Hansard

Scotland is a nation of 5 million people, and covers nearly half the UK landmass. It has some of the best agricultural land in Europe and, without doubt, some of the best and most efficient farmers in Europe. With those assets, one would expect that Scotland should, at the very least, be able to supply milk for its own needs, and should certainly be aiming for quality Scottish dairy products to lead in the European marketplace.

However, all is far from well in Scottish agriculture, notably in the once-prosperous dairy sector. Dairy farmers now face a situation in which the average cost of production of a litre of milk is more than the price that can be achieved in the marketplace. Clearly, the survival of many dairy farm businesses is now seriously under threat, especially when we consider that cull cows now fetch less than 50 per cent of the price that they did before BSE, and that male dairy calves are virtually unmarketable.

For the average dairy farmer in Scotland, net dairy farm income has collapsed to a mere £4,400 per annum. The average farm-gate price for milk has fallen to its lowest real-terms level since records began in 1970. In the past three years alone, it has plummeted by a third to just 16p per litre—the lowest price in Europe.

What has brought about what can be described only as a serious crisis in the Scottish dairy sector? What could have happened to Scotland's agricultural advantage to have given rise to those shocking statistics? The National Farmers Union is in no doubt. The farmers in Ayrshire, Lanarkshire and Dumfriesshire, whom I am privileged to represent, are in no doubt. The combined actions and the stewardship of the agriculture industry of successive Westminster Governments have taken their toll on Scottish farmers, and I want to examine the main areas of concern.

The biggest factor by far is the strength of sterling. Gordon Brown's exchange rate policy has damaged the competitiveness of other parts of the economy where international trade is important, such as manufacturing industry. That policy makes imports cheaper and exports dearer, to our detriment. By way of illustration, I noticed at the weekend that the dairy counter of my local supermarket is selling no fewer than 13 different brands of butter, only two of which are UK-produced.

In the dairy industry, those pressures are compounded by the intervention price system. To be technical, as the pound rises against the euro, the sterling value of the intervention milk price equivalent, which is set in euros, is pulled down. As the IMPE acts as a marker price for milk products, the farm-gate price for milk paid to the farmer also falls. In the four years since 1996, farm-gate prices have fallen more than 7p per litre, of which more than 4p is attributable to currency movements of that kind.

It is in that context that the minister's recent announcement on agrimonetary compensation should be viewed. Although I congratulate the minister on his successful efforts to secure compensation for dairy farmers for the damage caused by the increasing strength of sterling against the euro, the compensation is worth just 0.15p per litre. Only last weekend, the farm-gate price for milk fell again. One frustrated Ayrshire farmer was quoted in The Herald as saying:

"We may be getting £2m in compensation, but the cut in the milk price from April 1st will take away £12m".

I am sure that the minister will agree with the NFU that, although such payments are welcome, they are no panacea for the Scottish farming industry. I urge him to continue to make representations to HM Treasury ministers in London seeking an end to what is an extremely damaging exchange rate policy.

I will refer now to the structural problems that the industry faces, which can be dealt with directly by the Scottish Executive. The problems are not manufactured by the farmers but, as I have said before, are consequences of Government action, in particular the abolition of the milk marketing boards and the discouragement of vertically integrated co-operatives in a misplaced drive for competitiveness through deregulation. The abolition of the Scottish Milk Marketing Board in 1994 could have brought new challenges, advantages and prosperity. However, the decision to prohibit its successors—Scottish Milk, and Milk Marque in England and Wales—from processing and to restrict their activities to trading robbed many farmers of the opportunity to share in the profits that have been made as the farm-gate price for milk has been driven down by dairy companies, which have quickly learned to work the system to their advantage.

Of the 7p fall in farm-gate prices, 2p can be attributed to the effects of deregulation and intervention by the likes of the Monopolies and Mergers Commission. The farm-gate price for milk might have fallen by 30 per cent, but the supermarket price has fallen by only around 6 per cent. Someone somewhere is making a profit, but it is not the farmers. Until farmers have ownership of the supply chain—the processing, where the profit is made—they will continue to lose out to those who can buy milk directly at the farm gate, add value by processing, and then supply it directly to supermarkets. I am pleased that some progress has been made and that, ahead of developments south of the border, Scottish Milk is now able to process more than 10 per cent of its throughput.

Greater vertical integration, which allows farmers more ownership of the processing and marketing operation, is vital. Measures to encourage purchasing co-operatives to develop milk processing operations can pass some of the profits on to farmers, rather than the current situation in which the money is made and kept in the hands of the biggest operators that buy, process and sell milk. Companies such as Wiseman and Express Dairies are currently enjoying monopoly profits.

It is the responsibility of this Parliament to act now to limit the damage that previous Governments have left in their wake. We must be imaginative. We must recognise the long-term benefits of restructuring to secure the future of the industry. Capital investment is needed to allow farmers to gain a share of the profits that are currently being secured through milk processing. But how can such capital be generated when the milk price is so low? In the view of the Scottish National party, the Scottish Enterprise and Highlands and Islands Enterprise networks should be tasked to encourage producer co-operatives and to provide funding for them to establish joint ventures with dairy companies and others in the private sector. The minister need look no further than the Galloway Creamery in Stranraer for a successful joint venture of that kind, which pre-dates the current crisis.