but it is not just about the individuals. We are talking here about retaining agricultural businesses that are viable and actually are active. I think active is the key word in here. By supporting agriculture in the way it is currently supported we have a very active agriculture. As I think all of us hinted at in our opening comments, that is about a whole lot of things, it is about producing food and it is about delivering wider benefits. We talk about non-market benefits and the environment is a very obvious one. An awful lot of the environment is created by farm management, certainly in Scotland where farmers manage about 80 or 85% of the land. There are other industries which are very dependent on agriculture. For example, the food processing sector in Scotland, it is the biggest manufacturing sector in the country, there are 122,000 jobs that exist either directly or on the distribution side, and it is about £7.5 billion GVA. Scottish farming supplies over a third of what goes into that sector. If you did not have an active farming industry there and if you pulled away all the subsidies and goods it seeks to produce it would not just affect farmers, it would affect an awful lot of other jobs. 122,000 jobs in the context of Scotland is a lot of jobs.

  Mr Davies: I would like to support what Andy has said and perhaps go further. We need to retain the capability to produce food. In the last few years that need does not seem to have been so obvious, but going forward and with climate change and so forth, we do not know when we might have to fall back on food from our own resources. I would even go further than Andy because in a Welsh situation we have cultural issues. The majority of people involved in agriculture still speak Welsh and it is a major issue for us in Wales if we wish to retain the language and our heritage. Farming does not only produce food, it has a responsibility for the environment and the environment seems very important for tourism coming in to parts of Wales. We need to retain the beautiful countryside we have in order to generate other income for other sectors, such as tourism.

  Q327  Chairman: What seems to be happening on the corn production side is that when prices go up the taxpayer sees that you are making lots of money from farming. Would you ever see an end to the Government support under those circumstances?

  Mr Robertson: All of us sitting here probably would say that if in fact prices went up and stayed up then that would be absolute Utopia and that is where we would want to be. We would want to be in a situation where agriculture could rely solely on the marketplace. If you go back 150 years, we have seen many, many ups and downs and many false dawns. I can think back to the early 1990s when the McSharry reforms of the CAP first came in. At that stage cereal prices went up very dramatically and farmers were getting the best of both worlds; they were getting subsidy and they were getting high prices. Sadly that did not last and very quickly prices tumbled to the level they were at up until just over a year ago. If the prognosis is that world prices will go up—and there are some signs of that in cereals and on milk—and it is a sustained increase then certainly that is a different world, but it is going to take a wee while to get there and certainly we will not be there overnight. If we want to have a viable agricultural industry we need to support that industry until we get to a stage where it can be supported by the market alone.

  Dr Fenwick: I would echo those sentiments. I think it is important to look at things in an historical context and ask ourselves what might have happened had we not had a CAP or the preceding subsidies. Our headquarters shares a site with a plant breeding station and that was established to stop the depopulation of the uplands of Wales back in the 1920s and 1930s. Had it not been for the introduction of subsidies in the post-War period that rural depopulation would have been significantly accelerated and we would not be as well placed to face the challenges that we are now clearly facing in terms of carbon emissions, food supplies and meeting the biofuel requirements that are going to be growing in the next few years. I think it needs to be looked at in that historical context. I would emphasise that nobody wants to be in a situation where we do require these subsidies to exist. In terms of Welsh agriculture, the 2020 group report which was published a number of weeks ago highlighted the fact that the average Welsh farm income is £12,500, which equates to around £3 an hour in terms of the payment received by those who work on those farms and we have to look at it from that point of view. People simply will not be there to farm the land.

  Chairman: So what you are saying is the CAP is a temporary state of affairs dealing with a particular problem and should eventually disappear.

  Q328  Viscount Ullswater: I am not sure that I am really reading that message from you, what the Chairman might have just said. Am I right in thinking that you see the CAP or what might be there from the Community actually sustaining the rural communities in Wales and Scotland, not just acting as a lower tier, but really there to sustain those communities irrespective of the fortunes of farming?

  Mr Robertson: I lived and worked in the Orkney Islands for six years. If you take an island as a microcosm of what goes on in communities generally, you need schools, you need shops, you need services, you need transport links and so on. We had very, very clear experience there of a small island where farmers were by and large the predominant sector. If there was any reduction in the number of farmers then you started to lose critical mass and you started to lose things like schools and shops and so on. Certainly in the remoter rural communities it is fair to say that agriculture is very central to the economic and community wellbeing in these. Until we get to a stage where farming can be supported not just temporarily but in a sustainable sense and in the long term by the price from the market then I think the CAP does do that job. I would go back to what Mariann Fischer Boel said yesterday, ie it does a number of jobs, it supports a competitive agriculture but it also supports rural communities and it delivers a good environment and so on. We cannot really just say the CAP does one thing; it does a whole lot of things.

  Mrs James: I think we have seen previously that the subsidy system that we have had has actually encouraged increased production. We have now moved to a situation where there is a Single Farm Payment and where there is a greater transparency in the marketplace and that farmers will produce provided the prices that they are securing from the marketplace make it a profitable exercise. I think what we see is the CAP being a buffer. Certainly we have traditionally had a cheap food policy in the UK. You have only got to look at the sheep sector, which is particularly important to Wales, to realise that the marketplace at the moment is only satisfying about 79% of production costs. Clearly that is an unsustainable position in the longer term. Profitability, at the end of the day, to return to the earlier question, is the relationship between market returns and costs of production. Yes, market returns may well increase, but if costs of production are rising at a similar rate then clearly the net margin is not actually changing, and certainly we have seen that in the milk sector where there has been a significant increase in the producer price but costs of production have risen substantially as well. We would see the CAP acting as a buffer whilst retail prices are not discharging full recompense.

  Q329  Baroness Jones of Whitchurch: Is there not an argument that if you were given notice that the CAP funding was going to be withdrawn in four or five years, ten years even, you would learn to adjust to whatever you were producing? If you looked at the rural landscape in Scotland and Wales in ten years' time, you would have adjusted to the fact that those subsidies were no longer there and you might be doing different things on the land, you might be growing different things, but eventually you would be able to adjust to the market. The Chairman has already given the example that we heard last week from New Zealand that that is exactly what they did. They used to have subsidies, they put people on notice and they managed to adjust and work in a market situation. Could you not envisage that happening in your areas?

  Mr Davies: Efficiency and sustainability do not fit in the same box. I accept what you say, there would be a dramatic change in the landscape if you removed the supports, you would see a dramatic change in the communities and some of those communities would disappear totally. We saw this back in the 1800s when the corn laws and things were relaxed and so forth. There would be dramatic change. You would see a dramatic change in the vegetation because those people would move and find work in other areas. Evolution, if you want to call it that, would mean that, sadly, we would not be able to sustain the same type of people or the same type of communities in those rural areas that we have now. I fear that they would become dormitories for people who had decided to retire and go down the route of the good life in peaceful areas or you would have commuters. What you would do is urbanise the rural areas and that may be what you would wish to do, but I am sure it is not what people who come to visit these areas would wish to see.

  Mr Morgan: We hear about New Zealand farming all the time. New Zealand is a totally different country. I spent some time there on a scholarship. Given that 80% of Wales is LFA and we house cattle and sheep for seven months of the year, in New Zealand production costs like that are out of the window, everything could be done off grass. They have a better climate than we have. To take New Zealand as a benchmark for Welsh farming is not quite right. 96% of New Zealand's agriculture goes on exports. They are very well placed in the world to get those exports into the Middle East and what have you. It would be nice to have a New Zealand climate that we could farm in Wales, but we cannot compete on production costs with New Zealand.

  Q330  Earl of Arran: I agree it is a completely different climate and a different situation et cetera. From a purely farming point of view, I am rather interested to know, in Wales particularly with so much grassland, are you beginning to adopt extensive grazing at all, like the New Zealand method?

  Mr Morgan: Yes.

  Q331  Earl of Arran: Is that actually working, thereby you are keeping your cows out for most of the year?

  Mr Morgan: No. In the uplands you would not be able to keep them out.

  Q332  Earl of Arran: On the lowlands?

  Mr Morgan: There are rules within the dairy industry and Dai will know better than I about that.

  Mr Davies: We farm in west Wales, Pembrokeshire and Carmarthenshire, which has a very bad climate. The way forward post the 1980s was to go down the route of New Zealand-type dairy farming where you left the cattle out for nine months of the year. They were dry during the winter and you produced the milk during the summer. There was a huge shift towards that, but if you went down there now you would see there has been a huge shift back in the other direction. As far as welfare standards are concerned, there is a need for us to comply with cross-compliance. We are not allowed to poach the land; you are not supposed to feed the cattle out and so forth. There has been a huge move back towards conventional farming and higher standards of welfare. Picking up on the New Zealand issue and what you said about them having adopted this, we have to remember that agriculture in New Zealand is a dominant part of the economy. When they did away with their subsidies the first thing they did was devalue the New Zealand dollar by 18% so they could become very competitive. I am sure if we changed our system in the UK the powers that be would not be prepared to devalue the pound by 18% in order for us to have a better market out there.

  Mr Robertson: I can remember from my time in government that about 90% of the ups and downs are caused by currency fluctuations, so that is key. None of us would want to give the impression that farmers just want to sit back and take subsidies and not adapt. All farmers are trying to adapt. One of the points of the last series of reforms in 2003 was to try and get agriculture to be more market orientated. There are examples where people actually can go into, for instance organic farming because there is a market for it, but it will not work for everybody because if everybody went into organic farming there would be no price premium. Farmers are by and large small businesses and they are price takers rather than price setters. We work in a supply chain in the United Kingdom where the balance of power sits very, very heavily at the retail end. If in fact farmers were in a position where they could actually, like most other industries, set a price and say this is what we are going to produce and sell for then that would be great, but in fact they do not set their own price. They are told very, very firmly by the rest of the supply chain what the rest of the supply chain is prepared to pay for them. At that moment that price does not in any way reflect the cost of production let alone the many wider benefits that agriculture actually delivers. Any suggestion that we should move towards a subsidy-free system, which is a perfectly valid argument to put forward, cannot go forward without accepting that there would have to be some change to the balance of power in the supply chain to allow farmers to benefit.

  Q333  Chairman: I would accept that and your analogy about price takers and price setters is right, but at the same time that is in the hands of the farmers. We are very bad at cooperating as farmers. If we got together and said, "Sorry guys, you're not going to get your milk at this price, you've got to pay that," something might change, which is more or less what happened in the New Zealand situation.

  Mr Robertson: There is a very important point about competition law in all of that. At the moment there are not equal principles being applied to the various parts of the supply chain. For example, the four major retailers control about 80% of the food market, and one of them, the biggest, has about 35%. There has been a number of decisions, for instance in milk, where the OFT has said they would not allow a co-operative to hold more than 25% of the market. If we want to operate in much more of a free market we have got to apply the same principles all the whole way along the supply chain.

  Q334  Chairman: I accept that. Both of the NFUs mentioned in their written statement about production capacity, "subsidies in the meantime should maintain production capacity". Exactly what do you mean by production capacity, and at what stage does it cease to be necessary to support that particular capacity?

  Mr Robertson: There is a very important point of principle here, which is the one we have been referring to, which is that if the demand for food across the world increases we need to be in a position to meet that demand. If you look at the new Member States of Eastern Europe, they have got potentially some fantastic land out there, but it is nowhere near producing to its full capacity. In the Ukraine the average depth of topsoil is around 30 feet, it is fantastic land, but they cannot produce because they have had years and years of underinvestment. The fertility levels are not high enough. I think what we mean by retaining production capacity is certainly the land retaining the inherent fertility. It would be too easy for people to take a very short-term approach, to shove on lots of nitrogen but not keep phosphate levels, potash levels and lime levels high enough, which in the long term would mean you would have serious problems. The other aspect of that certainly from a Scottish perspective is infrastructure, for instance housing. Again, if you want to keep cattle, the sad fact is that you have to house them for about six months of the year and if you do not keep buildings in good condition and if you do not keep them in a condition that meets a lot of the very new environmental and other requirements then you cannot keep cattle. There is a constant investment required in land fertility, in buildings and so on and that is what we really mean.

  Q335  Chairman: How do you square what you have just said—I may have got it wrong—with the fact that there was a genuine feeling that cross-compliance was not a very fair or just system? It seems to me that the cross-compliance is doing just what you said, trying to keep our land in good heart and so on.

  Mr Robertson: There are two aspects to cross-compliance. I think the one you are referring to is good agricultural and environmental condition. Most of the emphasis is very much on environmental condition and is very much about preventing overgrazing for instance.

  Q336  Chairman: Summer management in particular comes into it.

  Mr Robertson: Yes. On agricultural condition what they say is it should be in a condition to produce the next year, which is pretty short-term stuff.

  Mrs James: On the one hand a farmer, if he is seeking to maximise his income, is going to optimise his production and optimising production is not necessarily the same as meeting good agricultural and environmental conditions, there is a conflict of interest there. I guess the other point I would want to make is the one about the length of the production cycle as far as livestock are concerned, particularly cattle and dairy cows, where you are looking at a three year production cycle which you just cannot switch on and off. I think that is particularly pertinent when, as Andy says, you have to look at investment when you are trying to get back into the production. Three years down the line the resource, given the levels of income, is not going to be there to invest and upgrade in order to go back into an enterprise. I think that would actually stymie that. The other aspect is one of infrastructure beyond the farm and it is particularly things like abattoir capacity, processing capacity. The fact is, if you lose your throughput of stock your unit costs go up and you become unviable and then you lose abattoirs. We have certainly seen that in Wales in terms of the concentration in terms of abattoir capacity with only really four major abattoirs left in Wales now.

  Q337  Lord Palmer: Mr Robertson, it is only perhaps fair to warn you that I am one of your members! You approve of the historic basis for the Single Farm Payments used in Wales and Scotland. Do you believe that production in the 2000-2004 period will be considered a legitimate basis on which to distribute Single Farm Payments in 2014?

  Mr Robertson: I think it is a very, very fair point that the further we get away from 2000-2004 the more difficult it is to justify saying somebody is getting a payment because of what they did ten years ago or whatever. I think that then raises the question as to what you would move to. Some of the suggestions are that you would move to an area payment and specifically a single area payment, which would be a single rate. The CAP up to now has very much reflected what people did in terms of production. If we are moving towards something different, which might be the cost of delivering a whole lot of wider benefits, then quite clearly the cost of delivering those benefits will not be the same on all farms on every type of land. While an historic payment may become more and more difficult to justify, I do not think that a single area payment which simply said we are going to pay X amount per hectare regardless of where the farm is, what type of farm it is and what it would be producing is valid either. We are currently doing some work, which we have referred to in our submission, to try and say what is the cost of delivering some of these other benefits, be they environmental benefits or supporting downstream industries or so on. If we have to move away from historic to area then we should actually make sure that that area payment reflects the costs of delivering these other benefits.

  Mr Davies: Accepting totally what you say, my Lord, I am a dairy farmer and I produce milk according to what I produced in 1983 and I will be producing that volume until 2015, which is quite a long period of time to be tied in to historical production. The other issue I would like to remind you of as well is as far as the Rural Development Fund is concerned, that is also based on investment and historical spend that we did. The Commissioner mentions quite often that we should be using this fund for this purpose or that purpose, but that fund, as far as the UK is concerned, is very, very restricted. There are many things which restrain us which are based on historical matters. As far as Wales is concerned, there are very marginal farms which through hard work and grafting have intensified over a period of time and without the level of support they are getting at the moment those marginal farm would not be viable. We changed the system of our support for the LFA areas in Wales in the last few years and we saw a dramatic shift of resources when we went down the route of area payments instead of headage payments. A lot of these marginal farms suffered quite badly and some even went out of business.

  Dr Fenwick: I would echo those sentiments. It is an anomaly to talk about historical allocations being done away with in terms of farms but saying we are going to keep historical entitlements effectively in terms of Member States. That is a clear anomaly. To do away with one without doing away with the other does not seem appropriate.

  Q338  Chairman: Are you advocating the total reallocation of CAP funds?

  Dr Fenwick: I would not want to allocate that without looking into the figures. We should also bear in mind that while we do broadly have an historical system, the trading of entitlements has taken place, so there has been trade between farmers of entitlements which has removed at least an element of the historic system. We should also bear in mind that the impact of reallocating monies would be extremely severe. For example, the single payments the farms have received are generally based on their productivity. A lowland farm can produce similar productivity to an upland farm. That productivity you estimate, in simple terms, based on the amount of grass that can be grown. There are climatic differences and there are soil differences. For example, a 200 acre farm, in an extreme example, could have the same productivity as a 1,500 acre farm. We might assume that those two farms could have the same single payment effectively because of that productivity. To reallocate that money and totally redistribute it from a system where perhaps a lowland farm could be receiving £350 per hectare and an upland farm £40 a hectare and to put an average figure on it, obviously it does not take a great deal of insight to realise that that lowland farm is going to go out of business, it is going to be completely unable to compete with the upland farm.

  Mrs James: Certainly, from our perspective, we see that by 2013 there will be a very strong push from the European Commission and from domestic government to actually shift resources away from SFP under Pillar I to Pillar II. In a way we are actually shifting the emphasis in any case. We envisage the reliance on historic payment will actually become somewhat less over time.

  Q339  Baroness Jones of Whitchurch: I would like to follow on that whole issue which is to do with the non-market benefits of the CAP. In various bits of your submissions and this morning you have talked about the non-market benefits and you included things like the environment and the greater quality of life issues and I am sure there are others. Why should the CAP fund those non-market benefits? Are we not stretching its purpose way beyond its original intention here?

  Mr Robertson: I think the quick answer to that is that the CAP has evolved. The CAP was all about securing food supplies. If you go back to the Treaty of Rome in 1956, apart from having a common market, it was the second thing that featured and it is all about, in the wake of World War II, securing food supplies. It did it hugely effectively. In fact, it did it almost too effectively at one stage and we had the well-publicised `wine lakes' and `beef mountains' and all the rest of it. As a result of that there have been the successive changes to the CAP. The Agenda 2000 changes introduced the whole concept of a second Pillar and a rural development pillar which actually recognised the fact that an awful lot of what agriculture does is not just about food production but it is about its effect on the rural economy and rural communities. That is really why we have got into looking at the wider effects. What I would say is that Pillar II is still, relatively speaking, quite small compared to Pillar I. There is an awful lot of what farming does which is not in any way taken account of by Pillar II payments. There was some work done in England jointly between the NFU and the Commission for Rural England which showed that there was over £400 million-worth a year of work done on farms for environmental and landscape benefit which sat outside any CAP scheme. So there is an awful lot done by farmers which is not paid for.