My Lords, I declare an interest, as I farm extensively in one of England's remote rural areas where there are more sheep than people, close to the noble Lord, Lord Palmer--to whom we are indebted for this timely debate.
Behind all our considerations lies the basic problem that no country wants to run out of food. Governments world wide subsidise their agriculture to ensure supply. The consequence is over-production. When a commodity is in surplus, prices naturally fall. Governments move in with additional subsidies, which in turn create even more surpluses and prices fall still further. Farming internationally is now in that phase.
We also have in power a new generation of politicians who have never personally faced the rigours of food rationing and are fed up with the whole subsidy exercise, and whose instinct is to say, "Why not let agriculture go hang?"
Agriculture is different because it works to a far slower timescale than most industries. It cannot be switched on and off. It takes 10 years to build a balanced dairy herd and six years to build an age-balanced sheep flock. Live animals cannot be kept in store but must be sold, whatever the market price. Agriculture is deeply dependent on the weather. Last but not least, it is directly exposed to basic world commodity prices at market clearing rates.
It is a chimera to imagine that the world can produce food at the prices on offer. Only 5 per cent of world foodstuffs are traded. The rest are disposed of under other arrangements, at higher prices.
Britain is exposed to the effects of an over-valued pound. It is all very well to say that farmers should hedge exchange rate volatility but that is not possible given that farming is done in small packets. An industry that is the least inflationary of all is currently crucified by the high pound against the euro. It is a pity that the Government do not take advantage of the agrimoney compensation arrangements, which were specifically designed to alleviate that problem.
There is a real problem--not least confirmed by the ghastly figure for suicides among farmers. Prices have dropped between 10 per cent and 30 per cent in most sectors. Milk is selling at half the price of bottled water in supermarkets. Four years ago, agricultural output in this country was roughly £20 billion annually and was one of our biggest industries. Output is now £16 billion. The impact on rural areas is enormous and no amount of diversification can fill the gap.
The underlying problem is that agricultural products are too cheap. Supply and demand have got out of balance. If food is being sold well below the cost of production, who is subsidising whom? America currently has massive farm bankruptcies and the home of free enterprise is not letting its farms go into free fall. America is subsidising its farmers, as is Canada, by billions of dollars a year because prices have fallen too low to sustain output.
One school of thought is that we should abandon agriculture and import our needs. The noble Lord, Lord Sewel--who is no longer in his place--may be among those who think that. That argument is attractive and simple but wrong. If we abandon agriculture we would have to import 20 million tonnes of grain, which would have an electrifying effect on the Chicago market. Prices would go roaring up and, apart from a balance of payments crisis, consumers would be no better off. There is also no way that America or Canada could supplant Europe's grain needs. America's grain production is some 300 million tonnes a year. Europe's is 200 million. Attempting substitution by American or other world production would be wholly unrealistic and largely unnecessary in terms of comparative advantage.
It is essential that governments make certain that grain is priced at a level that will ensure enough production without creating a level of farm bankruptcies that would undermine supply.
What, then, is the most appropriate mechanism for governments to support agriculture and thereby much of the rural economy that so depends on it? Food is currently too cheap. The customer buys food cheaply but subsidises the farmer indirectly through the tax system. We used to have a deficiency payment system that supported the markets at a price at which the average farmer could just make a living and no more. Good farmers did better, bad farmers did worse. The consumer benefited by direct low prices. We should try to persuade our European Union masters to return to that system.
As a nation, we need to make up our minds whether we want an agricultural industry that competes on level terms with the rest of Europe, is not handicapped by bearing the direct costs of excessive regulation and can pay a decent wage to its workers--to enable them to share in the national prosperity to which they have contributed so hugely over the past few years.
We are dealing with a huge, complex and varied industry. The subject needs to be considered factually and unemotionally. I hope that this debate will contribute in that way.